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Secured Credit in Europe: From Conflicts to Compatibility
9781509910069, 9781509910090, 9781509910076

Author / Uploaded
Teemu Juutilainen

Table of contents :
Acknowledgements
Contents
Table of Cases
Table of Legislation
Table of International Instruments
Introduction
I. Overview
II. Security Rights as Relational Legal Positions
III. Incompatibility: Cross-border Problems in Trade and Finance
IV. The Quest for Compatibility
1. Options: The Variety of Means to Promote Compatibility
I. Introduction
II. Thesis: The Centralised Substantive Approach
III. Antithesis: Gentler Approaches
IV. Search for Synthesis: The Integrated Approach
V. Conclusion
2. Objectives: The Essence of Desirable Development towards Greater Compatibility
I. Introduction
II. Epistemic Issues: Criteria for Choosing Objectives
III. The Objective of Foreseeability
IV. The Objective of Responsiveness
V. The Objective of Dividing Unforeseeability Costs
VI. Interrelations between Objectives
VII. Conclusion
3. Choices: Options Reviewed in the Light of Objectives
I. Introduction
II. The Centralised Substantive Approach
III. The Centralised Conflicts-Approach
IV. The Local Conflicts-Approach
V. The Local Substantive Approach
VI. Conclusion
Conclusions
Bibliography
Index

Citation preview

SECURED CREDIT IN EUROPE This monograph seeks the optimal way to promote compatibility between systems of proprietary security rights in Europe, focusing on security rights over tangible movables and receivables. Based on comparative research, it proposes how best to tackle cross-border problems impeding trade and finance, notably uncertainty of enforceability and unexpected loss of security rights. It offers an extensive analysis of the academic literature of more recent years that has appeared in English, German, the Scandinavian languages and F innish. The author o rganises the concrete means of promoting compatibility into a c entralised substantive approach, a centralised conflicts-approach, a local c onflicts-approach and a local substantive approach. The centralised approaches develop EU law, and the local approaches Member State laws. The substantive approaches unify or harmonise substantive law, while the conflicts approaches rely on private international law. The author proposes determining the optimal way to promote compatibility by objective-based division of labour between the four approaches. The objectives developed for that purpose are derived from the economic functions of security rights, the conditions for legal evolution and a transnational conception of justice. This book is an important contribution to the future of secured transactions law in Europe and more widely. It will be of interest to academics, policymakers and legal practitioners involved in this field.

ii

Secured Credit in Europe From Conflicts to Compatibility

Teemu Juutilainen

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2018 Copyright © Teemu Juutilainen, 2018 Teemu Juutilainen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/opengovernment-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Juutilainen, Teemu, author. Title: Secured credit in Europe : from conflicts to compatibility / Teemu Juutilainen. Description: Portland, Oregon : Hart Publishing, 2018. | Includes bibliographical references and index. Identifiers: LCCN 2017048782 (print) | LCCN 2017058751 (ebook) | ISBN 9781509910083 (Epub) | ISBN 9781509910069 (hardback : alk. paper) Subjects: LCSH: Security (Law)—Europe. | Security (Law)—European Union countries. | Debtor and creditor—European Union countries. | Conflict of laws—Security— European Union countries. Classification: LCC KJC1088 (ebook) | LCC KJC1088 .J88 2018 (print) | DDC 346.407/4—dc23 LC record available at https://lccn.loc.gov/2017048782 ISBN: HB: 978-1-50991-006-9 ePDF: 978-1-50991-007-6 ePub: 978-1-50991-008-3 Typeset by Compuscript Ltd, Shannon

To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

ACKNOWLEDGEMENTS

This book is based on my doctoral dissertation of the same title, defended at the University of Helsinki in September 2015. The book manuscript was completed in July 2017. I start by thanking the dissertation supervisors, Professor Emeritus Jarno Tepora and Chancellor Emeritus, Professor Emeritus Thomas Wilhelmsson. Professor Tepora was the first person to suggest pursuing a doctorate, while Professor Wilhelmsson hired me for my first research position. Ever since, I have been able to count on their help and advice. Thanks are also due to Professor Sjef van Erp and Professor Tuulikki Mikkola for their preliminary examination of the dissertation manuscript. Their encouraging and constructive comments helped in finalising the dissertation. Moreover, I am indebted to Professor Van Erp for his remarks as the appointed opponent at the public examination. These exercised considerable influence in preparing the book manuscript. I appreciate all those who have helped me embrace, and develop, the research topic. Any such list would be incomplete without mentioning Professor Moritz Brinkmann, Professor Janne Kaisto, Professor Ulla Liukkunen, Professor Hans-W Micklitz and Professor Jan Smits. Most of the work on the dissertation as well as this book took place at the University of Helsinki, Faculty of Law, and within it, at the Institute of Inter national Economic Law (KATTI). I am obliged to Professor Pia Letto-Vanamo, the director of KATTI, for supporting this research in various ways, in terms of both substance and practical preconditions. All in all, the Faculty of Law has proved to be a supportive community and deserves collective thanks. I have felt particularly supported in company with Professor Sabine Frerichs, Dr Emilia Korkea-aho, Dr Fernando Losada, Dr Riku Neuvonen and Dr Suvi Sankari. This research has formed part of the following, partly overlapping, endeavours: ‘Private Law in a Multicultural and Multilingual European Society’ (funded by the Academy of Finland), directed by Professor Wilhelmsson; the Graduate School ‘Foundations of European Law’ (funded by the Finnish Ministry of Education and the Academy of Finland), directed by Professor Wilhelmsson and P rofessor Letto-Vanamo; the Centre of Excellence ‘Foundations of European Law and Polity’ (funded by the Academy of Finland), directed by Professor Kaarlo Tuori; ‘The Architecture of Regulatory Competition’ (funded by the University of H elsinki), directed by Professor Smits; ‘European Bonds: The Moral Economy of Debt’

vi

Acknowledgements

(funded by the Academy of Finland and the University of Helsinki), directed by Professor Frerichs. I thank the directors and all members, from whom I have learned a lot. Grateful acknowledgement is due for grants received from the following funders: the Chancellor of the University of Helsinki; the Finnish Lawyers’ Association (Suomalainen Lakimiesyhdistys); the Foundation for Economic Education, Finland (Liikesivistysrahasto); the Fund of the 25th of March, Finland (Maaliskuun 25 päivän rahasto); the Max Planck Society, Germany (Max-Planck-Gesellschaft); the Olga and Kaarle Oskari Laitinen Foundation, Finland (Olga ja Kaarle Oskari Laitisen säätiö); the Savings Banks Research Foundation, Finland (Säästöpankkien tutkimussäätiö). I appreciate the hospitability of the Max Planck Institute for Comparative and International Private Law (Hamburg), where I was a visiting fellow during doctoral studies and where I later returned to complement the sources of the book manuscript. On the first visit, I was privileged to discuss this research with Director Emeritus, Professor Emeritus Ulrich Drobnig, a true pioneer in the field. I thank Christopher Goddard, who proofread and language edited the book manuscript, greatly improving its clarity and style. At Hart Publishing, I warmly thank everyone involved in making this book a reality. In particular, I am grateful to Dr Roberta Bassi, as commissioning editor, for advice and patient guidance through the publishing process. I also owe a debt of gratitude to the four anonymous reviewers whose comments sharpened my awareness of reader expectations. On a personal note, I thank family and friends for their encouragement and interest in my research. The constant support of my parents, Ritva and Hannu, has been invaluable. Finally, I thank Anna-Kaisa for sharing the joys and worries of this work in our daily life. This book is dedicated to her. Teemu Juutilainen Helsinki, November 2017

CONTENTS

Acknowledgements��v Table of Cases�� xiii Table of Legislation�� xvii Table of International Instruments�� xxiii

Introduction��1 I. Overview��1 II. Security Rights as Relational Legal Positions��6 III. Incompatibility: Cross-border Problems in Trade and Finance��12 IV. The Quest for Compatibility��19 1. Options: The Variety of Means to Promote Compatibility��27 I. Introduction��27 II. Thesis: The Centralised Substantive Approach��28 A. The ‘Eternal Crisis’ of Private International Law��28 i. All-Sided Conflict Rules and Loss of Predictability��28 a. Europe: Flexible Choice of Law and Result-Selective Motives��31 b. The US: A Multitude of Choice-of-Law Methods��32 ii. Critique and Consequences for the European Discourse on Security Rights��33 B. Proposals for EU Unification or Harmonisation of Substantive Law��37 i. Comprehensive Means��37 a. UCC Article 9 as a Model��38 b. DCFR Book IX as a Blueprint��43 c. Eliminating the Need for Choice of Law��46 ii. Partial or Piecemeal Means��47 iii. Optional or Supplementary Means��49 III. Antithesis: Gentler Approaches��54 A. Critique of the Centralised Substantive Approach��54 i. Unnecessity��55 ii. Detrimental Effects��56 B. The Centralised Conflicts-Approach��57 C. The Local Conflicts-Approach��63 D. The Local Substantive Approach��65

viii

Contents IV. Search for Synthesis: The Integrated Approach��66 A. An Inclusive Third Way��66 B. Gentler Approaches: ‘Eternal Crisis’ or Unused Potential?��70 C. Interrelations and Interaction between the Approaches��75 D. Conformity with Internal Market Law��77 i. The Structure of Reasoning��77 ii. Trade Barrier��78 iii. Ground for Justification��87 iv. Proportionality of Justification��90 v. Implications for the Integrated Approach��97 V. Conclusion��98

2. Objectives: The Essence of Desirable Development towards Greater Compatibility��101 I. Introduction��101 II. Epistemic Issues: Criteria for Choosing Objectives��102 III. The Objective of Foreseeability��105 A. Content and Importance��105 B. The Variety of Solutions: The Preference for Comprehensive Means��105 C. The Economic Functions of Security Rights��107 i. The Standpoint of Secured Creditors��107 ii. The Standpoint of Security-Provider Debtors��113 iii. The Standpoint of the Whole Economy��115 iv. Cross-border Problems Impeding Economic Functions��118 v. Solutions through Foreseeability��121 D. Foreseeability in Justifying the Priority of Secured Claims��122 E. Institutional Support for Foreseeability��128 i. The Late Payment Directive��130 ii. The Financial Collateral Directive��131 iii. DCFR Book IX��133 IV. The Objective of Responsiveness��135 A. Content and Importance��135 B. Controversial Policy Choices��136 i. Concerns about Economic Efficiency and Distributional Fairness��136 ii. Priority Questions��142 a. Carve-outs: Full or Partial Priority?��142 b. The Scope of Security Devices: A Broader Notion of Priority��149 c. Priorities between Different Security Devices: The Treatment of Acquisition Financing��153

Contents

ix

iii. Publicity Questions��158 a. The Functions of Publicity��158 b. Is Publicity Necessary?��160 c. Variations of Registration��162 iv. The Virtues of Local Choices��168 a. The Responsiveness to Economic and Social Circumstances and Value Choices��168 b. Against the Technicality Thesis: Continuum of Policies and Values��173 c. Unknowability of the Optimal Features of Law on Security Rights��179 C. The Potential of Competition between Jurisdictions��180 i. Theoretic Fragments��181 ii. General Account of Competition between Jurisdictions��184 a. Starting Point: The Tiebout Model��184 b. Modifications Needed to the Tiebout Model��185 iii. Competition as to the Law on Security Rights: Mapping the Dynamics��188 a. Actors and Incentives��188 b. Formation of Content��193 c. A Slow Race to the Top?��198 D. Institutional Support for Responsiveness��199 V. The Objective of Dividing Unforeseeability Costs��203 A. Content and Importance��203 B. The Transnational Conception of Justice��204 i. Justice Pluralism��204 ii. Conflicts Justice or Material Justice?��205 iii. Theories on the Division of Conflit Mobile Costs��207 C. Institutional Support for the Division of Unforeseeability Costs��212 i. The Swedish Supreme Court: Starting Point and Exceptions��213 ii. The Danish Supreme Court: The Principle of Import Country Law��216 iii. The German Federal Court of Justice: Resolving the Problem of Initial Invalidity��219 iv. EU Internal Market Law: ‘Structural’ Institutional Support��221 VI. Interrelations between Objectives��222 A. Coexistence and Reconciliation Required��222 B. Process Perspective: Potential Integration��223 VII. Conclusion��224

x

Contents

3. Choices: Options Reviewed in the Light of Objectives��227 I. Introduction��227 II. The Centralised Substantive Approach��228 A. Deciding on the Preservation of Responsiveness��228 i. Prerequisite: Competence��229 a. Potential Legal Bases��229 b. Subsidiarity and Proportionality: Beyond Enforceable Legal Principles��233 ii. Who Should Decide on the Preservation of Responsiveness?��234 iii. Envisioning Procedures for the Preservation of Responsiveness��236 B. Comprehensive Unification or Harmonisation of Substantive Law��238 i. The Prospect of Significantly Increased Foreseeability��239 ii. The Risk of Severely Impeded Responsiveness��240 iii. Ways Forward: Enhanced Cooperation or a ‘Strongly Recommended’ Model Law��241 C. Partial or Piecemeal Unification or Harmonisation of Substantive Law��244 i. Dealing with the Threat of Fragmentation��245 ii. Spontaneous Convergence as a Starting Point: Simple Retention of Title��250 iii. The Separation of Cross-border and Domestic Security Arrangements��252 D. Optional or Supplementary Instruments��254 i. The ‘European Security Right’��254 a. Content��254 b. Critique��260 ii. ‘Community Security Right’��263 a. Content��263 b. Critique��264 III. The Centralised Conflicts-Approach��267 A. Uniform Conflict Rules and Other Means of Coping with Substantive Diversity��267 B. Competence��270 C. General Design Requirements for Conflict Rules on Third-Party Relations��272 i. Definite and Predictable Choice of Law��272 a. Choice of Connecting Factors��272 b. The Exclusion of Renvoi��274

Contents

xi

ii. Rejection of Party Autonomy as a General Solution��275 iii. Asset Type-Specificity in Choosing Connecting Factors��280 D. Conflicts Treatment for Security Rights over Tangible Movables��281 i. The General Conflict Rule: Lex Rei Sitae Challenged by Security-Provider Location��281 ii. Improvement through the Unification of Conflict Rules��286 iii. The Grace Period��287 E. Conflicts Treatment for Security Rights over Receivables��289 IV. The Local Conflicts-Approach��292 A. Residual Nature��292 B. Security Rights over Tangible Movables��292 i. The Treatment of Conflit Mobile Situations��292 ii. The Scope of the Lex Registrationis Rule��295 C. Security Rights over Receivables��295 V. The Local Substantive Approach��296 I. Conclusion��299 V Conclusions��301

Bibliography��305 Index��325

xii

TABLE OF CASES

EU Cases 8/74 Procureur du Roi v Benoît and Gustave Dassonville [1974] ECR 837��79 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein [1979] ECR 649 (Cassis de Dijon)�� 79, 80–81, 87–88, 90, 92 788/79 Criminal proceedings against Herbert Gilli and Paul Andres [1980] ECR 2071��88 261/81 Walter Rau Lebensmittelwerke v De Smedt PVBA [1982] ECR 3961��90 286/81 Criminal proceedings against Oosthoek’s Uitgeversmaatschappij BV [1982] ECR 4575��80–83, 85 178/84 Commission of the European Communities v Federal Republic of Germany [1987] ECR 1227��90 C-69/88 H Krantz GmbH & Co v Ontvanger der Directe Belastingen and Netherlands State [1990] ECR I-583�� 85–87 C-339/89 Alsthom Atlantique SA v Compagnie de construction mécanique Sulzer SA [1991] ECR I-107��79, 87, 231 C-204/90 Hanns-Martin Bachmann v Belgian State [1992] ECR I-249��89 C-267/91 and C-268/91 Criminal proceedings against Bernard Keck and Daniel Mithouard [1993] ECR I-6097�� 80–85 C-93/92 CMC Motorradcenter GmbH v Pelin Baskiciogullari [1993] ECR I-5009��79 C-315/92 Verband Sozialer Wettbewerb eV v Clinique Laboratoires SNC and Estée Lauder Cosmetics GmbH [1994] ECR I-317�� 81–82 C-384/93 Alpine Investments BV v Minister van Financiën [1995] ECR I-1141��82 C-412/93 Société d’Importation Edouard Leclerc-Siplec v TF1 Publicité SA and M6 Publicité SA [1995] ECR I-179��82 C-415/93 Union royale belge des sociétés de football association ASBL v Jean-Marc Bosman, Royal club liégeois SA v Jean-Marc Bosman and others and Union des associations européennes de football (UEFA) v Jean-Marc Bosman [1995] ECR I-4921��82 C-484/93 Peter Svensson and Lena Gustavsson v Ministre du Logement et de l’Urbanisme [1995] ECR I-3955��86 C-34/95, C-35/95 and C-36/95 Konsumentombudsmannen (KO) v De Agostini (Svenska) Förlag AB and TV-Shop i Sverige AB [1997] ECR I-3843��83 C-120/95 Nicolas Decker v Caisse de maladie des employés privés [1998] ECR I-1831��89 C-212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459��187 C-222/97 Manfred Trummer and Peter Mayer [1999] ECR I-1661��86, 91 C-376/98 Federal Republic of Germany v European Parliament and Council of the European Union [2000] ECR I-8419 (Tobacco Advertising I)��230, 241

xiv

Table of Cases

C-144/99 Commission of the European Communities v Kingdom of the Netherlands [2001] ECR I-3541��246 C-208/00 Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC) [2002] ECR I-9919��187 C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECR I-10155��187 C-452/01 Margarethe Ospelt and Schlössle Weissenberg Familienstiftung [2003] ECR I-9743��86 C-491/01 The Queen and Secretary of State for Health ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd [2002] ECR I-11453 (Ex p BAT)��202, 234 C-380/03 Federal Republic of Germany v European Parliament and Council of the European Union [2006] ECR I-11573 (Tobacco Advertising II)�� 230–31 C-436/03 European Parliament v Council of the European Union [2006] ECR I-3733��230, 232 C-110/05 Commission of the European Communities v Italian Republic [2009] ECR I-519 (Trailers)��83–84, 86–87 C-142/05 Åklagaren v Percy Mickelsson and Joakim Roos [2009] ECR I-4273��84 C-302/05 Commission of the European Communities v Italian Republic [2006] ECR I-10597 (Commission v Italy)��131, 248 C-58/08 The Queen, on the application of Vodafone Ltd and Others v Secretary of State for Business, Enterprise and Regulatory Reform [2010] ECR I-4999��231 C-133/08 Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV and MIC Operations BV [2009] ECR I-9687��36 C-274/11 and C-295/11 Kingdom of Spain and Italian Republic v Council of the European Union, ECLI:EU:C:2013:240��241 C-105/12 to C-107/12 Staat der Nederlanden v Essent NV, Essent Nederland BV, Eneco Holding NV and Delta NV, ECLI:EU:C:2013:677��230 National Cases Denmark UfR 1966.475 V��216 UfR 1973.796 SH��216 UfR 1982.1038 V��216 UfR 1983.311 H�� 216–17 UfR 1984.8 H��216, 218 UfR 1987.766 H��218 UfR 1992.373 V��218 Finland KKO 1968 II 53��152 KKO 1971 II 65��152 KKO 1971 II 102��152, 297 KKO 1977 I 4��152

Table of Cases

xv

Germany RGZ 57, 175 (11 March 1904)��160 RGZ 59, 146 (8 November 1904)��160 BGHZ 39, 173 (20 March 1963)��93, 219 BGHZ 45, 95 (2 February 1966)��220 BGH IPRspr 1991 no 71 (11 March 1991)��219 BGH XI ZR 302/97; NJW 1999, 940 (8 December 1998)��72 The Netherlands Keereweer qq v Sogelease, HR 19 mei 1995, NJ 1996, 119��96 Brandsma qq v Hansa Chemie AG, HR 16 mei 1997, NJ 1998, 585��72, 183 Sweden NJA 1932, 292��152 NJA 1972, 192��214 NJA 1978, 593��152, 213, 215 NJA 1984, 693��213 UK Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676��157 Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150��157 Blue Sky One Ltd and Others v Mahan Air and Another [2010] EWHC 631 (Comm)��73, 287

xvi

TABLE OF LEGISLATION

EU Legislation Treaties Treaty establishing a Constitution for Europe��34 Treaty establishing the European Community (TEC)�� 80, 200, 229, 230 Art 94 (formerly Art 100)��201 Art 295��131, 252 Treaty on European Union (TEU) Art 5��201 Art 5(2)��229 Art 5(3)��233 Art 5(4)��233 Art 20��54, 241 Art 20(4)��242 Art 50��24 Treaty on the Functioning of the European Union (TFEU) Art 26(2)��18 Art 34 (Art 30 TEC, Art 30 TEEC)�� 19, 78, 80–81, 84–85, 87, 221 Art 36��78, 87–89, 221 Art 63��78 Art 63(1) (Art 56(1) TEC)�� 86–87 Art 65��78 Art 65(1)��87 Art 81�� 270–71 Art 81(2)(c) (Art 65(b) TEC)�� 270–71 Art 114 (Art 95 TEC, formerly Art 100a TEC)��201, 229–33 Art 115��201, 229 Art 118��242 Art 267��36 Art 326�� 241–42 Arts 326–34�� 241–42 Art 345 (Art 295 TEC)��131, 230, 252 Art 352 (Art 308 TEC, formerly Art 235 TEC)��229, 232–33, 255 Protocol (No 2) on the application of the principles of subsidiarity and proportionality��201, 237 Protocol (No 21) on the position of the United Kingdom and Ireland in respect of the area of freedom, security and justice��272 Protocol (No 22) on the position of Denmark��272

xviii

Table of Legislation

Conventions Convention on the law applicable to contractual obligations (Rome Convention)�� 32, 34, 72, 197 Art 3��35 Art 4��31–32, 35–36 Art 4(1)��31, 36 Art 4(2)��31, 36 Art 4(3)��31, 36 Art 4(4)��31, 36 Art 4(5) ��31, 36 Art 5(2)��32 Art 7��32 Art 16��32 First Protocol on the interpretation by the Court of Justice of the European Communities of the Convention on the law applicable to contractual obligations��35 Second Protocol conferring on the Court of Justice of the European Communities certain powers to interpret the Convention on the law applicable to contractual obligations��35 Regulations Regulation (EC) 40/94 on the Community trade mark [1994] OJ L11/1��232 Regulation (EC) 1435/2003 on the Statute for a European Cooperative Society (SCE) [2003] OJ L207/1��232 Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6��272 Art 3��16, 80 Art 4��16, 35–36, 71 Art 4(1)��36 Art 4(2)��36 Art 4(3)��36, 216 Art 6(2)��190 Art 14�� 4, 15, 36, 62, 72, 189, 269, 276, 291 Art 14(1)��16 Art 14(2)��15 Art 14(3)�� 15, 62, 183, 276, 289 Art 19��284 Art 19(1)��284 Art 19(2)��285 Art 24��31 Art 27(2)��15, 72, 189 Art 28��31 Regulation (EU) 2015/848 on insolvency proceedings (recast) [2015] OJ L141/19 Art 7(2)(i)��60 Art 8��60 Art 10��60

Table of Legislation

xix

Directives Directive 88/361/EEC for the implementation of Article 67 of the Treaty [1988] OJ L178/5 Annex I��86 Directive 2000/35/EC on combating late payment in commercial transactions [2000] OJ L200/35��247 Art 4(1)��130 Directive 2001/37/EC on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco products [2001] OJ L194/26��202 Directive 2002/47/EC on financial collateral arrangements [2002] OJ L168/43��152, 247 Recital 5��132 Recital 8��133 Recital 9��132 Recital 10��132 Recital 13��130, 132 Art 1(2)��131 Art 1(4)��132 Art 2(1)(h)��133 Art 3��132 Art 6(1)��132 Art 8��132 Directive 2009/44/EC amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims [2009] OJ L146/37��131, 249 Directive 2011/7/EU on combating late payment in commercial transactions (recast) [2011] OJ L48/1��130, 247 National Legislation Finland Act on Financial Collateral (11/2004)��247 Act on the Ranking of Claims (1578/1992) s 5��146 Bankruptcy Act (120/2004) c 5 s 7(2)��152, 296–98 Enterprise Mortgage Act (634/1984)��146 s 3��150 s 4(1)��150 s 4(3)��150 Vehicle Mortgage Act (810/1972)��150 Vehicles Act (1090/2002)��150 France Civil Code��79 Arts 2333–50��38

xx

Table of Legislation

Germany Introductory Act to the Civil Code (EGBGB) Art 43(2)��219 Art 43(3)��221 Art 45��61 Art 46��221 Civil Code s 1205��93, 160 s 1206��93 s 1280��160 Italy Civil Code Art 1523��220 Art 1524(1)��94, 220 Legislative Decree No 231/2002 Art 11(3)��95 The Netherlands Civil Code Book 3��61, 160, 182 ex Art 92a(1)��61 ex Art 92a(2)��61 Art 94(3)��182 Art 237��160 Art 239��160 Book 6��96 Art 251��96 Art 252��96 Book 10��61, 64 Art 128(1)��64 Art 128(2)��61, 64 Norway Mortgages and Pledges Act (8 February 1980 No 2) ss 3-14–3-22��154 s 3-14(b)��157 s 3-15(2)��152 Sweden Floating Charges Act (2008:990)��147 c 2 s 1��150 Priority Rights Act (1970:979) s 5��147 Switzerland Federal Act on Private International Law (1987) Art 102(2)��288

Table of Legislation

xxi

UK Companies Act 2006 pt 25��164 Enterprise Act 2002��145 s 252��144 Insolvency Act 1986 s 176A��144 s 176A(3)–(5)��144 Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097)��144 US Louisiana Civil Code Arts 3515–49��33 Uniform Commercial Code (UCC)��240 Art 1��40 s 1-201(b)(35)��40 s 1-203��40 Art 9�� 19, 38–45, 51–52, 68, 94, 99, 107, 139, 142, 144, 151, 157, 164, 167–69, 193, 239, 242–43, 248, 256, 259 s 9-102��40 s 9-103��157 s 9-108��41 s 9-109��40 s 9-109(a)(1)��40 s 9-109 Official Comment 2��40 s 9-202��40 s 9-203(a)��41 s 9-203(b)��41 s 9-204��42 s 9-205��40 s 9-301(1)��42 s 9-309��41 s 9-309(1)��167 ss 9-310–9-314��41 ss 9-317–9-339��42 s 9-317(e)��167 s 9-324��157, 167 s 9-324 Official Comment 4��167 ss 9-501–9-527��42 s 9-502(a)��41 s 9-502(d)��42 s 9-504��41 US Code, Title 11 c 11��144

xxii

TABLE OF INTERNATIONAL INSTRUMENTS

Convention on International Interests in Mobile Equipment (Cape Town Convention)�� 24, 49, 53, 163, 178, 255–58, 298 Art 30(1)��259 Art 39��258 Art 40��258 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Aircraft Protocol)��298 Convention on the International Recognition of Rights in Aircraft��49 Draft Common Frame of Reference (DCFR)�� 11, 43–44, 133, 239 Principles para 16��134 Principles para 36��134 Book IX Proprietary security in movable assets��68, 133–34 IX.—1:101(1)��44 IX.—1:102 comment B��44 IX.—1:102 comment D��134 IX.—1:102(2)��44 IX.—1:102(2)(b)��44 IX.—1:103��44 IX.—1:103(2)��44 IX.—1:103(2)(c)��157 IX.—1:104��44 IX.—1:105��256 IX.—1:201(3)��44, 166 IX.—c 2��11, 44 IX.—2:104 comments��45 IX.—2:104(3)��44 IX.—2:105 comments A and B��45 IX.—2:107��45 IX.—c 3��11, 45, 160 IX.—c 3 s 3��160 IX.—3:102��45 IX.—3:103��45 IX.—3:107 comment C��167 IX.—3:107 comment D��167 IX.—3:107(1)��166 IX.—3:107(2)��167 IX.—3:107(3)��167

xxiv

Table of International Instruments

IX.—3:107(4)��45, 167 IX.—3:108��44, 288 IX.—3:301��45 IX.—3:301 comments��45 IX.—3:301 comment A��134 IX.—3:301 comment C��45, 164, 166 IX.—3:301 comment D��45, 165 IX.—3:302��45 IX.—3:303��45 IX.—3:304��165 IX.—3:305��45 IX.—3:305(1)��45 IX.—3:305(2)��45 IX.—3:306��45 IX.—3:306(1)��45 IX.—3:306(1)(e)��165 IX.—3:306(2)��45 IX.—3:307��45 IX.—3:309��165 IX.—3:312��44 IX.—3:315��45 IX.—3:318��45 IX.—3:333��44 IX.—c 4��45 IX.—4:101��45 IX.—4:101(5)��46 IX.—4:102��46 IX.—4:102(2)��45 IX.—4:106��44 IX.—4:107��46 IX.—c 7��44, 46, 258 IX.—7:103��46 EBRD, Core Principles for a Secured Transactions Law��48, 102, 151 Principle 3��179 Principle 5��20, 179 Principle 7��20, 179 EBRD, Model Law on Secured Transactions��171 Art 4.5��165 pt 5��160 EBRD, Publicity of Security Rights: Guiding Principles for the Development of a Charges Registry��165 Principles of European Contract Law (PECL) Art 11:401(1)��277 UNCITRAL Guide on the Implementation of a Security Rights Registry��67, 164 UNCITRAL Legislative Guide on Insolvency Law pt 2, ch V, para 64��179 Recommendation 187��179, 259 Recommendation 188��179

Table of International Instruments

xxv

UNCITRAL Legislative Guide on Secured Transactions��24, 44, 48, 67, 115, 153, 178, 197 Introduction, para 20��1 Introduction, para 46��115–16 Introduction, para 47��116 ch II��11 ch II, para 1��7 ch III��11 ch IV��160 ch IV, paras 10–14��164 ch IX, paras 133–39��168 ch X, para 1��272 ch X, para 2��268 ch X, para 5��268 ch X, para 6�� 272–74 ch X, para 7��268 ch X, paras 10–11��273 ch X, para 13��276 ch X, para 14��275 ch X, para 19��59 ch X, para 20��1, 153, 281 ch X, paras 22–25��280 ch X, para 23��282 ch X, para 24��282 Recommendation 45��268, 287 Recommendation 180��168 Recommendation 192��168 Recommendations 203–08��280 Recommendation 221��275 UNCITRAL Model Law on Secured Transactions��67, 115 c II��11 c III��11 c IV��160, 164

xxvi

Introduction I. Overview Commercial activity largely depends on credit. However, economic actors willing to extend credit to other economic actors in need of it cannot be taken for granted. Rather, willingness presupposes a legal infrastructure that enhances the confidence of prospective creditors in the likelihood of repayment or other recovery. A major component of this legal infrastructure in different jurisdictions is a system of proprietary security rights.1 A proprietary (or ‘real’) security right is a right over an asset or aggregate of assets, and is intended to secure payment of a debt or other performance of an obligation. An asset subject to a proprietary security right is called an ‘encumbered asset’, while a creditor who has acquired and holds a proprietary security right is called a ‘secured creditor’.2 Accordingly, ‘secured credit’ means credit extended against a proprietary security right. Encumbered assets may be applied to satisfy the secured creditor’s claim, often called a ‘secured claim’, if the debtor defaults on the obligation.3 Henceforth, proprietary security rights are referred to as ‘security rights’. 1 For an overview of these legal infrastructures and other legal underpinnings of a market e conomy, see DW Arner, Financial Stability, Economic Growth, and the Role of Law (New York, Cambridge University Press, 2007) 91–125. See also U Drobnig, ‘Secured Credit in International Insolvency Proceedings’ (1998) 33 Texas International Law Journal 53, 54. Drobnig observes that the more a market economy advances, the more it becomes a credit economy, adding that under present conditions, credit cannot usually be granted without some sort of security. On recent empirical studies in the field, see J Armour, A Menezes, M Uttamchandani and K van Zwieten, ‘How Do Creditor Rights Matter for Debt Finance? A Review of Empirical Evidence’ in F Dahan (ed), Research Handbook on Secured Financing in Commercial Transactions, Research Handbooks in Financial Law (Cheltenham, Edward Elgar, 2015). 2 See UNCITRAL Legislative Guide on Secured Transactions, Introduction, para 20. Especially in the context of US law, and laws influenced by it, the term ‘collateral’ is used for encumbered assets and the term ‘security interest’ for proprietary security rights. 3 Proprietary security rights are usually provided by the debtor itself. This book is not concerned with guarantees and other personal security rights, which are the other main type of security rights. The provider of a personal security right is a third person who assumes the risk of the debtor’s default and typically becomes liable to the creditor with all its assets. Personal security rights can be used as an alternative or a supplement to proprietary security rights, and they may have to serve as substitutes in legal systems that restrict the use of proprietary security rights. See U Drobnig (ed), Personal Security, Principles of European Law 4 (Munich, Sellier European Law Publishers, 2007) 79, 100. On the distinction between these types of security rights, see A de la Mata Muñoz, Typical Personal Security Rights in the EU: Comparative Law and Economics in Italy, Spain and Other EU Countries in the Light of EU Law, Basel II and the Financial Crisis, Studien zum ausländischen und internationalen Privatrecht 253 (Tübingen, Mohr Siebeck, 2010) 8–14.

2

Introduction

This book focuses on security rights over tangible movables and receivables, with the further conditions that these rights are created by an agreement (or a unilateral disposition) between the debtor and the secured creditor, and that the secured claim is of a monetary nature. Security rights over tangible movables and receivables are suitable for examination as a single group because they tend to be used in similar economic circumstances. In particular, both types of encumbered assets play a major role in financing small and medium-sized enterprises.4 More importantly for the present purposes, security rights over tangible movables and receivables are exposed to particular cross-border problems in trade and finance, for comparable reasons.5 Cross-border problems within the internal market of the EU are the point of departure for this book. The principal issues are uncertainty of enforceability and unexpected loss of security rights. These result from the combined effect of divergences between individual Member State substantive laws on secured credit on the one hand and the current condition of private international law, particularly the current conflict rules, on the other hand.6 The main concern centres on thirdparty relations. Enforceability against third parties, most notably the debtor’s other creditors on insolvency, is crucial to the fulfilment of the economic purposes of security rights.7 However, as EU and Member State laws currently stand,

4 Security rights that are created not by an agreement but directly by virtue of law often serve highly diverse purposes. Examples include the repairer’s right of retention and maritime lien. See A Veneziano, ‘Attachment/Creation of a Security Interest’ in H Eidenmüller and E-M Kieninger (eds), The Future of Secured Credit in Europe, European Company and Financial Law Review, special vol 2 (Berlin, De Gruyter Recht, 2008) 128. Veneziano notes that the uniform regulation of non-consensual security rights does not seem feasible due to their diverse nature and great differences between legal systems. 5 The cross-border aspects of security rights over immovables and investment assets have mostly become discourses of their own. On plans for a Eurohypothec over immovables, see O Stöcker, ‘The Eurohypothec’ in S van Erp, A Salomons and B Akkermans (eds), The Future of European Property Law (Munich, Sellier European Law Publishers, 2012). For an introduction to security arrangements and other transactions with respect to securities, see R Goode, H Kronke and E McKendrick (eds), Transnational Commercial Law: Text, Cases and Materials, 2nd edn (Oxford, Oxford University Press, 2015) 425–58. For more comprehensive treatment, see T Keijser (ed), Transnational Securities Law (Oxford, Oxford University Press, 2014). 6 ‘Conflict rule’ is a synonym for ‘choice-of-law rule’. In this book, the term ‘choice-of-law system’ is used for systems of conflict rules. The term ‘choice of law’ denotes determination of the substantive law applicable to a particular legal relation or question, by application of a conflict rule. It may also refer to the opportunity for parties to select the applicable substantive law themselves, expressly by a choiceof-law clause or tacitly. This opportunity, also known as ‘party autonomy’, typically exists in matters of contract law, but seldom in property law matters, such as third-party effectiveness of security rights. See generally R Westrik and J van der Weide, ‘Introduction’ in R Westrik and J van der Weide (eds), Party Autonomy in International Property Law (Munich, Sellier European Law Publishers, 2011) 1–6. 7 See E Dirix, ‘Effect of Security Rights vis-à-vis Third Persons’ in U Drobnig, HJ Snijders and E-J Zippro (eds), Divergences of Property Law: An Obstacle to the Internal Market? (Munich, Sellier European Law Publishers, 2006) 69–70. Dirix writes: ‘A security device that would not withstand the entitlement of other creditors or the administrator of an insolvency proceeding simply cannot qualify as a security right.’ See also R Goode, ‘The Protection of Interests in Movables in Transnational Commercial Law’ (1998) 3 Uniform Law Review 453, 456. According to Goode, bankruptcy ‘provides the acid test of the efficacy of real rights in general and security interests in particular’ and protection from bankruptcy creditors is a primary concern to the holders of these rights.

Overview

3

enforceability against third parties usually cannot be guaranteed in cross-border contexts. We know from various comparative studies that preconditions for and restrictions on the effectiveness of security rights against third parties vary from one jurisdiction to another. These divergences are wide, even between EU Member States.8 Preconditions typically relate to the publicity of security arrangements and the specificity of encumbered assets. Restrictions may involve, say, cutting down the priority of secured claims in relation to other claims on the debtor’s insolvency or limitations on the scope of security devices available.9 A major cause of complications with these divergences is that the conflict rules covering third-party relations, sometimes referred to as ‘proprietary’ conflict rules, typically do not allow the parties to a security arrangement to know for certain beforehand which jurisdictions’ preconditions they need to fulfil so as to guarantee enforceability against third parties. The general conflict rule for tangible movables, the lex rei sitae rule, may determine the applicable substantive law in an unpredictable manner if encumbered assets are moved from their initial location to another jurisdiction.10 As for receivables, then, the conflict rule varies between

8 A pioneering study in this field was prepared by Ulrich Drobnig and published in 1977 as the UNCITRAL Report of the Secretary-General: study on security interests (A/CN.9/131). As for the situation in Europe, particularly illuminating have been studies where experts representing different jurisdictions discuss given factual situations on the basis of their respective legal systems. See HC Sigman and E-M Kieninger (eds), Cross-border Security over Receivables, GPR Praxis: Schriften zum Gemeinschaftsprivatrecht (Munich, Sellier European Law Publishers, 2009); HC Sigman and E-M Kieninger (eds), Cross-border Security over Tangibles, GPR Praxis: Schriften zum Gemeinschafts privatrecht (Munich, Sellier European Law Publishers, 2007); E-M Kieninger (ed), Security Rights in Movable Property in European Private Law, The Common Core of European Private Law (Cambridge, Cambridge University Press, 2004). For other relatively recent comparative reviews, see V Sagaert, ‘Security Interests’ in S van Erp and B Akkermans (eds), Cases, Materials and Text on National, Supranational and International Property Law, Ius Commune Casebooks for the Common Law of Europe (Oxford, Hart Publishing, 2012) 425–532; F F iorentini, ‘Proprietary Security Rights in the Western European Countries’ in M Bussani and F Werro (eds), European Private Law: A Handbook, vol I (Berne, Stämpfli Publishers, 2009) 442–57; T Tajti, ‘Security Rights in Central and Eastern Europe in the First Decade of the New Millennium: Where Do We Go from Here?’ in M Bussani and F Werro (eds), European Private Law: A Handbook, vol I (Berne, Stämpfli Publishers, 2009) 489–506. Studies on crossborder aspects of secured credit have often started with a comparative part discussing the substantive law in selected jurisdictions. See, eg, B-E Reinertsen Konow, Løsørepant over landegrenser (Bergen, Fagbokforlaget Vigmostad & Bjørke, 2006) 45–227; B Graham-Siegenthaler, Kreditsicherungsrechte im internationalen Rechtsverkehr: Eine rechtsvergleichende und international-privatrechtliche Untersuchung, Berner Bankrechtliche Abhandlungen 13 (Berne, Stämpfli Verlag, 2005) 13–630; JW Rutgers, International Reservation of Title Clauses: A Study of Dutch, French and German Private International Law in the Light of European Law (The Hague, TMC Asser Press, 1999) 13–68. 9 Dirix (n 7) 75–89; E-M Kieninger, ‘Evaluation: A Common Core? Convergences, Subsisting Differences and Possible Ways for Harmonisation’ in Kieninger (n 8) 655–57, 669–71; G McCormack, Secured Credit under English and American Law, Cambridge Studies in Corporate Law (Cambridge, Cambridge University Press, 2004) 32–37. 10 C von Bar and U Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe: A Comparative Study (Munich, Sellier European Law Publishers, 2004) 342, 468; E-M Kieninger, ‘Introduction: Security Rights in Movable Property within the Common Market and the Approach of the Study’ in Kieninger (n 8) 16–18. Even a security arrangement that is intended by the secured creditor as purely domestic may become a cross-border one if the encumbered asset is moved to another jurisdiction.

4

Introduction

jurisdictions. As a result, the applicable substantive law may depend on the jurisdiction where the dispute is adjudicated.11 Even if the parties to a security arrangement could know the applicable substantive law with sufficient certainty beforehand, transaction-cost concerns remain. In particular, complying with the preconditions set by a foreign jurisdiction is likely to be costly and time-consuming. All this seems worrying from the viewpoint of the EU internal market. Indeed, many commentators perceive these problems as obstacles to its proper functioning.12 For some, the idea of the internal market entails a need to ‘level the playing field’, to create equal competition conditions for enterprises from different Member States, including in terms of security rights.13 The foregoing merely sketches a rough overview of the problems that the European discourse on security rights addresses and attempts to solve. Proposed solutions range all the way from full substantive unification or harmonisation to abstaining from substantive efforts altogether and, instead, improving the current choice-of-law systems.14 An intermediate solution is known as the ‘European Security Right’ (ESR). This would involve introducing a new supranational type of security right, not to replace but to supplement existing domestic types.15

11 FJ Garcimartín Alférez, ‘Assignment of Claims in the Rome I Regulation: Article 14’ in F F errari and S Leible (eds), Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (Munich, Sellier European Law Publishers, 2009) 233–47; HC Sigman and E-M Kieninger, ‘The Law of Assignment of Receivables: In Flux, Still Uncertain, Still Non-uniform’ in Sigman and Kieninger (eds), Crossborder Security over Receivables (n 8) 46–74. 12 See U Drobnig, HJ Snijders and E-J Zippro, ‘Divergences of Property Law: An Obstacle to the Internal Market?’ in Drobnig, Snijders and Zippro (n 7) 12–13. A related question is whether nonenforcement of foreign security rights may breach fundamental freedoms in the shape of free movement of goods and capital. See W-H Roth, ‘Secured Credit and the Internal Market: The Fundamental Freedoms and the EU’s Mandate for Legislation’ in Eidenmüller and Kieninger (n 4) 37–61. 13 See W Rank, ‘Harmonisation of National Security Rights’ in Drobnig, Snijders and Zippro (n 7) 206; von Bar and Drobnig (n 10) 469. 14 eg, compare the views presented in von Bar and Drobnig (n 10) 467–69, in favour of unification or harmonisation of substantive laws, and MV Polak, ‘Recognition, Enforcement and Transformation of Foreign Proprietary Rights: A Handful of Observations and Suggestions’ in Drobnig, Snijders and Zippro (n 7) 127–28, in favour of unification or harmonisation of conflict rules. For overviews of the proposed solutions, see H Beale, ‘The Future of Secured Credit in Europe: Concluding Remarks’ in Eidenmüller and Kieninger (n 4); Drobnig, Snijders and Zippro, ‘Divergences of Property Law’ (n 12). 15 K Kreuzer, ‘Die Harmonisierung des Rechts der Mobiliarsicherheiten’ in J Basedow, O Remien and M Wenckstern (eds), Europäisches Kreditsicherungsrecht: Symposium im Max-Planck-Institut für ausländisches und internationales Privatrecht zu Ehren von Ulrich Drobnig am 12. Dezember 2008 (Tübingen, Mohr Siebeck, 2010) 52–69; HJ Snijders, ‘Access to Civil Securities and Free Competition in the EU: A Plea for One European Security Right in Movables’ in Drobnig, Snijders and Zippro (n 7) 159–64. For the original proposal, see KF Kreuzer, ‘Europäisches Mobiliarsicherungsrecht oder: Von den Grenzen des Internationalen Privatrechts’ in WA Stoffel and P Volken (eds), Conflits et harmonisation: Mélanges en l’honneur d’Alfred E. von Overbeck à l’occasion de son 65ème anniversaire (Fribourg, Editions Universitaires Fribourg Suisse, 1990) 637–40.

Overview

5

A majority of commentators seem to support some kind of substantive intervention by the EU. This book, in contrast, examines a broader variety of options. In a nutshell, the aim here is to reveal the optimal way to promote compatibility between systems of security rights over tangible movables and receivables in Europe. The focus is on the EU and its Member States. Compatibility in this context is understood as the absence of cross-border problems, or at least the availability of practicable solutions to them. Importantly, compatibility is seen as a matter of degree, so that systems of security rights can be more or less compatible with each other at a given point in time. This entails that compatibility can be advanced gradually. In terms of concrete means to promote compatibility, the book analyses four main types. These can be presented as a fourfold table of two variables as follows. First, means can be introduced at the centralised level or the local level; in other words, measures can be taken by the EU or by an individual Member State. Second, means can fall under substantive approaches or conflicts approaches. A ‘substantive approach’ is a general term for efforts to unify or harmonise substantive law, which can be more or less comprehensive in scope, whereas a ‘conflicts approach’ refers to means based mainly on private international law. In sum, the four main types of concrete means to promote compatibility are a centralised substantive approach, a centralised conflicts-approach, a local conflicts-approach and a local substantive approach. This book contributes to the European discourse on security rights by proposing the optimal division of labour between the four approaches. This proposal needs to specify the content of the approaches it encompasses; for example, within the centralised substantive approach, how comprehensively, if at all, should the EU pursue the unification or harmonisation of substantive law and by what particular instruments? As for the local conflicts-approach and the local substantive approach, Finnish law, and in some respects Nordic law more generally, serves as a case study. Achieving optimal division of labour involves choices between the four approaches as well as within each of them, that is, finding the optimal composition of concrete means to promote compatibility. Accordingly, the core question is: how to choose? The answer this book offers is that choices should be based on a set of objectives capturing the essence of desirable development towards greater compatibility between systems of security rights, with that development being understood as a gradual process. These objectives are derived from sources as diverse as the economic functions of security rights, the conditions for legal evolution, such as adaptability to local circumstances and experimental learning, and a transnational conception of justice. How to derive and employ the objectives is introduced in section IV. Before that, notes on how security rights are viewed and understood in this book in section II are followed by a review of the cross-border problems to which these rights are exposed in trade and finance in section III.

6

Introduction

II. Security Rights as Relational Legal Positions So far, we have established that this book focuses on security rights created by an agreement, that employ tangible movables or receivables as encumbered assets,16 and that secure satisfaction of monetary claims. In most situations, these secured claims concern repayment of credit that the secured creditor makes available to the debtor. In all situations within the scope of this book, the security provider is the debtor of the secured claim, not a third person. This means that the agreement which creates the security right is between the debtor and the secured creditor. Examples of particular security devices they may have to employ to this end include pledges, fixed and floating charges, enterprise charges, retentions (or ‘reservations’) of title (or ‘ownership’), security transfers of title (or ‘ownership’) and security assignments.17 At this point, we should note that rights created by retention of title and other so-called ‘title-based’ security devices are not characterised in all jurisdictions as security rights. Sometimes they are referred to as ‘quasi-security rights’ or ‘functional equivalents of security rights’, as opposed to ‘genuine security rights’. However, this book rejects that distinction and treats them all as security rights. One reason is that all these rights carry out similar and in some cases identical economic functions, so the distinction would prove arbitrary or even misleading in a cross-border perspective.18 Indeed, as the same economic function may be

16 Questions relating to certain special types of tangible movable, eg, money, negotiable instruments and certified securities, are not discussed. The term ‘receivable’ is used here for personal rights to payment of a monetary sum which are not expressed as payable through a negotiable instrument. Contractual rights are the most significant group among these, but, eg, rights to non-contractual damages are also included in the definition. Then again, not all contractual rights are included. Due to the requirement of a monetary nature, eg, rights concerning services or delivery of goods are left out. cf Sigman and Kieninger (n 11) 3–4; A Flessner and H Verhagen, Assignment in European Private International Law: Claims as Property and the European Commission’s ‘Rome I Proposal’, GPR Praxis: Schriften zum Gemeinschaftsprivatrecht (Munich, Sellier European Law Publishers, 2006) 2. 17 For an overview of these security devices and their uses, see U Drobnig, ‘Security Rights in Movables’ in AS Hartkamp et al (eds), Towards a European Civil Code, 4th revised edn (Alphen aan den Rijn, Kluwer Law International, 2011). On variation in terminology, see E-M Kieninger and GL Gretton, ‘Glossary’ in Kieninger (n 8). cf Rank (n 13) 203. Rank uses the term ‘proprietary security right’ for ‘security rights under which title to the collateral is vested in the collateral taker’. What he means by the distinction between proprietary and non-proprietary security rights is more commonly expressed as the distinction between title-based and other security devices. In this book, and in accordance with established usage, the location of title is irrelevant as to whether a security right is deemed proprietary. The term ‘proprietary security right’ is used at the beginning of the book to mark the distinction from personal security rights, which fall outside the scope of the book. See n 3. 18 See RD Vriesendorp, ‘The Effect of Security Rights Inter Partes: Some Observations from a Netherlands Law Perspective’ in Drobnig, Snijders and Zippro (n 7) 64. Vriesendorp notes the arbitrariness of the distinction. For an alternative account, see L Gullifer, ‘Quasi-security Interests: Functionalism and the Incidents of Security’ in I Davies (ed), Issues in International Commercial Law (Aldershot, Ashgate, 2005). Gullifer weighs advantages and drawbacks of the distinction, mainly from the viewpoint of English and Welsh law. See also PR Wood, Comparative Law of Security Interests and Title Finance, Law and Practice of International Finance 2, 2nd edn (London, Sweet & Maxwell, 2007) 27–30.

Security Rights as Relational Legal Positions

7

achievable through a title-based security device in one jurisdiction and through a non-title-based security device in another, both kinds of security device must be included for a whole picture of security arrangements used in practice. Another reason is that the book seeks transnational solutions to the cross-border problems addressed, so that it cannot be premised on jurisdiction-specific taxonomies of rights. In contrast, an important distinction in this book consists in that between possessory and non-possessory security rights (and security devices). In the case of a possessory security right, such as a traditional right of pledge, the encumbered asset may be held by the secured creditor (pledgee) or a third person, while the security-provider debtor (pledgor) must be dispossessed of the asset (for thirdparty effectiveness, if not for the existence of the right). The commercial significance of non-possessory security rights is far greater because they typically allow the debtor to continue using, refining and even disposing of the assets by sale or otherwise.19 Regardless of the above distinctions, a security right is best understood as a creditor’s legal position, consisting of different entitlements and protections in relation to different persons. The following account is a comparative generalisation rather than a description of any particular legal system. Certainly the most fundamental relation, and the first in time, is that between the creditor and the security-provider debtor. By virtue of their security agreement, the creditor becomes a secured creditor, and the creditor’s claim a secured claim; in other words, a security right is created.20 The security agreement can be a separate contract, or a clause or a set of clauses in a contract on, say, credit or credit sales.21 As for substance, the security agreement designates as encumbered a tangible movable, a receivable, or some amount or aggregate of those assets. These encumbered assets may be applied to satisfy the secured claim if the debtor defaults on the obligation, that is, fails to pay the debt as agreed. Depending on the security device used, this may involve realising encumbered assets and recovering the debt out of the realisation proceeds, or repossessing assets that the debtor has been supplied with. The former is typically the case for pledges and charges, and the latter for retentions of title and the like. The above entitlements concern the secured creditor’s relation to the debtor. However, in view of the economic purposes of security rights, these entitlements

19 Drobnig (n 17) 1026–38. This distinction applies to security rights over tangible movables. All security rights over receivables are inherently non-possessory due to the non-physical nature of encumbered assets. On the diminishing role of possession in doctrines on security rights, see Kieninger (n 9) 652–54. 20 UNCITRAL Legislative Guide on Secured Transactions, ch II, para 1. According to the terminology of the Legislative Guide, a security right is deemed to be created when it has become effective against the grantor, ie, the security provider. As to the Legislative Guide’s recommendations on creation of security rights, see Veneziano (n 4). 21 On security agreements generally and with comparative observations, see AJM Steven, ‘The Effect of Security Rights Inter Partes’ in Drobnig, Snijders and Zippro (n 7).

8

Introduction

as such are not enough. Indeed, entitlements also need to be protected against third parties, meaning persons who are outsiders to the security agreement and who may threaten the secured creditor’s position based on that agreement. This kind of threat is present if third parties compete for the same assets that the security agreement between the secured creditor and the debtor designates as encumbered assets. For if a third party or some collective of third parties prevails, the security right proves ineffective and unenforceable against that third party or collective. As a consequence, the secured creditor will be treated as an ordinary, unsecured creditor with regard to the encumbered assets. This can be illustrated by an example from the context of liquidation-type collective insolvency proceedings. In the example, the relevant third parties are the debtor’s other creditors, represented by the insolvency administrator. Let us first assume that the secured creditor’s security right is unenforceable against the other creditors and, additionally, that no creditor is entitled to any kind of preferential treatment. In that case, distribution of the debtor’s assets follows the so-called pari passu principle. This means distributing the assets among the creditors in proportion to the amounts of their outstanding claims. In other words, it pursues pro rata equality based on the creditors’ pre-insolvency entitlements. Typically, the total amount of the creditors’ claims exceeds the amount of the debtor’s assets, so that no creditor can be paid in full. In contrast, let us now assume that the secured creditor’s security right is enforceable against the debtor’s other, unsecured creditors. Through recourse to the encumbered assets, the secured creditor receives proportionally more than the unsecured creditors and may even be paid in full. This of course diminishes the assets that can be distributed among the unsecured creditors.22 As can be expected, the opportunity to evade the ‘equality of misery’ of pari passu distribution is generally considered as the main reason why creditors demand security rights.23

22 Contrary to the terminology adopted here, the term ‘pari passu principle’ is sometimes used for the equal treatment of creditors in a similar priority position or belonging to the same creditor class, eg, the rateable abatement of the claims of those creditors. See RJ Mokal, ‘Priority as Pathology: The Pari Passu Myth’ (2001) 60 CLJ 581, 583–84. Mokal points out the unsoundness of this use as follows. The use disconnects the determination of equality from pre-insolvency law. In addition, the use reduces the principle to triviality in that the principle then only describes what insolvency law actually does and fits with any priority scheme. As a result, the principle says nothing about why insolvency law treats certain creditors as equals. However, here Mokal refers to ‘equality’, within quotation marks, since in his view the principle in any case reflects mere formal as opposed to true equality. 23 McCormack (n 9) 5. The microeconomic purpose of security rights discussed so far can be called the risk-reduction function. A second, closely related function is prevention of risk-shifting. This means that without a security right, the debtor could increase the creditor’s risk in several ways, eg, by issuing more debt to other creditors, giving away its assets or developing a riskier investment strategy. A third function may be to inform the creditor about the debtor’s willingness to eventually repay the credit. See J-H Röver, Secured Lending in Eastern Europe: Comparative Law of Secured Transactions and the EBRD Model Law (Oxford, Oxford University Press, 2007) 11–15. For a critique of some aspects of this third function, the ‘signalling’ theory, see J Armour, ‘The Law and Economics Debate about Secured Lending: Lessons for European Lawmaking?’ in Eidenmüller and Kieninger (n 4) 6–7. To be sure, the microeconomic purposes of security rights can be explained in various ways. See, eg, HW Fleisig, ‘Economic Functions of Security in a Market Economy’ in JJ Norton and M Andenas (eds),

Security Rights as Relational Legal Positions

9

But why, though, does the law allow deviation from pari passu distribution with security rights?24 For surely the pro rata equality that this principle represents is an intuitively appealing starting point for distribution of an insolvent debtor’s assets. Accordingly, Lynn M LoPucki hits the mark with his often-cited view on the nature of security rights: ‘Security is an agreement between A and B that C take nothing.’25 Following that idea, this book has to consider why and to what extent prospective secured creditor A and debtor B are allowed to dispose of the insolvency value of B’s assets to the benefit of A in a way that binds unsecured creditor C. Interestingly, different legal systems give somewhat different answers to this. The main justification seems to be the same everywhere. It is based on the assumption that insolvency-proof security rights increase the availability of credit and lower its cost, notably the interest rate. Creditors are assumed to extend more and cheaper credit in exchange for their reduced credit risk. Moreover, the assumption is that the ensuing increase in lending and borrowing stimulates economic activity and growth. In this way, credit is supposed to act as ‘the oil of an economy’.26 Nevertheless, the actual implications of these assumptions vary between legal systems. This variation warrants calling some jurisdictions liberal and others strict or even illiberal in their attitude towards secured credit.27 This finds its most concrete expression in the preconditions for and restrictions on the effectiveness of security rights against third parties that jurisdictions have introduced, especially against the debtor’s other creditors in collective insolvency proceedings.28 The preconditions often concern publicity. Most legal systems require security arrangements to be made public. However, the security devices subject to

Emerging Financial Markets and Secured Transactions, International Economic Development Law 6 (London, Kluwer Law International, 1998) 16–21. Fleisig starts by defining asymmetric information, moral hazard and adverse selection as underlying characteristics of a credit market, or indeed any market that involves promises over time, and then goes on to explain how security rights help to deal with these characteristics. In addition to these purposes, security rights often entail other practical advantages. eg, they may enable the creditor to sell off or to take possession of the encumbered assets without judicial or other official intervention. See McCormack (n 9) 7–11. 24 McCormack (n 9) 11–38. For an overview of various theoretical explanations for these deviations, see M Brinkmann, ‘The Position of Secured Creditors in Insolvency’ in Eidenmüller and K ieninger (n 4) 251–60. 25 LM LoPucki, ‘The Unsecured Creditor’s Bargain’ (1994) 80 Virginia Law Review 1887, 1899. 26 Drobnig (n 1) 54. See McCormack (n 9) 15–22. 27 See U Drobnig, ‘Recognition and Adaptation of Foreign Security Rights’ in Drobnig, Snijders and Zippro (n 7) 114; Kieninger (n 10) 18. 28 Kieninger (n 9) 655. Kieninger’s analysis suggests that in Europe, liberal jurisdictions include Germany, Greece, England and Ireland, whereas Austria, France, Belgium, Portugal, Italy, Spain, the Netherlands, Scotland, Denmark, Sweden and Finland are stricter. The strictness of the latter group is due to their ‘comparatively hostile attitude towards non-possessory security rights’, which stems from their close adherence to principles such as publicity, specificity and the mandatory character of property law rules, and from the prohibition of the pactum commissorium. For a global perspective and different assessment criteria, see Wood (n 18) 16–24. For updates on selected jurisdictions, see L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016).

10

Introduction

publicity requirements, and the means of fulfilling those requirements, vary between jurisdictions. The usual means are dispossessing the security-provider debtor of the encumbered assets,29 notifying a certain person of the security arrangement, and registration. The significance of creditor possession is generally decreasing due to the growing prevalence of non-possessory security rights, which allow the debtor to use encumbered assets productively.30 Notification requirements mainly concern security rights over receivables. Where applicable, notice is to be given to the debtor of the encumbered receivable. However, the trend seems to be towards abolishing notification requirements.31 Registration systems come with different characteristics. Some registers are indexed by assets, o thers by p ersons. Accordingly, a register can be searchable either by individualised encumbered asset or by name or other identifier of a security-provider debtor. The data subject to registration and the documentation needed for registration also vary between registration systems.32 Another group of typical preconditions concerns the specificity of encumbered assets. Specificity requirements determine whether and to what extent constantly changing asset-entities, such as stock-in-trade or an enterprise’s assets as a whole, or future assets are eligible as encumbered assets. Yet, the potential ineligibility of future assets (or ‘after-acquired assets’) may also result from publicity requirements that cannot be fulfilled beforehand.33 Further, specificity requirements determine whether and in what way generic assets have to be individualised in order to be fit for security purposes.

29 If the security-provider debtor is dispossessed of the encumbered assets, the security right is a possessory security right. In other words, the distinction between possessory and non-possessory security rights is made from the secured creditor’s point of view. 30 Drobnig (n 1) 55. According to Drobnig, the most important development with respect to security rights in the twentieth century was the discovery of ways to effectively use non-possessory security rights. See E-M Kieninger, ‘Securities in Movable Property within the Common Market’ (1996) 4 European Review of Private Law 41, 43–47. Kieninger outlines the directions this development has taken in different European jurisdictions. Several jurisdictions have introduced special types of non-possessory security rights which are made public by registration, whereas some others, particularly Germany, allow extensive use of title-based security devices such as retention of title and security transfer of title, thus in effect abandoning the publicity principle. See also Kieninger (n 9) 652–56. There, Kieninger notes the connection between the decreasing significance of possession and the gradual disappearance of the doctrine of ostensible or apparent ownership, according to which third parties can rely on the fact of possession when evaluating their prospective business partner’s creditworthiness. On earlier developments in these matters, see WJ Zwalve, ‘A Labyrinth of Creditors: A Short Introduction to the History of Security Interests in Goods’ in Kieninger (n 8). 31 Kieninger (n 9) 649–50, 657; Flessner and Verhagen (n 16) 6. See generally AF Salomons, ‘Deformalisation of Assignment Law and the Position of the Debtor in European Property Law’ (2007) 15 European Review of Private Law 639. 32 HC Sigman, ‘Perfection and Priority of Security Rights’ in Eidenmüller and Kieninger (n 4) 156–59; Kieninger (n 9) 670–71. See S van Erp, ‘The Cape Town Convention: A Model for a European System of Security Interests Registration?’ (2004) 12 European Review of Private Law 91, 96–97, 103–08. 33 Kieninger (n 9) 669–70. Kieninger approvingly recognises the tendency in most jurisdictions of the EU to widen the range of assets eligible as encumbered assets.

Security Rights as Relational Legal Positions

11

Prime examples of restrictions are so-called ‘carve-out’ provisions. These set aside part of the proceeds from the realisation of encumbered assets, with a view to leaving more to be distributed among unsecured creditors.34 In addition, jurisdictions have traditionally introduced various statutory privileges that rank ahead of secured claims on insolvency. Perhaps the most typical are those granted to the employees of an insolvent company or to tax authorities.35 True, statutory privileges are themselves deviations from pari passu distribution, but since they militate against the priority of secured over unsecured claims, they can be classified here as restrictions. These preconditions and restrictions combine differently in terms of particular types of security rights and security devices that different jurisdictions make available for use. Although the above discussion of preconditions and restrictions focuses on the effectiveness of security rights against the debtor’s unsecured creditors in collective insolvency proceedings, these creditors are not the only relevant group of third parties. Others include the debtor’s creditors in debt recovery proceedings (individual enforcement) and persons claiming to have subsequently acquired ownership or a limited proprietary right in encumbered assets, insofar as that acquisition of right is somehow incompatible with the prior security right. An instance of a limited proprietary right is a subsequent security right over an asset already encumbered by a prior security right. The effectiveness preconditions against these third parties may be, but do not necessarily have to be, the same as against the debtor’s unsecured creditors in collective insolvency proceedings. Each legal system has its way of ranking competing rights and of resolving priority conflicts.36 As will by now have become clear, the understanding of security rights here is based on a distinction between their effectiveness against a security-provider debtor and against third parties.37 In theory, this distinction can always be drawn. In practice, though, effectiveness against a security-provider debtor and effectiveness against third parties, as well as the respective preconditions for effectiveness, coincide at times. This may occur in two ways. First, registration is sometimes a precondition for effectiveness not only against third parties but also against the

34 See G McCormack, ‘The CFR and Credit Securities: A Suitable Case for Treatment?’ in A Vaquer (ed), European Private Law beyond the Common Frame of Reference: Essays in Honour of Reinhard Zimmermann (Groningen, Europa Law Publishing, 2008) 114–16; McCormack (n 9) 32–37. 35 Dirix (n 7) 75–77. Often the purposes of statutory privileges can be fulfilled by alternative means, such as mandatory insurance schemes in the case of wage security for employees. 36 See generally Dirix (n 7) 75–89. 37 This corresponds to the distinction in the UNCITRAL Legislative Guide on Secured Transactions between the creation of a security right (effectiveness as between the parties), as in ch II, and the effectiveness of a security right against third parties, as in ch III. The same is reproduced in the UNCITRAL Model Law on Secured Transactions, cc II and III. A similar distinction is adopted in the Draft Common Frame of Reference, Book IX Proprietary security in movable assets, cc 2 and 3. See C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR), full edn, vol 6 (Oxford, Oxford University Press, 2010) 5408–547.

12

Introduction

security-provider debtor. Examples of this so-called ‘constitutive’ effect of registration can be found in special legislation on ships and aircraft. Second, effectiveness against third parties sometimes results immediately from effectiveness against a security-provider debtor, which may be achieved by mere agreement. Examples of such situations often concern title-based security devices, especially retention of title.38

III. Incompatibility: Cross-border Problems in Trade and Finance The problems that this book seeks to solve, or at least alleviate, arise in connection with situations that can be termed ‘cross-border third-party conflicts’. These situations are third-party conflicts in that a secured claim, or its preferential treatment on insolvency, is challenged by a third party or a collective of third parties, most typically the security-provider debtor’s other creditors in insolvency proceedings. Third parties compete for the same assets that the security agreement designates as encumbered assets. National laws on secured credit are typically well equipped to solve third-party conflicts.39 Thus, insofar as national law and purely domestic cases are concerned, solutions are often easily available. Importantly, parties to security arrangements generally know beforehand what they are required to do in order to achieve and retain effectiveness against third parties. However, the same cannot be said of third-party conflicts that involve crossborder aspects, that is, cross-border third-party conflicts. As a rule, jurisdictions are much less prepared to deal with them. Of course, some cross-border aspects are more significant than others. Within the scope of this book, some of the most prominent situations are those where the ‘parties’ to a third-party conflict, the secured creditor and, say, the other creditors of the security-provider debtor, have different expectations about the substantive law governing the conflict. When the case is being adjudicated, they may disagree as to whether or not the law of the forum, the lex fori, should govern the dispute, or whether or not that law is to be applied similarly as in a purely domestic case. These kinds of cross-border third-party conflicts give rise to the main issues addressed in this book, namely uncertainty of enforceability and unexpected loss of security rights.

38 Veneziano (n 4) 119–21. See Kreuzer, ‘Die Harmonisierung’ (n 15) 58. Kreuzer refers to the German ‘all or nothing’ solution, which does not separate creation inter partes and third-party effects. 39 The relevant legal norms are usually classified as property law or (substantive) insolvency law. They include preconditions for and restrictions on the effectiveness of security rights against third parties.

Incompatibility: Cross-border Problems in Trade and Finance

13

In short, these issues are brought about by the combined effect of substantive divergences between jurisdictions and the current conflict rules of private international law. As noted in section II above, preconditions for and restrictions on the effectiveness of security rights against third parties vary between EU Member States. Since enforceability against third parties is crucial to the fulfilment of the economic purposes of security rights, (prospective) secured creditors need to know which substantive law will govern potential third-party conflicts and thus which jurisdiction’s preconditions for third-party effectiveness their security arrangement should fulfil. The current conflict rules often prove unhelpful in this respect.40 Conflict rules covering third-party relations are asset type-specific.41 The general conflict rule for tangible movables (and immovables), used in Europe and widely elsewhere ‘by tradition and often unwritten’, is the lex rei sitae rule.42 According to this rule, the applicable law is that of the jurisdiction where the asset in question is physically located. In terms of security rights, the rule refers to the location of an encumbered asset. Despite its clear-cut appearance, the rule is to be blamed for uncertainty of enforceability and unexpected loss of security rights. This is due to its connecting factor, location of the asset, which proves unstable in situations where the encumbered asset is moved from its initial location to another jurisdiction. These situations are often referred to as Statutenwechsel or conflit mobile.43 The latter term is used henceforth. Indeed, the applicable law may change every time the asset is moved across a border. If the encumbered asset is moved after the creation of a security right but before a third-party conflict emerges, such a conflict will raise the question as to

40 In this book, the terms ‘effectiveness’ and ‘enforceability’ against third parties are not used interchangeably. Effectiveness means fulfilment of the preconditions for protection against (the relevant type of) third parties under the substantive law of a particular jurisdiction. Enforceability additionally takes into account any hurdles to such protection related to private international law. If a security right is enforceable against third parties, the judiciary of the relevant jurisdiction actually protects the secured creditor’s entitlements against third parties. In a purely domestic case, effectiveness and enforceability coincide. In a cross-border case, though, a security right may meet the criteria for effectiveness under the substantive law of one jurisdiction, but still be unenforceable since the relevant conflict rule points to the substantive law of another jurisdiction whose effectiveness criteria this right fails to meet. Unenforceability may also result from failure to find a domestic equivalent to a foreign security right which a jurisdiction would otherwise be willing to protect. This is the case if protection in that jurisdiction necessarily requires the transposition of the foreign right into the domestic system of security rights. On the doctrine of transposition, see Kieninger (n 10) 17–18. See also B Akkermans and E Ramaekers, ‘Lex Rei Sitae in Perspective: National Developments of a Common Rule?’ in B Akkermans and E Ramaekers (eds), Property Law Perspectives, Ius Commune Europaeum 106 (Cambridge, Intersentia, 2012) 129–30, 143–44. 41 The scope of these ‘proprietary’ conflict rules, meaning conflict rules for property law matters, varies between jurisdictions. Nevertheless, they invariably cover third-party relations. 42 Von Bar and Drobnig (n 10) 342, 468. Similarly, see K Kreuzer, ‘Conflict-of-Laws Rules for Security Rights in Tangible Assets in the European Union’ in Eidenmüller and Kieninger (n 4) 298–99. 43 See J Kropholler, Internationales Privatrecht einschließlich der Grundbegriffe des Internationalen Zivilverfahrensrechts, 6th revised edn (Tübingen, Mohr Siebeck, 2006) 188, 559–64; Rutgers (n 8) 165, 210.

14

Introduction

which of the successive locations is decisive, or whether both should play a role. Although different jurisdictions and commentators approach this problem of successive locations somewhat differently, third-party conflicts are usually governed by the law of the jurisdiction where the asset is located at the time when the conflict emerges, for example, when insolvency proceedings against the security-provider debtor commence (giving rise to a conflict between the secured creditor and the debtor’s other creditors). As a result, a secured creditor may be startled to discover that the encumbered asset has been moved to another jurisdiction and that the security right has proved unenforceable against third parties because the preconditions for third-party effectiveness set by that jurisdiction are not fulfilled.44 For the secured creditor, this means loss of the security right. These situations are bound to occur frequently because commercially, as noted in section II, the more significant types of security rights are non-possessory. Since the encumbered asset remains in the possession of the security-provider debtor, the secured creditor typically lacks effective means to ensure that the asset stays in the initial location or in some other jurisdiction whose preconditions for third-party effectiveness the security arrangement fulfils. While the parties to the security agreement can stipulate a particular location, the secured creditor cannot know for sure that the security-provider debtor will act accordingly. It is important to note that this risk concerns not only security arrangements that from the outset are planned to cross borders, but also those meant by the secured creditor to be purely domestic. An initially domestic security arrangement may give rise to a cross-border third-party conflict if the security-provider debtor in possession of the encumbered asset moves the asset across the border.45 Because the lex rei sitae rule is known to function particularly arbitrarily with assets that by their nature often cross borders, some Member States have introduced special conflict rules for those assets. These rules typically concern major means of transport, such as aircraft and ships, and make use of the relevant registry (or otherwise defined state of origin) as the connecting factor.46 However, this lex registrationis solution is problematic insofar as it is not adopted throughout the EU and the scope of the special conflict rules varies between Member States. Where conflict rules diverge between jurisdictions, the law applicable to a third-party conflict may vary depending on the jurisdiction where the dispute

44 Drobnig (n 27) 114; von Bar and Drobnig (n 10) 342; Kieninger (n 10) 17–18. Of course, it is also possible that the secured creditor moves the encumbered asset and, being ignorant of the relevant conflict rule and the effectiveness preconditions set by the jurisdiction of the new location, causes the unenforceability. However, this book is more concerned about situations where even informed secured creditors acting prudently are at risk. 45 E-M Kieninger, ‘European Regulation of Security Rights’ in Drobnig, Snijders and Zippro (n 7) 167. According to Kieninger, goods that are not originally intended to cross borders and cases where the secured creditor never thought that the security right might have to be enforced in another Member State are the ‘most prominent problem’. 46 Kreuzer (n 42) 298–99. See Polak (n 14) 126–27.

Incompatibility: Cross-border Problems in Trade and Finance

15

concerning that conflict is adjudicated. This may also enable and even encourage forum shopping.47 In the case of third-party relations with respect to receivables, no single general conflict rule exists in Europe. True, Article 14 of the Rome I Regulation,48 which deals with the assignment of claims, explicitly states that its concept of assignment also covers security rights over claims.49 Yet the Article is silent as to which law governs third-party relations, such as conflicts between an assignee and the assignor’s creditors or between two assignees in the case of a double assignment of the same claim. The conflict rule for third-party relations was omitted from the Article because the Member States failed to reach a consensus on the most suitable connecting factor.50 Article 27(2) of the Regulation contains a review clause according to which the issue is to be considered further.51 At present, different Member States use different conflict rules. Worse, some Member States have not even decided which conflict rule to use. As may be expected, scholarly opinion is divided over the most suitable connecting factor. The competing connecting factors and the general options for a common European conflict rule are the law governing the contract of assignment, the law of the assignor’s habitual residence and the law governing the assigned claim.52 It is unlikely that a single perfect solution exists for all cases and circumstances,

47 On conflict rules and forum shopping, see generally AS Bell, Forum Shopping and Venue in Transnational Litigation, Oxford Private International Law Series (Oxford, Oxford University Press, 2003) 15, 38–47. 48 Parliament and Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. 49 Art 14(3): ‘The concept of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges or other security rights over claims.’ While this book focuses on security arrangements with respect to receivables, it should be kept in mind that the same conflict rules and similar cross-border problems concern the outright transfers of receivables. 50 PMM van der Grinten, ‘Article 14 Rome I: A Political Perspective’ in Westrik and Van der Weide (eds) (n 6) 154–61; Garcimartín Alférez (n 11) 218, 233–47; Sigman and Kieninger (n 11) 50–59. cf A Flessner, ‘Between Articles 14 and 27 of Rome I: How to Interpret a E uropean Regulation on Conflict of Laws?’ in Westrik and Van der Weide (eds) (n 6). The notion of a ‘third party’, as used here, does not include the assigned debtor, ie, the debtor of the assigned claim. See Art 14(2) of the Rome I Regulation. 51 According to Art 27(2), the Commission should have submitted a report on the issue to the European Parliament, the Council and the European Economic and Social Committee by 17 June 2010. The Commission fulfilled this obligation as late as 29 September 2016 with ‘Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person’ COM(2016) 626 final. The Commission states that the search for a common European conflict rule continues in the context of the Capital Markets Union programme and presents three ‘possible approaches’. The report is based on the ‘Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person’, prepared for the Commission by the British Institute of International and Comparative Law (BIICL) and published on the Commission website: ec.europa.eu/justice/civil/document/index_en.htm (Reports & Studies 2012). 52 Garcimartín Alférez (n 11) 233–49. See TC Hartley, ‘Choice of Law Regarding the Voluntary Assignment of Contractual Obligations under the Rome I Regulation’ (2011) 60 ICLQ 29, 51–56.

16

Introduction

so the technique of a main rule and exceptions may be needed. At any rate, the need for a common European conflict rule is well established.53 The current situation is unsatisfactory, similarly to the non-uniform lex registrationis solution, in that the law applicable to a third-party conflict often varies depending on the jurisdiction where the dispute concerning it is adjudicated. To sum up, the main cross-border problems in trade and finance, including situations that are initially domestic but later on acquire cross-border aspects, are basically similar with respect to security rights over tangible movables and those over receivables.54 A central concern is that the parties to a security agreement, especially the secured creditor, cannot know for certain beforehand which law will govern potential third-party conflicts. This law may eventually be different from the law that the secured creditor initially had in mind. As a consequence, a security right may turn out to be wholly or partially unenforceable against third parties. In other words, the secured creditor is at risk of unexpectedly losing this right or some of the entitlements it is supposed to entail.55 Comparative surveys have shown differences in the willingness of different jurisdictions to recognise and enforce foreign security rights. Generally, these differences reflect the liberality or the strictness of a jurisdiction’s domestic system of security rights, that is, its internal substantive laws regarding these rights.56 Relations between the parties to a security agreement seldom give rise to such issues. These relations are often understood as contractual,57 and the Rome I Regulation provides conflict rules for contractual relations. Importantly, Article 3 allows the parties to select the applicable substantive law by themselves (party autonomy).58 Problems are unlikely to arise even if some aspects of these relations, inter partes, are understood as proprietary.59 One exception may be certain situations where effectiveness against a security provider coincides with effectiveness against third parties.60 Even so, it is generally hard to find reasons not to recognise and enforce a security right validly created in another jurisdiction if no

53

See Garcimartín Alférez (n 11) 246–49. Further, cross-border problems may be similar irrespective of whether the security right in question secures sale credit or loan credit. On these two main types of credit, see Röver (n 23) 7–10. 55 See Wood (n 18) 143. Wood calls these situations an ‘international legal ambush where expectations in one jurisdiction are surprised by the rules of another’. 56 Drobnig (n 27) 113–14. 57 For a comparative review of law on these relations, see Steven (n 21). 58 On the law applicable in the absence of party choice, see Art 4. As for assignments of claims, see Art 14(1), which provides for ‘between assignor and assignee’ use of the same conflict rules that cover contracts in general. Traditionally the idea of party autonomy has been rejected in property law, at least where third-party effects are concerned. See Westrik and Van der Weide, ‘Introduction’ (n 6) 1–6; Kieninger (n 10) 16–17. 59 See Recital 38 of the Rome I Regulation, which clarifies that Art 14(1) ‘also applies to the property aspects of an assignment, as between assignor and assignee, in legal orders where such aspects are treated separately from the aspects under the law of obligations’. 60 Discussed in section II above. See also C Forsyth, ‘Certainty versus Uniformity: Renvoi in the Context of Movable Property’ (2010) 6 Journal of Private International Law 637, 637–38. 54

Incompatibility: Cross-border Problems in Trade and Finance

17

third-party interests are at stake. Therefore, this book is mainly concerned with third-party relations and cross-border problems in that respect.61 Even if the law governing potential third-party conflicts was always sufficiently clear to the parties to a security agreement, another reason for dissatisfaction with the current state of the laws in Europe consists of increased transaction costs in cross-border contexts. Finding out and fulfilling the preconditions for third-party effectiveness of security rights set by a foreign jurisdiction is likely to be cumbersome and costly compared to a domestic setting.62 Foreign legal services may have to be purchased to arrange that reliably. The loss of time and money is even greater if several potentially applicable substantive laws have to be taken into account. To see the whole picture of cross-border problems sketched out above, one has to consider their consequences for individual market actors and whole markets. These microeconomic and macroeconomic viewpoints are interconnected, and findings are similar with respect to both of them: fulfilment of the economic purposes of security rights is seriously impaired in cross-border contexts as compared to domestic ones. By bargaining on a security right, a prospective secured creditor wishes to increase the likelihood of recovering the credit it is about to make available, that is, to reduce its credit risk. Because payment difficulties and insolvency often attract third parties interested in the debtor’s assets, reduction of credit risk requires that a security right is effective and enforceable against third parties, especially against the debtor’s other creditors.63 However, as explained above, uncertainty of enforceability is rather the normal state of affairs in cross-border environments, bringing with it loss of security rights, often unexpectedly. The kind of certainty that the prospective secured creditor seeks may not be achievable where cross- border third-party conflicts may arise. Of course, the more probable these conflicts are, the less certain the secured creditor’s position is. This is not a problem only for secured creditors; security-provider debtors are also harmed by it. If prospective secured creditors have to fear that security rights may prove unenforceable against third parties, they have little or no incentive to offer prospective debtors more favourable credit terms in exchange for security rights, because these rights do not significantly reduce their credit risk. As a result, prospective debtors may lose the benefit of, say, a lowered interest rate, an increased amount of credit or a prolonged credit period. Indeed, credit may not

61 Nevertheless, divergences as to rules on enforcement of security rights as such may cause problems in practice, irrespective of whether third parties are involved. See, eg, H-J Lwowski, ‘Ökonomische und rechtliche Anforderungen an ein optimal funktionierendes Mobiliarkreditsicherungsrecht aus der Sicht der Praxis’ in Basedow, Remien and Wenckstern (n 15) 179. These rules concern a secured creditor’s remedies upon default, including the realisation of encumbered assets. Since these matters are clearly different from the more substantive questions of effectiveness and enforceability against third parties dealt with in this book, they would require a study of their own. 62 Rank (n 13) 206. 63 See Röver (n 23) 11–14; McCormack (n 9) 4–11.

18

Introduction

be offered at all in the first place.64 In sum, uncertainty as to the enforceability of security rights against third parties frustrates the microeconomic purposes of these rights.65 The viewpoints of individual market actors can be broadened to cover whole markets. This is so because the advantages that prospective secured creditors offer to prospective debtors in exchange for security rights are thought to matter for the entire economy. In particular, security rights are assumed to increase the availability of credit and lower its cost in general. These effects, then, are assumed to increase total investment and production in the economy concerned. In this way, security rights are expected to promote economic activity and growth.66 This ultimate macroeconomic purpose of security rights cannot be achieved without an appropriate legal framework.67 Any defects in a legal framework that impede the microeconomic purposes of security rights may be expected to cause suboptimal macroeconomic performance. To be sure, the uncertain enforceability of security rights must be seen as a major defect in this respect. Even if a jurisdiction has an appropriate domestic system of security rights and other parts of a legal framework to support it,68 the probability of cross-border third-party conflicts may cause such uncertainty. As emphasised above, even security arrangements that are intended as purely domestic may give rise to these conflicts, so that the combined effect of conflict rules and substantive divergences may result in security rights becoming unenforceable. This suggests that the lack of compatibility between EU Member State systems of security rights may even impede the internal functioning of those systems individually. The above problems show further dimensions when studied in the light of EU internal market law. The concept of the internal market embraces the idea of trade and finance freely flowing across jurisdictional boundaries.69 However, when security rights are deployed in the internal market, in cross-border trade and finance, the probability of cross-border third-party conflicts becomes remarkably higher than in the case of security arrangements intended as domestic. Consequently, the risk of unenforceability becomes more constant. This is likely to constrain the fulfilment of the microeconomic and macroeconomic purposes of

64

Röver (n 23) 12. See McCormack (n 9) 15–16. a practitioner’s account confirming and illustrating these observations, see LJ Town, ‘A Banker’s Perspective’ in M Bridge and R Stevens (eds), Cross-border Security and Insolvency (Oxford, Oxford University Press, 2004). 66 Röver (n 23) 15–16; McCormack (n 9) 15–22. 67 See Fleisig (n 23) 24–35. Fleisig ends his essay, a comparison between the US and certain South American jurisdictions, in an attempt to quantify the losses caused by defective systems of security rights. In his analysis, reform in this area could raise Argentine gross domestic product by between six and eight per cent, and Bolivian by between three and nine per cent. 68 This is not the case in all European jurisdictions. See L Gullifer, ‘Conclusions and Recommendations’ in Gullifer and Akseli (n 28) 506–08; Tajti (n 8) 489–503. 69 See Art 26(2) of the Consolidated Version of the Treaty on the Functioning of the European Union [2016] OJ C202/47 (TFEU). 65 For

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security rights within the internal market as a whole. In addition, transaction costs increase for having to comply with requirements of foreign systems of security rights, particularly preconditions for third-party effectiveness.70 Several commentators have advanced these and related arguments to demonstrate that the current situation obstructs the functioning of the internal market.71 It has even been suggested that the situation is a case for negative integration. According to this view, it may be illegal for Member States not to recognise and enforce foreign security rights. The usual argument to this effect is that a refusal to recognise and enforce may qualify as a measure having an effect equivalent to a quantitative restriction on imports, as prohibited by Article 34 of the Treaty on the Functioning of the European Union (TFEU).72 Still, the main focus of the European discourse on security rights remains the need for positive integration and the means for achieving it. A broad range of options for solutions have been put forward. Many commentators propose substantive unification or harmonisation, often more or less along the lines of Article 9 of the US Uniform Commercial Code (UCC). Others would rely on gentler means, such as the unification and improvement of conflict rules.73 This book aspires to inform future choices between the various options.

IV. The Quest for Compatibility The overarching issue in this book is one of systems compatibility: how optimally to promote compatibility between systems of security rights over tangible movables and receivables in Europe? This general issue unfolds into more specific sub-questions concerning, first, the available concrete means of promoting compatibility and, second, the choices between them. Answers are sought with a hypothesis on the methodological potential of objective-based assessment, as explained below. This quest for compatibility relies on certain conventional assumptions as to the role of secured credit. It generally subscribes to the dual conviction that a system of security rights forms part of the necessary legal infrastructure of a m arket economy,74 and that secured credit is a ‘general social and economic good’.75

70

Roth (n 12) 38–40; Rank (n 13) 204–06. See also von Bar and Drobnig (n 10) 347–49. Drobnig, Snijders and Zippro (n 12) 12. Cited in n 69. See Roth (n 12) 40–61. On the law governing free movement, with observations on security rights, see S Weatherill, ‘Diversity between National Laws in the Internal Market’ in Drobnig, Snijders and Zippro (n 7) 131–36. 73 Beale (n 14) 377–81; Drobnig, Snijders and Zippro (n 12) 12–13. 74 See Arner (n 1) 107–09. 75 See McCormack (n 9) 18–22. McCormack discusses various indications of a growing international consensus on this. 71 72

20

Introduction

Accordingly, the quest also considers cross-border problems and their consequences described in section III above to be socially wasteful. All in all, this book does not question the need for greater compatibility between systems of security rights. Generally speaking, it would be difficult to find justifications not to facilitate secured credit in cross-border contexts, seeing how forcefully the same institution is being facilitated in national settings. Indeed, secured credit hardly turns less legitimate when it transcends jurisdictional boundaries. Since the need for compatibility can be treated as given, the book directly focuses on the available concrete means of promoting it. However, a note of caution is in order here. The belief that secured credit is a societally beneficial institution does not necessarily imply that the use of security rights should be unrestricted or that claims secured by those rights should enjoy absolute priority over other claims in the debtor’s insolvency proceedings and in other third-party conflicts.76 Certain limitations on the preferential treatment of secured creditors on insolvency are unlikely to render security rights impractical.77 What is more, recurrent controversies over justification for the priority of secured over unsecured claims, debated in terms of distributional fairness and economic efficiency, demonstrate that systems of security rights involve difficult value and policy choices.78 Differing understandings as to justification for priority may actually explain some divergences between these systems.79 In this book, compatibility between systems of security rights is defined as the absence of cross-border problems, particularly those discussed in section III, or the availability of workable solutions to them. Compatibility is of course a matter of degree at any given moment, as it exists more or less, while the adoption of a particular means may increase compatibility to a greater or lesser extent. As a technique of presentation, and with a view to structuring the discussion, the concrete means through which compatibility can be promoted are sorted into four main

76 cf F Dahan and J Simpson, ‘The European Bank for Reconstruction and Development’s Secured Transactions Project: A Model Law and Ten Core Principles for a Modern Secured Transactions Law in Countries of Central and Eastern Europe (and Elsewhere!)’ in Kieninger (n 8) 101–04. Dahan and Simpson refer to the ten core principles for a modern secured transactions law, prepared by the European Bank for Reconstruction and Development (EBRD). See especially principles 5 and 7. 77 Röver (n 23) 17–18. Röver writes: ‘It is, however, one thing to reject the idea of taking away preferred satisfaction of the secured creditor and quite another to claim that preferred satisfaction must be unfettered.’ According to him, the costs of the insolvency procedure and claims by the insolvent company’s employees ‘typically and justly’ rank above secured claims. Further situations that may call for limitations to preferential treatment of secured creditors, he notes, are those where the security right has been received in a ‘doubtful way’, such as shortly before insolvency proceedings were opened or without providing real value in exchange, and those where the insolvent company is to be kept as a going concern by way of restructuring or by selling it in its entirety. 78 On these debates in the US and England, see McCormack (n 9) 22–37. 79 T Juutilainen, ‘Security Rights and the Lack of a Priority Debate: How to Proceed with Choice of Law and Harmonization?’ in T Wilhelmsson, E Paunio and A Pohjolainen (eds), Private Law and the Many Cultures of Europe, Private Law in European Context Series 10 (Alphen aan den Rijn, Kluwer Law International, 2007) 348–54.

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types, called ‘approaches’: (1) a centralised substantive approach; (2) a centralised conflicts-approach; (3) a local conflicts-approach; and (4) a local substantive approach.80 The centralised approaches (1 and 2) consist of measures taken by the EU, and the local approaches (3 and 4) consist of measures taken by an individual Member State. The substantive approaches (1 and 4) include all kinds of efforts to unify or harmonise substantive law, while the conflicts approaches (2 and 3) are mainly based on private international law, notably conflict rules making up choice-oflaw systems. In other words, means within the substantive approaches typically solve cross-border problems by eliminating divergences between Member State substantive laws, whereas means within the conflicts approaches facilitate coping with those divergences. These four approaches give an idea of what the multi-level structure of European private law is about in this particular area of law. Considering the various legislatures and courts, including in connection with negative integration and competences as to private law,81 a picture emerges where ‘the powers and also, to some degree, the resources for political action, are located at various and relatively autonomous levels dispersed throughout the Union’.82 Nevertheless, this picture is somewhat simpler than those concerning certain other parts, let alone the entirety, of European private law.83 Two factors contribute to its relative simplicity. First, promoting compatibility between systems of security rights requires binding legislation or case law, particularly to address the treatment of these rights in insolvency-related and other third-party conflicts. Therefore, at the end of the day, only ‘hard law’ will do.84 Second, the kind of law required may be issued only by the EU, a state or a jurisdiction within a state. Even so, the contents of the concrete means considered, and perhaps eventually adopted, may be influenced by other actors as well.85

80 This division bears some resemblance to Kreuzer’s classification of the instruments of ‘spatial coordination law’ (räumliches Koordinationsrecht). See Kreuzer, ‘Europäisches Mobiliarsicherungs recht’ (n 15) 613–14. 81 See generally J Stuyck, ‘The European Court of Justice as a Motor of Private Law’ in C TwiggFlesner (ed), The Cambridge Companion to European Union Private Law (Cambridge, Cambridge University Press, 2010) 102–05; S Weatherill, ‘Competence and European Private Law’ in Twigg-Flesner (above in this note); Weatherill (n 72). 82 C Joerges, ‘The Challenges of Europeanization in the Realm of Private Law: A Plea for a New Legal Discipline’ (2004) 14 Duke Journal of Comparative & International Law 149, 190. The quotation is from Joerges’ account of the European polity as a multi-level system of governance sui generis. 83 See generally F Cafaggi and H Muir-Watt, ‘Introduction’ in F Cafaggi and H Muir-Watt (eds), Making European Private Law: Governance Design (Cheltenham, Edward Elgar, 2008). 84 This is not to downplay the potential role of, say, model laws and legislative guides as intermediate steps. 85 Suffice it to recall the United Nations Commission on International Trade Law (UNCITRAL) and the EBRD and other organisations that have advised Central and Eastern European jurisdictions in law reforms during the transition from a planned to a market economy. See generally TC Halliday, ‘International Organizations as Global Lawmakers: Seven Shifts in Practice for Secured Transactions Law and Beyond’ in NO Akseli (ed), Availability of Credit and Secured Transactions in a Time of Crisis

22

Introduction

The choice as to whether or not to adopt a particular concrete means should be made on the basis of its advantages and drawbacks. This is the point where the above overarching question gives way to more specific sub-questions. It is naturally possible that means belonging to different approaches are used simultaneously. In some cases, though, using a certain means may pre-empt the means of all or some other approaches. For example, assuming the competence required, comprehensive unification of substantive law by the EU (1) could make the conflicts approaches (2 and 3) altogether futile and spontaneous harmonisation by an individual Member State (4) impossible or illegal.86 Likewise, full unification of conflict rules by the EU (2) could prevent Member State efforts to improve choice of law (3). These trade-offs suggest that the optimal composition of concrete means to promote compatibility between systems of security rights amounts to the optimal division of labour between the four approaches. Ergo, determining the optimal division of labour should indicate the optimal way to promote compatibility. This book proceeds on the hypothesis that the optimal division of labour can be determined by way of objective-based assessment. This in turn requires developing a set of objectives to function as criteria for evaluating the four approaches and the advantages and drawbacks of different concrete means within those approaches and then comparing them with each other. Importantly, these objectives should capture the essence of desirable development towards greater compatibility between systems of security rights, a process expected to progress gradually. To that end, the objectives should at least attend to the following general requirements. First, they should set and adhere to long-term goals for development. These should include facilitating the fulfilment of the economic purposes of security rights in cross-border contexts. Second, they should recognise and deal with the fact that decisions on the features of systems of security rights often have to be made with imperfect information. This particularly holds true for controversial policy choices, such as questions of priority and publicity.87

(Cambridge, Cambridge University Press, 2013); T Meyer, ‘Social Market Economy Values in Legal Reform Projects in South East Europe (SEE)’ in C Jessel-Holst, R Kulms and A Trunk (eds), Private Law in Eastern Europe: Autonomous Developments or Legal Transplants? Materialien zum ausländischen und internationalen Privatrecht 50 (Tübingen, Mohr Siebeck, 2010). On the role of the EBRD, see F Dahan, ‘The EBRD’s Experience in Secured Transactions Reform: How Can Outsiders Help?’ in Gullifer and Akseli (n 28). 86 The term ‘spontaneous harmonisation’ is used here for situations where individual jurisdictions align their laws, out of their own initiative, with the laws of other jurisdictions. For a different definition, see MBM Loos, ‘The Influence of European Consumer Law on General Contract Law and the Need for Spontaneous Harmonization: On the Disturbance and Reconstruction of the Coherence of National Contract Law and Consumer Law under the Influence of European Law’ (2007) 15 European Review of Private Law 515, 523–24. 87 See, eg, Kieninger (n 10) 8–9. According to Kieninger, ‘it should not be overlooked that there exists also a substantial amount of literature which questions the assumption that security rights are economically beneficial’ and ‘awareness of the detrimental effects which secured transactions might

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Third, they should encourage the use of shorter-term remedies to cure issues, notably injustices, caused by remaining incompatibility at different stages of development. Three objectives can be identified, each of which matches one of the above requirements: foreseeability, which supports the ‘universal’ economic functions of security rights; responsiveness, which safeguards ‘evolutionary prerequisites’ of the law, including adaptability to local circumstances and experimental learning;88 and the division of unforeseeability costs, which implements a transnational conception of justice. Identification raises epistemic questions—in particular, whether we know, or whether we can be convinced, that these objectives, rather than others, should guide development towards greater compatibility between systems of security rights. A strong theoretical case can be made because the three objectives are already visible in the European discourse on security rights, even though their roles and interrelations have not so far been examined in depth. Additionally, the objectives must be tried out in practice, so as to ascertain their capability to guide choices between concrete means of promoting compatibility. In this way, testing the objectives in theory and practice also tests the hypothesis on the methodological potential of objective-based assessment. The agenda as a whole may best be described as a combination of research de lege ferenda and normative regulatory theory,89 applied in the multi-level structure of European private law. While this book is not a comparative study in the standard meaning of systematic comparison between a number of legal systems, it nevertheless builds on various such studies. Comparative observations and analysis are essential in recognising cross-border problems and as a reservoir of ideas in the search for solutions to them.90 In assessing concrete means of promoting compatibility between systems of security rights, the legal positivist constraints of different legal orders have to be taken into account. This in turn involves the viewpoint of

arguably have on unsecured creditors is helpful for understanding the restrictions that presently exist in Member States’ laws’. She thus concludes: ‘For any future European legislation, it will no doubt be essential to get a clear picture of the economic advantages and possible disadvantages of any suggested regime of security rights.’ However, a clear picture may be hard to get because commentators disagree on central points. At the same time, cross-border problems make the current situation untenable. 88 This book is not concerned with the potential of biological evolutionary theory in legal scholarship. For such an approach, see JM Smits, ‘How to Predict the Differences in Uniformity between Different Areas of a Future European Private Law? An Evolutionary Approach’ in A Marciano and J-M Josselin (eds), The Economics of Harmonizing European Law, New Horizons in Law and Economics (Cheltenham, Edward Elgar, 2002). 89 On difficulties in clearly distinguishing between ‘legal’ and ‘regulatory’ scholarship, see J Black, ‘Law and Regulation: The Case of Finance’ in C Parker, C Scott, N Lacey and J Braithwaite (eds), Regulating Law (Oxford, Oxford University Press, 2004) 33–40. 90 This can be called ‘applied’ comparative law. See E Örücü, The Enigma of Comparative Law: Variations on a Theme for the Twenty-First Century (Leiden, Martinus Nijhoff Publishers, 2004) 16.

24

Introduction

doctrinal study of law, or ‘legal dogmatics’. In particular, this concerns determining the limits of the ‘legally possible’, whether the means are part of centralised or local approaches.91 As for the centralised approaches, with the EU as the relevant actor, competences must be scrutinised. As for the local approaches, with individual Member States as the relevant actors, constraints result from EU and domestic law alike. Further, if the coherence of law is to be preserved,92 the means to be adopted generally cannot depart too much from courses of action typical of the legal order in question. This book is limited to European jurisdictions and mainly focuses on the EU and its Member States. Such a limitation can be criticised on the basis that cross-border third-party conflicts may also have connections to non-European jurisdictions and that efforts to create transnational commercial law should be global rather than regional.93 Still, the limitation adopted is justifiable, above all in that the EU and its Member States are in a relatively good position to succeed in achieving compatibility between systems of security rights.94 This is due to the EU legislature on the one hand and the relative legal cultural proximity of the Member States on the other. Nevertheless, the limitation must not lead to overlooking feasible initiatives at the global level.95 The focus on EU Member States notwithstanding, the local approaches are also open to non-Member States, including any future ex-Member States.96 91 Doctrinal study of law may sometimes be able to extend these limits. See T Wilhelmsson, Critical Studies in Private Law: A Treatise on Need-Rational Principles in Modern Law, Law and Philosophy Library 16 (Dordrecht, Kluwer Academic Publishers, 1992) 46–48. Wilhelmsson emphasises the role of new future-oriented general principles constructed by scholars. 92 See U Liukkunen, ‘Collision between the Economic and the Social: What Has Private Inter national Law Got to Do with It?’ in P Letto-Vanamo and J Smits (eds), Coherence and Fragmentation in European Private Law (Munich, Sellier European Law Publishers, 2012) 134. Liukkunen writes: ‘A legal system is considered coherent if its components fit together.’ According to her, coherence ‘should be regarded as a fundamental value in every legal system’, yet it ‘does not commit us to an unrealistic ideal of a tensionless legal order’. See also K Tuori, Ratio and Voluntas: The Tension between Reason and Will in Law, Applied Legal Philosophy (Farnham, Ashgate, 2011) 153, 164–65. Tuori connects the importance of coherence to formal justice in legal decision-making, ie, to treating like cases alike and unlike cases unalike, and thus safeguarding legal certainty and predictability. To this end, legal norms applied in individual cases have to manifest more extensive legal principles that form a coherent whole. 93 See, eg, Kreuzer (n 42) 308. Calling for worldwide solutions where possible, Kreuzer argues that ‘regional, especially European solutions should be the exception, and should only be adopted if there are compelling objectives under European law such as the creation of a single European judicial area’. In his view, especially the coordination of private international law ‘should not be restricted to one region, eg Europe’. On global (and some regional) developments, see generally NO Akseli, International Secured Transactions Law: Facilitation of Credit and International Conventions and Instruments, Routledge Research in Finance and Banking Law (Abingdon, Routledge, 2011) 7–17. 94 cf RH Stevens, ‘Choosing the Right Approach for European Law Making’ in Eidenmüller and Kieninger (n 4) 96–101. 95 eg, the UNCITRAL Legislative Guide on Secured Transactions is an essential source for this book, and the (UNIDROIT) Convention on International Interests in Mobile Equipment, signed at Cape Town on 16 November 2001, is discussed in connection with the relevant approaches. 96 On 29 March 2017, the UK notified its intention to withdraw from the EU in accordance with Art 50 of the Treaty on European Union (Consolidated Version [2016] OJ C202/13).

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The agenda of this book is implemented in three stages in chapters one to three. Chapter one situates the agenda in the ongoing European discourse on security rights, which seeks solutions to practical cross-border problems outlined in section III above. Virtually all commentators consider that some measures should be taken to remedy the current situation, but the debate on the appropriate measures is far from a consensus. The four main types of means to promote compatibility between systems of security rights—the four approaches—provide a structured way to explore the main dividing lines of the discourse. It is proposed that the dynamic of the discourse is best presented as a dialectic between those who argue for the centralised substantive approach, in a more or less comprehensive variant, and those who see better solutions among the three ‘gentler approaches’. Chapter one ends in the preliminary conclusion that the optimal way towards greater compatibility between systems of security rights is likely to be a combination of means belonging to several of the four approaches. This combination is termed an ‘integrated approach’. The argument for an integrated approach comes in two versions. According to the weaker and more conventional version, such an approach is necessary due to circumstances in the short and medium term. Even if full substantive unification or harmonisation by the EU was regarded as the best solution, achieving it would take time. Therefore, other approaches would be needed in complementary roles for the meantime. According to the stronger and more controversial version, an integrated approach may be desirable even as a long-term solution. This is so because different approaches entail different virtues, so that focusing on only one of these approaches would lead to losing the virtues of other approaches. Some of the virtues, so this version of the argument goes, may be too valuable to lose. Optimally, an integrated approach combines the advantages and avoids the drawbacks of all four approaches. While chapter one demonstrates the prima facie feasibility of an integrated approach, its actual feasibility can be confirmed, and its content determined, only by way of a detailed division of labour between the four approaches. This requires choices between the concrete means within each of the four approaches. To guide these choices, chapter two lays out the set of objectives introduced above. Developing this set requires not only clarifying the content and importance of the three objectives but also defining their relations, each to the other, and reconciling them with one another where needed. In sum, chapter two paves the way for an objective-based integrated approach. Chapter three, making up the practical part of the agenda, first applies the set of objectives to centralised approaches, that is, EU measures. The centralised substantive approach is studied first, followed by the centralised conflicts-approach. The different concrete means belonging to these approaches are assessed on the basis of the extent to which they advance or impede achieving the objectives developed in chapter two. Next, a similar exercise is carried out with respect to local approaches. The local conflicts-approach is followed by the local substantive approach. Finnish law serves as a case study, but some of the argumentation,

26

Introduction

especially in terms of the local conflicts-approach, applies to Nordic law more generally. Likewise, argumentation in the other Nordic jurisdictions is often useful in the context of Finnish law.97 Provided that the premises are correct, the results of chapter three should express the optimal composition of concrete means to promote compatibility between systems of security rights over tangible movables and receivables in Europe. Thus, the outcome should be the optimal way to promote compatibility between these systems.

97 On legal cultural proximity between the Nordic jurisdictions, see generally J Husa, K Nuotio and H Pihlajamäki (eds), Nordic Law: Between Tradition and Dynamism, Ius Commune Europaeum 66 (Antwerp, Intersentia, 2007). On its role in legal scholarship, see Wilhelmsson (n 91) 16–20. Wilhelmsson notes that the Nordic legal community in private law makes the exchange of dogmatic ideas between legal scholarship of the different countries a natural occurrence. Especially concerning property law, cf J Sandstedt, Sakrätten, Norden och europeiseringen: Nordisk funktionalism möter kontinental substantialism (Stockholm, Jure Förlag, 2013) 181–82.

1 Options: The Variety of Means to Promote Compatibility I. Introduction This chapter looks into the various means put forward in the European discourse on security rights to solve cross-border problems. The search for solutions is the essence of this discourse. The four main types of concrete means to promote compatibility proposed in the introduction, the four approaches, are used to structure the following analysis. However, the current stage and dynamic of the discourse cannot be faithfully described as a contest between four equal alternatives. Instead, it is best viewed as a dialectic between the centralised substantive approach and the three ‘gentler approaches’, namely the centralised conflicts-approach, the local conflicts-approach and the local substantive approach. The presentation of the dialectic starts off with the centralised substantive approach. It is natural to discuss this approach first, as the initial thesis of the dialectic, because a majority of commentators in the European discourse appear to consider some substantive top-down measure by the EU necessary and feel pessimistic about the potential of private international law to provide adequate solutions.1 Another reason to discuss the centralised substantive approach first is that use of the means it covers may pre-empt all or some of the gentler approaches. The more comprehensive the means used, the more that occurs. Next, the gentler approaches are presented as antithetical to the centralised substantive approach. Indeed, these two groupings of means contradict each other in one important respect, in that the centralised substantive approach attempts to solve cross-border problems by eliminating substantive diversity, whereas the gentler approaches facilitate coping with substantive diversity and may even regard it as instrumental for the solutions needed. Some of the virtues attributed to the gentler approaches are thought to stem from competition between legal systems (or ‘regulatory competition’), which cannot function without substantive diversity. In terms of conflicts approaches, be they centralised or local, private international law may hold unused potential. To the extent that it does, the need for 1

As shown in section II.A, such pessimism may be influenced by experience from other areas of law.

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Options

the centralised substantive approach may have to be reconsidered. In a historical perspective, this order of presentation may seem peculiar in that chronologically the gentler approaches precede the centralised substantive approach. Yet, as already noted, the idea is to examine the current stage and dynamic of the E uropean discourse rather than its history. This way of contrasting the centralised substantive approach and the gentler approaches is termed a dialectic in anticipation of a potential synthesis between them. Both categories entail their own characteristic virtues, which to a certain extent are mutually exclusive. Therefore, it is worthwhile asking whether the categories could be reconciled as a ‘third way’ with a view to combining the advantages and avoiding the drawbacks of them both, rather than by choosing one and rejecting the other. If this ‘integrated approach’ proves to be prima facie workable, it is for the subsequent chapters to define a detailed division of labour between the four approaches. A note of caution seems advisable here. That is, when means within the approaches are exemplified in the following by citations from scholarly writings, we should keep in mind that citations often do not give a full picture of the commentators’ views on choices between the various means. For example, a commentator presented as a proponent of a means falling under the centralised substantive approach may not necessarily oppose, and may indeed support, means within other approaches. The aim is to contrast arguments, not their authors.

II. Thesis: The Centralised Substantive Approach A. The ‘Eternal Crisis’ of Private International Law i. All-Sided Conflict Rules and Loss of Predictability The case for the centralised substantive approach can be seen as an instance of what Ole Lando calls the ‘eternal crisis’ of private international law. In these words, he expresses general disappointment with and distrust in choice of law as a solution to problems that typify transactions of a cross-border nature.2 Lando’s view is discussed here for two reasons: first, it helps to place the centralised substantive approach into a proper intellectual context; and, second, it serves as a caution by showing that this context, and experiences from other areas of law, may induce questionable generalisations. By ‘crisis’, Lando suggests that choice of law lacks the potential to provide reasonable and predictable solutions. However, calling the state of private

2 O Lando, ‘The Eternal Crisis’ in J Basedow, KJ Hopt and H Kötz (eds), Festschrift für Ulrich Drobnig zum siebzigsten Geburtstag (Tübingen, Mohr Siebeck, 1998).

Thesis: The Centralised Substantive Approach

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international law a crisis is by no means new.3 Lando is aware of this and, indeed, places the emphasis on ‘eternal’. By the eternality of the crisis, then, he signals pessimism, based on failed attempts on both sides of the Atlantic, about the chances of overcoming problems by further developing conflict rules. As a way out of this predicament, he suggests reducing the use of conflict rules and introducing uniform substantive rules instead.4 He mainly draws examples from cross-border contracts, but assumes that the eternal crisis disrupts several other fields too, including security rights. He writes: ‘It would take too much space to show how the problems, which we meet in contracts, also occur where choice-of-law rules are established to govern issues in torts, movable property, family relations, and other areas of private law.’ In another passage, he mentions ‘secured transactions in movable property’ as an area of law regarding which ‘plans to draft uniform rules for Europe’ exist.5 Lando begins by describing what conflict rules were supposed to achieve in the minds of 1940s and 1950s scholars he refers to as ‘universalists’. Conflict rules were to become no less than one of the avenues towards universal justice in the world, ‘a modest but still not unimportant contribution’ to the cause. The ideal of a conflict rule was ‘all-sided’, meaning a rule which, on the basis of certain objective criteria, gave foreign law the same scope of application as the lex fori. The objective criteria that decided whether foreign or domestic law was applicable in an individual case were mostly connecting factors. The universalists often wished that the conflict rules they proposed would be used in all jurisdictions. In addition, many ‘particularist’ scholars, who emphasised the national character of conflict rules and thought that each state should have a system of private international law to reflect its own tradition and culture, subscribed to the idea of all-sided conflict rules. They justified this by the principle of equality. Proposed conflict rules were frequently invoked by courts and later influenced codifications of private international law. Some conflict rules were eventually unified by international conventions.6 According to Lando, private international law ended up in a crisis even though the scholars’ insights had an impact on court practices, private international law codifications and even the unification of conflict rules. The explanation he proposes is that courts did not take all-sided conflict rules seriously. This, in turn, cast doubt on the efficiency of these rules. In short, courts proved unwilling to apply 3 For different grounds, see G Kegel, ‘The Crisis of Conflict of Laws’ (1964) 112 Recueil des cours: Collected Courses of the Hague Academy of International Law 91; H Kronstein, ‘Crisis of “Conflict of Laws”’ (1949) 37 Georgetown Law Journal 483. 4 Lando (n 2) 375–78. 5 ibid 371, 379. 6 ibid 361–62. On the origins of all-sided conflict rules, or ‘multilateralism’, see FK Juenger, ‘The Problem with Private International Law’ in J Basedow et al (eds), Private Law in the International Arena: From National Conflict Rules towards Harmonization and Unification: Liber Amicorum Kurt Siehr (The Hague, TMC Asser Press, 2000) 292–93. See also M Bogdan, Private International Law as Component of the Law of the Forum: General Course, A Collection of Law Lectures in Pocketbook Form (The Hague, Hague Academy of International Law, 2012) 80–83. Synonymous with all-sided conflict rules, Bogdan uses the term ‘bilateral’ conflict rules, as opposed to ‘unilateral’ conflict rules, which ‘designate normally merely the scope of application of the lex fori’.

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the rules as purely as the scholars expected. Lando assumes that the trouble was, and still is, that all-sided conflict rules can ‘make any rule in any legal system applicable’, possibly leading to what Leo Raape called ‘a leap into the dark’.7 Use of an all-sided conflict rule may entail certain complications. First, if foreign law is applicable, its contents have to be ascertained. Obtaining reliable information may be cumbersome, slow and costly. This is often the case when the law in question belongs to an unfamiliar legal tradition and is expressed in a foreign language, with additional difficulty if the sources of law are obscure and contradictory.8 Second, courts may have reason to suspect what they are told about the contents of foreign law. This is largely due to procedural rules. In cases where the parties have a right to dispose of the litigation, the party who wants the court to apply foreign law must typically raise the issue. In many jurisdictions, this is not done ex officio. In addition, the party pleading for the application of foreign law usually has the burden of furnishing proof of its contents. Consequently, and as a rule, the application of foreign law will be pleaded for and its contents proved by the party whose interests that application would serve. If the court finds the proof insufficient, which may not be rare in the above procedural setting, it will usually apply the lex fori.9 Third, and paramount to Lando’s point, an all-sided conflict rule does not take into account whether the applicable foreign law leads to a result that the court can accept. Instead of relying on the ‘blind neutrality’ of all-sided conflict rules, many courts tend to apply the law they like best to the issue before them. This often means preferring the lex fori to foreign law. In the above scholars’ view, this approach is wrong because cross-border situations call for a fair and equitable distribution of the power of legal systems to govern legal relations and questions. To that end, courts should ‘treat all the laws of the world as equally just and good’. However, courts often see their mission as doing justice in individual cases, which runs counter to the more abstract conception of justice behind all-sided conflict rules.10 Lando accuses courts of pretending to follow the rules on the books, but often not doing so in reality. He argues that courts use covert techniques to reach the

7 Lando (n 2) 362, citing Raape after M Keller and K Siehr, Allgemeine Lehren des internationalen Privatrechts (Zürich, Schulthess Polygraphischer Verlag, 1986) 121. See L Raape and F Sturm, Internationales Privatrecht, vol I: Allgemeine Lehren, 6th revised edn (Munich, Verlag Franz Vahlen, 1977) 199. Raape and Sturm write: ‘Die Verweisung auf fremdes Recht ist leider häufig ein Sprung ins Dunkle.’ [Reference to foreign law is unfortunately often a leap into the dark.] According to them, the issue is usually not unfamiliarity with foreign law, but that we may be reluctant to apply that law. This is especially the case if the application of the foreign law in question would frustrate important aims of domestic law, say, those of fundamental rights. 8 Lando (n 2) 362–63. 9 ibid 363. 10 ibid 363–64. cf Juenger (n 6) 301–02.

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outcomes they want.11 While courts are typically expected to prefer the lex fori to foreign law, this so-called ‘homeward trend’ is not the only temptation they may encounter. Their preference may be, say, for a modern law over an outdated one. Be that as it may, the main problem with courts wanting to do justice in individual cases, disregarding all-sided conflict rules, is the loss of predictability in choice of law. Due to the discrepancy between the rules on the books and court practice, it may be impossible to know which law the court would apply in potential litigation. As a result, the outcome of potential proceedings may be beyond prediction.12 a. Europe: Flexible Choice of Law and Result-Selective Motives Attempts to solve the crisis have taken different courses on different sides of the Atlantic. In Europe, these attempts have shown a trend towards greater flexibility in choice of law. In certain national and unified conflict rules, flexibility has been advanced by general or exception clauses providing for the application of the law to which the matter is most closely connected. Lando makes an example of Article 4 of the Rome Convention,13 aiming to prove that this approach is inadequate to solve the crisis. According to this Article, in the absence of a choice of law by the parties, ‘the contract shall be governed by the law of the country with which it is most closely connected’ (Article 4(1)). The Article also sets presumptions as to what constitutes the closest connection for its purposes. The general presumption points to the country of ‘the party who is to effect the performance which is characteristic of the contract’ (Article 4(2)).14 Specific presumptions are provided for contracts relating to immovable property (Article 4(3)) and carriage of goods (Article 4(4)). However, these presumptions ‘shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country’ (Article 4(5)). This possibility of rebutting the presumptions arouses Lando’s suspicions of Article 4. His view on the correct interpretation of the

11 Lando (n 2) 364. For an example of a covert technique, Lando mentions a rule according to which, absent an express or tacit choice of law by the parties, a contract was to be governed by the law that the parties must be presumed to have intended. In most decided cases, the presumed intention invoked by the court was a mere fiction. All the same, the courts very often ended up applying the lex fori, using the presumed intention ‘as a window dressing’. This rule was professed in England, France, Germany and elsewhere in the latter half of the nineteenth and the first half of the twentieth century. 12 ibid 364–65. Lando even suggests that the average lawyer tends to be afraid of private international law and that most lawyers and judges try to avoid its refined mechanisms. 13 Convention on the law applicable to contractual obligations, opened for signature in Rome on 19 June 1980 (consolidated version) [2005] OJ C334/1, 3. This Convention is now mostly replaced by Parliament and Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. See Arts 24 and 28 of the Rome I Regulation. 14 Depending on the party and circumstances, the country may be that of the party’s habitual residence or central administration at the time of concluding the contract, or the party’s principal place or other place of business.

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rticle, drawing on the Giuliano–Lagarde Report,15 is that a court can rely on the A relevant presumption unless the contract is obviously more closely connected with another law. Apart from the actual ‘safety valves’ of the Convention,16 a result-selective approach is not allowed. Nevertheless, looking into French, Dutch and Portuguese court practice, Lando finds reason to suspect that some judgments have been influenced by result-selective motives. The strength of Article 4 presumptions varies between judgments. This may be explainable by a homeward trend or a tendency to pursue a just and reasonable outcome rather than the real closest connection.17 Such motives undermine predictability in choice of law.18 b. The US: A Multitude of Choice-of-Law Methods Unlike Europe, the US has seen an open revolt against conflict rules. In the wake of legal realism, in the first half of the twentieth century, scholars began to probe into the actual choice-of-law methods followed by courts. They discovered that the reasoning provided by courts could be more or less irrelevant to case outcomes. This in turn implied that the real reasons behind decisions could lie elsewhere. Indeed, courts often considered the different outcomes that the application of different laws would produce and chose a certain connecting factor because it gave an opportunity to apply the law to which it pointed. Examples included the tendency of courts to end up applying laws that saved bona fide contracts from invalidity. Observing such covert techniques, the scholars exposed the crisis of choice of law. They were eventually able to convince most courts to openly analyse the governmental interests behind different substantive rules and directly consider the outcome of the conflict in question.19 Brainerd Currie, a radical scholar, considered conflict rules futile and even suggested getting rid of them. Instead of conflict rules, he recommended determining whether the purpose of each of the potentially applicable substantive rules

15 Report on the Convention on the law applicable to contractual obligations, by Mario Giuliano and Paul Lagarde [1980] OJ C282/1, 22. 16 These are found particularly in Art 7 on internationally (or ‘directly applicable’) mandatory rules and Art 16 on public policy, ordre public. See U Liukkunen, The Role of Mandatory Rules in International Labour Law: A Comparative Study in the Conflict of Laws (Helsinki, Talentum, 2004) 128–47. 17 Lando (n 2) 365–68. 18 See ibid 369–71. Lando observes similar problems in techniques employed by German courts to protect consumers by overstepping the limitations set in Art 5(2) of the Convention. The protection provided by Art 5(2) is limited to situations where the consumer has been ‘sought out’, in a way specified in the Article, in his or her own country by the other party. The German courts extended similar protection to certain situations in which German tourists had been persuaded to buy goods outside of Germany. According to Lando, the techniques used to this end ‘were not by the book’. 19 ibid 365, 371–72. For a detailed account, see P Hay, PJ Borchers and SC Symeonides, Conflict of Laws, Hornbook Series, 5th edn (St Paul, West, 2010) 18–121. For an example of scholarly approaches, see DF Cavers, ‘A Critique of the Choice-of-Law Problem’ (1933) 47 Harvard Law Review 173, 192–95. In Cavers’ approach, choice of law ‘would not be the result of the automatic operation of a rule or principle of selection but of a search for a just decision in the principal case’. According to him, this nature of inquiry should be preserved even if the approach is formulated into rules.

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would be advanced by its application in the case. In this connection, he made an important distinction between ‘false’ and ‘true’ conflicts. False conflicts are situations where only one of the two states whose laws conflict in the case has a governmental interest in having its law applied. In other words, only one state has a domestic policy that would be advanced if the law of that state was applied. In these situations, Currie suggested applying the law of the interested state, irrespective of whether it is the lex fori or the foreign law. True conflicts, in turn, are situations where two or more states have a governmental interest in having their laws applied. These situations, according to Currie, should be governed by the lex fori.20 In sum, his approach is characterised by a striking preference for the forum state’s policies and laws over those of other states. Currie acquired several followers in terms of ideas of true conflicts and governmental interests behind substantive law. Most of them, though, were not ready to abandon conflict rules or give to the lex fori the same preference as he did. Several suggested applying the law that provides the ‘better solution’. Publication of the ‘Restatement of the Law Second, Conflict of Laws’ in 1971 was an attempt to find a compromise between the various choice-of-law methods in the US. It contains ‘Choice-of-Law Principles’ (section 6), which echo Currie and other modern theorists (section 6(2)), as well as rules along the lines of traditional conflict rules.21 All in all, the Second Restatement often provides several options from which courts can pick and choose as they see fit. Understandably, the whole picture of choiceof-law methods followed by courts became miscellaneous. The methods used have varied between states and case types. The tendency has been towards modern and away from traditional methods.22

ii. Critique and Consequences for the European Discourse on Security Rights Lando’s conclusion to analysis of the situation on both sides of the Atlantic concurs with Currie. In Lando’s opinion too, we would be better off without conflict rules. Still, he is discontented with attempts in the US to mitigate the adverse consequences of all-sided conflict rules by focusing on the policies, the governmental interests, behind substantive rules. He suggests that they are better suited for US interstate conflicts, since a US state court may more easily determine the policies behind a statute of another US state than those behind a statute of a foreign

20 B Currie, Selected Essays on the Conflict of Laws (Durham, NC, Duke University Press, 1963) 180–84, 417; Lando (n 2) 372–73. 21 Lando (n 2) 373. A somewhat similar compromise was included in the Louisiana Civil Code, Book IV ‘Conflict of Laws’ of 1991. Book IV comprises Arts 3515–49. 22 Lando (n 2) 373–75. Lando draws on SC Symeonides, ‘Choice of Law in the American Courts in 1993 (and in the Six Previous Years)’ (1994) 42 American Journal of Comparative Law 599. On the Second Restatement, see Hay, Borchers and Symeonides (n 19) 62–78. A Third Restatement is currently in preparation. See CM Vázquez, ‘Introduction to Symposium on the Third Restatement of Conflict of Laws’ (2016) 110 American Journal of International Law Unbound 137.

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country. Of course, difficulties may arise in both contexts, especially in the case of unwritten rules or rules whose purpose is obscure. Lando adds that even if the relevant policies are known, it is often uncertain how they should be reflected in international situations and that it would in any case be impossible to provide each substantive rule with an application-in-space rule. According to him, modern choice-of-law methods employed in the US lead to unpredictability because they bring into play so rich a menu of alternative considerations that how a court will determine the law applicable in a particular case is unforeseeable.23 The problem in Europe, for Lando, is that courts often try to avoid the choiceof-law process and refuse to accept conflict rules that are ‘remorseless and blind to the final cause’. He believes that uniform conflict rules, such as those of the Rome Convention, would produce reasonable and predictable results if courts learned to like the choice-of-law process, if ascertaining and applying foreign law was easy for them and if they could do away with the craving to do justice in the individual case and the homeward trend. Arguing that courts only irregularly succeed in doing so, he concludes that the crisis of private international law is likely to remain chronic. In his view, the crisis can only be mitigated by limiting the operation of conflict rules, that is, by unifying substantive law so that conflicts cases would arise more rarely than today. On that note, he turns to consider possible steps towards a European Civil Code.24 As explained in section II.A.i above, a reason to discuss Lando’s view here is to provide a proper intellectual context for the centralised substantive approach to security rights. Indeed, proposals for the unification or harmonisation of substantive law in this area are regularly premised on disappointment with or distrust in choice of law as a solution to cross-border problems.25 If Lando’s view is accepted, 23 Lando (n 2) 375–76. In a similar vein, see Hay, Borchers and Symeonides (n 19) 121–28. According to Hay, Borchers and Symeonides, the conflicts revolution failed to produce a new system capable of attending to the basic needs and aspirations of the choice-of-law process, such as uniform results and predictable decisions. On the conflicts revolution and the lex rei sitae rule, see S van Erp, ‘Lex Rei Sitae: The Territorial Side of Classical Property Law’ in C Godt (ed), Regulatory Property Rights: The Transforming Notion of Property in Transnational Business Regulation (Leiden, Brill Nijhoff, 2017) 69–72. 24 Lando (n 2) 375–79. A fundamental issue with choice of law, traditionally understood, is that it requires even truly international legal relations to be localised into a certain national legal system. See AM López Rodríguez, Lex Mercatoria and Harmonization of Contract Law in the EU (Copenhagen, DJØF Publishing, 2003) 32–34; Juenger (n 6) 304–05. From today’s perspective, a European Civil Code is an unlikely course. The original idea appears to have become politically derailed partly due to the rejection of the Treaty establishing a Constitution for Europe [2004] OJ C310/1 by French and Dutch voters in 2005. See MW Hesselink, ‘The Common Frame of Reference as a Source of European Private Law’ (2009) 83 Tulane Law Review 919, 920. See also S Frerichs and T Juutilainen, ‘Rome Under Seven Hills? An Archaeology of European Private Law’ in S Börner and M Eigmüller (eds), European Integration, Processes of Change and the National Experience, Palgrave Studies in European Political Sociology (Basingstoke, Palgrave Macmillan, 2015) 81–85. 25 See, eg, H Beale, ‘The Future of Secured Credit in Europe: Concluding Remarks’ in H Eidenmüller and E-M Kieninger (eds), The Future of Secured Credit in Europe, European Company and Financial Law Review, special vol 2 (Berlin, De Gruyter Recht, 2008) 377–81; U Drobnig, HJ Snijders and E-J Zippro, ‘Divergences of Property Law: An Obstacle to the Internal Market?’ in U Drobnig, HJ S nijders and E-J Zippro (eds), Divergences of Property Law: An Obstacle to the Internal Market? (Munich, Sellier European Law Publishers, 2006) 12–13; C von Bar and U Drobnig, The Interaction of Contract Law

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it strongly supports these proposals, while prejudging the conflicts approaches as being of little or no use. It is important to keep in mind that his view concerns the usefulness of private international law and unification of law in general, and thus extends beyond cross-border contracts, which is his main source of examples. However, Lando’s view, or other similar views, should not be taken at face value. The following caveats are based on European private international law. To begin with, Lando’s view deserves criticism for its excessive reliance on anecdotal and selective evidence. In particular, as regards the Rome Convention, Lando discusses at length and in the light of hand-picked cases the problems of Article 4, which concerns choice of law in the absence of party choice. While these problems cannot be downplayed as such,26 his account as a whole is unbalanced in that it mostly disregards Article 3. This Article enables party choice,27 and can hardly be criticised for failing to produce reasonable and predictable results. The relationship of Article 3 to Article 4 is that of a main rule to a fallback rule.28 Where the parties to a contract have exercised their freedom of choice under Article 3, courts’ potential dislike of the choice-of-law process or other attitudes and motives discussed above will generally be of no consequence insofar as Article 4 is concerned. Further, developments after the publication of Lando’s essay have removed some of the causes of the alleged crisis, thus questioning at least its alleged eternalness. The European Court of Justice (ECJ) has been conferred with the power to issue preliminary rulings on the interpretation of the Rome Convention.29 Interestingly, the first reference for a preliminary ruling on the Convention sought clarification,

and Tort and Property Law in Europe: A Comparative Study (Munich, Sellier European Law Publishers, 2004) 468–69; E-M Kieninger, ‘Introduction: Security Rights in Movable Property within the Common Market and the Approach of the Study’ in E-M Kieninger (ed), Security Rights in Movable Property in European Private Law, The Common Core of European Private Law (Cambridge, Cambridge University Press, 2004) 16–22; T Rott, Vereinheitlichung des Rechts der Mobiliarsicherheiten: Möglichkeiten und Grenzen im Kollisions-, Europa-, Sach- und Vollstreckungsrecht unter Berücksichtigung des US-amerikanischen Systems der Kreditsicherheiten, Veröffentlichungen zum Verfahrensrecht 23 (Tübingen, Mohr Siebeck, 2000) 36–39; U Drobnig, Private Law in the European Union, Forum Internationale 22 (The Hague, Kluwer Law International, 1996) 19; KF Kreuzer, ‘Europäisches Mobiliarsicherungsrecht oder: Von den Grenzen des Internationalen Privatrechts’ in WA Stoffel and P Volken (eds), Conflits et harmonisation: Mélanges en l’honneur d’Alfred E. von Overbeck à l’occasion de son 65ème anniversaire (Fribourg, Editions Universitaires Fribourg Suisse, 1990). 26 See U Magnus, ‘Article 4 Rome I Regulation: The Applicable Law in the Absence of Choice’ in F Ferrari and S Leible (eds), Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (Munich, Sellier European Law Publishers, 2009) 30–31. 27 The first sentence of Art 3(1): ‘A contract shall be governed by the law chosen by the parties.’ 28 See H Heiss, ‘Party Autonomy’ in Ferrari and Leible (n 26) 1–4; Magnus (n 26) 27. 29 First Protocol on the interpretation by the Court of Justice of the European Communities of the Convention on the law applicable to contractual obligations, opened for signature in Rome on 19 June 1980; Second Protocol conferring on the Court of Justice of the European Communities certain powers to interpret the Convention on the law applicable to contractual obligations, opened for signature in Rome on 19 June 1980 (consolidated versions) [2005] OJ C334/1, 20, 26. These so-called Brussels Protocols were signed in 1988, but only entered into force in 2004. See P Stone, EU Private International Law, Elgar European Law, 3rd edn (Cheltenham, Edward Elgar, 2014) 280. The current official name of the ECJ, ie, the EU’s highest court of law, is the Court of Justice.

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among other things, on Article 4(5), which provides for rebuttal of the presumptions of closest connection in Article 4(2)–(4).30 As noted above, Lando considered Article 4(5), and its supposedly result-selective interpretations, to be particularly problematic. Now, existing and possibly forthcoming preliminary rulings curtail the opportunity for national courts to indulge in result-selectivism. In terms of the Rome I Regulation,31 which has mostly replaced the Rome Convention, the power to give preliminary rulings derives directly from the primary law of the EU.32 What is more, as compared to Article 4 of the Rome Convention, Article 4 of the Rome I Regulation represents a transition towards greater predictability and legal certainty. Both Articles concern choice of law in the absence of choice by the contracting parties. But instead of the presumptions of closest connection provided by Article 4 of the Rome Convention, Article 4 of the Rome I Regulation provides fixed conflict rules for various types of contracts (Article 4(1)–(2)). Granted, according to Article 4(3) of the Rome I Regulation, the law indicated by the relevant fixed conflict rule may sometimes be overridden in favour of another law. This somewhat blurs the line between fixed conflict rules and presumptions. However, to override a fixed conflict rule, Article 4(3) of the Rome I Regulation requires that the contract is ‘manifestly more closely connected’ with another country. The threshold for rebutting a presumption of closest connection is lower, as Article 4(5) of the Rome Convention requires that the contract is (only) ‘more closely connected’ with another country.33 The foregoing shows that Lando’s view can be questioned even on its home ground, in contracts. Private international law seldom provides perfect solutions, but it appears, more than anything, to be a matter of attitude whether the defects identified justify speaking of a crisis. At any rate, the alleged eternal character of a crisis finds little support in Lando’s argumentation and can partially be falsified in retrospect. Most importantly, it should be much harder to stretch the idea of an eternal crisis, as he attempts to do, beyond the field of contract law. This is so 30 Case C-133/08 Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV and MIC Operations BV [2009] ECR I-9687. 31 Cited in n 13. 32 Art 267 of the Consolidated Version of the Treaty on the Functioning of the European Union [2016] OJ C202/47 (TFEU). See J Stuyck, ‘The European Court of Justice as a Motor of Private Law’ in C Twigg-Flesner (ed), The Cambridge Companion to European Union Private Law (Cambridge, Cambridge University Press, 2010) 110–11. 33 Magnus (n 26) 29–30. See PMM van der Grinten, ‘Article 14 Rome I: A Political Perspective’ in R Westrik and J van der Weide (eds), Party Autonomy in International Property Law (Munich, S ellier European Law Publishers, 2011) 146. A negotiator for the Rome I Regulation on behalf of the Netherlands, Van der Grinten observes: ‘The “hard and fast” rules in Article 4 of the Rome I Regulation serve mainly to meet the criticism of others within the Commission (e.g. Internal Market), who thought that Private International Law lacked legal certainty and predictability, and that it should better be replaced by mutual recognition based on the law of the country of origin. In order to arrive at maximum legal certainty, the scope of the “closest connection” rule in Article 4 of the Rome Convention has been narrowed down.’ In fact, the threshold seems to have already been raised in Intercontainer Interfrigo in relation to Art 4(5) of the Rome Convention. The ECJ construed Art 4(5) as meaning that a presumption must be rebutted where ‘it is clear’ that a closer connection with another country exists. Then again, the ECJ held that rebuttal does not require presumptions to be without any genuine connecting value. See paras 60–64 of the judgment.

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because different areas of law involve different kinds of cross-border problems, which may also be curable to different extents by means of private international law. Preliminary observations on security rights over tangible movables and receivables support the last-mentioned point, suggesting that the potential of private international law cannot be written off with an unspecific reference to an eternal crisis. In this area, cross-border problems mainly relate to conflict rules themselves, as they currently stand, notably their unstable connecting factors or nonuniformity between jurisdictions, rather than to the ways in which courts apply them. Thus, the question remains what could be achieved by improving current connecting factors or replacing them with better-functioning ones, or by unifying divergent conflict rules. This is discussed on several occasions below, in greatest detail in chapter three. In the present chapter, it is worth noting that pessimism about the potential of private international law, similar to Lando’s view, is fairly common in the European discourse on security rights. Samples of it are given in section II.B, which maps the concrete content of the centralised substantive approach, including various unification or harmonisation proposals and their motives. We will return to Lando’s view in connection with the gentler approaches in section IV.B.

B. Proposals for EU Unification or Harmonisation of Substantive Law Means falling under the centralised substantive approach are ‘centralised’ in the sense that they could be adopted by the EU, but not by Member States individually. These means can be described as top-down Europeanisation because from the viewpoint of Member States they involve receiving new norms from above, from the institutions of the EU. The means are ‘substantive’ in that they involve the unification or harmonisation of substantive law, which typically aim to eliminate substantive diversity. Despite these common features, the centralised substantive approach is not a homogeneous group of means. Indeed, the comprehensiveness of the means varies, as do the unifying or harmonising instruments they involve. For convenience of presentation, the means can be divided into three further categories, namely comprehensive means (section II.B.i), partial or piecemeal means (section II.B.ii) and optional or supplementary means (section II.B.iii).

i. Comprehensive Means In this book, ‘comprehensive means’ denotes means that introduce a stand-alone system of security rights to replace existing national systems, wholly or for the most part. Eva-Maria Kieninger implies the need for such a system, doubting that it will be possible in the long run to ‘evade a general unification of secured transactions law in the EU’. According to her, the ‘most prominent problem’ relates to assets

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that are not originally intended to cross borders and to cases where the secured creditor never thought that security rights might have to be enforced in another Member State.34 These and other conflit mobile situations are often thought to indicate the limits of solutions that private international law can offer.35 Kieninger contrasts general unification with proposals for introducing a ‘European Security Right’ (ESR). This would mean supplementing existing national types of security rights with a new supranational type, so that the national types and the supranational type would coexist. In her view, general unification is needed because security rights involve certain sensitive questions that cannot be addressed by a mere ESR. One group of these questions concerns the accommodation of an ESR with domestic security rights, both contractual and statutory, and with various aspects of domestic insolvency laws, including the actio pauliana and ranking of claims.36 Another sensitive point is the principle of publicity, where the attitudes of Member States differ significantly. Kieninger’s illustration is that German law broadly accepts undisclosed non-possessory security devices, such as Sicherungsübereignung (security transfer of title or ‘fiduciary transfer of ownership for security purposes’), whereas French law, for example, generally requires non-possessory security devices, such as gage or warrant, to be entered into specific registers in order to be effective against third parties.37 Comprehensive means are also favoured by those commentators who anticipate that partial or piecemeal means would create particular problems in the shape of fragmentation.38 a. UCC Article 9 as a Model According to Kieninger, the solution for Europe lies in Article 9 of the Uniform Commercial Code (UCC), headed ‘Secured Transactions’, which is the body of secured transactions law in the US. She calls for a closer examination to establish which of its features are importable and which may not be.39 More generally, it has become fairly common to propose UCC Article 9 as a model for future

34 E-M Kieninger, ‘European Regulation of Security Rights’ in Drobnig, Snijders and Zippro (eds) (n 25) 167. 35 See von Bar and Drobnig (n 25) 468; Kieninger (n 25) 17–18. 36 Kieninger (n 34) 167–68. See Rott (n 25) 159–65. Rott discusses problems that the coexistence of national and supranational security rights would entail and concludes that comprehensive unification of substantive law is the only feasible option. 37 Kieninger (n 34) 168. See M Brinkmann, ‘The Peculiar Approach of German Law in the Field of Secured Transactions and Why It Has Worked (So Far)’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016) 340–44; J-F Riffard, ‘The Still Uncompleted Evolution of the French Law on Secured Transactions towards Modernity’ in Gullifer and Akseli (above in this note) 370–78. The new French regime of registrable non-possessory pledge, gage, in Arts 2333–50 of the Civil Code was introduced in 2006. Dispossession of the grantor remains an alternative method of achieving third-party effectiveness. 38 See A Veneziano, ‘The DCFR Book on Secured Transactions: Some Policy Choices Made by the Working Group’ in S van Erp, A Salomons and B Akkermans (eds), The Future of European Property Law (Munich, Sellier European Law Publishers, 2012) 124–27. 39 Kieninger (n 34) 169.

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European law,40 or to study its suitability for that purpose.41 This is undoubtedly inspired by the fact that Article 9 has already had a significant influence on law reforms elsewhere. For example, the Personal Property Security Acts (PPSAs) of Canadian provinces and territories are its direct progeny.42 In terms of content, the appeal of UCC Article 9 may largely be explained by a modern, advanced aura, which it has in the eyes of many observers around the world. Article 9 is a substantial body of law.43 It aims to facilitate financing secured by ‘personal property’, meaning tangible movables and intangibles, through increasing the availability, efficiency and economy of such financing.44 To quote Harry C Sigman: Article 9 seeks to attain this goal by providing as much certainty and predictability as possible, by providing a comprehensive set of flexible market-oriented rules for the creation and enforcement of security interests and for the determination of priority among competing claims to the collateral, minimizing the need for and likelihood of litigation.45

Quite deliberately, the comprehensiveness and detailed nature of Article 9 leave little room for judicial development.46 UCC Article 9 is inclusive and enabling in that it applies to virtually all types of personal property, and allows the use of future as well as present property as ‘collateral’, the term used for encumbered assets. It also applies to all types of 40 See U Drobnig, ‘Choosing the Right Approach for European Law Making: Commentary’ in Eidenmüller and Kieninger (n 25) 103. Drobnig regards Art 9 as the ‘decisive key-model for dealing with the basic issue of method’. See also HC Sigman, ‘Security in Movables in the United States— Uniform Commercial Code Article 9: A Basis for Comparison’ in Kieninger (ed) (n 25) 80. In Sigman’s view, Art 9 ‘is likely to play an important role as a source of ideas, if not also as a model for their implementation’ in European reforms. 41 See, eg, DJY Hamwijk, Publicity in Secured Transactions Law: Towards a European Public Notice Filing System for Non-possessory Security Rights in Movable Assets? (Doctoral thesis, University of Amsterdam 2014) 155–374; M Brinkmann, Kreditsicherheiten an beweglichen Sachen und Forderungen: Eine materiell-, insolvenzund kollisionsrechtliche Studie des Rechts der Mobiliarsicherheiten vor dem Hintergrund internationaler und europäischer Entwicklungen, Jus Privatum: Beiträge zum Privat recht 156 (Tübingen, Mohr Siebeck, 2011) 351–487; B Graham-Siegenthaler, Kreditsicherungsrechte im internationalen Rechtsverkehr: Eine rechtsvergleichende und international-privatrechtliche Untersuchung, Berner Bankrechtliche Abhandlungen 13 (Berne, Stämpfli Verlag, 2005) 514–723. 42 See Sigman (n 40) 54; C Walsh, ‘Transplanting Article 9: The Canadian PPSA Experience’ in Gullifer and Akseli (n 37). 43 The UCC is a model law and a law separately enacted by states, not a single federal law. It was developed by cooperation between the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI). Art 9 is in force in all states in virtually identical form. It was substantially revised in 1998 and was slightly amended in 2000. The revised Art 9 became effective in 46 states on 1 July 2001 and in the rest of the states by 1 January 2002. See Sigman (n 40) 60–64; P Winship, ‘An Historical Overview of UCC Article 9’ in Gullifer and Akseli (n 37). Selected sections of the revised Art 9 were amended in 2010, with a view to addressing issues arising in practice since the revision. The 2010 amendments took effect in most states on 1 July 2013 and are now effective in all states (the only US jurisdiction without this update is the US Virgin Islands). References in this book to Art 9 are to the revised Art 9 with the 2010 amendments. Information on the UCC, including revisions, amendments and enactment statuses, is available at www.uniformlaws.org. 44 Sigman (n 40) 54. 45 ibid 54–55. cf Hamwijk (n 41) 321–25. 46 Sigman (n 40) 55. See Kieninger (n 34) 169. Kieninger cites ‘mistrust against judge made law in a field that so much requires legal certainty’ as a reason for the complexity of Art 9.

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c reditors and debtors, and without regard to the obligation secured, although consumer debtors and consumer-related transactions are subject to protective special rules. Importantly, permitting present and future assets to be used as collateral, and to secure present and future obligations, with no restrictions as to the nature or amount, entails the availability of what may be referred to as a ‘floating lien’. This facilitates modern financing transactions, including revolving credit and bulk assignments of receivables.47 Based on a functional approach, UCC Article 9 operates with a unitary security device, called ‘security interest’.48 Section 1-201(b)(35), in UCC Article 1, defines this as ‘an interest in personal property or fixtures which secures payment or performance of an obligation’, with the addition that the term covers ‘any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9’.49 Functionalism is well visible in section 9-109, which states Article 9’s scope of application. This is particularly true for section 9-109(a)(1), according to which Article 9 applies to ‘a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract’. According to Sigman, ‘all transactions in movables which serve the purpose or have the effect of providing security for an obligation’ fall within the scope of Article 9. The apparent form of the transaction and the nomenclature used by the parties are disregarded for this purpose, although not necessarily for other purposes, such as taxation or balance sheet presentation. Instead, the economic substance of the transaction governs.50 Another functionalist feature is found in section 9-202, which states that, unless otherwise provided, the location of title to the collateral (whether in the secured party or the debtor) is irrelevant in terms of the applicability of Article 9.51

47 Sigman (n 40) 56–57. According to s 9-205, a ‘security interest is not invalid or fraudulent against creditors solely because’, inter alia, ‘the debtor has the right or ability to … use, commingle, or dispose of all or part of the collateral’. For a comparison with the English-style floating charge, see G McCormack, Secured Credit under English and American Law, Cambridge Studies in Corporate Law (Cambridge, Cambridge University Press, 2004) 73–76. 48 See McCormack (n 47) 71. McCormack writes: ‘All the old terminology of law and the favourites beloved of lawyers such as pledge, mortgage, conditional sale, trust receipt etc. have been consigned to the corridors of legal history and replaced by the unitary concept of a security interest.’ For an account of Art 9’s roots in American legal realism, see Brinkmann (n 41) 353–56. 49 UCC Art 1 is headed ‘General Provisions’. References in this book to Art 1 are to the revised Art 1 of 2001. Several terms used in the definition of s 1-201(b)(35), including ‘chattel paper’ and ‘payment intangible’, are defined in s 9-102. 50 Sigman (n 40) 57–58. eg, a transaction termed a ‘lease’ may be treated as a secured transaction for the purposes of Art 9. S 1-203 sets out criteria as to when this is the case. On leases of goods and Art 9, see LM LoPucki, E Warren and RM Lawless, Secured Transactions: A Systems Approach, Aspen Casebook Series, 8th edn (New York, Wolters Kluwer, 2016) 30–31, 361–65. Official Comment 2 to s 9-109, as amended in 2010, states that the parties’ subjective intention with respect to the legal characterisation of their transaction is also irrelevant to whether Art 9 applies. For a view critical of Art 9-type functionalism, see MG Bridge, RA Macdonald, RL Simmonds and C Walsh, ‘Formalism, Functionalism, and Understanding the Law of Secured Transactions’ (1999) 44 McGill Law Journal 567. 51 See Sigman (n 40) 57. According to s 1-201(b)(35), ‘retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer … is limited in effect to a reservation of a “security interest”’.

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‘Creation’, ‘attachment’ and ‘perfection’ of a security interest are key concepts in UCC Article 9. A security interest is created by simple agreement. No particular terminology or form is required, and the collateral description rules laid down in section 9-108 are rather relaxed.52 Section 9-203(a) states that a ‘security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment’. Section 9-203(b) lays down the prerequisites for ‘enforceability’ ‘against the debtor and third parties with respect to the collateral’.53 However, to be effective against third parties, as the term ‘effective’ is used in this book,54 an additional step is needed. This step, perfection, is an integral part of the priority scheme of Article 9. While a perfected security interest generally prevails over a competing interest, this is not always the case, so that choice of method of perfection may affect p riority. In order to know, one has to examine the specific priority rule covering a particular third-party conflict.55 In cases specified in section 9-309, such as with ‘a purchase-money security interest in consumer goods’, perfection occurs automatically when the security interest attaches. In other cases, one of the three methods provided for in sections 9-310 to 9-314 is generally required, namely ‘filing’, ‘possession’ or ‘control’. The methods of perfection available in a particular situation depend on the type of collateral.56 Filing is nearly always permissible, and it is by far the most common method with respect to most collateral types.57 Indeed, the filing system, known as ‘notice filing’, is one of the hallmarks of UCC Article 9. Notice filing does not involve recording the security agreement, or details of a particular transaction, but a ‘financing statement’ containing minimal identifying data: the name of the debtor, the name of the secured party or a representative, and an indication of the collateral (section 9-502(a)). For this purpose, although not for attachment, even a supergeneric description of collateral such as ‘all assets or all personal property’ of the debtor suffices (section 9-504). In short, the filing system provides a database

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Sigman (n 40) 64–65. See LoPucki, Warren and Lawless (n 50) 150–58. According to s 9-203(b), unless otherwise provided, a security interest is enforceable only if ‘value has been given’, ‘the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party’ and one of the four evidentiary conditions listed is met (eg, a security agreement authenticated by the debtor, including a description of the collateral). On the interpretation of these prerequisites, see LoPucki, Warren and Lawless (n 50) 134–45; Sigman (n 40) 65–66. 54 Introduction, sections II and III, especially n 40. 55 Sigman (n 40) 69–71. 56 ibid. Possession means actual, rather than constructive (fictitious), possession. Thus, it is available as a perfection method only in the case of tangible collateral. Control is defined separately for investment property, deposit accounts, letter-of-credit rights and electronic chattel papers. These are the only types of collateral with respect to which control is available as a perfection method. Perfection by control does not necessarily entail disempowerment of the debtor regarding the collateral, whereas perfection by possession (dispossession from the debtor’s viewpoint) does. See ibid 70–71. See also G McCormack, ‘American Private Law Writ Large? The UNCITRAL Secured Transactions Guide’ (2011) 60 ICLQ 597, 614. As an example of control, McCormack mentions ‘where a securities intermediary agrees to respond to instructions from the secured party rather than from the debtor’. 57 Sigman (n 40) 70–71. 53

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of information which merely warns the searcher that a creditor may, now or later, have a security interest in property in which the debtor may, now or later, have rights. For information on the actual state of affairs, that is, who has what and when, the searcher needs to make further inquiries from the parties.58 A financing statement can be filed before or after a security interest attaches, and indeed even before a security agreement is made (section 9-502(d)). Importantly, a financing statement is not limited to a particular transaction, but may cover the parties’ entire credit relationship, including transactions under a security agreement not even contemplated at the time of filing. As a series of transactions between the parties does not require repeated filings, notice filing for example facilitates financing techniques that involve the use of inventory or receivables. Moreover, a financing statement may cover after-acquired property (collateral) and perfect future advances under a security agreement (see section 9-204), without the need to mention after-acquired property or future advances in the financing statement. However, the indication of collateral in the financing statement must always be broad (or generic) enough to cover the intended collateral.59 UCC Article 9 contains a detailed priority scheme, which aims at maximising certainty and allows secured creditors effectively to assess their exposure to thirdparty claims against the collateral. The priority rules are found in sections 9-317 to 9-339. For example, in a contest between conflicting security interests in the same collateral, the general rule is ‘the first to file or perfect’. In other words, priority is given to a secured creditor who filed before the contestant perfected, even if the secured creditor who filed first is the second to perfect. A central subset of Article 9’s priority rules concerns the superpriority of ‘purchase-money security interests’. These security interests may exist in favour of third-party financiers who enable the acquisition of collateral by the debtor, as well as in favour of sellers. Superpriority is meant to prevent preclusion or monopolisation of financing by a first-filed floating lien.60 Another major part of Article 9 consists of rules on post-default rights and remedies.61 Virtually all recent sketches for a comprehensive European system of security rights draw on UCC Article 9.62 Kieninger’s outline of main policy choices for

58 ibid 59, 76–78; McCormack (n 47) 76–78. As for the question where to file (and search), see LoPucki, Warren and Lawless (n 50) 407–09; Sigman (n 40) 68–69. The general rule found in s 9-301(1), concerning non-possessory security interests, is the ‘location’ of the debtor. For details of the filing system, see ss 9-501 to 9-527. 59 McCormack (n 47) 76–77. 60 Sigman (n 40) 58–59, 71–75. See McCormack (n 47) 79–93. 61 See Sigman (n 40) 78–79. The secured creditor is typically authorised to realise the collateral at a non-judicial sale. 62 See G McCormack, ‘Convergence, Path-Dependency and Credit Securities: The Case against Europe-Wide Harmonisation’ in M Andenas and C Baasch Andersen (eds), Theory and Practice of Harmonisation (Cheltenham, Edward Elgar, 2011) 352. McCormack sees two ‘pressure points’ for European reform in recent years, one arising from ‘the desire by some to create a European Civil Code’ and the other from ‘lobbying to promote the merits of Article 9’.

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such a system, in the conclusions of her Common Core study, may serve as an example.63 In this context too, her position on the desirability of comprehensive means is fairly clear: If the EU institutions seriously started to prepare a regulation on European contract law or even a European Civil Code replacing autonomous national law, there is no reason why the area of secured transactions should be left outside; rather security rights in movables is the field where unification is most desirable.64

In addition to direct references to Article 9 sections, Kieninger refers to work by the United Nations Commission on International Trade Law (UNCITRAL) and the European Bank for Reconstruction and Development (EBRD).65 As is commonly known, Article 9 has influenced the secured transactions projects of both institutions.66 Kieninger follows UCC Article 9 at least in the following policy choices. The security device should be a uniform, functionally defined interest. It should include retention of title and leasing, although the rules for purchase-money security interests would not have to be exactly the same as for other security interests. Parties should be allowed to choose and define the collateral according to their business needs, regardless of whether it consists of present or future assets, and individually definable or constantly changing assets. Publicity should be created by a debtor-based registry. The register should be searchable by the interested public and registered information restricted to the absolute minimum. Time of registration should serve as a priority determinant. For example, in conflicts among secured creditors, the first to register should generally be the first in right. The basic rules on registration and priority should be modified to cater for the special needs of purchase-money creditors. However, the result would not necessarily have to follow Article 9 in all respects.67 b. DCFR Book IX as a Blueprint A more recent and nuanced sketch for a European system of security rights is Book IX of the Draft Common Frame of Reference (DCFR), headed ‘Proprietary

63 E-M Kieninger, ‘Evaluation: A Common Core? Convergences, Subsisting Differences and Possible Ways for Harmonisation’ in Kieninger (ed) (n 25) 665–72. Kieninger appears to suggest that these policy choices are valid irrespective of whether the European system would be introduced as a supplementary (opt-in or opt-out) model or as a model replacing national law altogether. Her only distinction in this respect is that ‘if a European Security Right is going to be introduced as a supranational model and not as a replacement of national law, the European legislature should all the more be able to realise innovative concepts and have to pay less attention to the existing national law’ (at 669). 64 ibid 665. 65 ibid 668–72. 66 See McCormack (n 56) 598; M Nussbaumer and F Dahan, ‘Promoting Legal Reform in Eastern Europe: The EBRD Approach’ in C Jessel-Holst, R Kulms and A Trunk (eds), Private Law in Eastern Europe: Autonomous Developments or Legal Transplants? Materialien zum ausländischen und internationalen Privatrecht 50 (Tübingen, Mohr Siebeck, 2010) 21–22; S igman (n 40) 54. 67 Kieninger (n 63) 669–72. For a largely similar list of policy choices, see Beale (n 25) 397–98.

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security in movable assets’. DCFR Book IX puts forward a comprehensive means in that it comprises all necessary parts of a whole system of security rights. The idea of comprehensiveness is especially visible in the transitional provisions on entries in other systems of registration or notation under national law (IX.—3:312) and on security rights created before establishment of the ‘European register of proprietary security’ (IX.—3:333).68 The same can be said of the provisions on pre-existing security rights over assets brought into the EU area from a country outside it (IX.—3:108, 4:106).69 In general, the provisions of DCFR Book IX are less detailed than those of UCC Article 9, but Book IX has clear counterparts in Article 9.70 We can observe several points where Book IX follows Article 9 in broad terms. To begin with, Book IX assumes a functional approach. Thus, according to IX.—1:102(2), the term ‘security right’ includes not only limited proprietary rights of a type that ‘is generally recognised as designed to serve as proprietary security, especially the pledge’, but also contract-based limited proprietary rights, regardless of name, that ‘are either intended by the parties to entitle the secured creditor to preferential satisfaction of the secured right from the encumbered asset or have this effect under the contract’,71 as well as certain other rights. The location of title to the encumbered asset has some relevance since Book IX distinguishes ‘retention of ownership devices’ (IX.—1:101(1), 1:103) from security rights.72 However, except for creation (chapter 2) and enforcement (chapter 7), security rights and retention of ownership devices are subject to the same rules (IX.—1:104).73 For example, as IX.—1:201(3) shows, both may constitute an ‘acquisition finance device’, which closely resembles Article 9’s purchase-money security interest. Further, the description of the asset to be encumbered is generally not subject to strict rules. In particular, according to IX.—2:104(3), a security agreement

68 In the system of Book IX, registration in this register is a method of achieving effectiveness against third parties. 69 The future of Book IX is unknown. Like the other DCFR Books, it is an outcome of academic projects. See S van Erp, ‘DCFR and Property Law: The Need for Consistency and Coherence’ in R Schulze (ed), Common Frame of Reference and Existing EC Contract Law, 2nd revised edn (Munich, Sellier European Law Publishers, 2009). According to Van Erp, if the DCFR is to be developed into a ‘political CFR’, Book IX along with Book VIII Acquisition and loss of ownership of goods, Book X Trusts, and an extension to mortgages on immovable property should be included for several systematic and pragmatic reasons. 70 For a detailed comparison, see Brinkmann (n 41) 438–57. The influence of Art 9 on Book IX may have been direct or intermediated by the UNCITRAL Legislative Guide on Secured Transactions. See G McCormack, Secured Credit and the Harmonisation of Law: The UNCITRAL Experience, Corporations, Globalisation and the Law ( Cheltenham, Edward Elgar, 2011) 186–93. 71 Somewhat curiously from the functionalist point of view, IX.—1:102(2)(b) requires the limited proprietary right to be based on ‘a contract for proprietary security’. 72 Besides retention of ownership (retention of title) in a contract of sale, retention of ownership devices may arise in connection with hire-purchase, financial leasing and consignment. See IX.—1:103(2). 73 See C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR), full edn, vol 6 (Oxford, Oxford University Press, 2010) 5392 (IX.—1:102 comment B).

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may concern (designate as encumbered) ‘a future, generic or untransferable asset’, albeit that ‘the security right arises only if and when the asset comes into existence, is specified or becomes transferable’.74 Chapter 3 on effectiveness against third parties follows in many respects the perfection rules of UCC Article 9. For an obvious similarity, the methods for achieving third-party effectiveness are registration, possession and control. Registration is permissible with respect to all types of asset, possession in the case of corporeal assets, and control in the case of certain intangible assets (IX.—3:102). Choice between, or cumulative use of, methods, where possible, may sometimes affect priority (IX.—3:103, 4:102(2)). An acquisition finance device in connection with credit for assets supplied to a consumer is effective without registration (IX.—3:107(4)). Deviating from the filing system of UCC Article 9, which presupposes that states maintain their own registers, DCFR Book IX envisions a ‘European register of proprietary security’ (IX.—3:301), entirely electronic with online access and a direct entry system (IX.—3:302, 3:305).75 Otherwise, its basic solutions are rather similar to those of Article 9. The European register is designed as a ‘personal folio system’, where entries concerning security rights (and retention of ownership devices) are ‘filed against identified security providers’ (IX.—3:302(1), 3:303). Entries can be made before or after the creation of the security right or the conclusion of the security contract, that is, ‘advance filing’ is permitted (IX.—3:305(2)). The minimum content of an entry is laid down in IX.—3:306. This ‘minimalism’ resembles that of the content of a financing statement under Article 9, although some differences exist.76 As for minimum declaration of the encumbered assets, ‘a declaration that the creditor is to take security over the security provider’s assets or is to retain ownership as security is sufficient’ (IX.—3:306(2)).77 In short, registration under Book IX amounts to notice filing much along the lines of Article 9.78 In DCFR Book IX, the priority scheme is laid down in chapter 4. According to the general rules of IX.—4:101, ‘the priority between several security rights and between a security right and other limited proprietary rights in the same asset is determined according to the order of the relevant time’. For security rights, 74 See ibid 5415–18 (IX.—2:104 comments, IX.—2:105 comments A and B). Grant of a security right by a consumer is subject to special rules in IX.—2:107. In these cases, the assets to be encumbered must be identified individually. 75 See ibid 5494–99 (IX.—3:301 comments). Direct entry system means here that the secured creditor can make entries without the involvement of a public registrar (IX.—3:305(1)). 76 In particular, IX.—3:306(1) requires an indication ‘by one or several references to a list of categories of assets to which category the encumbered assets belong’, fulfilment of the requirements of consent by the security provider and a declaration whereby the creditor assumes liability for damage caused by wrongful registration. According to IX.—3:307, an entry may include additional content, namely additional information on the encumbered assets or the content of the security right, the expiry date of the entry (if earlier than the end of the regular expiry period of five years) and the maximum amount of security. IX.—3:318, then, provides that the register can be searched for entries filed against individual security providers or entries with specific descriptions of encumbered assets. 77 cf IX.—3:315 on a security provider’s right to deletion or amendment of an entry in the absence of a corresponding security right. 78 See von Bar and Clive (n 73) 5496–98 (IX.—3:301 comments C and D).

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this is the time of registration, if any, or the time at which third-party effectiveness is otherwise achieved, whichever is earlier, and, for other limited proprietary rights, the time of creation. The time of creation is decisive between two or more security rights that are ineffective against third parties.79 Superpriority is given, for example, to acquisition finance devices that are effective against third parties (IX.—4:102). For determination of priority, an execution creditor is regarded as holding a third-party effective security right from the time of bringing execution against specific assets, provided that all preconditions for execution proceedings against those assets according to the procedural rules of the place of execution are fulfilled (IX.—4:107). Chapter 7 of Book IX deals with default and enforcement. Except for certain consumer cases, availability of extra-judicial enforcement is the main rule (IX.—7:103). c. Eliminating the Need for Choice of Law Introduction of a comprehensive European system of security rights would largely eliminate the need for choice of law, and thus conflict rules, within the scope of that system. To be sure, this is often a major motive behind proposals for comprehensive means. For example, Kieninger, the author of the outline of main policy choices discussed in section II.B.i.a above, refers to ‘a pressing need … for a harmonisation in the field of secured transactions’ in the EU.80 She attributes that need at least partly to failings of private international law. In particular, she demonstrates that the problems of the lex rei sitae rule in conflit mobile situations cannot fully be resolved by the doctrine of transposition, that is, converting a foreign security right into an equivalent domestic security right. This leads her to concur with Ulrich Drobnig’s observation that ‘where the substantive rules differ, private international law can only appeal to try to bridge the gap but it cannot itself provide the necessary material for building that bridge’.81 Elsewhere Drobnig envisions ‘the general introduction of a unified or harmonized regime of security’ as the ultimate goal in this area and largely rejects private international law as a possible remedy. Focusing on security rights over tangible movables, he points out that the unification of conflict rules is unworkable given that cross-border problems exist, even though the relevant conflict rule, lex rei sitae, is already uniform by tradition. He argues that the current divergences between security regimes are in the long run incompatible with a fully effective

79

On priority of a security right obtained by good faith acquisition, see IX.—4:101(5). Kieninger (n 63) 664. Kieninger (n 25) 16–22. See U Drobnig, ‘Entwicklungstendenzen des deutschen internationalen Sachenrechts’ in A Lüderitz and J Schröder (eds), Internationales Privatrecht und Rechtsvergleichung im Ausgang des 20. Jahrhunderts: Bewahrung oder Wende? Festschrift für Gerhard Kegel (Frankfurt am Main, Alfred Metzner Verlag, 1977) 150. The idea of transposition is to enable the protection of foreign security rights in the context of domestic law, but this may be impracticable if the domestic law is stricter in attitude towards security rights. With respect to security rights over receivables, and assignments of claims in general, Kieninger calls for ‘at least’ a uniform conflict rule (at 20). 80

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internal market, which requires the ‘removal of all artificial barriers to competition’ and preparing a level playing field among the Member States.82 A level playing field, insofar as it presupposes the same or similar substantive laws across the EU, clearly cannot be brought about through choice of law. As an intermediate solution, though, Drobnig appears to endorse one private international law improvement, namely ‘a grace period’. This would be a period of three or four months after an encumbered asset has been moved to a new jurisdiction. During that period, the security right would retain its validity and the effects it had under the law of the previous location. The idea is to give the parties to the security arrangement a chance to comply with the potentially different requirements for effectiveness under the law of the new location.83

ii. Partial or Piecemeal Means Compared to comprehensive means, partial or piecemeal means are, as the terms suggest, more limited unification or harmonisation efforts. These are advanced and advocated for similar reasons to comprehensive means, often due to disappointment with or distrust in choice of law as a solution to cross-border problems. Limitations to efforts are typically justified by assumptions of easier Member State acceptability or by the need for intermediate learning phases before attempting a more comprehensive solution. As we can observe in the following selection, the category of partial or piecemeal means covers a variety of concrete proposals. According to Willem Rank, in the EU ‘harmonisation of the laws relating to security rights is not only necessary and desirable, but also inevitable’. The reasons include the risk of non-recognition or subordination to rights of third parties in cross-border contexts and the consequences of that risk to the availability and cost of credit. ‘Transactional risk has a price ticket attached to it’, Rank summarises. He also emphasises transaction costs particular to cross-border finance and the lack of a level playing field, and ensuing distortions of competition, within the internal market. As for non-recognition and non-enforcement, he sees little help in converting a foreign security right into a similar security right under domestic law (transposition). For he suggests that such conversion is possible only if sufficient correspondence exists between the foreign security right and its domestic equivalent, and if the formalities for creating the domestic equivalent have been observed.84 Although convinced of the need for harmonisation, Rank advises caution: ‘If one does attempt to achieve full harmonisation, one might get caught in a complex and time consuming process and the chance that any substantial result may 82 Von Bar and Drobnig (n 25) 468–69. See the note on authorship at 20–21, according to which Drobnig is responsible for the property law-related part of the study, including the section on security in movables. 83 ibid 468–69. 84 W Rank, ‘Harmonisation of National Security Rights’ in Drobnig, Snijders and Zippro (eds) (n 25) 204–06.

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be booked is virtually zero.’ Rank’s first choice of instrument would be a directive, apparently because the implementation of a directive allows national legal concepts to be taken into account and the preservation of the continuity of national legal systems, which in turn is likely to prevent fragmentation of the law. He argues that the instrument chosen should follow a functional approach, departing as far as possible from traditional legal concepts and focusing on the economic function of security rights.85 For purposes of content design, Rank suggests consultation with legal experts and market participants, but he already has a benchmark in mind. In his view, the EBRD’s ten core principles for a secured transactions law capture the essence of what harmonised legislation should achieve. The first principle reads: ‘Security should reduce the risk of giving credit, leading to an increased availability of credit on improved terms.’ As Rank observes, this is the overriding principle, and the other nine are derived from and relate to it.86 The directive he proposes would probably consist of functionally expressed key features of the law on security rights, to be implemented in more specific terms by Member States. Kieninger, too, sees a directive as an option. In contrast to Rank’s proposal, this would concern one specific security device, namely simple retention of title. According to Kieninger, ‘such a mini-directive would have considerable merits for intra-community trade’ and it would require only minor changes in some Member States’ laws. Her Common Core study suggests that, besides leasing, simple retention of title is the only area where harmonisation would be relatively easy as significant convergence already exists. Harmonisation beyond simple retention of title would be much more complex.87 As discussed in section II.B.i.a above, Kieninger also presents an outline of main policy choices for further-going efforts. Because a directive on simple retention of title is put forward as an alternative to, or a first step towards, comprehensive means, these two options clearly share the same justification. This is largely grounded in the view that private international law solutions are insufficient.88 85 ibid 210, 213–15. Rank also mentions model law as an option. See Beale (n 25) 381. Beale proposes working on a ‘European Secured Credit Directive’ simultaneously with a ‘European Security Instrument’. 86 Rank (n 84) 213–14. The other nine principles state central characteristics of a modern system of security rights, relating, inter alia, to creation, scope, publicity, priority and enforcement of security rights (not in that order) and emphasising commercial utility and expediency of the system. The ten core principles are available on the EBRD website: www.ebrd.com/what-we-do/legal-reform/access-tofinance/transactions.html. 87 Kieninger (n 63) 664–65. See E-M Kieninger, ‘Collateralisation of Contracts’ (2013) 9 European Review of Contract Law 430, 446. Kieninger notes that a harmonising directive based, eg, on the UNCITRAL Legislative Guide on Secured Transactions or DCFR Book IX ‘might be regarded as the ideal solution’, but ‘the prospects for the realization of such a heroic endeavour seem gloomy’. For an apparently more optimistic view, see E-M Kieninger, ‘Perspektiven für ein Europäisches Mobiliarkreditsicherungsrecht’ (2016) 24 Zeitschrift für Europäisches Privatrecht 201, 212–14. 88 See Kieninger (n 63) 664; Kieninger (n 25) 18, 20–21. See also E-M Kieninger, Mobiliarsicherheiten im Europäischen Binnenmarkt: Zum Einfluß der Warenverkehrsfreiheit auf das nationale und internationale Sachenrecht der Mitgliedstaaten, Europäisches Privatrecht 1 (Baden-Baden, Nomos Verlagsge sellschaft, 1996) 2 15–17. There, Kieninger argues that a solution based on an obligation to recognise

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Drobnig proposes yet another type of means, at the same time partial and piecemeal. As noted in connection with comprehensive means (section II.B.i.c), for him the general introduction of a unified or harmonised security regime is the ultimate goal. However, as the first step towards this goal, he proposes ‘a uniform regime for border-crossing trade’. The general unified or harmonised security regime could eventually be introduced ‘in the light of the experiences with’ that first step.89 In other words, a security regime for cross-border trade would be introduced in order to arrange an intermediate learning phase, besides being due to easier Member State acceptability.90 It remains unclear what kind of a system the uniform security regime for crossborder trade would be. Drobnig merely mentions that it ‘may be optional but would have to cover especially the effects vis-à-vis third parties’.91 Of course, a security regime can be uniform to a greater or lesser extent. At least two basic models are possible. The regime could introduce new uniform security devices, perhaps with new uniform means of publicity, such as a central registration system. Alternatively, the regime could be based on recognition of security rights, introducing uniform maximum rules on creation of those rights and achieving third-party effectiveness as well as uniform minimum rules on the effects of those rights in all Member States. Both models would entail questions as to their relation to and influence on national systems of security rights.

iii. Optional or Supplementary Means Optional or supplementary means belong to the partial or piecemeal means discussed above, but are more conveniently presented as a category of their own. These means involve adding one or more new supranational security devices besides existing national security devices. Supranational security devices would supplement, rather than replace, national ones. Accordingly, the parties to a s ecurity and transpose security rights validly created in another Member State would not be practicable as such. According to her, a certain minimum degree of substantive harmonisation would be needed to make such uniform reregulation of private international law work, particularly due to divergences in publicity requirements. She adds that the same holds true for solutions substituting party autonomy or lex contractus for the current conflict rules in proprietary matters. 89 Von Bar and Drobnig (n 25) 469. See Drobnig (n 25) 19. Drobnig writes: ‘It would indeed seem to be desirable to establish uniform rules, at least for border-crossing security interests. And such rules must be enacted on the level of substantive law since conflicts rules cannot solve the practical problems involved.’ 90 See U Drobnig, ‘A Subsidiary Plea: A European Contract Law for Intra-European Border-Crossing Contracts’ in S Grundmann and J Stuyck (eds), An Academic Green Paper on European Contract Law, Private Law in European Context Series 2 (The Hague, Kluwer Law International, 2002) 349–51. According to Drobnig, whatever the position on domestic property regimes of movables, states are willing to accept unified regimes for transborder movement of assets charged with security rights. He refers to experience with the Convention on the International Recognition of Rights in Aircraft, signed at Geneva on 19 June 1948, and the Convention on International Interests in Mobile Equipment, signed at Cape Town on 16 November 2001, and to regional developments in Europe, the Americas and Africa. 91 Von Bar and Drobnig (n 25) 469. By ‘third parties’, Drobnig means the execution and insolvency creditors of both the security-provider debtor and the secured creditor.

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arrangement could choose to use a supranational security device instead of a national one if they consider it worthwhile to do so. In the choice aspect, these means resemble the proposed Common European Sales Law,92 and other ‘optional instrument’ ideas put forward in the European contract law discourse.93 Granted, optional or supplementary means may at first seem misplaced in the centralised substantive approach, which by definition solves cross-border problems by eliminating substantive diversity. Perhaps paradoxically, optional or supplementary means appear to increase rather than remove substantive diversity. However, they offer the possibility to eliminate substantive diversity and its effects in legal positions of individual actors. Moreover, they might eventually make national security devices obsolete and are often regarded as intermediate solutions on the way to more comprehensive means. For these reasons, their place is in the centralised substantive approach. In the area of security rights, the idea of an optional instrument was first introduced by Karl F Kreuzer in 1990. The context at the time, as described by Kreuzer himself, can be summarised as follows. Private international law, be it autonomous-national or unified, cannot provide satisfactory solutions to the problem of non-recognition of foreign security rights. In particular, this holds true for reregulation based on party autonomy, the application of the law of destination, a so-called grace period or retroactive use of the import state law. All these options offer, at best, only partial improvements. Moreover, a recognition convention would be unfeasible. All in all, solutions should be sought in unification or harmonisation at the level of substantive law because recognition issues are rooted in divergences of substantive law. Obstacles to such substantive solutions exist, though. ‘Isolated’ harmonisation of systems of security rights seems doomed to failure because these rights are part of closed and balanced national ‘creditor regimes’ (Gläubigerordnungen), which intersect various fields of law, notably insolvency law. The unification of entire creditor regimes, in turn, is rather unlikely, if not utopian, in the foreseeable future, even in Europe.94 Kreuzer’s own proposal, the ‘European Security Right’ (Europäisches Sicherungs recht, ESR) in movables, was meant to avoid these obstacles. Following the model of the Community patent or the Community trade mark, the ESR was to coexist with corresponding national rights. National security rights and creditor regimes were to be left completely untouched. Kreuzer presumed this to increase the chances of Member States accepting the proposal. Of course, the ESR was to

92 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law’ COM(2011) 635 final. 93 See, eg, H Schulte-Nölke, ‘The Way Forward in European Consumer Contract Law: Optional Instrument Instead of Further Deconstruction of National Private Laws’ in Twigg-Flesner (n 32) 142–46. Parallels can also be found in the proposed Eurohypothec, the European Economic Interest Group, the European Company and the European Cooperative Society. See Drobnig (n 40) 106–10. For an idea of an optional instrument for EU property law, see E Ramaekers, European Union Property Law: From Fragments to a System, Ius Commune Europaeum 117 (Cambridge, Intersentia, 2013) 254–91. 94 Kreuzer (n 25) 615–35.

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be recognised across the Community. The proposal primarily concerned crossborder security arrangements, but Kreuzer suggested that the use of ESRs could be allowed in domestic security arrangements too, so that the parties could choose between an ESR and a national security right. According to Kreuzer, one and the same asset could only be allowed to be encumbered either by one or more ESRs or by one or more national security rights. In other words, with respect to a particular asset, these security devices were to be strictly alternative.95 According to Kreuzer, like UCC Article 9, the ESR was to comprise a unitary ‘all-purpose’ security device, available for securing sale credit as well as loan credit. Further, the ESR was to be capable of encumbering all types of movable asset, possibly except for ships and aircraft with respect to which transnationally regulated classes of security rights already existed.96 For publicity purposes, Kreuzer proposed a central register.97 He outlined that the instrument introducing the ESR should, in any case, prescribe the preconditions for the creation and recognition of an ESR, and its position in priority order (ranking of claims). Registration was to be a precondition for the creation of an ESR and should function as the priority determinant in the case of an asset being encumbered by more than one ESR.98 In each Member State, an ESR was to be given the effects of a particular national type of security right, designated in the instrument introducing the ESR (a convention or a directive).99 More recently, Henk J Snijders has presented a partly rethought version of Kreuzer’s proposal. Snijders shares Kreuzer’s central premise, maintaining that the unification of conflict rules would be ‘only a partial solution to the problem, because the differences between domestic law systems do not disappear’. For proof, he refers to application of the lex rei sitae rule in the Member States. In addition, he dismisses proposals for a grace period or ‘adjustment of the substantive law result’ as discriminatory towards domestic traders and creditors. He generally supports the harmonisation (a term he uses as inclusive of unification) of substantive law on security rights.100 However, he suspects that harmonisation of any significance would take a long time, especially taking into account the large number of Member States as negotiating parties. He also stresses ‘systematic and dogmatic’ differences between national property laws as well as the often imperative, hard and fast nature of

95

ibid 637–38. ibid 638–39. 97 ibid 639–40. Kreuzer also considered, probably as an alternative to registration, a certificate indicating the security rights encumbering an asset, with an official ‘encumbrance mark’ attached to the asset itself. This, he noted, has the downside that encumbrance, or absence thereof, could be verified only in the presence of the asset, and that the risk of forgery could not be excluded. 98 ibid 640. In addition, registration of an ESR was to preclude good faith acquisition of a national security right over the same asset. 99 ibid. 100 HJ Snijders, ‘Access to Civil Securities and Free Competition in the EU: A Plea for One European Security Right in Movables’ in Drobnig, Snijders and Zippro (eds) (n 25) 156–58. 96

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property law, which is likely to make achieving compromise in negotiations more difficult in comparison to other fields, such as contract and tort law. The time argument, he suggests, holds true even for Drobnig’s proposal to start by introducing a unitary security regime just for the purposes of cross-border trade.101 Against this backdrop, Snijders considers the ESR worth trying. He recognises some new developments that call for repeating and further refining the idea. These developments include an increased awareness that general harmonisation is too slow a project to be the only way to deal with the improper functioning of the internal market, and that partial harmonisation through directives concerning small, albeit important, areas of civil law ‘results in a terrible patchwork’. Further, Snijders observes that an increasing number of authors point out problems caused by differences between national property laws, particularly in that some jurisdictions, such as Germany, allow fiducia cum creditore, while others do not. Finally, he notes that due to the internet, the ‘logistic problems’ of public registration of security rights are no longer as serious as before.102 Snijders comments on three points with respect to the overall idea of the ESR, concurring with Kreuzer on the first point, but dissenting with him on the other two. First, he supports extending the ESR to purely domestic situations. This would avoid problems with defining an ‘international’ situation and would not discriminate against domestic creditors. Second, he suggests that ESRs and national security rights should perhaps not be strictly alternative with respect to an asset. Instead, one and the same asset could be open to being encumbered by both types of security right, where the older type would prevail over the newer type, while the newer type would be effective only insofar as the older type expires or is otherwise ineffective. Third, Snijders considers that the idea of a single unitary security device, although attractive, boils down to a question of how to term it. He maintains that, within a unitary concept of ESR, certain distinctions are needed (such as those between non-possessory and possessory pledge, reservation of title and other security rights in movables, and security rights in tangible and in intangible movables), and the results of these distinctions could be labelled either as two versions of the same security device or as two separate security devices.103 Snijders calls for detailed planning of the desired characteristics and effects of the ESR.104 In his view, these should include availability of a non-possessory right, effect against third parties, some good faith protection in the case of unauthorised 101 ibid 158–59. Snijders also doubts Drobnig’s proposal because it appears to discriminate against holders of domestic security rights (competitive position of domestic actors) and would not solve ‘problems in international situations that cannot be considered as cases of cross-border trade’. In his example of such situations, the grantor of a fiduciary right changes domicile, thereby turning an initially domestic situation into an international one. 102 ibid 160–61. 103 ibid 161. 104 ibid 163. Here, Snijders argues that the question whether the ESR has to be ‘a kind of fiduciary ownership’ should be avoided as much as possible. However, nothing in Kreuzer’s proposal, which is inclined towards functionalism along the lines of UCC Art 9, suggests that the ESR should be introduced in the form of fiduciary ownership.

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creation of an ESR and secured creditor’s entitlements in the case of debtor default (appropriation or only selling authorisation if the encumbered asset is a tangible movable, entitlement to demand performance and receive payment if the encumbered asset is a receivable). Somewhat less clear are his remarks that an additional need exists for ‘untransferability and meanwhile dependency and accessority of the debt for which the security right has been established’ and ‘some rules on accountancy and tax law’.105 Further, Snijders emphasises that the ESR should be an absolute right with erga omnes effect, including towards bankruptcy trustees. He suggests that this does not necessarily require the unification of national insolvency laws, but that the ESR should be recognised by bankruptcy trustees and given the same status and treatment as a domestic security right. Finally, he notes that Kreuzer’s plea for a central register can be supported a fortiori in our time due to the progress of information technology. Accordingly, the register should be suited for electronic establishment of ESRs and electronic consultation throughout the EU without significant costs and time loss. In addition, it should be debtor-based and provide basic data on the debtor and the encumbered assets without risking the disclosure of confidential data.106 After Snijders, Kreuzer himself has restated the ESR idea. While many of its basic characteristics remain the same as in the 1990 proposal, Kreuzer now elaborates the idea drawing on the Convention on International Interests in Mobile Equipment (Cape Town Convention) and the Protocols thereto, and DCFR Book IX. Among the characteristics Kreuzer has rethought and changed for the latest version is the original’s strict alternativeness of ESRs and national security devices with respect to a particular asset.107 Over the years, several commentators have discussed the ESR idea.108 Kieninger seems to express a common sentiment among them, at least in general terms. She tells of having found the idea highly appealing when she first started writing about the topic, and still considers it good in the sense that it could be used as a ‘Trojan horse’ if extended to purely domestic transactions. As a long-term solution, though, she doubts it. This is due to certain sensitive questions, including how to accommodate the ESR with domestic systems of security rights and insolvency, particularly in terms of questions of priority and publicity. In addition, the ESR would not help in terms of what Kieninger regards as the most prominent problem, namely assets not originally intended to cross borders and cases where the secured creditor never thought that the security right might have to be enforced abroad.109 105 ibid. 106

ibid 163–64. K Kreuzer, ‘Die Harmonisierung des Rechts der Mobiliarsicherheiten’ in J Basedow, O Remien and M Wenckstern (eds), Europäisches Kreditsicherungsrecht: Symposium im Max-Planck-Institut für ausländisches und internationales Privatrecht zu Ehren von Ulrich Drobnig am 12. Dezember 2008 (Tübingen, Mohr Siebeck, 2010) 52–69. 108 See, eg, Brinkmann (n 41) 475–85; Beale (n 25) 379–81; A Flessner, ‘Security Interests in Receivables: A European Perspective’ in Eidenmüller and Kieninger (n 25) 340–41; Kieninger (n 34) 166–69; Kieninger (n 88) 239–42. 109 Kieninger (n 34) 167–68. 107

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Yet another proposal has been put forward by Frank MJ Verstijlen. This involves a ‘Community Security Right’, which is understood as ‘a bundle of national security rights’. Such a bundle would be created by fulfilling a single set of ‘formalities’, such as an agreement and registration in a public European register. With registration, the bundle ‘would come into existence to the extent that this security right can be created at that time on the assets concerned and between the parties involved and with the specificity with which the assets are described in the registration’. According to Verstijlen, the security right would automatically have its place in each legal system, and problems with the ‘conversion or assimilation’ of foreign security rights would not exist because the secured creditor would already have the relevant domestic security right, insofar as that security right is available in the legal system concerned.110 One may wonder to what extent Verstijlen’s proposal actually differs from Kreuzer’s original idea. After all, Kreuzer proposed that an ESR should be given the effects of a designated national type of security right in each Member State.111 The means proposed by Kreuzer and Verstijlen are optional in the sense of being available as options to the parties to a prospective security arrangement. However, it is also possible to speak of optionality in another sense, namely as being available as an option to individual Member States. This kind of optionality characterises all more or less comprehensive systems of security rights that Member States are free to adopt, as a replacement for national law, or refrain from adopting.112 Such systems could be introduced at least by convention, model law or ‘enhanced cooperation’ within the EU.113 Optionality in this sense may not fit perfectly in any one of the four approaches, that is, the main types of means of promoting compatibility between systems of security rights. Indeed, the instrument introducing an optional system may be created at the European level, which is characteristic of the centralised substantive approach. Then again, the fact that the eventual adoption of the system is up to individual Member States points towards the local substantive approach.

III. Antithesis: Gentler Approaches A. Critique of the Centralised Substantive Approach A majority of commentators in the European discourse on security rights seem inclined towards the centralised substantive approach, be the concrete means they 110 FMJ Verstijlen, ‘General Aspects of Transfer and Creation of Property Rights Including Security Rights’ in Drobnig, Snijders and Zippro (eds) (n 25) 34–35. 111 Kreuzer (n 25) 640. 112 cf von Bar and Drobnig (n 25) 469. In fact, when Drobnig proposes introduction of a uniform security regime for cross-border trade which ‘may be optional’, he does not specify what kind of optionality he means. 113 On enhanced cooperation, see Art 20 of the Consolidated Version of the Treaty on European Union [2016] OJ C202/13 (TEU).

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propose more or less comprehensive. Still, voices critical of the centralised substantive approach also exist. Criticism centres around two main arguments, which can be called ‘unnecessity’ and ‘detrimental effects’. Some examples of both are given in the next two sections. These examples, though, should be read with caution because it is not always clear what concrete means the authors had in mind.

i. Unnecessity The unnecessity argument maintains that cross-border problems in relation to the use of security rights are exaggerated, that evidence of the seriousness of these problems is lacking or that problems can be satisfactorily dealt with by other, less intrusive means. In this vein, Gerard McCormack argues that the case for ‘a common law of proprietary securities’ is at best unproven and that intra-Community trade apparently functions ‘perfectly well without’ such a law. He finds no particular evidence of trade hindrance which would need to be removed by the promulgation of a common European code. While admitting that cross-border transactions may involve higher transaction costs than purely domestic ones, he suggests that ‘legal concerns and issues can always be factored into the terms of the agreement’.114 McCormack points out that cross-border trade is probably far more significantly impeded by non-legal considerations, including ‘language barriers, lack of a common basis of trust and understanding, lack of local knowledge and lack of familiarity with local business practices’. In addition, he sees signs of ‘spontaneous or functional convergence’ in the number of international, other than purely European, instruments that are being promulgated. Arresting this development by imposing a European ‘overarching legislative architecture’ may be unwise, he warns.115 Maurice V Polak, in turn, implies that the European discourse has so far been dominated by dogmatic reasoning and lacking in adequate empirical evidence. As regards the debate on whether or not divergences of property law form an obstacle to the internal market, he hesitates to take sides before ‘some hard-and-fast empirical data producing evidence of real, factual obstacles’ is available.116 For the time being, he would strive for the harmonisation or unification of conflict rules as to proprietary rights. Compared to the harmonisation or unification of substantive law, this appears to him as ‘quicker, cheaper and less drastic’, but still ‘ambitious enough’.117

114 G McCormack, ‘The CFR and Credit Securities: A Suitable Case for Treatment?’ in A Vaquer (ed), European Private Law beyond the Common Frame of Reference: Essays in Honour of Reinhard Zimmermann (Groningen, Europa Law Publishing, 2008) 104. 115 ibid. See McCormack (n 62) 355–56. 116 MV Polak, ‘Recognition, Enforcement and Transformation of Foreign Proprietary Rights: A Handful of Observations and Suggestions’ in Drobnig, Snijders and Zippro (eds) (n 25) 128. While Polak’s essay covers proprietary rights in general, most of his examples deal with security rights. 117 ibid. Polak’s instrument of choice for introducing these conflict rules would be regulation.

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Yet another version of the unnecessity argument, which regards the European level as particularly unsuitable for substantive law measures, can be extracted from Robert H Stevens’ views. He maintains that cross-border problems of the types discussed in this book are not capable at all of being addressed by the European harmonisation of substantive law. His explanation is twofold. On the one hand, these problems do not concern small and medium-sized enterprises, which typically ‘have all of their assets situated within the Member States’. On the other hand, while these problems indeed arise for enterprises that are large enough, few such enterprises will do business only within the EU (‘Community’), which makes specifically European measures ‘unacceptably parochial in outlook’.118 Following Stevens, the European harmonisation of substantive law would thus be unnecessary for two different reasons, depending on the size of economic actors, namely the absence of problems to begin with or the insufficient geographical scope of measures to deal with problems.

ii. Detrimental Effects The detrimental effects argument points out that means within the centralised substantive approach may not only be unnecessary but even positively harmful. As for comprehensive means, McCormack draws attention to innovation, learning based on experiment and comparison, and competition between legal systems. He perceives these processes as essential for the development of law and predicts that the unification of substantive law would smother them. The end of jurisdictional diversity would eliminate conditions for competition between national legal orders and local level innovation. As a consequence, initially unpromising yet ultimately beneficial ideas would be less likely to win through and become generally accepted. All in all, ‘potentially enriching seed beds for dynamism and innovation’ would risk descending into ‘economic sterility’. In contrast, where jurisdictional diversity prevails, ‘seeds of ingenuity’ can be put into play and tested at the national level, later to be reproduced across national borders if they prove to be generally beneficial.119 In McCormack’s view, a European code in the shape of an optional instrument, which merely enlarges contractual choice, is hard to object to, but objections may still be raised. For example, additional costs and complexity could result from parties having to expend time and energy on understanding and appreciating

118 RH Stevens, ‘Choosing the Right Approach for European Law Making’ in Eidenmüller and ieninger (n 25) 96. See R Stürner, ‘Perfection and Priority of Security Rights: Commentary’ in K Eidenmüller and Kieninger (n 25) 172–73. cf von Bar and Drobnig (n 25) 468. Drobnig suggests that problems related to ‘intra-European transborder movement of encumbered movable assets’ occur frequently and affect ‘primarily the unwary … especially small and medium enterprises’. 119 McCormack (n 114) 100–01. See McCormack (n 62) 357–60. For similar arguments from a more general perspective, see H Wagner, ‘Economic Analysis of Cross-border Legal Uncertainty: The Example of the European Union’ in J Smits (ed), The Need for a European Contract Law: Empirical and Legal Perspectives (Groningen, Europa Law Publishing, 2005) 38–41.

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the effects of the code. Again, an optional instrument could at least temporarily increase uncertainty because, as a novel legal product, its proper interpretation may take time. In short, increased uncertainly would raise transaction costs.120 Additionally, McCormack observes that an optional instrument including security rights would effectively enable pushing out the boundaries of the numerus clausus, or closed list, of property rights in national jurisdictions.121 Although less clearly articulated, this observation can be read as a warning that an optional instrument could pose a threat to the integrity and coherence of national systems of property law. Polak remains unconvinced of the desirability of the harmonisation, let alone unification, of substantive property law at the European level even if empirical data showed divergences seriously impairing the proper functioning of the internal market. He presumes that the operation itself would involve high costs, including those of the reception of new rules in legal practice throughout all Member States. More fundamentally, he asks, why so easily throw away national legal rules, or national systems of property law, which have been carefully developed over a long time? In that connection, he wonders ‘why we lawyers are—not for the first time—so keen to hang our heads to economic arguments’. He goes on to add that languages, dialects and cultural differences in general also cause obstacles to the internal market, and yet nobody, at least nobody to be taken seriously, suggests that Europe should speak just one language or nourish a single culture.122 Sections III.B–III.D below present what kind of means remain available if the centralised substantive approach, or at least the comprehensive means within it, are rejected on the grounds of the above or other arguments. The aim is to introduce the three gentler approaches (the centralised-conflicts approach, the local conflicts-approach and the local substantive approach) for the purposes of the following chapters, rather than to provide a complete account of the means these approaches cover.

B. The Centralised Conflicts-Approach The centralised conflicts-approach consists of means that can be adopted at the EU level, as opposed to the Member State level, and that aim to manage problems related to divergences between the substantive laws of Member States. These means facilitate coping with, rather than eliminate, substantive diversity. The means involve developing EU private international law, notably the unification of

120 McCormack (n 114) 103. Here, McCormack refers to H Collins, ‘Transaction Costs and Subsidiarity in European Contract Law’ in S Grundmann and J Stuyck (eds), An Academic Green Paper on European Contract Law, Private Law in European Context Series 2 (The Hague, Kluwer Law International, 2002) 277. Collins argues the same in the contract law context. 121 McCormack (n 114) 104. 122 Polak (n 116) 128.

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conflict rules. Polak’s proposal for ‘a European regulation containing choice of law rules for proprietary rights’ is a prime example of this.123 The unification of conflict rules pursues so-called ‘decisional harmony’, Ent scheidungseinklang. This is the Savignian, formal ideal of private international law, according to which cases involving a choice-of-law aspect should have a similar outcome irrespective of where they are adjudicated.124 Decisional harmony can be achieved when courts of different jurisdictions determine the applicable law in a similar way. Uniform conflict rules, while not a perfect solution in all respects, appear to be necessary to this end. A virtue of decisional harmony highly relevant to the theme of this book is that it improves the ability of the parties to a security arrangement to ascertain the law whose substantive preconditions for effectiveness they have to fulfil so as to secure their position. This information is indispensable to secured creditors, both actual and prospective, particularly in terms of effectiveness against third parties. Decisional harmony also eliminates possibilities for forum shopping. Indeed, if courts in all relevant jurisdictions used the same conflict rules and thus applied the same substantive law in a particular case, the parties to a dispute would have less incentive to try to tactically choose a particular court to hear the case, in anticipation of a favourable outcome. Such choices could not influence the outcome of the case or at any rate not as a matter of applicable law.125 It is often thought, for good reason, that conflict rules have to be uniform in order to function properly. Kreuzer, for example, emphasises this view. ‘Uncoordinated conflict rules are a contradictio in adiecto’, he argues, since the very purpose of these rules is to coordinate between national substantive laws in transnational situations. He notes that this is particularly true of the EU, which aims to become a single legal and judicial area.126 The question of content for uniform conflict rules mainly concerns the search for the most suitable connecting factor. Traditionally, this search is carried out separately for rights with respect to tangible movables and rights with respect to receivables. This still seems necessary for two reasons. First, not all connecting factor options are available for both types of asset. Most significantly, tangible movables have a physical location, whereas receivables can only have a definitional location. Thus, the actual physical location of an asset, as used in the lex rei sitae rule, is a connecting factor option only in the case of tangible movables. Second, it 123 ibid.

124 J Kropholler, Internationales Privatrecht einschließlich der Grundbegriffe des Internationalen Zivilverfahrensrechts, 6th revised edn (Tübingen, Mohr Siebeck, 2006) 36–40; FC von Savigny, System des heutigen Römischen Rechts, vol 8 (Berlin, Veit und Comp., 1849) 27. 125 JW Rutgers, International Reservation of Title Clauses: A Study of Dutch, French and German Private International Law in the Light of European Law (The Hague, TMC Asser Press, 1999) 5–6. Rutgers discusses uniform conflict rules as a halfway house between private international law and uniform substantive law. See AS Bell, Forum Shopping and Venue in Transnational Litigation, Oxford Private International Law Series (Oxford, Oxford University Press, 2003) 38–40. 126 K Kreuzer, ‘Conflict-of-Laws Rules for Security Rights in Tangible Assets in the European Union’ in Eidenmüller and Kieninger (n 25) 308. However, Kreuzer primarily calls for worldwide rather than European coordination of private international law.

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cannot be presumed that one and the same connecting factor is necessarily optimal in the case of both tangible movables and receivables.127 In terms of the unification of conflict rules concerning security rights over tangible movables, the foremost content question is whether the lex rei sitae rule should retain its position as the principal, general conflict rule. Admittedly, this rule is so firmly established that replacing it might be difficult to imagine.128 It is used almost universally, by tradition and often uncodified, but it also suffers from prominent drawbacks. Indeed, the lex rei sitae rule demonstrates that mere uniformity cannot solve all cross-border problems if the rule itself is flawed by an unstable connecting factor. This is the case with the lex rei sitae rule because the applicable substantive law may change every time the encumbered asset is moved from one jurisdiction to another.129 This merits a search for alternative connecting factors. If a better-functioning connecting factor is found, it should be put into practice by way of a uniform conflict rule, as unilateral solutions easily undermine decisional harmony. Ulrik Rammeskow Bang-Pedersen, to name one commentator, has considered whether the lex rei sitae rule should be replaced altogether with another conflict rule. In his analysis, a preferable rule would provide for the application of the law of the ‘intermediary person’s home country’, mellemleddets hjemland. The ‘intermediary person’ is the party from whom the ‘parties’ to a third-party relation derive their conflicting claims or rights, which in cases concerning security rights typically means the security-provider debtor, while the ‘home country’ is understood as the centre of main interests. Rammeskow Bang-Pedersen recommends that Denmark, his home jurisdiction, should strive for the international introduction of this rule, including at the EU level, but should not introduce it unilaterally as a general conflict rule.130 Even if Member States stick with the lex rei sitae rule and maintain its position as the principal, general conflict rule, which at present seems quite likely, they may have reasons to collectively enact this rule.131 Particularly in conflit mobile situations, the rule’s spontaneous uniformity may be more apparent than real.132 127 See M Deschamps, ‘Conflict-of-Laws Rules for Security Rights: What Should Be the Best Rules?’ in Eidenmüller and Kieninger (n 25) 286–91. 128 See, eg, JW Rutgers, ‘Secured Credit and the Internal Market: The Fundamental Freedoms and the EU’s Mandate for Legislation: Commentary’ in Eidenmüller and Kieninger (n 25) 73. In Rutgers’ view, ‘it does not seem feasible that another conflict of law rule will be introduced’. 129 See von Bar and Drobnig (n 25) 342. Drobnig even argues that the lex rei sitae rule provokes rather than prevents conflicts. 130 U Rammeskow Bang-Pedersen, Internationale aspekter af insolvens- og tingsretten (Copenhagen, Forlaget Thomson, 2002) 592–619. In ch X of the UNCITRAL Legislative Guide on Secured Transactions, a somewhat similar rule is referred to as ‘the law of the location of the grantor’. See para 19. 131 See, eg, Polak (n 116) 128. In Polak’s outline for a European choice-of-law regulation on proprietary rights, the lex rei sitae rule is the general rule for the creation, transfer and enforcement of a proprietary right. 132 See generally B Akkermans and E Ramaekers, ‘Lex Rei Sitae in Perspective: National Developments of a Common Rule?’ in B Akkermans and E Ramaekers (eds), Property Law Perspectives, Ius Commune Europaeum 106 (Cambridge, Intersentia, 2012).

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These situations involve moving an encumbered asset to another jurisdiction after the creation of the security right and, after the move, the appearance of a cause for dispute concerning the enforceability of the right against third parties.133 This dispute raises the question as to what roles the laws of successive jurisdictions should play in terms of the lex rei sitae rule. Answers vary between Member States, but the willingness to recognise and enforce foreign security rights generally depends on the ‘liberality or illiberality’ of the forum jurisdiction’s domestic system of security rights.134 An additional hurdle exists where recognition or enforcement is conditional on finding a domestic ‘equivalent’ to the foreign security right.135 The general tendency thus seems to be that the law of the forum jurisdiction essentially governs recognition and enforcement, but this is not necessarily always the case. For example, in Nordic legal literature, we find readiness to differentiate choice-of-law situations on the basis of the secured creditor’s awareness, or unawareness, that the encumbered asset would later be moved to another jurisdiction with different preconditions for third-party effectiveness. Indeed, the proposal is that expected (or intended) and unexpected moves should be treated differently. Importantly, Danish and Swedish case law support this to some extent.136 All in all, the treatment of foreign security rights appears to involve a great deal of uncertainty in several Member States.137 Unification of conflict rules, retaining the lex rei sitae rule as the principal, general conflict rule, could include the introduction of rules on the application of the lex rei sitae rule in conflit mobile situations.138 Of course, these additional rules would not remove the root of the problems, namely the lex rei sitae rule’s unstable connecting factor, but at least some wasteful litigation could be avoided in the future. Further, part of the problems could be addressed by enacting complementary rules on matters other than choice of law in the strict sense of the term. A well-known possibility would be to introduce a grace period. As explained in section II.B.i.c above, this period, for example, three or four months from the arrival of the encumbered asset in a new jurisdiction, would give the parties to a 133

In this context, third parties are typically other creditors of the security-provider debtor. Drobnig, ‘Recognition and Adaptation of Foreign Security Rights’ in Drobnig, Snijders and Zippro (eds) (n 25) 114. Drobnig notes that this application of the lex rei sitae rule is ‘confirmed and reinforced’ by (what is now) Art 7(2)(i) of the Parliament and Council Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast) [2015] OJ L141/19. cf Arts 8 and 10. The question of ‘liberality or illiberality’ includes, eg, the degree to which security rights have to be publicised, if at all, and encumbered assets to be specified. 135 HC Sigman and E-M Kieninger, ‘Introduction’ in HC Sigman and E-M Kieninger (eds), Crossborder Security over Tangibles, GPR Praxis: Schriften zum Gemeinschaftsprivatrecht (Munich, Sellier European Law Publishers, 2007) 30–31. 136 J Lookofsky and K Hertz, International privatret på formuerettens område, 5th edn (Copenhagen, Jurist- og Økonomforbundets Forlag, 2015) 137–43; M Bogdan, Private International Law in Sweden, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2015) 80–82. 137 See Sigman and Kieninger (eds) (n 135), in particular the ‘Cross-border issues’ sections of national case studies. 138 See, eg, Polak (n 116) 128. Polak suggests formulating a general rule for ‘situations where a foreign security right is to be recognized and enforced … providing for the transformation of the foreign right into the equivalent right existing under the law of the state of recognition and enforcement’. 134 U

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security arrangement a chance to comply with the preconditions for third-party effectiveness under the law of the new location. Finally, it should be noted that the lex rei sitae rule is gradually eroding and giving way to more stable connecting factors. Because this rule functions particularly arbitrarily with mobile assets that by their nature often cross borders, such as aircraft, ships and other major means of transport, some Member States have introduced special conflict rules for selected types of these assets. The special conflict rules usually substitute the law of the state of registration, lex registrationis, or the law of the otherwise defined state of origin, for the law of the location of the asset.139 Although built on stable connecting factors, the rules may be problematic in terms of decisional harmony insofar as not all Member States have introduced them and the scope of the rules varies between Member States. This is an instance of how uncoordinated choice-of-law upgrades may be suboptimal for the internal market as a whole. Accordingly, the EU-wide introduction and unification of these rules might also improve the current situation.140 Further erosion of the lex rei sitae rule would be caused by the introduction of other special conflict rules proposed in legal literature, concerning other assets than the major means of transport mentioned above. For example, Polak has generally called for more functional alternatives to the lex rei sitae rule. One option he suggests is to extend the lex registrationis rule to ‘more mundane assets’ than has so far been the case. He particularly discusses automobiles, with respect to which the required legal framework could be created by adapting national automobile registers to registration of proprietary rights.141 In addition, Polak asks whether party autonomy, which has traditionally been seen as irreconcilable with property law, could provide solutions. His focus is on a limited form of party autonomy, as found in ex Article 92a(2) of Book 3 of the Dutch Civil Code.142 By virtue of this provision, retention of title to a good to be exported may be created (proprietary effects achieved) in accordance with the law of the destination state if that law is more favourable to the creditor than the lex rei sitae at the time of delivery and if the good is actually imported to the destination state. Potential complications in relation to the recognition and enforcement of Dutch retention of title are thus avoided, provided that the law of the d estination state approves such a choice by the parties.143 If extension of the lex registrationis 139 Kieninger, ‘Collateralisation of Contracts’ (n 87) 446; Kreuzer (n 126) 298–99. See, eg, Art 45 of the German Introductory Act to the Civil Code (EGBGB), concerning aircraft, watercraft and rail vehicles. 140 The same can be said of the special conflict rules for goods in transit, res in transitu, although this particular choice-of-law question appears to be far less important in practice. See Kreuzer (n 126) 299, 313. 141 Polak (n 116) 126–27. 142 At present, Art 128(2) of Book 10 includes a largely similar provision. 143 Polak (n 116) 119–20, 124–25. Ex Art 92a(1) provides for application of the lex rei sitae at the time of delivery, so ex Art 92a(2) concerns situations where delivery takes place in the Netherlands. See J van der Weide, ‘Party Autonomy in Dutch International Property Law’ in Westrik and Van der Weide (n 33) 51–52.

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rule and the introduction of party autonomy (in a limited or unlimited form) proved to be well-founded, Polak would include them in a European choice-of-law regulation concerning proprietary rights.144 The foregoing indicates that the unification of conflict rules could improve the current situation with respect to security rights over tangible movables. A more pressing need for uniform conflict rules, though, concerns security rights over receivables. This is because security rights over receivables lack even the kind of spontaneous, partial uniformity in choice of law that the lex rei sitae rule has brought about with respect to security rights over tangible movables. In Article 14 of the Rome I Regulation, headed ‘Voluntary assignment and contractual subrogation’, the concept of assignment explicitly includes security rights over claims (Article 14(3)).145 However, this Article does not provide a conflict rule for thirdparty relations. It thus fails to answer the question which law governs conflicts concerning, say, the effectiveness of an assignment between the assignee and the assignor’s creditors or between the assignee and a competing assignee in the case of a double assignment.146 A conflict rule for third-party relations was omitted from the Article because the negotiating Member States failed to reach a consensus on the most suitable connecting factor for this purpose.147 In the absence of a uniform conflict rule, different Member States use different conflict rules. Moreover, the state of the law is unclear in some Member States. To be sure, such differences and unclarity in choice of law are disastrous for decisional harmony and predictability, as the law applicable to a third-party relation often varies depending on where the dispute is adjudicated. Many commentators would agree with Francisco J Garcimartín Alférez’s assessment of the situation: ‘What seems to be indisputable is the need of legal certainty, i.e. the need of a rule even if it is “the second best”.’148 Still, choosing between the options is likely to be difficult and to raise considerable debate. The relevant options are the same as during the negotiations for the Rome I Regulation, namely the law governing the contract of assignment, the law of the assignor’s habitual residence and the law governing the assigned claim. A solution may also require a combination of different conflict rules and connecting factors in the form of a main rule and exceptions.149

144

Polak (n 116) 128. FJ Garcimartín Alférez, ‘Assignment of Claims in the Rome I Regulation: Article 14’ in F Ferrari and S Leible (eds), Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (Munich, Sellier European Law Publishers, 2009) 222–23. According to Garcimartín Alférez, the typical scenario for Art 14’s material scope of application is the assignment of pecuniary claims. 146 ibid 233–35. cf A Flessner, ‘Between Articles 14 and 27 of Rome I: How to Interpret a European Regulation on Conflict of Laws?’ in Westrik and Van der Weide (n 33). 147 In addition, political motives far less related to the content of Art 14 played a role. On both aspects of the omission, see Van der Grinten (n 33). 148 Garcimartín Alférez (n 145) 248. 149 ibid 236–49. The three options correspond to the conflict rules that Member States use in their unilateral private international law and that thus compete with each other in Europe. A fourth option that could be mentioned is the law of the assigned debtor’s habitual residence, but this seems to be a historical curiosity rather than a real option. 145 See

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The debate will probably heat up now that the matter is included in the Com mission’s Capital Markets Union programme.150

C. The Local Conflicts-Approach The local conflicts-approach comprises means that involve choice of law, or substantive law as applied in connection with choice of law, and that can be unilaterally introduced by individual Member States. These means are typically seen as intermediate, second-best solutions, useful when progress with respect to the centralised conflicts-approach lags or seems unattainable. Cross-border problems can at least be significantly mitigated by improving responses to them at the national level. This has been a point of departure for many academic works on security rights in cross-border contexts.151 However, the local conflicts-approach is subject to constraints that stem from the aim of decisional harmony discussed in the previous section. For example, even if better-functioning alternatives to the lex rei sitae rule are found, Member States should be cautious about adopting them unilaterally.152 Indeed, if different Member States use different conflict rules in similar matters, predictability in choice of law will be impeded and forum shopping enabled because cases may have different outcomes depending on where they are adjudicated. As Polak remarks, ‘the general lesson is that the more revolutionary and idiosyncratic a choice of law system is made, the less it has to offer in terms of legal certainty and predictability’.153 Not all unilateral choice-of-law revisions disrupt decisional harmony, though. If a Member State’s conflict rules differ from a general European consensus on the desirable content of conflict rules, then aligning the conflict rules with that consensus and the conflict rules of the other Member States promotes decisional harmony. Further, Member States’ unilateral choice-of-law upgrades are unlikely to impede decisional harmony if they concern situations where uniform (or semiuniform) conflict rules have failed to provide predictability about the applicable law in the first place. Therefore, for example, while maintaining the lex rei sitae rule as a general conflict rule, Member States may use a degree of creativity in dealing with conflit mobile situations, without this undermining decisional harmony. 150 See Commission, ‘Action Plan on Building a Capital Markets Union’ (Communication) COM(2015) 468 final, 23, 30; Commission, ‘Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person’ COM(2016) 626 final. 151 See, eg, Rutgers (n 125) 11–12. Rutgers deals mainly with Dutch private international law, taking into account EU law. Additionally, she seeks inspiration and a better understanding of problems by examining French and German law. 152 See, eg, Rammeskow Bang-Pedersen (n 130) 617–19. 153 Polak (n 116) 125. Polak uses this argument in the context of party autonomy, but recognises that it can be mounted against any deviation from the lex rei sitae rule. He also notes that even EU-wide uniform conflict rules may cause problems if jurisdictions outside Europe do not accept the approach chosen.

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Examples of such creativity may include the Dutch limited form of party autonomy and Nordic ideas to differentiate choice-of-law situations on the basis of subjective factors relating to a secured creditor’s awareness, both briefly presented in the previous section. These solutions are neutral to decisional harmony because they address conflit mobile situations, the treatment of which varies between Member States and often involves significant uncertainty.154 Both solutions aim to improve the handling of these situations, albeit in rather different ways. The Dutch party autonomy solution, now laid down in Article 128(2) of Book 10 of the Civil Code, seeks to steer Dutch exporters clear of potential problems that the recognition and enforcement of Dutch retention of title might face in the import country.155 According to this provision, the parties may agree that the proprietary effects of retention of title to a good intended for export are governed by the law of the destination state, provided that retention of title does not cease to be effective under that law until the purchase price has been paid in full. The choice by the parties will only be effective if the good is actually imported to the designated destination state. The basic rule of Article 128(1), according to which the proprietary effects of retention of title are governed by the law of the state in which the good is located at the time of delivery, would often produce the same result as the provision of Article 128(2) because delivery usually takes place in the import state.156 The drafters of the provision of Article 128(2) especially thought of Dutch exporters who, by choosing German law when exporting goods to Germany, could benefit from German forms of retention of title that do not exist under Dutch law.157 The Nordic solution, which makes use of subjective factors relating to a secured creditor’s awareness, is concerned with the treatment of foreign security rights. It distinguishes between two types of choice-of-law situation: first, situations in which the secured creditor could expect, or had intended, that the encumbered asset would later be moved to another jurisdiction (now the forum jurisdiction); and, second, situations in which the secured creditor could not expect this and had meant the security arrangement to be purely domestic, without crossborder aspects. Differentiating the treatment of foreign security rights between these types of situation seems to be motivated by the idea of protecting legitimate expectations. 154 From the Danish perspective with comparative observations, see Rammeskow Bang-Pedersen (n 130) 491–545. For a case law review, see U Drobnig, ‘European Conflict Rules for the Mutual Recognition of Security Rights in Goods’ in Westrik and Van der Weide (n 33). 155 See Polak (n 116) 120. 156 See Drobnig (n 154) 172, 174. Drobnig regards the basic rule of Art 128(1) as helpful for international sales, but is less convinced of the provision of Art 128(2). In his view, the latter ‘provision may risk encouraging the argument e contrario that without such express choice of law the desirable application of the new lex rei sitae is doubtful’. He also asks whether it is ‘really legitimate for the old lex rei sitae to determine the application of the future new lex rei sitae’, even if acceptance of the latter is required. 157 See Van der Weide (n 143) 51–52. Examples include Eigentumsvorbehalt mit Verarbeitungsklausel, which extends retention of title to cover goods manufactured out of the goods sold. Concisely on the German special forms of retention of title, see F Baur, JF Baur and R Stürner, Sachenrecht, 18th revised edn (Munich, Verlag CH Beck, 2009) 828–30, 860; Rutgers (n 125) 46–48.

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The differentiation functions as follows. In situations of the first-mentioned type, most of which are import situations, the question of third-party effectiveness is governed exclusively by the law of the forum jurisdiction.158 As a result, a security right is enforceable against third parties only if the preconditions of the forum jurisdiction for third-party effectiveness are fulfilled.159 Apparently, the justification is that a secured creditor who has deliberately chosen to move the encumbered asset to the forum jurisdiction, or at least has tacitly accepted the move, cannot legitimately expect to be protected beyond the protection provided by the forum jurisdiction to domestic secured creditors. In contrast, in situations of the second-mentioned type, where the secured creditor could not expect the encumbered asset to be moved, or a move violated the agreement between the parties, commentators have shown a willingness to protect foreign security rights even if the preconditions for third-party effectiveness under the law of the forum jurisdiction are not fulfilled.160 It remains unclear, though, how exactly this protection should be arranged.

D. The Local Substantive Approach The last main group of means for promoting compatibility between systems of security rights, the local substantive approach, consists of means whereby individual Member States develop their own domestic substantive law. At first sight, these solutions may seem insignificant because they are unilateral and not directly aimed at coordinating between different national substantive laws, unlike solutions based on private international law. Nevertheless, they provide chances to affect the root of cross-border problems within the scope of this book, that is, divergences of substantive law on security rights between individual jurisdictions. Use of these means offers the potential for spontaneous harmonisation. This involves individual jurisdictions voluntarily aligning their substantive law with the laws of other jurisdictions.161 Of course, the immediate reasons for doing so may

158 Third-party effectiveness also depends on the validity of the security agreement between the parties (the secured creditor and the security-provider debtor). This matter is subject to the law governing the agreement, typically a law chosen by the parties themselves as part of that agreement. See, eg, Bogdan (n 136) 76 fn 186, 80. 159 Lookofsky and Hertz (n 136) 140–43; Rammeskow Bang-Pedersen (n 130) 532–36; J Cordes, L Stenseng and P Lenda, Hovedlinjer i internasjonal privatrett, 2nd edn (Oslo, Cappelen Akademisk Forlag, 2010) 462; Bogdan (n 136) 80–81. Most scholarly views, and the Danish case law where this doctrine first concretely materialised, concern retention of title. 160 Rammeskow Bang-Pedersen (n 130) 501–29; Cordes, Stenseng and Lenda (n 159) 462; Bogdan (n 136) 81–83. As Bogdan points out, some Swedish case law can be read as providing support for this view. 161 On ‘spontaneous harmonisation’ in a different meaning, see MBM Loos, ‘The Influence of European Consumer Law on General Contract Law and the Need for Spontaneous Harmonization: On the Disturbance and Reconstruction of the Coherence of National Contract Law and Consumer Law under the Influence of European Law’ (2007) 15 European Review of Private Law 515, 523–24. For Loos, the term denotes efforts by individual jurisdictions to align their laws in non-harmonised areas with harmonised laws in order to maintain the coherence of the national legal system.

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vary. For example, a jurisdiction may wish to imitate foreign solutions that it considers to be of superior quality, whether technically or otherwise.162 Imitation may also be mediated by model laws, legislative guides or other ‘soft’ instruments. Then again, a jurisdiction may wish to remove national peculiarities and idiosyncrasies with the explicit aim of preventing an ‘international legal ambush where expectations in one jurisdiction are surprised by the rules of another’.163 Importantly, the likelihood of cross-border problems, and the risk of unenforceability and loss of security rights, may be reduced irrespective of the motives for these efforts. On the whole, the local substantive approach can be seen as preserving rather than eliminating substantive diversity, because its direct effects are confined to a single jurisdiction and because the solutions adopted are entirely up to that jurisdiction. In keeping with the other gentler approaches, it is certainly more tolerant towards substantive diversity than the centralised substantive approach.

IV. Search for Synthesis: The Integrated Approach A. An Inclusive Third Way The European discourse on security rights introduced in sections II.B–III.D misses one option, which can be called an ‘integrated approach’. Instead of choosing between the centralised substantive approach and the gentler approaches, the integrated approach would choose both, thus pursuing a distinct third way. The centralised substantive approach, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach could all perform a function in the integrated approach, designated by a systematic division of labour between the four approaches. The rest of chapter one aims to demonstrate that the integrated approach is prima facie feasible and may currently even provide the optimal solution for Europe, a search for which is the main purpose of this book. The detailed division of labour between the four approaches within the integrated approach is developed in chapters two and three. Two different arguments can be advanced for the integrated approach: a weaker and a stronger one. The weaker argument is unlikely to face significant opposition, whereas the stronger argument is genuinely controversial and hinges on several supporting arguments. The main difference between the two arguments concerns their temporal range. According to the weaker argument, the integrated approach 162 In law reform projects, advice by foreign experts may play a major role. See generally S van Erp, ‘Comparative Private Law in Practice: The Process of Law Reform’ in E Örücü and D Nelken (eds), Comparative Law: A Handbook (Oxford, Hart Publishing, 2007). 163 PR Wood, Comparative Law of Security Interests and Title Finance, Law and Practice of International Finance 2, 2nd edn (London, Sweet & Maxwell, 2007) 143. On national peculiarities concerning simple retention of title in Europe, see K ieninger (n 63) 658–59, 664. Removal of these by the respective individual jurisdictions would e xemplify the local substantive approach.

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provides a solution for the short and medium term. The stronger argument, in turn, takes the integrated approach for a long-term solution, if not a permanent one. The weaker argument has it that even if the centralised substantive approach, in particular comprehensive substantive unification or harmonisation, was regarded as the only feasible solution in the long run, developing and implementing these means would be a slow process. Therefore, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach are valuable options for the meantime. To the extent that these gentler approaches are utilised, they should be coordinated so that their mutual composition promotes optimal compatibility between systems of security rights. This coordination task would require taking account of the interrelations and potential interaction between the approaches, including the point that choice-of-law systems (conflict rules) also function as a procedural mechanism that may influence the content and quality of substantive laws.164 The presumption that comprehensive substantive unification or harmonisation would take a long time hardly requires much evidence, in view of the obvious difficulty of any such undertaking. An illustrative starting point even today is the decision by UNCITRAL in 1980 to discontinue its work on security interests because ‘world-wide unification of the law of security interests in goods, for the reasons brought out in the discussions, was in all likelihood unattainable’. In short, the reasons were the complexity of the subject, differing understandings as to the ‘concepts of security interests and title retention’ in various jurisdictions, and the subject’s close connections with other areas of law, such as bankruptcy, which should also be unified or harmonised in order for a model law to be effective.165 Time has passed since that decision, the topic has returned to the UNCITRAL agenda and ‘the climate for reform’ appears to have changed.166 The UNCITRAL Legislative Guide on Secured Transactions (2007) is now followed by the UNCITRAL Guide on the Implementation of a Security Rights Registry (2013) and the UNCITRAL Model Law on Secured Transactions (2016).167 Despite undeniable progress, it is telling that global initiatives have thus far been limited to narrow sectors (specific types of encumbered assets or security arrangements) and soft instruments that jurisdictions are free to adopt to the extent and in the way they wish.168 The idea of general unification or harmonisation at the global level is 164 Generally on this point, see EA O’Hara and LE Ribstein, The Law Market (New York, Oxford University Press, 2009) 19–21. 165 Report of the United Nations Commission on International Trade Law on the work of its thirteenth session (New York, 14–25 July 1980) (A/35/17), paras 23–28. 166 HL Buxbaum, ‘Unification of the Law Governing Secured Transactions: Progress and Prospects for Reform’ (2003) 8 Uniform Law Review 321. 167 See SV Bazinas, ‘The UNCITRAL Legislative Guide on Secured Transactions and the Draft UNCITRAL Model Law on Secured Transactions Compared’ in Gullifer and Akseli (n 37). The two Guides and the Model Law are available at www.uncitral.org/uncitral/en/uncitral_texts/security.html. 168 For an overview, see UNCITRAL, Hague Conference and UNIDROIT Texts on Security Interests: Comparison and analysis of major features of international instruments relating to secured transactions. Available at the URL cited in n 167.

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still rather utopian. European efforts of a similar or more modest scope would certainly be less difficult, but rapid success is highly unlikely. On the contrary, the over 40-year history of failed initiatives at the European level holds little reason for optimism.169 Commentators have pointed out various reasons why substantive unification or harmonisation is unlikely to succeed in the foreseeable future, even within the EU. A few examples will suffice: Snijders, according to whom ‘harmonisation of any significance … may take many, many years’, refers to wide ‘systematic and dogmatic differences’ between Member States in the field of property law. He presumes that consensus will be ‘extremely difficult to reach’ when such ‘systematical fundamentals of law’ are at stake.170 Rank writes in a similar tone, explaining why ‘harmonisation will not be simple’. He points out fundamental differences not only between civil law and common law but also within the group of civil law jurisdictions. His examples concern differences in the conceptual basis of property law as well as in more practical matters, including the formalities for creation and perfection and the permitted ways of enforcing ‘collateral arrangements’.171 Finally, Verstijlen hints at the value and policy choices that systems of security rights involve. Legislators have to strike a balance between protecting the interests of various parties, including debtors, suppliers, credit institutions, unsecured creditors and the treasury. To be sure, this balance differs between jurisdictions.172 Differences in the underlying choices may be expected to complicate substantive unification and harmonisation. In DCFR Book IX, Europe now has a common reference point for the discourse. As noted in section II.B.i.b above, Book IX can be read as a blueprint for a comprehensive European system of security rights, one substantially influenced by UCC Article 9. However, Book IX has so far been sparsely analysed in legal literature, even considering its recentness. In fact, it is by no means guaranteed that Book IX will ever draw the attention needed to become a real model.173 One possible explanation for the silence is that the perceived threat to national systems of security rights is still too remote to mobilise their defenders.174

169

See Kieninger (n 25) 22–24. Snijders (n 100) 158. 171 Rank (n 84) 206–08. 172 Verstijlen (n 110) 23–24. 173 See S van Erp, ‘European Property Law: A Methodology for the Future’ in R Schulze and H Schulte-Nölke (eds), European Private Law: Current Status and Perspectives (Munich, Sellier European Law Publishers, 2011) 248. Van Erp recognises the risk that the property law-related parts of the DCFR will be ignored: ‘We should avoid that European model law, such as the DCFR, becomes what [David A] Thomas has written with regard to the American restatements relating to property: that lawyers do not really care about them.’ 174 On the relationship between Book IX and national laws in Europe, see U Drobnig and O Böger (eds), Proprietary Security in Movable Assets, Principles of European Law 11 (Munich, Sellier European Law Publishers, 2015). In that volume, the articles of Book IX and comments on them are accompanied by an introduction and national notes. 170

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Granted, the mere observation that an attempt at comprehensive substantive unification or harmonisation would most likely prove a long and difficult process cannot confirm the need for and feasibility of the integrated approach, even as a mere intermediate solution in the sense of the weaker argument. Three additional points require a closer look. First, because the integrated approach refuses to place all bets on the centralised substantive approach, the potential of the gentler approaches has to be studied. This is undertaken in section IV.B below, which examines Lando’s view on the ‘eternal crisis’ of private international law in the context of the centralised conflicts-approach and the local conflicts-approach as to security rights. A working hypothesis is that even though these private international law-based means cannot solve all cross-border problems, they still hold enough unused potential to justify their use and efforts to develop them further. The local substantive approach is subjected to similar scrutiny. Second, interrelations and potential interaction between the different approaches within the integrated approach have to be studied. This is so because the combined effect of these individual approaches may turn out to be something more than the sum of its parts. In the optimal case, the approaches constitute a framework for the desirable development of substantive law. Proof of this would clearly point towards the validity of the stronger argument for the integrated approach introduced above. This point is discussed briefly in section IV.C and more thoroughly in chapter two.175 Third, given that the local conflicts-approach and the local substantive approach rest on the authority of individual Member States to develop their own law, the compatibility of these approaches with EU internal market law has to be studied. The stimulus for this stems from commentators who argue that Member State laws may be in breach of some internal market freedoms if the application of these laws leads to the non-recognition or non-enforcement of foreign security rights. The question whether and to what extent internal market law may constrain the use of the integrated approach is discussed in section IV.D. Discussion of these three points is expected to prove the prima facie feasibility of the integrated approach. However, actual feasibility is another matter. This can only be assessed in relation to a detailed division of labour between the individual approaches within the integrated approach, including choices between the concrete means that these individual approaches comprise. A central hypothesis in this book is that the optimal division of labour between the four approaches can be determined by way of objective-based assessment, resulting in an ‘objectivebased integrated approach’. The objectives that this exercise requires are identified and developed in chapter two, and are applied in connection with the concrete means within the four approaches in chapter three.

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In ch 2, this discussion takes place in the context of the objective of responsiveness.

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B. Gentler Approaches: ‘Eternal Crisis’ or Unused Potential? Whether or not Lando’s view on the ‘eternal crisis’ of private international law (discussed in section II.A above) proves valid in the case of security rights depends on what conflict rules are expected to achieve in this area. If one expects a perfect solution, a neat removal of all cross-border problems, the reality will be disappointing and Lando’s words will be apt. In contrast, if one accepts a more modest aim, private international law-based means may be perceived to offer significant improvements. In addition to private international law-based means, that is, the centralised conflicts-approach and the local conflicts-approach, this section deals with the local substantive approach so as to cover all gentler approaches. Problems of private international law with respect to security rights have little to do with the willingness of courts, or the lack thereof, to apply conflict rules in the way that scholars and legislators have meant them to be applied.176 Instead, the real issues lie in design of conflict rules. It appears to be impossible to create perfectly functioning conflict rules in this area. Defects of the lex rei sitae rule have already been mentioned (for example, in section III.B). The spontaneous, partial uniformity of this conflict rule proves the more general point that some crossborder problems may persist even if conflict rules are uniform. The limits of mere unification are thus exposed. The main defect of the lex rei sitae rule is its unstable connecting factor, the physical location of the asset. Here, ‘unstable’ means that the law governing the question of third-party effectiveness may change whenever the encumbered asset is moved to another jurisdiction. A move and a resulting change of applicable law often overtake the secured creditor. When a third-party conflict arises and is adjudicated in the jurisdiction of the new location of the encumbered asset, the security right is generally held to be unenforceable if the preconditions for third-party effectiveness under the law of that jurisdiction are not fulfilled.177 In view of the ‘overwhelming importance in our time’ of non-possessory security devices,178 in practice the secured creditor usually cannot prevent the security-provider debtor from moving the encumbered asset across borders. As a consequence, it may be impossible for the secured creditor to fully ensure enforceability, as this would require fulfilling the preconditions for third-party effectiveness under the laws of all jurisdictions to which the encumbered asset may later be moved and in which a third-party conflict may arise and be adjudicated.179

176 As explained in section II.A, Lando perceives lack of that willingness as the main reason for failures of private international law in contract law matters. 177 See von Bar and Drobnig (n 25) 342–48, 468. 178 U Drobnig, ‘Security Rights in Movables’ in AS Hartkamp et al (eds), Towards a European Civil Code, 4th revised edn (Alphen aan den Rijn, Kluwer Law International, 2011) 1029–31. 179 See Deschamps (n 127) 288. Deschamps writes: ‘If a transaction may give rise to the exercise of recourses in several States, a secured creditor seeking full protection will want to have its security right recognized in all such States.’

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Further, it is unlikely that all cross-border problems could be removed by replacing the lex rei sitae rule with another conflict rule of a general nature, even if that rule was entirely uniform. An illustrative example is Rammeskow Bang-Pedersen’s proposal to apply the law of the intermediary person’s home country (discussed in section III.B above). As he observes, this conflict rule would do away with the defects characteristic of the lex rei sitae rule, but entails weaknesses of its own kind. First, its connecting factor is not entirely stable in that the applicable law could change if the intermediary person changes home country.180 Second, additional uncertainty would arise from the interplay between the connecting factor and company law. In particular, the applicable law would be different depending on whether the intermediary person is a branch of a foreign company (foreign law applies) or a domestic subsidiary of a foreign company (domestic law applies). Third, the conflict rule would have questionable outcomes in certain third-party relations where the factual circumstances strongly suggest that the domestic law of the forum jurisdiction should apply, but where the intermediary person (acting in the forum jurisdiction) is foreign and thus triggers the application of foreign law.181 Introduction of unlimited party autonomy, which means allowing the parties to a security arrangement to select the law applicable to third-party relations, would also entail new problems. Examples include third-party conflicts between two secured creditors relying on different security arrangements in which the respective parties have selected different substantive laws to govern third-party relations. In short, these situations involve conflicting party choices.182 The trouble here is that resolving these kinds of conflicts would require a meta-rule, which probably cannot be introduced without undermining the purpose of initial party choices and is thus unlikely to increase predictability. The above examples of the law of the intermediary person’s home country and unlimited party autonomy suggest that designing a perfectly functioning conflict rule is impossible in this area.183 More generally, it seems confirmed that private international law cannot offer perfect solutions to cross-border problems with respect to security rights. As hinted above, though, ‘perfect’ may not be a relevant point of reference. Solutions falling short of that standard may still

180 Rammeskow Bang-Pedersen (n 130) 609–10. However, since Rammeskow Bang-Pedersen defines a change of home country as a de facto change of the centre of main interests, changing a home country is more difficult, and consequently less frequent, than moving individual assets. 181 ibid 611–12, 616–17. Rammeskow Bang-Pedersen calls these situations ‘chain transfers’ (kædeoverdragelser). The term may be misleading in that the two examples he gives involve, respectively, only one actual disposition of the assets concerned. The first example concerns a third-party relation between a buyer of stolen goods and their original owner (a foreign burglar-seller as the intermediary person), and the second example a third-party relation between a lessor and the lessee’s creditors (a foreign lessee of a digger as the intermediary person). 182 Kieninger (n 87) 440–41; Deschamps (n 127) 285. It is also possible that party choice in one security arrangement might conflict with the determination of the applicable law on objective grounds in the absence of party choice (Rome I Regulation, Art 4) in another security arrangement. 183 Even if it was possible and eventually done, divergences of substantive law would continue to cause transaction costs of kinds that would not exist under a single uniform system of security rights.

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significantly improve the current situation, which is all that needs to be demonstrated to support the integrated approach. In fact, demonstrating the potential for such improvements is quite straightforward and has to some extent already been achieved in sections III.B on the centralised conflicts-approach and III.C on the local conflicts-approach. Here, the clearest case concerns security rights over receivables. The conflict rule for third-party relations involving these rights varies between Member States, so that decisional harmony cannot be achieved. The attempt at unification as part of the treatment of assignment of claims in Article 14 of the Rome I Regulation failed, but the matter has now been taken under review in accordance with Article 27(2) of the Regulation, albeit behind schedule.184 Accordingly, it is possible that a uniform conflict rule will eventually be enacted. The main options are the same as those found in unilateral private international law of Member States, namely the law governing the contract of assignment, the law of the assignor’s habitual residence and the law governing the assigned claim. Yet it is also possible that different kinds of transaction and circumstance require different conflict rules. Thus, the question may be which conflict rule should stand as the general rule and what exceptions to it are needed. In any case, experience from negotiations for the Rome I Regulation suggests that a consensus will not easily be reached.185 Nevertheless, the current situation with competing unilateral conflict rules is so unsatisfactory that many commentators would even settle for a ‘second-best’ conflict rule, if only it is uniform.186 Indeed, at present, security rights over receivables (as well as outright transfers of claims) are at risk in cross-border contexts because the law governing third-party relations varies between jurisdictions, notably in terms of preconditions for third-party effectiveness. As a consequence, the law applicable to a third-party conflict may depend on the jurisdiction where the case is adjudicated. This can be illustrated by the 1997 landmark Dutch Supreme Court case Brandsma qq v Hansa Chemie AG.187 The dispute was between a German assignee and a Dutch assignor’s insolvency liquidator, and the outcome would probably have been the opposite if adjudicated by a German court. In its judgment, the Dutch Supreme Court opted for the law governing the contract of assignment, declaring that this law applies to both contractual and proprietary aspects of assignment.188 Soon after that, the German Federal Court of Justice passed judgment in another case, opting for the law governing the assigned claim.189

184

The concept of assignment in Art 14 explicitly covers security rights. See Art 14(3). See Garcimartín Alférez (n 145) 246–47. 186 ibid 248. 187 Brandsma qq v Hansa Chemie AG, HR 16 mei 1997, NJ 1998, 585. 188 See THD Struycken, ‘The Proprietary Aspects of International Assignment of Debts and the Rome Convention, Article 12’ (1998) Lloyd’s Maritime and Commercial Law Quarterly 345. 189 BGH XI ZR 302/97; NJW 1999, 940 (8 December 1998). See A Flessner and H Verhagen, Assignment in European Private International Law: Claims as Property and the European Commission’s ‘Rome I Proposal’, GPR Praxis: Schriften zum Gemeinschaftsprivatrecht (Munich, Sellier European Law Publishers, 2006) 12–13. 185

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Further, the connecting factor options available for security rights over receivables (assignments of claims) are rather promising in terms of predictability, as compared to the connecting factor of the lex rei sitae rule or other conceivable general conflict rules for security rights over tangible movables. In particular, this holds true for the law governing the assigned claim, which has been described as ‘unique and immutable’. The substantive law designated by this connecting factor does not change even if the assignor moves, nor does it change in the case of double assignment or subsequent assignments of the same claim.190 In sum, private international law promises significant improvements in terms of security rights over receivables. While scholars generally recognise this, participating in or otherwise supporting the search for a common European conflict rule, many appear to underestimate the potential of private international law solutions in terms of security rights over tangible movables. The usual cause of pessimism is the view that in the lex rei sitae rule we already have a uniform conflict rule, so the unification of conflict rules is not available as a solution.191 This view is not entirely correct, for the alleged uniformity is real only in static basic situations. In section III.B, it was pointed out that the use of the lex rei sitae rule in conflit mobile situations varies between jurisdictions. It was also mentioned that the position of the lex rei sitae rule as a general conflict rule has been eroded by introducing special conflict rules for certain mobile assets, notably major means of transport. Insofar as the existence and scope of these special conflict rules varies between jurisdictions, decisional harmony cannot be fully achieved. Some of the problems this results in, namely unpredictable choice of law and the risk of unenforceability and loss of security rights, can be illustrated by the circumstances of a 2010 case in the High Court of Justice of England and Wales, Blue Sky One Ltd and Others v Mahan Air and Another.192 The case in its entirety concerned a complex high-value commercial dispute, involving various aircraft-related transactions against the background of US sanctions against Iran. However, the only branch of the case relevant to us here deals with the law governing the validity of a mortgage over an aircraft.193 The aircraft was registered in the UK, but, at the time of creation of the mortgage, was located in the Netherlands. The mortgage was valid under English substantive law, but was invalid under Dutch substantive law. The relevant English conflict rule was the lex rei sitae (lex situs) rule, whereas Dutch law used the lex registrationis (lex registri) rule. In this case, the problems resulting from divergent

190 Garcimartín Alférez (n 145) 244. In a ‘double assignment’, an assignor assigns the same claim to two different assignees, whereas ‘subsequent assignments’ means that an assignor assigns a claim to an assignee who then assigns it to another assignee. 191 See, eg, von Bar and Drobnig (n 25) 468. 192 Blue Sky One Ltd and Others v Mahan Air and Another [2010] EWHC 631 (Comm). 193 See C Forsyth, ‘Certainty versus Uniformity: Renvoi in the Context of Movable Property’ (2010) 6 Journal of Private International Law 637, 637–39. The dispute concerned enforceability against the mortgagor rather than a third-party conflict. However, the choice-of-law question would probably have been the same in a case concerning enforceability against third parties.

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conflict rules manifested themselves as a renvoi dilemma. That is, the High Court had to choose between two ways of applying Dutch law, as designated by the lex rei sitae rule. The first option, rejecting renvoi, was to apply Dutch substantive law only and hold the mortgage to be invalid. The second option, accepting renvoi, was to apply Dutch law, including its conflict rule, which referred back to English law, and uphold the mortgage.194 Thus, the current divergence of conflict rules causes not only situations where the outcome of a dispute depends on the place of adjudication, but also situations where the local attitude towards renvoi is the decisive point. All this is unsatisfactory in view of the need for predictability in cross-border trade and finance. The foregoing suggests that the unification of conflict rules may bring about significant improvements even with respect to security rights over tangible movables. Importantly, these efforts can be expected to involve rethinking connecting factors. For example, if better-functioning alternatives are found to the lex rei sitae rule, the unification of conflict rules provides a way to introduce them without impeding decisional harmony. Two kinds of option can be envisioned: on the one hand, conflict rules to overtake the lex rei sitae rule as the general conflict rule for rights with respect to tangible movables; and, on the other hand, special conflict rules that would in effect reduce the scope of application of the lex rei sitae rule. The local conflicts-approach promises more modest improvements, but improvements nevertheless. Even unilateral alignments of national conflict rules with an international consensus on optimal conflict rules, or with national conflict rules of a majority of jurisdictions close by, promote predictability in choice of law by increasing decisional harmony. As regards the lex rei sitae rule, considerations of decisional harmony should not prevent individual jurisdictions from developing their own solutions to problems of conflit mobile situations. Since different jurisdictions at any rate deal with these situations somewhat differently, it is questionable whether decisional harmony exists in the first place. Examples of such solutions may include complementing the lex rei sitae rule by additional choice-of-law factors, which may be objective or subjective by nature.195 Another possibility would be more the flexible application of substantive law in connection to choice of law, catering for the special needs of protection present in crossborder situations. Such needs may be thought to arise from a legal ambush, where a party has not had a chance to prepare for the application of the substantive law designated by the relevant conflict rule. The local substantive approach, in turn, may address the root of cross-border problems. Every time a jurisdiction reforms its substantive law on security rights in a way that reduces its national peculiarities or idiosyncrasies, the number of divergences that may give rise to cross-border problems diminishes and the risk of these problems is reduced. Indeed, reforms in individual jurisdictions may 194 ibid.

195 Deviating from the original idea of objectivity behind the lex rei sitae rule, subjective choice-oflaw factors may concern the secured creditor’s awareness, or the intention of the parties to a security arrangement, that the encumbered asset will be moved from its initial location to another jurisdiction.

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bring about spontaneous harmonisation regardless of whether these reforms are actually motivated by a wish to avoid cross-border problems in the future.196 Of course, the chances of spontaneous harmonisation are greatest if an international consensus exists on desirable features of the law on security rights. The preparation and use of model laws, legislative guides and other soft instruments may facilitate building such a consensus.197 The local conflicts-approach and the local substantive approach (the local approaches) may seem insignificant at first sight. To appreciate their potential, we have to understand that each individual improvement, however modest, diminishes the group of potential cross-border problems, or at least the group of crossborder problems without a workable solution. In particular, the local approaches are worthwhile because of the aggregate effect of several individual improvements. In terms of the centralised conflicts-approach and the local conflicts-approach (the conflicts approaches), it is essential to note that the perceived weakness of private international law solutions is largely attributable to the defects of certain particular incarnations of these solutions rather than to defects inherent in private international law. All in all, the gentler approaches show clear potential to significantly improve compatibility between national systems of security rights. In this respect, the integrated approach outlined in the previous section appears prima facie feasible.

C. Interrelations and Interaction between the Approaches The idea that the individual approaches within the integrated approach may become something more than their sum, and optimally a framework for the desirable development of substantive law, calls for studying the interrelations and interaction between these approaches. Some instances of interaction, such as the following, are quite simple and evident. In relation to the centralised approaches, the local approaches provide an opportunity for innovation and experimental learning. That is, private international law and substantive law solutions alike can be tested at the national level and later introduced supranationally if they prove beneficial.198 Then again, the extent to which the local approaches are needed in the first place depends on the extent to which the centralised approaches have resulted in removal of cross-border problems or introduction of workable solutions to them.199

196

For a sceptical view, see Kieninger (n 88) 234. See Rank (n 84) 211–13. same holds true for ways in which the local approaches are put into practice in different jurisdictions, ie, jurisdictions may emulate each other. See McCormack (n 114) 100–01. 199 Additionally, individual means within the centralised substantive approach may affect each other. In particular, efforts at partial harmonisation, where successful, are likely to pave the way for further harmonisation or unification. Indeed, it may be possible to reproduce similar solutions in a larger scope, and the degree of consensus achieved may help to focus attention on remaining problems. At any rate, such efforts provide experimental knowledge. See von Bar and Drobnig (n 25) 469. 197

198 The

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A more complex instance of interaction relates to the idea that choice-of-law systems (systems of conflict rules) may function as a procedural mechanism that influences the content and quality of laws. Erin A O’Hara and Larry E Ribstein illustrate this idea with the following example on the law governing product liability. For background, let us suppose that a consumer is injured in state A due to the use of a product purchased in state B but manufactured in state C. Now, different conflict rules concerning the manufacturer’s liability create different incentives for states in developing their substantive laws. Importantly, some incentives are clearly more desirable than others. At least three conflict rule options can be envisioned, namely the law of the manufacturer’s principal place of business, the law of the consumer’s residence and the law of the place of sale of the product.200 If the law of the manufacturer’s principal place of business is chosen, manufacturers can avoid liability by locating their operations in states whose substantive law provides consumers with little protection. States, in turn, may be willing to compete for factories by lowering their standards of care for manufacturers, especially if most consumers who might be hurt by the products manufactured reside elsewhere. In contrast, if the law of the consumer’s residence is chosen, competition between states may raise standards of care to an inefficiently high level. Products are mobile, so the residence of an injured owner of a product is usually unknowable at the time when the product is sold. Therefore, manufacturers cannot make consumers in high-protection states pay the increased cost of higher liability, but may charge all consumers some kind of average price. In that case, consumers in low-protection states effectively subsidise consumers in high-protection states. Efforts by low-protection states to reverse the subsidy may trigger competition between states for the highest levels of protection. As a result, all states may end up providing levels of protection that consumers do not value at market prices.201 Finally, if the law of the place of sale of the product is chosen to govern manufacturer liability, each state can adjust the level of protection according to the average preference of its citizens, and manufacturers can differentiate product prices between states on the basis of the costs of that liability. In other words, this conflict rule option is the most likely to ensure that the law on product liability matches citizen preferences and that the costs of protection are internalised by each state’s citizens. This is an instance of how conflict rules can function procedurally and ‘work to systematically improve the quality of laws without requiring agreement over their merits’. As an ‘alternative mechanism for encouraging states to provide desirable laws’, beyond the product liability example, O’Hara and Ribstein discuss enabling parties to contract for the law they prefer to govern their contract. The facilitation of such a party choice creates what they call a ‘law market’.202

200

O’Hara and Ribstein (n 164) 19–20.

202

ibid 20–21.

201 ibid.

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The key questions for our quest are whether systems of conflict rules may affect the development of substantive law on security rights and, most importantly, whether they can contribute to building a framework for desirable development in this area. These questions can be properly answered only after looking into the competitive processes that conflict rules on security rights may bring about, which is undertaken in chapter two. However, a preliminary hypothesis can be given here. This is possible because conflict rules governing the third-party effectiveness of security rights tend to be built on objective connecting factors rather than on party autonomy and typically lead to the application of the law of the security-provider debtor’s home jurisdiction.203 Somewhat similarly to the third conflict rule option in O’Hara and Ribstein’s example, such conflict rules appear to internalise the costs and benefits of substantive law in the enacting jurisdiction. Internalisation can be expected to result in two favourable consequences in the case of the law on security rights. First, jurisdictions acquire strong incentives to see to it that their substantive law on security rights is adequate. This is because the costs of a defective system of security rights primarily fall on the backs of domestic enterprises, impeding their chances to obtain credit at reasonable cost. Second, internalisation increases awareness of the costs and benefits of substantive law enacted by a jurisdiction, while at the same time making these costs and benefits comparable with those of solutions adopted by other jurisdictions. This in turn improves the chances of making informed decisions on developing substantive law further.204 The prima facie feasibility of the integrated approach appears clear in the light of the above discussion.

D. Conformity with Internal Market Law i. The Structure of Reasoning The final question to be dealt with to confirm the prima facie feasibility of the integrated approach is its conformity with EU internal market law. This matter calls for attention because the integrated approach aims at gradual development towards compatibility between systems of security rights, rather than at an instant solution to all cross-border problems. Divergences between systems would not be completely removed, at least not in the short and medium term. What is more, the recognition and enforcement of foreign security rights could not always be guaranteed, even though the likelihood of such problems would gradually diminish. 203 This regularity is explained in ch 2, section IV.C.iii. Suffice it to mention here that in the case of security rights over tangible movables and the lex rei sitae rule, a reason is that today the more commercially significant types of security rights are non-possessory, enabling the security-provider debtor to remain in possession of the encumbered asset, and a majority of security-provider debtors (and enterprises in general) have most of their assets and operations in their home jurisdiction. 204 See T Juutilainen, ‘Coherence through Uniform Private International Law of Property’ in P Letto-Vanamo and J Smits (eds), Coherence and Fragmentation in European Private Law (Munich, Sellier European Law Publishers, 2012) 120–22.

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The process-like and incomplete nature of the integrated approach appears to be at odds with some scholars’ reading of internal market law. Since the 1990s, arguments have been advanced that the non-recognition or non-enforcement of foreign security rights may constitute an infringement of the free movement of goods or capital.205 This view and its potential implications for the integrated approach are assessed in sections IV.D.ii–IV.D.v. The relevant provisions are currently found in the Treaty on the Functioning of the European Union (TFEU),206 Articles 34 and 36 on free movement of goods, and Articles 63 and 65 on free movement of capital. These provisions have been extensively interpreted by the ECJ. Thus shaped, internal market law centres around two questions. First, is the national measure, in this case the non-recognition or non-enforcement of a foreign security right, a trade barrier within the meaning of that law? If the answer is negative, the measure remains in national competence and unaffected by the free movement provisions. If the answer is positive, a second question needs to be answered, namely: is the measure justified under internal market law? A negative answer entails that the application of the measure has to be d iscontinued.207 This trade-liberalising effect is referred to as ‘negative harmonisation’ or ‘negative integration’.208 If the answer is positive, the measure remains permitted as a matter of internal market law despite its fragmentary effect on the internal market.209

ii. Trade Barrier Those arguing for the existence of a trade barrier have a strong case, even though it is uncertain which of the several possible ways of reaching that conclusion are correct. In terms of free movement of goods, the starting point is whether the non-recognition or non-enforcement of a foreign security right may be caught by Article 34 TFEU. This Article prohibits not only quantitative restrictions on imports between Member States but also ‘all measures having equivalent effect’. Quantitative restrictions are understood as import bans or quotas, or prohibitions to buy.210 These are all measures with a direct purpose of restricting trade.

205 For early studies along these lines, see Kieninger (n 88); P von Wilmowsky, Europäisches Kreditsicherungsrecht: Sachenrecht und Insolvenzrecht unter dem EG-Vertrag, Beiträge zum ausländischen und internationalen Privatrecht 60 (Tübingen, JCB Mohr (Paul Siebeck), 1996); Rutgers (n 125). 206 Cited in n 32. 207 S Weatherill, ‘Diversity between National Laws in the Internal Market’ in Drobnig, Snijders and Zippro (eds) (n 25) 131–32. 208 EJ Lohse, ‘The Meaning of Harmonisation in the Context of European Union Law: A Process in Need of Definition’ in Andenas and Baasch Andersen (n 62) 293–95. 209 Weatherill (n 207) 132. For a private law and private international law point of view, see JW Rutgers, ‘The Rule of Reason and Private Law or the Limits to Harmonization’ in A Schrauwen (ed), Rule of Reason: Rethinking Another Classic of European Legal Doctrine, The Hogendorp Papers 4 (Groningen, Europa Law Publishing, 2005) 150–57. 210 For a review of the ECJ case law, see C Barnard, The Substantive Law of the EU: The Four Freedoms, 5th edn (Oxford, Oxford University Press, 2016) 72–73.

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herefore, a measure only concerning security rights should not qualify as a T quantitative restriction. Instead, it may qualify as a measure of equivalent effect (MEE).211 In the current state of internal market law, nothing suggests that the combined effect of substantive law and conflict rules, resulting in non-recognition or nonenforcement of foreign security rights in individual cases, could not constitute an MEE. The basic definition of an MEE was laid down by the ECJ in Dassonville: ‘All trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra-Community trade are to be considered as measures having an effect equivalent to quantitative restrictions.’212 In subsequent judgments, the ECJ has further broadened this definition by making it clear that an MEE does not have to be literally a ‘trading rule’, or even a ‘rule’. Nor does it have to be ‘enacted’ by a Member State, since a consistent policy or practice suffices.213 In Cassis de Dijon, the ECJ affirmed that even measures that do not discriminate between domestic and imported goods may constitute an MEE.214 Alsthom Atlantique and CMC Motorradcenter back the view that rules of private law can be included in the concept of an MEE.215 In Alsthom Atlantique, the challenged rule was based on French case law interpreting a Civil Code article on the vendor’s liability for latent defects, while in CMC Motorradcenter, it was based on German case law concerning the duty of contracting parties to provide information to each other before concluding the contract. Although the ECJ did not find a trade barrier in these cases, its reasoning seems to presuppose that private law rules could, in principle, constitute one. For if that was not the case, the reasoning would largely be superfluous. Indeed, the ECJ could simply have denied applicability of the Treaty articles for the reason that private law is categorically excluded from their scope.216 As regards security rights, Alsthom Atlantique is particularly relevant. The ECJ observed in its reasoning that ‘the parties to an international contract of sale are generally free to determine the law applicable to their contractual relations and can thus avoid being subject to French law’.217 Contractual choice-of-law clauses, 211 See B Akkermans, ‘Property Law and the Internal Market’ in Van Erp, Salomons and Akkermans (n 38) 206–10; W-H Roth, ‘Secured Credit and the Internal Market: The Fundamental Freedoms and the EU’s Mandate for Legislation’ in Eidenmüller and Kieninger (n 25) 48–50. 212 Case 8/74 Procureur du Roi v Benoît and Gustave Dassonville [1974] ECR 837, para 5. 213 See Barnard (n 210) 74–76 and the judgments cited. 214 Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein [1979] ECR 649 (hereinafter Cassis de Dijon). See Rutgers (n 125) 185–86. 215 Case C-339/89 Alsthom Atlantique SA v Compagnie de construction mécanique Sulzer SA [1991] ECR I-107; Case C-93/92 CMC Motorradcenter GmbH v Pelin Baskiciogullari [1993] ECR I-5009. 216 Rutgers (n 125) 183–84; E-M Kieninger, ‘Securities in Movable Property within the Common Market’ (1996) 4 European Review of Private Law 41, 54. 217 Alsthom Atlantique (n 215) para 15. See Rutgers (n 209) 152. Rutgers writes: ‘It can be inferred from this judgment that the rules concerning free movement do not impinge upon private law if the parties are allowed to submit their relationship to a legal system of their own choice.’ Similarly, see S Grundmann, ‘The Structure of European Contract Law’ (2001) 9 European Review of Private Law 505, 513–14.

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to which the ECJ refers, are indeed generally accepted between parties in matters of contract law.218 In contrast, they are only rarely accepted in relation to third parties. Parties creating a security right do not generally enjoy the opportunity to decide the law applicable to the third-party effects of that right, and possibly not even the law applicable to their mutual relation insofar as property law matters are involved.219 In most cases, though, security rights are useless without thirdparty effects, in particular enforceability against other creditors. Therefore, the ECJ’s observation lends support, e contrario, to the argument that national rules resulting in the non-recognition or non-enforcement of foreign security rights, the applicability of which the parties to a security arrangement cannot contract out of and avoid, constitute an MEE. Commentators have proposed different ways to include treatment of foreign security rights in the scope of Article 34 TFEU. These ways differ especially in their relation to Keck, the judgment in which the ECJ toned down its interpretation of the concept of an MEE.220 The ECJ introduced the category of national provisions that restrict or prohibit ‘certain selling arrangements’ (CSAs) and declared that these provisions do not breach Article 34 TFEU (then Article 30 of the Treaty establishing the European Economic Community (TEEC)) if two conditions are satisfied. First, the provisions have to ‘apply to all relevant traders operating within the national territory’. Second, the provisions have to ‘affect in the same manner, in law and in fact, the marketing of domestic products and those from other Member States’.221 As regards national rules concerning the product itself, the ECJ reaffirmed the principles of Cassis de Dijon.222 Kieninger brings the treatment of foreign security rights within the scope of Article 34 TFEU (then Article 30 of the Treaty establishing the European Community (TEC)) with the help of Oosthoek, which is a pre-Keck judgment.223 In Oosthoek, the ECJ held: Legislation which restricts or prohibits certain forms of advertising and certain means of sales promotion may, although it does not directly affect imports, be such as to restrict their volume because it affects marketing opportunities for the imported products. The possibility cannot be ruled out that to compel a producer either to adopt advertising or sales promotion schemes which differ from one Member State to another or to discontinue a scheme which he considers to be particularly effective may constitute an obstacle to imports even if the legislation in question applies to domestic products and imported products without distinction.224

218

Rome I Regulation, Art 3. See Heiss (n 28). See A Flessner, ‘Choice of Law in International Property Law: New Encouragement from Europe’ in Westrik and Van der Weide (n 33) 11; Deschamps (n 127) 285–86. 220 Joined Cases C-267/91 and C-268/91 Criminal proceedings against Bernard Keck and Daniel Mithouard [1993] ECR I-6097. In para 14, the ECJ states its purpose ‘to re-examine and clarify its caselaw on this matter’. See Barnard (n 210) 122–28. 221 Keck (n 220) paras 16–17. 222 ibid para 15. 223 Kieninger (n 216) 55–56. Case 286/81 Criminal proceedings against Oosthoek’s Uitgeversmaatschappij BV [1982] ECR 4575. 224 Oosthoek (n 223) para 15. 219

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Limiting her inquiry to security rights used in connection with contracts of sale, Kieninger argues that granting credit together with the creation of a security right, particularly retention of title, can be analysed as a method for the seller to market its products. Consequently, according to her, the above Oosthoek formula applies to security rights. Thus understood, the formula suggests that the lex rei sitae rule and national substantive rules, the combined effect of which prevents recognition or enforcement of foreign security rights, constitute an MEE. Indeed, these rules force a seller that wants to export its goods either to abandon its way of sales promotion or to alter that way, with the consequence of increased costs or difficulty, or both. The seller has to choose between: (1) not granting credit at all; (2) granting credit without security, which increases risk and potential costs; (3) granting credit and demanding personal security such as a bank guarantee, for which financial institutions generally charge fees; and (4) granting credit and seeking to establish a security right in accordance with the law of the import state, which is probably harder and costlier for foreign sellers than domestic ones.225 Applying the Oosthoek formula, Kieninger disregards the change in the law that Keck is understood to have introduced. In Keck, as already mentioned, the ECJ employed two separate tests, distinguishing measures on CSAs from measures on the product itself. Kieninger develops a lengthy argument to support her view that Oosthoek is still valid law, Keck notwithstanding. She makes three points, basically arguing that measures meant in the Oosthoek formula may affect marketing of domestic and imported products in a different manner in fact. First, similar reasoning emphasising foreign sellers’ adaptation costs as in Oosthoek can be found at the end of the Cassis de Dijon line of cases. In addition, adaptation costs are essential in understanding the ECJ’s reasoning in Cassis de Dijon. Second, the ECJ applied a single test, rather than two separate tests, in the post-Keck case Clinique.226 The case concerned a German prohibition on using the word ‘Clinique’ in product labelling and in marketing. Instead of two separate tests that Keck would seem to suggest, the ECJ applied a single test and treated the whole regulation as relating to the product itself. Third, in Kieninger’s view, ‘only this interpretation does justice to the telos of art 30’ (now Article 34 TFEU). She postulates that national rules which compel product design or marketing and sales promotion separately for each national market must contravene this Article because the European single market is promoted and realised through companies that produce and market across Europe.227 In a concurring view, Jacobien W Rutgers agrees with Kieninger’s conclusion, but disagrees with her reasoning. The problem for Rutgers is Kieninger’s ‘denial’ of Keck and the subsequent case law where the ECJ has upheld the distinction

225 Kieninger (n 216) 56, 60–62. See J Basedow, ‘Der kollisionsrechtliche Gehalt der Produktfreiheiten im europäischen Binnenmarkt: favor offerentis’ (1995) 59 Rabels Zeitschrift für ausländisches und internationales Privatrecht 1, 43. 226 Case C-315/92 Verband Sozialer Wettbewerb eV v Clinique Laboratoires SNC and Estée Lauder Cosmetics GmbH [1994] ECR I-317. 227 Kieninger (n 216) 59–60.

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between measures on CSAs and measures on the product itself. Rutgers observes that the majority of authors consider Oosthoek to be one of the cases that would have been decided differently after Keck.228 Additionally, she notes that Clinique is exceptional, and is not a solid basis for Kieninger’s argument, because the ECJ had to deal with selling arrangements and product requirements at the same time.229 Rutgers’ own reasoning, which exclusively concerns retention of title clauses,230 is based on two alternative tests, namely the Keck test and the access-to-market test.231 For the purposes of the Keck test, she defines retention of title as a selling and marketing arrangement, that is, a CSA. Next, she proceeds to examine whether application of the lex rei sitae rule results in either formal or material discrimination between domestic and imported products. She finds no formal discrimination because the lex rei sitae rule submits retention of title clauses to the same legal system, regardless of whether they encumber domestic or imported products. Nevertheless, in her view, material discrimination occurs if a foreign retention of title clause cannot be enforced because the type of clause in question does not exist in the law of the import country and the clause cannot be ‘assimilated’, that is, transposed into an equivalent type under that law.232 Rutgers derives the access-to-market test from Alpine Investments and Bosman, which respectively concern free movement of services and workers,233 from Advocate General Jacobs’ opinion in Leclerc-Siplec, which concerns free movement of goods and services,234 and from legal literature.235 This test is whether the rules concerning retention of title ‘constitute a direct or substantial hindrance to the access of a market in that Member State’. According to Rutgers, this is the case if the rules, particularly the lex rei sitae rule, prevent enforcement of a foreign retention of title clause. She illustrates this with an example of a German seller that is unable to enforce a verlängerter Eigentumsvorbehalt (retention of title ‘extended’ to receivables arising out of subsale of the sales objects, by way of anticipatory security assignment, or to products made from the sales objects) in the N etherlands and therefore needs costlier devices, such as insurance or bank guarantees. Rutgers argues that this substantially hinders the German seller’s entry to the Dutch

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Rutgers (n 125) 199–200. cf Barnard (n 210) 129–30. Rutgers (n 125) 200. 230 She uses the term ‘reservation of title clause’. 231 The role of these tests in her study is to establish that the lex contractus rule, unlike the lex rei sitae rule, conforms to internal market law. She also prefers the lex contractus rule for qualities of its connecting factor. See ibid 164–65. 232 ibid 194–95. 233 Case C-384/93 Alpine Investments BV v Minister van Financiën [1995] ECR I-1141, para 38; Case C-415/93 Union royale belge des sociétés de football association ASBL v Jean-Marc Bosman, Royal club liégeois SA v Jean-Marc Bosman and others and Union des associations européennes de football (UEFA) v Jean-Marc Bosman [1995] ECR I-4921, para 103. 234 Case C-412/93 Société d’Importation Edouard Leclerc-Siplec v TF1 Publicité SA and M6 Publicité SA [1995] I-179, Opinion of AG Jacobs, paras 40–42. 235 S Weatherill, ‘After Keck: Some Thoughts on How to Clarify the Clarification’ (1996) 33 CML Rev 885, 896; Rutgers (n 125) 188–94. 229

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arket. She prefers the access-to-market test over the Keck test, ‘since it takes into m account the effects of a measure’, even though both tests appear to produce the same result.236 Even if Rutgers is right in her criticism of Kieninger’s use of Oosthoek,237 Rutgers’ own argumentation also leaves room for doubt. In particular, her Keck test is flawed insofar as it presupposes the equal treatment of all types of retention of title for assessing material discrimination.238 The fact that an import country refuses to enforce extended retention of title clauses beyond the effects of a simple retention of title clause, if it internally only accepts simple retention of title, should hardly be considered as material discrimination. This is so because extended retention of title and simple retention of title are functionally different security devices with respect to encumbered assets as well as uses.239 Moreover, no seller is forced to use extended retention of title clauses in international sales, because all jurisdictions that accept extended retention of title also accept simple retention of title. In fact, it is uncertain whether the Keck test applies to security rights in the first place, because Keck does not necessarily require that measures on retention of title be characterised either as measures on CSAs or as measures on the product itself.240 Indeed, the division between these types of measure is not exhaustive.241 In this vein, Wulf-Henning Roth argues that non-recognition of foreign security rights ‘should be seen as a distinct category of measures of potentially equivalent effect in its own right’. In support, he suggests that non-recognition ‘is closely connected with the cross-border movement of an asset’ and ‘works as a remote barrier of market access’.242 The access-to-market test, favoured by Rutgers, appears to be the most likely way in which the treatment of foreign security rights can be included in the concept of an MEE. Since Rutgers’ study, the ECJ has increasingly emphasised the market access approach, also introducing it in the context of free movement of goods. The leading case here is Trailers. This concerned Italian legislation prohibiting the use

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Rutgers (n 125) 195–96. To assess whether this is the case, we should take into account the post-Keck case law and scholarly analysis suggesting that Keck did not reverse Oosthoek after all. See Barnard (n 210) 129–35; S Enchelmaier, ‘Measures of Equivalent Effect II: Specific Measures’ in PJ Oliver (ed), Oliver on Free Movement of Goods in the European Union, 5th edn (Oxford, Hart Publishing, 2010) 174–75. As the starting point of this line of cases, Barnard and Enchelmaier cite Joined Cases C-34/95, C-35/95 and C-36/95 Konsumentombudsmannen (KO) v De Agostini (Svenska) Förlag AB and TV-Shop i Sverige AB [1997] ECR I-3843. 238 cf B Akkermans and E Ramaekers, ‘Free Movement of Goods and Property Law’ (2013) 19 European Law Journal 237, 247. 239 See Brinkmann (n 37) 342–43. 240 cf Rutgers (n 125) 194. 241 See Barnard (n 210) 127; P Oliver, ‘Measures of Equivalent Effect I: General’ in Oliver (n 237) 115, 117. 242 Roth (n 211) 49–50. In Roth’s account, this concerns import cases, which he distinguishes from transit traffic. He argues (at 48) that in transit cases, the notion of an MEE ‘extends to all (also evenhandedly applied) provisions which tend to make the transit traffic less attractive and more costly, and which may lead the structure of transit traffic to be moved from one State to another’. 237

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of motorcycles and similar vehicles to tow trailers.243 Having rehearsed its earlier case law from Dassonville to Keck, the ECJ summed up and added: Consequently, measures adopted by a Member State the object or effect of which is to treat products coming from other Member States less favourably are to be regarded as measures having equivalent effect to quantitative restrictions on imports within the meaning of Article 28 EC, as are the measures referred to in paragraph 35 of the present judgment [product requirements, even if indistinctly applicable]. Any other measure which hinders access of products originating in other Member States to the market of a Member State is also covered by that concept.244

The concept of market access is extremely open and vague, and has been criticised accordingly.245 To be sure, openness and vagueness would make it easy for the ECJ to employ the concept in a case concerning the treatment of foreign security rights. Bram Akkermans and Eveline Ramaekers have attempted to outline how this might happen, yet focusing on foreign property rights in general. They distinguish between two types of situation. First, if a foreign property right will not be accepted in a Member State due to the absence of an equivalent right in its national numerus clausus of property rights, the foreign property right is prevented from accessing the market of that Member State. Second, even if an equivalent right exists and the foreign property right can be transposed into it, transposition may change the content of the foreign property right and thus make it less attractive for the foreign trader to enter the market of the Member State. In other words, while the foreign property right is not directly prevented from accessing the market of the Member State, market access is still hindered. In both cases, Akkermans and Ramaekers find a breach of Article 34 TFEU.246 Akkermans and Ramaekers’ analysis appears to be too straightforward, particularly in that Article 34 TFEU is not about free movement of property rights, but free movement of goods.247 Therefore, a link should be established between

243 Case C-110/05 Commission of the European Communities v Italian Republic [2009] ECR I-519 (hereinafter Trailers). True, the concept of market access had already featured in Keck (n 220) para 17. Unlike in Trailers, though, it was not presented as a condition of its own, but as a consequence of satisfying the two conditions laid down in para 16. See Barnard (n 210) 123. 244 Trailers (n 243) para 37. For an application of the access-to-market test, see paras 56–58. The market access approach was confirmed in Case C-142/05 Åklagaren v Percy Mickelsson and Joakim Roos [2009] ECR I-4273, paras 24, 26. 245 See, eg, J Snell, ‘The Notion of Market Access: A Concept or a Slogan?’ (2010) 47 CML Rev 437, 469. Snell writes: ‘In other words, the reference to market access may allow the Court to avoid difficult choices concerning the reach of the free movement law; it grants it the maximum freedom of manoeuvre. As the term lacks a clear content, the Court may use it freely either to approve or to condemn measures that it happens to like or dislike. Market access may simply provide a sophisticated-sounding garb that conceals decisions based on intuition.’ Footnotes omitted. 246 Akkermans and Ramaekers (n 238) 247–48. 247 cf ibid 255–57. Akkermans and Ramaekers discuss the possibility of a doctrine of ‘mutual recognition of property rights’. cf also M Bogdan, ‘Den EG-rättsliga ursprungslandsprincipen och svensk internationell sakrätt’ in B Flodgren (ed), Vänbok till Axel Adlercreutz (Lund, Juristförlaget i Lund, 2007). Bogdan begins his analysis of the conformity of Swedish international property law with internal market law from the principle of mutual recognition (or ‘country-of-origin principle’).

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treatment of foreign property rights and access to the product market. In terms of security rights, this could be done by reasoning similar to that developed by Kieninger on the basis of Oosthoek, that is, by stressing the costs and difficulty caused by abandoning or altering one’s scheme of sales promotion.248 Because Oosthoek is used here only as a source of substantive arguments rather than as a binding source of law, it is irrelevant whether or not Oosthoek remains valid law after Keck. Yet another free movement of goods case deserves to be briefly discussed, namely Krantz.249 In this case, the ECJ actually dealt with a question concerning treatment of a foreign security right over movable property. Despite pre-dating the market access approach, and even Keck for that matter, Krantz offers insights into an important detail of that approach, namely its threshold of application. The case concerned a Dutch provision which authorised the Collector of Direct Taxes to seize goods on the premises of a taxpayer, to recover a tax debt, even if the goods were subject to a retention of title clause, and in that sense still owned by the seller. The seller had claimed before the Dutch courts that the provision was incompatible with Article 34 TFEU (then Article 30 TEEC) because ‘if the powers of the Collector were generally known, sales on instalment terms to the Netherlands would decline’.250 This failed to convince the ECJ, which noted that the provision applies without distinction to domestic and imported goods, and is not meant to control trade with other Member States. Importantly, the ECJ held that the possibility of the provision causing nationals of other Member States to hesitate to sell goods on instalment terms to the Netherlands was ‘too uncertain and indirect to warrant the conclusion that [such a provision] is liable to hinder trade between Member States’.251 The ECJ thus established a sort of a de minimis rule, or a threshold of application, which was not met in this particular case. However, several commentators argue that the outcome could have been different had the case not concerned a peripheral provision on tax collector’s powers, but the general mechanisms by which the combined effect of the lex rei sitae rule and national substantive law result in the non-recognition or non-enforcement of foreign security rights.252 Because of the greater likelihood of non-recognition or non-enforcement for this latter reason, awareness of it may indeed be expected to have a greater effect on the behaviour of foreign sellers. A detail in Advocate General Darmon’s opinion in Krantz seems to be well in accordance with this argument. While Darmon proposed the conclusion that the ECJ eventually adopted, he also observed that the ‘conclusion might perhaps have required reconsideration if [the Dutch law in

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See Kieninger (n 216) 60–62. Case C-69/88 H Krantz GmbH & Co v Ontvanger der Directe Belastingen and Netherlands State [1990] ECR I-583. 250 ibid para 4. 251 ibid paras 10–11. 252 See, eg, Akkermans (n 211) 217–18; Rutgers (n 125) 197–98; Kieninger (n 216) 62–63. 249

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question] had also applied to stocks, since the possibility of effects on trade arising out of a greater degree of “reluctance” could not then have been ruled out’.253 The point here is that non-recognition or non-enforcement due to the combined effect of the lex rei sitae rule and national substantive law are likely to cause a similar ‘degree of reluctance’.254 It is an open question whether the market access approach involves this kind of threshold of application and what exactly the threshold would be.255 In Trailers, for example, the ECJ appears to hint at the existence of a threshold by speaking of a ‘considerable influence’ that a prohibition to use a product in the territory of a Member State exerts on consumer behaviour, which in turn affects market access.256 If the market access approach comes with such a threshold, the arguments presented in the wake of Krantz can be brought into this context. These arguments then support the view that the threshold may be crossed in the case of the treatment of foreign security rights. The law on free movement of capital, while less elaborate, is also thought to provide a basis for finding trade barriers in the treatment of foreign security rights. The main Treaty provision, Article 63(1) TFEU, prescribes: ‘Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.’ For the interpretation of the term ‘movement of capital’, the ECJ has frequently resorted to Directive 88/361/EEC,257 Annex I of which is a list (‘Nomenclature’) of capital movements.258 The list includes ‘credits related to commercial transactions or to the provision of services in which a resident is participating’ (item VII) and ‘financial loans and credits’ (item VIII). The preamble to the list states that capital movements are taken to cover ‘all the operations necessary for the purposes of capital movements: conclusion and performance of the transaction and related transfers’. These points already suggest that security rights can be included in the concept of movement of capital. What is more, item IX of the list explicitly mentions ‘sureties, other guarantees and rights of pledge’.259 Roth, among others, discusses the treatment of foreign security rights over movable property in the context of free movement of capital. In his view, an infringement of this freedom can occur, for example, in the case of retention of title. 253

Krantz (n 249), Opinion of AG Darmon, para 13. Kieninger (n 216) 63. According to Kieninger, Darmon’s remark ‘applies to a far greater extent to the general regulations concerning security rights’. cf Akkermans (n 211) 220–21. Akkermans seems to suggest that the mere application of a market access test in Krantz could have resulted in a different outcome. 255 Akkermans and Ramaekers (n 238) 245–46; Snell (n 245) 455–60. 256 Trailers (n 243) para 56. See Barnard (n 210) 105–06. 257 Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [1988] OJ L178/5. 258 See, eg, Case C-452/01 Margarethe Ospelt and Schlössle Weissenberg Familienstiftung [2003] ECR I-9743, para 7; Case C-222/97 Manfred Trummer and Peter Mayer [1999] ECR I-1661, paras 21–24; Case C-484/93 Peter Svensson and Lena Gustavsson v Ministre du Logement et de l’Urbanisme [1995] ECR I-3955, paras 6–7. See also Barnard (n 210) 522–23; Akkermans (n 211) 225–27. 259 See Roth (n 211) 47–48. 254

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He notes that the freedom protects not only transborder investments but also security rights attached to assets and that an interstate dimension required by Article 63(1) TFEU (then Article 56(1) TEC) is present, say, if a credit agreement is concluded between parties residing in different Member States or if an asset encumbered by a security right is moved from one Member State to another. A restriction of capital movement, then, occurs ‘whenever the transborder movement of capital is burdened in a specific manner’, for example, if the state of destination regards a foreign security right as non-existent because the right is unknown to its legal order or does not comply with its registration or form requirements.260 In sum, for the purposes of internal market law, non-recognition or nonenforcement of foreign security rights can be explained as a trade barrier in several plausible ways.261 In the light of the ECJ case law, the strongest candidate seems to be free movement of goods with the market access approach. In particular, reading Trailers together with Alsthom Atlantique and Krantz leaves little doubt that the ECJ could, if such a case came before it, include rejection of a foreign security right in the concept of an MEE in the sense of Article 34 TFEU. This would concern acquisition security (purchase-money security) devices, such as retention of title.

iii. Ground for Justification A national measure constituting a trade barrier may still remain lawful if the Member State in question can justify it on a ground recognised by internal market law.262 These grounds can be found either in the express derogations as to the relevant freedoms in the Treaty text or in the open-ended categories introduced by the ECJ.263 The express derogations from prohibitions of quantitative restrictions and MEEs (free movement of goods) are listed in Article 36 TFEU and from prohibition of restrictions on capital movements in Article 65(1) TFEU.264 The open-ended categories are called ‘mandatory requirements’ as regards free movement of goods,265 and ‘overriding requirements of general interest’ as regards free

260 ibid 50–51. See P von Wilmowsky, ‘Sicherungsrechte im europäischen Binnenmarkt’ in BH Oppermann and P von Wilmowsky, Integration im europäischen Zivil- und Wirtschaftsrecht, Juristische Studiengesellschaft Hannover 29 (Baden-Baden, Nomos Verlagsgesellschaft, 1999) 36–38; von Wilmowsky (n 205) 77–93. In von Wilmowsky’s analysis, acquisition security devices, such as retention of title, may be protected by the free movement of goods and the free movement of capital, whereas other security devices may only be protected by the free movement of capital. cf Rutgers (n 125) 178–82. Rutgers argues that retention of title clauses only fall within the scope of the free movement of goods. 261 See Weatherill (n 207) 135. Weatherill makes up an example of a typical conflit mobile situation and suggests that ‘refusal to recognise and enforce the security right in question would constitute a barrier to inter-State trade on the model of Cassis de Dijon’. 262 ibid 132. 263 See Roth (n 211) 51–52. 264 See Barnard (n 210) 149–71, 545–52. 265 This category is also, and increasingly, called ‘imperative requirements’, ‘overriding requirements in the public interest’ or ‘public interest requirements’. See ibid 171–72.

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movement of capital.266 While some express derogations can be associated with security rights,267 the grounds for justification relevant here are more likely to be found in the open-ended categories. The following discussion focuses on mandatory requirements, but assumes that fairly similar grounds could justify restrictions on free movement of capital.268 The category of mandatory requirements was first introduced in Cassis de Dijon. There, the ECJ held that these grounds could relate ‘in particular to the effectiveness of fiscal supervision, the protection of public health, the fairness of commercial transactions and the defence of the consumer’.269 In subsequent judgments, the ECJ has recognised various additional mandatory requirements, concerning highly diverse matters.270 According to Catherine Barnard, the ECJ accepts most of the grounds for justification proposed by the Member States, ‘provided that the national policies do not pursue aims of a purely economic nature’. The ECJ thereby confirms ‘that the Treaty is not purely about creating an economic constitution’.271 Originally, only indistinctly applicable measures could be accepted as mandatory requirements.272 Measures that may result in the non-recognition or non-enforcement of foreign security rights, conflict rules and substantive laws, are in any case indistinctly applicable.273 Several commentators maintain that national substantive laws on security rights and the relevant conflict rules are based on aims, policies or principles that may qualify as mandatory requirements. For example, Roth refers to the protection of transparency and confidence of market actors. According to him, these aims lie at the heart of the numerus clausus and mandatory content of security rights as well as registration requirements. He also observes that any legal system has to provide 266

See ibid 541–43. Barnard uses the term ‘public interest requirements’ here, too. At least ‘public policy’ and ‘protection of industrial and commercial property’, both of which are grounds mentioned in Art 36 TFEU, have been put forward as possible justifications in this context. See Akkermans and Ramaekers (n 238) 248; Akkermans (n 211) 210–11; Basedow (n 225) 44–45. cf Rutgers (n 125) 202. 268 See Roth (n 211) 51. Roth uses the concept of mandatory requirements in connection with the free movement of goods and capital alike. See also Rutgers (n 209) 153. Rutgers writes: ‘The discussion hereafter will not be restricted to one particular free movement, since the justifications similarly all generally apply to the free movements.’ 269 Cassis de Dijon (n 214) para 8. 270 See Barnard (n 210) 173–79. Barnard lists, with case references, examples of additional mandatory requirements and divides them into three broad and overlapping categories, namely ‘protection of public goods and values’, ‘protection of individuals’ and ‘protection of public order’. To illustrate the diversity of matters, the first-mentioned category includes, among other things, protection of the environment, protection of cinema as a form of cultural expression, protection of national or regional socio-cultural characteristics, maintenance of press diversity, protection of books as cultural objects and protection of animal welfare. 271 ibid 174. Barnard observes (at 172) that mandatory requirements are often based on EU policies identified in the Treaty. 272 This was first confirmed in Case 788/79 Criminal proceedings against Herbert Gilli and Paul Andres [1980] ECR 2071, para 6. cf Barnard (n 210) 172; Rutgers (n 125) 201. Barnard and Rutgers point out that the distinction between indistinctly and distinctly applicable (non-discriminatory and discriminatory) measures has lost relevance. 273 See Akkermans and Ramaekers (n 238) 248. 267

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priority rules to determine the ranking between different security arrangements and creditors. He argues that since European law does not provide priority rules or determine whether or not publicity is to be regarded as important, these policy decisions remain at the discretion of each Member State. He adds that Member States are competent to determine the geographical scope of their national provisions embodying these policies and that the lex rei sitae rule may therefore appear appropriate.274 Akkermans and Ramaekers reason that national substantive laws on security rights (and property rights in general) and the relevant conflict rules may fall within the scope of the public policy derogation of Article 36 TFEU.275 However, in their view, the most likely ground for justification to be used by a Member State is ‘the internal coherence of the system of property rights’, the balance of which could be upset by the forced recognition of foreign property rights.276 Another potential ground for justification they deduce from the need to protect creditors. In particular, Member States may be unwilling to accord foreign security rights priority on insolvency, because domestic creditors cannot be expected to know about the existence and scope of these rights.277 Like Akkermans and Ramaekers, Kieninger emphasises protection of the internal balance of a system (or ‘order’). She also concurs with Roth in that, as long as no common system is introduced at the European level, it is up to each Member State to create its own system, deciding and balancing the underlying policies.278 Most importantly, though, she specifies the idea of a system in this particular context in two ways that may prove crucial for building a compelling argument to justify a trade barrier. First, the system itself, rather than its individual constituent parts or underlying policies, should be regarded as the relevant object of protection. For example, the German experience shows that publicity of property rights is not in itself indispensable for a functioning system of credit and security. Thus, according to Kieninger, it would be premature to conclude that property law principles such as publicity, or numerus clausus, are themselves mandatory requirements.279 Second, the system should be understood broadly, as ‘a certain order of property rights and a certain order of creditors’. Accordingly, systems of security rights are subsystems of wider systems that ‘seek to create a certain ranking of different groups of 274

Roth (n 211) 52–54. Akkermans and Ramaekers (n 238) 248. See Roth (n 211) 52. While not arguing on the basis of the express derogations from Art 36 TFEU, Roth comes close to Akkermans and Ramaekers’ view in that ‘priority rules are closely linked to the economic order of each Member State’. 276 Akkermans and Ramaekers (n 238) 249. Akkermans and Ramaekers note that the ECJ has recognised system coherence as a valid ground for justification in social security law and tax law cases. See, eg, Case C-120/95 Nicolas Decker v Caisse de maladie des employés privés [1998] ECR I-1831, para 39 (‘financial balance of the social security system’); Case C-204/90 Hanns-Martin Bachmann v Belgian State [1992] ECR I-249, para 28 (‘cohesion of the tax system’). 277 Akkermans and Ramaekers (n 238) 249. 278 Kieninger (n 216) 63–64. 279 ibid. See Brinkmann (n 37) 343–50. 275

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c reditors, to determine a certain legal content of proprietary rights and to control the volume of security rights and credit in general’.280 As explained in the following section, these two specifications are highly relevant for formulating a justificatory argument so that it stands a good chance of passing the proportionality test, which indeed is the actual challenge.

iv. Proportionality of Justification A national measure that constitutes a trade barrier is not lawful merely by virtue of the existence of a ground for justification. In addition, the measure has to pass the proportionality test, that is, to be suitable and necessary in relation to the justifying aim it pursues.281 Suitability means that the effect of the measure is apt for achieving the aim. A central aspect of necessity is that the aim could not be achieved by some other solution with less hindrance to intra-EU trade.282 In addition, the proportionality test requires that the Member State pursues the justifying aim in a consistent (‘systematic’, ‘coherent’) manner.283 Before submitting potential justifications concerning security rights to the proportionality test, we should attempt to formulate as compelling a justificatory argument as possible. This argument will be based on the idea of the integrity of a creditor regime. Besides the national system of security rights, the notion of a creditor regime can be understood to encompass all other legal norms that contribute to formation of the legal position of a creditor at the national level. An indispensable part of a creditor regime is the order according to which priority conflicts between creditors are resolved and the ranking of competing claims is established. The notion thus cuts across several fields of law, especially the law of obligations, property law and substantive insolvency law. A creditor regime simultaneously performs several functions, some of which are essential to its operability as a system in that they enable or support other functions performed. The gist of the justificatory argument, then, is that intrusions into the integrity of a creditor regime, particularly through the forced recognition and enforcement of foreign security rights, could seriously undermine the functions of that regime. Therefore, any challenge to this ground for justification on the basis of the proportionality test has to be assessed in relation to all relevant functions and the systemic whole that they form. At least the following functions should be regarded as relevant for this purpose. First, a creditor regime has to provide a definitive solution to all possible priority 280 ibid 64. On the German notions of Güterordnung and Gläubigerordnung, which Kieninger’s idea of a system appears to follow, see P Wohlgemuth, Vergemeinschaftung des Mobiliarsicherheitenrechts, Deutsches, Europäisches und Vergleichendes Wirtschaftsrecht 42 (Baden-Baden, Nomos Verlagsgesellschaft, 2005) 134–35. See also Kieninger (n 88) 179, 210. 281 See Cassis de Dijon (n 214) paras 11, 13. See also, eg, Case 261/81 Walter Rau Lebensmittelwerke v De Smedt PVBA [1982] ECR 3961, paras 12, 17. See generally Barnard (n 210) 179–95. 282 Akkermans and Ramaekers (n 238) 249–50; Akkermans (n 211) 213–17. 283 See, eg, Case 178/84 Commission of the European Communities v Federal Republic of Germany [1987] ECR 1227, paras 48–49. See Kieninger (n 216) 64–65. See also Roth (n 211) 54. Roth notes that the ECJ itself has used this requirement unsystematically.

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conflicts between creditors. This means establishing a ranking between creditor claims, both secured and unsecured, for all kinds of factual circumstances and all types of proceedings. It also means readiness to resolve questions concerning the existence of various kinds of rights that different creditors and other parties may claim to have. Second, closely related to the first function, a creditor regime has to facilitate assessment of credit risk. To that end, the ranking between creditor claims has to be as fixed and transparent as possible. It is particularly important for prospective creditors to know to what extent credit risk can be reduced by employing different types of security device. Indeed, both microeconomic and macroeconomic advantages that security rights are supposed to bring about depend on creditors’ increased confidence in the likelihood of repayment or other recovery.284 The ECJ explicitly recognised these functions in Trummer and Mayer, a case concerning mortgage registration and free movement of capital, as follows: It should be noted that a Member State is entitled to take the necessary measures to ensure that the mortgage system clearly and transparently prescribes the respective rights of mortgagees inter se, as well as the rights of mortgagees as a whole vis-à-vis other creditors. Since the mortgage system is governed by the law of the State in which the mortgaged property is located, it is the law of that State which determines the means by which the attainment of that objective is to be ensured.285

Third, a creditor regime has to continually reproduce the balance that the legislator has struck between the interests of actors involved, such as debtors, suppliers (trade creditors), financial institutions, the treasury, the debtor’s employees and so on. This balance manifests itself, among other things, in the types of security rights available under the legal system, the scope of these rights, their effects towards third parties, and the preconditions for and restrictions on these effects. The balance varies between legal systems because, as Verstijlen explains, it reflects local social circumstances and local opinions on the extent to which the interests of different actors deserve to be protected. Accordingly, he considers it legitimate that a

284 See generally HW Fleisig, ‘Economic Functions of Security in a Market Economy’ in JJ Norton and M Andenas (eds), Emerging Financial Markets and Secured Transactions, International Economic Development Law 6 (London, Kluwer Law International, 1998). 285 Trummer and Mayer (n 258) para 30. The case concerned Austrian rules which required a mortgage securing a debt payable in the currency of another Member State to be registered in Austrian currency (then the schilling). The ECJ held that the rules restricted the free movement of capital and that they could not be justified by the objective of clarity and transparency of the mortgage system in this particular case. Apparently, the rules failed the proportionality test. The ECJ made two remarks that suggest so. First, the rules could achieve the objective ‘only at the price of a lack of security for creditors whose debts are denominated in foreign currencies’ (para 31). Indeed, the ECJ noted that the value of a mortgage for such a debt may, due to currency exchange fluctuations, fall lower than the value of the debt to be secured (para 26). Second, the rules contained an element of uncertainty, capable of compromising attainment of the objective, ie, the rules also allowed the value of the mortgage to be expressed by reference to the price of fine gold, which was subject to fluctuations like the value of a foreign currency (para 32). Both remarks seem to deny the suitability of the rules to pursue the objective. See Rutgers (n 209) 155. Rutgers infers from the judgment that ‘foreseeability and transparency are overriding mandatory requirements’, but in this case ‘the proportionality requirement was not met’.

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jurisdiction aims to prevent its system of property rights from being bypassed by the recognition of foreign property rights.286 Fourth, a creditor regime has to maintain its own systemic consistency. The more a creditor regime relies on a functionalist reasoning and way of justifying its solutions, which aims at like treatment of arrangements with a similar economic purpose, the more important this function becomes. As Torgny Håstad suggests, long-term consistency can only be based on the constant observation of underlying economic realities. According to him, this particularly holds true for property law (and tax law), where contracting parties constantly try to gain benefits at the expense of third parties by making use of misleading terms and juridical constructions.287 Fifth, a creditor regime, like a legal system in general, has to implement the principle of equality. From this point of view, it would be problematic to allow foreign (or domestic) creditors to make use of security devices that are unknown to the domestic system of security rights or do not fulfil its preconditions for thirdparty effectiveness. Indeed, it would be difficult to justify giving such a privilege, and competitive advantage, to some but not all actors operating within the same creditor regime. The forced recognition or enforcement of foreign security rights would have this effect.288 To be sure, a principle of mutual recognition of property rights would drain this function of justificatory power, but so far the existence of such a principle is questionable, to say the least.289 The integrity of a creditor regime, which involves protection of the above functions, provides a solid ground for justification. As a starting point, it justifies the non-recognition or non-enforcement of foreign security rights that are of a type unknown to the domestic system of security rights or that fail to fulfil the domestic preconditions for third-party effectiveness. A reservation is needed here, though. Even if the type of foreign security right (security device) is unknown to the domestic system of security rights, non-recognition and non-enforcement cannot always be justified. This is the case if the domestic system includes a functional equivalent to the foreign right, and the foreign right does not breach policies underpinning the preconditions for the third-party effectiveness of that functional equivalent. An example of these situations is the often-cited 1963 judgment of the German Federal Court of Justice, where a French gage sur véhicule, a registered non-possessory pledge, was upheld and transposed into a German

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Verstijlen (n 110) 23–24, 30. T Håstad, ‘Nordiska önskemål vid en integration av säkerhetsrätten’ in S Tuominen (ed), Civilrättens integration ur nordisk synvinkel (Helsinki, Juridiska fakulteten vid Helsingfors universitet, 2001) 55–56. 288 F Diedrich, ‘Warenverkehrsfreiheit, Rechtspraxis und Rechtsvereinheitlichung bei internatio nalen Mobiliarsicherungsrechten’ (2005) 104 Zeitschrift für Vergleichende Rechtswissenschaft 116, 125. 289 It is far easier to establish a principle of mutual recognition concerning regulatory frameworks for production and marketing of goods, which is the principle’s original context as articulated in Cassis de Dijon, than concerning systems of property rights, whose operability largely depends on their internal integrity. cf Akkermans and Ramaekers (n 238) 255–57. 287

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Sicherungsübereignung, a security transfer of title.290 The Federal Court did this even though the German Civil Code expressly rejects non-possessory pledges,291 the reasoning being that German law had derogated from the principle of publicity since the invention of Sicherungsübereignung.292 As Kieninger argues, European law requires the same solution. Given that Germany does not pursue the principle of publicity in a consistent (‘coherent’) way, it could not use that principle to justify non-recognition or non-enforcement of a gage sur véhicule.293 Justified by the integrity of a creditor regime, the non-recognition and nonenforcement of foreign security rights stand up to most, if not all, challenges that can be based on the proportionality test. Suitability is not an issue because non-recognition and non-enforcement protect all the functions of a creditor regime discussed above. Instead, challenges have been based on views that non- recognition and non-enforcement cannot be regarded as necessary because less restrictive means are available, and views that a Member State resorting to nonrecognition and non-enforcement may not be pursuing the ground for justification in a consistent manner. The above formulation of the justificatory argument helps us to see that these views often involve too restricted an understanding of the relevant ground for justification. For example, Roth suggests that a refusal to recognise foreign non-possessory security rights due to the principle of publicity could be substituted by a less restrictive means, namely by introducing an additional registration requirement.294 If that is the case, proportionality may require upholding these rights for a reasonable time after the encumbered asset enters into the new jurisdiction, say, by providing a grace period for registration and possibly ranking purposes.295 Admittedly, a registration requirement for foreign non-possessory security rights would impart information, at any rate better than a possession requirement. However, this ‘less restrictive means’ could otherwise undermine a creditor regime, including the functions discussed above. 290

BGHZ 39, 173 (20 March 1963). See ss 1205 and 1206. 292 Kieninger (n 216) 49, 65. 293 ibid. Kieninger writes: ‘If the principles of a certain order are not followed in a coherent way they can no longer form a significant part of it.’ As a matter of technique, a foreign security right can be enforced by transposing it into a domestic right, as in the above example, or directly as a foreign right. See Roth (n 211) 55–56. According to Roth, both options may offer less restrictive alternatives to nonrecognition based on the numerus clausus principle. He sees more potential in the latter option because it does not depend on the existence of a domestic functional equivalent. 294 Roth (n 211) 56–57. Similarly, see Akkermans and Ramaekers (n 238) 251–53. Akkermans and Ramaekers discuss this in connection with a hypothetical case concerning treatment of an English floating charge in the Netherlands. An interesting detail in their reasoning is a remark that transposition (‘assimilation’) of the floating charge into a Dutch security right does not provide the secured creditor with a ‘real equivalent’ insofar as English law would entitle the secured creditor to appoint an administrator on insolvency of a company, an entitlement unknown in Dutch law. Arguably, provided that this difference is regarded as a trade barrier in the first place, the systemic features of insolvency law and the purpose of orderly carrying out of insolvency proceedings are likely to provide additional justificatory arguments. 295 Roth (n 211) 57–58. 291

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Let us assume that an asset subject to a security transfer of title is brought to a jurisdiction which refuses to enforce these security arrangements against third parties so as to prevent the circumvention of its rules on possessory pledge. Let us then assume that a security transfer of title could be validated as enforceable against third parties in that jurisdiction by recording it in a special register established for foreign non-possessory security rights. To be sure, such a validation opportunity would be at odds with implementing the principle of equality (the fifth function) because foreign creditors could benefit from security devices unavailable to domestic creditors and could thus gain a competitive advantage over them.296 In extensive use, the opportunity would disrupt the systemic consistency of the creditor regime and the balance of interests struck by the legislator (the fourth and the third function).297 Further, the risk position of domestic creditors would alter if the priority of a registered foreign non-possessory security right was determined according to the moment when that right became effective against third parties under the law of the jurisdiction of origin, as full protection of holders of these foreign rights requires. Any domestic security rights over the same asset created before the registration of the foreign right in the jurisdiction of the new location, along with any other domestic creditor interests concerning the same asset arising during that time, could become unexpectedly subordinated to the foreign right. The probability of such a ‘reverse legal ambush’ would generally impede the assessment of credit risk within the domestic creditor regime (the second function). Finally, regardless of the priority-determining moment, allowing any foreign security right (and not only a security transfer of title) to be validated by registration, could impede the function of providing a definitive solution to all possible priority conflicts between creditors (the first function).298 This is so because it would be impossible beforehand to establish priority rules that take into account all possible foreign security arrangements.299 Passing the proportionality test may prove to be somewhat tighter when it comes to non-enforcement due to unfulfilled formal requirements. For example, Kieninger discusses the data certa requirement of Article 1524(1) of the Italian Civil Code from this perspective. At the time when she was writing, this requirement entailed that a retention of title clause would be enforceable against the buyer’s creditors only if it was included in a document with an ascertained date, which can be acquired, for example, through notarial verification or registration of the document and which has to pre-date the commencement of insolvency

296 See Snijders (n 100) 156–57. Snijders recognises similar equality issues with the grace-period solution. 297 See Håstad (n 287) 55. In Håstad’s view, hollowing out rules on possessory pledge by having other rules for security transfer of title amounts to self-deception. See also Verstijlen (n 110) 30. 298 This would impede the second function at the same time. 299 eg, it is unlikely that functionalist categories and priority rules along the lines of UCC Art 9 could provide a solution if the domestic system of security rights itself does not subscribe to such functionalism. The nature and difficulty of this task would depend on whether foreign security rights are to be transposed into domestic rights or, insofar as possible, enforced as such.

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or e xecution proceedings.300 Kieninger admits that the requirement performs the function of fraud prevention, ensuring that the clause was inserted into the contract of sale from the outset.301 Yet she argues that this legitimate aim could be achieved by less restrictive means, such as oral evidence, provided that the burden of proof is on the seller.302 It is questionable, though, whether Kieninger succeeds in establishing that the data certa requirement is not necessary for the purposes of the proportionality test. This requirement is clearly a more effective means of fraud prevention than, say, oral evidence. Arguably, the necessary level of fraud prevention cannot be ascertained in the abstract, but only in the context of an actual creditor regime. Fraud prevention belongs to policy choices balancing the interests of different actors (the third function). Local circumstances matter in this balancing, particularly the expected occurrence of fraud in the shape of antedating and local views on the need for protection. If the means of fraud prevention adopted are insufficient in relation to local circumstances, the ability of a creditor regime to provide definitive solutions to priority conflicts and to facilitate the assessment of credit risk (the first and the second function) are undermined as well. As already mentioned, another avenue to challenge the non-recognition or non-enforcement of foreign security rights is to argue that the Member State in question does not pursue the proposed ground for justification consistently. Apparently, inconsistency can be taken as an indication of both unsuitability and unnecessity, and consequently of disproportionality of the national measure in relation to the ground for justification. Some caution is in order with this line of argumentation, though, since the impression of a lack of consistency may result from too restricted a point of view. This seems be the case when Roth wonders whether Austria follows its policies of creditor protection in a consistent (‘coherent’) manner. He is doubtful because Austrian law accepts retention of title as a non-possessory security right, but requires possession in the case of a fiduciary pledge as a precondition for valid creation.303 Now, this difference as such does not indicate inconsistent creditor protection, as preferential treatment of retention of title may be justified by policies that simply do not apply to a fiduciary pledge. Indeed, this is even likely because retention of title, which is an acquisition security device, is used in different situations and for different purposes than a fiduciary pledge, and so the two security devices are not functional equivalents.304

300 Kieninger (n 216) 48. On amendments introduced by Legislative Decree No 231/2002, Art 11(3), see A Veneziano, ‘Italy’ in Sigman and Kieninger (eds) (n 135) 182–84. 301 Kieninger (n 216) 65–66. Kieninger denies that the requirement performs the publicity function. Similar criticism can be targeted at possession requirements as to pledges and the like. See Roth (n 211) 57; von Wilmowsky (n 205) 169–71. 302 Kieninger (n 216) 66. 303 Roth (n 211) 57. 304 Generally on the question of whether acquisition security devices (‘purchase-money security interests’) require special rules if European laws on security rights are harmonised, see Kieninger (n 63) 671–72. See also Veneziano (n 38) 132–35.

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Another example is Rutgers’ view that the numerus clausus of property rights (‘real rights’) cannot be used as a ground for justification in the case of Dutch and German law. According to her, the closed systems of property rights in these jurisdictions ‘are undermined by various constructions and therefore could not be considered mandatory rules’.305 She argues that legal certainty, which the closed systems are supposed to provide, is impaired by exceptions to the possession requirement and its publicity function. These include the Dutch retention of title and the German Sicherungsübereignung (security transfer of title) and different forms of retention of title.306 Rutgers observes that many German security arrangements, such as the Sicherungsübereignung, have been authorised through case law, extending the statutory catalogue of property rights.307 As regards Dutch law, she notes that the legislator has not defined the content of every property right very precisely. Consequently, according to her, private parties are able to create new property rights within the statutory catalogue of property rights if they ‘manage to label [those new rights] correctly’. Rutgers adds that the legislator itself has not applied the closed system consistently. Her example here is ‘qualitative rights’ with third-party effects, introduced in Articles 251 and 252 of Book 6 of the Dutch Civil Code.308 In order to assess Rutgers’ view, it is useful to recall that the numerus clausus of property rights can be understood in two ideal-typical ways, namely as a principle and as a rule. The numerus clausus principle simply implies that restrictions exist as to the type and content of property rights that private parties are allowed to create. In legal systems adhering to this principle, as Akkermans explains, ‘parties are not necessarily prohibited from creating new property rights, but the addition of new rights might be subject to serious restrictions’. The numerus clausus rule, in contrast, prevails in a legal system where private parties may be altogether prohibited by law from creating new property rights.309 Rutgers apparently perceives the numerus clausus of property rights (more) as a rule, and indeed succeeds in demonstrating that Dutch and German law are not entirely consistent with this rule. It can be questioned, though, whether the justificatory argument should presuppose the numerus clausus rule in the first place. Even Member States claiming to adhere to this rule could base their justificatory argument on the numerus clausus principle. In terms of the above five functions

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Rutgers (n 125) 202. ibid 17–18, 38–39. 307 ibid 38–39, 121. See Brinkmann (n 37) 343–44; Kieninger (n 88) 26–27. 308 Rutgers (n 125) 18–20, 33. As for the ability of private parties to create new property rights, and thus undermine the closed system of property rights, Rutgers particularly refers to the Dutch Supreme Court case Keereweer qq v Sogelease, HR 19 mei 1995, NJ 1996, 119. See PM Veder, Crossborder Insolvency Proceedings and Security Rights: A Comparison of Dutch and German Law, the EC Insolvency Regulation and the UNCITRAL Model Law on Cross-border Insolvency, Law of Business and Finance 8 (Deventer, Kluwer Legal Publishers, 2004) 16–20. 309 B Akkermans, The Principle of Numerus Clausus in European Property Law, Ius Commune Europaeum 75 (Antwerp, Intersentia, 2008) 403. 306

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of a creditor regime, it can be argued that none of them presupposes the numerus clausus of property rights as a rule, whereas all of them presuppose it as a principle. All of these functions would be frustrated if private parties were free to create any imaginable property right, with any imaginable content, and to decide about its priority treatment. Nevertheless, all of the functions may remain perfectly operational in spite of exceptions to the possession requirement and extensions to the statutory catalogue of property rights in the case law. The same holds true for any possible leeway left to parties to define the content of the property rights they create as well as for the existence of ‘non-property rights’ with third-party effects. The possession requirement and its publicity function do not seem to be quite as significant for the idea of a closed system of property rights as Rutgers suggests. Indeed, publicity requirements concerning security rights, or the absence thereof, are better understood as a result of balancing actors’ interests by the legislator (the third function) than as necessary underpinnings of a creditor regime.

v. Implications for the Integrated Approach The integrated approach, introduced in section IV.A, is prima facie feasible even in the light of internal market law. The above review was undertaken because the compatibility of the integrated approach with internal market law could be challenged due to its process-like and incomplete nature. Developing in parallel the centralised and the local approaches as well as the substantive and the conflicts approaches, the integrated approach cannot guarantee the recognition and enforcement of foreign security rights in all possible situations. Admittedly, the review does not provide a conclusive answer on whether non-recognition or non-enforcement may breach internal market law and, if so, in what exact circumstances.310 Nevertheless, some implications for the integrated approach can be drawn. The existence of a trade barrier can often be easily established in situations of non-recognition or non-enforcement, but justifications are also generally available. The strongest ground for justification lies in creditor regimes and their functions. Indeed, a justificatory argument based on the integrity of a creditor regime stands a good chance of passing the proportionality test. The final word on the validity of this view, of course, belongs to the ECJ, which can rule either way if a relevant case is brought before it. Still, considering that the case for justification is strong, this uncertainty should not prevent the development and adoption of the integrated approach. Therefore, at least for the time being, the integrated approach is also to be considered prima facie feasible in this respect. What is more, a call for some sort of integrated approach could exist even if the ECJ found an unjustified trade barrier. This is so for two reasons. First, the 310 See Weatherill (n 207) 149. According to Weatherill, the precise nature of interaction between EU (‘European Community’) law and national property law ‘is troublingly imprecise’. This is perfectly true in the case of security rights.

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trade barrier banned would most probably consist of the combined effect of local conflict rules and local substantive law on security rights.311 Consequently, the Member State in question could, at least in principle, cure the situation by changing its conflict rules or substantive law. Choices are best made within an integrated approach because having all options simultaneously under consideration enhances the likelihood of informed decisions. Second, negative integration would not be capable of building a coherent system of security rights because it is by definition about the mere removal of obstacles to fundamental freedoms. A decision of the ECJ resulting in negative integration could easily upset the coherence of the national system of security rights. Restoring coherence would then require the development of local substantive law and perhaps also local conflict rules.312 Negative integration would not obviate the need for centralised unification or harmonisation either, because ‘it would lead to the development of a complex case law equally unfavourable to security in international trade’.313 In sum, since negative integration by its nature demolishes rather than builds, and does not do even that systematically, the need would remain to develop the centralised and the local approaches as well as the substantive and the conflicts approaches. Of course, negative integration would pose constraints on the possible contents of the local approaches.

V. Conclusion The current state of the European discourse on security rights is best described as a dialectic between the centralised substantive approach and the three gentler approaches, namely the centralised conflicts-approach, the local conflictsapproach and the local substantive approach. The centralised substantive approach and the group of gentler approaches both aim to solve cross-border problems, but are separated by their attitude towards substantive diversity. The centralised substantive approach strives for removal of divergences in substantive law, whereas the gentler approaches tolerate these divergences and even find reasons to preserve some of them. The centralised substantive approach is often motivated by pessimism about the potential of choice of law, sharing the sentiments of Lando’s view on the ‘eternal crisis’ of private international law. The concrete means within this approach come in varying extent and intensity. These can usefully be divided into comprehensive

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See Roth (n 211) 44–46. Forced recognition and enforcement of a type of foreign security right could call for adjustments to domestic law. For the sake of equality, domestic creditors should probably also be allowed to use the same or a similar security device. This could be achieved either by amending substantive law or by enabling contractual choice-of-law in property law matters. 313 Kieninger (n 216) 66. 312

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means, which tend to emulate UCC Article 9, partial or piecemeal means, and optional or supplementary means. The gentler approaches are antithetical towards the centralised substantive approach because these two categories are more or less mutually exclusive, depending on the concrete means in question. The preference of some commentators for the gentler approaches is motivated by explicit criticism of the centralised substantive approach. The need for centralised unification or harmonisation of substantive law has been questioned, and in particular its comprehensive forms have been suspected of detrimental effects on processes through which the law develops, and eventually on the quality of the law. All four approaches come with their own advantages and drawbacks. Therefore, choosing only one approach would result in losing the advantages of the other approaches. For example, none of the three gentler approaches, even if steps forward as such, can prevent cross-border problems as effectively as the centralised substantive approach. This calls for investing in the centralised substantive approach. The question would then be what concrete means to choose within this approach. Unfortunately, though, the more extensive and intensive the means chosen, the more ‘virtues of diversity’ will probably be lost, among them the idea of national systems of security rights as experimental laboratories in the service of further development of the law.314 In view of these seemingly inevitable trade-offs, the question arises whether the centralised substantive approach and the gentler approaches could be reconciled as an inclusive ‘third way’ that would combine the advantages and avoid the drawbacks of all four approaches. The discussion in this chapter suggests that such an integrated approach is at least prima facie feasible. A weaker and a stronger argument can be advanced for the integrated approach. According to the weaker argument, the integrated approach is needed at least as an interim solution, even if the comprehensive unification or harmonisation of substantive law was regarded as the only workable solution. This is so because comprehensive substantive unification or harmonisation would certainly be a lengthy process. The stronger argument has it that the integrated approach could even serve as a long-term solution, if not a permanent one. The following findings support the prima facie feasibility of the integrated approach. First, the gentler approaches clearly hold unused potential. This is particularly the case with the centralised conflicts-approach, which involves the unification of conflict rules, but the local conflicts-approach and the local substantive approach also promise significant improvements. Second, the individual approaches within the integrated approach may, through their interrelations and interaction, form a framework for the desirable development of substantive law. This prospect is based on ideas of local innovation, experimental learning and competitive processes between jurisdictions. The incentive structures that different

314

See generally G Wagner, ‘The Virtues of Diversity in European Private Law’ in Smits (n 119).

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choice-of-law systems create play a major role here. Third, it appears unlikely that internal market law would pose obstacles to developing the integrated approach. The actual, rather than mere prima facie, feasibility of the integrated approach can only be assessed in relation to a detailed division of labour between the individual approaches it comprises. A central hypothesis in this book is that the optimal division of labour between the different approaches can be determined by way of objective-based assessment. The objectives to be used for this purpose should capture the essence of what can be regarded as desirable development towards greater compatibility between systems of security rights. The following chapter is dedicated to identifying, elaborating and justifying those objectives, and to exploring their mutual relations with a view to developing a preliminary, abstract division of labour between the four approaches.

2 Objectives: The Essence of Desirable Development towards Greater Compatibility I. Introduction Ultimately, the goal of the research and analysis in this book is to find the optimal way to promote compatibility between systems of security rights in Europe. The main difficulty with a quest like this is that optimality is an entirely contingent notion. Indeed, optimality is a value that can only be established in relation to pre-set criteria. This chapter sets out to identify the relevant criteria for the quest. Our working premise is that these criteria should consist of a set of objectives that capture the essence of desirable development towards greater compatibility. It goes without saying that the notion of desirable development is equally contingent. Therefore, the first issues to be dealt with are epistemic: how do we know what objectives to choose? What criteria should the objectives themselves fulfil? Final answers can probably only be given after testing the choices with concrete legal material over time. However, compelling reasons suggest that the objectives should at any rate be based on the economic functions of security rights, the conditions for legal evolution and a transnational conception of justice. These ideas give rise to three objectives, namely foreseeability, responsiveness and the division of unforeseeability costs. We will analyse the three objectives separately below. Particular attention will focus on their justifications, that is, their economic, ethical and institutional underpinnings. Importantly, each objective is given a specific meaning in the context of the European discourse on security rights. Finally, we will examine the relations between and among the objectives, an exercise resulting in a preliminary, abstract division of labour within the integrated approach outlined in chapter one. This is a step towards establishing the actual feasibility of the integrated approach rather than merely its prima facie feasibility.

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II. Epistemic Issues: Criteria for Choosing Objectives The review of legal literature in chapter one exposed a clear lack of consensus on how best to solve or alleviate cross-border problems in relation to the use of security rights. Some commentators prefer a more or less comprehensive variant of the centralised substantive approach, while others prefer gentler approaches (the centralised conflicts-approach, the local conflicts-approach and the local substantive approach), or some particular combination of means. Additionally, the reasons for preferences vary. But a useful start might be to briefly consider possible explanations for the lack of consensus. One likely explanation is insufficient attention to the question of what objectives should guide development towards greater compatibility between systems of security rights and efforts to that end. In this book, though, answering that question is a key part of the method employed. Commentators often overlook the question of objectives as meant in this book. Clearly, this assertion calls for a few words of explanation before proceeding. The objectives as understood and developed in this book operate at a different level from, say, the features of a desirable system of security rights that commentators quite commonly postulate.1 In particular, the objectives as understood in this book describe the directions of a process, in the shape of development towards greater compatibility between systems of security rights, rather than the concrete outcomes of that process. Moreover, even if the need is recognised for an objective-based approach, reasonable individuals may nevertheless disagree on what objectives should be chosen. This calls for developing defensible criteria. To be sure, the choices are a matter of argumentation and debate, not something that could simply be known beforehand. However, consensus on those criteria is possible. Indeed, a consensus is probably more easily achievable on the criteria than on the actual features of a desirable system of security rights. Some criteria for choosing the objectives are more formal by nature, while others are more substantive. The formal end of criteria includes universality and, as hinted above, process orientation. Universality requires that desirable development should be defined and understood from a viewpoint common to all jurisdictions concerned. Purely national preferences as to means for promoting compatibility have to be set aside. This is because the goal to be achieved is a coherent set of objectives. In turn, process orientation requires that the objectives

1 See W Rank, ‘Harmonisation of National Security Rights’ in U Drobnig, HJ Snijders and E-J Z ippro (eds), Divergences of Property Law: An Obstacle to the Internal Market? (Munich, Sellier European Law Publishers, 2006) 214. Rank relies on the ten core principles for a secured transactions law prepared by the European Bank for Reconstruction and Development (EBRD). See also M Williams, H Lu and C-A Ong, Secured Finance Law in China and Hong Kong (Cambridge, Cambridge University Press, 2010) 12–19. Williams, Lu and Ong propose ‘criteria to measure the performance of the credit security laws of Hong Kong and China in respect of the four functional mechanisms of creation, perfection, publicity and enforcement’.

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should contribute to building a framework within which consensus can be reached on choices of concrete means. The means eventually chosen would then gradually increase the compatibility between systems of security rights. The reasons that call for process orientation are similar to the arguments for the integrated approach presented in chapter one, section IV. That is, first, it is debatable whether comprehensive means within the centralised substantive approach would provide a desirable final solution. This is because the comprehensive unification or harmonisation of substantive law could result in the loss of opportunities for local innovation, experimental learning and the thrust of competitive processes between jurisdictions to develop their laws. These ‘virtues of diversity’ require further research and discussion. Second, even if it was established that comprehensive substantive unification or harmonisation is the way to go, the task would be complex and lengthy. Therefore, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach would be needed as sources for ‘way-station’ solutions in the meantime. For proper functioning, these gentler approaches should probably be continuously coordinated, both between one another as well as in relation to the means employed within the centralised substantive approach.2 At the substantive end of criteria, an obvious starting point is the need to deal with cross-border problems. As we have seen in the introduction and chapter one, the main issue is uncertainty whether, once validly created and fully effective, security rights remain enforceable against third parties. In brief, this uncertainty, this potential loss of security rights, results from the combined effect of two factors. These are, first, substantive divergences between jurisdictions and, second, the current shortcomings under which choice of law (private international law) operates. These shortcomings include conflict rules with an unstable connecting factor, non-uniform conflict rules and unclear conflict rules. The resulting problems are indeed severe enough to impede the economic functions of security rights. Therefore, one of the objectives should be devoted to safeguarding these functions. Another aim of the more substantive criteria should be that systems of security rights respond to societal needs and wants. These needs and wants vary somewhat between jurisdictions. Moreover, they may also change over time.3 With 2 The first reason resembles the ‘stronger argument’ and the second reason the ‘weaker argument’ for the integrated approach. 3 Even if the policy goals for legal reform were given and universal, different jurisdictions might need different legal techniques to achieve them. See RA Macdonald, ‘Article 9 Norm Entrepreneurship’ (2006) 43 Canadian Business Law Journal 240, 290. On the controversial question of the full or limited priority of secured over unsecured claims on insolvency, see G McCormack, ‘American Private Law Writ Large? The UNCITRAL Secured Transactions Guide’ (2011) 60 ICLQ 597, 609–11; T Juutilainen, ‘Security Rights and the Lack of a Priority Debate: How to Proceed with Choice of Law and Harmonization?’ in T Wilhelmsson, E Paunio and A Pohjolainen (eds), Private Law and the Many Cultures of Europe, Private Law in European Context Series 10 (Alphen aan den Rijn, Kluwer Law International, 2007) 356–59. Generally on ‘local social circumstances and local opinions’ in designing a system of security rights, see FMJ Verstijlen, ‘General Aspects of Transfer and Creation of Property Rights Including Security Rights’ in Drobnig, Snijders and Zippro (n 1) 23–24, 30.

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this in view, individual systems of security rights should retain adaptability and feasibility of legal evolution, despite efforts to promote compatibility between these systems. In fact, retaining this adaptability and feasibility does not necessarily run counter to promoting compatibility, because competitive processes between jurisdictions may foster a consensus on desirable features of the law on security rights. In turn, this consensus may lead to spontaneous harmonisation, thus paving the way for further centralised harmonisation or unification. As noted in chapter one, section IV.C, choice-of-law systems may affect the incentives present in competitive processes and thus influence the outcomes that these processes may yield. Finally, the more substantive criteria should include an understanding of justice as a transnational value. This understanding requires that developing solutions to cross-border third-party conflicts should take into account both domestic and foreign interests, and both domestic and foreign needs for protection. Regrettably, traditional solutions have often failed to do so. In terms of conflict rules, so-called objective and neutral (‘blind’) connecting factors may in effect favour domestic creditors by designating the lex fori as applicable in most cases. In particular, this is often the case with the lex rei sitae rule, including its workings in conflit mobile situations.4 Generally speaking, the less convergence of national substantive laws on security rights is achieved, the higher practical relevance a transnational conception of justice should have. The gist, in economic terms, is that maintaining a national system of security rights which differs from corresponding systems in other jurisdictions involves costs that can be understood as negative externalities. In contrast, a transnational conception of justice suggests that these costs should not be entirely imposed on actors from other jurisdictions in the shape of foreign secured creditors. Three objectives emerge from this outline of criteria. These objectives are here termed ‘foreseeability’, ‘responsiveness’ and ‘division of unforeseeability costs’. In sections III–V below, each of these three objectives is examined and further developed. The aim of so doing is to identify the economic, ethical and institutional justifications underpinning them. Section VI focuses on interrelations between and among the objectives. Some reconciliation is necessary in that, although the objectives of foreseeability and responsiveness contradict one another, nevertheless neither could conceivably be wholly sacrificed. Importantly, this reconciliation is expected to inform the division of labour between the individual approaches within the integrated approach.

4 See U Drobnig, ‘Recognition and Adaptation of Foreign Security Rights’ in Drobnig, Snijders and Zippro (n 1) 106–14. Drobnig’s case law review confirms that the willingness of a jurisdiction to recognise and enforce foreign security rights generally depends on the ‘liberality or illiberality’ of its domestic system of security rights.

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III. The Objective of Foreseeability A. Content and Importance The objective of foreseeability calls for predictability in terms of the law that applies to a security arrangement and the effects of that law on the arrangement. In other words, the parties to a security arrangement should be able to be reasonably sure in advance of the legal treatment that the security right they create will receive, if put to the test. In particular, this necessarily involves eliminating the risk of legal ambush.5 This is a situation where a security arrangement (and hence a secured creditor’s legal position) unexpectedly becomes subject to a legal system other than the one that the secured creditor had expected. This risk can materialise in the shape of unenforceability—indeed, loss—of a security right if the preconditions for effectiveness vary between the two legal systems. Thus understood, foreseeability largely overlaps with the notion of cross-border legal certainty.6 However, in some circumstances, foreseeability may be achieved by extra-legal means. For example, where the lex rei sitae rule is the relevant conflict rule, predictability as to applicable law could be guaranteed by preventing the asset in question from physically crossing borders. Four reasons account for the importance of this objective in promoting compatibility between systems of security rights. First, foreseeability can be advanced, to a greater or lesser extent, by a broad variety of solutions to cross-border problems. Theoretically, some of these solutions could result in perfect foreseeability. Others, while weaker in effect, could relatively easily be adopted and put into practice. Second, the economic functions of security rights appear to depend on foreseeability. Third, the most compelling justification for priority of secured over unsecured claims on insolvency also appears to depend on foreseeability. Fourth, the objective of foreseeability finds strong institutional support in legislative efforts at the European level as well as in national legal sources. These reasons are examined more closely in sections III.B–III.E below.

B. The Variety of Solutions: The Preference for Comprehensive Means Increases in foreseeability are achievable in practice. Indeed, all the solutions to cross-border problems discussed in this book more or less advance 5 See PR Wood, Comparative Law of Security Interests and Title Finance, Law and Practice of International Finance 2, 2nd edn (London, Sweet & Maxwell, 2007) 143. 6 See H Wagner, ‘Economic Analysis of Cross-border Legal Uncertainty: The Example of the European Union’ in J Smits (ed), The Need for a European Contract Law: Empirical and Legal Perspectives (Groningen, Europa Law Publishing, 2005) 30–32.

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foreseeability. These solutions consist in the different means for promoting compatibility between systems of security rights. Within the centralised substantive approach, means that aim at comprehensive unification or harmonisation (comprehensive means) may even appear to promise perfect foreseeability. On the face of it, unpredictability in terms of applicable legal norms and effects would seem to be excluded in a monoculture consisting of a single system of security rights.7 Other means, while promising less, may still hold potential for significant increases in foreseeability. Each means in its own way diminishes the group of potential cross-border conflicts with unpredictable outcomes. This was demonstrated in chapter one, section IV.B, in terms of the centralised conflicts-approach, the local conflicts-approach and the local substantive approach, collectively referred to as the gentler approaches. Nevertheless, the comprehensive unification or harmonisation of substantive law should be seen as the ultimate goal of the objective of foreseeability and as its main policy implication. This is so because, for the purposes of analysis, the objective is postulated to seek maximal fulfilment. Other means can be seen as secondary goals. These are means that advance foreseeability more modestly and that may become redundant due to the comprehensive unification or harmonisation of substantive law.8 Thus, lesser means within the centralised substantive approach (partial or piecemeal means, optional or supplementary means) should be employed only where the comprehensive unification or harmonisation of substantive law is unfeasible or feasible only after intermediate phases. The same holds true for the gentler approaches. This undisputed preference for the comprehensive unification or harmonisation of substantive law prevails only if the point of view is, as above, limited to the objective of foreseeability. But this point of view is highly restricted and neglects to deal with any of the various objections that can be raised against the comprehensive unification or harmonisation of substantive law. In this book, these objections are discussed mainly in connection with the objective of responsiveness in section IV below. Some views presented in the European discourse on security rights share the ultimate goal of the objective of foreseeability.9 Even these views, 7 The exclusion of unpredictability would not be entirely true in reality. See ibid 38–39. Wagner makes the general point that legal uncertainty causes costs, even in national transactions. For that reason, comparison between the present situation and an imagined post-unification situation free of transaction costs is unrealistic. 8 See S Kozuka, ‘The Economic Implications of Uniformity in Law’ in J Basedow, T Kono and G Rühl (eds), An Economic Analysis of Private International Law, Materialien zum ausländischen und internationalen Privatrecht 46 (Tübingen, Mohr Siebeck, 2006) 74. Kozuka observes: ‘Uniform law provides a set of rules to replace the existing domestic law and e liminates room to choose between the domestic laws of states.’ 9 See, eg, C von Bar and U Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe: A Comparative Study (Munich, Sellier European Law Publishers, 2004) 468–69. Drobnig (see the note on authorship at 21–22) regards ‘the general introduction of a unified or harmonized regime of security, especially non-possessory security’ as a potential second phase solution. The first phase would be a ‘uniform regime for cross-border security rights’. He does not assess objections to such unification or harmonisation, at least explicitly.

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though, usually differ from the pure form of the objective, in that they would not be satisfied with mere uniformity of law or harmony between laws, but would expect the result of unification or harmonisation to be ‘better law’ than existing national laws.10 Accordingly, the unification and harmonisation of substantive law are seen as opportunities for content reform.11

C. The Economic Functions of Security Rights Foreseeability is an essential objective because the main economic functions of security rights depend on predictability in terms of the legal norms that apply to security arrangements and the effects of these norms on these arrangements. These functions are ‘universal’ in that they are pursued in all market economy jurisdictions. A complete picture of the economic functions of security rights requires, on the one hand, the microeconomic standpoint of individual market actors, secured creditors and security-provider debtors in conjunction with, on the other hand, the macroeconomic standpoint of the economy as a whole. The relevant standpoints are briefly discussed below.12 This discussion is followed by accounts of how cross-border problems currently impede the economic functions of security rights and how the current situation can be improved by increases in foreseeability.

i. The Standpoint of Secured Creditors For a secured creditor, the purpose of security rights is to reduce credit risk. This means increasing the likelihood that, at the agreed time or close to it, the secured creditor will recover the principal amount of the credit and the price of that credit in the form of interest. Security rights only reduce the risk related to a debtor’s

10 See DW Leebron, ‘Claims for Harmonization: A Theoretical Framework’ (1996) 27 Canadian Business Law Journal 63, 73–75. In Leebron’s terminology, the views could be said to involve both a normative and non-normative component. He explains the components as follows: ‘The normative component consists not in the assertion that two political entities should adopt the same policies or laws (that is inherent in any harmonization claim), but rather in any accompanying claim that the laws of at least one society should be conformed to a better standard. The non-normative component is the claim that the laws of the two societies should be made the same, apart from any normative judgment as to either of the society’s laws.’ 11 See, eg, E-M Kieninger, ‘Evaluation: A Common Core? Convergences, Subsisting Differences and Possible Ways for Harmonisation’ in E-M Kieninger (ed), Security Rights in Movable Property in European Private Law, The Common Core of European Private Law (Cambridge, Cambridge University Press, 2004) 668–72. 12 For clarity, the discussion is kept general and does not go into the details of different types of security rights. However, it should be kept in mind that not every type fulfils all the functions mentioned, and some types may fulfil them more than others. See J-H Röver, Secured Lending in Eastern Europe: Comparative Law of Secured Transactions and the EBRD Model Law (Oxford, Oxford University Press, 2007) 18–19. Röver raises a similar caveat and notes that American authors, from whom much of the writing comes, often equate security with its American incarnations, particularly the security interest under the UCC (Uniform Commercial Code) Art 9.

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inability or unwillingness to pay. But security rights do not affect, say, the risk of money value changes within an economy or in relation to foreign currencies.13 Reduction of credit risk occurs through three main functions: (1) reservation of value out of which the secured claim can be satisfied if the debtor defaults; (2) prevention of risk shifting to the detriment of the secured creditor; and (3) substitution of information on the debtor. The first of these functions, reservation of value out of which the secured claim can be satisfied if the debtor defaults, refers to encumbered assets designated in the security agreement. In the event of default, depending on the security device (type of security right) employed, a secured creditor is entitled to repayment out of the proceeds of realising encumbered assets or to repossession of (encumbered) assets supplied to the debtor.14 However, the ‘most prominent and defining effect’ of security rights is their enforceability in the debtor’s insolvency proceedings, with priority over claims by other creditors.15 This effect maximises a secured creditor’s prospects of recovery on the debtor’s insolvency.16 Importantly, security rights create deviations from the pari passu principle, also known as paritas creditorum. This universal basic principle of insolvency law serves as a default rule for the distribution of a debtor’s assets in liquidation-type collective insolvency proceedings. Under the pari passu principle, assets are distributed among creditors in the proportions of their outstanding claims.17 A deviation from this principle, then, implies that a secured creditor evades the ‘equality of misery’ that distribution on a pro rata basis causes in the typical situation where the total amount of creditor claims exceeds the amount of the debtor’s distributable assets. As a result, a secured creditor is likely to recover its credit fully or substantially,

13

ibid 11. In this book, title-based security arrangements, such as retention of title, are also understood as security rights, and assets subject to these arrangements are referred to as encumbered assets. See the introduction, section II. 15 M Brinkmann, ‘The Position of Secured Creditors in Insolvency’ in H Eidenmüller and E-M Kieninger (eds), The Future of Secured Credit in Europe, European Company and Financial Law Review, special vol 2 (Berlin, De Gruyter Recht, 2008) 250. See J Armour, ‘The Law and Economics Debate about Secured Lending: Lessons for European Lawmaking?’ in Eidenmüller and Kieninger (above in this note) 22–25. 16 G McCormack, Secured Credit under English and American Law, Cambridge Studies in Corporate Law (Cambridge, Cambridge University Press, 2004) 5. According to McCormack, this is often regarded ‘as the first, and most important, reason for the taking of security’. 17 See Brinkmann (n 15) 250–51. According to Brinkmann, the pari passu principle is an aspect of the collectivity of insolvency proceedings. Other aspects include the notions that once proceedings have commenced, creditors can no longer enforce their claims individually, the debtor can no longer improve the position of chosen creditors to the detriment of others, and the power to manage and dispose of the estate belongs to the insolvency representative. cf E Dirix, ‘Effect of Security Rights visà-vis Third Persons’ in Drobnig, Snijders and Zippro (n 1) 70–75. Dirix defines the pari passu principle somewhat differently as ‘the equal treatment of creditors who are in a similar position’. This definition is inconsistent with the idea of the principle as a default rule concerning all creditors. See RJ Mokal, ‘Priority as Pathology: The Pari Passu Myth’ (2001) 60 CLJ 581, 583–84. 14

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‘whereas placement in the ranks of the ordinary unsecured creditor may leave a person with little hope of recovering anything’.18 This narrative can be called the ‘positive’ or ‘traditional’ side of the function in question. Additionally, modern finance uses security rights in ways that reveal a ‘negative’ side. Let us consider, say, project finance for a pipeline. The financing banks will wish to acquire all the security rights over the project that they can, even though they know that the enforcement of these rights would not generate much value. Indeed, the actual reason for the banks to want security rights is to shield their room for manoeuvre against third parties. That is, the banks wish to prevent third parties from acquiring security rights because the possibility of third parties enforcing these rights would threaten to frustrate the banks’ opportunity to restructure the financing if needed. Because the banks bear the main commercial risk, they prefer to resolve any difficulties with the debtor directly. In short, security rights are not primarily acquired to be enforced, but to avoid enforcement of similar rights by third parties.19 The second main function, prevention of risk shifting to the detriment of the secured creditor, is closely related to the first, or a consequence of it. That is, because the value of the encumbered assets is reserved for satisfying the secured claim if the debtor defaults, the debtor is in different ways prevented from shifting risks to the detriment of the secured creditor. In contrast, in the absence of a security arrangement, the debtor could issue more debt, thus reducing the unsecured creditor’s expected share in a distribution according to the pari passu principle. The debtor could also lose its assets, with the same effect on the unsecured creditor, by distributing them as dividends or salaries. Further, the debtor could develop a more risky investment strategy. This involves a conflict of interest between equity and debt holders. In that respect, economists have recognised a problem of moral hazard.20 This implies that, on the one hand, equity holders will reap the potential benefit of additional risk-taking in the shape of increased returns. But, on the other hand, they can reduce their own relative risk by increasing external financing, so that the cost of additional risk-taking will be borne by debt holders.21 18 McCormack (n 16) 5–7. McCormack cites two UK studies for empirical evidence. According to a survey by the Society of Practitioners of Insolvency, from 1997 and 1998, unsecured creditors are returned nothing in 75 per cent of cases and can expect 100 per cent returns only in two per cent of cases. A study by Julian Franks and Oren Sussman, from 2000, suggests that recovery rates for banks are in the order of 77 per cent, for preferential creditors 27 per cent and for unsecured trade creditors negligible. 19 Röver (n 12) 12–13. For a detailed discussion, see J-H Röver, ‘Security in Project Finance and PPP and the Implications for Secured Transactions Law: “Security is a Shield, Not a Sword”’ in F Dahan (ed), Research Handbook on Secured Financing in Commercial Transactions, Research Handbooks in Financial Law (Cheltenham, Edward Elgar, 2015) 244–50. 20 Röver (n 12) 13. Equity holders are the debtor’s shareholders or other owners, while debt holders are the debtor’s creditors. 21 ibid 13–14. See Armour (n 15) 7. Armour makes a similar point in terms of financial agency costs, ie, the costs of interest conflicts between shareholders and creditors. The shareholders (or managers) of a financially distressed business ‘may have incentives to pursue highly risky strategies that actually have a negative net present value, simply because they stand to benefit from the upside in the unlikely event that the strategy is successful’.

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A security right restricts the debtor’s ability to alienate encumbered assets, thus enabling the secured creditor to prevent the debtor from selling assets of stable value to fund more risky ventures. A security right also restricts the debtor’s ability to obtain new credit for such ventures. New creditors, aware of the priority of the existing creditor’s security right, would have to look primarily to the value generated by the venture to be funded, and carefully scrutinise the purpose for which the credit is sought.22 The third main function, substitution of information on the debtor, means that, by virtue of a security right, a creditor needs less information on the debtor. The secured creditor thus saves on information costs. These costs, moreover, may be exceptionally high due to the characteristics of the credit market, as explained below. Indeed, information on the encumbered assets and the enforceability of the security right substitutes for information on the character and financial circumstances of the debtor.23 This function plays a role before the decision to extend credit in the first place, when a prospective secured creditor is evaluating the prospective debtor’s promise to repay, and probably also afterwards. Focusing on the time before the decision to extend credit, let us consider first, for comparison, a non-credit sale of goods, or some other ‘spot transaction’ in an ordinary market. Because the parties’ performance occurs nearly simultaneously, information on a party’s honesty, diligence, business acumen, financial strength and like attributes is largely extraneous to the other party. But in a credit market, such information on a prospective debtor is essential to the prospective creditor. The debtor’s part in a credit transaction involves a promise over time, and the prospective creditor has to assess whether that promise will eventually be kept. However, the information may be costly and difficult, if not impossible, to obtain due to three factors: asymmetric information, adverse selection and moral hazard. All of these are characteristics of the credit market and we will now briefly examine what they are and what they mean in the context of a secured credit transaction.24 Asymmetric information here means simply that a prospective debtor who seeks credit has a better idea than the prospective creditor as to whether or not the credit is likely to be repaid.25 Of course, a prospective debtor may also have an

22 Armour (n 15) 7–9. According to Armour, security may yield ‘positive externalities’, ie, social benefits beyond the parties to a security agreement. By lowering the probability that the debtor will engage in wealth-reducing transactions, security also lowers the probability of default to the benefit of all creditors. Another instance is control over the enforcement process, subject to restrictions by insolvency law. Control can be allocated to those best placed to maximise realisation value, deterring other creditors from a wasteful ‘race to collect’ when the debtor faces financial difficulties. 23 HW Fleisig, ‘Economic Functions of Security in a Market Economy’ in JJ Norton and M Andenas (eds), Emerging Financial Markets and Secured Transactions, International Economic Development Law 6 (London, Kluwer Law International, 1998) 19. Fleisig notes that an extreme case, with nearly total substitution, is a pawnshop. See McCormack (n 16) 9. 24 Fleisig (n 23) 16–20. See DW Arner, Financial Stability, Economic Growth, and the Role of Law (New York, Cambridge University Press, 2007) 107. 25 Fleisig (n 23) 19.

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incentive to hide some of this information, should it be likely to reduce a prospective creditor’s willingness to extend credit. Adverse selection makes matters even worse. A prospective creditor cannot tell whether a prospective debtor is serious and prudent or ‘just a gambler’. When interest rates rise with increasing demand for credit, the proportion of the serious and prudent among all credit seekers shrinks. As a consequence, the creditor’s profits may decrease, although the interest rate rises. This results above all in ‘credit rationing’: limiting the supply of credit despite both demand and willingness on the part of prospective debtors to pay higher interest.26 Moral hazard, in turn, manifests itself in the negative link between the amount of credit extended and debtor behaviour. The greater the credit amount, the less likely it is that the debtor will be offered a larger credit amount in the future, and so the greater the incentive to the debtor to default on the present credit. This, too, induces credit rationing.27 While the grant of security rights addresses the problems of asymmetric information, adverse selection and moral hazard,28 willingness to offer security rights nevertheless does not necessarily indicate greater creditworthiness among prospective debtors who offer them than among credit seekers who do not offer them. Interestingly in this context, so-called ‘signalling theory’ presumed the opposite and, in fact, viewed the offer of a security right as a credible signal of a high-quality debtor.29 However, this theory was later convincingly rejected. Indeed, it is notable how signalling theory runs counter to the experience that security rights are

26 Röver (n 12) 14–15. See Fleisig (n 23) 19–20. For a detailed discussion of adverse selection and the resulting credit rationing, see JE Stiglitz and A Weiss, ‘Credit Rationing in Markets with Imperfect Information’ (1981) 71 American Economic Review 393. On adverse selection generally, see GA Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) 84 Quarterly Journal of Economics 488. Akerlof famously illustrates (at 489–92) the phenomenon with an example of a market for used automobiles, where bad cars, ‘lemons’, tend to drive out good cars. This occurs because good and bad cars sell at the same price, which again is due to the fact that only the seller, but not the potential buyers, can tell whether a car is good or bad. Akerlof observes: ‘As the price falls, normally the quality will also fall. And it is quite possible that no goods will be traded at any price level.’ 27 Fleisig (n 23) 19–20. Fleisig notes, referring apparently to both adverse selection and moral hazard: ‘In loan markets, the size of the loan cannot be completely determined with the interest rate— the price of money—nor can the interest rate be determined by a free auction among bidders.’ 28 See McCormack (n 16) 9. According to McCormack, in theory, all the prospective secured creditor needs to do is to check the value of the encumbered assets so as to ensure that they adequately secure the credit to be extended. He adds, though, that a prudent secured creditor will allow for a certain excess in the value of the encumbered assets over the secured claim ‘to cover for legal and practical obstacles to enforcement as well as unfavourable enforcement timing and conditions’. cf H Muent and F Pissarides, ‘Impact of Collateral Practice on Lending to Small and Medium-Sized Enterprises’ (Autumn 2000) Law in Transition 54, 55 fn 4. Muent and Pissarides suggest that as the relation between a financier bank and its borrower client develops, the substitution of information on the encumbered assets and the enforceability of the security right for information on the debtor becomes reversed so that ‘there is usually a continuum along which collateral is gradually replaced by a better understanding of the borrower’. 29 For an example of research emphasising security rights as a ‘signalling mechanism’, see H Bester, ‘The Role of Collateral in Credit Markets with Imperfect Information’ (1987) 31 European Economic Review 887, 892–94.

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more frequently provided by younger and smaller enterprises, which are generally known to be of a lower creditworthiness. The error in the theory has been traced to its underlying idea of the cost of providing a security right. That is, the cost, in terms of expected value, was wrongly understood as consisting in the risk of losing the encumbered assets, and thus to be greater for a less creditworthy debtor.30 Here, though, the theory failed to see that in the event of default, creditors will seize the debtor’s assets regardless of whether or not the assets are encumbered by a security right. In other words, the cost, as defined above, does not vary between secured and unsecured credit.31 After the decision to extend credit, a security right is likely to reduce a creditor’s monitoring costs. Here, too, information on the encumbered assets and enforceability of the security right substitutes for information on the debtor. At this stage, though, substitution concerns information on the debtor’s ongoing and future behaviour rather than information on the debtor’s attributes as such. In particular, a security right may obviate much of the need to follow how prudently and successfully the debtor conducts its business.32 This side of the function is also closely related to the function of prevention of risk shifting to the detriment of the secured creditor, and tackles similar moral hazard problems between equity and debt holders.33 At this point, it will be useful to recapitulate the three main functions of security rights in reducing credit risk. We recall that these are: (1) reservation of value out of which the secured claim can be satisfied if the debtor defaults; (2) prevention of risk shifting to the detriment of the secured creditor; and (3) substitution of information on the debtor. But besides these three main functions, several additional functions have been recognised. 30 Armour (n 15) 6. Armour rejects the theory. cf Bester (n 29) 893. Bester writes: ‘In an equilibrium with perfect sorting, borrowers with high probability of default prefer contracts with higher interest payments and lower collateral than borrowers with low default risk. The reason is that high risk borrowers are more likely to lose their collateral.’ cf also Röver (n 12) 14. Judging from the following passage, Röver seems to accept the theory: ‘The serious entrepreneur will be willing to give security whereas the gambler prefers not to provide security which it is most likely to lose. Thus, applicants for credit order themselves into different classes of risk according to their willingness to give security.’ 31 Armour (n 15) 6–7. Armour explains, as follows, that a debtor’s willingness to offer a security right may actually signal lack of quality. The difference between secured and unsecured credit, as perceived by the debtor, will be felt in circumstances where default does not occur. Providing a security right involves giving a creditor rights to control the alienation of assets, whereas such rights are not present in connection with unsecured credit. This can be understood as the cost of providing a security right, as opposed to receiving credit on an unsecured basis. Because the cost is incurred only so long as the debtor does not default, the marginal cost decreases with the probability of default. Armour points out (at 7 fn 12) that a security right can, nevertheless, act as a signal of quality where it is provided by someone other than the principal debtor. 32 TH Jackson and AT Kronman, ‘Secured Financing and Priorities among Creditors’ (1979) 88 Yale Law Journal 1143, 1152–53. Jackson and Kronman write: ‘A secured creditor can focus his attention on the continued availability of his collateral and is largely free to disregard what the debtor does with the remainder of his estate. By restricting his attention in this way, the secured creditor can reduce the number and complexity of his monitoring tasks and thus achieve a substantial savings in monitoring costs.’ 33 See Armour (n 15) 7–9.

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One of these can be called the control function. As for security rights over specific assets, this means that the debtor may be more likely to pay the secured creditor than unsecured creditors due to the threat of losing an asset that is essential to conducting the debtor’s business.34 More generally, security rights often place a creditor bank in a position from where it can exert pressure over a financially distressed debtor company. This may occur both within formal insolvency proceedings and in the context of informal rescues. For example, banks appear to encourage or force restructurings that involve downsizing and management replacement.35 Additional functions are also found in the procedural privileges of enforcement that security rights entail in many jurisdictions, especially outside of insolvency. The extent to which ‘self-help’ and other extra-judicial remedies are allowed varies between jurisdictions.36 Further, additional functions become visible when security rights are observed in particular finance contexts. For example, security rights enable larger projects by permitting larger absolute loans and larger loans relative to the value of capital. It has been argued that such projects are more likely to achieve proper economies of scale, and therefore receive proper funding and be profitable. The combination of these characteristics, so the argument goes, reduces the overall project risk.37

ii. The Standpoint of Security-Provider Debtors Providing a security right is thought to benefit a debtor in several ways. Most notably, security rights encourage prospective creditors to extend credit that would otherwise not be available.38 One proof of this is that certain types of financing are not offered on an unsecured basis at all. Examples include structured financing, say, in the form of acquisition finance or project finance.39 While unsecured 34 McCormack (n 16) 7. As noted above in connection with rejection of the signalling theory, unsecured creditors will eventually also have the debtor’s assets seized in the event of default. Still, a security right over an essential asset may result in the secured creditor being paid quicker than unsecured creditors because that asset stands first in line to be lost. On the connection between creditor control and the scope of a security right, see Armour (n 15) 16–19. 35 McCormack (n 16) 10–11. According to McCormack, security rights and the resulting ‘element of control over the terms of the corporate workout’ also play a role in the so-called ‘London Approach’, a well-established but informal rescue procedure for larger quoted companies in the UK. On this procedure, see generally J Armour and S Deakin, ‘Norms in Private Insolvency: The “London Approach” to the Resolution of Financial Distress’ (2001) 1 Journal of Corporate Law Studies 21. 36 E Dirix, ‘Remedies of Secured Creditors outside Insolvency’ in Eidenmüller and Kieninger (n 15) 228–36; McCormack (n 16) 8–9. See AJM Steven, ‘The Effect of Security Rights Inter Partes’ in Drobnig, Snijders and Zippro (n 1) 54–56; Dirix (n 17) 74–75. See also Röver (n 12) 13. Röver writes of a ‘management function’ where a security right enables the secured creditor to appoint a receiver or manager over the debtor’s assets. Here, he recognises the use of security rights to enable a private administration procedure with the aim of increasing the proceeds from the sale of encumbered assets. 37 Fleisig (n 23) 22. 38 McCormack (n 16) 15. 39 Röver (n 12) 8–9. Röver stresses the importance of international project finance for emerging markets, where local banking markets may not be able to finance large-scale projects. In return for financing, international banks request optimum, complex security packages.

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credit is extended both to consumers and businesses, the norm is secured credit, particularly when credit is extended in large amounts and for the medium to long term.40 Further, in exchange for a security right and reduced credit risk, creditors grant debtors more beneficial credit terms. First, the interest rate, which is the actual price of credit, may be reduced along with other costs of credit such as fees. The argument about interest rate reductions has sometimes been questioned on the basis of empirical evidence that secured credit extended by banks is associated with interest rates no lower than those for unsecured credit.41 It should be understood, though, that this argument is made ceteris paribus—all other things being equal. In contrast, in empirical comparisons of interest rates for secured and unsecured credit, all other things are seldom equal. Indeed, reality may best be described by a selection effect, where both security rights and increased interest rates are associated with riskier debtors.42 Interest rate differences between secured and unsecured credit become more readily visible in a comparison of credit terms offered to debtors with similar levels of credit risk.43 Second, a security right may increase the amount of credit that prospective creditors are willing to extend.44 In other words, security has the potential to tackle credit rationing.45 Third, prospective creditors may be willing to extend credit for a more prolonged period on the basis of a security right.46 Fourth, security may

40 ibid.

41 Armour (n 15) 10. For an example of such empirical evidence, see SA Davydenko and JR Franks, ‘Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the UK’ (2008) 63 Journal of Finance 565, 598–99. Davydenko and Franks write: ‘Regressions (4) to (6) show that secured loans usually have higher spreads, although the difference is not statistically significant.’ 42 Armour (n 15) 10–11. See Davydenko and Franks (n 41) 599. Davydenko and Franks seem to concur with the selection effect: ‘It is likely that firms that are able to borrow without posting collateral are considered safe by the bank and therefore have somewhat lower spreads.’ cf McCormack (n 16) 16–17. McCormack observes that the argument about interest rate reductions may involve idealised assumptions on creditor behaviour: ‘Banks are in the business of making profits. The banks charge whatever rate of interest they think they will be able to get away with; in other words, whatever rate of interest the market will bear.’ Nevertheless, McCormack also recognises the selection effect. According to him, a company perceived as a bad credit risk may be required to provide security rights and may additionally pay higher interest, whereas a blue-chip company may not only be able to resist demands for security, but competition between banks may also force down the cost of borrowing. 43 Armour (n 15) 11. See J Armour, A Menezes, M Uttamchandani and K van Zwieten, ‘How Do Creditor Rights Matter for Debt Finance? A Review of Empirical Evidence’ in Dahan (n 19) 14, 20. Armour, Menezes, Uttamchandani and Van Zwieten note that reforms enhancing creditor rights, including security rights, may have the counterintuitive effect that the average interest rate increases. Their explanation is that ‘those debtors now offered credit, who would not previously have had access to credit, are relatively risky and so attract higher interest rates’. On the effects of legal change on bank lending in Central and Eastern European transition economies, see R Haselmann, K Pistor and V Vig, ‘How Law Affects Lending’ (2010) 23 Review of Financial Studies 549. 44 Röver (n 12) 12. 45 See Fleisig (n 23) 20. 46 Röver (n 12) 12. See Fleisig (n 23) 15. Fleisig cites the practice of the credit union at the World Bank to prove the above discussed effects of security rights. Although the evidence is anecdotal, he suggests that it is very close to the results of a controlled experiment, nearly as close as is possible in

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influence the ratio between debt and equity that creditors accept with the debtor. Fifth, and finally, security may influence other terms of credit, such as financial ratios that the debtor is required to comply with and other covenants.47 In sum, security rights are in several ways mutually beneficial both to the secured creditor and to the security-provider debtor.48

iii. The Standpoint of the Whole Economy Security rights are understood to entail favourable macroeconomic consequences, effects that concern the economy as a whole. Most importantly, total investment and production are expected ultimately to grow because security rights increase the amount of credit in an economy and make credit available at lower interest rates.49 These views are backed by ‘a growing international consensus that secured credit is a general social and economic good’.50 Perhaps the most authoritative expression of this consensus is the work of the United Nations Commission on International Trade Law (UNCITRAL),51 which currently culminates in the Legislative Guide on Secured Transactions (2007) and the Model Law on Secured Transactions (2016).52 For example, the Legislative Guide states at the beginning of a section on its key objectives: Contemporary economies involve the manufacture and sale of movable assets and the provision of services, both domestically and internationally … many businesses typically are not able to meet all their ongoing financial requirements in cash. The availability of credit and especially the availability of credit at the lowest possible cost are, consequently,

economics. The credit union offers a credit equal to six months’ pay on the signature of the borrower (unsecured credit), up to one year’s pay if the borrower offers a security right over movable property and up to four years’ pay if the borrower offers a security right over real estate. Moreover, a credit secured by movable property has a longer term and a lower interest rate than a signature credit, and a credit secured by real estate a longer term and a lower interest rate than a credit secured by movable property. Only differences in security and encumbered assets explain the variation in credit terms. 47

Röver (n 12) 12. E-M Kieninger, ‘Introduction: Security Rights in Movable Property within the Common Market and the Approach of the Study’ in Kieninger (ed) (n 11) 7. Kieninger reminds us that the mutually beneficial nature of security was recognised long before the advent of economic analysis and modernity. She refers to the Corpus Iuris Civilis, Institutes of Justinian, Book III, Title XIV, para 4. There, it is stated that a pledge is given for the benefit of both parties, enabling the debtor to borrow more readily and making the creditor’s loan safer. 49 Röver (n 12) 15. See Fleisig (n 23) 25. Fleisig suggests that even unsecured credit is cheaper in the presence of support by a framework for secured credit. 50 McCormack (n 16) 18. 51 See ibid 20–21. 52 The Legislative Guide and the Model Law are available at www.uncitral.org/uncitral/en/uncitral_ texts/security.html. See SV Bazinas, ‘The UNCITRAL Legislative Guide on Secured Transactions and the Draft UNCITRAL Model Law on Secured Transactions Compared’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016); SV Bazinas, ‘The Utility and Efficacy of the UNCITRAL Legislative Guide on Secured Transactions’ in NO Akseli (ed), Availability of Credit and Secured Transactions in a Time of Crisis (Cambridge, Cambridge University Press, 2013). 48 See

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fundamental to the growth of the economy … The fundamental justification for secured transactions law lies in the premise that the total net wealth of an economy will increase if more secured credit is available as a complement to unsecured credit.53

Importantly, the UNCITRAL stance draws on earlier work by several regional and other expert organisations, including the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank, the International Bank for Reconstruction and Development, the International Monetary Fund and the Organization of American States.54 Particularly strong consensus building can be perceived in the work of the EBRD and other legal reform-assisting organisations with the transition economies of Central and Eastern Europe. These organisations considered laws on security rights critical in fostering market-based decision-making and increasing the pace of investment activity in the private sector. Influence from these organisations resulted in giving laws on security rights a high priority on legislative agendas, especially in terms of permitting non- possessory security rights.55 Heywood W Fleisig has attempted to quantify the macroeconomic significance of security rights over movable property. His question was to what extent defects in the legal framework for secured credit, as compared to other possible factors, account for high interest rates in an economy. In the search for answers, he set out to compare interest rates for equipment finance, more specifically tractor loans, in the US and Argentina.56 In the US, loans secured only by the tractor itself were available at an interest rate of 10–15 per cent a year. In Argentina, tractor loans were treated as unsecured, and interest rates for such loans were about 60 per cent a year. Thus, the interest rate difference between US secured credit and Argentine unsecured credit was somewhere between 45 and 50 percentage points. According to Fleisig, this difference was created by a combination of three factors, namely macroeconomic uncertainty, high bank spreads and risk related to the encumbered asset (‘collateral’). Each of these factors was then quantitatively broken down in order to understand their relative importance.57 Fleisig quantified macroeconomic risk by using dollar-denominated interest rates in Argentina as a benchmark. In the US, the dollar interest rate involves no risk of currency devaluation. Because the US government, and no one else, has the legal right to print dollars, its probability of becoming unable to convert dollar bonds into dollars is the least in the world. Therefore, the interest rate on US government dollar-denominated bonds reflected no macroeconomic risk.

53

Introduction, para 46. ibid para 47. 55 McCormack (n 16) 18–19. McCormack even writes of ‘pressure’ exercised by the organisations. 56 Fleisig (n 23) 24–25, 28. Apparently, the legal and economic data are from the mid-1990s. Despite the dated data, Fleisig’s account deserves to be noted here due to its method of quantification and the magnitude of importance it accords to security rights over movable property. 57 ibid 25. 54

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Assessing the Argentine government’s ability to pay its dollar-denominated debt was more complicated. This ability depended on the government’s fiscal performance and ability to convert pesos to dollars. In turn, creating the required surpluses depended on several further complex matters, such as ‘export competitiveness, the ability to raise taxes or devalue imports, and the willingness of other foreign lenders to lend to Argentina’. Bond buyers’ collective concern about such uncertainties finds expression in interest rates: Argentina paid more for borrowing than did the US. Fleisig observed that interest rates on short-term dollar-denominated debt had recently been at 5.5 per cent in the US and 11.4 per cent in Argentina, and that this difference of 5.9 percentage points arose from the public perception of Argentina’s macroeconomic risk. Consequently, of the 45–50 percentage-point difference between equipment lending interest rates, only about 5.9 percentage points could be accounted for by macroeconomic risk.58 Next, Fleisig assessed how large a part of the interest rate difference could be explained by higher bank spreads between the lending rates and the costs of funds, and general problems of debt collection. By looking into real estate mortgages, he ended up with 4.6 percentage points because the recent mortgage interest rate in the US had been 7.5 per cent and in Argentina 18 per cent, and of this 10.5 percentage-point difference, the above-mentioned 5.9 percentage points arose from macroeconomic risk. In addition, he compared interest rates on new car loans, which in both countries could be secured credit. The interest rate in the US had been 9.7 per cent and in Argentina 21 per cent. Of this 11.3 percentagepoint difference, 10.5 percentage points arose from greater macroeconomic risk, greater bank spreads and general difficulties in collecting private debts. The remaining 0.8 percentage-point difference was explained by the greater difficulties in using automobiles as encumbered assets in Argentina as compared to the US.59 Finally, at the starting point of the analysis, the roughly 45 percentage-point difference between equipment lending interest rates to the detriment of Argentine farmer investors, Fleisig concluded the following. About 6 percentage points arose from macroeconomic uncertainty, and about 5 percentage points from higher bank spreads and general debt collection problems. The remaining 35 percentage points, about three-quarters of this particular problem of high interest rates, arose from defects in the Argentine framework on security rights over movable property.60 Fleisig went on to report estimations ‘[u]nder a variety of simplifying assumptions’ that a reform of the law on security rights over movable property could raise Argentine gross domestic product by between 6 and 8 per cent. A different

58

ibid 25–26. ibid 26–27. 60 ibid 27. Fleisig rejected (at 27–32) several alternative explanations as lacking strong logic or as quantitatively less important than problems arising from defects in the legal framework for security. These explanations included bank disinterest in making small loans, overly restrictive bank supervision and insufficient savings to be used for investment. 59

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estimation technique suggested a similar potential gain for Bolivia, between 3 and 9 per cent of gross domestic product.61 According to Fleisig, defects in the law on security rights over movable property also affect the allocation of investment rather than only its volume and price. Indeed, the inability to use movable property as security for credit diverts investment away from movable property and towards real estate, even though investment in movable property might increase production and capital growth more. For businesses, higher volumes of trade usually require larger inventories. If inventories cannot be used as security for credit, and the business has no unencumbered value in real estate, additional inventory may have to be financed out of the business’ own capital. Paradoxically, the same business may be able to borrow to expand its physical plant, using the expanded real property as security, but not to increase its inventory, which would probably be more economically valuable. Similarly, farmers may have disincentives to invest in livestock and machinery, which could be more productive investments than land or fixed assets. Moreover, a defective framework on security rights over movable property prevents capital markets from efficiently allocating savings because investing borrowers may not be able to provide sufficient safeguards for savers’ funds. All this hinders economic activity and growth.62

iv. Cross-border Problems Impeding Economic Functions To fully realise how cross-border problems impede the economic functions of security rights discussed above, we need to consider the relations between and among these functions. Importantly, most of the functions are not independent or stand-alone, but rather result from other functions. The macroeconomic functions are consequences of the microeconomic functions, repeated in masses of individual relations between parties to security arrangements. Further, the microeconomic functions for a security-provider debtor are the consequences of the microeconomic functions for the secured creditor. This is so because the security-provider debtor receives the benefits of providing security in exchange for the entitlements received by the secured creditor. Even the microeconomic functions for a secured creditor are not independent from each other. On the contrary, one of the three main functions in this category, reservation of value out of which the secured claim can be satisfied if the debtor defaults,63 can be seen as a core function on which the other main

61 ibid 35. cf Röver (n 12) 16. According to Röver, Fleisig’s numbers should not be taken at face value, because it is difficult to estimate the production potential of one economy using data taken from another economy. Nevertheless, he admits that Fleisig’s conclusions ‘demonstrate … by order of magnitude the remarkable quantitative dimension of the macroeconomic contribution of security’. On methodological issues in empirical studies of creditor rights, see generally Armour et al (n 43) 6–7. 62 Fleisig (n 23) 33–34. See Röver (n 12) 16. 63 As explained in section III.C.i above, enforceability against third parties is an important aspect of this function.

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functions depend. Indeed, the functions of preventing risk shifting to the detriment of the secured creditor and of substituting for information on the debtor appear to be rather direct consequences of this core function. When it comes to additional functions, the control function can easily be seen as resulting from the core function, and procedural privileges would hardly be available for any reason other than to help execute the core function. It is thus submitted that the various functions of security rights are properly understood as a chain of dependencies, as follows. Reservation of value out of which the secured claim can be satisfied if the debtor defaults is a core function on which the other microeconomic main and additional functions for a secured creditor depend. In turn, the microeconomic functions for the security-provider debtor depend on the microeconomic functions for the secured creditor. Finally, the macroeconomic functions depend on mass repetition of the microeconomic functions. The cross-border problems discussed in this book particularly hit the core function of reservation of value. These problems often result in the unenforceability of security rights, and thus in the forfeiture of that function. In that case, contrary to the security agreement and its very purpose, the encumbered assets cannot be applied to satisfy the secured claim, or only part of them can. If a security arrangement may give rise to recourse to the courts of several jurisdictions, which is common in cross-border contexts, a secured creditor clearly needs to ensure that its security right will be recognised and enforced in all these jurisdictions. That may be impossible, though, largely for reasons that can be traced back to the current conflict rules. To be on the safe side, a secured creditor should first study the conflict rules of all jurisdictions whose courts may later have to adjudicate on the enforceability of the security right, and then fulfil the preconditions for enforceability in accordance with all substantive laws to which these conflict rules point. Again, problems typically arise in relation to enforceability against third parties and conflict rules concerning these relations. As for security rights over tangible movables, the main reason is the unstable connecting factor of the lex rei sitae rule, causing the applicable law to change when an encumbered asset crosses borders. As for security rights over receivables, the main reason is the non-uniformity of the relevant conflict rule, due to which the applicable law and the expected outcome of a dispute may vary depending on where the case is adjudicated. It may be unknowable to the secured creditor what the relevant jurisdictions are, and the number of potentially applicable substantive laws easily grows too large. Thus, a secured creditor is often unable to do everything that being on the safe side requires. Even if relevant foreign jurisdictions are known, complying with their substantive preconditions for enforceability may be impossible in practice or may incur disproportionate transaction costs.64 64 For more detailed accounts of cross-border problems, including beyond the above main reasons, see the introduction, section III and ch 1, section IV.B.

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Now, because cross-border problems seriously undermine the above defined core function of reserving value to satisfy a secured claim in the event of debtor default, the effects of these problems will advance along the chain of dependencies, hitting the other microeconomic functions and eventually the macroeconomic functions. A secured creditor uncertain of gaining the benefits of the core function, and the other functions depending on it, will have little incentive to provide the security-provider debtor with more beneficial credit terms. These failures of microeconomic functions will have repercussions on the macroeconomic functions, which in particular concern the availability and cost of credit in an economy. Granted, as long as the majority of security arrangements take place, from start to finish, in purely national contexts, the idea of secured credit is not threatened as such. Yet the full potential of secured credit is then not utilised either. Moreover, individual security arrangements may in any case run into cross-border problems, even if the secured creditor has no particular reason to expect this to happen.65 In addition, such uncertainty and the resulting market partitioning operate contrary to the purpose of the internal market.66 An asset finance practitioner’s account by Lindsay J Town confirms much of what has been said above. Her experience is primarily from the leasing market, but she suggests that her views may be ‘equally appropriate for any form of cross- border transaction where the value of the asset being financed is a material part of the risk and reward calculation’. Thus, they should apply to many of the security rights within the scope of this book. For example, Town lists the following cross-border issues. If an asset moves across borders, other parties may acquire an interest in that asset that was not taken into account in the original financing structure, and may interfere with recovery and realisation. The more jurisdictions an asset moves through, the more likely a successful challenge to the security and the higher the risk that additional parties may claim an interest. And even the most carefully crafted financing structure can be destroyed by the implications of an asset being regarded as fixed to, or part of, land.67 Further, Town describes the range of a financier’s possible reactions where certainty of recovery of the asset and confidence in the processes involved are lacking. First, the financier may decline the transaction altogether. The downside of this is the potential damage to wider relationships. Second, the financier may increase the price nearer to that of an unsecured loan. Third, the financier may

65 We should keep in mind that even an initially purely domestic security arrangement may give rise to a cross-border third-party conflict. This is possible, say, if the security-provider debtor moves the encumbered asset (subject to a non-possessory security right) to another jurisdiction unexpected by the secured creditor, or in violation of the security agreement. See E-M Kieninger, ‘European Regulation of Security Rights’ in Drobnig, Snijders and Zippro (n 1) 167. 66 See Kieninger (n 48) 21; U Drobnig, HJ Snijders and E-J Zippro, ‘Divergences of Property Law: An Obstacle to the Internal Market?’ in Drobnig, Snijders and Zippro (n 1) 12. 67 LJ Town, ‘A Banker’s Perspective’ in M Bridge and R Stevens (eds), Cross-border Security and Insolvency (Oxford, Oxford University Press, 2004) 11–13.

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limit its dealings to borrowers of the highest quality only. However, this limits the financier’s potential market, while a large section of business is denied access to cross-border financing structures. Fourth, the financier may limit its dealings to the countries most understood. This, then, may damage relationships with multinational companies, while at the same time severely limiting market potential. Fifth, the financier may resort to contractual ‘overkill’ to cover all conceivable possibilities. This results in unwieldy documentation, which may cause confusion in foreign courts.68 Town sums up that ‘the multiplication of risks and relative uncertainty in dealing with such cross-border transactions are material threats to the development of the business for both financier and customer alike’.69 All in all, her account is an apt illustration of how the effects of cross-border problems advance along the chain of dependencies between the economic functions of security rights.

v. Solutions through Foreseeability We specified foreseeability in section III.A as predictability concerning the applicable legal norms and their effects. Of particular significance for this notion is that a secured creditor should be able to know beforehand, with certainty, the right set of substantive preconditions, the fulfilment of which will ensure the enforceability of the security right. An essential aspect of this certainty is that the set will not change, say, with the location of the encumbered asset or the forum that adjudicates on the question of enforceability. The importance of foreseeability, thus understood, is best demonstrated by the chain of dependencies between the economic functions of security rights, as outlined in the previous section. Foreseeability allows a secured creditor to protect the core function of security rights. As we have seen, the core function is reservation of value out of which the secured claim can be satisfied if the debtor defaults. And reservation of value is ensured by fulfilling the relevant substantive preconditions. The security right offered by the prospective debtor is thus capable of reducing the prospective secured creditor’s risk through this function and the other microeconomic functions depending on it. Consequently, the prospective secured creditor has a clear incentive to offer more beneficial credit terms to the prospective debtor in exchange. The mass repetition of such exchanges of mutual benefit, in a large number of individual security arrangements, produces the macroeconomic effects of security rights. Importantly, the macroeconomic effects come about undiminished because the negating effects of cross-border problems cannot enter the chain of dependencies. The foregoing confirms that the objective of foreseeability must play a central role in development towards greater compatibility between systems of security rights.

68 69

ibid 13. ibid 14.

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We established in section III.B that foreseeability can be advanced by a broad variety of solutions. These solutions consist in the different means of promoting compatibility between systems of security rights.70 As noted, though, not all solutions are equally effective. Comprehensive means (a category of means within the centralised substantive approach) appear to be the most effective because they could, at least in theory, remove cross-border problems altogether and make conflict rules redundant. Moreover, they promise the greatest reduction in transaction costs. Indeed, if no other objectives were to be taken into account, foreseeability would merely give reason to call for the comprehensive unification or harmonisation of substantive law.

D. Foreseeability in Justifying the Priority of Secured Claims Further confirmation of the importance, or indeed necessity, of the objective of foreseeability is found by examining its role in justifying the priority of secured over unsecured claims on insolvency. To be sure, secured credit cannot be regarded as an uncontroversial institution, despite the growing international consensus on its desirability. As already noted in the introduction, section II, Lynn M LoPucki captures the essence of the issue: ‘Security is an agreement between A and B that C take nothing.’71 The ‘C’ stands for unsecured creditors on the debtor’s insolvency, and ‘take nothing’ for the effect of deviating from pari passu distribution of the assets of the insolvency estate. In other words, the priority position that a security right grants to the secured creditor’s claim diminishes the assets available for distribution to unsecured creditors, who will thus recover less than suggested by their proportions of outstanding creditors’ claims. Because the priority of secured over unsecured claims appears, at least on the face of it, counterintuitive from the viewpoint of equality, it is worth asking why laws enable it.72 The mere fact that security rights have been around since time immemorial does not, as such, mean that priority is justified in today’s perspective. Indeed, to be relied on, justification has to be explicable in substantive terms. As demonstrated in the following, several of the proposed grounds for justification can be challenged, while the most compelling ground backs the argument on the importance of the objective of foreseeability.

70

On organising these means into four main types, termed ‘approaches’, see ch 1, sections II–III. LM LoPucki, ‘The Unsecured Creditor’s Bargain’ (1994) 80 Virginia Law Review 1887, 1899. See Kieninger (n 48) 8–9. 72 See Brinkmann (n 15) 251–52; McCormack (n 16) 11; Jackson and Kronman (n 32) 1146. See also M Brinkmann, Kreditsicherheiten an beweglichen Sachen und Forderungen: Eine materiell-, insolvenzund kollisionsrechtliche Studie des Rechts der Mobiliarsicherheiten vor dem Hintergrund internationaler und europäischer Entwicklungen, Jus Privatum: Beiträge zum Privatrecht 156 (Tübingen, Mohr Siebeck, 2011) 498–500; RM Goode, ‘Is the Law Too Favourable to Secured Creditors?’ (1983) 8 Canadian Business Law Journal 53, 57–58. 71

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One proposed ground for justification sees security rights as merely a matter of freedom of contract. Security is thus regarded as a fair exchange for credit or as a result of bargaining that others are to respect. The problem with this ground is that it does not really justify the harm that security rights may cause to unsecured creditors, be they voluntary or involuntary.73 While parties are free to contract away their own rights, freedom of contract cannot explain why they should also be allowed to contract away the rights of third parties who have not even participated in the negotiations.74 In other words, the priority of secured over unsecured claims amounts to non-consensual subordination of one creditor’s claim to that of another.75 Again, freedom of contract fails to explain why the debtor should be allowed, in effect, to rearrange the ranking of creditor claims. The creditors themselves have the power to dispose of this ranking on insolvency, but it is difficult to see why the same should hold true for the debtor, who is a third party in relation to the creditors.76 The nature of security rights as proprietary rights (‘property rights’, ‘real rights’, ‘rights in rem’) has inspired another proposed ground for justification. This ground explains the priority of secured over unsecured claims as a consequence of security rights being proprietary rights, and therefore having erga omnes effects. However, while perhaps correct as a description of the lex lata (currently valid law), the explanation entirely misses the question of justification. Because no universal and fixed criteria exist for what constitutes a proprietary right, justification cannot be based on the notion of proprietary right. Thinking of the lex lata in any jurisdiction, then, the catalogue of proprietary rights could be different from what it currently is. Thus, the reason for the erga omnes effects of a right has to be something other than its proprietary nature, where probably the proprietary nature will have to be deduced from its erga omnes effects, not the other way round.77 This critique can be fortified by following a point made by Alf Ross, a leading Scandinavian legal realist. He analyses the concept of ownership in a way that can be extended to all proprietary rights, and even beyond. According to him, words

73 Voluntary creditors can be lenders or suppliers on credit, basically any creditors that have voluntarily extended credit to the debtor. Involuntary creditors are typically exemplified by tort claimants. See Brinkmann (n 15) 259–60. 74 McCormack (n 16) 12–13; LA Bebchuk and JM Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics’ (1997) 82 Cornell Law Review 1279, 1288–90. According to McCormack, ‘freedom of contract’ and ‘bargain’ approaches fit comfortably with traditional English legal and judicial thinking. See R Goode, ‘Security in Cross-border Transactions’ (1998) 33 Texas International Law Journal 47, 48. Goode hints, in accordance with McCormack, that the liberality of the common law systems of security rights can be partly accounted for by general sympathy felt in these jurisdictions towards the notions of party autonomy and self-help. 75 McCormack (n 16) 13–14; Bebchuk and Fried (n 74) 1285–88. 76 Brinkmann (n 15) 254–55. Brinkmann suggests that the principle of privity prevents using freedom of contract as a ground for justification and that it is irrelevant whether a creditor could bargain for priority with the debtor because the power to dispose of priority on insolvency does not belong to the debtor, but to the creditors. See Dirix (n 17) 71–72. 77 Brinkmann (n 15) 253–54.

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like ‘ownership’ are mere systematic connections between a set of conditioning facts (that ‘create ownership’) and legal consequences (that ‘ownership entails’). These words serve the purpose of presentation and facilitate communication, but are empty in the sense that they have no semantic reference.78 In this analysis, the notion of proprietary right can only refer to a certain combination of conditioning facts and legal consequences (in terms of legal consequences, especially erga omnes or third-party effects) shared by various non-identical ‘rights’, that is, to a common denominator of sorts. This use of the notion of a proprietary right is merely classificatory in that it says nothing of the reasons why the conditioning facts and legal consequences in this group of ‘rights’ are connected in the way they are. Mere classification cannot amount to justification without touching on the reasons for the connections. A third proposed ground for justification maintains that providing a security right is something less than transfer of (full) ownership, but is similar to it by nature. The argument runs a maiore ad minus, as follows. Outside of insolvency, if a debtor is allowed to transfer the ownership of an asset to another person, then providing a priority right in that asset should all the more so be allowed, because a priority right is minus (‘lesser’) than a transfer of ownership.79 However, it has been convincingly demonstrated that the underlying assumption of similarity between transfer of ownership and providing a security right is misguided, as is now summarised here below. First, unlike transfer of ownership, providing a security right over an asset does not change the person for whose obligations the asset answers. Accordingly, an ownership transferee’s creditors can enforce their claims by seizing the asset, whereas a secured creditor’s creditors cannot. Second, providing a security right involves creating a priority right with the debtor’s insolvency as a condition precedent. This conditional character makes security a special case, and distinguishes it from, among other things, transfer of ownership, because insolvency law g enerally rejects the alienation of a debtor’s rights with the debtor’s insolvency as a condition precedent. Third, the ‘bundle of rights’ which the right of ownership comprises cannot include the right to enforce a claim by seizing an asset owned by a debtor, because those rights belong to the debtor’s creditors. If providing a security right truly were minus than transfer of ownership, and not something qualitatively different, the right of ownership would have to include such an enforcement right.80

78

A Ross, ‘Tû-Tû’ (1957) 70 Harvard Law Review 812, 818–24. (n 15) 252. Brinkmann rejects this ground. cf SL Harris and CW Mooney, Jr, ‘A Property-Based Theory of Security Interests: Taking Debtors’ Choices Seriously’ (1994) 80 Virginia Law Review 2021, 2047–53. Having stated that ‘security interests … are interests in property’, Harris and Mooney add (at 2051): ‘We believe it follows that the law should honor the transfer or retention of security interests on the same normative grounds on which it respects the alienation of property generally.’ 80 Brinkmann (n 15) 252–53. 79 Brinkmann

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A novel and more sophisticated way of understanding and justifying priority has been proposed by Moritz Brinkmann. He begins with a basic distinction between two types of security agreement, using a ‘new-value criterion’ as the dividing line: in the first type, a security right is provided in consideration of new assets, whereas in the second type, no transfer to the debtor of new funds or other form of value occurs. The purest form of the first type, ‘new-value security’, is retention of title, but security for a new money loan is also included in this category. Examples of the second type, ‘security with no new value’, are security rights over future assets and company charges, whereby assets acquired after the first credit transfer supplement the security (become encumbered) regardless of whether the creditor extends new credit. The second type even includes security for a revolving credit facility or current account, whereby credit is extended on a continuing basis. For Brinkmann, the decisive point of classification is the absence of ‘a causal correlation between encumbrance and transfer of funds’, that is, a missing ‘legal nexus’. This means that the encumbrance of new assets occurs even if the debtor draws no new credit.81 According to Brinkmann, new-value security does not violate the pari passu principle and therefore needs no further justification. Apparently, the gist is that the provision of these security rights to one creditor is neutral for the value of the debtor’s estate and thus for the other creditors, because provision brings new assets to the estate in the shape of goods (retention of title) or funds (security for a new money loan). If this view is correct, new-value security improves one creditor’s position, but not at the expense of the other creditors. In contrast, so the argument goes, security with no new value requires justification. As for these security rights, the pari passu principle is violated because losses to other creditors, incurred by conceding priority to the secured claim, are not compensated for by adding new assets to the debtor’s estate.82 Brinkmann bases the required justification, for security with no new value, on the notion of implicit consent. That is, extending unsecured credit while at the same time knowing that security rights exist, would imply approval of those rights. Of course, implicit consent requires unsecured creditors to have notice of any security rights over future assets. In Brinkmann’s view, actual notice is not required to this end, but constructive notice suffices. This leads him to stress the importance of publicity, particularly through registration. Indeed, he notes that ‘with the unfortunate exception of German law, all jurisdictions I am aware of, which accept global security rights, require registration of such rights’.83 In the more problematic case of security rights not yet existing at the time when unsecured credit is extended, Brinkmann finds a ‘still viable’ ground for justification, in that unsecured creditors can protect themselves by negative pledge clauses

81

ibid 255–58, 261. ibid. See Brinkmann (n 72) 259–71. 83 Brinkmann (n 15) 258–59. See Brinkmann (n 72) 302–08. 82

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or other covenants. In order for these restrictions on the debtor’s competence to be effective, the availability of efficient means of monitoring the debtor’s behaviour is crucial. Registration of future security rights is an indispensable facilitator of such monitoring, and registers should preferably be searchable online. Finally, Brinkmann points out that justification based on implicit consent is irrelevant in terms of involuntary creditors such as tort claimants. Accordingly, he suggests that tort claims should not be subordinated to secured claims.84 Overall, Brinkmann’s argumentation leaves open questions, some of which are serious enough to compromise the proposed ground for justification. First, is it correct to assume that new-value security does not impair the debtor’s estate, but rather is neutral for its value and the other creditors? Here, a problem lies with security rights for new money loans. Brinkmann recognises that security rights for new money loans are different from, say, retention of title, in that funds acquired through new money loans will be dissipated by the opening of the debtor’s insolvency proceedings. In his view, though, the decisive point is that ‘immediately after the transaction, the unsecured creditors are not worse off than they were before because the creditor has transferred additional funds into the estate’.85 Now, it is difficult to understand why the moment of credit transaction and provision of security right should be decisive for justification purposes. After all, deviation from the pari passu principle, the object for which justification is being sought, only occurs later, on the debtor’s insolvency. Credit in exchange for encumbrance of assets is not neutral for the other creditors, because such a transaction increases their risk of diminished returns in insolvency proceedings. This appears to be the case at least if previously unencumbered assets necessary for the debtor’s business (production or otherwise) become encumbered in exchange for a new money loan. These assets are likely to be valuable and remain with the debtor, whereas the ‘new money’ may have been used up before insolvency.86 Second, as for security with no new value and the notion of implicit consent, are involuntary creditors really the only type of creditors regarding whom this ground for justification is irrelevant? Arguably, the same irrelevance holds true for all nonadjusting creditors. These are creditors who lack the bargaining power to adjust the terms of their credit agreements according to risk, especially risk caused by the existence of security rights.87 Third, as for security rights not existing at the time when unsecured credit is extended, how realistic is it to base justification on the possibility of using negative pledge clauses? Here, too, the question of bargaining

84

Brinkmann (n 15) 259–60. See Brinkmann (n 72) 308–21. Brinkmann (n 15) 261. 86 See H Eidenmüller, ‘Secured Creditors in Insolvency Proceedings’ in Eidenmüller and Kieninger (n 15) 275–76. Eidenmüller raises a related concern: ‘Surely the unsecured creditors are very interested in how the new value advanced to the debtor is used. If the equity cushion of a debtor firm is gone, the firm’s owners have an interest to engage in overly risky activities, and the secured creditor has no incentive to stop them—to the detriment of the unsecured creditors.’ 87 ibid 276–77. 85

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power raises doubts. A negative pledge considerably restricts the debtor’s future room for manoeuvre. Indeed, a debtor is likely to accept such a restriction only if required by a very significant creditor or in some specific context and structure such as project finance.88 Therefore, basing general justification on the possibility of using negative pledge clauses seems questionable. Considering the shortcomings of the foregoing proposals, justification has to be sought elsewhere. The most compelling, or promising, ground for justification is instrumental and consequentialist. This ground relies on the view that security rights, and the priority of secured claims, bring beneficial effects for the economy and society at large by promoting economic activity and growth. As discussed on several occasions above, these are macroeconomic consequences of the effects of security rights in a vast amount of individual relations between creditors and debtors, particularly in terms of increased availability and the lowered cost of credit. The same view informs the ‘growing international consensus that secured credit is a general social and economic good’.89 In essence, this is a utilitarian justification. The losses that security rights, and the priority of secured claims, potentially cause to unsecured creditors on insolvency are seen as an acceptable trade-off for the overall benefits brought about for the economy and society as a whole. In this way, security rights promise the maximisation of utility. Of course, ‘utility’ is here best understood as welfare or preference satisfaction rather than as (more immediate) pleasure or happiness along the lines of classical utilitarianism.90 The justification largely relies on expected, rather than actual, increases in utility. Actual increases in utility are achieved if economic activity is actually stimulated and if the increased economic activity and growth actually lead to increases in general welfare. Both are empirical questions, and questions of measurement. The way in which this justification depends on the notion of foreseeability is now easily perceived. Stimulation of economic activity cannot be expected if prospective secured creditors are unable beforehand to know the legal treatment of security rights and are thus unable to rely on these rights having the intended effects. In cross-border contexts, the main manifestation of this problem is the inability to rely with confidence on the third-party effectiveness of a security right due to uncertainty as to which jurisdiction will exercise control over preconditions for and restrictions on effectiveness. This results from the combined effect of substantive divergences and conflict rules, which may also be divergent (non-uniform), unclear or built on an unstable connecting factor. Recalling the 88

On uses of negative pledge, see Wood (n 5) 131–36. See also Röver (n 19) 239. McCormack (n 16) 15–21. 90 cf RA Posner, ‘Utilitarianism, Economics, and Legal Theory’ (1979) 8 Journal of Legal Studies 103. Posner wishes to draw a sharper line between the economic norm of wealth maximisation and utilitarianism than seems necessary here. See D Lyons, ‘Utility and Rights’ in J Waldron (ed), Theories of Rights, Oxford Readings in Philosophy (Oxford, Oxford University Press, 1984) 110–11. Lyons includes normative economic analysis of law, despite differences in terminology and doctrine, in ‘modifications and descendants of utilitarianism’. 89

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terminology of section III.C.iv, the chain of dependencies between the different economic functions of security rights is already weakened at the outset if foreseeability is lacking. Uncertain of the effects of security rights, a prospective secured creditor may lack the incentive to lower the cost of credit or otherwise offer prospective debtors more beneficial credit terms, or indeed to extend credit in the first place. As a result, the beneficial macroeconomic effects of security rights, which are essential for the justification in question, arise only partially. To sum up, the message here is that the objective of foreseeability must play a central role in informing development towards greater compatibility between systems of security rights. This is not only because the economic functions of security rights as such depend on foreseeability, but also because the most compelling justification for the priority of secured over unsecured claims depends on foreseeability. If it were not for the beneficial macroeconomic effects, which can only arise with foreseeability, subordinating unsecured to secured claims would just be an unfounded privilege to secured creditors. The alternative grounds for justification could not compensate for the absence of this utilitarian justification, as the foregoing discussion of their shortcomings demonstrates.

E. Institutional Support for Foreseeability The idea of institutional support here is quite different from that in doctrinal legal scholarship (or ‘legal dogmatics’). In doctrinal legal scholarship, institutional support is a notion closely related to, and required in, the construction of legal principles, which forms a part of efforts at systematisation. A function of legal principles in those efforts is to condense the normative contents of fields of law. When legal principles are understood as a type of legal norm, as the other type alongside legal rules, the requirement of institutional support means that a legal principle must receive support from acknowledged sources of law.91 In this connection, Ronald Dworkin explains how to defend a claim that some principle qualifies as a legal principle: [W]e would mention any prior cases in which that principle was cited, or figured in the argument. We would also mention any statute that seemed to exemplify that principle (even better if the principle was cited in the preamble of the statute, or in the committee reports or other legislative documents that accompanied it). Unless we could find some such institutional support, we would probably fail to make out our case, and the more support we found, the more weight we could claim for the principle.92

However, the objective of foreseeability differs significantly from legal principles, as indeed do the other objectives developed in this book. The objectives developed

91 K Tuori, Ratio and Voluntas: The Tension between Reason and Will in Law, Applied Legal Philosophy (Farnham, Ashgate, 2011) 188–91. Tuori also discusses the different types of legal principle, particularly with respect to their varying norm and source qualities, and the resulting polysemy of the term ‘principle’. 92 R Dworkin, Taking Rights Seriously (Cambridge, MA, Harvard University Press, 2001) 40. See Tuori (n 91) 193. Tuori writes: ‘Legal principles unlock the law in the direction of moral principles and

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here and legal principles are both normative by nature, but in different ways. Legal principles are themselves legal norms, constituents of lex lata. In contrast, the objectives are normative in that they attempt to inform development of lex ferenda (future law). Unlike for legal principles, institutional support cannot be regarded as necessary for the objectives. This is so because the objectives may influence future law even as purely academic proposals. This influence could be described as the objectives receiving institutional support ex post facto. For the objectives developed here, institutional support ex ante is required in a far less demanding sense, if at all. Quite simply, academic proposals are strengthened if they resonate with the efforts of institutions that actually possess the power to shape future law or with ideas endorsed by those institutions. Here, this sort of institutional support can be drawn from legal texts at both the European and national levels alike. As for types of legal text, say, any of those mentioned by Dworkin will do. Institutional support for the objective of foreseeability appears particularly easy to find. Evidence is hardly needed to the effect that national systems of property law are strongly committed to the objective of foreseeability, including in terms of security rights. The notion of proprietary rights, often based on the idea of rights ‘against the world’ or with erga omnes effects,93 necessarily involves exclusiveness and stability. A manifestation of these qualities is that a properly established security right survives third-party challenge.94 In the context of national law, a secured creditor or other holder of a proprietary right usually has no difficulty in knowing how to achieve effectiveness against third parties and thus prevail in any future third party challenge. The existence and certainty of these features (indeed, the very existence of foreseeability) in national systems of security rights offers institutional support for the objective of foreseeability in cross-border contexts, too. After all, as discussed in section III.C.iv above, cross-border problems distort the economic functions of security rights in general, even in initially purely national contexts. At the European level, we can refer to decades of unification or harmonisation efforts by the EU (EC, EEC) and the European Council.95 The fact that so far most of these efforts have proved unsuccessful does not weaken the institutional support that they offer, because they nevertheless prove the persistence, if not the exacerbation, of cross-border problems and the continuing will to solve them.

ethical values, but the requirement of institutional support entails that a morally justifiable principle can only form part of the legal order if it is backed up by an institutional legal source, such as legislation or its travaux préparatoires, or case-law.’ 93 See S van Erp, ‘General Issues: Setting the Scene’ in S van Erp and B Akkermans (eds), Cases, Materials and Text on National, Supranational and International Property Law, Ius Commune Casebooks for the Common Law of Europe (Oxford, Hart Publishing, 2012) 51–53. 94 Here, ‘establish’ denotes the creation of the security right and taking the additional steps possibly required for third-party effects, eg, those related to publicity. 95 Additionally, we can refer to work by other international organisations, even those with a global scope, with representation from European jurisdictions. See Kieninger (n 48) 22–26.

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Many efforts are explicitly motivated by the need to do away with cross-border uncertainty. The following examples are drawn from relatively recent efforts. The first example represents unsuccessful efforts and the second example successful efforts (successful at least in terms of the completion of a legislative project), while the third example demonstrates the proliferation of new instruments whose actual utility is yet to be seen.

i. The Late Payment Directive The first example concerns the treatment of retention of title in efforts that resulted in the enactment of the Late Payment Directive.96 The Commission proposed the harmonisation of third-party effects of simple retention of title clauses. According to the draft Directive,97 Member States were to ‘provide for the retention of title to be enforceable against third parties, even in the case of bankruptcy of the debtor’ or a like procedure (Article 4(3)). A retention of title clause was to be agreed in an individual contract or contained in a standard contract, in an invoice or in delivery documents, received by the buyer no later than at the time of delivery and not objected to by the buyer. Importantly, no other formality was to be required (Article 4(1)). Recital 13 of the draft Directive shows that the aim of the provision on retention of title was to deal with cross-border problems, particularly non-recognition of foreign retention of title clauses. The idea was to bring about foreseeability through recognition of a single clause by all Member States,98 hence the institutional support for the objective of foreseeability. The provision on retention of title that eventually ended up in the Directive (Article 4(1)) was watered down.99 It prescribes as follows: Member States shall provide in conformity with the applicable national provisions designated by private international law that the seller retains title to goods until they are fully paid for if a retention of title clause has been expressly agreed between the buyer and the seller before the delivery of the goods. 96 Parliament and Council Directive 2000/35/EC of 29 June 2000 on combating late payment in commercial transactions [2000] OJ L200/35. The current version is Parliament and Council Directive 2011/7/EU of 16 February 2011 on combating late payment in commercial transactions (recast) [2011] OJ L48/1. However, the content of the article on retention of title remains the same as in the original version. 97 Commission, ‘Amended proposal for a European Parliament and Council Directive combating late payment in commercial transactions’ COM(1998) 615 final. See Commission, ‘Proposal for a European Parliament and Council Directive combating late payment in commercial transactions’ COM(1998) 126 final. On earlier harmonisation attempts concerning retention of title, see G Monti, G Nejman and WJ Reuter, ‘The Future of Reservation of Title Clauses in the European Community’ (1997) 46 ICLQ 866, 892–94; G McCormack, Reservation of Title, 2nd edn (London, Sweet & Maxwell, 1995) 226–28. 98 Recital 13 states that ‘the use of retention of title clauses … is at present constrained by a number of differences in national law’ and that ‘it is necessary to ensure that creditors are in a position to exercise the retention of title throughout the Community, using a single clause recognised by all Member States’. 99 On the legislative history, see JM Milo, ‘Combating Late Payment in Business Transactions: How a New European Directive Has Failed to Set a Substantial Minimum Standard Regarding National

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The wording is ambiguous, to say the least. Third-party effects are not mentioned at all, while the reference to the applicable national provisions designated by private international law appears to imply that the idea of creating a common European concept of retention of title has been given up. Later, the European Court of Justice (ECJ), in Commission v Italy,100 put an end to speculation as to whether the provision could nevertheless oblige Member States to guarantee the effectiveness of foreign retention of title clauses against third parties.101 According to the ECJ, it cannot be inferred that the provision is intended to affect rules other than those providing that it is possible to expressly agree a retention of title clause before delivery of goods and to retain title until the goods are paid for in full. The ECJ went on to add that rules concerning the enforceability of retention of title clauses against third parties, whose rights are not affected by the Directive, remain exclusively governed by the national legal orders of the Member States.102 In sum, even though the objective of foreseeability found its way into the Directive provision only in a very limited sense, its presence in the legislative process shows that it enjoys institutional support.103

ii. The Financial Collateral Directive Our second example concerns the Financial Collateral Directive.104 Even after a major amendment,105 its scope is rather limited and specialised. The limitations concern parties to financial collateral arrangements and assets acting as financial collateral. Article 1(2) defines the parties within the scope. The Directive aims mainly at regulating transactions between financial institutions, or certain other private or public actors on financial markets.106 Transactions where at least one

rovisions on Retention of Title’ (2003) 11 European Review of Private Law 379, 382–85. Milo P explains the result by uncertainty over the meaning of Art 295 of the Treaty establishing the European Community (TEC) (now Art 345 of the Consolidated Version of the Treaty on the Functioning of the European Union [2016] OJ C202/47 (TFEU)) and by the misuse of this Article. See also E-M Kieninger, ‘Der Eigentumsvorbehalt in der Verzugsrichtlinie: Chronik einer verpaßten Chance’ in J Basedow et al (eds), Aufbruch nach Europa: 75 Jahre Max-Planck-Institut für Privatrecht (Tübingen, Mohr Siebeck, 2001) 158–60. 100

Case C-302/05 Commission of the European Communities v Italian Republic [2006] ECR I-10597. See, eg, Milo (n 99) 392. According to Milo, ‘it might be argued that even non-recognition of a foreign retention of title clause due to additional national criteria is not allowed in the light of Article 4 and recital 21: the possibility for creditors to exercise a retention of title clause on a non-discriminatory basis throughout the Community’. 102 Commission v Italy (n 100) paras 29–30. 103 This would probably not count as institutional support for a legal principle. However, as explained at the beginning of section III.E, the idea of institutional support for objectives is different. 104 Parliament and Council Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements [2002] OJ L168/43. 105 Parliament and Council Directive 2009/44/EC of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims [2009] OJ L146/37. 106 See S van Erp and B Akkermans, ‘European Union Property Law’ in C Twigg-Flesner (ed), The Cambridge Companion to European Union Private Law (Cambridge, Cambridge University Press, 101

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of the parties is a natural person are excluded from the scope. Article 1(4), as amended, requires that financial collateral must consist of cash, financial instruments or credit claims.107 A detailed account of the technicalities of the Directive is unnecessary here. Suffice to say that, within its limited and specialised scope, the Directive harmonises certain aspects of the law on security rights. Importantly, some of these harmonisation objects are explicitly motivated by the need to increase foreseeability in cross-border relations.108 Article 8 of the Directive disapplies certain insolvency provisions to financial collateral arrangements. According to Recital 5, this is to improve the legal certainty of such arrangements. In particular, the aim is to protect the effective realisation of financial collateral and the validity of techniques such as bilateral close-out netting, the provision of top-up (additional) collateral and the substitution of collateral. Article 6(1) of the Directive prescribes that Member States are to ensure effectiveness of ‘title transfer financial collateral arrangements’, that is, arrangements based on the transfer of full ownership of financial collateral. This is significant from the property law point of view because attitudes towards security transfer of ownership generally differ between legal systems.109 Recital 13 explains that the aim is to protect title transfer financial collateral arrangements, for example, by eliminating the so-called recharacterisation risk of those arrangements as security interests.110 Finally, in increasing foreseeability, the Directive notably relies

2010) 178. cf K Lilleholt, ‘European Private Law: Unification, Harmonisation or Coordination?’ in R Brownsword, H-W Micklitz, L Niglia and S Weatherill (eds), The Foundations of European Private Law (Oxford, Hart Publishing, 2011) 356. According to Lilleholt, while the original idea was to prepare ‘rules concerning big transactions between financial actors’, the scope of application was widened so that it now ‘alters the balance between financial institutions and businesses of any kind and size contracting even for quite small loans’. 107 See A Veneziano, ‘European Secured Transactions Law at a Crossroad: The Pitfalls of a “Piecemeal Approach” to Harmonisation’ in L Gullifer and S Vogenauer (eds), English and European Perspectives on Contract and Commercial Law: Essays in Honour of Hugh Beale (Oxford, Hart P ublishing, 2014) 406–07. 108 See Commission, ‘Proposal for a Directive of the European Parliament and of the Council on financial collateral arrangements’ COM(2001) 168 final. The following passage (at 3) is particularly telling: ‘Participants in the EU market who seek to reduce credit risk through the use of collateral face fifteen different regimes as regards perfection requirements (procedures a collateral taker must follow to ensure the rights to the collateral are good against third parties including a liquidator in the event of bankruptcy). They are also confronted with uncertainties as regards the law applicable to cross-border transfers of book entry securities. They also have to consider the impact of all the different bankruptcy legislations which exist in Member States. As a result, administrative burdens hamper a cost-effective and integrated EU market and legal uncertainty results in unnecessary systemic risk in the financial markets, there being a higher risk of invalidation of cross-border use of collateral than for domestic use of collateral.’ 109 See Van Erp and Akkermans (n 106) 179; HJ Snijders, ‘Access to Civil Securities and Free Competition in the EU: A Plea for One European Security Right in Movables’ in Drobnig, Snijders and Zippro (n 1) 159. 110 The Directive also generally forbids formal requirements with respect to financial collateral arrangements. In particular, see Art 3. However, Recitals 9 and 10 suggest that the main reason for this is to limit administrative burdens for parties rather than to increase foreseeability.

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not only on substantive harmonisation, but also on unification of conflict rules. For several questions in relation to book entry securities collateral, such as those of effectiveness against third parties, Article 9 of the Directive prescribes the application of the law of the country in which the relevant account is maintained.111 Recital 8 justifies this solution as ‘preventing legal uncertainty as a result of other unforeseen legislation’. All in all, the Directive embodies ample institutional support for the objective of foreseeability.

iii. DCFR Book IX The third and final example concerns Book IX of the Draft Common Frame of Reference (DCFR), ‘Proprietary security in movable assets’. It remains to be seen whether and how Book IX will impact the unification, harmonisation or coordination (spontaneous or otherwise) of European systems of security rights. As the drafters emphasise, the DCFR is an academic text, not a politically authorised one. The DCFR is meant to be a possible model for an actual or ‘political’ Common Frame of Reference (CFR), which could however differ from the DCFR in terms of coverage and contents. Due to its significance for legal science, research and education, the DCFR is also expected to stand on its own, regardless of whether a CFR becomes reality. Moreover, the DCFR is envisioned as a source of inspiration outside the academic world, for suitable solutions to private law questions.112 Despite the rather nebulous purposes of the DCFR, its Book IX clearly offers institutional support for the objective of foreseeability. This can be inferred from the role of the Commission and, more generally, the EU, in the project resulting in the DCFR as well as from certain features in the content of Book IX. The initiative came from the Commission, and the project was funded under the 6th Framework Programme for Research and Technological Development.113 The topic of security rights was included in the Commission Action Plan ‘A More Coherent European Contract Law’, where the idea of a CFR was first launched. In the Action Plan, the Commission identified cross-border problems with several types of security rights over movable property, such as retention of title, security transfer of title and assignment of claims in the context of factoring.114 Accordingly, the 111 On the potential problems related to this conflict rule and to the definition of ‘relevant account’ in Art 2(1)(h), see D Einsele, ‘Security Interests in Financial Instruments’ in Eidenmüller and Kieninger (n 15) 359–60. 112 C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR), full edn, vol 1 (Oxford, Oxford University Press, 2010) 3–4 (Introduction paras 5–8). See generally MW Hesselink, ‘The Common Frame of Reference as a Source of European Private Law’ (2009) 83 Tulane Law Review 919. 113 See A Veneziano, ‘The DCFR Book on Secured Transactions: Some Policy Choices Made by the Working Group’ in S van Erp, A Salomons and B Akkermans (eds), The Future of European Property Law (Munich, Sellier European Law Publishers, 2012) 123–24. 114 Commission, ‘A More Coherent European Contract Law: An Action Plan’ (Communication) COM(2003) 68 final, 12–13 (paras 41–46). eg, the Commission noted: ‘The divergence of rules often entails that, in the case of the sale of goods with reservation of title, the “security” foreseen in the contract disappears at the moment when the good in question is brought across the border. It is generally observed that divergence of rules on securities creates a great risk for operators on the market.’

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ommission noted that the CFR ‘can be expected to contain’, for example, ‘rules C on credit securities on movable goods’.115 Later, in a Green Paper on policy options for progress towards a European Contract Law for consumers and businesses, the Commission envisioned an instrument of European contract law. This instrument was to be developed from the basis of the (then already published) DCFR and it ‘could cover’, among other things, ‘proprietary security in movable assets’.116 To date, security rights have not been included in any such instrument. In terms of content, as suggested in chapter one, section II.B.i.b, DCFR Book IX forms a blueprint for a comprehensive European system of security rights. Therefore, it has potential to promote foreseeability in cross-border relations. To what extent such promotion will actually occur depends on Book IX’s future impact on the unification, harmonisation or coordination of European systems of security rights. The current substantive divergences are explicitly contrasted with the model rules of Book IX in some of the comments on these model rules.117 Finally, ‘security’ is cited as one of the underlying principles of the whole DCFR (alongside ‘freedom’, ‘justice’ and ‘efficiency’), and some aspects of this principle closely resemble the objective of foreseeability in this book. A resemblance can be seen, for example, in the remark: ‘Security, particularly in forward planning, is also threatened by uncertainty of outcomes.’118 As for property law and security rights in particular, the principle of security is recognised as a core aim: Security is a paramount value in relation to property law … It almost goes without saying that security is also a core aim of the Book on proprietary security. The whole objective is to enable parties to provide and obtain security for the proper performance of obligations. The rules are comprehensive and cover all types of proprietary security over movable assets, including retention of ownership devices. They aim at maximum certainty by recommending a registration system for the effectiveness of a proprietary security against third parties.119

Having established that foreseeability must be one of the objectives of desirable development towards greater compatibility between systems of security rights and that it enjoys ample institutional support, we are now ready to turn to the second of the three objectives discussed and developed in this book, namely responsiveness. While foreseeability centres on the economic functions of security rights, responsiveness significantly broadens the perspective, and doing so also enriches our notion of desirable development.

115

ibid 17 (para 63). ‘Green Paper from the Commission on policy options for progress towards a European Contract Law for consumers and businesses’ COM(2010) 348 final, 4, 13. 117 See, eg, von Bar and Clive (n 112, vol 6) 5393 (IX.—1:102 comment D, on types of security), 5494–95 (IX.—3:301 comment A, on publicity and registration systems). 118 ibid 44 (Principles para 16). 119 ibid 52 (Principles para 36). 116 Commission,

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IV. The Objective of Responsiveness A. Content and Importance The objectives of desirable development towards greater compatibility between systems of security rights should also include responsiveness. This objective is understood here as sensitivity to reasons and rationales to resist changes in the law, as well as to impulses that call for changes in the law. These simultaneous propensities for stability and change are not contradictory because in their own ways, both stability and change facilitate the law’s adaptation to social circumstances. From the viewpoint of national systems of security rights, the comprehensive u nification or harmonisation of substantive law could involve changing the law and cementing the changes, thus suppressing both propensities. In this sense, responsiveness can be seen as a counter-objective to foreseeability, whose main policy implication consists in comprehensive substantive unification or harmonisation. The objective of responsiveness is inspired by the notion of ‘responsive law’ developed by Philippe Nonet and Philip Selznick and yet clearly different from it. For Nonet and Selznick, responsive law is a modality (and evolutionary stage) of law-in-society, alongside (and preceded by) ‘repressive law’ and ‘autonomous law’. The main factor distinguishing between these modalities is the relationship of the law to political will. Repressive law is subordinate to power politics, whereas autonomous law is separated from political will and is capable of protecting its integrity. Responsive law, in turn, involves integration of law and political aspirations.120 Nonet and Selznick develop their model in the US national context and explain it largely in terms of institutional arrangements and administration. The objective of responsiveness developed in this book is more ahistorical and abstract by nature. Unlike Nonet and Selznick’s responsive law, responsiveness as understood in this book says very little of the particular ways in which law relates to other social institutions. Rather, responsiveness is a simple variable of adaptability, whether by way of change or resistance to change. In principle, this variable can be used to analyse any system or subsystem of law. However, the objective of responsiveness and responsive law concur in that they both consider ‘law as a facilitator of response to social needs and aspirations’.121 Arguably, responsiveness is a desirable objective as a general proposition with respect to any system or subsystem of law. Still, for true normative implications,

120 P Nonet and P Selznick, Law and Society in Transition: Towards Responsive Law, 2nd edn (New Brunswick, Transaction Publishers, 2009) 14–18. 121 ibid 14–15. This is how Nonet and Selznick sum up the essence of responsive law.

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the objective of responsiveness needs to be justified and elaborated in terms of concrete legal institutions. As for secured credit and security rights, this is done in sections IV.B–IV.D below. Section IV.B examines the notion that laws on security rights are inevitably based on controversial policy choices. In that connection, we observe that it may be necessary to retain a say about some of the issues involved at the level of national legal systems or in otherwise decentralised decision-making. Section IV.C discusses, and further theorises, the view that competition between jurisdictions (regulatory competition) may in itself promote the desirable development of substantive law and may result in spontaneous convergence. Conflict rules (choice-of-law systems) may play a major role in these competitive processes. Finally, section IV.D maps sources of institutional support for the objective of responsiveness, as was done above for the objective of foreseeability.

B. Controversial Policy Choices Controversial policy choices are understood here as situations of law design where more than one solution is available, different solutions are supported by different interest groups or individual commentators, and it is impossible to pinpoint the one and only right solution on objective grounds. The notion that systems of security rights involve such choices is hardly news to anyone familiar with comparative work, harmonisation (or unification) debates or national reform efforts in this field. Nevertheless, some examples of the main issues are in order, if only to demonstrate their nature and magnitude. We will begin this account by observing that although secured credit is generally regarded as a justified institution, as discussed in section III.D above, the force of the justifications relied on varies between legal systems and commentators. In legal literature, priority of secured over unsecured claims has been attacked on the basis of doubts about economic efficiency and distributional fairness. One concrete manifestation of these concerns in some jurisdictions involves so-called carve-out provisions. These aim at leaving a part of the value of encumbered assets to unsecured creditors, resulting in partial rather than full priority of secured over unsecured claims. Other priority-related questions are also discussed below. Another controversial point is the extent of the requirement to publicise security arrangements, in particular by what specific means that requirement should be fulfilled. The content of the objective of responsiveness begins to unfold in earnest when we focus on why at least some of these choices may best be made at the national level or otherwise decentralised.

i. Concerns about Economic Efficiency and Distributional Fairness The best-known debate on the economic efficiency and distributional fairness of secured credit originates from the US in the 1980s, and particularly from scholarly

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responses to an article written by Thomas H Jackson and Anthony T Kronman.122 Jackson and Kronman wanted to explain in passing the justification for the priority treatment of secured creditors, which at that time seemed like an uncontroversial matter.123 However, other scholars soon began to question Jackson and Kronman’s assumptions and reasoning, so that eventually two distinct critical camps emerged: one relying on law and economics, and the other advancing more general arguments of distributional fairness and the need for protection.124 In this context, both Kaldor–Hicks and Pareto criteria for economic efficiency have been discussed. Kaldor–Hicks requires that the priority treatment of secured creditors maximises total social wealth, even if the wealth of some parties is reduced. Pareto is more demanding since it requires that secured creditors are made better off without making other parties worse off. The primarily relevant other parties are, of course, certain groups of unsecured creditors.125 Jackson and Kronman based their view of the economic utility of secured credit on the assumption that the total costs of monitoring a debtor’s behaviour can be lowered by giving the claims of some creditors priority over the claims of other creditors. They suggested that priority should be (as in their view it already was) given to those creditors whose monitoring costs are high, so as to shift the monitoring burden to those creditors who enjoy a comparative advantage in the shape of lower monitoring costs.126 Other commentators called this assumption into question.127 For example, according to Robert E Scott, Jackson and Kronman’s argument results in the counterintuitive conclusion that typical unsecured creditors, including trade creditors and employees, are better monitors than typical secured creditors, such as banks and other financial institutions.128 Another view, voiced by Saul Levmore, suggested that creditors with good monitoring ability take security in order to solve the freeriding problem, that is, the problem of no or inefficiently little monitoring as each creditor hopes that other creditors take care of monitoring.129 One provocative line of argumentation questioning the economic efficiency of priority has its origin in a classic of finance theory known as the Modigliani–Miller theorem. The gist of these arguments is that secured credit is a zero-sum game

122

Jackson and Kronman (n 32). LoPucki, E Warren and RM Lawless, Secured Transactions: A Systems Approach, Aspen Casebook Series, 8th edn (New York, Wolters Kluwer, 2016) 673. 124 See McCormack (n 16) 22. McCormack connects these camps, respectively, with ‘right’ and ‘left’ perspectives. 125 ibid 23. 126 Jackson and Kronman (n 32) 1158–61. 127 The following account is selective and does not strictly follow the chronological order. 128 RE Scott, ‘A Relational Theory of Secured Financing’ (1986) 86 Columbia Law Review 901, 909–10. cf Jackson and Kronman (n 32) 1160–61. Jackson and Kronman indeed argued that trade creditors (suppliers) are often better monitors than, say, banks because trade creditors are likely to have a detailed knowledge of existing conditions in the would-be debtor’s branch of industry. 129 S Levmore, ‘Monitors and Freeriders in Commercial and Corporate Settings’ (1982) 92 Yale Law Journal 49, 55–56. Levmore notes that ‘overmonitoring’ by several creditors may be equally inefficient. 123 LM

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with no social gain, but merely a redistributive function and added costs.130 Put simply, Franco Modigliani and Merton H Miller argued that, under a set of restrictive assumptions (such as the absence of taxes), changes in capital structure do not affect the value of a firm.131 The value of a firm consists in the value of the claims on its cash flow and, on Modigliani and Miller’s assumptions, the present value of cash flow remains the same whether cash flow-generating projects are financed with debt, equity, any combination of the two, or other instruments.132 On the basis of the Modigliani–Miller theorem, Alan Schwartz developed what became known as the ‘puzzle of secured debt’. He explains: My argument in brief was this: the existence of later secured debt would commonly reduce the value of earlier unsecured debt … Initial creditors then would either bar later security (so it would not be seen) or raise their interest rates to make up for the loss in value of their loans. On my assumptions, the rise in interest rates would exactly offset the decline in value of the unsecured debt, so security could not create gains for the firm … This led to an MM-like puzzle: If secured debt generates costs but does not increase the revenues from the projects it finances, why is so much security seen? … The various possibilities of how security could reduce costs or increase revenues did not seem promising. Thus, for me, the security interest puzzle remained … The security interest puzzle, like the MM puzzle on which it is based, holds that when the method by which a project is financed cannot increase the revenue from that project, the resources spent on issuing security are wasted. Incurring these costs amounts to torching dollars.133

The costs of issuing security (those equated with ‘torching dollars’) are not the only potential inefficiencies that critics have found. For example, Lucian Arye Bebchuk and Jesse M Fried discuss the following efficiency costs, which they particularly connect with ‘full priority’ of secured over unsecured claims. First, full priority may cause excessive use of security. The costs of security include the ‘priority-independent’ costs of creating a security interest and monitoring the collateral, and the potential adverse effects on the borrower’s investment and financing opportunities in the future. Incurring these costs may exceed the benefits of security, and thus waste value, in loan transactions that will go forward regardless of whether a security interest is used.134 Second, full priority may in some situations undesirably reduce the secured creditor’s incentive to monitor the borrower. Third, the availability of secured credit under full priority may in some situations

130

See LoPucki, Warren and Lawless (n 123) 674–75; McCormack (n 16) 24–25. Modigliani and MH Miller, ‘The Cost of Capital, Corporation Finance and the Theory of Investment’ (1958) 48 American Economic Review 261. 132 A Schwartz, ‘Taking the Analysis of Security Seriously’ (1994) 80 Virginia Law Review 2073, 2079. Schwartz summarises the theorem more in layman’s terms. 133 ibid 2079–81 (footnote omitted). For earlier versions of the argument, see A Schwartz, ‘The Continuing Puzzle of Secured Debt’ (1984) 37 Vanderbilt Law Review 1051; A Schwartz, ‘Security Interests and Bankruptcy Priorities: A Review of Current Theories’ (1981) 10 Journal of Legal Studies 1. For a brief history of the ‘puzzle debate’, see PM Shupack, ‘Solving the Puzzle of Secured Transactions’ (1989) 41 Rutgers Law Review 1067, 1073–83. 134 Bebchuk and Fried (n 74) 1293–95. 131 F

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cause the borrower to undesirably reduce investment in precautions or engage in more activity with a high risk of tort liability. Fourth, full priority may facilitate loan transactions by which the borrower can fund inefficient investments. Thus, a loan transaction that would otherwise not go forward may go forward subsidised by the creation of a security interest with full priority.135 No clear conclusion emerged from the debate on the economic efficiency of secured credit, and the justification for priority treatment accorded to secured creditors is commonly thought to remain a controversial matter.136 Then again, it is well known that this debate had little impact on the Uniform Commercial Code (UCC) Article 9 revision that took place simultaneously with the debate and intensified it.137 One may wonder whether this should be taken as an indication that the defenders of secured credit and full priority eventually prevailed. In terms of the merits and weight of arguments as such, the answer should be negative. This view is based on a review of the likely reasons for the slight impact. Gerard McCormack points out three such reasons, none of which directly relates to the merits and weight of the arguments advanced in the debate. First, instead of attempting to affirmatively establish that secured credit was inefficient, the critics merely wanted to raise questions, ‘to say that it presented a puzzle’. Second, banks and other such institutions influence the political process and press for the introduction of more effective and comprehensive security rights. The third reason McCormack borrows from certain ‘pro-Article 9 adherents’: even if UCC Article 9 was inefficient, abolishing it would almost certainly have resulted in a state of affairs that is less efficient, more costly and thus more wasteful.138 Now, the concern of the third reason would not have precluded adjustments more modest than abolishing UCC Article 9 altogether. As for the second reason, economic efficiency on the one hand, and what banks and such institutions happen to desire on the other, may well be two separate matters. As McCormack notes, it is certainly possible, although difficult to establish, that institutions are acting inimically to their own interests. The first reason, in turn, deals with the motivational basis and aims of the critics. In sum, all three reasons, in one way or another, are external to the substance of the argumentation itself. Consequently, the outcome of the revision, assuming that the three reasons explicate it, cannot be used to infer the best arguments or to establish which side was more right. As noted above, the other camp—the one focusing on distributional fairness— also started by questioning Jackson and Kronman’s assumptions and reasoning.

135

ibid 1320. Eidenmüller (n 86) 277–78. Eidenmüller considers granting full priority to secured creditors ‘a coherently defendable policy choice on efficiency grounds’, but concedes that ‘the debate is still unresolved on the theoretical level’. 137 See McCormack (n 16) 26–27. In fact, the revised Art 9 strengthened the institution of secured credit by extending its scope and broadening the range of assets eligible as collateral. 138 ibid. On the third reason, see JJ White, ‘Work and Play in Revising Article 9’ (1994) 80 Virginia Law Review 2089, 2091–93. 136 See

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Jackson and Kronman explained the justification for priority treatment of secured creditors as follows: When a debtor grants a security interest to one of his creditors, he increases the riskiness of other creditors’ claims by reducing their expected value in bankruptcy. It is a fair assumption, however, that these other creditors will be aware of this risk and will insist on a premium for lending on an unsecured basis, will demand collateral (or some other form of protection) to secure their own claims, or will search for another borrower whose enterprise is less risky. In general, whatever level of risk he faces, if his transaction with the debtor is a voluntary one, a creditor may be expected to adjust his interest rate accordingly and to take whatever risk-reducing precautions he deems appropriate. Since creditors remain free to select their own debtors and to set the terms on which they will lend, there is no compelling argument based upon considerations of fairness for adopting one legal rule (debtors can rank creditor claims in whatever way they see fit) rather than another (all creditors must share equally in the event of bankruptcy).139

Other commentators’ concerns about distributional fairness arose from identifying different classes of unsecured creditor. In theory, they admitted, no one would be harmed if all unsecured creditors were informed of security interests granted by a debtor to other creditors and were able to compensate the loss of expected bankruptcy value, say, by raising their own interest rates. In real life, though, that did not always seem possible, because some unsecured creditors are either not informed or not able to adjust to the situation. As a consequence, granting security interests to other creditors may prejudice some unsecured creditors. Some of them may be ‘involuntary creditors’, who have not chosen to extend credit in the first place, such as tort claimants. Some of the voluntary ones, then, may be ‘nonadjusting creditors’ in that they may not be sufficiently sophisticated to be able to adjust, or market competition may rule out their efforts to adjust, or their bargaining power may be insufficient to adjust for other reasons. Typical examples include trade creditors (suppliers) and employees.140 Importantly, Elizabeth Warren has pointed out that the economic efficiency debate and the distributional fairness debate are connected. According to her explanation, the expertise provided by economic analysis does not extend to ‘the ultimate normative question about preference for one group over another in the distribution of limited assets’.141 Clearly, then, efficiency arguments such as promotion of lending are not in themselves sufficient when designing the law on security rights. Warren argues: [E]ven if a security device promotes lending, reasons not to support it may exist. Some of the reasons may be grounded in efficiency arguments. Some may be naked applications

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Jackson and Kronman (n 32) 1147–48 (footnotes omitted). (n 71) 1892–1902, 1916–20; J Hudson, ‘The Case against Secured Lending’ (1995) 15 International Review of Law and Economics 47, 55–57. See LoPucki, Warren and Lawless (n 123) 678; Brinkmann (n 15) 260; McCormack (n 16) 22, 27–28. 141 E Warren, ‘Making Policy with Imperfect Information: The Article 9 Full Priority Debates’ (1997) 82 Cornell Law Review 1373, 1377. 140 LoPucki

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of paternalism. Some of the arguments may refer to community sensibilities and fairness. These concepts may be hard to quantify in an equation full of sigmas and betas, but they have to do with our collective confidence in the commercial law system.142

Like the economic efficiency debate, the distributional fairness debate should today be regarded as still unresolved. They both exhibit major policy issues that design of systems of security rights necessarily has to deal with. Indeed, parallel yet smaller-scale debates have also arisen in European legal literature until very recently,143 and are likely to arise in the future. As for European law-making, Brinkmann states that ‘a fair regime of security rights’ will be achievable only if the basis for the secured creditor’s privileged position is known. In his view, so far this basis is not entirely clear in terms of insolvency law.144 In the future, empirical studies may shed more light on both debates. Even now, for example, Horst Eidenmüller cites empirical evidence to support his view that the presence of non-adjusting creditors is unlikely to bring about situations where security rights are granted even if they result in an inefficient outcome. First, debtors are unable to ‘sell’ to secured creditors value that belongs to nonadjusting creditors, judging from the evidence that interest rates on secured credit extended by banks in the UK, Germany and France do not seem to be lower than interest rates for unsecured credit.145 Second, further evidence against exploitation of non-adjusting creditors is found in a study showing that secured credit to distressed companies in the UK is correlated with the grant of personal guarantees by directors of companies.146 Third, US tobacco manufacturers have less secured debt than average, although in theory they should have more due to their above-average exposure to non-adjusting (involuntary) creditors in the shape of tort claimants.147 Fourth, while trade creditors may be unable to adjust their credit contract terms to compensate for security rights granted to other creditors, studies suggest that they are able to adjust the amount of trade credit extended.148

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ibid 1386–87. eg, V Finch, ‘Security, Insolvency and Risk: Who Pays the Price?’ (1999) 62 MLR 633; RJ Mokal, ‘The Search for Someone to Save: A Defensive Case for the Priority of Secured Credit’ (2002) 22 OJLS 687; Brinkmann (n 15); Eidenmüller (n 86). 144 Brinkmann (n 15) 251. 145 Eidenmüller (n 86) 277. See Davydenko and Franks (n 41). Eidenmüller admits, though, the possibility of a selection effect where security demands and higher interest rates are both associated with riskier debtors. This effect was discussed in section III.C.ii above. 146 Eidenmüller (n 86) 277. See J Franks and O Sussman, ‘Financial Distress and Bank Restructuring of Small to Medium Size UK Companies’ (2005) 9 Review of Finance 65. 147 Eidenmüller (n 86) 277. See Y Listokin, ‘Is Secured Debt Used to Redistribute Value from Tort Claimants in Bankruptcy? An Empirical Analysis’ (2008) 57 Duke Law Journal 1037. 148 Eidenmüller (n 86) 277–78. See MA Petersen and RG Rajan, ‘Trade Credit: Theories and Evidence’ (1997) 10 Review of Financial Studies 661. cf KN Klee, ‘Barbarians at the Trough: Riposte in Defense of the Warren Carve-out Proposal’ (1997) 82 Cornell Law Review 1466, 1473. According to Klee, a vendor with the debtor as its only customer is unlikely to change credit terms or suspend shipping. He notes that during Chrysler Corporation’s restructuring, certain parts manufacturers continued to ship despite increased risk. 143 See,

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Some of this evidence indeed speaks against the possibility of exploiting nonadjusting creditors. However, the evidence still seems too scarce and weak to merit any general conclusions. At any rate, Warren’s point on the limits of economic analysis should be kept in mind: the ultimate normative question of priorities on insolvency requires broader considerations.149

ii. Priority Questions a. Carve-outs: Full or Partial Priority? A concrete extension of the foregoing considerations of economic efficiency and distributional fairness is the so-called ‘full priority’ debate in the US, and a similar debate has taken place in several other countries. This debate centres on whether secured creditors should enjoy full or somehow curtailed priority. In other words, the question has been whether some part of the value of encumbered assets should be reserved for the satisfaction of unsecured claims. In some jurisdictions, the debate has resulted in the enactment of ‘carve-out’ provisions to the benefit of unsecured creditors. The debate and its varying legislative outcomes should be taken as an instance of the controversial policy choices that the design of the law on security rights necessarily involves. In the US, intense debate was sparked by a carve-out proposal from Warren in 1996. The proposal was drafted in connection with revision of UCC Article 9, on instruction from Geoffrey Hazard, then Director of the American Law Institute. The gist of the proposal was ‘to permit a judgment lien creditor to attach up to twenty per cent of the value of a debtor’s assets without regard to outstanding security interests’. In the absence of unsecured assets, the judgment lien creditor could thus execute on property subject to a security interest, recovering up to 20 per cent of the value of the judicial sale proceeds. The proposal was limited to commercial loans. The purpose of the proposed carve-out was to reserve some value of a debtor’s assets for unsecured creditors, who also contribute to the life of the debtor’s business, and to counteract monopoly lending arrangements with the debtor.150 In addition, it has been suggested that a carve-out along the lines of the Warren proposal would incentivise secured creditors to help the debtor avoid bankruptcy, because they would be certain to lose 20 per cent of the value of the encumbered assets in a bankruptcy scenario.151 The Warren proposal was met with ardent opposition from commercial lenders and academics favouring full priority. Their most frequent and weighty

149

Warren (n 141) 1377. See Brinkmann (n 15) 252. LoPucki, Warren and Lawless (n 123) 681–82. LoPucki, Warren and Lawless reproduce a part of the memorandum containing the text of the proposal and explanations. 151 McCormack (n 16) 28. For a brief account of other ‘subordination’ or ‘partial priority’ proposals, which more or less resemble the Warren proposal, see SL Harris and CW Mooney, Jr, ‘Measuring the Social Costs and Benefits and Identifying the Victims of Subordinating Security Interests in Bankruptcy’ (1997) 82 Cornell Law Review 1349, 1349–55. 150

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argument was that curtailing secured creditors’ priority would reduce the availability of credit in the economy,152 which would especially hurt small businesses and cause more bankruptcies.153 Even commentators who did not expect changes in priorities to entail significant benefits or costs recommended caution because of the indirect benefits of priority rights.154 While the potential contraction of credit became the main issue, the Warren proposal was also attacked, among other things, for violating the freedom of contract and allowing unsecured creditors to extort value from secured creditors.155 In the explanation for the proposal, Warren was less afraid of the potential contraction of credit. She conceded, though, that it was a difficult question. According to her, no change in lending activity was to be expected to the extent that much commercial lending was based on tying up and fencing off the debtor from competing lenders, rather than on the liquidation value of assets. Similarly, no change was to be expected to the extent that much commercial lending was based on significantly lower loan-to-value ratios than full liquidation value. F urther, insofar as markets were rational, curtailing the priority of secured claims should be offset by benefits to unsecured creditors, resulting in more unsecured commercial lending and lower-cost trade credit. However, to the extent that secured creditors lent to 100 (or 90, or even 80) per cent loan-to-value, the ‘proposal would encourage some de-leveraging of American businesses, particularly of high-risk businesses’.156 The question of the potential contraction of credit could not be resolved in the full priority debate. A clear indication of this is that the burden of proof became an issue. Indeed, the debate turned to the secondary question, namely which of the debating parties should be responsible for furnishing empirical evidence to prove their theoretical claims.157 No compelling empirical evidence was furnished. Some support for Warren’s side was provided by commentators pointing out that priority of secured claims in bankruptcy under US law was already eroded by

152

LoPucki, Warren and Lawless (n 123) 683. (n 16) 29–30. See Harris and Mooney (n 151) 1356–64. Harris and Mooney suggest (at 1371) that the small businesses potentially hurt by contraction of credit are often minorityowned. cf Warren (n 141) 1394. Warren perceives this as playing a race card: ‘Their support? Anecdotal evidence. This argument can be rephrased to say that banks want full priority to help their minority friends.’ Reference omitted. 154 See DG Baird, ‘The Importance of Priority’ (1997) 82 Cornell Law Review 1420, 1420. Baird writes: ‘It remains much easier to see the individual worker who is unpaid than those who would have received a job, but did not because an entrepreneur could not find the investors needed to start the firm.’ 155 See Klee (n 148) 1468. Klee sets out to refute the various attacks, dubbing them ‘hysterical efforts to entrench wealth in the hands of banks, insurance companies, and finance companies at the expense of tort creditors, tax creditors, environmental creditors, and, perhaps, employees and trade creditors’. 156 LoPucki, Warren and Lawless (n 123) 682–83. See Klee (n 148) 1472–73. In Klee’s view, deleveraging is not necessarily undesirable, because over-leveraged businesses attract unsecured credit, but do not justly compensate unsecured creditors for risk. Here he refers to various types of unsecured creditor. 157 See Warren (n 141) 1379–81. 153 McCormack

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certain rules, doctrines and practices, effectively resulting in partial priority.158 Yet, it should be noted that focusing merely on potential contraction of credit, however important, would overlook Warren’s main point: The ultimate question is not whether a partial priority scheme might cause some constriction in lending. That empirical question remains open, although there are strong arguments both to refute and to support the idea that available total credit would remain the same. The real question is how the efficiency arguments, even if they were unambiguously true, stack up against other considerations.159

As Steven L Harris and Charles W Mooney, Jr had predicted, carve-out proposals and other ‘subordination’ or ‘partial priority’ proposals turned out to be against political realities in the US.160 The Warren proposal failed to persuade members of the UCC Article 9 Drafting Committee and did not make it to the actual proceedings.161 On the contrary, the revision resulted in extending the scope of secured credit and broadening the range of assets eligible as collateral.162 In contrast, a carve-out provision was eventually introduced in Britain (England, Wales and Scotland).163 The provision is found in section 176A of the Insolvency Act 1986. This new section was inserted into the Act by section 252 of the Enterprise Act 2002. In short, section 176A requires that where a floating charge relates to property of a company, a certain percentage, ‘a prescribed part’, of the company’s net property (floating charge assets less preferential claims and, apparently, the expenses of an administrator or liquidator) has to be made available for the satisfaction of unsecured creditors. According to the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097), the prescribed part is calculated on a sliding scale: 50 per cent of the first £10,000 and 20 per cent of the rest, but subject to a ceiling of £600,000.164

158 McCormack (n 16) 28–29. See LA Bebchuk and JM Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’ (1996) 105 Yale Law Journal 857, 871–72. They particularly refer to certain features of c 11 (US Code, Title 11) reorganisations, which ‘tend either to waste value or to enrich junior claimants at the expense of secured creditors’. See also Warren (n 141) 1383–84. Warren recognises another potential source of support in comparative studies involving jurisdictions that do not use full priority rules. 159 Warren (n 141) 1388. At this point, Warren arrives at questions of distributional fairness. 160 McCormack (n 16) 31. See Harris and Mooney (n 151) 1371–72. Harris and Mooney write: ‘Entrepreneurship is an indelible feature of the American social fabric. Even assuming that hiking the price of admission to the business marketplace would promote efficiency, so that only those with substantial unleveraged capital could afford to participate (a dubious assumption), many—perhaps most—would shrink from the prospect.’ 161 LoPucki, Warren and Lawless (n 123) 684. 162 McCormack (n 16) 26–27. See generally HC Sigman, ‘Security in Movables in the United States—Uniform Commercial Code Article 9: A Basis for Comparison’ in Kieninger (ed) (n 11) 63–64. 163 The different outcomes between the US and Britain probably cannot be explained by mere different ‘political realities’. See McCormack (n 16) 31–32. McCormack points out that US bankruptcy law has traditionally been seen as very ‘pro-debtor’, whereas the position of the UK is seen as ‘pro-creditor’. 164 See generally L Gullifer (ed), Goode on Legal Problems of Credit and Security, 5th edn (London, Sweet & Maxwell, 2013) 217–20. Exceptions to the carve-out are laid down in sub-ss (3)–(5) of s 176A.

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The idea behind this carve-out was first presented in the 1982 Cork Committee Report on Insolvency Law and Practice. Amongst the report’s recommendations was a ‘10 per cent fund’ of floating-charge realisations to be set aside for unsecured creditors. Proponents of the 10 per cent fund saw it as a compensation measure for unsecured creditors, especially against the background that the report also recommended certain other changes that would strengthen the position of floating charge holders, such as the abolition of preferences and restrictions on retention of title. In addition, some saw it as a ‘fighting fund’ for expenses of improper preference or wrongful trading actions, or other proceedings to recover misdirected company assets. Banks objected to the 10 per cent fund, suspecting that the percentage might later be substantially increased, and were concerned about losing operational flexibility. The potential contraction of credit and introduction of more stringent terms were also brought up. This time, the government paid heed to the banking community and the 10 per cent fund proposal was rejected.165 The debate was later resumed, resulting in the current carve-out provision as part of the Enterprise Act 2002. It should be understood, though, that the change of priority position was not substantial from the viewpoint of floating charge holders, because the Crown preference was abolished at the same time. Due to the Crown preference and the employee preference, priority had already been limited.166 Again, to proponents, carve-out proposals stood for the fair balancing of interests. For example, David Milman and David EM Mond described the resurrected Cork proposal as ‘a fair concession to unsecured creditors without destroying the notion of security in its entirety’.167 It has also been suggested that a carve-out might prevent domino-like chains of insolvencies that may follow if trade creditors and suppliers of a failed business are left unpaid.168 Some opponents saw carve-outs as violating the freedom of contract and banks’ property rights. The potential contraction of credit became a main theme. Accordingly, some opponents argued that a carve-out would make small businesses, those supposed to be helped, actually worse off because banks are willing to lend less and on more unfavourable terms.169 Some carve-out proponents responded, arguing that such fears are exaggerated.170

165 McCormack (n 16) 32–33. See D Milman and DEM Mond, Security and Corporate Rescue ( Manchester, Hodgsons, 1999) 55. According to Milman and Mond, banks were successful in resisting the proposal because the forces for change were uncoordinated. 166 M Bridge, ‘The English Law of Security: Creditor-Friendly but Unreformed’ in Kieninger (ed) (n 11) 96; McCormack (n 16) 115–17. 167 Milman and Mond (n 165) 52. Referring to the above-mentioned ‘fighting fund’ idea, M ilman and Mond suggested that the full benefit of a carve-out provision to unsecured creditors may go beyond the mathematical figure of percentage. Moreover, they expected immeasurable benefits in the shape of enhanced respect for the system if the prospects for enforcement of laws are improved. 168 See McCormack (n 16) 38. 169 See ibid. 170 Milman and Mond (n 165) 53–54.

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We find another example of a carve-out in Finnish law, concerning the treatment of enterprise mortgages in bankruptcy proceedings.171 According to section 5 of the Act on the Ranking of Claims (1578/1992), claims secured by an enterprise mortgage are entitled to payment with priority over other claims, but in bankruptcy (liquidation-type collective insolvency proceedings) only with respect to 50 per cent of the value of the (enterprise) mortgaged property. Even then, certain other claims rank higher. These include claims secured by a right of pledge (or charge) or a right of retention, claims arisen in connection with enterprise restructuring proceedings and child maintenance claims (sections 3, 3 a and 4). The 50 per cent rule was introduced as part of a general reform of priority rules in 1993. The explicit aim of the rule was to promote equality between creditors by reserving assets to be distributed among unsecured creditors. In the same reform, most statutory privileges, such as those for tax and wage claims, were abolished. The role of the 50 per cent rule in this package was to maintain the relative priority position of enterprise mortgages roughly the same as it was when the abolished statutory privileges existed.172 Stakeholder and other opinions gathered in the drafting process show that the reform was somewhat controversial. Interestingly, though, the idea of partial priority (carve-out) was not objected to as such. Rather, the debate centred on the question of what priority percentage should be accorded to enterprise mortgage holders. The Ministry of Commerce and Industry as well as representatives of employers, industry and lenders regarded the proposed 50 per cent priority as too small. In their view, this percentage would weaken the position of the enterprise mortgage, making it more difficult and costly, especially for small and mediumsized enterprises, to obtain credit. In contrast, several other opinions, including those of the Ministry of Finance and the Central Tax Administration, regarded 50 per cent as ‘suitable or even too large’.173 Representatives of employers, industry and lenders argued that the priority percentage should be raised to 70 or 75. This was rejected in the Government Proposal resulting in the reform of priority rules. It was noted that such a high priority percentage would entail very small returns to unsecured creditors, also taking into account that the ‘non-priority part’ of claims secured by an enterprise mortgage may yield significant returns in pari passu distribution (on an equal

171 With certain exceptions, the entire movable property of an enterprise, including its intangible assets, can be used as a ‘floating’ security for credit by an enterprise mortgage under the Enterprise Mortgage Act (634/1984). ‘Enterprise mortgage’ is the English term used by the relevant register authority, the Finnish Patent and Registration Office. 172 Government Proposal, ‘Hallituksen esitys Eduskunnalle etuoikeusjärjestelmän uudistamista koskevaksi lainsäädännöksi’ HE 181/1992, 17–19. See C Bergström, T Eisenberg and S Sundgren, ‘On the Design of Efficient Priority Rules for Secured Creditors: Empirical Evidence from a Change in Law’ (2004) 18 European Journal of Law and Economics 273, 276–77. Bergström, Eisenberg and Sundgren use the term ‘floating charge’ instead of ‘enterprise mortgage’. 173 HE 181/1992, 12.

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footing with unsecured claims). The reform would thus not improve the position of ‘account creditors’, ‘small contractors’ and other creditors that in practice are not in a position to demand security. As a consequence, the reform would fail to promote equality among creditors—that is, it would fail with respect to one of its explicit and central aims. The Government Proposal also estimated that the 50 per cent rule would not significantly change the use of enterprise mortgages in lending practice. Defining the security value of an enterprise mortgage was supposed to become easier as a result of abolishing statutory privileges.174 To be sure, the 50 per cent rule (in effect, a 50 per cent carve-out) restricts the security value of a Finnish enterprise mortgage as compared to functionally similar ‘floating’ security rights in jurisdictions that have introduced smaller carveouts or none at all. Accordingly, Eva-Maria Kieninger notes in her Common Core study that the ‘commercial significance’ of an enterprise mortgage ‘is lessened by the [50 per cent] rule’.175 Granted, an enterprise mortgage is generally used as a supplementary form of security and not accepted as the only security for credit.176 Swedish law provides yet another example. This concerns the Swedish equivalent of an enterprise mortgage, in English usually referred to as a ‘floating charge’,177 and its earlier incarnations. For background, we need to understand that Swedish insolvency priorities are either general or special. General priority concerns all assets belonging to a bankruptcy estate, but ranks below special priorities and applies only in bankruptcy (collective liquidation proceedings). Special priority concerns only certain specific assets, but applies in distraint (individual enforcement proceedings) as well as in bankruptcy.178 From 2004 to 2008, the security device in question was called a företagsinteck ning. Before 2004, it was called a företagshypotek, as is the case again since 2009. Holders of a företagsinteckning were accorded general priority in 55 per cent of the bankruptcy estate remaining after payment of higher ranking claims (in effect, a 45 per cent carve-out). Holders of a företagshypotek were, and are again, accorded special priority, without a percentage limitation, in certain types of the security provider’s assets. In short, the reform of 2004 weakened the security device, whereas the reform of 2009, basically returning to the pre-2004 rules, strengthened it.179 The weakening in 2004 had been motivated, among other things, by the aim of promoting enterprise restructurings and incentivising more attention in lending to the viability of enterprises themselves, rather than the mere security that enterprises can offer.180

174

ibid 18–19. The 50 per cent rule only applies in bankruptcy, ie, collective liquidation proceedings. Kieninger (n 11) 650. Kieninger uses the term ‘enterprise charge’. HE 181/1992, 17. However, the Government Proposal notes that the use of enterprise mortgages has increased because it is often the only security that an enterprise can offer to a lender. 177 Floating Charges Act (2008:990); Priority Rights Act (1970:979), s 5. 178 Government Proposal, ‘Företagshypotek—en bättre säkerhet för lån till företag’ Prop. 2007/08:161, 35. 179 Here the reforms are designated according to the year when the legislation entered into force. 180 Prop. 2007/08:161, 35–36, 39. 175 176

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The 2009 reform aimed at strengthening the security device, as the title of the Government Proposal suggests.181 The underlying perception was that the positive effects of the 2004 reform were outweighed by its negative effects on the supply of capital for enterprises and on credit terms. In backing this perception, the Government Proposal refers to two reports by the (then existing) Swedish Institute for Growth Policy Studies.182 The controversial, and indeed political, nature of both reforms became evident in the stakeholder opinions gathered during preparation for the 2009 reform, but even more so in the related parliamentary debates. Most notably, the Government Proposal was opposed by representatives of the left (the Social Democratic Party and the Left Party) on the following grounds. The effects of the 2004 reform were essentially positive. The enterprise survival rate had increased, and the number of bankruptcies and related unemployment had decreased. It had not become more difficult to obtain credit, even though regional differences probably existed. At any rate, the 2004 reform was still too recent to draw reliable conclusions, a view shared by many, including the Tax Authority and the Enforcement Authority. The Government Proposal would allow banks to benefit at the expense of suppliers and small enterprises. Not least against the background that the Swedish economy was on its way to recession, the Government Proposal would risk increases in bankruptcies and unemployment.183 These grounds apparently failed to convince the majority. As a result, the 45 per cent (general priority) carve-out was eventually abolished, albeit that the change of priority type (from general to special) entailed restrictions on the scope of the security device. To conclude our series of examples, the need for carve-outs is one of the policy choices that the design of a system of security rights may have to deal with. Its controversial character is demonstrated by the different choices made by different jurisdictions,184 even those close in legal cultural terms, as well as the unresolved nature of the debate preceding these choices. What we know is that the benefits of a carve-out provision for unsecured creditors are clear enough. For example, Clas Bergström, Theodore Eisenberg and Stefan Sundgren, who empirically studied the Finnish priority reform, found a significant increase in average payments to general unsecured creditors.185 Another of their findings was that the introduction of

181 ‘Floating

charge—a better security for enterprise loans.’ Prop. 2007/08:161, 33. An alternative solution considered was to maintain general priority but raise its percentage to 100. 183 Civil Committee Report, ‘Civilutskottets betänkande: Lag om företagshypotek’ 2008/09:CU5, motion by Carina Moberg and others. 184 See generally McCormack (n 3) 609–11. 185 See Bergström, Eisenberg and Sundgren (n 172) 274, 282–84. Bergström, Eisenberg and Sundgren write: ‘Mean payments to unsecured creditors increased from 0.9 percent of their claims to 4.0 percent and general creditors receiving nonzero payments increased more than tenfold. The average difference between distributions to floating charge-holders and general unsecured creditors decreased from 16.4 percent of the amounts owed before the reform to 7.0 percent of the amounts 182

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the carve-out provision did not increase direct bankruptcy costs.186 Admittedly, though, the type of carve-out discussed here is a ‘blunt instrument’, in that it benefits all unsecured creditors and not merely non-adjusting ones.187 Less clear are the costs of carve-outs to the wider economy. As explained above, concerns have been raised about the potential contraction of credit—its reduced availability and elevated cost. An empirical study of the above Swedish reform of 2004 by Geraldo Cerqueiro, Steven Ongena and Kasper Roszbach, which analyses a large bank’s response to the weakening of the security device in question, supports these concerns.188 Then again, it has been pointed out that any unreasonable reactions by particular lenders are likely to be mitigated by an increasingly competitive market.189 According to John Armour, some evidence suggests that the British carveout encouraged substitution from floating charges to more asset-based finance, and that this potentially hampers the resolution of financial distress by bringing into play more negotiating parties.190 In addition, he refers to more general evidence that the statutory re-ordering of priorities seems to incentivise creditors to demand a higher ratio of security (‘collateral’) to loan value and shift their focus to kinds of security (‘classes of collateral’) that are not subject to such re-ordering.191 However, the evidence remains inconclusive. In this connection, Armour observes: Where it is easy for creditors to substitute into different types of financing structure, this may defeat the object of subordination, and may detract from some of the benefits of having secured credit in a capital structure. That said, the effects either way do not appear to be particularly large.192

b. The Scope of Security Devices: A Broader Notion of Priority Carve-out provisions usually concern ‘floating’ (also referred to as ‘revolving’, ‘all-assets’ or ‘blanket’) types of security device, such as the floating charge and

owed after the reform. Those hoping to shift funds from secured to unsecured creditors succeeded.’ Their data are from a transition period when the priority percentage was 60, instead of the eventual 50. However, the statutory privilege for wage claims was abolished only after that period and the introduction of an insurance-based system of wage security. 186 Bergström, Eisenberg and Sundgren (n 172) 274, 287–88. cf Baird (n 154) 1433–34. Baird suggests, in the context of corporate reorganisation, that such an increase could occur due to an increase in the number of creditors claiming a share of the debtor’s assets and in the complexity of their claims, which is likely to require more administration by lawyers and other professionals. 187 Finch (n 143) 668. See Armour (n 15) 23–24. 188 G Cerqueiro, S Ongena and K Roszbach, ‘Collateralization, Bank Loan Rates, and Monitoring’ (2016) 71 Journal of Finance 1295. As a result of the reform, the bank reduced the assessed values of encumbered assets, increased interest rates and tightened credit limits. In addition, it curtailed monitoring of both borrowers and encumbered assets. 189 McCormack (n 16) 35; Milman and Mond (n 165) 53–54. 190 Armour (n 15) 24. See S Frisby, Report on Insolvency Outcomes, Presented to the Insolvency Service, 26 June 2006, 32–43. 191 Armour (n 15) 24. See Davydenko and Franks (n 41). 192 Armour (n 15) 25.

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enterprise mortgage discussed above. However, priority of secured over unsecured claims can also be examined at the level of a whole system of security rights, taking into account all security devices available in a jurisdiction.193 In that kind of examination, carve-outs represent just one of the factors that may limit priority. Another factor, which we will discuss next, is the scope of different security devices. Limits on priority increase in pace with greater restrictions on scope, whether of assets eligible as security for credit, of persons eligible as security providers or of situations where security devices can be employed. Put differently, these restrictions in effect preserve part of a debtor’s assets unencumbered and thus subject to pari passu distribution in the event of insolvency. Accordingly, restrictions can be controversial, similarly to carve-outs. Restrictions as to assets eligible as security for credit may concern ‘floating’ security devices as well as security devices for specific (‘fixed’) assets. For example, according to the Swedish Floating Charges Act (2008:990), somewhat simplified, a floating charge covers the entire movable property of an enterprise except, for example, cash and bank funds, shares and other financial instruments intended for public trading (chapter 2 section 1). In contrast, these excluded types of assets are covered by an enterprise mortgage under the Finnish Enterprise Mortgage Act (634/1984) (section 3).194 Moreover, the Swedish floating charge excludes all property that can be used as security by way of mortgage (inteckning), whereas the Finnish enterprise mortgage exceptionally covers property that is mortgageable under the Vehicle Mortgage Act (810/1972).195 An example of asset restrictions as to security devices for specific assets can be taken from the Finnish Vehicle Mortgage Act. This establishes a registration-based system for creating non-possessory security rights over certain land-based vehicles, such as trucks (lorries), buses, coaches, truck trailers, tractors and motorised work machines.196 Perhaps counter-intuitively, ordinary cars (automobiles) and vans are not mortgageable under this Act or otherwise as individual objects.197

193 This is particularly relevant in Europe, where no jurisdiction has developed a comprehensive functionalist approach, but systems of security rights consist of a range of different security devices. See Kieninger (n 11) 648. This is the case even with the Belgian system of security rights, which has recently been extensively reformed. See E Dirix, ‘The Belgian Reform on Security Interests in Movable Property’ in Gullifer and Akseli (n 52) 396, 404. 194 cf s 4(3) of the Enterprise Mortgage Act, which enables pledging (charging) securities, bookentry securities and receivables even though these assets are covered by an enterprise mortgage. 195 Floating Charges Act, c 2 s 1; Enterprise Mortgage Act, s 4(1). Yet, under Finnish law, if a vehicle mortgage is registered before an enterprise mortgage covering the vehicle, the claim secured by the vehicle mortgage takes priority to be satisfied out of the value of the vehicle. 196 Mortgageable vehicles are listed in s 1. Class definitions for vehicle types are given in the Vehicles Act (1090/2002). 197 Cars and vans can be subject to an enterprise mortgage or a possessory pledge. However, these alternatives may not serve the needs of the parties to a security arrangement. A secured creditor may not be satisfied with the priority position accorded to an enterprise mortgage in bankruptcy proceedings or the fact that the security-provider debtor is permitted to use and alienate encumbered assets in the ordinary course of business. In turn, the debtor is unlikely to be willing to provide a possessory

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The main purpose of this exclusion was to keep the workload of the register authority manageable.198 More recently in legal literature, the exclusion has also been recognised as entailing distributional effects. Indeed, it has been suggested that inclusion of cars, or enabling any other non-possessory security right over individual cars, could considerably weaken the position of unsecured creditors— at present, a car may form a significant part of the property that can be distrained against in enforcement proceedings for debt recovery.199 From a comparative point of view, restrictions as to eligible assets often result from the principle of specificity. Additionally, the principle of publicity may in effect cause restrictions. This is typically the case with future (after-acquired) assets because publicity requirements are often difficult to fulfil before the asset in question comes into existence and belongs to the security provider. To be sure, no universal contents exist for the principles of specificity and publicity. Indeed, what actually cause restrictions are the ways in which these principles are concretised by individual legal systems. In any case, the tendency of European jurisdictions is towards broadening the range of eligible assets. Examples include reforms enabling or facilitating the use of (present or future) claims as security for credit.200 Restrictions as to persons eligible as security providers may serve the function of protecting natural persons in jurisdictions without a developed consumer protection regime. Natural persons may enter into security agreements without fully appreciating the risks that a secured creditor’s entitlements with respect to encumbered assets may entail, especially the risk of losing assets important to one’s livelihood or individuality, such as a family home. If actual consumer protection is lacking, a more primitive form of protection can be arranged by preventing natural persons from creating security rights over certain types of asset.201 Restrictions as to eligible persons may also come into existence as a result of legislation that

pledge because the possession requirement would prevent the debtor from using the encumbered asset to conduct its own business. 198 Government Proposal, ‘Hallituksen esitys Eduskunnalle laeiksi autokiinnityslain 1 ja 22 §:n sekä irtaimistokiinnityksestä annetun lain 3 §:n muuttamisesta’ HE 165/1976, 1–2. This purpose was probably a valid reason for the exclusion at a time when information technology was not yet widely used. 199 J Tepora, J Kaisto and E Hakkola, Esinevakuudet, 2nd edn (Helsinki, Kauppakamari, 2016) 59–60, 482. 200 Kieninger (n 11) 649–52, 669–70. Kieninger welcomes this tendency and proposes developing it further on the basis of the idea that the parties to a security arrangement should be able to choose and define encumbered assets according to their own business needs. Here, she would follow UCC Art 9 and the seventh of the EBRD ten core principles. In her view, any concerns about injustice towards later creditors seeking security or unsecured creditors should be dealt with by rules on publicity and priority rather than by restricting the range of eligible assets. 201 G McCormack, ‘The CFR and Credit Securities: A Suitable Case for Treatment?’ in A Vaquer (ed), European Private Law beyond the Common Frame of Reference: Essays in Honour of Reinhard Zimmermann (Groningen, Europa Law Publishing, 2008) 110. McCormack considers protection by blanket bans a blunt tool which may restrict the availability of credit. In his view, though, limitation of consumer credit availability may be no bad thing in a world where consumer over-indebtedness is thought to be a pressing social problem.

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enables or facilitates the use of certain types of assets only with respect to limited types of persons or in ways that are relevant only for those persons. Examples include security devices introduced in connection with the implementation of the Financial Collateral Directive.202 Restrictions as to situations where security devices can be employed mean that some conceivable uses of security devices available in a jurisdiction are excluded. Finnish retention of title exemplifies this: a seller’s retention of title clause is unenforceable against a buyer’s other creditors if the buyer is entitled to transfer the assets to a third party notwithstanding the retention of title.203 It should be noted that the mere grant by the seller of entitlement to transfer causes unenforceability, regardless of whether transfer actually occurs or not. In a typical situation of this kind, a buyer is entitled to resell goods purchased before paying the purchase price. Thus, Finnish retention of title does not fit the use of, say, a seller who supplies a retailer with goods. A similar restriction exists in Swedish and Norwegian law.204 The prevailing, although not entirely uncontroversial, explanation for this restriction begins with the observation that a retention of title clause with an entitlement to transfer the assets to a third party does not provide the seller with a reliable security right. Indeed, if the seller needs to enforce the clause, the buyer may or may not have the assets, and so the clause is incapable of substantially reducing the seller’s credit risk. Such clauses are unlikely to incentivise sellers to extend more credit or offer improved credit terms, notably lower interest rates, and therefore cannot generally be expected to stimulate economic activity.205 This means that the most compelling justification for priority of secured over unsecured claims is absent.206 Accordingly, the case for enforceability of a retention of title clause against the buyer’s other creditors, essentially an instance of priority of secured over unsecured claims, may not be considered strong enough.

202 See TRMP Keijser, Financial Collateral Arrangements: The European Collateral Directive Considered from a Property and Insolvency Law Perspective, Law of Business and Finance 9 (Deventer, Kluwer, 2006) 86–88. Additional examples might be Italian statutory non-possessory pledges introduced for the particular purposes of the food industry. See A Veneziano, ‘Italy’ in HC Sigman and E-M Kieninger (eds), Cross-border Security over Tangibles, GPR Praxis: Schriften zum Gemeinschafts privatrecht (Munich, Sellier European Law Publishers, 2007) 166. 203 Bankruptcy Act (120/2004), c 5 s 7(2). Besides entitlement to transfer assets subject to retention of title, this rule covers the entitlement to attach those assets to other assets or otherwise dispose of the assets as if an owner. The (now codified) rule stems from earlier case law of the Finnish Supreme Court. See decisions KKO 1977 I 4, KKO 1971 II 102, KKO 1971 II 65 and KKO 1968 II 53. See Tepora, Kaisto and Hakkola (n 199) 453–60; J Tuomisto, ‘Irtaimen kauppaan liittyvä omistuksenpidätysehto ja uusi konkurssilaki’ in T Lohi (ed), Kaavoitus, rakentaminen, varallisuus: Juhlajulkaisu Vesa Majamaa 1945–28/12–2005 (Helsinki, Edita, 2005) 507–15. 204 Tuomisto (n 203) 508; T Håstad, ‘Nordiska önskemål vid en integration av säkerhetsrätten’ in S Tuominen (ed), Civilrättens integration ur nordisk synvinkel (Helsinki, Juridiska fakulteten vid Helsingfors universitet, 2001) 68–69. See, on Sweden, the Supreme Court decisions NJA 1932, 292 and NJA 1978, 593, and, on Norway, the Mortgages and Pledges Act (8 February 1980 No 2), s 3-15(2). See also Kieninger (ed) (n 11) 299–300. 205 T Håstad, ‘General Aspects of Transfer and Creation of Property Rights, Including Security Rights’ in Drobnig, Snijders and Zippro (n 1) 41–42; Tuomisto (n 203) 509. 206 Various proposed grounds for justification were discussed in section III.D above.

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c. Priorities between Different Security Devices: The Treatment of Acquisition Financing Priority-related questions concern not only secured versus unsecured claims, but also the ranking between, and the scope of, different security devices available in a jurisdiction. Moreover, many questions of priority between different security devices are in themselves controversial. This is so because different types of secured creditor tend to, or indeed have to, use different types of security device, and so rules favouring a certain type of security device often also favour a certain type of secured creditor at the expense of others. We find a clear instance of this in the relationship between ‘acquisition security devices’ (or ‘purchase-money security devices’) and general security devices.207 Principal users of acquisition security devices are trade creditors (suppliers), whereas general security devices are mostly used by banks and other lenders.208 Notions of, and terms for, acquisition security devices vary between legal systems, but, for example, the UNCITRAL Legislative Guide on Secured Transactions defines ‘acquisition security right’ as a security right in a tangible asset (other than a negotiable instrument or negotiable document) that secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit otherwise provided to enable the grantor to acquire the asset.209

In addition, the Legislative Guide clarifies that, to qualify as an acquisition security right, a right ‘need not be denominated as such’ and that the term includes retention-of-title rights and financial lease rights.210 General security devices are understood in this book as ‘floating’ or ‘fixed’ security devices capable of securing various kinds of obligation, however incurred, and encumbering various types of asset.211 Acquisition security devices typically rank above general security devices. Following US terminology, this priority treatment is sometimes referred to as ‘superpriority’.212 This is often justified by the idea that the acquisition financed brings new assets to the debtor so that, without superpriority, existing holders of all-assets security rights would receive a windfall benefit since they did not

207 Perhaps an even clearer, yet less commonplace, instance would be the priority treatment of s ecurity devices that are introduced for the purposes of a particular branch of trade or industry. See E-M Kieninger, ‘Securities in Movable Property within the Common Market’ (1996) 4 European Review of Private Law 41, 44–46. 208 See Håstad (n 205) 41–42; T Håstad, ‘Inför en europeisk sakrätt: Några principfrågor’ (2002–03) Juridisk Tidskrift 745, 768–69. 209 Introduction, para 20. 210 ibid. 211 The notions of security device and security right overlap. However, ‘security device’ has more the meaning of a type of security right or security agreement, whereas ‘security right’ usually denotes a subjective right, ie, a right belonging to a particular person. 212 See, eg, Sigman (n 162) 74.

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participate in funding the new assets.213 Additionally, superpriority prevents financiers with an all-assets security right from achieving an effective credit monopoly based on obtaining priority over the debtor’s after-acquired assets. Indeed, if an all-assets financier quits extending credit, the debtor may not be able to borrow from other financiers insofar as these other financiers could only be afforded lower-ranking security rights. Yet another argument for superpriority is that financiers lending against specific assets may be able to offer more competitive interest rates than general all-assets financiers. This may be the case because their risk is more specific and thus easier to establish.214 In Europe, the most typical acquisition security devices are retention (or ‘reservation’) of title (or ‘ownership’) clauses included in sales contracts. These clauses, in their simple form, usually entitle the seller to take back the assets (goods) supplied if the buyer defaults on payment of the purchase price. Their common formulation is that title to or ownership of the assets passes to the buyer only when the purchase price is paid in full. However, depending on the legal system, resort to ‘title’ or ‘ownership’ terminology may be unnecessary. For example, one characteristic of the ‘methodological realism’ of the Nordic legal systems is regarded as being that the same legal effects can be achieved by a clause where the seller reserves a right to take the assets back or to cancel the sales contract.215 Judging from the prevalence of retention of title and its equivalents, the idea of acquisition security, as such, seems uncontroversial in Europe.216 Even so, comparison reveals significant differences as to the scope of such devices. These differences can be understood in terms of strength variables that determine the priority position of acquisition security devices in relation to general security devices.

213 McCormack (n 201) 125. See Håstad (n 208) 769–70. Håstad suggests that this justification holds good insofar as priority treatment only concerns the acquired assets themselves. Receivables from a third party or new products, eg, are assets to which others, such as banks, employees and the state, have also contributed. Techniques to separate the different inputs are conceivable, but they would complicate the system. According to Håstad, the same justification, if taken seriously, should be applied in the case of all-asset security for money loans. The result would be a chronologically reversed priority order, with the best priority position accorded to the most recent lender. 214 McCormack (n 201) 125. McCormack also discusses two counter-arguments. First, specificasset financiers are unlikely to be able to offer more competitive interest rates because they tend to be smaller, secondary financiers. Second, attributing superpriority to acquisition security devices seems to imply, questionably, that the advance of funds to purchase new assets is perceived as more valuable to the debtor than the advance of funds for other reasons, say, employee wages. 215 Håstad (n 204) 67–68. See Tepora, Kaisto and Hakkola (n 199) 431–34. Tepora, Kaisto and Hakkola suggest that a retention of title clause, a take back clause and a cancellation clause are indistinguishable not only as to their economic purposes, but even as to their juridical content. The Norwegian equivalent to retention of title is termed according to its true purpose: ‘sales pledge’ (salgspant). See ss 3-14–3-22 of the Mortgages and Pledges Act. See also JEA Skoghøy, Panterett, 3rd edn (Oslo, Universitetsforlaget, 2014) 98–111. Nordic functionalist thinking would be difficult to reconcile with the English orthodox notion of security, which excludes retention of title clauses as ‘quasi-security’. See L Gullifer, ‘Quasi-security Interests: Functionalism and the Incidents of Security’ in I Davies (ed), Issues in International Commercial Law (Aldershot, Ashgate, 2005) 5–6. 216 See McCormack (n 201) 125; Kieninger (n 11) 658–59.

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In other words, it is not the mere ranking order (where acquisition security rights may enjoy superpriority), but also the scope of acquisition security devices, that apportions debtor assets between holders of acquisition security rights and holders of general security rights. The broader the scope of acquisition security devices, the more ‘acquisition secured creditors’ and the less ‘general secured creditors’ receive in distribution of debtor assets. The first strength variable (or, rather, a variable that may expose particular weakness) is whether acquisition security rights are enforceable in insolvency proceedings. If not, they fail to protect acquisition financiers (often sellers) in situations where protection is needed most, so that using the term ‘security right’ is actually questionable.217 Apparently, at least simple retention of title clauses or their equivalents, as used in basic circumstances, are enforceable on insolvency in all European jurisdictions. However, this has not always been the case. French law has allowed the enforcement of retention of title clauses in a buyer’s insolvency proceedings since 1980, and Belgian law only since 1998.218 The second strength variable (again, more about weakness than strength) is whether restrictions apply in situations where acquisition security devices can be employed, that is, whether some conceivable uses of these security devices are excluded. The restrictions meant here concern basic forms of acquisition security, whereby a sales object serves as the encumbered asset, and a seller’s sales price receivable is the secured claim. Prime examples are Finnish, Swedish and Norwegian restrictions according to which a seller’s retention of title clause (or equivalent) is unenforceable against the buyer’s other creditors if the buyer is entitled to transfer the assets to a third party notwithstanding the clause.219 Because the restrictions exclude conceivable uses of retention of title, say, by sellers that supply retailers with goods, these acquisition security devices are weakened to the benefit of banks and other lenders that make use of general (all-asset) security devices.220 Further strength variables concern characteristics that may strengthen rather than weaken acquisition security devices, as compared to their basic form. The following cursory account, mainly based on Kieninger’s Common Core study

217

See Dirix (n 17) 69. before these changes to insolvency legislation, French law featured special register-based charges to support certain trade or industry branches, such as gage sur véhicule automobile to stimulate car sales, and Belgian law featured a statutory preference for unpaid sellers, though this originally only concerned sellers of professional equipment such as machines. See Kieninger (n 48) 10–11. For details, see Kieninger (ed) (n 11) 186–89, 255–57. On recent developments, see J-F Riffard, ‘The Still Uncompleted Evolution of the French Law on Secured Transactions towards Modernity’ in Gullifer and Akseli (n 52) 385; Dirix (n 193) 394–402. 219 These restrictions were briefly discussed in section IV.B.ii.b above. 220 See Håstad (n 208) 768. According to Håstad, Swedish suppliers have long insisted that repealing this restriction would substantially increase their willingness to extend credit at low cost, but the legislator has remained unresponsive. 218 Even

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published in 2004, lays out traditional European solutions, adding a third and a fourth strength variable.221 The third strength variable is whether the sales objects, the assets purchased, are themselves only eligible as (encumbered) assets subject to an acquisition security right or whether some surrogate assets are also eligible. Certain surrogate assets are eligible by way of two types of so-called ‘extended’ retention of title clauses.222 These types are called ‘products clauses’ (or ‘manufacturing clauses’) and ‘proceeds clauses’.223 Products clauses aim to include within the scope of retention of title any new products made from the sales objects. Some European jurisdictions accept products clauses, though the dogmatic explanations for acceptance vary. One explanation sees a products clause as a permitted derogation from specificatio rules (Germany), while another explanation sees it as a security transfer of ownership as to new products (Greece and a minority view in Germany). For most jurisdictions covered by the Kieninger study, though, a products clause involves a charge over goods not belonging to the seller. However, the consequences of this view vary. In some jurisdictions, future products cannot be charged in advance, say, due to strict identification requirements (Spain). In other jurisdictions, a registered charge over future products is possible and is the only option (England, Ireland and the Netherlands). In turn, some jurisdictions accept contractual arrangements according to which the (original) seller is regarded as the manufacturer of the new products, but the commercial practicability of these arrangements is limited by the requirement that the seller must bear the risk of manufacturing and subsale (Austria, France, Italy, Denmark, Sweden and Finland).224 Proceeds clauses aim to include within the scope of retention of title the proceeds arising out of subsale of the sales objects. In some European jurisdictions, this is possible through ‘real subrogation’, where the buyer’s rights against the subbuyer are transferred to the (original) seller by operation of statute as long as the subsale claim still exists (France and Belgium) or through anticipatory security assignment (Germany and Greece). In contrast, many European jurisdictions offer no practicable means of extending retention of title to proceeds. This is due to registration or notification requirements (notification to the sub-buyer) that

221 Kieninger (ed) (n 11). The study covers 15 European jurisdictions and South Africa. The jurisdictions identified below in parentheses are meant as non-exhaustive examples. These should be read with caution because more recent reforms or case law may have changed the situation is some jurisdictions. 222 See U Drobnig, ‘Security Rights in Movables’ in AS Hartkamp et al (eds), Towards a European Civil Code, 4th revised edn (Alphen aan den Rijn, Kluwer Law International, 2011) 1035–36; Håstad (n 204) 69–70. 223 Kieninger (n 11) 661–62. For a somewhat different classification of retention of title clauses than that given here, see McCormack (n 16) 164–65. 224 Kieninger (n 11) 662–63; Kieninger (ed) (n 11) 396–97. See Brinkmann (n 72) 209–14. See also McCormack (n 16) 191–203. McCormack discusses separately situations that respectively involve accession, mixing of goods and manufacture of a new product, nova species.

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either cannot be satisfied in the case of future claims or incur excessive costs.225 Then again, the trend appears to be towards abolishing or relaxing notification requirements.226 The fourth strength variable concerns claims that can be secured by an acquisition security device. While a simple retention of title clause only secures the purchase price claim (and possibly some other claims directly related to the acquisition), a further type of extended retention of title clauses also aims to secure claims that are unrelated to this particular acquisition. This is the case with ‘all-sums clauses’ (or ‘all-monies clauses’), according to which the security continues until the buyer pays all debts owed to the seller, not only those arising from purchase of the assets subject to the retention of title clause. Most jurisdictions covered by the Kieninger study reject these clauses ‘as a fruitless attempt to create a non-possessory security right in movable property which does not share the preferential status accorded to simple retention of title’. But some European jurisdictions accept them, either as such (England, Scotland and Ireland) or transforming them into security ownership once the purchase price of the assets subject to the retention of title clause is paid (Germany).227 Finally, a comparison between acquisition security in Europe and in the US provides an additional insight into the relationship between acquisition security devices and general security devices, and consequently between the interests of suppliers and lenders. In Europe, acquisition security is markedly a seller’s security because the main acquisition security devices are retention of title clauses and their equivalents.228 A third-party financier cannot make use of retention of title, save probably as a transferee of the actual seller’s rights. In the US, the situation differs in that a purchase-money security interest can also be created in favour of a third-party financier that enables the acquisition by paying the seller or lending money to the buyer.229 We can call this ‘non-seller acquisition security’.230

225 Kieninger (n 11) 662; Kieninger (ed) (n 11) 346–48. See Brinkmann (n 72) 202–09; McCormack (n 16) 181–91. In England, Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (hereinafter Romalpa) seemed to enable the effects of a proceeds clause to be achieved by way of trust law. However, this position has been reversed in subsequent cases distinguishing the Romalpa decision. Currently, a proceeds clause is likely to be treated as creating a charge, which requires registration for effectiveness against the buyer’s creditors. See, eg, Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150. 226 See A Flessner and H Verhagen, Assignment in European Private International Law: Claims as Property and the European Commission’s ‘Rome I Proposal’, GPR Praxis: Schriften zum Gemeinschafts privatrecht (Munich, Sellier European Law Publishers, 2006) 6. 227 Kieninger (n 11) 661–62; Kieninger (ed) (n 11) 434–37. See Brinkmann (n 72) 214–19. As Brinkmann notes, these clauses lose their character as acquisition security when the asset purchased no longer secures concrete acquisition credit but other obligations. See also McCormack (n 16) 176–81. 228 cf s 3-14(b) of the Norwegian Mortgages and Pledges Act, according to which under certain conditions, salgspant is available for third-party lenders. 229 UCC Art 9, ss 9-103 and 9-324. See Sigman (n 162) 57–58, 74. 230 Arguably, the inclusion of finance leasing in the European notion of acquisition security smooths over the difference. See Kieninger (ed) (n 11) 619–22. See also DCFR IX.—1:103(2)(c).

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On the face of it, the existence of non-seller acquisition security seems to blur the initially simple picture of who benefits from the availability and strength (as measured by the above strength variables) of acquisition security devices. Indeed, through non-seller acquisition security, lenders (pure financiers) also gain from the superpriority accorded to purchase-money security interests. However, it should be noted that when a lender acquires a purchase-money security interest, the actual seller may benefit by getting paid right away, that is, without extending sales credit in the first place. Consequently, suppliers benefit from acquisition security devices regardless of whether these devices are available for them exclusively or also for lenders. In the latter case, suppliers benefit more directly.

iii. Publicity Questions a. The Functions of Publicity Besides the various priority-related matters discussed above, publicity requirements form a group of controversial policy questions. To begin with, we should recognise that publicity requirements bear on priority to a great degree. Typically, the effectiveness of a security right against third parties (and in some cases even between the parties) presupposes that the security arrangement is publicised in a set way. Subject to exceptions and to variation between jurisdictions and security devices, the most common ways are by possession, notification or registration. Accordingly, fulfilling a publicity requirement may be necessary in order to achieve the priority position characteristic of the security device employed.231 In a priority contest between two secured creditors with a security right over the same assets, being the first to fulfil a publicity requirement often functions as the priority determinant and so establishes whose right is primary and whose is secondary.232 However, publicity requirements involve further important features which justify discussion as a group on their own, separate from priority questions. These features concern the protection of third parties, most notably other creditors. Indeed, the features concretise traditional property law dogma that third parties should be able to find out about the existence of proprietary rights because these rights, as rights against the world or with erga omnes effects, may affect their legal position.233 As regards security rights in particular, publicity has been thought to eliminate the problem of ‘false wealth’ (or ‘ostensible ownership’).

231

See generally Wood (n 5) 140–41; Kieninger (n 11) 655–56. The relevant rule may be, eg, the following. As a default setting, an earlier pledgee acquires the primary right of pledge. However, a later pledgee may acquire that primary right, and leave the earlier pledgee with a secondary right, by fulfilling the relevant publicity requirement, in good faith, before the earlier pledgee. 233 See S van Erp, European and National Property Law: Osmosis or Growing Antagonism? Walter van Gerven Lectures 6 (Groningen, Europa Law Publishing, 2006) 14–15; Dirix (n 17) 82. See also J Benjamin, Interests in Securities: A Proprietary Law Analysis of the International Securities Markets (Oxford, Oxford University Press, 2000) 105. Benjamin even states that ‘natural justice requires that [property] rights should only arise in circumstances where they are apparent to third parties’. 232

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This problem consists in a prospective creditor overestimating a prospective debtor’s creditworthiness based on a wrong assumption that assets found at the prospective debtor’s premises are unencumbered. The contemporary significance of this point has been challenged because retentions of title, leases and similar arrangements are so commonplace that possession no longer indicates ownership or absence of encumbrance.234 Moreover, credit extension is today rarely decided on the basis of assets seen at the prospective debtor’s premises. Thus, prospective creditors are unlikely to be misled even if security arrangements are not publicised.235 A more current and compelling explanation of the need for publicity, still relating to protection of other creditors, can be derived from the debates on economic efficiency and distributional fairness of secured credit.236 Arguments according to which the priority of secured over unsecured claims is efficient and fair are premised on the idea that when one creditor acquires a security right, other creditors adjust to deal with the increased risk, that is, the reduction of their expected returns in the event of insolvency. Adjustment may involve raising interest rates, requiring security or searching for less risky debtors.237 Importantly, though, these efforts are possible only if creditors are informed, by some form of publicity, of existing security rights granted by the debtor.238 In other words, absence of publicity threatens to turn all creditors effectively into non-adjusting creditors. Further, publicity helps prevent the fraudulent antedating of security agreements. Of course, some means of publicity may do this better than others.

234

Gullifer (n 215) 7–8; Kieninger (n 11) 652–54. Kieninger (n 11) 654. 236 These debates were discussed in section IV.B.i above. 237 Jackson and Kronman (n 32) 1147–48. 238 cf D Hamwijk, ‘Public Filing with Regard to Non-possessory Security Rights in Tangible Assets as Contemplated by the DCFR: Of No Benefit to Unsecured (Trade) Creditors’ (2011) 19 European Review of Private Law 613, 615–22. Hamwijk argues that a public filing system would not benefit unsecured (trade) creditors. She builds on the assumption that the question whether or not a prospective debtor has encumbered its assets with security rights does not affect the risk of non-payment, so that when deciding about credit extension, prospective creditors will ignore that question and rely on other factors, general confidence in the debtor and the debtor’s cash flow. According to her, this holds true for all types of prospective creditor as regards deciding whether to extend credit in the first place (deciding on the conditions of credit extension is a different matter). We may wonder, though, whether this assumption correctly represents creditor decision-making. Arguably, deciding about credit extension is affected by the estimated overall credit risk, which consists in a combination of the risk of nonpayment (debtor default) and the risk of diminished returns in the event of non-payment. Creditor confidence is unlikely to be an either-or matter (full confidence or no confidence at all), and the more doubts exist, the greater the significance of security. Hamwijk’s other main point is that information on the quantity of unencumbered assets at the time when a creditor extends unsecured credit is irrelevant to that creditor because the assets may become encumbered in the future. However, irrelevance may not be entirely true in arrangements where funds are advanced, and the corresponding repayments made, several times in succession. The creditor could exercise continuous assessment of credit risk by register checks and adjust the interest rate before each new advance if the debtor has provided security rights for other creditors. cf DJY Hamwijk, Publicity in Secured Transactions Law: Towards a European Public Notice Filing System for Non-possessory Security Rights in Movable Assets? (Doctoral thesis, University of Amsterdam 2014) 127–32. 235

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At any rate, registration involving a public authority is likely to be more reliable than possession or notification, both of which occur between private parties. However, fraudulent antedating can also be fought by means that do not actually bring about publicity. Let us take the example of the Dutch ‘silent pledge’ (stil pandrecht). This is a non-possessory pledge over tangibles or claims, which has to be created by notarial deed or registered with the tax authorities. The register in question is not accessible to the public.239 b. Is Publicity Necessary? The above functions of publicity appear solid. Indeed, internationally developed models for the law on security rights regularly include some kind of registration system.240 Therefore, it may seem that a functioning system of security rights necessarily requires publicity. Some comparative observations, though, may lead to contesting this view. The most striking example is German law, which broadly accepts non-publicised (undisclosed) security rights. As Julia Rakob describes, German security rights over movable property are ‘with very few exceptions … privy to the parties who created them, and are not registered or otherwise notified to the public’.241 The workhorses among German security devices are the security transfer of title to tangible movables (Sicherungs übereignung) and the security assignment of receivables (Sicherungsabtretung). Both security devices have been developed in legal practice and employ rules on absolute transfer of assets so as to circumvent mandatory publicity requirements for pledges. The Imperial Court of Justice, the predecessor to the Federal Court of Justice, approved this at the beginning of the twentieth century, and the position remains the same today.242 In addition, through extensions and priority treatment, ‘German practice built the title retention device into something far more powerful than in any other European country, and without imposing any form of publicity’.243

239 Dutch Civil Code, Book 3 Arts 237 and 239. See Hamwijk, Publicity (n 238) 65–75; Hamwijk, ‘Public Filing’ (n 238) 628–29; Dirix (n 17) 83; Kieninger (n 11) 651. 240 See, eg, EBRD Model Law on Secured Transactions, pt 5, available at www.ebrd.com/ documents/comms-and-bis/pdf-model-law-on-secured-transactions.pdf; UNCITRAL Legislative Guide on Secured Transactions, ch IV; UNCITRAL Model Law on Secured Transactions, c IV; DCFR Book IX, c 3 s 3. See also GG Castellano, ‘Reforming Non-possessory Secured Transactions Laws: A New Strategy?’ (2015) 78 MLR 611, 632–37. 241 J Rakob, ‘Germany’ in Sigman and Kieninger (n 202) 66 (footnote omitted). Rakob notes (at 69) that registers exist only for security rights over vessels, aircraft, offshore cables and, under limited circumstances but with little practical relevance, farming equipment. 242 ibid 63–65. RGZ 57, 175 (at 177) (11 March 1904); RGZ 59, 146 (at 147) (8 November 1904). Under the German Civil Code, a pledge over a tangible movable requires actual possession (s 1205), while a pledge over a claim requires notification to the debtor of that claim (s 1280). See M B rinkmann, ‘The Peculiar Approach of German Law in the Field of Secured Transactions and Why It Has Worked (So Far)’ in Gullifer and Akseli (n 52) 343–49. Brinkmann explains how the German legislator implicitly accepted security transfer of title in the nineteenth century by not prohibiting it in the Civil Code, and presents an overview of how the German courts have shaped the law since then. 243 HC Sigman and E-M Kieninger, ‘Introduction’ in Sigman and Kieninger (n 202) 3–4.

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How does the German system of security rights manage to function without publicity? Rakob explains banking practice as follows. Banks rely on prospective borrowers’ representations about encumbrances over their assets. The risk of borrowers lying is acknowledged, but is usually estimated as small. One reason for this is that a lie would often require the support of forged accounts, which is quite a threshold to cross. The view of the banks appears to be that the costs of establishing and operating a register would outweigh the benefits of barring ‘the occasional crook’. In addition, subject to the borrower’s permission, banks request statements from other lenders known to be extending credit to the borrower along with evidence that the borrower has paid the purchase price for its assets and that any retentions of title have expired. Understandably, financing sellers do not push for a register because they are in any case protected against prior security arrangements.244 According to Ulrich Drobnig, in a country without a registration system, ‘the courts proceed from a general presumption that business people must know that any major piece of equipment is bought on credit’.245 Brinkmann refines this picture with an account of the German ‘extreme relationship banking’ practice known as the Hausbankprinzip, which is dominant in financing of small and medium-sized enterprises. A Hausbank is a particular bank, often a savings bank or cooperative bank, which typically acts as ‘the exclusive supplier of all financial services’ to customers. This practice, Brinkmann argues, ‘significantly reduces the need for publicity’ in the German system of security rights. Relationships between a Hausbank and its customers are usually long and involve substantial mutual trust, with all information on the customer’s financial circumstances available to the Hausbank. Therefore, it would be difficult for the customer to deceive its Hausbank by encumbering the same assets twice. What is more, an attempt at deception would entail gambling with the ‘financial foundation’ of the customer’s business, because obtaining credit from another source without a pre-existing relationship would be hard. Here, Brinkmann argues that the Hausbankprinzip ‘by and large’ fulfils the functions of a notice filing system in that an alternative source of credit would ask the Hausbank to confirm that assets offered as security are not already encumbered, that is, subject to a security right granted to the Hausbank.246 McCormack offers further insights, discussing the broader structure of the German credit market. Arguably, in his view, a registrationless system ‘only works well in a relatively closed credit market like Germany where there are a number of powerful players with a quasi-monopolistic control on credit’. In such a market, leading banks possess detailed information on businesses’ financial behaviour and credit needs. McCormack observes that this market structure, combined with the absence of a public filing system, seems to have a self-reinforcing effect: if information on borrowers is not publicly available, new or foreign financial institutions 244

Rakob (n 241) 66, 72. Drobnig, ‘Present and Future of Real and Personal Security’ (2003) 11 European Review of Private Law 623, 660. 246 Brinkmann (n 242) 349–50. 245 U

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may effectively be excluded from entering the credit market. In addition, banks may be less willing to extend credit to new entrepreneurs that they do not yet know.247 The German experience shows that publicity need not be seen as an absolute necessity for a functioning system of security rights. However, this observation immediately calls for some reservations. First, if Brinkmann and McCormack are right about their points on the special characteristics and structure of the German credit market, the German experience cannot be generalised to cover all jurisdictions. Second, as Rakob and Brinkmann explain, the German system manages to function without publicity largely because German banks trust their borrowers.248 But trust levels are likely to vary between jurisdictions. Indeed, trust is established on the basis of credit market actor behaviour in the long run, behaviour that cannot be expected to be the same everywhere. Put bluntly, crooks may also be more or less occasional. These two reservations can be understood as instances of credit cultural variation. Third, the fact that the German system of security rights presently functions without publicity does not necessarily mean that it functions optimally. It is difficult to assess whether Germany has correctly weighed the costs and benefits of publicity,249 and whether the current law will remain appropriate in the future.250 In a comparative view, the above and other credit cultural variation especially affects the benefits that publicity can be expected to entail. As a consequence, the extent and form of publicity will most probably remain controversial choices among jurisdictions. Accordingly, it is questionable whether ‘one size fits all’. c. Variations of Registration Even for those who fully subscribe to the idea that the law on security rights should require publicity through registration, designing a registration system may present difficult choices. These may concern even the most basic structural

247

McCormack (n 201) 117–18. See Rakob (n 241) 72. Rakob notes that business measures by banks ‘may lead to greater confidence in the value of the security, but do not create certainty in a legal sense’. 249 For a summary of the costs and benefits involved, see Wood (n 5) 141–44. See also Brinkmann (n 242) 350. Brinkmann discusses the ramifications of the Hausbankprinzip for credit market competition. Put simply, transaction costs may be reduced, whereas lock-in effects may increase the cost of credit. See also A Morell and F Helsen, ‘The Interrelation of Transparency and Availability of Collateral: German and Belgian Laws of Non-possessory Security Interests’ (2014) 22 European Review of Private Law 393. 250 See Brinkmann (n 242) 351–54. Brinkmann suggests that German exporters would benefit from internationally recognised security rights, especially in view of ‘the ongoing integration of markets worldwide and the growing competition in international trade’. Additionally, he points out some signs of decline of the Hausbankprinzip. These relate to the effects of the Basel III Accord, the growing role of capital markets as a source of new capital for German enterprises (slowly diminishing the importance of bank credit) and some German manufacturers establishing their own banks for the purposes of export financing, ie, to extend credit to their international customers. 248

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features and functions. At least two such choices should arise. First, we have a choice between transaction filing (or ‘deed filing’) and notice filing, that is, two types of registration, which differ from each other in terms of the extent and specificity of recorded data.251 A consensus probably exists on the point that the needs of modern finance are generally better served by a person-based (debtor-based) register than an asset-based register.252 Second, we have a choice whether acquisition security devices, and not only general security devices, should also be subject to a registration requirement. The main difference between transaction filing and notice filing is that notice filing is divorced from particular individual security arrangements and can therefore be characterised as party-specific rather than transaction-specific. Transaction filing involves filing and registering a security agreement, or a deed or a synopsis of it—at any rate, information about a particular individual security arrangement. In contrast, the ‘notice’ (or ‘financing statement’) of notice filing may merely indicate the parties to a present or future security arrangement, and identify the assets concerned, which may also be present or future, in a specific or generic way. The idea is that a notice may be filed before or after a security arrangement, and a single filing is effective with respect to multiple security arrangements. The function of a notice filing system, besides enabling use of the time of filing as a priority determinant, is to alert others that a creditor may, now or later, claim a security interest (security right) over the assets in question. The database containing the information filed is publicly accessible. The actual state of affairs—that is, whether or not a security interest in fact exists or will exist—is meant to be discovered by inquiries from the parties themselves. Filing a notice does not create a security interest (creation occurs through a security agreement) but ‘perfects’ it, making the security interest enforceable against third parties or strengthening that enforceability in terms of different kinds of priority contest.253

251 This is not to say that registration systems always are or should be strictly either-or. See, eg, Dirix (n 193) 389–99. Dirix describes the new Belgian pledge register as ‘an intermediate step’ between the two types. 252 While asset-based registers are reliable and widely used with respect to major means of transport and other high-value assets, they are impractical for many other types of assets, such as stock-in-trade (inventory). Moreover, for a potential creditor, it could be overly cumbersome, even impossible, to go through all the asset-based registers necessary to form a general picture of encumbrances over the debtor’s assets. This general picture may be a puzzle for which pieces need to be collected from a large number of registers, and the potential creditor may not know in which registers to look. See Kieninger (n 65) 168; Kieninger (n 11) 670–71. See also S van Erp, ‘The Cape Town Convention: A Model for a European System of Security Interests Registration?’ (2004) 12 European Review of Private Law 91. Van Erp discusses registration under the Convention on International Interests in Mobile Equipment, signed at Cape Town on 16 November 2001. The registration system of the Convention and the Protocols thereto combines asset-based registers and notice filing. 253 On differences between transaction filing and notice filing, see McCormack (n 3) 614–15; McCormack (n 16) 129–62; HC Sigman, ‘Perfection and Priority of Security Rights’ in Eidenmüller and Kieninger (n 15) 151–59; Sigman (n 162) 59–60, 76–78; Van Erp (n 252) 96–97, 103–08.

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Transaction filing is the traditional European way, sometimes exemplified by the registration of company charges under UK law.254 Notice filing originates from UCC Article 9 and has spread through exportation to other jurisdictions. Examples include the Personal Property Security Acts (PPSAs) in Canada, New Zealand and Australia.255 In addition, the idea of notice filing has found its way into UNCITRAL efforts on Secured Transactions and DCFR Book IX.256 Many commentators prefer notice filing over transaction filing.257 Notice filing gathers supporters largely due to its flexibility, including the possibility to register in advance of a security arrangement, and to cover multiple security arrangements by a single registration.258 Further advantages result from the ‘minimalist’ content of filed notices. First, filing itself is swift and easy. Second, the register is less prone to errors.259 Third, registered information does not disclose business secrets or other sensitive content.260 And, finally, the costs of the registry can be kept low.261 Despite strong support for notice filing, a case can still be made for transaction filing.262 The main point would be that the register in a transaction filing system is a more reliable source of information for the very reason that each entry relates to an actual security arrangement.263 For example, according to the EBRD, it is desirable that a register shows (besides the identity of the chargor and a description of the asset charged, which are both seen as necessities) a description of the secured

254 McCormack (n 3) 614; Van Erp (n 252) 103–04. See Companies Act 2006, pt 25 (Company charges). On the 2013 reform of the registration system, see L Gullifer and M Raczynska, ‘The E nglish Law of Personal Property Security: Under-Reformed?’ in Gullifer and Akseli (n 52) 271–87. 255 See A Duggan, ‘A PPSA Registration Primer’ (2011) 35 Melbourne University Law Review 865, 872–73. 256 See UNCITRAL Legislative Guide on Secured Transactions, ch IV, paras 10–14; UNCITRAL Guide on the Implementation of a Security Rights Registry; UNCITRAL Model Law on Secured Transactions, c IV; von Bar and Clive (n 112, vol 6) 5496–97 (IX.—3:301 comment C). 257 See H Beale, ‘The Future of Secured Credit in Europe: Concluding Remarks’ in Eidenmüller and Kieninger (n 15) 389. 258 ibid. 259 Von Bar and Clive (n 112, vol 6) 5497 (IX.—3:301 comment C). 260 Kieninger (n 11) 670. 261 Sigman (n 162) 76–77. According to Sigman, a fully computerised and electronic system of notice filing ‘not only is virtually error-free, but also is not expensive to establish, is extremely efficient, and is financially self-sustaining’. He suggests that even the paper-based US systems have proved inexpensive to operate and efficient, and have not required vast bureaucracy. cf J Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law, vol 2: Contract and Movable Property Law, 6th edn (Oxford, Hart Publishing, 2016) 538–39. 262 See McCormack (n 3) 615. McCormack writes: ‘Many observers, and indeed legislatures, however, remain to be convinced about the merits of notice filing.’ For a detailed critique of the UCC Art 9 notice filing system, see Hamwijk, Publicity (n 238) 263–325. 263 McCormack (n 3) 615. See Drobnig (n 245) 660. Drobnig wonders whether ‘the complicated technical system [is] really necessary if all the information it offers is a notice that there may exist a security interest, so that intending creditors are put on notice but have to turn to the debtor in order to verify the true state of affairs’. See also Dalhuisen (n 261) 538. Dalhuisen writes: ‘[T]he benefits of this [UCC Art 9] filing system, which is meant to establish an easy, simple and certain method of creating priorities, are in practice much less obvious than they appear at first. Consequently, there is much less of a model in the US example than would appear from its face.’

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claim. This is meant to enable third parties ‘to assess the extent of the charge and possibly the nature of the liability secured’.264 The inclusion of a description of a secured claim binds filings and registrations to particular individual security arrangements, contradicting the idea of notice filing. Arguably, ways are also available to bring the user-friendliness of transaction filing closer to that of notice filing. Ideas proposed so far include the following. The internet and methods of data capture would allow easy filing and registration. In that connection, ‘financial privacy’ could be protected by dealing with commercially sensitive information in a separate document. In turn, the benefits of advance registration, if considered worthwhile to begin with, could be achieved by allowing transaction filing in advance, but subject to a requirement of confirmatory filing by a certain deadline.265 Moreover, jurisdictions (or, in future, supranational governmental entities) importing a notice filing system might wish to improve or adapt that system in ways that effectively reduce its user-friendliness. For example, the drafters of DCFR Book IX recognised the need to protect potential and actual security providers from fraudulent or otherwise unwanted filings. As a result, the text now proposes requiring the security provider’s consent to registration (IX.—3:309) and the preliminary authentication of persons making declarations, including filings, to the register (IX.—3:304). In addition, the text proposes requiring entries to be accompanied by a declaration that the creditor assumes liability for damage caused to the security provider or third persons by wrongful registration (IX.—3:306(1)(e)).266 Despite the sound purpose, these requirements may make filing more cumbersome than is generally expected from a notice filing system. This of course depends on the closer content of the requirements. At any rate, choosing between transaction filing and notice filing involves tradeoffs. Transaction filing cannot provide the flexibility and simplicity of notice filing, whereas notice filing necessarily falls short of the reliability and accuracy of transaction filing. In this vein, Armour argues that notice filing (or ‘generic registration’) allows greater customisation and innovation in terms of security arrangements. However, this may come at the price of greater search costs to third parties. Yet at the same time, he notes that even a transaction filing (or ‘specific registration’) system probably cannot provide all the details that subsequent 264 F Dahan and J Simpson, ‘Publicity of Security Rights: Setting Standards for Charges Registries’ (2005) Law in Transition 16, 24. See EBRD, Publicity of Security Rights: Guiding Principles for the Development of a Charges Registry (2004) 8–9, available at www.ebrd.com/downloads/legal/secured/ pubsec.pdf. See also EBRD Model Law on Secured Transactions, Art 4.5 (with commentary). 265 McCormack (n 3) 615. McCormack does not regard advance registration as particularly important. See EBRD, Publicity of Security Rights (n 264) 14. According to the EBRD, ‘since the introduction of rapid electronic registration systems the need for protecting priority [through advance registration] has largely disappeared’ and the ‘advantages of allowing a potential creditor to take priority during the negotiations are debatable’. cf M Bridge, ‘The Scope and Limits of Security Interests’ in Eidenmüller and Kieninger (n 15) 189. In Bridge’s view, permitting advance registration is ‘[o]ne of the greatest merits of Article 9’. 266 Von Bar and Clive (n 112, vol 6) 5498 (IX.—3:301 comment D). See Veneziano (n 113) 130.

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lenders wish to know. He suggests ‘a plausible a priori case’ for notice filing, although he admits that no empirical work, at least as yet, supports our understanding of these trade-offs.267 The drafters of DCFR Book IX also recognise a trade-off, pointing out that notice filing may increase transaction costs arising after registration (the need for further inquiries as to the existence and extent of security rights). Nevertheless, to them ‘it appears to be the generally accepted view that these costs are more than outweighed by the core advantages of a notice filing system’ (swift and easy filing, less likelihood of errors due to the reduction of necessary details and formalities).268 Now, it is difficult to know whether this is the case and whether proponents of notice filing have actually weighed these costs and advantages against each other; either way, the Book IX drafters give no guidance on how to go about doing so. Another controversial choice in the design of a registration system is whether acquisition security devices should be subject to a registration requirement (as a precondition for third-party effectiveness or otherwise). A natural starting point is that they should where such a requirement concerns general security devices, because most arguments for publicity apply to general security devices and acquisition security devices alike. As Drobnig states: ‘In view of the basic decision for demanding registration it is difficult to justify a complete exclusion.’269 Then again, introducing a registration requirement for all acquisition security devices would be a major change for most European jurisdictions. Indeed, the most typical form of acquisition security in Europe consists in simple retention of title clauses, which are generally effective erga omnes without registration or other publicity.270 Assuming that acquisition security devices nevertheless involve a registration requirement, the next question is whether that requirement should somehow be modified, in the interests either of holders of acquisition security rights or of third parties, or both. Given that retention of title is typically used as a standard sales contract term, with multiple buyers, and also in lower-value sales, registering each use may be excessively cumbersome. DCFR Book IX, with its starting point that an acquisition financing device is effective only if registered (IX.—3:107(1)), presents two possible ways of tackling this problem.271 The first is a ‘grace-period’ rule, according to which an acquisition financing device is retroactively effective from the date of creation if registration is effected within 35 days of the delivery of the asset

267 Armour (n 15) 27–29. Armour considers a registration system ‘that does not attempt to segment the form of the registration obligation according to the type of security interest involved’ to be particularly beneficial within the EU and in other circumstances where parties dealing with a debtor will have heterogeneous expectations as to the security devices they may encounter. 268 Von Bar and Clive (n 112, vol 6) 5497 (IX.—3:301 comment C). 269 U Drobnig, ‘Choosing the Right Approach for European Law Making: Commentary’ in Eidenmüller and Kieninger (n 15) 109. 270 See Kieninger (n 11) 672. Kieninger considers this as ‘spontaneous harmonisation already reached’. 271 For the definition of an acquisition financing device, see IX.—1:201(3).

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supplied (IX.—3:107(2)).272 According to Anna Veneziano, the grace period should ensure that the registration requirement does not necessarily concern retention of title clauses in simple sales of low value and short-term credit.273 The second way is the rule that an acquisition financing device is exceptionally effective without registration if it secures a credit for assets supplied to a consumer. This exception does not concern security over proceeds or other assets different from the assets supplied (IX.—3:107(4)).274 Of course, the problem is also largely mitigated in that Book IX allows for the creation and registration of ‘an all-encompassing security, covering more than one transaction and proceeds as well as products’.275 An additional question is whether other creditors holding earlier created and registered general security rights need extra protection, through publicity, from later created acquisition security rights that enjoy superpriority. UCC Article 9 recognises the need, but only with respect to encumbered assets belonging to the debtor’s inventory (‘inventory collateral’) (section 9-324). To attain superpriority in the case of inventory collateral, the purchase-money financier must, before the debtor comes into possession of the assets, achieve perfection and notify the earlier-filed creditor that it has or expects to acquire a purchase-money security interest in the inventory. A single notification is effective for five years.276 According to Official Comment 4 to section 9-324, the notification requirement is meant to address particular typical arrangements between an inventory-secured creditor (the addressee of the notification) and its debtor. Under these arrangements, the inventory-secured creditor is required to make periodic advances (extend additional credit), or release old inventory, against incoming inventory. However, a fraudulent debtor could apply for these advances even though it has provided a purchase-money security interest in the inventory to another creditor. The notification requirement protects the (non-purchase-money) inventory-secured creditor as follows. An inventory-secured creditor that has received notification can decline to make further advances if any purchase-money security interests have been perfected. In contrast, an inventory-secured creditor that has not received notification can rely on any advances retaining their initial priority position, since no superpriority security interest threatens that position.277

272 Registration after this period results in the acquisition financing device becoming effective only at the time of registration and losing its superpriority (IX.—3:107(3)). cf UCC Art 9, s 9-317(e), which provides a 20-day grace period. 273 Veneziano (n 113) 133–34. The drafters maintain that 35 days is ‘not an arbitrary decision but takes into account a wide-spread commercial practice’, in that buyers are often given 30 days to effect payment. See von Bar and Clive (n 112, vol 6) 5483 (IX.—3:107 comment C). 274 See von Bar and Clive (n 112, vol 6) 5485–86 (IX.—3:107 comment D). See also UCC Art 9, s 9-309(1). 275 Veneziano (n 113) 133. See Beale (n 257) 389. Beale writes: ‘Notice filing is probably essential if the scheme is to cover forms of “quasi-security” such as the supply of inventory on retention of title terms or the outright sales of receivables, since these tend to take place by way of series of separate transactions. Having to register each one would be excessively burdensome.’ 276 Sigman (n 162) 74. 277 See ibid 74–75. Sigman notes that these arrangements are not normally used in the context of goods other than inventory.

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Thus, the notification requirement serves a sound purpose. However, as cCormack suggests, the requirement may be questioned on the basis that it M unnecessarily complicates the law, and that the distinction between inventory collateral and non-inventory collateral is somewhat arbitrary.278

iv. The Virtues of Local Choices The observations in sections IV.B.i–IV.B.iii above confirm that the design of a system of security rights, from foundations to details, necessarily involves controversial choices. Next, we turn to reasons why it may be worthwhile, if not necessary, to retain a say about at least some of these choices in national legal systems, or in otherwise decentralised decision-making, rather than to top-down impose a single model on all jurisdictions. All these reasons concretise the objective of responsiveness (defined in section IV.A above), especially in terms of the law’s adaptability to local circumstances. We will first substantiate the idea that jurisdictions differ from one another in terms of economic and social circumstances and value choices, and that these differences should matter in future law-making (section IV.B.iv.a). This task requires challenging a powerful counter-argument, here referred to as the ‘technicality thesis’ (section IV.B.iv.b). Finally, we will note that the optimal features of law on security rights would be unknowable even if the above differences did not exist (section IV.B.iv.c). This raises further questions for future law-making. a. The Responsiveness to Economic and Social Circumstances and Value Choices A single model of a system of security rights may not fit all jurisdictions. This is because jurisdictions may require different kinds of law due to their different economic and social circumstances.279 In addition, the question of fit depends on a jurisdiction’s value choices, as expressed by the policies and norms of its system of security rights. Due to different economic and social circumstances, if a single model of a system of security rights was top-down imposed on all

278 McCormack (n 3) 622. As if to split the difference between the position of UCC Art 9 and the point mentioned by McCormack, the UNCITRAL Legislative Guide on Secured Transactions offers two alternative recommendations. See Recommendations 180 and 192. See also ch IX, paras 133–39. Another matter where the Legislative Guide offers two alternatives, one of which again relies on the distinction between inventory and non-inventory, is whether the superpriority of an acquisition financier should be extendable to proceeds. 279 See generally S van Erp, ‘Civil and Common Property Law: Caveat Comparator—The Value of Legal Historical-Comparative Analysis’ (2003) 11 European Review of Private Law 394, 396. Having noted that harmonisation pressures within property law mainly concern security rights, Van Erp states: ‘[T]he question how immune to harmonisation property law is not only poses an interesting academic question, but also a question of great practical relevance. To answer this question, property law should be analysed from a legal-historical, legal-comparative, social-economic, political and cultural background.’

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jurisdictions, some jurisdictions could be burdened by superfluous norms, while others could be left with insufficient norms, or the result might be otherwise unbalanced. Value-based fit, then, has to do with the legitimacy of law. Roderick A Macdonald’s two transplantation caveats, drawing on his experience as a law reform expert and consultant, provide a perfect keynote for these reflections: First, and most importantly, we should never take for granted the economic, political, social and institutional factors that make it possible to even contemplate security on property regimes as a means for enhancing access to credit. Second, we should never underestimate the fragility of these legal regimes, especially as they relate to the necessary citizen confidence and willingness to accept judicially declared outcomes that underpin them.280

Macdonald’s Ukrainian experience suggests that we tend to take for granted some basic conceptions of the rule of law that are necessary preconditions for an operable regime of secured lending. Slow and unreliable courts, the haphazard enforcement of judgments and systematically rapacious creditors almost certainly prevent a regime from working. In these situations, a regime cannot be built on the idea of courts policing ex post ‘good faith and commercial reasonableness’. Rather, ex ante ‘bright line rules’ are needed. For these reasons among others, the initial idea of reforming Ukrainian law along the lines of UCC Article 9 failed.281 Even if we assume that the rule of law in all EU Member States is at a sufficient level with a view to law reform, which is by no means certain, differences in economic and social circumstances may still complicate matters. In this connection, another quotation from Macdonald is in order: ‘States have quite distinct socio-economic-political systems. In addition, the types of and actual role of credit institutions and the contractual practices attending to commercial law generally vary considerably from country to country.’282 Suffice it here to take two examples of potential complications. These concern publicity and priority, respectively. The publicity example concerns Germany. We already discussed how the German system of security rights manages to function virtually without publicity.283 Explanations were found in the special characteristics and structure of the German credit market (extreme relationship banking, a relatively closed

280

Macdonald (n 3) 241–42. 248–51. Macdonald writes: ‘Much of the theory and general conceptualization of secured lending that permeates western systems, and which is present in international conventions, model laws and “draft legislative guides” such as those now being promulgated by various international norm entrepreneurs is inapplicable to and unworkable in countries that find themselves in situations like Ukraine. Commentators who would make law subservient to economics misunderstand the relative autonomy of law in its two main western European variants.’ Footnote omitted. As for the persistence of Romanist concepts in Ukrainian legal thinking, he notes: ‘A “law and economics” approach to legal regulation simply misses the key lessons of 50 years of comparative law: law is not simply an independent variable and legal doctrine is not fungible.’ 282 ibid 258. 283 Section IV.B.iii.b. 281 ibid

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market and a number of well-informed banks in a quasi-monopolistic position) and the level of trust among market actors (borrowers seldom misrepresenting encumbrances over their assets or otherwise attempting to deceive lenders because of the difficulties and risks involved). Now, if non-publicity is optimally, or nearly optimally, in line with these and other features of German credit culture, the introduction of a publicity regime in Germany could be superfluous (at least from the jurisdiction’s internal perspective).284 As a result, the costs of a notice filing system could exceed the benefits. Indeed, Hans-Jürgen Lwowski writes to that effect. In his view, a notice filing system would not entail notable benefits for German domestic lending. This is because prospective lenders even today do what they should do after discovering a filed notice. They make inquiries of other banks, ‘inspect the books’ and request written confirmation so as to ascertain that no hidden encumbrances exist and to assess their credit risk.285 Therefore, a notice filing system would merely incur additional administrative costs.286 According to Lwowski, a notice filing system would strengthen the position of secured creditors in cross-border situations, that is, protect them against loss of security rights. However, he does not consider this significant as such, because problems related to enforcement abroad and retrieval of the security object (high and unpredictable costs, loss of time and similar issues) would remain unresolved. Additionally, he expresses financial privacy concerns, in particular about enterprises having to ‘publicise’ the fact that they require credit and that security was demanded of them. Since a register searchable by anyone would serve the curiosity of competitors, he suggests an inter-bank system as an alternative.287 The other example, concerning priority, indicates that a jurisdiction’s economic circumstances, or ‘development stage’, may curtail or expand its range of possible

284 See Brinkmann (n 242) 350–51. According to Brinkmann, the German approach ‘has worked quite well during the last 120 years’, but he doubts ‘to what extent [it] is fit to meet current and future developments’. 285 H-J Lwowski, ‘Ökonomische und rechtliche Anforderungen an ein optimal funktionierendes Mobiliarkreditsicherungsrecht aus der Sicht der Praxis’ in J Basedow, O Remien and M Wenckstern (eds), Europäisches Kreditsicherungsrecht: Symposium im Max-Planck-Institut für ausländisches und internationales Privatrecht zu Ehren von Ulrich Drobnig am 12. Dezember 2008 (Tübingen, Mohr Siebeck, 2010) 178–79. See Brinkmann (n 242) 350. Brinkmann indeed argues that the German relational lending practice, Hausbankprinzip, by and large fulfils the functions of notice filing. 286 Lwowski (n 285) 179. Lwowski appears to miss the point that banks would need to make these inquiries, inspections and requests only in situations where a notice has been filed. Thus, notice filing could save banks effort. As for potential advantages of notice filing to secured creditors, he mentions that it would become more difficult for third parties to succeed in good faith acquisition. Yet he downplays this point, noting that the existing preconditions for good faith acquisition are seldom fulfilled in practice (at 176–77, 180). See Kieninger (n 65) 168. Kieninger writes: ‘If one speaks to a German lawyer about a registration system for security interests in movable property, the immediate reaction is: Impossible!’ Although Kieninger explains this by the fact that the lawyer has an asset-based register in mind, such a reaction may also imply satisfaction towards the absence of a register and non-publicity. See also von Bar and Drobnig (n 9) 349. 287 Lwowski (n 285) 179–81.

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policy choices. Similar observations have been made elsewhere in terms of other features of a system of security rights. One instance concerns the EBRD Model Law on Secured Transactions and the balance it strikes between the interests of a secured creditor and a security-provider debtor, inter partes. In Nordic legal scholarship, this balance has been found to be tilted towards creditor interests, at the expense of debtor interests, more than is typical of the Nordic legal systems. The pro-creditor attitude has been explained by the fact that the model law primarily targeted the post-socialist transition economies of Central and Eastern Europe, whose economic development was thought to require a particularly investorfriendly atmosphere.288 Importantly, it has been pointed out that a more stable economic situation in the future may entail rebalancing, placing more weight on debtor interests.289 This argument can easily be extended to concern the priority orders of systems of security rights. Indeed, a jurisdiction with a developing and particularly investment-hungry economy may not be able to afford to promote creditor equality, say, by carve-out provisions or, more primitively, limiting the scope of security devices, even if it would prefer to do so.290 This finding seems to be in line with one of the conclusions of the well-known empirical comparative study on the legal protection of investors by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W Vishny: ‘A final interesting result … is that creditor rights are, if anything, stronger in poorer than in richer countries, perhaps because poor countries adapt their laws to facilitate secured lending for lack of other financing opportunities.’291 The above remark on the ability to afford promoting creditor equality hints that jurisdictions may wish to make independent value choices in designing the system of security rights applicable in their territory. These wishes, though, are seldom recognised in unification or harmonisation debates. Instead, these debates often seem to be governed by an implied technicality thesis. Here, the ‘technicality thesis’ denotes a belief that the law on security rights, especially concerning movable property, mainly consists of technical rules that involve little by way of value and 288 MF Tveiten, ‘Generalpant for Øst-Europa: En Modell-lov for nasjonale pantelover’ (1995) Lov og Rett 188, 200–02. Tveiten notes, eg, that the rules on realisation of encumbered assets, which give creditors a free hand, would not have been acceptable from the Norwegian point of view. 289 E Tammi-Salminen, Sopimus, kompetenssi ja kolmas: Varallisuusoikeudellinen tutkimus negative pledge -lausekkeiden sivullissitovuudesta, SLY-sarja A 227 (Helsinki, Suomalainen Lakimiesyhdistys, 2001) 130. 290 See Tveiten (n 288) 200–01. Tveiten also contrasts the model law rules on eligibility of all kinds of asset as security for credit, and on the enterprise charge, with the more restrictive Norwegian law and debate on the relationship between secured and unsecured credit. 291 R La Porta, F Lopez-de-Silanes, A Shleifer and RW Vishny, ‘Law and Finance’ (1998) 106 Journal of Political Economy 1113, 1139. cf G Affaki, ‘Analysis of Obstacles to the Proper Functioning of the Internal Market: Legal, Economic and Social Aspects’ in Drobnig, Snijders and Zippro (n 1) 196. Affaki sums up his view on the results of the La Porta, Lopez-de-Silanes, Shleifer and Vishny study as follows: ‘A large scale empirical study involving data collection in 49 countries has shown that legal systems that rigorously protect creditors, enable them to repossess collateral upon default, and grant them priority relative to other claimants in bankruptcy, encourage better functioning debt markets than systems that are more lax.’ This does not seem to be entirely in accordance with the above cited conclusion.

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policy considerations and thus no political stakes. Therefore, so the thesis appears to go, unification or harmonisation in this field ought to be relatively straightforward, that is, easier in comparison to similar efforts in most other fields of private law.292 Even if no commentator has explicitly stated the technicality thesis as their opinion, the following three observations, taken together, strongly hint at its prevalence as a background idea.293 First, the law on security rights, or property law to which it largely belongs in most legal systems, is often distinguished from other areas of private law that are considered to be more value-laden or ideological. Examples of these areas include contract law and, even more so, family law.294 Second, in discussions of potential difficulties in harmonising the law on security rights, the focus is (often solely) on matters of a technical nature, such as conceptual differences between legal systems.295 Third, it has been suggested that the development of the law on security rights in different legal systems has largely resulted from path dependence rather than prudent and holistic planning.296 Arguably, this

292 See NHD Foster, ‘Comparative Commercial Law: Rules or Context?’ in E Örücü and D Nelken (eds), Comparative Law: A Handbook (Oxford, Hart Publishing, 2007) 266–67. Foster describes, but does not himself hold, an ‘instrumentalist view’ of commercial law, which resembles the technicality thesis: ‘Commerce, though, is not “close to people’s lives”, and is therefore not affected by cultural attitudes. Business people everywhere just want to make money. So commercial law is not affected by culture either. It is just lawyer’s law, a mere instrument … formulated to perform technical functions in a technical field.’ To be sure, no one suggests that the harmonisation, let alone unification, of the law on security rights would, as such, be an easy task. Indeed, decades of failed efforts confirm the opposite. See Kieninger (n 48) 22–24. 293 See B Bouckaert, ‘Divergences of the Law on Securities: A Law and Economics Approach’ in Drobnig, Snijders and Zippro (n 1) 175. In accordance with the above technicality thesis point, Bouckaert notes: ‘The law on liens and security rights … has the reputation of being extremely technical and very remote from intellectually more challenging topics in which political and ethical questions are involved. Yet, this could be just an appearance.’ 294 E Tammi-Salminen, ‘Eurooppalaistuvan esineoikeuden haasteet’ in EJ Hollo (ed), Kansallinen oikeus ja liittovaltioistuva Eurooppa: National Law and Europeanisation, Lakimies-sarja E 21 (Helsinki, Suomalainen Lakimiesyhdistys, 2009) 195–96. As regards family law, the prevailing attitude seems to be the direct opposite of the technicality thesis, articulated as the ‘cultural constraints’ argument. See M Antokolskaia, ‘Family Law and National Culture: Arguing against the Cultural Constraints Argument’ in K Boele-Woelki (ed), Debates in Family Law around the Globe at the Dawn of the 21st Century (Antwerp, Intersentia, 2009). See also U Drobnig, ‘A Subsidiary Plea: A European Contract Law for Intra-European Border-Crossing Contracts’ in S Grundmann and J Stuyck (eds), An Academic Green Paper on European Contract Law, Private Law in European Context Series 2 (The Hague, Kluwer Law International, 2002) 349. Drobnig predicts that unification in the field of property law is likely to face more resistance than in the field of contract law ‘because property in general is thought to be more closely bound up with “basics” of each country’. However, according to him, this applies to regimes of immovable rather than movable property. 295 See, eg, Rank (n 1) 206–08. Rank’s account of why ‘harmonisation will not be simple’ mainly deals with such technicalities. 296 G McCormack, ‘Convergence, Path-Dependency and Credit Securities: The Case against Europe-Wide Harmonisation’ in M Andenas and C Baasch Andersen (eds), Theory and Practice of Harmonisation (Cheltenham, Edward Elgar, 2011) 363–65. See JM Smits, ‘How to Predict the Differences in Uniformity between Different Areas of a Future European Private Law? An Evolutionary Approach’ in A Marciano and J-M Josselin (eds), The Economics of Harmonizing European Law, New Horizons in Law and Economics (Cheltenham, Edward Elgar, 2002) 60–63, 66.

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would advocate against conscious value choices. In what follows, the technicality thesis is challenged, drawing analytical support from Duncan Kennedy’s work on the apparent technicalities of law. b. Against the Technicality Thesis: Continuum of Policies and Values In an essay on contract law theory, Kennedy demonstrates that even ‘merely technical’ rules may involve political stakes, albeit indirect ones, meaning that their politics is ideological and rhetorical rather than directly distributive. Kennedy’s examples of such rules, which he analyses in detail, concern the liability of a mistaken party and the right to interrupt performance (conditions, anticipatory breach). As for political stakes, Kennedy advances a twofold argument. He first claims that in discussing contract technicalities, legal scholars advance arguments that resonate with (or are homologous with or mutually reinforcing towards) arguments in domains that are conventionally considered to be political rather than merely technical. He illustrates: ‘If contract law requires businessmen of equal bargaining power to look out for one another, then it is more plausible that public law should require strong groups to look out for weak ones.’297 And this is how he describes the ‘transposition’ or ‘structural analogy’ between the two debates: When debate on the technical issues becomes passionate, it is often clear that the reason is the sense that some participants on each side are asserting the relevance of public law divisions, while others are just as vigorously denying that relevance.298

In Kennedy’s view, the foregoing first claim is ‘simplistic’, but the second claim is even ‘overly complex’. The gist of the second claim is that regardless of how issues of contract technicalities are resolved, the very understanding of them as merely technical has its own effect, reinforcing mainstream political centrism against radicalism of the left and the right alike, through a reinforcement of the public– private distinction. At the same time, ‘private law as a whole aspires to resemble its classical contract core, which is quintessentially legal, rational, scientific, and individualist, while the contrasting domain of public law is political, arational, arbitrary, and altruist’.299 For this book, though, Kennedy’s two claims on the political stakes have only limited relevance. This is so because, as argued below, significant parts of the law on security rights are not merely technical in Kennedy’s sense. However, this argumentation can be deepened by utilising another aspect of Kennedy’s work, namely a ‘continuum conception’ for categorising legal rules. Indeed, his continuum can be developed into a comparative tool, sensitive to different policies and value choices between systems of security rights in different jurisdictions.

297 D Kennedy, ‘The Political Stakes in “Merely Technical” Issues of Contract Law’ (2002) 10 European Review of Private Law 7, 7–12. 298 ibid 25. 299 ibid 8, 24, 26–27.

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Kennedy describes merely technical issues as questions to which the answer is unlikely to be of any importance for the shape of the economy and which are not cared about, if cared about at all, because of their distributional consequences.300 As for the law on security rights, the first step towards challenging the technicality thesis is to demonstrate that the opposite is true in this area of private law. That is quite easily achieved through the following logically connected series of assertions and inferences. The law on security rights is commonly regarded as a necessary legal infrastructure for a market economy. This is so because the availability of credit at reasonable cost is understood to depend on these rights.301 If this understanding holds true, then the law on security rights is of great importance for the shape of the economy. Moreover, as discussed on several occasions above, a central economic mechanism of security rights aims to create insolvency priorities that deviate from the default rules of substantive insolvency law, which in itself is all about distributional consequences. These rules reflect the pari passu principle. The extent to which security rights are allowed to cause deviations from the pari passu principle varies between legal systems. The same applies to the rules on priority order between different types of security rights and statutory privileges. This variation implies that the law on security rights necessarily involves fundamental value and policy choices.302 What is more, answers to the question why the law permits security rights in the first place and accords secured claims priority over unsecured claims on insolvency vary between legal systems. For example, common law jurisdictions are thought to be particularly liberal in this respect. Roy Goode connects liberality with the sympathies these jurisdictions generally feel towards the ideas of party autonomy and self-help.303 In a similar vein, McCormack observes that a ‘bargain approach’, based on freedom of contract, belongs to traditional English legal and judicial thinking. This approach views a security right as a fair exchange for credit. Accordingly, ‘absent overwhelming considerations of public policy’, the bargain between the secured creditor and the debtor (their contract) should be respected by third parties.304 In jurisdictions less liberal towards secured credit, the point of departure may be reversed. For example, in the Nordic countries the point of departure appears to be that agreements to the detriment of third parties are not accepted, while exceptions require special reasons. As regards security rights and deviations from the pari passu principle (to the detriment of third parties), the only plausible reasons may be the effects of security rights on the availability and cost of credit,

300

ibid 7. Arner (n 24) 91–94, 107–15. This idea was discussed in section III.C above. 302 See Verstijlen (n 3) 23–24. Verstijlen emphasises that the balance legislators have struck in these matters ‘is not … the same everywhere, but may depend on local social circumstances and local opinions on the extent to which the interests of the parties involved should be protected’. 303 Goode (n 74) 48. 304 McCormack (n 16) 12–15. 301

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and the consequences of these effects on economic activity. Such thinking may at least in part explain the relatively strict preconditions for and restrictions on the enforceability of security rights in these jurisdictions. Differences of this kind would most probably surface in, and complicate, any serious unification or harmonisation efforts. Against this backdrop, the technicality thesis appears questionable, to say the least. So as to categorise different rule-solutions and to grasp their political stakes, Kennedy has developed an analytical device involving a continuum between ‘altruist’ and ‘individualist’ ends. According to him, different contract law rulesolutions on mistake and interrupted performance can be placed on this continuum on the basis of whether they impose lighter or heavier duties of sacrifice towards vulnerable parties and lighter or heavier duties of sharing towards misfortunate parties. Additionally, these same solutions can be placed on the continuum on the basis of the extent that they make the duty a function of fault by the mistaken or breaching party (heavy duty regardless of foolishness at one end of the continuum and no duty regardless of innocence at the other).305 Now, we can adapt and expand the continuum idea so that legal rules (rule-solutions) on security rights, and eventually entire systems of security rights, could be placed on a continuum so as to tease out otherwise latent aspects of these legal rules and systems. In this adaptation, the counterparts for altruism and individualism as the ends of the continuum would be the two opposite extreme positions in terms of the possibility to create security rights, enforceable in liquidation-type collective insolvency proceedings, on the basis of an agreement between the prospective secured creditor and security-provider debtor. These ends are absolute pari passu distribution and absolute freedom of contract with thirdparty effects (hereinafter, for brevity, referred to as the ‘pari passu end’ and the ‘contract freedom end’). The pari passu end rejects enforceability against third parties altogether, whereas the contract freedom end in principle enables unlimited enforceability against third parties. Building the continuum between these extreme positions is apt because their tension captures the economic mechanism of security rights as well as the main reason for its controversial nature, which together explicate many divergences between systems of security rights. Because the continuum is only a tool for analysis, it is of no consequence that its ends are imaginary in the sense of not depicting any existing national system of security rights. The point of the continuum exercise is to make systems of security rights, and the legal rules of which they consist, comparable with each other, that is, commensurable with respect to the most relevant point of comparison. It goes without saying that no system or rule has an exact place on the continuum. However, the continuum allows two or more systems or rules to be arranged in relation to each other. This implies that some systems and rules find their place closer to one end, with others closer to the other end.

305

Kennedy (n 297) 13–14.

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Importantly, the continuum also enables the observation of fundamental value choices in systems of security rights. This is so because the ends of the continuum, which as such represent imaginary extreme policy choices, can be connected with different sets of values. The contract freedom end involves values of liberalist contract law, such as individual autonomy and self-determination together with formal equality in these respects.306 Moreover, it involves utilitarian values, as can be extracted from the argument that the overall benefits of security rights for the economy as a whole, in the shape of increased supply and reduced cost of credit, are an acceptable trade-off for the losses that these rights potentially cause to unsecured creditors on insolvency. In other words, this argument sees security rights as a way to maximise utility.307 In contrast, the pari passu end involves equality in a substantive, situation-specific sense. Additionally, it arguably involves solidarity values in that the pari passu principle can be understood as an expression of creditors’ mutual responsibility towards each other for their common debtor’s failure to repay credit extended.308 In sum, the position of a particular system of security rights on this continuum reflects differing composites or compromises between the foregoing values. In this context, at least three kinds of legal rules push the system of security rights to which they belong towards the pari passu end of the continuum. First come carve-out rules which set aside part of the proceeds of realising encumbered assets to leave more to be distributed among unsecured creditors.309 Second are rules that restrict the scope of security devices, be they restrictions on assets eligible as security for credit, persons eligible as security providers or situations where security devices can be employed.310 Finally, third come rules that require security arrangements to be publicised, be they in the form of publicity possession, registration or notification.311 Conversely, the absence of each such rule pushes the system towards the contract freedom end. Of course, some rules push a system along the continuum more forcefully than others. The reason for this is plainly that all the above-mentioned rules can be formulated more or less strictly. Besides, some rule-contents may as such represent a particularly significant shift towards one or the other end of the continuum. The clearest example is carve-out rules because their overt purpose is to promote creditor equality on insolvency.

306 See generally T Gutmann, ‘Some Preliminary Remarks on a Liberal Theory of Contract’ (2013) 76 Law and Contemporary Problems 39, 39–42. 307 The argument was discussed in section III.D above regarding justifying the priority of secured over unsecured claims. 308 The etymological roots of the term ‘solidarity’ lie in the Roman law of obligations, namely in obligatio in solidum. See K Bayertz, ‘Four Uses of “Solidarity”’ in K Bayertz (ed), Solidarity, Philosophical Studies in Contemporary Culture 5 (Dordrecht, Kluwer Academic Publishers, 1999) 3. 309 Discussed in section IV.B.ii.a above. 310 Discussed in section IV.B.ii.b above. 311 Discussed in section IV.B.iii above. These rules are a more difficult case because they often also facilitate the use of security rights by employing publicity as a priority determinant. Nevertheless, they can be seen as limitations on freedom of contract with third-party effects.

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As we have seen above, various policy differences between systems of security rights boil down to, or are explicable by, different value choices. Granted, it is quite another thing to argue that (at least some) decisions on value choices should also be retained at a national or other local level in the future—decentralised—in preference to imposing a single model on all jurisdictions by way of the comprehensive unification or harmonisation of substantive law. Nevertheless, this argument can still be made, based on the view that producing legitimacy of the law could otherwise prove difficult. In the following, the argument is developed from the viewpoint of national legal systems. We can start by observing that national jurisdictions are still meaningful value communities. Therefore, their value choices are material as such, and deserve to be respected.312 Then again, in the face of Europeanisation and globalisation, national jurisdictions are becoming increasingly arbitrary value communities. Jan M Smits, among others, notes the needs and wants of individuals to search for community and identity elsewhere. This leads him to support permitting people to opt into other national laws or European regimes, as exemplified by the idea of party autonomy in the proposed Common European Sales Law.313 In terms of security rights, this kind of party autonomy would be problematic, if not outright unworkable, because the law on security rights largely deals with third-party relations, as opposed to relations between contracting parties.314 What is more, the issue of arbitrariness could hardly be addressed by attempting to replace smaller value communities with a larger one by unifying or harmonising substantive law. While this argument is developed from the viewpoint of national legal systems, the argument itself is not a nationalist one, particularly not in any Volksgeist-inspired sense. Indeed, it is not argued that the law and its underlying value commitments are ‘the unique expression of a people’ flowing from its ‘common consciousness’.315 Other jurisdictions could end up with similar contents and commitments. Moreover, even within a jurisdiction, these matters are always to a degree contested and contingent. Nevertheless, a single model of a system of

312 For a similar point in the context of non-recognition of foreign security rights, see Verstijlen (n 3) 23–24, 30. The point also finds parallels in other areas of private law. See, eg, JM Smits, ‘European Private Law: A Plea for a Spontaneous Legal Order’ in DM Curtin, JM Smits, A Klip and JA McCahery, European Integration and Law: Four Contributions on the Interplay between European Integration and European and National Law to Celebrate the 25th Anniversary of Maastricht University’s Faculty of Law (Antwerp, Intersentia, 2006) 81. Smits argues against the maximum harmonisation of consumer law because some jurisdictions would probably have to scale back their consumer protection and it ‘would be wrong to prevent a national preference for a higher level of protection’. 313 JM Smits, ‘What Do Nationalists Maximise? A Public Choice Perspective on the (Non-) Europeanization of Private Law’ (2012) 8 European Review of Contract Law 296, 303–05. See Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law’ COM(2011) 635 final. 314 See M Deschamps, ‘Conflict-of-Laws Rules for Security Rights: What Should Be the Best Rules?’ in Eidenmüller and Kieninger (n 15) 285–86. 315 On Volksgeist thinking and nationalism in law, see Smits (n 313) 299–303 (includes the quoted phrases); G Comparato, Nationalism and Private Law in Europe, Modern Studies in European Law 45 (Oxford, Hart Publishing, 2014) 81–110.

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security rights, based on a single set of value choices, may not fit all national jurisdictions. This is partly because all jurisdictions have probably attempted to build their own system of security rights as a system of coherent choices, including in relation to areas of law that surround or overlap with the law on security rights, particularly property law and substantive insolvency law. In other words, valuebased fit may require broader coherence of the law.316 However, the weightiest aspect of the argument is that national jurisdictions are needed as platforms for legal-political decision-making. The value choices involved in the design of a system of security rights typically relate to priority questions broadly understood, including carve-outs and the scope of security devices, along with publicity questions. They require an assessment of the interests of different parties and the need for protection as well as the microeconomic and macroeconomic effects of different means of protection. Such assessments lie at the heart of legal-political decision-making. As demonstrated by carve-out debates in particular, the processes involved are often intense and may result in changing the law. Importantly, the processes themselves are necessary for channelling ‘community sensibilities and fairness’ into systems of security rights and for maintaining ‘our collective confidence in the commercial law system’.317 In short, legal-political decision-making as a process is necessary for the legitimacy of law on security rights. National jurisdictions are needed as platforms for this process because real alternatives do not seem to exist. Pushing the process to the European level, together with the relevant legislation, might be undesirable for two reasons. First, legislation at the European level would probably be far more difficult to change than national law.318 Consequently, even if debate arose and suggested that sentiments had changed, the European legislature might prove unable or excessively slow to react. Second, the internationally developed models, which European legislation would probably follow, tend to be technocratic by nature.319 Symptomatically

316 On the notion of coherence, see K Tuori, Ratio and Voluntas: The Tension between Reason and Will in Law, Applied Legal Philosophy (Farnham, Ashgate, 2011) 153, 164–65. 317 See Warren (n 141) 1386–87 (includes the quoted phrases). 318 See T Wilhelmsson, ‘The Design of an Optional (Re)statement of European Contract Law: Real Life Instead of Dead Concepts’ in Grundmann and Stuyck (n 294) 357–58. 319 For a discussion of background interests that may have influenced the content of international instruments in this area, see McCormack (n 3); C Devaux, ‘The Role of Experts in the Elaboration of the Cape Town Convention: Between Authority and Legitimacy’ (2013) 19 European Law Journal 843. McCormack discusses the UNCITRAL Legislative Guide on Secured Transactions and US business interests, while Devaux focuses on the Convention on International Interests in Mobile Equipment and the interests of the aviation industry. See also G McCormack, ‘Secured Transactions Law Reform, UNCITRAL and the Export of Foreign Legal Models’ in NO Akseli (ed), Availability of Credit and Secured Transactions in a Time of Crisis (Cambridge, Cambridge University Press, 2013) 35, 53–58. cf SV Bazinas, ‘The Utility and Efficacy of the UNCITRAL Legislative Guide on Secured Transactions’ in Akseli (above in this note) 172–77. Bazinas writes: ‘It is true that UNCITRAL engaged recently in a discussion of its working methods. However, this discussion had nothing to do with the impact of a neo-liberal American agenda on UNCITRAL texts.’

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of that tendency, they take priority (again broadly understood) of secured over unsecured claims as the overriding policy. In doing so, they may effectively block discussion of other aims that a system of security rights should perhaps be assigned. For example, promotion of creditor equality, which has traditionally been regarded as an important aim in the Nordic countries, does not seem to be recognised by UNCITRAL, whose Legislative Guide on Insolvency Law recommends as follows: The insolvency law should minimize the priorities accorded to unsecured claims. The law should set out clearly the classes of claims, if any, that will be entitled to be satisfied in priority in insolvency proceedings … Claims superior in priority to secured claims should be minimized and clearly set forth in the insolvency law.320

Indeed, UNCITRAL has taken a clear stand against carve-outs due to their alleged ‘potential to create uncertainty with respect to the recovery of secured credit, thus discouraging the provision of secured credit and raising the associated costs’.321 Likewise, the EBRD, in its ten core principles for a secured transactions law, seems to subscribe to the full priority of secured claims and maximal scope of security devices: If the secured debt is not paid, the holder of security should be able to have the charged assets realised and to have the proceeds applied towards satisfaction of his claim prior to other creditors … The security right should continue to be effective and enforceable after the bankruptcy or insolvency of the person who has given it … Security should be available (a) over all types of assets, (b) to secure all types of debts, and (c) between all types of person.322

c. Unknowability of the Optimal Features of Law on Security Rights Even assuming that a single model of a system of security rights could fit all European jurisdictions, which is highly questionable in the light of the above discussion, one reason remains to retain at least some decisions concerning the design of these systems at the national or other local level, and thus decentralised. Quite simply, we do not know, and probably cannot know, what should be regarded as the optimal features of law on security rights. This is so because the economic mechanisms behind security rights are still largely unclear and virtually untestable. A striking example is that we can only guess how existing systems of

320

UNCITRAL Legislative Guide on Insolvency Law (pt 2), Recommendations 187 and 188. ibid pt 2, ch V, para 64. 322 The quotations are from principles 3, 5 and 7. See F Dahan and J Simpson, ‘The European Bank for Reconstruction and Development’s Secured Transactions Project: A Model Law and Ten Core Principles for a Modern Secured Transactions Law in Countries of Central and Eastern Europe (and Elsewhere!)’ in Kieninger (ed) (n 11) 102–03. Dahan and Simpson reproduce the text of the principles. 321

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security rights would compare to a theoretical situation where security rights were altogether banned and unenforceable. In such a situation, the need for ‘defensive use’ of security rights, in the sense of demanding security just because other creditors may demand it, would cease.323 It is hardly surprising, then, that unclarity also concerns individual features, or subsystems, of systems of security rights. The existing empirical findings more or less support certain theoretical positions (and features of law) rather than actually confirming them. Empirical literature is particularly underdeveloped in terms of appropriate design of publicity mechanisms.324 Assuming that the point on unknowability of the optimal (or, indeed, even appropriate) features holds true, would it really make sense to lock into one fixed set of features by way of comprehensive substantive unification or harmonisation? Would it not be wiser to rely on individual jurisdictions as experimental laboratories for different alternative features?325 These questions, among others, are covered in the next section.

C. The Potential of Competition between Jurisdictions The objective of responsiveness was defined above as sensitivity to reasons and rationales to resist changes in the law as well as to impulses that call for changes in the law.326 One source for such reasons, rationales and impulses, besides the economic and social circumstances and value commitments of individual jurisdictions, could be competition between jurisdictions. This means jurisdictions competing with one another as producers of law, also referred to as ‘competition between legal systems’ or ‘regulatory competition’. At times, competition is raised in discussions on the future of the law on security rights, or even property law in general. Importantly, competition between jurisdictions has been suggested as possibly entailing different kinds of benefits in terms of development of the law. If notable benefits can be verified or demonstrated as likely to accrue, then competition forms another reason to include responsiveness in development objectives alongside the objective of foreseeability. We will attempt to verify or demonstrate these benefits in the following. The problem with ideas of competition discussed so far in the context of security rights is that they often seem to lack a proper theoretical basis or, if they have one, to withhold it. Indeed, they can at best be taken as theoretic fragments, which may contain important insights but fall short of being fully c onvincing. The argument

323 See Röver (n 12) 10. According to Röver, a ‘no pledge world’ is an unworkable scenario despite its appealing simplicity. The problems he sees relate to non-protection of sale creditors, and loan creditors not being able to assess the economic basis for their financing activities. 324 Armour (n 15) 4, 28–29. 325 See generally Smits (n 312) 75–76. 326 Section IV.A.

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submitted here is that a more comprehensive competition theory for the law on security rights might cure these shortcomings. Therefore, the question is how to move from these fragments of theory to an entire theory. The attempt here consists of rehearsing the essence of the Tieboutian theory tradition, as applied to law (section IV.C.ii),327 and making the adjustments that the characteristics of the law on security rights require ( section IV.C.iii). But before we go into that, a brief review of the theoretic fragments is in order.

i. Theoretic Fragments One theoretic fragment can be gleaned from Kieninger’s discussion of unification or harmonisation options with respect to security rights. In the relevant passage, she deals with the question whether European legislation should replace national law altogether or whether it should provide an additional model that parties to a security arrangement could opt for instead of the otherwise applicable national law.328 Such an additional model has been put forward and further developed by the name of a ‘European Security Right’ (ESR).329 According to Kieninger, on a theoretical level, the ESR arguably ‘would leave room for “competition among legal systems” or “regulatory competition” and … would restrict the detrimental effects of errors or false compromises in the legislative process’. Nevertheless, she seems sceptical about this alternative. Indeed, she argues that if the EU institutions seriously started preparing a contract law regulation or even a civil code, security rights should be included as ‘the field where unification is most desirable’.330 Kieninger thus regards the ESR as a more cautious, and at least in some respects safer, alternative to unification or harmonisation by outright removal of substantive divergences. In this connection, she appears to understand competition between jurisdictions as a positive phenomenon. However, she does not explicate what makes it so, apart from the point about caution. Nor does she attempt to explain the dynamics of competition in this area in the sense of the way in which competition is expected to function in terms of security rights in particular. These open questions call for an overall competition theory for the law on security rights. The next theoretic fragment is from Frank MJ Verstijlen. He begins with the observation that divergences between property laws may affect the EU internal market. However, in his view, this may not be a problem for the internal market; if local property law is not suited, or is poorly suited, to a specific type of transaction,

327 ‘Tieboutian theory tradition’ here denotes the lineage of theories beginning from CM Tiebout, ‘A Pure Theory of Local Expenditures’ (1956) 64 Journal of Political Economy 416 (the idea of ‘voting with one’s feet’). Well-known reconceptualisations in terms of law are R Romano, ‘Law as a Product: Some Pieces of the Incorporation Puzzle’ (1985) 1 Journal of Law, Economics, and Organization 225 (‘law as a product’); and EA O’Hara and LE Ribstein, The Law Market (New York, Oxford University Press, 2009) (‘law markets’). 328 Kieninger (n 11) 665. 329 Discussed in ch 1, section II.B.iii. 330 Kieninger (n 11) 665–66.

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the problem primarily concerns that particular Member State. He goes on to suggest that such problems may be solved through competition between jurisdictions and that the internal market may even be instrumental for the solution. As the driving force behind competition, he sees the propensity of legal systems to adapt to the needs of the society they serve. If a legal system is too rigid and disallows a certain type of transaction that is considered useful, then transactions of that type will not be entered into at all, or will be entered into abroad. This incentivises the jurisdiction to change its law.331 Verstijlen gives an example concerning the transfer (assignment) of claims under Dutch law. The Dutch Civil Code of 1992 initially required notification to the debtor of an assigned claim (assigned debtor). However, as a result of the increasing importance of factoring and securitisation in the following decade, the notification requirement came to be considered impractical. These financing techniques typically involve a large number of assignments and assigned debtors, and thus would require a large number of notifications. In that light, the legislator eventually allowed assignment without notification. The competitiveness of the Dutch financial market was explicitly referred to in the parliamentary proceedings as lending weight to this reform.332 At the European level, Verstijlen proposes introducing a ‘Community Security Right’.333 By this he means ‘a bundle of national security rights, created with one single act, for instance an agreement followed by registration in a public European register’. According to him, this approach would retain the possibility that legal systems compete, which may lead to natural harmonisation and pave the way for further harmonisation or unification of the law on security rights in particular or even property law in general.334 In sum, Verstijlen clarifies what results might be expected from competition between jurisdictions in property law matters. Competition may remove crossborder problems through convergence between property law systems and may even operate so that these systems better serve societal needs. Verstijlen also recognises an incentive for jurisdictions to compete, namely the fact of losing the benefit of useful but disallowed types of transaction. While these are essential insights, a still more comprehensive picture is needed of the actors and incentives involved in competition as process. Importantly, the special characteristics of the law on security rights should be better accounted for when constructing that picture. Another theoretic fragment is a recurrent theme in McCormack’s recent works. The context is his reluctance towards creating a European Civil Code, particularly in terms of security rights. He writes: The end of jurisdictional diversity eliminates opportunities for competition between national legal orders. There is no scope for innovation at the local level and the creation 331

Verstijlen (n 3) 24–25. ibid. See the Dutch Civil Code, Book 3 Art 94(3). See also Flessner and Verhagen (n 226) 26–27. 333 Discussed in ch 1, section II.B.iii. 334 Verstijlen (n 3) 34–35. 332

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of uniformity can lead to economic sterility. As a result there is less chance for initially unpromising, but ultimately beneficial, ideas to win through and gain general acceptance. The absence of an all-pervasive European norm means that seeds of ingenuity can be sown, tested and put into play at the local national level and then reproduced across national frontiers if they turn out to be generally beneficial. The creation of a pan- European legal order would submerge these potentially enriching seedbeds of dynamism and innovation in a sea of sterile uniformity.335

Thus, McCormack recognises that competition between jurisdictions may result in experimental learning. In addition, he understands the functioning of national jurisdictions as experimental laboratories as necessary for the desirable development of the law. Again, these are essential insights, but still the need for a more comprehensive picture remains. Yet another theoretic fragment is provided by Axel Flessner and Hendrik Verhagen, who propose a uniform European conflict rule for the assignment of claims. The rule would be based on party autonomy, even in terms of third-party effectiveness.336 In other words, an assignor and an assignee would be allowed to choose by themselves the substantive law that determines the preconditions for effectiveness of the assignment against third parties, including the assignor’s (other) creditors. According to Flessner and Verhagen, such a conflict rule could ‘act as a catalyst for the evolution of substantive law’. Parties to cross-border transactions would have at their disposal institutions with which they could achieve results incompatible with the domestic law of one or both of them. This, then, could give the jurisdictions involved incentives to re-evaluate their law. Flessner and Verhagen envision the consequences as follows: ‘The free circulation of legal institutions of different national origin could lead to a “struggle for life” between competing institutions, from which the most adapted form may eventually survive.’337 Flessner and Verhagen’s view implies the important point that different conflict rules may entail different dynamics of competition. However, their own proposal is controversial in that conflict rules in the field of property law have traditionally been based on objective connecting factors, not on party autonomy or other

335 McCormack (n 296) 358–59 (footnotes omitted). McCormack notes that his points are built on ‘the celebrated’ Tiebout (n 327). See S Weatherill, ‘Why Object to the Harmonization of Private Law by the EC?’ (2004) 12 European Review of Private Law 633, 655–56. 336 In a choice-of-law context, the notion of assignment usually includes security assignments and the creation of other security rights over claims. This is explicitly stated in Art 14(3) of Parliament and Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. 337 Flessner and Verhagen (n 226) 26–27. Flessner and Verhagen argue that this actually happened when the Dutch Supreme Court adopted a party autonomy conflict rule in its judgment in Brandsma qq v Hansa Chemie AG (HR 16 mei 1997, NJ 1998, 585) (hereinafter Hansa). The Hansa judgment indeed preceded the reform allowing assignment without notification, discussed by Verstijlen. According to Flessner and Verhagen, the outcome of the Hansa judgment may have been partly motivated by the Supreme Court’s awareness of the adverse effects of the notification requirement on cross-border assignments.

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subjective connecting factors.338 In turn, building an overall competition theory for the law on security rights requires examining the likely effects of both objective and subjective connecting factors to competitive processes between jurisdictions.

ii. General Account of Competition between Jurisdictions a. Starting Point: The Tiebout Model A competition theory for the law on security rights has to be based on a general account of competition between jurisdictions. The origins of these accounts usually lie in Charles M Tiebout’s classic article ‘A Pure Theory of Local Expenditures’ from 1956.339 Although short of a complete account of competitive processes between jurisdictions, this article provides certain necessary ingredients for such an account. The article is not about theorising legal change in the first place and has been adapted to that purpose only later by others. Tiebout himself positioned it in ‘applied economic theory’ or ‘public finance theory’.340 Tiebout’s agenda was partly to challenge the then-prevailing view that the level of provision of public goods cannot be decided by any market-type mechanism.341 Previous theorists had understood this problem in the following way. The government should find out consumer-voters’ wants for public goods and then tax them accordingly, thus adapting to their preferences. Unfortunately, the government has no way to make consumer-voters reveal their true preferences. In fact, it may even be rational behaviour on their part to understate these preferences so as to avoid tax and yet enjoy public goods. The political mechanism provides unsatisfactory solutions: budgets are put together by somehow picturing the expenditure wants of the so-called typical voter and combining that information with an ability-topay principle on the revenue side.342 Tiebout suggested that whereas this analysis is valid in terms of federal expenditure, the same does not necessarily hold true for local expenditure, that is, expenditure on public goods provided by local communities. He presented a model meant to yield a solution for the level of local expenditure, so that this level reflects popular preferences more accurately than is possible at the federal or other central level. The basic idea of this model was that consumer-voters move and can be expected

338

See Deschamps (n 314) 285–86. See generally P Larouche, ‘Legal Emulation between Regulatory Competition and Comparative Law’ in P Larouche and P Cserne (eds), National Legal Systems and Globalization: New Role, Continuing Relevance (The Hague, TMC Asser Press, 2013) 248–57. 340 Tiebout (n 327) 416. 341 See ibid 416–18. Tiebout’s proposal for a definition of a public good is ‘one which should be produced, but for which there is no feasible method of charging the consumers’. Examples include the police, fire protection, education, hospitals, courts, beaches, parks, roads and parking facilities. He also notes a definition by Paul A Samuelson, according to which public goods are ‘collective consumption goods … which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good’ (emphasis omitted). 342 ibid 417. 339

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to settle in those local communities that best satisfy their individual preferences for public goods. According to Tiebout, here lies a significant difference between the central and local provision of public goods. At the central level, the government tries to adjust to the pictured pattern of consumer-voter preferences. In contrast, various governments have more or less set revenue and expenditure patterns at the local level.343 In Tiebout’s assumption, a consumer-voter moves to a local community whose expenditure and revenue pattern best satisfies their preferences.344 Therefore, so the argument goes, the greater the number of local communities and the greater the variance among their expenditure and revenue patterns, the closer consumervoters will get to fully realising their preferences. Tiebout developed an ‘extreme’ and an ‘even more severe’ version of his model. Both versions were based on unrealistic assumptions of consumer-voters’ full mobility and willingness to move, their full knowledge of the relevant differences between local communities, and their independence of employment opportunities, among other things. Tiebout used these versions to make his theoretical points and then went on to relax the assumptions in order to demonstrate that the model has real-life policy implications.345 b. Modifications Needed to the Tiebout Model The Tiebout model requires some adaptations and additions to be able to serve as the basis for an account of competition between jurisdictions. First, the model’s public goods have to be replaced by legal norms. Alternatively, the notion of public goods can be expanded to include legal norms.346 Second, the model’s local communities have to be replaced by jurisdictions in the sense of territorial polities that maintain their own legal systems. In the context of this book, the relevant jurisdictions are EU Member States, while the EU as a sui generis central government takes the place of the model’s federal level. Third, the model’s consumer-voters have to be replaced by the broader category of enterprises and individuals. However, these adaptations do not yet suffice. In the Tiebout model, local communities with their more or less set expenditure and revenue patterns are perceived as rather passive towards each other.347 In Pierre Larouche’s words,

343

ibid 418. According to Tiebout, this difference ‘is an assumption about reality’. This is why the Tiebout model is often dubbed a theory of ‘voting with one’s feet’. 345 Tiebout (n 327) 418–24. With the ‘extreme’ version, Tiebout showed how the act of moving or failing to move can reveal the consumer-voter’s demand for public goods, in the same way as does the usual market test of willingness to buy. The ‘even more severe’ version was supposed to lay out the assumptions under which the model yields the optimal allocation, as would a private market. 346 See DC Esty and D Geradin, ‘Regulatory Co-opetition’ in DC Esty and D Geradin (eds), Regulatory Competition and Economic Integration: Comparative Perspectives, International Economic Law Series (Oxford, Oxford University Press, 2001) 32. 347 Yet they are not entirely passive. See Tiebout (n 327) 419. One of the assumptions of the model’s ‘extreme’ version is that local communities which are below their optimal size try to attract new residents so as to lower average costs. 344

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the Tiebout model lacks ‘a dynamic element’.348 In contrast, an account of competition between jurisdictions calls for theorising competitive processes, which are by nature dynamic. These processes consist of reactions from jurisdictions to actual or anticipated actions by enterprises and individuals. We can study the relevant types of action, say, in the context of a situation where company management feels dissatisfied with certain aspects of legislation in the company’s home jurisdiction (here meaning its place of registration and de facto administration). Let us assume that domestic legislation for one reason or another significantly impedes the company’s business operations, whereas the legislation of a neighbouring jurisdiction would not seem to do so. If the management wants to respond to this situation, it has two basic options. Albert O Hirschman has made them known as ‘exit’ and ‘voice’. According to him, exit belongs to the realm of economics, while voice belongs to the realm of politics.349 For the company, the main instance of exit would be a management decision to move its administration and business operations to the neighbouring jurisdiction that appears to provide more favourable legislation. This option resembles the act of moving, ‘voting with one’s feet’, in the Tiebout model. Erin Ann O’Hara and Larry E Ribstein, who also cite Hirschman’s concepts, use the term ‘exit’ even for certain actions that do not involve moving in a physical sense. In these actions, contracting parties or other actors choose laws outside their home jurisdiction to govern their legal relations. That is possible if the jurisdictions in question consent to enforce the choice-of-law clause or other party autonomy-based choice-of-law mechanism used.350 This type of exit can be referred to as ‘non-physical exit’. In the field of contract law, choice-of-law clauses are widely used and enforced on both sides of the Atlantic and elsewhere. Developments in the field of corporate law have taken a similar direction. In the US, a special conflict rule, known as the ‘internal affairs doctrine’, allows corporations to organise under the law of any state regardless of their physical location. As is well known, Delaware has become the leading incorporating state. Generally, other states respect the law of the state of incorporation and refrain from imposing a connection requirement. O’Hara and Ribstein explain that the internal affairs doctrine ‘does not cover most important policy questions concerning corporate governance’ but states also ‘do not care enough about regulating corporate governance to risk forcing firms that highly value Delaware law to avoid their borders’.351 It is commonly thought that the 348 See Larouche (n 339) 249–50. Larouche writes: ‘It is a static model, where an equilibrium is reached whereby a number of different preference patterns as to public expenditure coexist, and consumer-voters are drawn to the one that matches their preferences best.’ 349 AO Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, MA, Harvard University Press, 1970) 15–16. Hirschman describes exit as ‘neat’, since one either exits or not, and ‘impersonal’. Voice, in contrast, is ‘far more “messy”’. He states that ‘it can be graduated, all the way from faint grumbling to violent protest; it implies articulation of one’s critical opinions rather than a private, “secret” vote in the anonymity of a supermarket’. 350 EA O’Hara and LE Ribstein, ‘Rules and Institutions in Developing a Law Market: Views from the United States and Europe’ (2008) 82 Tulane Law Review 2147, 2154–57. 351 O’Hara and Ribstein (n 327) 107–17 (quoted passages at 117).

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Centros line of judgments of the ECJ has opened possibilities for a Delaware-like effect in Europe as well.352 Continuing the example, with the same company, voice would mean that the management in one way or another expresses its dissatisfaction with legislation. The management should convey its message through the political system of the company’s home jurisdiction. A successful result, a change of legislation, may require involvement of interest groups, acting as middlemen or aggregating voices of several companies in a similar position.353 As O’Hara and Ribstein have shown, exit and voice may also intersect. The exit of enterprises or individuals from a jurisdiction, or a jurisdiction’s failure to attract new enterprises or individuals from abroad, may leave certain other enterprises or individuals in the jurisdiction worse off. If it seems that a change of legislation would correct the situation for them, for example, by making exit less attractive, they have an incentive to lobby for that change—an instance of voice. O’Hara and Ribstein call such enterprises or individuals an ‘exit-affected interest group’.354 One way to present a general account of competition between jurisdictions is the market metaphor. This means viewing legal norms as a product that jurisdictions offer to enterprises and individuals, and which enterprises and individuals buy, figuratively speaking.355 By ‘law market’, which is a central notion in their scholarship, O’Hara and Ribstein refer ‘to ways that governing laws can be chosen by people and firms rather than mandated by states’.356 The market metaphor helps to approach the subject in a systematic way, identifying the relevant actors and their incentives on both the supply and demand side alike. The relative effect of different possible actions by enterprises and individuals can be assessed against the backdrop that jurisdictions generally wish to keep and increase economic activity in their territory: economic activity entails jobs and tax revenues, among other things. Possible actions include exit and the threat of exit,

352 Case C-212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459; Case C-208/00 Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC) [2002] ECR I-9919; Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECR I-10155. See O’Hara and Ribstein (n 327) 121–22; O’Hara and Ribstein (n 350) 2170; L de Lima Pinheiro, ‘Competition between Legal Systems in the European Union and Private International Law’ (2008) 28 IPRax: Praxis des Internationalen Privat- und Verfahrensrechts 206, 212. cf Larouche (n 339) 253. Larouche finds only modest practical impact: start-ups have benefited from the ability to choose an incorporation jurisdiction, but existing companies still face obstacles to moving. cf also B Gabor, Regulatory Competition in the Internal Market: Comparing Models for Corporate Law, Securities Law and Competition Law, Private Regulation (Cheltenham, Edward Elgar, 2013) 119–23; S Deakin, ‘Regulatory Competition versus Harmonization in European Company Law’ in Esty and Geradin (eds) (n 346) 198–09. 353 On interest group dynamics, see O’Hara and Ribstein (n 350) 2152–53. 354 ibid 2155; O’Hara and Ribstein (n 327) 28–29. 355 See generally Romano (n 327). 356 O’Hara and Ribstein (n 327) 65. O’Hara and Ribstein explain: ‘This choice is created by the mobility of at least some people, firms, and assets and the incentives of at least some states to compete for people, firms, and their assets by creating desired laws.’

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and, on the reverse side of exit, entry and the promise of entry. Voice may be used in various ways and degrees, direct or intermediated, and also in connection with a threat of exit or promise of entry. All else being equal, actual physical exit or entry can be assumed to give jurisdictions stronger incentives to change their law than voice that involves no more than a threat of physical exit or a promise of physical entry. Similarly, voice that involves such a threat or promise can be assumed to give stronger incentives than voice without either of them. In contrast, the relative strength of incentives given by non-physical exit or entry—for example, through an enforceable choice-of-law clause—may be impossible to assess. In fact, much more cannot be said on the basis of a general account of competition between jurisdictions. For a more accurate picture of competitive processes, we have to turn to field-specific assessment.357 Therefore, the following discussion seeks features of competition specific to the law on security rights.

iii. Competition as to the Law on Security Rights: Mapping the Dynamics a. Actors and Incentives The dynamics of competition as to the law on security rights are shaped by two special features of this area of law, namely the mandatory nature of substantive law and the objective connecting factors on which conflict rules are built. The mandatory nature of substantive law entails, above all, that parties to a security arrangement cannot decide by themselves the preconditions under which their arrangement becomes effective against third parties. These preconditions are laid down by mandatory law, so that parties are unable to deviate from them. Correspondingly, the objective connecting factors of conflict rules do not enable parties to decide the law governing third-party relations, including the question of effectiveness against third parties, but determine that law on some objective grounds.358 The best-known conflict rule with an objective connecting factor is the lex rei sitae rule, which prescribes application of the law of the jurisdiction where the asset in question is physically located. The lex rei sitae rule covers immovable property and, as a general rule, tangible movable property.359 It has given way to some asset type-specific conflict rules, but these typically also resort to objective connecting factors. Notable examples are conflict rules for major means of t ransport,

357 See generally Gabor (n 352) 10–11. Gabor notes that ‘competitive law-making cannot be described through one single model that could predict the welfare implications within any legal field’ because regulatory competition studies have shown ‘highly field-specific features’. See also Weatherill (n 335) 655–56. 358 Deschamps (314) 285–86. 359 R Goode, H Kronke and E McKendrick (eds), Transnational Commercial Law: Text, Cases and Materials, 2nd edn (Oxford, Oxford University Press, 2015) 65. Physical location is an unstable connecting factor in that the applicable law may change if the asset is moved to another jurisdiction. Solutions to problems of these conflit mobile situations vary between jurisdictions. See von Bar and Drobnig (n 9) 342–49.

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such as aircraft and ships, often pointing to the law of the state of registration (lex registrationis) or the law of an otherwise defined state of origin.360 Conflict rules for receivables and other claims vary between jurisdictions, but the tendency towards objective connecting factors holds true here as well. In the EU, the unification of conflict rules concerning third-party relations in the assignment of claims (including security rights over claims) was attempted in connection with the enactment of the Rome I Regulation.361 Such a rule was eventually omitted from the Regulation (subject, though, to a review clause in Article 27(2)) because the Member States failed to reach a consensus on the most suitable connecting factor. Nevertheless, it is telling that the two rule options with most support were the law of the assignor’s habitual residence and the law governing the assigned claim. The assignor’s habitual residence is an objective connecting factor, whereas the law of the assigned claim can be regarded as semi-objective.362 The law governing the contract of assignment, the option with a connecting factor based on party autonomy, was ruled out at an early stage in the negotiations.363 In other words, the starting point with respect to the law on security rights is the opposite of that prevailing in the field of contract law.364 This setting has consequences for the demand side of the ‘market for law on security rights’. Let us consider an example where a company, whose home jurisdiction (by registration and de facto administration) is jurisdiction A, wishes to encumber its assets by types of security rights that are available under the law of jurisdiction B, but unenforceable against third parties under the law of jurisdiction A. Jurisdictions A and B are EU Member States.365 As usual, unenforceability against third parties makes security rights useless to the company and its creditors, who expect their claims to be secured, especially on insolvency. The assets that the company wishes to encumber are ordinary tangible movables, means of transport and receivables from the company’s domestic debtors.

360 K Kreuzer, ‘Conflict-of-Laws Rules for Security Rights in Tangible Assets in the European Union’ in Eidenmüller and Kieninger (n 15) 298–99. Physical location is a particularly unsuitable connecting factor for means of transport which by their nature often cross borders. 361 Cited in n 336. 362 The law of the assigned claim is not a fully objective connecting factor, because the original creditor (later assignor), and through the original creditor potentially even the prospective assignee, may exert ex ante influence on the choice of law governing the (later assigned) claim, say, by a standard contractual choice-of-law clause before the claim arises. 363 The law governing the contract of assignment was the Dutch proposal. See PMM van der Grinten, ‘Article 14 Rome I: A Political Perspective’ in R Westrik and J van der Weide (eds), Party Autonomy in International Property Law (Munich, Sellier European Law Publishers, 2011) 156. According to Van der Grinten, the proposal ‘was received with considerable hostility, and was not supported by any other Member State’. The search for a common European conflict rule now continues as part of the Commission’s Capital Markets Union programme. 364 See O’Hara and Ribstein (n 350) 2156. O’Hara and Ribstein write: ‘Choice-of-law clauses in contracts should have the presumption of enforceability that is accorded contract provisions generally in a market economy, even if lawmakers conclude that some regulation of these clauses is appropriate.’ 365 For the sake of simplicity in discussion of conflict rules for security rights over receivables, let us assume that neither of the jurisdictions is the Netherlands.

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Due to conflict rules based on objective connecting factors, non-physical exit from jurisdiction A’s system of security rights (and entry into jurisdiction B’s system) by a choice-of-law clause is not possible with respect to any of these assets. What other solutions might be available for non-physical exit? First, moving ordinary tangible movables to jurisdiction B could perhaps be seen as a kind of non-physical exit, since only the assets themselves would move in a physical sense. However, this is unlikely to be feasible because the company probably needs these assets for conducting its business in jurisdiction A.366 Second, registering the means of transport in jurisdiction B could enable nonphysical exit, but this would be an uncertain solution because the scope of the lex registrationis rule varies between jurisdictions. For example, the same assets may be covered by the lex registrationis rule in one jurisdiction and by the lex rei sitae rule in another.367 Moreover, the company’s means of transport may not even be eligible for registration under the law of jurisdiction B (as foreign objects), while jurisdiction A may restrict the use of means of transport registered abroad. Third, if in jurisdiction A the conflict rule for third-party relations in the assignment of claims (and thus security rights over receivables) is the law governing the assigned claim, the company could try to arrange for its future receivables to be governed by the law of jurisdiction B. This kind of arrangement is generally a matter of party autonomy between the company and its customers or other future debtors.368 This might enable non-physical exit, but would also be an uncertain solution because the conflict rule for third-party relations in the assignment of claims varies between jurisdictions. In addition, the company’s domestic (and basically any non-B) customers and other future debtors might be uncomfortable or suspicious about the arrangement and might insist on having their debt governed by domestic (or other non-B) law. The uncertainty involved in the two last-mentioned solutions would probably alarm prospective secured creditors. This is so because they could not know for certain beforehand in which jurisdictions enforceability of their security rights may later be challenged, and thus which conflict rule will eventually be used for a particular type of asset (as for means of transport, the lex registrationis rule or, say, the lex rei sitae rule; as for receivables, the law governing the assigned claim or, say, the law of the assignor’s habitual residence). Worse, in some jurisdictions

366 Today, the more commercially significant types of security rights are non-possessory, enabling the security provider to remain in possession of the encumbered assets. These security rights allow the security provider to continue using and often refining and even disposing of the assets by sale or otherwise. See Drobnig (n 222) 1026–38. Even if the company could give up possession of the assets, its creditors in jurisdiction A would probably shun security rights over assets located abroad. See Lwowski (n 285) 179–80. 367 See C Forsyth, ‘Certainty versus Uniformity: Renvoi in the Context of Movable Property’ (2010) 6 Journal of Private International Law 637, 637–39; Kreuzer (n 360) 298–312. 368 See Arts 3(1), 12 and 14(2) of the Rome I Regulation and cf Art 3(3) and, eg, Art 6(2) on consumer contracts.

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some of the relevant choice-of-law questions are still open, that is, the content of some conflict rules is unknown or unclear. Moreover, in jurisdiction A, the recognition and enforcement of security rights created under the law of jurisdiction B might cause complications, for example, in terms of transposition and priority order in insolvency proceedings. As a result of all this uncertainty, prospective secured creditors might be unwilling to extend credit in the first place or to offer significantly more beneficial credit terms in exchange for security rights. While non-physical exit seems impracticable, the option of physical exit remains to be analysed. Indeed, by relocating its administration, operations and physical assets to jurisdiction B, the company would obtain access to the types of security rights available under the law of that jurisdiction,369 although some of the problems resulting from non-uniform conflict rules would persist. However, this option may not be realistic, for it is difficult to imagine decisions on the location of a company’s administration and operations being made only or even mainly on the basis of law on security rights, however favourable these may be to the company. Verstijlen, too, makes this point. According to him, it is unclear to what extent divergences with respect to security rights, or property law in general, influence economic decisions. He gives an example of an entrepreneur choosing a country in which to open a shop. The entrepreneur may think highly of, say, the German system of retention of title. Still, matters such as market potential, labour costs and taxation are likely to weigh much more in the decision than this or other features of property law. Verstijlen presumes that even in credit transactions, where security is of the greatest importance, property law comes second to other matters such as the prospective debtor’s credit rating.370 If this analysis is correct, the idea of ‘voting with one’s feet’ along the lines of the Tiebout model does not seem to give jurisdictions particularly strong incentives to compete in the market for law on security rights. Put differently, it is unlikely that enterprises would resort to physical exit so as to better satisfy their preferences in these matters. Nevertheless, the analysis should not stop here, because jurisdictions’ incentives to compete may be of a more indirect nature.

369 As for ordinary tangible movables, the lex rei sitae rule would point to the law of jurisdiction B. As for means of transport, the lex rei sitae rule and the lex registrationis rule, whichever applies, would point to the law of jurisdiction B if the company also registers its means of transport in jurisdiction B. In terms of receivables, the law of the assignor’s habitual residence and the law governing the assigned claim, whichever applies, would point to the law of jurisdiction B if the company’s receivables are governed by the law of jurisdiction B (generally a matter of party autonomy). 370 Verstijlen (n 3) 22–23. The situation may be different regarding industries where financing transactions are often structured by way of special purpose vehicles (SPVs), such as the airlines industry. SPVs may be established in different jurisdictions for various reasons, often related to the regulatory environment. See BP Honnebier, ‘Analysing the Effects of the Cape Town Convention on Four Selected Issues That Hinder the International Financing and Leasing of Aircraft and Engines’ in S Kozuka (ed), Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions, Ius Comparatum: Global Studies in Comparative Law 22 (Cham, Springer International Publishing, 2017) 338. One such reason may be the local legal framework for finance and security. See Tepora, Kaisto and Hakkola (n 199) 177–78 fn 264.

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As a rule, jurisdictions are concerned about providing a favourable regulatory framework for economic activity. The law on security rights makes up a major part of these frameworks and certainly affects economic actors’ overall performance. Suffice it here to recall the discussion in section III.C.iii above and the ‘growing international consensus that secured credit is a general social and economic good’ because it increases the supply of credit and reduces its cost in an economy, thus playing a central role for development and growth. As noted in that section, economists have attempted to quantify the beneficial effects of security rights. Their results suggest crucial significance in the scale of national economies taken as a whole. Therefore, jurisdictions should have strong incentives to see to it that their system of security rights is adequate. Although the threat of physical exit by enterprises as a response to inefficiencies and other defects in these systems may be insignificant, jurisdictions should want to cure these defects because the overall economic performance of enterprises matters to them. From a jurisdiction’s point of view, these are also competitive pressures, which implies that responding to them involves varying degrees of local innovation, as well as emulation of systems in other jurisdictions. Both innovation and emulation may provide better responses to regulatory needs.371 All this is in accordance with a more general observation in regulatory competition literature, namely that not all competitive pressures among jurisdictions are based on mobility of regulation addressees or production factors (capital and labour). For example, Barbara Gabor notes that one reason to compete may be international trade. Under trade openness, and without resorting to protective measures, jurisdictions can achieve advantages through more effective internal regulation. This increases the domestic productivity and international competitiveness of domestic firms.372 The above analysis, which suggests the impracticability of both non-physical and physical exit as a response to defective law on security rights, is not meaningless in terms of incentives for jurisdictions to compete. On the contrary, the inability or unlikelihood of enterprises to exit should amplify jurisdictions’ incentives to ensure that their system of security rights is adequate. Since enterprises operating in their home jurisdiction cannot or do not consider it worthwhile to seek better (property) law elsewhere, they have to cope with their home jurisdiction’s law, with all its defects. It is important to note that no such amplification of incentives would occur if enterprises were able to opt for the law of another jurisdiction by an enforceable choice-of-law clause, thus improving their overall economic performance by way of non-physical exit.373 Indeed, this is one aspect 371 These responses are not developed in a vacuum. See generally T Wilhelmsson, ‘Free Movement of Legal Sources: The Use of Foreign Sources in Private Law in Europe’ in K Purnhagen and P Rott (eds), Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz, Studies in European Economic Law and Regulation 3 (Cham, Springer, 2014). 372 Gabor (n 352) 14–15. 373 Incentives resulting from potential non-physical entry, ie, foreign enterprises opting for the law of a jurisdiction by an enforceable choice-of-law clause, may be even weaker. See de Lima Pinheiro

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of conflict rules based on objective connecting factors internalising the costs and benefits of substantive law in the enacting (or otherwise law-producing) jurisdiction. We will discuss further aspects in the next section. Finally, in a comprehensive competition theory for the law on security rights, the role of (possibly exit-affected) interest groups should be taken into account. In particular, the voice of the finance industry, and financial lawyers, is likely to have a significant influence on decisions concerning this area of law and its development. At least two courses of action can be envisioned, with somewhat opposite consequences. First, the finance industry may cling to the idiosyncrasies of domestic law, and lobby to maintain them, so as to protect its ‘unique expertise’. Second, the finance industry may lobby for what it perceives as the highest quality law, without protectionist aims. Pursuing this line of study would require systematic empirical evidence.374 b. Formation of Content As discussed above, jurisdictions face competitive pressures regarding the law on security rights. This is so even though non-physical exit is generally unavailable, while physical exit seems too unlikely to be able to incentivise changes in the law. Plausibly, the inner logic of this area of law, pertaining to substantive law as combined with the relevant conflict rules, positively affects the way in which these pressures are received and turned into factors for legal change. Indeed, the picture that unfolds through discussion of this inner logic is not one of an area of law at the mercy of competition, changing in ways that are beyond control and, say, resulting in a race to the bottom. Rather, impulses for change are likely to promote the gradual and conscious (informed and thoroughly planned) development of law. We can identify at least three characteristics of the inner logic that explain this: first, path-dependence fortified by strong systemic interconnections; second, frequent interdependence between technical and value-laden aspects of law; and, third, internalisation of the costs and benefits of substantive law in the enacting jurisdiction (further aspects of internalisation to complement that of

(n 352) 209. De Lima Pinheiro discusses contractual choice-of-law clauses as follows: ‘As a matter of fact, States have no direct interest in their legal system being chosen. The analogy with the supply of goods on the market therefore falls down immediately, because States derive no material advantage from having their law chosen. States pursue the collective goal of regulating private affairs in a fair manner, and not necessarily in the most attractive manner for the parties concerned.’ See also S Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’ (2013) 21 European Review of Private Law 13, 27–35. cf G Rühl, ‘Regulatory Competition in Contract Law: Empirical Evidence and Normative Implications’ (2013) 9 European Review of Contract Law 61, 73–78. 374 For just one example of lobbying power, see McCormack (n 296) 365–92. McCormack discusses attempts to reform the English law of secured credit along the lines of UCC Art 9. Legal practitioners’ general stance has been ‘that the present law, while it may do with the occasional incremental adjustment, works well, and if it is not broke, there is no need to fix it’.

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the impracticability of both non-physical and physical exit discussed in the previous section). These apply to property law more generally, beyond mere security rights, at least as this field is typically understood in Continental European civil law systems and Nordic legal systems.375 In property law, competitive pressures meet a particularly path-dependent subsystem of law. McCormack, discussing legal development in general, cites legal doctrine as a major cause of path-dependence. ‘While the law will change and adapt to new demands and circumstances’, he suggests, ‘the change is effected by adapting existing legal concepts rather than by introducing new ones.’ According to him, the set of doctrinal tools in a legal system is limited and ‘has a self-perpetuating effect’.376 Arguably, this kind of endogenous path-dependence is more intense in property law than in most other fields of law.377 One explanation is that property law needs strong systemic interconnections between its concepts, principles and rules in order to perform some of its central functions. The central functions of property law include conflict resolution (or ‘priority determination’). This function means that property law has to resolve conflicts between dispositions or interests that may be perfectly valid when observed in isolation from each other, but that cannot exist simultaneously or occupy the same priority position. These conflicts arise in third-party relations. Good examples are a priority contest between a secured creditor and the debtor’s other, unsecured creditors, and the creation of competing security rights over the same asset. Systemic interconnections are necessary with a view to performing this function consistently and foreseeably. Hence, concepts, principles and rules used in conflict resolution need to be thought of as a whole and in terms of hierarchies. Otherwise it would be impossible to treat similar (enough) cases similarly and different (enough) cases differently, which may also require reasoning by way of analogy. This kind of equal treatment is essential in that, as Torgny Håstad notes, in property law matters, parties often try to benefit at the expense of third parties by employing misleading terminology and juridical constructions.378 All in all, the role of foreseeability, including legal certainty, in conflict resolution is central to property law because the economic functions of legal institutions in this field typically depend on it. Again, security rights would provide good examples.379

375 In different legal systems and by different authors, law equivalent to that discussed below as property law may be systematised differently, ie, included in other fields of law. The points made here apply to law on security rights even in that case. One finds law on security rights in fields called ‘commercial law’, ‘financial law’ and ‘(substantive) insolvency law’. eg, in English law, ‘property law’ often only refers to land law. See S van Erp, ‘General Issues: Setting the Scene’ in S van Erp and B Akkermans (eds), Cases, Materials and Text on National, Supranational and International Property Law, Ius Commune Casebooks for the Common Law of Europe (Oxford, Hart Publishing, 2012) 39. 376 McCormack (n 296) 364–65. 377 See Smits (n 296) 62–63, 66. 378 Håstad (n 204) 55–56. 379 Discussed in section III.C above.

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Strong systemic interconnections entail that property law typically cannot be changed without dealing with the systemic surroundings of the element changed. For example, a rule transplant from foreign law may require the adaptation of the surrounding concepts and principles, or explaining the transplant as a limited exception and carefully defining those limits. Either way, elevated attention to systemic interconnections is likely to make changing property law not only more cumbersome, but also better informed and planned. Another characteristic with a parallel effect is that technical and value-laden (policy) aspects are often intertwined and inseparable in systems of property law. This can be illustrated by fitting property law into the distinction between homogeneous and heterogeneous legal products, an idea introduced by Anthony Ogus. Homogeneous legal products are those where variation in preferences between market actors in different jurisdictions is usually insignificant. The best example is ‘facilitative law’, that is, law which provides mechanisms for achieving mutually desired outcomes. Heterogeneous legal products, in contrast, belong to ‘interventionist law’, which means law that protects defined interests or supersedes voluntary transactions.380 Realistically, though, property law cannot be located only in either facilitative (homogeneous) or interventionist (heterogeneous) law. Unsurprisingly, Ogus himself suggests that property law involves both aspects.381 Indeed, we can easily find examples of property law features that are both facilitative and interventionist at the same time. One such example is rules on the asset scope of security rights.382 These rules determine the types of asset eligible as security for credit and subject to the security device in question, which is clearly a facilitative task. Yet the same rules also affect the distribution of assets on insolvency between secured creditors holding different types of security rights as well as between secured and unsecured creditors. And law on distributional matters should surely count as interventionist law. Examples in general property law include rules on transfer of ownership and good faith acquisition.383 These observations, too, support the view that changing property law, as a result of competitive pressures or otherwise, can typically be expected to be informed and thoroughly planned. Insofar as technical aspects of property law are intertwined with value-laden aspects, ‘simple’ technical aspects cannot be changed

380 A Ogus, ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’ (1999) 48 ICLQ 405, 410–13. Ogus writes (at 418): ‘The predictive part of the analysis suggests that competition between jurisdictions will generate a tendency for national legal principles to converge in those areas of law designed primarily to facilitate trade. In contrast there is, in general, no reason to expect this phenomenon to apply to interventionist areas of law because national preferences regarding the level of protection are likely to differ.’ 381 ibid 410, 413. 382 Discussed in section IV.B.ii.b above. 383 See generally B Lurger, ‘Political Issues in Property Law and European Unification Projects’ in MW Hesselink (ed), The Politics of a European Civil Code, Private Law in European Context Series 7 (The Hague, Kluwer Law International, 2006).

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without also considering (and perhaps actually changing) ‘complicated’ valueladen ones. However, perhaps the most important point on content formation of property law concerns the effect of conflict rules governing third-party relations. This point embraces the notion of private international law (choice-of-law systems) as a procedural mechanism that may influence the content and quality of laws.384 Particularly relevant in this respect is whether the costs and benefits of substantive law are internalised in the enacting jurisdiction. Frank H Easterbrook makes a closely related point on the connection between internalisation and efficiency: When governments become sufficiently plentiful, and when the scope of laws matches the domain of their costs and benefits (that is, when costs and benefits are all felt within the jurisdiction enacting the laws), competitive forces should be as effective with governments as they are with private markets.385

As observed in the previous section, conflict rules based on objective connecting factors lead to the internalisation of the costs and benefits of substantive law.386 This characteristic is notable here, too, and desirable because the link between internalisation and the conscious development of law is clear: awareness of the costs and benefits of substantive law increases in the enacting jurisdiction, while at the same time comparisons with the costs and benefits of substantive law adopted by other jurisdictions become possible. As a result, the chances of making informed decisions on developing substantive law further are improved. How can this be expected to occur in terms of security rights? The answer lies in that, by virtue of conflict rules with objective connecting factors, the defects and merits of substantive law mainly affect (hamper or help) domestic securityprovider debtors in the enacting jurisdiction. In the case of the lex rei sitae rule, the reason is that most economic actors maintain their business operations centred on their home jurisdiction, and thus generally need their tangible assets there, for use in these operations. And non-possessory security rights allow for the use of encumbered assets by the security provider. In the case of the lex registrationis rule, the reason is that most economic actors (for varying reasons have to) o fficially record their registrable assets in their home jurisdiction.387 In turn, the reasons in the case of conflict rules for receivables and other claims may be even more straightforward. Most notably, the rule based on application of the law of the assignor’s (security provider’s) habitual residence leads to the application of the law of the security provider’s home jurisdiction directly by operation of the connecting factor insofar as the notions of habitual residence and home

384

O’Hara and Ribstein (n 327) 19–21. FH Easterbrook, ‘Federalism and European Business Law’ (1994) 14 International Review of Law and Economics 125, 127–28. 386 T Juutilainen, ‘Coherence through Uniform Private International Law of Property’ in P LettoVanamo and J Smits (eds), Coherence and Fragmentation in European Private Law (Munich, Sellier European Law Publishers, 2012) 121–22. 387 The broad use of convenience flagging and similar practices may erode this part of the argument. 385

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jurisdiction match. The same tends to hold true for the rule based on the application of the law governing the assigned (encumbered) claim, a semi-objective connecting factor, because that law often coincides with the law of the assignor’s habitual residence.388 Consequently, if a security-provider debtor’s home jurisdiction enacts, say, unreasonable restrictions on the enforceability of security rights against third parties, then the adverse effects and indeed costs (and most likely zero benefits) are felt by the security-provider debtor and other economic actors in a similar position. They may well end up suffering from decreased supply and elevated cost of credit, which will impede their overall economic performance. The consequences may be perceptible at the level of the national economy. This, possibly combined with comparison to the legislation of other jurisdictions, incentivises the enacting (home) jurisdiction to reconsider its legislation.389 Since internalisation also occurs in other jurisdictions, the costs and benefits of substantive law in different jurisdictions become comparable, which increases opportunities for legal emulation. This involves learning from the experience of others and adopting workable solutions.390 Here, it is essential to keep in mind that this discussion concerns the probable effects of conflict rules based on objective (or semi-objective) connecting factors. In contrast, a conflict rule based on (unrestricted) party autonomy would not result in such effective internalisation because that kind of conflict rule would enable non-physical exit, that is, opting for the substantive law of another jurisdiction by an enforceable choice-of-law clause. As a result, a conflict rule based on party autonomy would not give jurisdictions such strong incentives to reconsider their own substantive law. Our final point on content formation is that increasing international cooperation on different levels may bring about processes that actually combine or mix cooperation and competition. These processes could perhaps be seen as instances of ‘regulatory co-opetition’ as discussed by Daniel C Esty and Damien Geradin.391 Forms of cooperation in the field of property law may include different uses of internationally drafted reference texts (such as the UNCITRAL Legislative Guide on Secured Transactions, the property law books of the DCFR and various model laws), law reform assistance by organisations specialising in such services and regional harmonisation projects.

388 On this coincidence, see Max Planck Institute for Foreign Private and Private International Law, ‘Comments on the European Commission’s Green Paper on the Conversion of the Rome Convention of 1980 on the Law Applicable to Contractual Obligations into a Community Instrument and Its Modernization’ (2004) 68 Rabels Zeitschrift für ausländisches und internationales Privatrecht 1, 79–80. 389 Reconsidering may be a step towards spontaneous harmonisation. See Verstijlen (n 3) 24–25, 34–35. Verstijlen notes that this (‘natural harmonisation’) has to a certain extent already occurred with respect to retention of title. 390 For a theory of legal emulation, see Larouche (n 339) 270–83. Larouche aims at a model that would combine the strengths and remedy the weaknesses of regulatory competition and comparative law. 391 Esty and Geradin (n 346) 31–32.

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c. A Slow Race to the Top? The above analysis suggests that earlier scholarly assumptions about the potential beneficial effects of competition between jurisdictions as to the law on security rights contain more than a kernel of truth.392 Clearly, competition could ‘restrict the detrimental effects of errors or false compromises in the legislative process’, as compared to substantive unification or harmonisation, as indeed Kieninger notes. Likewise, competition leaves room for local innovation and experimental learning, thus avoiding a state of ‘economic sterility’, as McCormack argues. Experimental learning, particularly the cross-border movement of legal ideas, then, may result in ‘natural harmonisation’ (spontaneous harmonisation) and even pave the way for further centralised unification or harmonisation, both potential results of competition as envisioned by Verstijlen. What is more, our review of the likely dynamics of competition in terms of the law on security rights gives grounds for further conclusions. Competition not only allows local innovation and experimental learning, but also positively promotes them. In this way, competition may contribute to building a framework for the desirable development of substantive law. Promotion of local innovation and experimental learning are explained by the existence and nature of competitive pressures that jurisdictions face, and the way in which the inner logic of property law turns these pressures into factors for legal change. Indeed, it was argued that competitive pressures affect jurisdictions, but mainly result from jurisdictions’ concern about the overall economic performance of domestic enterprises. These pressures are indirect and gentle compared, say, to pressures caused by physical exit along the lines of Tieboutian voting with one’s feet. However, they are amplified by the fact that conflict rules based on objective connecting factors, which typically cover the third-party effectiveness of security rights, do not enable non-physical exit through an enforceable choice-of-law clause. This is one aspect of the internalisation of the costs and benefits of substantive law in the enacting jurisdiction caused by conflict rules with objective connecting factors. Additionally, it was argued that changing the law on security rights as a response to competitive pressures is generally likely to be gradual and conscious (informed and thoroughly planned). This was attributed to the inner logic of property law, central aspects of which include path-dependence fortified by strong systemic interconnections, frequent interdependence between technical and value-laden aspects of law, and certain further aspects of internalisation of the costs and benefits of substantive law (besides the aspect of exclusion of non-physical exit, as noted above). Under these conditions, a race to the bottom, where jurisdictions compete by lowering necessary protective standards or the quality of law, does not

392

These assumptions were discussed as ‘theoretic fragments’ in section IV.C.i.

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seem a likely scenario. Rather, a steady ascent of quality, a slow race to the top, is more probable.393 The foregoing has two important implications for the objective of responsiveness. First, competition theory concerning the law on security rights clearly supports responsiveness, because local innovation and experimental learning are preconditions for this objective. Responsiveness was defined above as sensitivity to impulses that call for changes in the law as well as to reasons and rationales to resist changes in the law.394 Competitive pressures serve as a way to discover impulses for change. Then again, the way in which these pressures are received and turned into factors for legal change, especially the inner logic of property law, forces the reasons and rationalities for resisting change to be taken into account. Second, the objective of responsiveness goes hand in hand with conflict rules based on objective connecting factors (rather than on party autonomy).395 Such conflict rules are essential to the role of competition in building a framework for the desirable development of substantive law. This is due to their effect on actor incentives (unavailability of non-physical exit) and on the formation of the content of substantive law (increased awareness and comparability in terms of costs and benefits). Both effects presuppose internalisation of the costs and benefits of substantive law in the enacting jurisdiction.

D. Institutional Support for Responsiveness The idea of institutional support here is the same as with the objective of foreseeability.396 The objective of responsiveness, too, is just an academic proposal. In a nutshell, while academic proposals may influence the development of future law simply by virtue of their persuasive content, they are strengthened if they resonate with the views of institutions in charge of shaping future law. Both national and European-level sources may provide institutional support in this sense. At the national level, institutional support for responsiveness can be drawn from the persistent resistance to harmonisation efforts by the EU and other international actors.397 Granted, evidence for this resistance is anecdotal, and circumstantial as regards the reasons for resisting, and yet it is abundant. We may not be able to assess to what extent the different reasons why a single model of a system of security rights may not fit all jurisdictions, as analysed in section IV.B.iv above,

393 On the notions of race to the bottom and race to the top in the context of regulatory competition theory, see Larouche (339) 249–50. 394 Section IV.A. 395 cf Flessner and Verhagen (n 226) 26–27. 396 For a comparison with the idea of institutional support as understood in the context of doctrinal legal scholarship and legal principles, see section III.E above. 397 See Kieninger (n 48) 22–26.

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actually explain the resistance and the resulting failure to harmonise substantive law. Nevertheless, it is likely that the varying economic and social circumstances and value choices of different jurisdictions have at least played a role in this. Another national-level source of institutional support is that private international law, even with its shortcomings, has traditionally been considered an appropriate means of arranging relations between different national systems of security rights and of resolving cross-border conflicts between these systems. Private international law (conflict rules) does not suppress substantive diversity; indeed, it may even serve to promote local innovation and experimental learning, as discussed in the previous section. At the European level, primary EU law offers institutional support for responsiveness. This is the case insofar as the Treaties presuppose, or at least overtly permit, diversity between Member State substantive laws.398 Pierre Legrand has drawn attention to some such points in the ‘Brief Remarks, Mainly for Positivists’ appendix to his polemic ‘Antivonbar’.399 In the following, three of these points are discussed in the light of the European discourse on security rights. First, Legrand remarks that the fundamental ideas underlying the Treaty of Rome (TEC) are the opening of intra-EU economic borders, the Member States recognising each other’s law and ‘market citizens’ being enabled to select the legal regulation that suits them best.400 This structure, as he suggests, assumes diversity among the laws of the various Member States.401 Legrand probably did not have security rights in mind when writing this, since (unrestricted) party autonomy involves notorious difficulties in this area of law, while contractual choice-of-law clauses are generally considered to be unenforceable against third parties. Still, his point can be taken as support for diversity-preserving solutions to cross-border problems in terms of security rights. Even mutual recognition may play a role in these solutions because not all kinds of substantive divergence should deter the recognition and enforcement of foreign security rights, while the doctrine of transposition is in part capable of dealing with cross-border problems.402 More generally, as a long-term goal, the objective of responsiveness attempts to guarantee that parties to security arrangements have options out of which to select a security device that fits their purposes (and that serves society). This requires local innovation and experimental learning. Second, Legrand argues that the Treaty of Rome itself accepts differences between Member State laws, ‘for the Treaty’s concern with the harmonisation of

398 As will by now have become clear, the main links between substantive diversity and responsiveness are local innovation and experimental learning. 399 P Legrand, ‘Antivonbar’ (2006) 1 Journal of Comparative Law 13, 40. 400 The TEC was cited in n 99. 401 Legrand (n 399) 40. 402 The question whether and in what situations non-recognition and non-enforcement of foreign security rights can be justified as a matter of EU internal market law was discussed in ch 1, sections IV.D.iii–IV.D.iv.

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laws expressed in Article 94 (formerly 100) acknowledges either that these differences are insurmountable or that they ought not to be fully transcended’.403 He is apparently referring to the point in the Article text which limits approximation competence to ‘such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market’. The corresponding current articles also presuppose connection with the common market (‘internal market’). Article 115 of the Treaty on the Functioning of the European Union (TFEU) is the direct successor of Article 94 of the Treaty of Rome and reproduces its text almost verbatim.404 Article 114 TFEU, which makes Article 115 largely obsolete,405 concerns ‘measures for the approximation … which have as their object the establishment and functioning of the internal market’. Now, if the approximation of laws on security rights was based on these Articles, the comprehensive unification or harmonisation of substantive law could easily result in excesses from the competence viewpoint. Indeed, it is possible that not all substantive divergences bear on the internal market as presupposed by the articles. Therefore, more cautious efforts—say, partial or piecemeal substantive harmonisation—would diminish the risk of overstepping competence and at the same time would be more in accordance with the objective of responsiveness. Third, Legrand maintains that the ‘preamble of the 1992 Treaty of European Union [referring to subsidiarity] and Article 7 of the Protocol on subsidiarity and proportionality appended to the 1998 Treaty of Amsterdam both recognise the inevitability or value of legal pluralism’.406 Indeed, subsidiarity and proportionality also deserve brief discussion in terms of security rights and the objective of responsiveness. At present, the most relevant provisions are found in Article 5 of the Treaty on European Union (TEU) along with the Protocol (No 2) on the application of the principles of subsidiarity and proportionality.407 Paragraph 3 of Article 5 of the TEU prescribes: Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.

Paragraph 4 of the same Article prescribes: ‘Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.’ In addition, both paragraphs oblige the

403

Legrand (n 399) 40. The TFEU was cited in n 99. 405 JW Rutgers, ‘Secured Credit and the Internal Market: The Fundamental Freedoms and the EU’s Mandate for Legislation: Commentary’ in Eidenmüller and Kieninger (n 15) 73. 406 Legrand (n 399) 40. 407 Consolidated Version of the Treaty on European Union [2016] OJ C202/13; Protocol (No 2) on the application of the principles of subsidiarity and proportionality [2016] OJ C202/206. 404

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EU institutions to apply the principles as laid down in Protocol No 2. This Protocol, as amended by the Treaty of Lisbon, emphasises ex ante monitoring and enforcement of subsidiarity by national parliaments, rather than ex post review by the ECJ.408 For its part, the ECJ was for a long time reluctant to examine the substantive merits of subsidiarity and proportionality complaints in detail. In particular, it used to view subsidiarity ‘more as a political than as a legal principle’, to quote Catherine Barnard.409 Eventually, the ECJ showed a greater willingness to perform such an examination in Ex p BAT,410 a case concerning the validity and interpretation of the Tobacco Products Directive.411 The ECJ ended up holding that the contested Directive was in accordance with both principles. In terms of subsidiarity, it reasoned that the objective of the Directive, namely the elimination of barriers raised by differences between the Member State laws, regulations and administrative provisions in question, ‘cannot be sufficiently achieved by the Member States individually and calls for action at Community level’.412 In connection with the proportionality assessment, the ECJ stated that the Community legislature must be allowed a broad discretion in an area such as that involved in the present case, which entails political, economic and social choices on its part, and in which it is called upon to undertake complex assessments. Consequently, the legality of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution is seeking to pursue.413

All in all, the ECJ’s reasoning gives the impression that the principles of subsidiarity and proportionality are not easily breached. However, the argument that subsidiarity and proportionality lend institutional support to the objective of responsiveness does not presuppose that potential EU measures on security rights would generally be prone to breach these principles; rather, it suffices that the principles involve normative ideas that resonate with the objective. This kind of resonance is easy to perceive. As for subsidiarity, we should keep in mind that two separate tests have to be passed. The proposed action should be not only such that its objectives cannot be

408 C Barnard, The Substantive Law of the EU: The Four Freedoms, 5th edn (Oxford, Oxford University Press, 2016) 575. 409 ibid 573–74. 410 Case C-491/01 The Queen and Secretary of State for Health ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd [2002] ECR I-11453 (hereinafter Ex p BAT). 411 Parliament and Council Directive 2001/37/EC of 5 June 2001 on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco products [2001] OJ L194/26 (repealed by Directive 2014/40/EU). 412 Ex p BAT (n 410) paras 181–85. 413 ibid paras 122–23, 141. Curiously, the ECJ also commented on proportionality in connection with subsidiarity, stating that ‘the intensity of the action undertaken by the Community in this instance was also in keeping with the requirements of the principle of subsidiarity in that … it did not go beyond what was necessary to achieve the objective pursued’ (para 184).

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sufficiently achieved by the Member States, but also such that the objectives can be better achieved at the EU level. Indeed, while cross-border problems with respect to security rights (dealing with which, to improve the functioning of the internal market, is the relevant objective) cannot be entirely solved by national-level measures, any proposed EU measures must still pass the ‘better achieved at Union level’ test. The more comprehensive unification or harmonisation of substantive law the proposed measure involves, the more problematic it appears in the light of this test, provided that the observations in section IV.B.iv above hold true. In that section, it was argued that a single model of a system of security rights may not fit all jurisdictions because different features of those systems may be preferable for different jurisdictions due to differing economic and social circumstances and value choices.414 As for proportionality, then, if cross-border problems can be satisfactorily solved by measures other than comprehensive substantive unification or harmonisation, then those other measures should be preferred. Means other than comprehensive substantive unification or harmonisation are better in preserving opportunities for local innovation and experimental learning, and thus adaptability of the law, which lies at the heart of the objective of responsiveness. Finally, as Roger Van den Bergh points out, both subsidiarity and proportionality form part of the European ‘quasi-constitutional framework’ that provides scope (albeit limited) for ‘competition between legislators’.415 As discussed in section IV.C.iii above, competitive processes keep local innovation and experimental learning in motion. We have now established that not only foreseeability, with which we began, but also responsiveness must be included in the objectives of desirable development towards greater compatibility between systems of security rights. Next up is the objective of dividing unforeseeability costs, the third and final instalment of the set of objectives developed in this book.

V. The Objective of Dividing Unforeseeability Costs A. Content and Importance The need for a third objective arises from the contradiction between the objectives of foreseeability and responsiveness, and from reconciliatory resolutions to

414 See R Van den Bergh, ‘Subsidiarity as an Economic Demarcation Principle and the Emergence of European Private Law’ (1998) 5 Maastricht Journal of European and Comparative Law 129, 131. Van den Bergh writes: ‘Decisions taken at a level closer to the citizens are more responsive to local needs. However, there may be circumstances in which centralized law-making is justified.’ 415 R Van den Bergh, ‘Towards an Institutional Legal Framework for Regulatory Competition in Europe’ (2000) 53 KYKLOS 435, 440–41, 447–48.

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that contradiction. As explained in sections III and IV above, maximal realisation of foreseeability would require the comprehensive unification or harmonisation of substantive law, which in turn would suppress responsiveness.416 Consequently, the preservation of responsiveness leaves a group of potential situations where foreseeability cannot be fully achieved. The objective of dividing unforeseeability costs concerns these situations. The objective suggests that conflict resolution in these situations should take into account the interests of both domestic and foreign creditors, of whom the latter tend to be more easily overlooked. One way to put this is that the idiosyncrasies of a national system of security rights produce negative externalities from a cross-border perspective,417 but the costs involved should not be imposed entirely on foreign (secured) creditors. As demonstrated in section V.B below, analogous points have been made in private international law literature in terms of the field’s general characteristics, on the one hand, and cross-border problems specific to security rights, on the other. These points, as well as the objective of dividing unforeseeability costs itself, can be thought to embody a broader transnational conception of justice. Possible sources of institutional support for the objective are charted in section V.C.

B. The Transnational Conception of Justice i. Justice Pluralism We can start reconstructing a transnational conception of justice, such as that embodied in the objective of dividing unforeseeability costs, from certain answers to the question why private international law is needed in the first place. In particular, why should jurisdictions keep open the possibility of their courts applying foreign law in cases that involve cross-border aspects? In the nineteenth century, Joseph Story argued that the rules which are to govern [such cases] are those which arise from mutual interest and utility, from a sense of the inconveniences which would result from a contrary doctrine, and from a sort of moral necessity to do justice, in order that justice may be done to us in return.418

Thus, a moral motivated pursuit of justice, and an expectation of reciprocity in that respect, occupied a central place in his view of the foundations of private international law, or ‘the administration of international law’.

416

Discussed particularly in sections III.B, IV.B.iv and IV.C.iii. See Verstijlen (n 3) 30–31. Story, Commentaries on the Conflict of Laws, Foreign and Domestic, in Regard to Contracts, Rights, and Remedies, and Especially in Regard to Marriages, Divorces, Wills, Successions, and Judgments, 5th edn (Boston, Little, Brown and Company, 1857) 42. 417

418 J

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Michael Bogdan cites similar reasons to support his view that conflict rules are normally enacted and applied in the interest of the forum jurisdiction and to advance its policies. According to him, ‘the arguments of utility, and the inconveniences and injustices that would result from a general refusal to apply foreign law, are the decisive factors behind the forum country’s rules on conflict of laws’.419 He stresses that a foreign legal rule is applied not because as such it is considered more just or otherwise better than the corresponding domestic rule, but rather because the legislator of the forum jurisdiction has deemed the foreign rule ‘better suited’ for (in a more relevant way connected to) the type of situation in q uestion. Accordingly, the foreign rule may be considered more just in the particular geographical context of a case.420 The term that Alex Mills uses to refer to this contextual nature of justice is ‘justice pluralism’, which he regards as a reflection of philosophical value pluralism, as distinguished from both value absolutism and value relativism. Justice pluralism holds that a just outcome depends not merely on the facts of a dispute but also on its legal cultural context. In Mills’ words, ‘there is no universal “just” resolution of a type of dispute, but an incommensurable conflict of values, embodied in different national private laws’. Consequently, when the task is to choose between the national laws of different jurisdictions, the appropriate criteria for choice of law, and for choice of justice standards, cannot be determined on the basis of ordinary national law principles.421 For the purposes of this book, it suffices to conclude that, while private international law pursues justice, its conception of justice is more complex and bound to context-dependent variation than ideas of justice in national substantive laws. The content of this conception cannot only be based on the law and legal culture of the forum jurisdiction. In short, the conception must be transnational by nature.

ii. Conflicts Justice or Material Justice? One persistent debate concerns the more specific nature of justice that private international law should pursue. The classical view is content with so-called ‘conflicts justice’, whereas a competing view calls for more demanding ‘material justice’ (or ‘substantive justice’). The classical view comes in many versions, but all are ‘preoccupied with choosing the proper state to supply the applicable law, rather 419 M Bogdan, Private International Law as Component of the Law of the Forum: General Course, A Collection of Law Lectures in Pocketbook Form (The Hague, Hague Academy of International Law, 2012) 65–66. Bogdan explains (at 74) that foreign law is normally not applied as a service, courtesy or assistance to a foreign jurisdiction, but rather because its application is in certain situations ‘conducive to the smooth functioning of international commercial and family relations and such smooth functioning lies in the interest of the forum country’, albeit that foreign jurisdictions usually share this interest. 420 ibid 66. 421 A Mills, The Confluence of Public and Private International Law: Justice, Pluralism and Subsidiarity in the International Constitutional Ordering of Private Law (Cambridge, Cambridge University Press, 2009) 5–6.

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than directly searching for the proper law or, much less, the proper result’.422 In a multi-state dispute, as long as certain (usually pre-defined) choice-of-law criteria are met, application of the substantive law so determined is considered proper. In this view, controlling the merits of the material outcome is generally thought to be beyond the possibilities of private international law because it is a matter that depends on the inherent merits or demerits of the applicable substantive law.423 The competing view regards just and fair dispute resolution, material justice, as an attainable and desirable goal of private international law. This follows from the understanding that multi-state disputes are not qualitatively different from domestic disputes. The idea of material justice has long roots in the history of private international law, but it acquired prominence and new advocates during the twentieth century, particularly in the US.424 However, the most extreme versions aside, this view has not been presented as a complete substitute for the classical view, but rather as a general corrective to that view.425 The debate between conflicts justice and material justice is relevant here because the objective of dividing unforeseeability costs particularly draws on the idea of material justice. Indeed, this objective can be said to focus on situations where conflicts justice fails. As explained in section V.A above, it concerns situations where the objective of foreseeability cannot be fully realised due to concessions made to the objective of responsiveness. In terms of private international law, unforeseeability means unpredictability as to the applicable substantive law. In private international law matters, particularly concerning security rights, such unpredictability amounts to failure of conflicts justice. For, considering how central a role foreseeability plays for the economic functions of security rights and for justification of the priority treatment of these rights on insolvency,426 predictability as to the applicable substantive law must be regarded as an essential part

422 SC Symeonides, ‘General Report’ in SC Symeonides (ed), Private International Law at the End of the 20th Century: Progress or Regress? XVth International Congress of Comparative Law (London, Kluwer Law International, 2000) 44–45. 423 ibid. See G Kegel, ‘Paternal Home and Dream Home: Traditional Conflict of Laws and the American Reformers’ (1979) 27 American Journal of Comparative Law 615, 616–17. Describing the classical view, to which he himself subscribes, Kegel notes that ‘substantive law aims at the materially best solution, PIL aims at the spatially best solution’. 424 Symeonides (n 422) 45–46. See, eg, FK Juenger, Choice of Law and Multistate Justice (Dordrecht, Martinus Nijhoff Publishers, 1993) 191–208. Juenger refers to evidence showing ‘that result-selectivity is an integral element of the positive conflict of laws and that recognition of the need for sound outcomes in multistate cases is growing’ (at 191) and goes on to plead for a teleological reorientation of the field. See generally M Reimann, ‘Comparative Law and Private International Law’ in M Reimann and R Zimmermann (eds), The Oxford Handbook of Comparative Law (Oxford, Oxford University Press, 2008) 1374–75. 425 Symeonides (n 422) 46. For a comparative overview of the various concessions of conflicts justice to material justice, see ibid 46–62. In fact, proponents of the two views have also shown considerable tolerance towards each other. See, eg, Kegel (n 423) 633. While repudiating the ‘American reformers’, Kegel praises them for ‘an architectural accomplishment of high rank, erected out of love for justice and with frequently illuminating clarity and unsurpassed fairness’. 426 Discussed in sections III.C and III.D above.

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of the appropriate choice-of-law criteria. These criteria, in turn, are necessary for conflicts justice to operate. In the following, this discussion will be concretised by concentrating on a major instance of unpredictability as to the applicable substantive law, namely conflit mobile situations.

iii. Theories on the Division of Conflit Mobile Costs Conflit mobile situations may even be regarded as the primary example of the need for division of unforeseeability costs. In these situations, an encumbered asset is moved from jurisdiction A to jurisdiction B after the creation of a security right over the asset. Rights with respect to that asset are subject to the lex rei sitae rule. After the move, a dispute arises in jurisdiction B on the enforceability of the right against third parties. The usual context for such a dispute is the security-provider debtor’s insolvency. A typical setting is that the security right fulfils the preconditions for third-party effectiveness under the substantive law of jurisdiction A, but not under that of jurisdiction B, the forum jurisdiction.427 Consequently, the right may be wholly or partially unenforceable in the forum jurisdiction, which amounts to whole or partial loss of that right. From the viewpoint of private international law, the cause of this problem is the lex rei sitae rule and, more specifically, its unstable connecting factor: the physical location of an asset. Instability means that the applicable law may change every time the encumbered asset crosses borders. In fact, opinions differ as to whether the lex rei sitae rule, as such, is even capable of determining the applicable law in conflit mobile situations. For example, in Finnish legal literature, Kaarina BuureHägglund suggests that the lex rei sitae rule does not give an ‘immediate answer’ to the question as to which of the successive asset locations should be considered decisive for choice-of-law purposes.428 She sees conflit mobile as a collision between two generally recognised principles. On the one hand, the forum jurisdiction has undeniable competence to regulate rights with respect to material objects located in its territory, say, in terms of publicity requirements. On the other hand, the principle of recognition of acquired rights requires that the foreign secured creditor be granted a position similar to that under the law of the initial location of the asset. According to Buure-Hägglund, this collision can be resolved either by sacrificing one of the principles or by somehow reconciling them.429 In contrast, Bogdan, in Swedish legal literature, appears to suggest that the lex rei sitae rule could unambiguously determine the applicable law in conflit mobile

427 If no relevant differences as to third-party effectiveness exist between the substantive laws concerned, the situation should not be regarded as conflit mobile, because a true conflict is absent. 428 K Buure-Hägglund, Irtaimiin esineihin kohdistuvat reaalivakuudet kansainvälisen yksityis oikeuden kannalta, Lakimies-sarja A 127 (Vammala, Suomalainen Lakimiesyhdistys, 1978) 91. Similarly, see M Munch, ‘U 1983 s. 311. Højesterets dom af 8. februar 1983’ (1983) Ugeskrift for Retsvæsen, Afdeling B (Juridiske afhandlinger, meddelelser m.m.) 255, 256. 429 Buure-Hägglund (n 428) 99.

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situations, but may in some cases yield unacceptable outcomes which call for correctives. He starts from the premise that changes in terms of proprietary rights (‘rights in rem’), which he understands as rights that are effective against third parties (or erga omnes), are governed by the law of the jurisdiction in which the asset in question was located when the event whose effects are being assessed took place. In a conflit mobile situation concerning a security right, this implies that the creation of the right is governed by the law of the initial location of the asset, the lex rei sitae during creation, whereas the potential termination of the right after the asset is moved to a new jurisdiction is governed by the law of that new jurisdiction.430 In the case of a foreign retention of title clause which does not conform to the Swedish preconditions for third-party effectiveness,431 Bogdan states that ‘consistent and strict application of the lex rei sitae’ would result in the clause losing its effectiveness once the sales object is moved to Sweden. In his view, though, the needs of international trade and creditor (seller) protection necessitate ‘a more flexible approach’.432 Both views—the one according to which the lex rei sitae rule cannot immediately determine the law applicable in a conflit mobile situation and the other according to which in principle it can but sometimes with an unacceptable result—show that the resolution of these situations involves a great deal of uncertainty. More generally, even before conflit mobile occurs, when a security right is being created, the (prospective) secured creditor faces unpredictability as to the eventually applicable law. The threat of loss of the right is very real because the asset is in most cases left in the security-provider debtor’s possession (due to the commercial significance and prevalence of non-possessory security rights), because the secured creditor thus cannot control the location of the encumbered asset, and indeed because the applicable substantive law may change every time the security-provider debtor moves the encumbered asset across the border to another jurisdiction. We should keep in mind that under these conditions, even a security arrangement that the secured creditor initially meant as purely domestic may give rise to a cross-border third-party conflict.433 In these respects, and particularly in conflit mobile situations, the lex rei sitae rule fails to provide conflicts justice. This is so because the appropriate choice-oflaw criteria, the foundation of conflicts justice, necessarily require predictability as to the applicable law in cases involving security rights. As a consequence, conflit mobile can be seen as an instance of situations that call for material justice in the shape of division of unforeseeability costs.434 430 M Bogdan, Private International Law in Sweden, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2015) 76–77, 81. 431 Non-conformity may result, say, from permission granted to the buyer to resell goods purchased before paying the purchase price, as discussed in section IV.B.ii.b above. 432 Bogdan (n 430) 81. For further details and references, see M Bogdan, Svensk internationell privat- och processrätt, 8th edn (Stockholm, Norstedts Juridik, 2014) 268–70, 272–73. 433 Kieninger (n 65) 167. 434 The notions of conflicts justice and material justice were discussed in section V.B.ii above.

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The ‘bigger picture’ of this book involves examining the different means of promoting compatibility between systems of security rights, and requires an answer to the question of how the objectives of foreseeability, responsiveness and the division of unforeseeability costs could guide choices between those means. Focusing back on conflit mobile situations, this amounts to asking whether the division of unforeseeability costs should actually be regarded as the primary objective in these situations or whether means that more directly increase foreseeability should be preferred. The case for the division of unforeseeability costs seems strong under two conditions. First, the relevant conflict rule should already be uniform, so that the unification of conflict rules does not promise significant increases in foreseeability. This appears to be the case with the lex rei sitae rule,435 at least on the face of it. However, as noted on several occasions above, the lex rei sitae rule can in practice be understood and applied quite differently.436 Second, the divergences of substantive law underlying a conflit mobile situation should not be merely accidental.437 This is because, if they were merely accidental, preserving them in the name of the objective of responsiveness would not be justified. That, in turn, would call for substantive approaches (centralised or local) to increase foreseeability by the removal of substantive divergences. For the sake of argument, let us assume that in a conflit mobile situation the substantive divergences involved that concern the third-party effectiveness of a security right are not merely accidental, but reflect (more or less conscious, better or worse articulated) policy choices. In the following, some ways of dealing with conflit mobile situations proposed in (mainly Nordic) legal literature are briefly discussed. Their common denominator is that they can all be reinterpreted as attempts to divide the costs of unforeseeability between domestic and foreign creditors. The costs involved are incurred by features of law, without fault attributable to any creditor, whether domestic or foreign. The aim here is merely to show that the proposals have the purpose, or effect, of dividing unforeseeability costs, and thus to exemplify what the objective of dividing unforeseeability costs may mean in practice. We will discuss the actual merits of the proposals in chapter three. It seems convenient to begin with the two authors already mentioned. BuureHägglund proceeds with the premise that the mere physical move of an encumbered asset from the jurisdiction of its initial location should not alter legal relations. Instead, the applicability of the law of the subsequent location requires that something new and ‘legally relevant’ occurs in the jurisdiction of the subsequent location. She phrases the question as what events in the jurisdiction of the 435

Von Bar and Drobnig (n 9) 468. studies confirm this. See, eg, B Akkermans and E Ramaekers, ‘Lex Rei Sitae in Perspective: National Developments of a Common Rule?’ in B Akkermans and E Ramaekers (eds), Property Law Perspectives, Ius Commune Europaeum 106 (Cambridge, Intersentia, 2012); JW Rutgers, International Reservation of Title Clauses: A Study of Dutch, French and German Private International Law in the Light of European Law (The Hague, TMC Asser Press, 1999) 69–165. 437 Here, ‘accidental’ means not explicable by differing economic or social circumstances, or differing value choices. 436 Comparative

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subsequent location should be regarded as relevant enough to trigger the applicability of its law. In her view, these events include dispositions concerning the encumbered asset, such as sale or pledge.438 A striking aspect in her analysis is that she ends up treating bankruptcy (collective liquidation proceedings) differently from distraint (individual enforcement proceedings). Indeed, she suggests that while the security-provider debtor’s bankruptcy in the jurisdiction of the subsequent location triggers the application of the law of that location, distraint against the encumbered asset in the same jurisdiction does not. For her, distraint is a ‘mere enforcement measure’, in terms of conflict rules comparable to a physical move of the encumbered asset, whereas bankruptcy ‘may also cause changes in substantive legal relations’.439 Buure-Hägglund’s proposal can be read as an attempt to divide unforeseeability costs because her express purpose was to reconcile the principles of the forum jurisdiction’s competence and recognition of acquired rights,440 and because the proposal would actually result in one kind of division of the costs in conflit mobile situations, which are fraught with unpredictability as to the applicable law. In bankruptcy situations, costs would be borne by foreign creditors, whose security rights might become unenforceable against the debtor’s other creditors. In distraint situations, costs would be borne by domestic creditors whose chances of applying the debtor’s assets to satisfy their claims might be diminished due to additional enforceable foreign security rights over some of those assets. In other words, unlike in bankruptcy, in distraint a foreign security right could remain enforceable against third parties even if it did not fulfil the requirements for thirdparty effectiveness under domestic substantive law. Let us note that Buure-Hägglund explicitly rejects the idea of complementing the lex rei sitae rule with subjective factors, such as the purposes or expectations of the parties to a security arrangement regarding future location of the encumbered asset.441 In contrast, Bogdan embraces that very idea. As already mentioned, he recommends flexibility in the application of the lex rei sitae rule. For him, this means distinguishing between two types of situation: those where the (prospective) secured creditor had a reason to expect (‘knew or should have known’) at the time of entering into the security agreement that the encumbered asset would later be moved to Sweden, and those where the secured creditor had no such reason. In the former type, which includes the usual export sales with a Swedish importer as retention-of-title buyer, the secured creditor should have acquired a security right that fulfils the requirements of Swedish law. If these requirements are not fulfilled,

438

Buure-Hägglund (n 428) 127–28. ibid 144–46, 167–70. 440 ibid 99. 441 ibid 199. According to Buure-Hägglund, this would decisively weaken the basic idea of the lex rei sitae rule, which is to determine the applicable law by objective criteria visible both to the parties and to third parties alike. 439

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the security right is unenforceable. In the latter type, the secured creditor has a legitimate interest that the security right be upheld despite unfulfilled requirements and it is conceivable that this interest should not be altogether sacrificed in the interest of the other creditors.442 Bogdan’s views find support in Swedish case law, which will be discussed in section V.C.i below. Similar thinking is well established in Denmark, too. As regards the expected (planned) moves of an encumbered asset, Danish case law, which will be discussed in section V.C.ii, has given rise to the ‘principle of the import country law’, princippet om importlandets ret.443 The underlying attitude, and its link to the objective of dividing unforeseeability costs, can be illustrated by following Erik Siesby’s reasoning: It would be contrary to the international tradition in this field if a conflict between a proprietary right created in accordance with the original lex rei sitae and a right created after a move to another country were necessarily resolved on the basis of the new lex rei sitae.444

Discussion of solutions distinguishing expected and unexpected moves also appears in Finnish and Norwegian legal literature, albeit that authors’ views on them vary from positive to neutral or negative.445 All in all, these Nordic solutions clearly divide the costs of conflit mobile between foreign and domestic creditors. Therefore, they present one way in which the objective of dividing unforeseeability costs can be put into practice. In these solutions, the division of costs is based on what is regarded as legitimate expectations on the part of foreign creditors.446 Importantly, the solutions also demonstrate that the objective does not stand for the division of the costs of conflit mobile in

442 Bogdan (n 430) 81–82; Bodgan (n 432) 273–74. Although Bogdan mainly discusses the treatment of foreign retention of title clauses and security transfers of ownership, he seems to extend his argumentation to security rights in general. 443 U Rammeskow Bang-Pedersen, Internationale aspekter af insolvens- og tingsretten (Copenhagen, Forlaget Thomson, 2002) 532–36; E Siesby, ‘Lovvalget vedrørende ejendomsforbehold endnu en gang’ (1984) Ugeskrift for Retsvæsen, Afdeling B (Juridiske afhandlinger, meddelelser m.m.) 163, 164. The term importlandets ret was coined by Siesby. 444 E Siesby, ‘Nyt lys over lovvalget vedrørende ejendomsforbehold’ (1983) Ugeskrift for Retsvæsen, Afdeling B (Juridiske afhandlinger, meddelelser m.m.) 272, 273. Translated by the present author. 445 For Finland, see J Tuomisto, ‘Finland’ in A von Ziegler, C Debattista, ABK Plegat and J Windahl (eds), Transfer of Ownership in International Trade, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2011) 160–61; J Kaisto, ”Pantti tai muu vakuus”: Vakuusoikeuden yleisistä opeista erityisesti vakuusluovutuksia ja takaisinsaantilain 14 §:n soveltamisalaa silmällä pitäen, SLY-sarja A 275 (Helsinki, Suomalainen Lakimiesyhdistys, 2006) 225–30; T Juutilainen, Omistuksenpidätys ja esineoikeudellinen lainvalinta (Helsinki, University of Helsinki Conflict Management Institute, 2005) 83–110; R Koulu, Kansainvälinen varallisuusoikeus pääpiirteittäin (Helsinki, WSOY, 2005) 212–13. For Norway, see B-E Reinertsen Konow, Løsørepant over landegrenser (Bergen, Fagbokforlaget Vigmostad & Bjørke, 2006) 464–78; J Cordes, L Stenseng and P Lenda, Hovedlinjer i internasjonal privatrett, 2nd edn (Oslo, Cappelen Akademisk Forlag, 2010) 461–62. 446 That kind of ‘unilaterality’ is one of Buure-Hägglund’s critical points towards these solutions. She would rather reject attempts to divide risk on the basis of what just one party to a conflict has done or meant. See Buure-Hägglund (n 428) 187.

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each individual case, but simply suggests that not all cases should be resolved in favour of domestic creditors at the expense of foreign creditors. Another way to divide the costs of conflit mobile between foreign and domestic creditors is the idea of a grace period. This means that for a set time of, say, three or four months after the move of an encumbered asset to another jurisdiction, the security right retains its validity and the effects it had under the law of the initial location (usually the location at the time when the right was created). A grace period would give the holder of that right a chance to (try to) comply with the requirements of the law of the new location. The division of costs aspect is well visible in the following comment by Drobnig: This chance for preserving the effects of the security right by complying with the special requirements of member state B [the new location] (special form requirements, registration, etc.) is of course to the disadvantage of the merchants in member state B because the applicable regime is foreign deviating from the domestic regime of B. For this reason, the grace period must be limited in time and perhaps even in its effects.447

C. Institutional Support for the Division of Unforeseeability Costs Keeping in mind that institutional support can be drawn from both national and supranational (European-level) sources of law, it is natural to start from the actual support received in national courts for the idea of dividing the costs of conflit mobile.448 First and foremost, this concerns the resonance that the idea of distinguishing between the expected and unexpected moves of an encumbered asset has received in the Swedish and Danish Supreme Courts. Both courts have quite clearly ruled that in cases of an expected move, the law of the new location (Swedish or Danish law, respectively) governs third-party conflicts that arise after the encumbered asset is moved to the jurisdiction of the new location (Sweden or Denmark). That is, in order to be enforceable against third parties, the security right has to fulfil the requirements for third-party effectiveness under the law of the new location. The treatment of cases of an unexpected move remains somewhat less clear, but at the very least, the judgments of both courts leave open the possibility that a foreign secured creditor might be granted greater protection than in cases of an expected move. In addition, the German Federal Court of Justice has protected foreign creditors in ways that can be reinterpreted as an endorsement of the objective of dividing unforeseeability costs. Discussion of the case law of these three courts offers by no means an exhaustive list and is simply meant to exemplify the available sources of institutional support. Finally, some ‘structural’

447 Von Bar and Drobnig (n 9) 469 (see the note on authorship at 21–22). Similarly, see Snijders (n 109) 156–57, 159. As discussed in section V.C.i below, a related idea has been introduced in Swedish case law. 448 See sections III.E and IV.D above, which elaborate on the role of institutional support in this book, as compared to its role in doctrinal study of law (or ‘legal dogmatics’).

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institutional support for the objective can be drawn from the logic of EU internal market law.

i. The Swedish Supreme Court: Starting Point and Exceptions The first Swedish Supreme Court judgment that operated with a distinction between expected and unexpected moves of an encumbered asset is NJA 1978, 593. This case concerned the enforceability in Sweden of a German retention of title clause. A contract of sale with that clause, oriental carpets as sales objects, was concluded in (West) Germany, between a German seller and a Swedish buyer. After the carpets had been delivered to Sweden, the buyer went bankrupt. The retention of title clause was fully effective under German substantive law. However, it was ineffective against the buyer’s creditors under Swedish substantive law because the carpets had been sold to the buyer with a view to resale (before payment of the purchase price). The Supreme Court formulated and applied the following rule: In situations of this kind, the question whether retention of title is effective against the buyer’s creditors should be assessed according to Swedish law, at least when the property is sold for export to Sweden, as in the present case.449

Consequently, the retention of title clause was held to be unenforceable against the buyer’s creditors. The Supreme Court thus established a rule for the clearest instances of an expected move, that is, outright export situations.450 Beyond these, though, the rule is vague. Was the Supreme Court signalling that even ‘weaker expectedness’ (such as the seller’s reason to suspect that the buyer is planning a move) suffices to trigger application of Swedish law, or was application of Swedish law to be taken as a main rule subject to some as yet undefined exceptions? The Supreme Court itself recognised the need for clarification in judgment NJA 1984, 693.451 This case concerned the security transfer of title to a car registered in (West) Germany. The ownership of the car was transferred to a German savings bank as security for a loan extended for buying that car and was to be transferred back to the transferor (security-provider debtor) upon repayment of the loan. At the time of the security transfer (the creation of the security right), the car was located in Germany. The security-provider debtor was de facto domiciled in Germany and conducted business there, although his family was in Sweden and he had other connections there as well. According to his own statement,

449 Translated by the present author. The original is as follows: ‘I situationer av detta slag bör, åtminstone när egendomen såsom i förevarande fall av säljaren avyttrats för export till Sverige, frågan huruvida förbehållet äger verkan mot köparens borgenärer bedömas efter svensk rätt.’ 450 cf AH Persson, Förbehållsklausuler: En studie om en säkerhetsrätts nuvarande och framtida ställ ning, Rättsvetenskapliga biblioteket 7 (Stockholm, Stiftelsen Skrifter utgivna av Juridiska fakulteten vid Stockholms universitet, 1998) 676–77. Persson appears to understand the judgment as direct application of the lex rei sitae rule, ie, the German retention of title clause losing its proprietary effects when the goods arrived in Sweden, simply because of the invalidity of the clause in terms of proprietary effects under Swedish substantive law. 451 See NJA 1984, 693, 698.

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which the Supreme Court accepted, the car had been lent to another person for a trip to Sweden, but meant to be driven back to Germany soon. However, while still located in Sweden, the car became subject to distraint for the security-provider debtor’s Swedish tax debts. The security-provider debtor sought cancellation of the distraint on the basis of the German security transfer of title, that is, the savings bank’s security right. The question that ended up before the Supreme Court was whether the German security transfer of title should be recognised and regarded as effective (enforceable) in connection with the Swedish distraint, even though the (publicity) requirements for effectiveness against the security-provider debtor’s other creditors were not fulfilled under Swedish substantive law.452 This time, the Supreme Court developed an elaborate answer, starting by weighing the interests of Swedish creditors against those of foreign creditors. Reasons against recognition of the German security transfer of title included the need for systemic order and simplicity, and Swedish creditors’ difficulties in assessing credit risks according to law other than that of Sweden. Yet the Supreme Court noted that Swedish law itself provided for certain non-publicised security rights over movable property, so that not all assets in a person’s possession might be available to satisfy claims by that person’s creditors. Reasons for recognition, in contrast, included foreign creditors’ interest in avoiding loss of rights in cases where assets are moved to Sweden without their involvement, and potential difficulties after such a move in agreeing with the debtor on a new security right in accordance with Swedish law. In addition, the Supreme Court stressed the importance of paying attention to the development of international commerce and the increasingly lively trade policy cooperation between countries in this field. Reciprocity was also discussed: if the aim was that Swedish security rights should retain their effectiveness even if the encumbered asset was temporarily moved abroad, Sweden would have to show readiness to provide similar treatment to security rights created elsewhere.453 On the basis of this discussion, the Supreme Court formulated a principled starting point and three more concrete exceptions to it. The starting point is that a property right which is effective according to the law of the jurisdiction where the asset was located when the right was created is regarded as enforceable in Sweden. The Supreme Court stated that while certain exceptions are needed in cases where an asset is brought to Sweden without observing Swedish requirements on possession or other publicity, these exceptions should not be stretched beyond what is necessary. Here, particular attention should be paid to such connections with a foreign state that give third parties reason to suspect that the asset may be encumbered by a security right under foreign law.454 452 The Supreme Court noted that a similar matter had been decided in judgment NJA 1972, 192, with the outcome of the rather straightforward application of Swedish law. However, the Supreme Court distinguished that case and considered it unhelpful with respect to the case at hand because its actual context had been the application of Swedish criminal law rules on confiscation. 453 NJA 1984, 693, 698–99. 454 NJA 1984, 693, 699.

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The Supreme Court formulated the exceptions as follows.455 First, if it was anticipated in connection with the security transfer of title (this probably means at the time of disposition) that the asset would be exported to Sweden, weightier reasons exist for non-enforcement in Sweden. In this connection, the Supreme Court referred to judgment NJA 1978, 593, discussed above. Second, the same applies to situations where the transferor (security-provider debtor) had such a strong connection to Sweden that the transferee (secured creditor) had reason to expect that the asset would be moved to Sweden. Third, irrespective of the circumstances of the transfer, after some time has elapsed since the asset moved to Sweden, the connection to the foreign state may be so hard to discern that the foreign security transfer of title should no longer be enforceable. Meanwhile, the transferee has had a chance to acquire a new security right or collect the receivables.456 In this particular case, the Supreme Court applied the starting point, and the absence of reasons to deviate from it, in favour of the parties to the German security transfer of title. The Supreme Court stressed the factual intention that the car would be staying in Sweden only temporarily, probably to note that (even) the third exception was not applicable. Interestingly, the Supreme Court did not provide the German security transfer of title with the effects of the Swedish pledge, which it ‘conceptually’ paralleled to a security transfer of title, but considered it appropriate to go further. Indeed, the Supreme Court ended up imitating the protection that security transfer of title is afforded under German law, which resulted in cancelling the Swedish distraint.457 Several aspects of the judgment correspond to the objective of dividing unforeseeability costs developed in this book. Most notably, the Supreme Court clearly pursues division of the costs of conflit mobile between domestic and foreign creditors, as its weighing of interests shows. Moreover, the Supreme Court connects its solution to the idea of reciprocity, which was recognised in section V.B.i as an element of the transnational conception of justice on which the objective is based. Finally, the Supreme Court employs two concrete ways of dividing costs, both of which were introduced in section V.B.iii. That is, the idea of distinguishing between expected and unexpected moves is prominent in the judgment, and the exception that pays attention to lapse of time closely resembles the idea of a grace period. Whether or not these are optimal ways to divide the costs of unforeseeability will be discussed in chapter three. Here, it suffices to establish, as indeed we

455 The terminology used by the Supreme Court is inconsistent in that the above starting point is formulated as concerning property rights or security rights in general, whereas the exceptions are formulated as concerning security transfer of title in particular. It can be assumed, though, that the exceptions are meant to be understood more generally. 456 NJA 1984, 693, 699. The Supreme Court’s reasoning resonates with (and perhaps follows) some ideas discussed by Bogdan in earlier legal literature. See M Bogdan, ‘Application of Foreign Rules on Non-possessory Security Interests in Swedish Private International Law’ (1978) 47 Nordisk tidsskrift for international ret 14, 24–26. 457 NJA 1984, 693, 699–700. For a critical view of the judgment, see Persson (n 450) 677–79.

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have done above, that the case law of the Swedish Supreme Court lends institutional support to the objective of dividing unforeseeability costs.458

ii. The Danish Supreme Court: The Principle of Import Country Law Until the early 1980s, the Danish courts lacked a consistent way of dealing with foreign retention of title clauses which did not fulfil the Danish preconditions for third-party effectiveness.459 As described by Siesby, it seemed as if the ‘individualising method’ had spread to choice of law in proprietary matters. This method seeks to determine the applicable substantive law by indicating the legal system to which the subject matter is most closely connected, an exercise that requires weighing several competing connecting factors.460 The variety of connecting factors that the courts had actually used include, besides the location of goods at different points of time, the location of sales negotiations, the location of bankruptcy proceedings and the seller’s residence in relation to the location where the contract was concluded or the sales objects delivered.461 The Danish Supreme Court significantly clarified the situation by judgments UfR 1983.311 H and UfR 1984.8 H, which are today read as expressions of the principle of import country law.462 This principle by and large corresponds to what we noted in section V.C.i on the treatment of import situations (or, more generally, situations of an expected move) under Swedish law. In UfR 1983.311 H, the case concerned retention of title to a heated plate press (varmepladepresse) sold by a German company to a Danish company which had already for years acted as an importer and retailer of the German company’s products to the Danish market. The Danish company had bought the press against a bill of exchange payable in three months (tre måneders veksel), brought the press to Denmark and sold it to a customer there. When the Danish company later became

458 For a discussion of the two judgments dealt with in this section, with an overview of the Swedish legal literature on them, see J Tavaststjerna, ‘Lagval vid gränsöverskridande säkerhetsrätter i lösöre: Nuvarande problem och framtida lösningar’ in M Lindqvist, A Stolt and J Tavaststjerna, and M Jänterä-Jareborg (ed), Tre aspekter av EU-IP: Studier rörande olovligt bortförande av barn, s amkönade parrelationer och säkerhetsrätter i lösöre (Uppsala, Iustus Förlag, 2011) 210–19. 459 See O Lando, ‘The Application by Danish Courts of Foreign Rules on Non-possessory Security Interests’ (1978) 47 Nordisk tidsskrift for international ret 3, 7–13. 460 E Siesby, Lærebog i International privatret: Almindelig del og formueret, 2nd edn (Copenhagen, Jurist- og Økonomforbundets Forlag, 1989) 112; E Siesby, ‘Om lovkonflikter vedrørende tingligt beskyttede rettigheder over løsøre’ (1979) Ugeskrift for Retsvæsen, Afdeling B (Juridiske afhandlinger, meddelelser m.m.) 345, 350. Typically, the individualising method finds use in determining the law applicable to a contractual relation in the absence of choice by the parties. See, eg, Rome I Regulation, Art 4(3)–(4). The method is generally thought to be poorly suited to choice of law in proprietary matters because the connecting factors used may be unknowable to third parties. 461 Siesby, Lærebog i International privatret (n 460) 112. See, eg, the judgments UfR 1982.1038 V, UfR 1973.796 SH and UfR 1966.475 V. 462 J Lookofsky and K Hertz, International privatret på formuerettens område, 5th edn (Copenhagen, Jurist- og Økonomforbundets Forlag, 2015) 140–43; Rammeskow Bang-Pedersen (n 443) 532–36. In these judgments, the Supreme Court adopted a solution that had earlier been put forward in legal literature. See Siesby, ‘Om lovkonflikter’ (n 460) 350.

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subject to liquidation proceedings, the German company claimed from the liquidation estate payment of an amount equivalent to the value of the press, basing its claim on retention of title. Under German substantive law, the retention of title clause was effective against the buyer’s other creditors and the liquidation estate. Under Danish substantive law, though, it was not. This was because of Danish case law-based rules on consignment (konsignation), which the Supreme Court found applicable. The requirements of these rules were not satisfied because the purchase price between the original seller and buyer had not become payable upon resale, but only later when the bill of exchange fell due, after the three-month credit period.463 The Supreme Court ruled that retention of title could be effective against Danish creditors only if the Danish requirements for effectiveness were fulfilled. In other words, the question of effectiveness against the liquidation estate was governed by Danish substantive law. In its brief reasoning for this choice of law, the Supreme Court pointed out that the machine in question had been sold to a buyer who acted as a retailer of the seller’s machines to the Danish market and that the machine had been located in Denmark when the buyer’s liquidation proceedings commenced.464 As noted above, this judgment is today taken as an expression of the principle of import country law. However, at the time the judgment was given, alternative readings were also possible. Siesby wrote that the judgment could, on the face of it, be understood as an expression of the lex concursus principle. This principle would involve applying the law of the jurisdiction where the bankruptcy proceedings take place to the question of third-party effectiveness of a proprietary right, provided that the asset concerned is located in that jurisdiction when the bankruptcy proceedings commence.465 As another possible reading, Siesby mentioned that the effects of a right against third parties are in principle assessed according to the law of the jurisdiction where the asset was located at the time the right was created, but after a move to another jurisdiction, the conditions for continued existence of those effects should be fulfilled according to the law of that other jurisdiction.466 Mogens Munch suggested that the judgment directly concerned only situations of sale to a retailer, where it is clear to the seller in which country the resale will take place. In these situations, the lex rei sitae at the time of the commencement of liquidation (bankruptcy) proceedings is applied. Munch deduced from the wording used by the Supreme Court that situations involving distraint (individual enforcement proceedings) were probably meant to be treated similarly.467 463

UfR 1983.311 H, 314. ibid 315. 465 Siesby (n 444) 273. Siesby rejects the lex concursus reading because he sees no reason to treat bankruptcy (collective liquidation proceedings) differently from distraint (individual enforcement proceedings), adding that to resolve all conflit mobile situations according to the new lex rei sitae would be contrary to international tradition. 466 ibid. 467 Munch (n 428) 258. 464

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The principle of import country law was eventually confirmed, and extended beyond mere resale situations, in UfR 1984.8 H. This case concerned the sale of a knitting machine (strikkemaskine) on credit and with a retention of title clause. The seller was an English company and the buyer a Danish company. The contract of sale included a choice-of-law clause stating that the contract was to ‘be construed’ (interpreted) according to English law. The Danish company went bankrupt, giving rise to a dispute concerning enforceability of the retention of title clause against the company’s other creditors. Under English substantive law, the retention of title clause was apparently valid. Under Danish substantive law, it was not, because the requirement of a 20 per cent down payment by the time of delivery of the sales object, as laid down by the (then in force) Instalment Sales Act, had not been fulfilled. According to the contract of sale, 10 per cent of the purchase price was to be paid upon order and another 10 per cent upon delivery, but the latter payment had been missed, possibly due to a mistake by a bank.468 The Supreme Court held the choice-of-law clause (English law) valid as between the seller and the buyer. The validity of the retention of title clause in their mutual relationship was thus governed by English substantive law. In contrast, ‘fulfilment of particular conditions for the effect of the retention of title clause in relation to the creditors’ was to be assessed according to Danish substantive law. Here, the Supreme Court’s reasoning was that the agreement in the contract of sale was that the machine would be sent to the buyer in Denmark, and the machine was indeed located there at the time of the bankruptcy order.469 Nevertheless, the judgment turned out favourably to the English company. This was so because the Supreme Court held that the minimum down payment rules, which could not be assumed to pursue the aim of creditor protection, were governed (also in relation to the buyer’s creditors) by English substantive law, that is, the law governing the contract of sale.470 Some commentators have also proposed the application of the principle of import country law in situations where the seller ought to have known of the buyer’s intentions to move the sales object to Denmark. And some would even extend the principle beyond retention of title to other security rights.471 Moreover, some have suggested that it would be unreasonable to require Danish preconditions

468

UfR 1984.8 H, 9. translated by the present author. The original is as follows: ‘opfyldelse af særlige betingelser for ejendomsforbeholdets virkning i forhold til kreditorerne’. cf UfR 1987.766 H, which seems to relax the requirement of locating in Denmark at the time of the bankruptcy order in cases concerning actio pauliana-type recovery of assets to the insolvency estate. cf also UfR 1992.373 V. For a brief commentary on both judgments, see T Svenné Schmidt, International formueret, 2nd edn (Copenhagen, Forlaget Thomson, 2000) 319–20. 470 UfR 1984.8 H, 9–10. The minimum down payment rules were intended to socially protect buyers from becoming involved in instalment sales that exceed their financial capacity, to stabilise normal instalment sales and to some extent limit consumption. See T Jensen, Afbetaling (Copenhagen, GEC Gads forlag, 1970) 425–37. 471 Lookofsky and Hertz (n 462) 142–43; Rammeskow Bang-Pedersen (n 443) 535–36. 469 Quotation

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for third-party effectiveness to be fulfilled if the encumbered asset was moved to Denmark against the secured creditor’s expectations.472 The principle itself and the foregoing scholarly ideas perfectly exemplify the objective of dividing unforeseeability costs, thus much like the Swedish case law and legal thinking discussed in section V.C.i above. The merits of the Danish solutions, too, will be further discussed in chapter three.

iii. The German Federal Court of Justice: Resolving the Problem of Initial Invalidity Germany has developed a rich body of case law dealing with foreign security rights. The underlying attitude is very liberal in that foreign security rights are generally recognised and held to be enforceable.473 Since the German substantive law on security rights is very liberal as well,474 the case law confirms Drobnig’s general thesis that willingness to recognise foreign security rights reflects ‘the liberality or illiberality of the respective import country’s domestic system of security rights’.475 The German basic rule concerning the effect of a change of location of an asset on the application of the lex rei sitae rule is codified in Article 43(2) of the Introductory Act to the Civil Code (EGBGB). The rule implies continuity of proprietary rights created under the law of the initial location, while explicitly only stating that these rights cannot be exercised contrary to the law of the new location.476 One might be led to think that German law has no need for division of the costs of conflit mobile. It may appear that no such costs will arise in the first place, because of a willingness on the German side to accommodate foreign security rights. However, this has not always been entirely true. Unforeseeability costs used to arise in certain import situations involving foreign retention of title clauses. In those situations, German law was in principle prepared to recognise the clause and hold it enforceable against third parties, but seemed unable to do so because the clause did not fulfil the requirements for third-party effectiveness under the law of the initial location, that is, the location of the sales object at the time when the

472 Svenné Schmidt (n 469) 317; P Arnt Nielsen, International privat- og procesret (Copenhagen, Jurist- og Økonomforbundets Forlag, 1997) 621. See also A Philip, Dansk international privat- og procesret, 3rd edn (Copenhagen, Juristforbundets Forlag, 1976) 397–98. 473 Von Bar and Drobnig (n 9) 344–45. See, eg, Federal Court of Justice judgments BGHZ 39, 173 (20 March 1963), concerning a French gage automobile over a lorry, and BGH IPRspr 1991 no 71 (11 March 1991), concerning an Italian mortgage over a luxury car. In both cases, the foreign security right was treated like a German security transfer of title. 474 In particular, absent or (by title-based security devices) circumventable publicity requirements contribute to this liberality. 475 Drobnig (n 4) 109–110, 114. According to Drobnig, eg, Italian case law confirms the same thesis from the viewpoint of a ‘rather strict’ domestic system. 476 U Drobnig, ‘German Conflict Rules on Security Interests in Movable Assets’ in Bridge and Stevens (n 67) 152–53.

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parties had agreed on retention of title. In other words, the problem resulted from the clauses being invalid from the very outset. The leading Federal Court of Justice judgment dealing with these situations is BGHZ 45, 95 (2 February 1966). The case concerned the effectiveness of a retention of title clause against the buyer’s bankruptcy creditors. The clause was part of a sale of knitting machines between an Italian seller and a German buyer, and agreed on by the parties when the machines were still located in Italy. As planned from the beginning, the machines were delivered to the buyer in Germany. Later, the buyer went bankrupt. Under Italian substantive law, the clause was effective only between the seller and the buyer, but not against the buyer’s creditors, because it had been agreed upon orally and thus disregarded Italian form requirements (Articles 1523 and 1524(1) of the Italian Civil Code). Under German substantive law, the clause would have been fully effective, including against the buyer’s creditors, because German law did not set corresponding form requirements or comprehend retention of title with merely relative effect (effective only between the parties).477 In this case, the Federal Court started by restating the position, established in its earlier case law, that moving an asset across the border to another jurisdiction does not alter a right acquired with respect to that asset, even though the applicable law changes. Further, the Federal Court noted that retention of title with merely relative effect was not entirely incompatible with the context of the German regime of proprietary rights. This was so because, while German law did not comprehend such retention of title, it did distinguish the relative ineffectiveness of legal acts. Instead of following this view to its logical end, that is, the ineffectiveness of the clause against the buyer’s creditors in Germany, the Federal Court chose to base its decision on the intention of the parties.478 The Federal Court gathered that the parties had intended to agree on a retention of title clause that would be fully effective in Germany. It observed, for example, that a clause effective only between the parties would not have fulfilled the parties’ purposes, nor would it even have served any meaningful purpose (considering the possibilities offered by the law of obligations on the basis of the contract of sale alone), and further that the disregard of Italian form requirements was probably due to the parties attempting to create a clause that was effective in Germany without realising the need to comply with Italian law. Next, the Federal Court took an extraordinary step: it construed an implied obligation by the buyer to retransfer the title to the seller when the machines entered Germany. The retransfer would be governed by German law, the law of the location of the machines when retransfer occurred. As a result, the seller would acquire a fully effective security, thus escaping the problem of initial invalidity (ineffectiveness against third parties).479

477

BGHZ 45, 95, 96–97. BGHZ 45, 95, 97–98. 479 BGHZ 45, 95, 98–101. See Drobnig (n 476) 153–54. 478

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While this solution was of course artificial and was criticised accordingly in the legal literature, nevertheless the result itself was welcomed.480 Today, the same result can be achieved under statutory conflict rules.481 It is submitted that resolving the problem of initially invalid retentions of title, be it by way of case law or statutory law, amounts to an instance of division of unforeseeability costs. A comparison of the German position with that of Sweden and Denmark shows that the division of unforeseeability costs is needed in quite different types of situation, depending on a jurisdiction’s general attitude towards the recognition and enforcement of foreign security rights. This general attitude, as Drobnig suggests, follows the ‘liberality or illiberality’ of a jurisdiction’s domestic system of security rights, that is, its substantive law on security rights.

iv. EU Internal Market Law: ‘Structural’ Institutional Support The most direct connection of the theme of this book with EU internal market law (conformity of the ‘integrated approach’ with internal market law) was dealt with in chapter one, section IV.D. In contrast, here we will discuss internal market law in a more indirect role, as a source of ‘structural’ institutional support for the objective of dividing unforeseeability costs. Such support can be drawn from the logic of internal market law, notably from its decision-making sequence and tensions. Indeed, decision-making typical of internal market law is structurally analogous with the division of unforeseeability costs and its corrective function in terms of problems caused by the other two objectives: foreseeability and responsiveness. One starting point of internal market law appears in Article 34 TFEU, in the shape of a prohibition on quantitative restrictions on imports and all measures of equivalent effect.482 In the structural analogy sketched here, this trade barrier ban represents the objective of foreseeability. However, internal market law has from its beginnings recognised that the trade barrier ban needs exceptions, as primarily indicated by the list of justificatory grounds in Article 36 TFEU. More importantly, the ‘mandatory requirements’ doctrine of the ECJ involves an open-ended list of justificatory grounds, meaning that new grounds can be introduced in the future.483 The possibility of such exceptions, especially as they are not subject to a numerus clausus, is the equivalent of responsiveness in the structural analogy between internal market law and the objectives developed in this book. M oreover, the coexistence of the trade barrier ban and the open-ended list of potential

480 Drobnig (n 476) 154. See U Drobnig, ‘Eigentumsvorbehalte bei Importlieferungen nach Deutschland’ (1968) 32 Rabels Zeitschrift für ausländisches und internationales Privatrecht 450, 452–54, 465–71. 481 Different commentators have relied here on different rules: Art 46 (significantly closer connection) or Art 43(3) (events that occurred in a previous location considered as if having occurred in the new location, Germany) of the EGBGB. See Drobnig (n 476) 154, especially fn 34. cf K Thorn, ‘Germany’ in von Ziegler et al (n 445) 213. 482 Discussed in ch 1, section IV.D.ii. 483 Discussed in ch 1, section IV.D.iii.

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exceptions to it surely causes uncertainty, probably also incurring uncertaintyrelated costs, for actors in the internal market. Now, internal market law also includes a mechanism which in effect divides the burden, and costs, of unforeseeability between domestic and foreign actors of a Member State, and is therefore analogous to the objective of dividing unforeseeability costs. This mechanism is the test of proportionality, which can be divided into the subtests of suitability and necessity. That is, a Member State is not permitted to introduce or maintain a measure constituting a trade barrier merely because it finds an eligible ground for justification. In addition to that, it has to show that the measure is suitable and necessary in relation to the aim pursued; in other words, the effect of the measure has to serve achieving the aim (suitability), while the aim must not be achievable by some other solution with less hindrance to intra-EU trade (necessity).484 Applying the test of proportionality requires casespecific weighing and balancing. As a result, some cases are resolved in favour of an individual Member State and its domestic actors, while others are resolved in favour of the more general interests of the internal market. What is more, much like the objective of dividing unforeseeability costs, the test criteria themselves, in their context-dependence, appear to be motivated by a transnational, ‘pluralist’ conception of justice.485

VI. Interrelations between Objectives A. Coexistence and Reconciliation Required The purpose of the three objectives developed in this chapter is to guide division of labour between the four main types of means for promoting compatibility between systems of security rights (the centralised substantive approach, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach) and to guide the choice of concrete means within these main types. It should be clear from the discussion in section V above that the objective of dividing unforeseeability costs is needed as a corrective due to the coexistence of the objectives of foreseeability and responsiveness (more precisely, due to preservation of responsiveness). But the most crucial question is how to reconcile foreseeability and responsiveness, since some means of promoting compatibility between systems of security rights increase foreseeability at the expense of responsiveness, with some even threatening to smother responsiveness altogether. However, the actual need for reconciliation is limited, for it appears to exist mostly, if not solely, with respect to the centralised substantive approach.

484 485

Discussed in ch 1, section IV.D.iv. Discussed in section V.B.i above.

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Indeed, this main type of means seeks foreseeability by removing the diversity of substantive law, thus contradicting the central aspects of responsiveness. At least at the present stage of integration, responsiveness requires substantive diversity. As for the other three main types of means, such a contradiction is usually absent. For example, the unification of conflict rules, a means belonging to the centralised conflicts-approach, has the potential to simultaneously increase f oreseeability and responsiveness: foreseeability in the shape of predictability introduced by ‘Savignian’ decisional harmony, and responsiveness through the effect that uniform conflict rules based on objective connecting factors exert on competition between jurisdictions and on the likely results of that competition.486 Consequently, the objectives guide choice of concrete means differently within the centralised substantive approach, on the one hand, and within the other main types of means, on the other. Within the centralised substantive approach, choices should attempt to maximise foreseeability, but at the same time preserve responsiveness to a sufficient degree. The crucial question, namely how to identify a sufficient degree, including who should have the final word about it, will be discussed in chapter three. In contrast, within the centralised conflicts-approach, the local conflictsapproach and the local substantive approach (collectively the gentler approaches), where the contradiction between foreseeability and responsiveness seldom occurs, the expectation that a particular concrete means increases foreseeability or responsiveness, or optimally both, should be taken as a reason in favour of choosing that means. The greater the increase that is expected, the stronger the reason generally is. However, increases in foreseeability should be prioritised due to the significance of this objective to the economic functions of security rights and to justifying the priority treatment of secured claims on insolvency.487 In turn, responsiveness may often be best served by simply not impeding it. While the objectives provide weighty reasons for and against choosing particular means, they do not provide an exhaustive list of reasons to be taken into account. Factors such as transaction costs and convenience to market actors play a role, too, as we will see in chapter three.

B. Process Perspective: Potential Integration The three objectives are not meant as a mere still picture, but as a dynamic model capable of changing along with development of laws and societies. The previous section outlined how the objectives should guide choice of concrete means of promoting compatibility between systems of security rights in present-day Europe. However, the situation is unlikely to remain exactly the same in the future.

486 487

Discussed in ch 1, section III.B and (in this chapter) section IV.C.iii above. Discussed in sections III.C and III.D above.

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In particular, the constellation of objectives may change as a result of developments in law and legal thinking. For example, from today’s perspective, the comprehensive (or ‘full’) unification or harmonisation of substantive law is inadvisable because it would suppress responsiveness. The need for responsiveness in this case results from the various controversial policy choices in designing a system of security rights, particularly in terms of priority (broadly understood) and publicity, as was discussed in section IV.B. There, it was also pointed out that a single model of a system of security rights may not fit all jurisdictions due to varying economic and social circumstances and value choices. However, law and legal thinking may develop at least in the following respects. To the extent that partial or piecemeal harmonisation is attempted and succeeds, this may pave the way for further harmonisation. As a by-product of efforts towards further harmonisation, and related discussions among academics and practitioners, consensus may develop regarding (currently) controversial policy choices.488 This development may be promoted by competitive processes between jurisdictions, through increased awareness and comparability of costs and benefits of different substantive law solutions.489 In sum, the future may bring integration as to law and legal thinking, changing the constellation of objectives. As a result, the objective of responsiveness may have less to protect, while the objective of dividing unforeseeability costs may have less to correct. Even the comprehensive unification or harmonisation of substantive law may become conceivable in the long run. It is unlikely, though, that the need for responsiveness will ever entirely disappear, because the law will always have to adapt to changing circumstances, for example, to the invention and use of new financing techniques. Another matter is that some responsiveness mechanisms could perhaps be introduced even at the level of supranational law. These could be developed on the basis of, say, broad participation in law drafting, experimentalist law and the periodic maintenance of law.

VII. Conclusion The purpose of this chapter has been to develop a set of objectives that capture the essence of desirable development towards greater compatibility between systems

488 Of course, a similar paving-the-way effect may occur at the global level. See generally S Huber, ‘Transnationales Kreditsicherungsrecht’ (2017) 81 Rabels Zeitschrift für ausländisches und internatio nales Privatrecht 77. 489 In section IV.C.iii.b, these advantages of competition were connected to the internalisation of the costs and benefits of substantive law in the enacting (or otherwise law-producing) jurisdiction, which in turn was identified to be an effect of conflict rules based on objective connecting factors.

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of security rights. Three objectives were identified, namely foreseeability, responsiveness and the division of unforeseeability costs. Each objective was separately examined in terms of its content and importance (substantive normative justification), followed by a search for institutional support, understood as resonance of the objective with existing sources of law at the national (Member State) and supranational (EU) levels. Foreseeability requires that parties to a security arrangement be able to know in advance the legal treatment that the security right they create will receive. In doing so, this objective addresses the credit markets’ need for certainty. The importance of foreseeability is largely due to the role that foreseeability plays in the economic functions of security rights, as well as in justifying the priority of secured over unsecured claims on insolvency. On the basis of these roles, foreseeability should be regarded as the leading objective. Responsiveness is understood as sensitivity to reasons and rationales to resist changes in the law as well as to impulses that call for changes in the law. Responsiveness emphasises the law’s adaptability and evolutionary potential, and accounts for results that competition between jurisdictions may be expected to yield. Its importance mainly rests on two observations: first, that the design of a system of security rights necessarily involves controversial policy choices; and, second, that a single model of a system of security rights may not fit all jurisdictions because varying economic and social circumstances and value choices are likely to require differentiated models. Foreseeability and responsiveness are both indispensable for desirable development towards greater compatibility between systems of security rights. Therefore, foreseeability, even if regarded as the leading objective, needs to leave room for responsiveness. In some situations, the resulting deficit in foreseeability incurs costs for economic actors. The objective of dividing unforeseeability costs is meant to address these situations and to do so from the standpoint of a transnational conception of justice. The main idea of this objective is that a jurisdiction should not impose all costs of unforeseeability on foreign economic actors. In other words, part of the externalities caused by an idiosyncratic system of security rights should be internalised in the jurisdiction maintaining that system. The three objectives are meant to guide the choice of concrete means to promote compatibility between systems of security rights. That exercise is for chapter three. As noted in section VI.B above, the constellation of objectives may change in the future, diminishing the need for the objectives of responsiveness and division of unforeseeability costs. However, from today’s perspective, the following preliminary points can be made about the interrelations between objectives. First, means that would altogether suppress responsiveness, or that leave very little room for it, should not be adopted. Second, where responsiveness is not threatened in this way, the expectation that a particular means will increase foreseeability or responsiveness, or both, should be taken as a reason in favour of adopting this

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means. However, between foreseeability and responsiveness, means expected to increase foreseeability should be prioritised. This is an aspect of foreseeability being regarded as the leading objective. Besides, responsiveness may often be best served by simply not impeding it rather than by actively attempting to increase it. Third, where unforeseeability costs exist due to preservation of responsiveness, and not merely accidentally, the division of unforeseeability costs should step in as a corrective.490

490 In contrast, unforeseeability costs that are merely accidental should be prevented from arising by means that increase foreseeability, particularly by substantive unification or harmonisation.

3 Choices: Options Reviewed in the Light of Objectives I. Introduction Choices have to be made between the various options available, that is, between the concrete means for promoting compatibility between systems of security rights. In this chapter, we will unpack the four main types of means assembled in chapter one (the centralised substantive approach, the centralised conflictsapproach, the local conflicts-approach and the local substantive approach), assessing these means in the light of the three objectives identified and elaborated in chapter two (foreseeability, responsiveness and the division of unforeseeability costs). Note that the observations in chapter two, section VI on interrelations between the objectives are now refined into recommendations for and against adopting particular means. To briefly rehearse those observations, foreseeability should be maximised, while preserving a sufficient degree of responsiveness. At the same time, unforeseeability-related costs arising from preservation of responsiveness should somehow be divided between domestic and foreign creditors.1 The objectives provide weighty reasons for choice of concrete means. To illustrate, the relevance of foreseeability lies in that it largely prevents potential crossborder problems. In turn, responsiveness is relevant because it stands for the adaptability of the law to different and changing economic and social circumstances and for experimental learning. These last must be considered as necessary prerequisites for the desirable development (or evolution) of law in the long run. Finally, the division of unforeseeability costs is relevant because justice in a transnational setting requires it. In many cases, the reasons provided by these objectives, as such, suffice to justify the choice of a particular means. At times, though, they have to be complemented by other observations, such as comparisons of transaction costs and convenience to economic actors. To be sure, different objectives must be emphasised in discussing the different main types of means. For example, in the centralised substantive approach, 1 As explained in ch 2, section V, the objective of dividing unforeseeability costs does not require division of costs in individual cases, but merely suggests that not all cases involving unforeseeability costs should be resolved in favour of domestic creditors at the expense of foreign ones.

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a major concern is often whether the concrete means, some of which are rather powerful instruments for increasing foreseeability, should be considered too intrusive on responsiveness. In contrast, the primary concern of the ‘gentler approaches’ (the other three main types of means) may be whether these means are capable of sufficiently increasing foreseeability, whereas potential harm to responsiveness is typically much less of a problem.2 In the following, discussion of each main type of means is structured according to major themes of ongoing academic (and practical) debate. For example, in discussing the centralised conflicts-approach in terms of security rights over tangible movables, one of these themes is whether the lex rei sitae rule should retain its position as the general conflict rule covering third-party relations or whether it should be replaced by some possibly better-functioning option. If the answer is to stick with the lex rei sitae rule, then the next question is to what extent it should be eroded by asset type-specific special conflict rules.3 As regards security rights over receivables, a major theme is the assessment of the advantages and drawbacks of the main conflict rule options for third-party relations in the assignment of claims, that is, the law governing the contract of assignment, the law of the assignor’s habitual residence and the law governing the assigned claim. This is so because conflict rules on assignment of claims cover security rights over claims, including receivables, but the EU currently lacks a common conflict rule for thirdparty relations in assignment of claims.4

II. The Centralised Substantive Approach A. Deciding on the Preservation of Responsiveness Matters that need to be discussed with respect to most means within the centralised substantive approach include to what extent responsiveness should be preserved and who should have the final word about it. We understand preservation of responsiveness here as protection of substantive diversity against over-extensive unification or harmonisation, while the candidates for the final decision-maker are the EU and each individual Member State. Arguably, due to the internal market connection, readiness to eliminate substantive diversity with a view to preventing cross-border problems is greater in EU institutions than in individual Member States. For simplicity, we will assume below that the EU is initially pursuing substantive unification or harmonisation to the maximum extent possible, whereas

2

cf sections III.C.ii, III.D.i and III.E below. Discussed in section III.D below. 4 Discussed in section III.E below. 3

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presumably some Member States would rather retain at least some distinctive features of their substantive law.5 We should note first that deciding on the aspects and extent of responsiveness to be preserved is a separate matter from establishing whether the EU has competence to adopt a particular means. Establishing competence can be thought of as a prerequisite for active preservation of responsiveness, which is needed only if competence exists, so that responsiveness can come under threat due to loss of substantive diversity. If that is the case, responsiveness gives rise to the question whether existing competence should be exercised or not. This, in turn, at least partly coincides with questions of subsidiarity and proportionality.

i. Prerequisite: Competence a. Potential Legal Bases According to Article 5(2) of the Treaty on European Union (TEU),6 under what is known as the principle of conferral, ‘the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein’. The Treaties do not confer general authorisation on the EU to legislate in the field of private law. However, particular legal bases exist that can be used for that purpose,7 including with respect to property law,8 and the law on security rights.9 As regards security rights, and measures classified in this book as belonging to the centralised substantive approach, the main options are Articles 114 and 352 of the Treaty on the Functioning of the European Union (TFEU).10 Article 115 TFEU can be left out of the discussion because its substance has become largely obsolete after (what is now) Article 114 TFEU was introduced by the Single European Act 1987.11 The European Court of Justice (ECJ) has stated on several occasions that determining the appropriate legal basis for adopting a

5 Of course, the reality is more complex than that. The EU is not a monolith with a unitary will, and the perceived need for substantive unification or harmonisation and the perceived value of substantive diversity are likely to vary between Member States, and between commentators within Member States. 6 Consolidated Version of the Treaty on European Union [2016] OJ C202/13. 7 S Weatherill, ‘Competence and European Private Law’ in C Twigg-Flesner (ed), The Cambridge Companion to European Union Private Law (Cambridge, Cambridge University Press, 2010) 58–59. See H-W Micklitz, ‘The EU as a Federal Order of Competences and the Private Law’ in L Azoulai (ed), The Question of Competence in the European Union (Oxford, Oxford University Press, 2014) 132–41. 8 E Ramaekers, European Union Property Law: From Fragments to a System, Ius Commune Europaeum 117 (Cambridge, Intersentia, 2013) 127–35. 9 JW Rutgers, ‘Secured Credit and the Internal Market: The Fundamental Freedoms and the EU’s Mandate for Legislation: Commentary’ in H Eidenmüller and E-M Kieninger (eds), The Future of Secured Credit in Europe, European Company and Financial Law Review, special vol 2 (Berlin, De Gruyter Recht, 2008) 73–80. 10 Consolidated Version of the Treaty on the Functioning of the European Union [2016] OJ C202/47. Arts 114 and 352 TFEU are ex Arts 95 and 308 of the Treaty establishing the European Community (TEC), as amended by the Treaty of Amsterdam. 11 Rutgers (n 9) 73. Unlike Art 114 TFEU, Art 115 TFEU requires that the Council act unanimously and provides a legal basis for issuing directives only.

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measure should follow the content and main object of that measure.12 Article 345 TFEU, according to which ‘[t]he Treaties shall in no way prejudice the rules in Member States governing the system of property ownership’, is not discussed here, because European academic discussion is nearly unanimous about it not causing obstacles to EU measures on security rights.13 Article 114 TFEU establishes competence for ‘measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market’. Thus, in the famous Tobacco Advertising judgments, the ECJ stressed and specified the point that Article 114 TFEU (then Article 95 of the Treaty establishing the European Community (TEC) or, before amendment, Article 100a TEC) does not entail ‘a general power to regulate the internal market’. Rather, a measure adopted on the basis of this Article ‘must genuinely have as its object the improvement of the conditions for the establishment and functioning of the internal market’. Accordingly, it does not suffice merely to find disparities between national rules and an abstract risk of obstacles to the exercise of fundamental freedoms or of distortions of competition.14 Rather, the decisive point is whether the measure in question actually contributes to eliminating or preventing trade barriers or distortions of competition.15 If the existence of a trade barrier (‘existence of obstacles 12 See, with references to earlier judgments, Case C-436/03 European Parliament v Council of the European Union [2006] ECR I-3733, para 35. 13 E-M Kieninger, ‘Introduction: Security Rights in Movable Property within the Common Market and the Approach of the Study’ in E-M Kieninger (ed), Security Rights in Movable Property in European Private Law, The Common Core of European Private Law (Cambridge, Cambridge University Press, 2004) 21–22. According to Kieninger, the provision is limited to ‘leaving decisions on the privatisation or nationalisation of certain sectors in trade and industry to the discretion of the Member States’. Similarly, see S van Erp and B Akkermans, ‘European Union Property Law’ in C Twigg-Flesner (ed), The Cambridge Companion to European Union Private Law (Cambridge, Cambridge University Press, 2010) 173. Van Erp and Akkermans parallel the provision to what is known as the principle of neutrality in EU competition law. See Joined Cases C-105/12 to C-107/12 Staat der Nederlanden v Essent NV, Essent Nederland BV, Eneco Holding NV and Delta NV, ECLI:EU:C:2013:677, paras 29–31, 36. See also Ramaekers (n 8) 101–27; F Losada, T Juutilainen, K Havu and J Vesala, ‘Property and European Integration: Dimensions of Article 345 TFEU’ (2012) 148 Tidskrift, utgiven av Juridiska Föreningen i Finland 203, 209–15; B Akkermans and E Ramaekers, ‘Article 345 TFEU (ex Article 295 EC), Its Meanings and Interpretations’ (2010) 16 European Law Journal 292; B Akkermans, The Principle of Numerus Clausus in European Property Law, Ius Commune Europaeum 75 (Antwerp, Intersentia, 2008) 523–25; JM Milo, ‘Combating Late Payment in Business Transactions: How a New European Directive Has Failed to Set a Substantial Minimum Standard Regarding National Provisions on Retention of Title’ (2003) 11 European Review of Private Law 379, 383–85; JW Rutgers, International Reservation of Title Clauses: A Study of Dutch, French and German Private International Law in the Light of European Law (The Hague, TMC Asser Press, 1999) 175–76. cf J Caramelo-Gomes, ‘Unification in the Field of Property Law from the Perspective of European Law’ in W Faber and B Lurger (eds), Rules for the Transfer of Movables: A Candidate for European Harmonisation or National Reforms? European Legal Studies 6 (Munich, Sellier European Law Publishers, 2008) 241–47. 14 Case C-376/98 Federal Republic of Germany v European Parliament and Council of the European Union [2000] ECR I-8419 (hereinafter Tobacco Advertising I), paras 83–84. However, the ECJ notes that the Article can be used as a legal basis for measures designed to prevent ‘likely’ ‘emergence of future obstacles to trade resulting from multifarious development of national laws’ (para 86). See Case C-380/03 Federal Republic of Germany v European Parliament and Council of the European Union [2006] ECR I-11573 (hereinafter Tobacco Advertising II), para 37. 15 Tobacco Advertising I (n 14) para 95; Tobacco Advertising II (n 14) paras 68–69.

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to trade’) has been established, it is not necessary to also prove distortions of competition so as to justify recourse to Article 114 TFEU.16 As Jacobien W Rutgers notes, the case law of the ECJ appears to confirm the view that a legal basis for European-level reregulation exists if a national measure impedes the free movement of goods, services or capital, regardless of whether the national measure is justified as a matter of internal market law. Another view, ‘the orthodox internal market doctrine’, has it that the power to reregulate requires an impediment which is justified, whereas a non-justified impediment merely calls for deregulation at the national level.17 If the first mentioned view is correct, then Article 114 TFEU is an appropriate legal basis for measures for the approximation of Member State laws on security rights, provided that these laws generate trade barriers in the shape of impediments to free movement of goods, services or capital. The occurrence of trade barriers is relatively easy to prove, as was done in chapter one, section IV.D.ii. Rutgers ends up with a similar conclusion, starting with the sensible premise that ‘rules of private international law (choice of law rules) should be taken together with the rules of substantive law to which they refer when determining whether they constitute an infringement [of one of the free movements]’. Accordingly, the combined effect of the lex rei sitae rule and substantive divergences, which is prone to cause loss of security rights, constitutes a trade barrier.18 On these grounds, a plausible case can be made at least for partial and piecemeal means within the centralised substantive approach. But we may question whether Article 114 TFEU would also cover the comprehensive (‘full’) unification of substantive law, that is, substituting a new European system of security rights for the current national systems. Doubts may arise from the wording of the Article, which only refers to ‘approximation’. Indeed, approximation is often understood as a synonym for harmonisation, but as something less than unification. For example, Willem Rank writes: ‘In the context of EU law, harmonisation is an alternative term for approximation. Harmonisation thus involves a greater measure of integration than mere coordination, but falls short of unification.’19 However, more inclusive interpretations are also possible, so that unification may even be understood as ‘only the most intensive form of harmonisation’.20

16 Tobacco Advertising II (n 14) para 67. The main message of the Tobacco Advertising judgments was repeated in Case C-58/08 The Queen, on the application of Vodafone Ltd and Others v Secretary of State for Business, Enterprise and Regulatory Reform [2010] ECR I-4999, paras 32–33. 17 Rutgers (n 9) 74–75. Available justifications were discussed in ch 1, section IV.D. 18 ibid 76–79. Rutgers’ analysis stresses the mandatory nature of the lex rei sitae rule in the light of Case C-339/89 Alsthom Atlantique SA v Compagnie de construction mécanique Sulzer SA [1991] ECR I-107. 19 W Rank, ‘Harmonisation of National Security Rights’ in U Drobnig, HJ Snijders and E-J Zippro (eds), Divergences of Property Law: An Obstacle to the Internal Market? (Munich, Sellier European Law Publishers, 2006) 201–02. 20 EJ Lohse, ‘The Meaning of Harmonisation in the Context of European Union Law: A Process in Need of Definition’ in M Andenas and C Baasch Andersen (eds), Theory and Practice of Harmonisation (Cheltenham, Edward Elgar, 2011) 310–11. Lohse notes, in reference to Art 114 TFEU, that the difference between approximation and unification seems predominantly formal.

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Either way, Article 114 TFEU does not seem to be an eligible legal basis for introducing a European Security Right (ESR) that would coexist with and supplement national types of security rights rather than replace them. Instead, Article 352 TFEU could presumably be used. This can be inferred from how the ECJ has treated other, comparable measures.21 For instance, with respect to the European Cooperative Society Regulation,22 the ECJ held that the correct legal basis was Article 352 TFEU (then Article 308 TEC), but not Article 114 TFEU (then Article 95 TEC). The reason was that ‘the contested regulation, which leaves unchanged the different national laws already in existence, cannot be regarded as aiming to approximate the laws of the Member States’. The ECJ stressed that the European cooperative society would be ‘a new legal form in addition to the national forms of cooperative societies’ and ‘a form which coexists with cooperative societies under national law’.23 Earlier, the ECJ had already held that Article 352 TFEU (then Article 235 TEC) may be used ‘as the basis for creating new rights superimposed on national rights’ in the field of intellectual property,24 as occurred with the Community Trade Mark Regulation.25 However, one institutional difficulty with Article 352 TFEU is that it requires unanimity in the Council, unlike Article 114 TFEU. The above does not mean that all measures categorised in this book as ‘optional or supplementary means’ necessarily fall outside the scope of Article 114 TFEU. For example, one measure that might fit within the scope is the proposal by Frank MJ Verstijlen for a ‘Community Security Right’. Inspired by the Community Patent, this would be ‘a bundle of national security rights, created with one single act’. The formalities of creation would be ‘comparable to those for the national security rights, without the need to fulfil all formalities in every Member State’. For this purpose, Verstijlen envisions registration in a European-level public register.26

21 The legal basis provided by Art 352 TFEU is ‘residual’, in that it can be used only where no other provision of the Treaties provides the necessary power to adopt the measure in question. As a consequence, Arts 114 and 352 TFEU are mutually exclusive. See, eg, Case C-436/03 European Parliament v Council of the European Union [2006] ECR I-3733, paras 36–46. See also Ramaekers (n 8) 128; Rutgers (n 9) 73–74. 22 Council Regulation (EC) 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) [2003] OJ L207/1. 23 Case C-436/03 European Parliament v Council of the European Union [2006] ECR I-3733, paras 40, 43–46. 24 Opinion of the Court 1/94 of 15 November 1994 on competence of the Community to conclude international agreements concerning services and the protection of intellectual property [1994] ECR I-5267, para 59. 25 Council Regulation (EC) 40/94 of 20 December 1993 on the Community trade mark [1994] OJ L11/1. See Ramaekers (n 8) 133–34. Ramaekers discusses the differences in wording between ex Art 308 (formerly 235) TEC and current Art 352 TFEU: eg, the scope of the current Article was broadened by removing the requirement for the measure to be necessary ‘in the course of the operation of the common market’ (currently, the measure has to be ‘necessary … to attain one of the objectives set out in the Treaties’). None of the changes seems to introduce new limitations to the eligibility of the Article as the legal basis for measures discussed in this book. 26 FMJ Verstijlen, ‘General Aspects of Transfer and Creation of Property Rights Including Security Rights’ in Drobnig, Snijders and Zippro (n 19) 34–35.

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As Verstijlen explains, national legal systems would be left intact; indeed, it would remain possible to create purely national security rights as well.27 This speaks in favour of Article 352 TFEU being the correct legal basis. However, a Community Security Right would not be a stand-alone security right. Rather, it would be a combination of European-level norms on creation and various national norms on content and effects. At least from a functionalist perspective, this can be understood as the partial unification or harmonisation of the preconditions for creating national security rights. Such unification or harmonisation, then, could well be ‘approximation’ in the sense of Article 114 TFEU. b. Subsidiarity and Proportionality: Beyond Enforceable Legal Principles The principles of subsidiarity and proportionality are meant to limit the exercise of EU competence to legislate. Indeed, even if a legal basis for a measure exists, subsidiarity may require that the measure cannot be adopted after all. Alternatively, proportionality may require the selection of a less extensive measure instead.28 Both principles have clear contact points with the objective of responsiveness developed in this book. In chapter two, section IV.D, we identified subsidiarity and proportionality as sources of institutional support for the objective of responsiveness, because their main normative ideas resonate with that objective. Responsiveness implies awareness that a single model of a system of security rights may not fit all jurisdictions. Assuming this to be true, the more comprehensive unification or harmonisation is being pursued, the less likely it is that the objectives of the measure chosen can ‘be better achieved at Union level’, as required by subsidiarity. This is so because the benefit of no, or fewer, cross-border problems might then entail the cost of less well-functioning credit markets in individual Member States, whose very domestic markets correspondingly form constitutive parts of the internal market. In turn, under proportionality, if cross-border problems can be removed by less stringent means than comprehensive substantive unification or harmonisation, then those lesser means should be preferred. For example, if the aim of the measure is to put an end to the unexpected loss of security rights (‘legal ambush’), this may be achievable by a combination of selective harmonisation, to remove the ‘remaining traps’, in tandem with the recognition of foreign security rights.29 These lesser means also leave room for local innovation and experimental learning, as well as for competition between jurisdictions, which feeds these processes. We could even go so far as to argue that responsiveness should be understood as

27 ibid. 28

Art 5(3) TEU on subsidiarity and Art 5(4) TEU on proportionality. generally and for comparison H Beale, ‘Finding the Remaining Traps Instead of Unifying Contract Law’ in S Grundmann and J Stuyck (eds), An Academic Green Paper on European Contract Law, Private Law in European Context Series 2 (The Hague, Kluwer Law International, 2002). 29 See

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part of the content of subsidiarity and proportionality with respect to EU measures on security rights. However, this understanding would not endow responsiveness with much concrete protection, at least in terms of judicial review by the ECJ. Indeed, the ECJ had shown a reluctance to substantively examine subsidiarity and proportionality complaints to begin with, and when it eventually engaged in such examination in Ex p BAT,30 the standards were set rather low for both principles.31 In Stephen Weatherill’s words, considering the ECJ’s reasoning with respect to subsidiarity, ‘one is left searching in vain to imagine any circumstances in which the adoption of common rules at EU level could fall foul of the court’s test’. ‘The court’, he continues, ‘has pushed the matter of subsidiarity towards the political debate and robbed it of much, if any, legal significance.’ Further, he notes that practical legal control through proportionality was limited in a similar manner, so that the two principles ‘exert negligible restraining influence’ as a result.32 This is disappointing but in no way fatal to the objective of responsiveness. We should keep in mind that responsiveness, foreseeability and the division of unforeseeability costs are of course not meant as enforceable legal principles in the first place. Instead, they are supposed to be (mere) objectives capturing the essence of what can be considered the desirable development of the law. Moreover, they are matters on which reasonable and informed individuals may be able to develop a consensus. As such, their proper place lies in the political process. And if they function as planned, any need for judicial review should actually be avoided. A separate matter is that the objective of responsiveness may in practice call for some kind of procedure, even if it is legally non-binding. To be of help, this procedure should embody a balanced answer as to who should have a say about preservation of responsiveness in individual cases and who should have the final word in the matter.

ii. Who Should Decide on the Preservation of Responsiveness? Whether and how to preserve responsiveness is a question that should generally be decided on a case-by-case basis by the actor in the best position to assess the need to preserve responsiveness in each case. This criterion clearly points to Member States rather than the EU and thus at the national (local) level rather than the supranational (centralised) level. The reverse would be impossible due to the significance of local circumstances in the notion of responsiveness, at least as developed in this book. In other words, each Member State is itself best aware of its economic and social circumstances and value choices, and is thus best placed

30 Case C-491/01 The Queen and Secretary of State for Health ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd [2002] ECR I-11453. 31 Briefly discussed in ch 2, section IV.D. 32 Weatherill (n 7) 64–65.

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to perceive their connections to the law and accordingly to take normative stands in that respect. For example, the optimal publicity regime may depend on the structure of the local credit market and on the level of trust (and morality) within that market. We discussed this in chapter two, sections IV.B.iii.b and IV.B.iv.a, with particular reference to Germany, where the local system of security rights appears to function well enough without publicity. Arguably, then, individual Member States should not only have a say about efforts to unify or harmonise publicity of security rights, but also the possibility to reject those efforts if necessary, because the fullest knowledge of the features of the local credit market surely exists at the local level. Likewise, local commentators are likely to provide the most accurate assessments of which aspects of the local priority regime result from conscious value and policy choices, and which result from mere historical chance. Therefore, assuming that local value and policy choices are considered potentially worth protecting, as they surely should be, then individual Member States should be allowed to decide whether and how to protect these choices in individual cases. The conclusion of this analysis is that unification or harmonisation should not be forced on Member States if they object to these efforts for reasons related to responsiveness.33 In certain important respects, this conclusion resembles a proposal by Erin A O’Hara and Larry E Ribstein. This can be said even though their context is quite different, namely the US federal system and interstate regulatory competition. O’Hara and Ribstein propose a federal statute, supposedly capable of enhancing the operation of the ‘law market’. Put simply, the law market involves competition between jurisdictions, kept in motion mainly by enforceable choice-of-law clauses. The potential advantages of competition include forcing local law-makers to take into account the costs their activities impose. This is expected to improve the quality (substantive content) and efficiency of local law. However, enforceable choice-of-law clauses can also circumvent laws that are already of good quality and efficient. Consequently, not only under-enforcement but also over-enforcement of choice-of-law clauses can be costly and inefficient.34 To deal with this, O’Hara and Ribstein propose a federal choice-of-law statute that would compel states to enforce choice-of-law clauses, but would also ‘enable the states to retain their power to enact super-mandatory rules that trump choiceof-law clauses’. They see the proposal as an ‘attempt to balance state regulatory concerns with the benefits of jurisdictional competition’. In their view, competition between jurisdictions is preferable to uniform law-making, for several reasons. For example, uniform law-making bodies pursue their own agendas and may fail to produce the best set of uniform laws, while uniformity may be promoted

33 See generally and for comparison R Van den Bergh, ‘Forced Harmonisation of Contract Law in Europe: Not to Be Continued’ in Grundmann and Stuyck (n 29). Van den Bergh argues (at 267) that in discussions ‘the costs of harmonisation largely go unnoticed’, including the disadvantages resulting from reduced diversity and competition between jurisdictions. 34 EA O’Hara and LE Ribstein, The Law Market (New York, Oxford University Press, 2009) 199–201.

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even when a better solution would be the diversity of substantive laws together with the enforcement of choice-of-law clauses. O’Hara and Ribstein also argue that formal uniform law-making may be unnecessary because ‘if uniformity is efficient, a robust market for law often will generate it’.35 We can draw two analogies between the O’Hara and Ribstein proposal and the notion of preserving responsiveness as proposed in this book. First, in both proposals, cross-border developments take precedence over local developments as a default rule. In the O’Hara and Ribstein proposal, this means that as a starting point, by virtue of the envisioned federal statute, states are compelled to enforce choice-of-law clauses, insofar as these clauses are written and expressly agreed by the parties.36 In the notion of preserving responsiveness, this involves the presumption that, when the EU has competence to unify or harmonise substantive law, this competence can be used. Second, in both proposals, exceptions to the precedence of cross-border developments are allowed in matters of particular importance to local jurisdictions. In the O’Hara and Ribstein proposal, this means that a state is not required to enforce a choice-of-law clause if enforcement is prohibited by a state statute enacted after the effective date of the federal statute and explicitly applicable to the type of agreement involved in the case.37 In the notion of preserving responsiveness, this means that an individual Member State may, for its own part, be permitted to reject efforts at unification or harmonisation that it objects to for reasons related to responsiveness. However, comparison with the O’Hara and Ribstein proposal also reveals a weakness in the notion of preserving responsiveness as outlined so far. O’Hara and Ribstein attempt to ensure predictability by clearly defining the situations where the enforcement of a choice-of-law clause is not required,38 whereas preservation of responsiveness still lacks a corresponding element. In the absence of such an element, Member States might become tempted to misuse preservation of responsiveness as an excuse to reject efforts at unification or harmonisation without having responsiveness-related reasons to do so. Instead, rejection could be sheer passivity or, say, due to the influence of a local pressure group whose interests might not equal those of the local jurisdiction as a whole. This issue could be addressed by procedures to preserve responsiveness.

iii. Envisioning Procedures for the Preservation of Responsiveness The above analysis suggests that while each Member State should be able to reject unification or harmonisation efforts that it considers too significant a loss of 35 ibid. 36

ibid 206–07. ibid. The same effect is proposed to be given to a statute or judicial rule that applies to the agreement involved and would have applied to it before enactment of the federal statute. An additional condition in either case is that the person protected by the statute resides in the regulating state at the time of entering into the agreement. 38 ibid 205–06. 37

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responsiveness, on the other hand potential misuse of that ability should be prevented. After all, the starting point should be that the EU is free to exercise existing competence. We can imagine procedural models capable of reconciling the aims of preserving responsiveness and preventing misuse. To be sure, any such procedures would have to be legally non-binding. This follows from the fact that responsiveness, although an objective, mainly belongs to the realm of academic and political debate on integration. One conceivable procedure would be to require a Member State resisting a unification or harmonisation measure to present responsiveness-related grounds to the Commission. Recognising that the Member State will have the final word on the matter, the Commission would limit its investigations to establishing whether the grounds presented can be formally regarded as responsiveness-related, but would not substantively review their merits. Let us consider an example where a Member State opposes a proposal for comprehensive substantive unification. Let us assume that the proposal involves replacing the national systems of security rights with a common European system, affording full priority to secured over unsecured claims on insolvency. Now, the Member State may resist the proposal on the grounds that such a priority regime would violate its value commitments, notably promotion of creditor equality, and that it prefers priority rules that also leave assets to be distributed to unsecured creditors. In that case, the Commission would have to accept the grounds presented. It could simply note that the grounds amount to ‘responsiveness reasons’ and possibly also that the domestic law of the Member State actually corresponds to those grounds. In contrast, the Commission would not be entitled to attempt to investigate, say, the extent to which the grounds presented and the domestic law make economic and ethical sense.39 Another conceivable procedure can be outlined by drawing inspiration from the Protocol (No 2) on the application of the principles of subsidiarity and proportionality.40 The Protocol includes a so-called ‘reasoned opinion’ (or ‘yellow and orange card’) procedure, which enables national parliaments of Member States to participate in the supervision of subsidiarity.41 EU institutions are obliged to bring to the attention of national parliaments draft legislative acts, ‘justified with regard to the principles of subsidiarity and proportionality’.42 In response, any national parliament (or parliament chamber) may give ‘a r easoned opinion stating why it considers that the draft in question does not comply with

39 As the discussion in ch 2, section IV.B suggests, any such investigation would probably end inconclusively. 40 Protocol (No 2) on the application of the principles of subsidiarity and proportionality [2016] OJ C202/206. 41 See G Davies, ‘Democracy and Legitimacy in the Shadow of Purposive Competence’ (2015) 21 European Law Journal 2, 16. Davies notes that ‘the “yellow card” subsidiarity process … involves national parliaments in the EU legislative process and allows them to take a stand on all measures adopted within a shared competence, which includes the internal market’. cf Ramaekers (n 8) 137–38. 42 Arts 4 and 5 of Protocol No 2. ‘Draft legislative acts’ relevant to our discussion here are typically Commission proposals.

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the principle of subsidiarity’. These opinions will have different effects depending on how far they represent the views of the entirety of national parliaments. For this purpose, each national parliament has two votes. Where reasoned opinions on non-compliance represent at least one-third of all votes allocated to national parliaments, the draft must be formally reviewed (‘yellow card’). Moreover, under the ordinary legislative procedure, a simple majority triggers heightened scrutiny (‘orange card’).43 The idea that could be transferred from the reasoned opinion procedure to a procedure for preserving responsiveness is the significance of the representativeness of Member State views. A Member State’s ability to reject a unification or harmonisation measure could be made conditional on other Member States subscribing to the grounds presented, or at least accepting them. The required proportion of votes, or otherwise measured representativeness, would depend on the initial level of tolerance to diversity and idiosyncrasies. This kind of procedure would in effect mainstream the content and uses of the notion of responsiveness. At the same time, the procedure would retain the final word on preserving responsiveness at the local level, although collectivised rather than vested in any individual Member State. To avoid misunderstanding, it is worth repeating that any procedure for preserving responsiveness could not be legally binding. This is so because responsiveness itself has no legal status, and while it has connections with the principles of subsidiarity and proportionality, even these principles belong more to the domain of integration politics than that of law. Thus, the procedures envisioned would merely provide guidance as to when it is advisable to exercise existing competence.

B. Comprehensive Unification or Harmonisation of Substantive Law Comprehensive unification or harmonisation of substantive law represents the maximal removal of diversity between national systems of security rights. Comprehensive unification can be distinguished from comprehensive harmonisation, although both involve replacing current national systems with a common European system. In comprehensive unification, the common European system is based on literally uniform law, introduced in a single text. In comprehensive harmonisation, terminological and other technical differences may remain between national laws, but all laws answer all conceivable substantive questions similarly. As a result, all laws in effect function as a unitary system, which should thus

43 Arts 6 and 7 of Protocol No 2. See C Barnard, The Substantive Law of the EU: The Four Freedoms, 5th edn (Oxford, Oxford University Press, 2016) 575–76.

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exclude the p ossibility of cross-border conflicts. In the following, we will analyse these ‘comprehensive means’ in the light of the objectives of foreseeability and responsiveness.

i. The Prospect of Significantly Increased Foreseeability As to foreseeability, the comprehensive unification or harmonisation of substantive law promises a great leap forward. At least in theory, the removal of substantive diversity should do away with the possibility of cross-border conflicts. In particular, it should put an end to the myriad of private international law problems, problems that currently exist because connecting factors in conflict rules for third-party relations (‘proprietary’ conflict rules) always involve trade-offs and therefore can never be perfect in all respects. None of those imperfections would matter if choice of law, and thus conflict rules, were made superfluous by comprehensive substantive unification or harmonisation. This would significantly increase the ability of the parties to a security arrangement to know in advance what legal treatment the security right created will receive, irrespective of where in Europe its enforceability may later be disputed. This would enable the parties to properly assess the economic benefits of the security arrangement and factor these benefits into the terms of their credit agreement.44 However, maximum possible foreseeability would not be achieved immediately after the introduction of a common European system of security rights. On the contrary, new kinds of uncertainties and additional transaction costs would appear at first, as with ‘any transnational and novel law’.45 Indeed, it is impossible to draft a body of legislation as substantial as one covering the entire law on secured credit in a form so clear and gapless that neither judicial nor legislative involvement is later required. And until clarifications and additions are in place, foreseeability is more or less lacking. One way to address this problem is to emulate laws that have stood the test of time and have been improved in several revisions. Arguably, the most plausible objects of emulation would be Article 9 of the Uniform Commercial Code (UCC) and its progeny. However, Book IX of the Draft Common Frame of Reference (DCFR) hints that European uniform law in this area would probably deviate from those models in several points of substance.46

44 These and wider positive effects of increased foreseeability were discussed in ch 2, sections III.C.iv and III.C.v. 45 See H Collins, ‘Transaction Costs and Subsidiarity in European Contract Law’ in Grundmann and Stuyck (n 29) 276–77. 46 See A Veneziano, ‘The DCFR Book on Secured Transactions: Some Policy Choices Made by the Working Group’ in S van Erp, A Salomons and B Akkermans (eds), The Future of European Property Law (Munich, Sellier European Law Publishers, 2012). Veneziano indicates several points in which DCFR Book IX does not follow UCC Art 9. Some deviations were also noted in ch 1, section II.B.i.b.

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ii. The Risk of Severely Impeded Responsiveness The most problematic aspects of the comprehensive unification or harmonisation of substantive law become visible in the light of the objective of responsiveness. Today, any efforts to introduce a common European system of security rights to replace the national systems would most likely fail. This is symptomatic of a situation where the ‘one-size-fits-all’ assumption is incorrect. A single model of a system of security rights might be perfectly acceptable to some Member States, but less so to others, due to variations in economic and social circumstances and value choices. This perspective can be broadened by marking Axel Flessner’s words on the success of the UCC in the US as compared to the situation in Europe: All in all, the American example should be used cautiously. It apparently works very well in the American economy which has had an internal market for 200 years and a fully-fledged federal system forming one nation—with one language, nationwide standards of legal education and legal practice and a highly mobile population which would expect to find roughly the same governmental and judicial standards everywhere in the Union. Europe is very different in each of these respects. Here, the aims must be more modest, and more diversity in legal institutions must be willingly tolerated. In this kind of union, the UCC cannot form the ‘base line’ for developing credit security law, as it apparently does in the drafting of the [UNCITRAL] Legislative Guide [on Secured Transactions].47

Forcing the comprehensive unification or harmonisation of substantive law at the current stage of European integration would severely impede responsiveness, assuming against the odds that it could even be accomplished. In chapter two, section IV.A, responsiveness was defined as sensitivity to reasons and rationales to resist changes in the law as well as to impulses that call for changes in the law. With this definition in mind, arguably, forcing comprehensive substantive unification or harmonisation would lightly dismiss all reasons and rationalities to resist change, and at the same time would exaggerate impulses that call for change, particularly the expected benefits of uniform or harmonised law. Granted, what is unfeasible or undesirable today may change in the future. In particular, partial and piecemeal means may increase acceptance of the harmonisation agenda and pave the way for further efforts, possibly even unification. The tipping point is where jurisdictions come to conclude that the benefits of thoroughly unified or harmonised law outweigh the costs resulting from the loss of legal diversity. Since this is unlikely to occur everywhere simultaneously—and indeed cannot be guaranteed to occur at all—different jurisdictions should probably be allowed to proceed at their own pace, as discussed in the next section.

47 A Flessner, ‘Security Interests in Receivables: A European Perspective’ in Eidenmüller and Kieninger (n 9) 338.

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iii. Ways Forward: Enhanced Cooperation or a ‘Strongly Recommended’ Model Law One way to enable jurisdictions to proceed each at their own pace would be enhanced cooperation in accordance with Article 20 TEU and Articles 326–34 TFEU. These allow a group of at least nine Member States, if authorised by a Council decision, to make use of the EU’s institutions and exercise its non- exclusive competences. The Council can adopt such a decision ‘as a last resort’, having first established that the objectives of the intended cooperation ‘cannot be attained within a reasonable period by the Union as a whole’. Acts adopted as enhanced cooperation only bind participating Member States. However, enhanced cooperation is open at any time to all Member States, subject to compliance with the conditions of participating in the authorising decision and with acts already adopted. In the Council, only members representing the participating Member States take part in the vote, but all members may deliberate. The Commission and the participating Member States must promote participation by as many Member States as possible.48 Eveline Ramaekers has discussed the possibility of creating ‘a “European” property law by way of enhanced cooperation’. A particular problem she finds relates to Article 326 TFEU, according to which enhanced cooperation ‘shall not undermine the internal market or economic, social and territorial cohesion … shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them’. Ramaekers observes that enhanced cooperation could be seen as hindering intra-EU trade or distorting competition since it results in different rules for participating and non-participating Member States. However, inferring from the ECJ’s reasoning in Tobacco Advertising I, she suggests that Article 326 TFEU might only be breached if the resulting differences had an ‘appreciable’ effect on the internal market.49 According to her, despite the disadvantage of a fragmented internal market, enhanced cooperation may be the only option to move forward in a certain area of law, while the example set by the participating Member States may relieve scepticism on the part of others and lower their threshold to joining.50 Here, we find resonance with the idea of learning based on experimentation and comparison, a central aspect of the objective of responsiveness. Subsequent ECJ case law seems to directly address the issue Ramaekers raised with respect to Article 326 TFEU. In Spain and Italy v Council,51 the ECJ dismissed actions by Spain and Italy to annul a Council decision authorising enhanced 48 On the broader context of enhanced cooperation or ‘differentiated integration’, see E Pistoia, ‘Enhanced Cooperation as a Tool to … Enhance Integration? Spain and Italy v. Council’ (2014) 51 CML Rev 247. 49 Ramaekers (n 8) 236–37. See Tobacco Advertising I (n 14) para 29. 50 Ramaekers (n 8) 238. 51 Joined Cases C-274/11 and C-295/11 Kingdom of Spain and Italian Republic v Council of the European Union, ECLI:EU:C:2013:240.

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c ooperation in the creation of unitary patent protection. Spain and Italy claimed a breach of Article 326 TFEU, among other things because ‘[c]reating uniform protection for innovation in one part only of the Union would encourage activities relating to innovatory products to be drawn to that part of the Union, to the detriment of the non-participating Member States’. The ECJ rejected this claim as invalid, referring to the same reason it used earlier in the judgment to reject claims of infringement of Article 118 TFEU, the relevant legal basis. This Article uses the language of ‘uniform’ protection of intellectual property rights, ‘throughout the Union’ and with ‘Union-wide’ authorisation, coordination and supervision. The ECJ held that the effects of the measures adopted will only be in force in the territory of the participating Member States, a result inherent in the fact that the competence conferred by the Article is used in connection with enhanced cooperation. Additionally, the ECJ noted: ‘Far from amounting to infringement of Article 118 TFEU, that consequence necessarily follows from Article 20(4) TEU, which states: “Acts adopted in the framework of enhanced cooperation shall bind only participating Member States.”’52 To be sure, this is a rather formal way to reject claims of breach of Article 326 TFEU. However, it could perhaps be read as an endorsement of the more substantive grounds proposed by the Council and the Member States intervening in support of the authorising decision. In their view, the plea by Spain and Italy was ‘based on premises in the realm of speculation’. Importantly, they argued that ‘the origin of the fragmentation of the market is to be found, not in the contested decision, but in the present situation, in which the protection offered by European patents is national’.53 In this respect, the situation would be similar if enhanced cooperation were to be used with respect to the law on security rights. Another way to enable jurisdictions to proceed at different paces, while at the same time strongly pushing towards uniformity, would be a model law along the lines of the UCC. Indeed, we should recall that the UCC ‘is not a single federal law, but rather a law separately enacted by each state’.54 The text of the UCC is drafted by a cooperative effort of the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI). Despite being enacted by states, (the revised) Article 9 of the UCC appears to have brought about nearly perfect uniformity. It has been adopted by every state and the District of Columbia. According to Harry C Sigman, local variation in the enacted content is minor and marginal, generally adding narrow exclusions from the scope of coverage, while even the risk of differing interpretations by courts of different states has not materialised to any significant extent. Moreover, an agreed uniform effective date, 1 July 2001, was successfully used and was complied with by 46 states (in effect in all states since 1 January 2002).55 52

ibid paras 66–71, 75. ibid para 74. Sigman, ‘Security in Movables in the United States—Uniform Commercial Code Article 9: A Basis for Comparison’ in Kieninger (ed) (n 13) 60. 55 ibid 61–63. 53

54 HC

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To be sure, UCC Article 9 is an important example of the potential of model laws. However, it is another question whether the US experience could be replicated in today’s Europe. The answer is probably negative, as, for example, Flessner suggests: In Europe, with its many different languages, deeply rooted credit security concepts and long standing national professional habits, and with no unified insolvency law, a possible model law meant to replace the existing law would meet much more resistance in the member states, and a majority for introducing it as a Community instrument seems improbable for the time being.56

Nevertheless, a model law, which Member States would be strongly recommended to adopt, could be used if the above idea of different paces is accepted.57 Because the decision whether or not to enact the model law, and whether or not to locally deviate from its letter, would be up to individual Member States, this technique would be unproblematic from the responsiveness viewpoint. If an agreed uniform effective date were used and complied with by some Member States, then others could join (legislate) any time later, even more flexibly than in enhanced cooperation. An additional responsiveness-related advantage, absent in enhanced cooperation, would be that Member States could also decide to deviate from the model law at will, that is, to amend or repeal at any time national legislation enacted on the basis of the model law. This would enable continuous evaluation of whether the benefits of uniformity still outweigh the costs incurred by loss of substantive diversity and Member States’ ‘own’ policy choices. While the threshold for opting out of, or deviating from, the model law would probably be high, the technique would at least in principle retain possibilities for local innovation, learning based on experimentation and comparison, and competition between jurisdictions. Generally, the more centralised the production of the law on security rights becomes, the more important it is to also find ways to preserve responsiveness at the centralised level. In the EU context, in addition to periodic reviews of legislative acts, spontaneous reviews upon request by a set number of Member States could be envisioned. Review procedures would of course depend on the organisations involved.58 In any case, it would be essential that different economic and social circumstances and different value commitments were represented, insofar as such differences exist.

56

Flessner (n 47) 337–38. it is unclear which organisations in Europe would be authoritative or prestigious enough to produce a successful model law. For discussion of the newly established European Law Institute and its position vis-à-vis other organisations, with comparison to the roles of the ALI and the NCCUSL, see R Zimmermann, ‘Challenges for the European Law Institute’ (2012) 16 Edinburgh Law Review 5, 19–22. 58 On the revision process of UCC Art 9, which well exemplifies the organisational aspect, see P Winship, ‘An Historical Overview of UCC Article 9’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016) 31–46; Sigman (n 54) 62–63. 57 However,

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C. Partial or Piecemeal Unification or Harmonisation of Substantive Law Partial or piecemeal unification or harmonisation of substantive law does not involve replacing the current national systems of security rights with a common European system, at least in the short term. Instead, these means concern a more or less restricted part of the law on security rights. Partial means are also piecemeal if they imply a plan to introduce additional measures in the future. While interchangeable use is often possible, some piecemeal means may not be properly called partial. This may be the case if the final aim is to achieve comprehensive unification or harmonisation within a relatively short period, through separate instalments or phases. The position assumed against forced unification or harmonisation in sections II.A and II.B above also holds for means that are partial or piecemeal. Thus, a Member State should be allowed to reject these measures, too, if it considers them too significant a loss of responsiveness. But to reject, the Member State should, here too, be required to substantiate its view by grounds that are responsivenessrelated in objective consideration. One actual difference between partial or piecemeal means on the one hand and comprehensive substantive unification or harmonisation on the other is that partial or piecemeal means are generally less likely to meet with resistance from Member States,59 or at any rate resistance backed by responsiveness-related grounds. At least two reasons account for this. First, when unification or h armonisation is not supposed to cover the entire law on security rights, it is possible to target particular areas, subfields of this law, with respect to which (spontaneous) convergence already exists between Member State laws. Second, Member States are probably more willing to negotiate limited exceptions to their policy choices and value commitments than to surrender them entirely, for example, regarding priority of secured over unsecured claims on insolvency. Indeed, such restricted concessions may be viewed as an acceptable trade-off for the benefit of fewer cross-border problems, even where a more extensive ‘sellout of one’s principles’ is out of the question. As a category, partial or piecemeal substantive unification or harmonisation encompasses a whole range of concrete means. In the following, we will discuss two general ideas which these means could pursue. One involves starting unification or harmonisation efforts from what can be seen as instances of (so far) maximal spontaneous convergence. The other employs a distinction between purely domestic and cross-border transactions. Before going into these general ideas, we will review a strand of criticism that touches all partial or piecemeal means: criticism concerning fragmentation of the law.

59

See Rank (n 19) 213.

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i. Dealing with the Threat of Fragmentation A general objection to partial or piecemeal unification or harmonisation of substantive law can be observed in the work of Anna Veneziano. She suggests that the European legislator should prioritise ‘the development of economically sound and coherent rules on secured transactions’. It seems safe to assume that she means here comprehensive substantive unification or harmonisation in the sense discussed above (especially in section II.B). Indeed, she justifies her plea by the need ‘to prevent the otherwise inevitable “piecemeal” approach of community legislation, which is now regretted for other areas such as contract law’.60 But what, we may ask, is wrong with the piecemeal approach, bearing in mind that piecemeal legislation, as such, is hardly a negative phenomenon? In all probability, Veneziano’s concerns are less about the legislative technique itself than some of its potential consequences, namely issues of fragmentation.61 In a more general view, Jan Smits explains the fragmentation of private law in terms of multiplication of the sources out of which private law flows, and by nation states losing their monopoly in that respect. One instance of multiplication of sources is law-making conducted or supported by the EU, alongside the activities of other supranational and private norm producers. Thus, Europeanisation well exemplifies this development, providing insights into fragmentation in practice. Smits identifies three reasons why Europeanisation ‘disturbs’ national systems of private law. The main focus of his discussion is the effects of directives, which typically only cover a part of the area initially subject to purely national legislation.62 Therefore, and despite mainly focusing on consumer contract law, his observations offer a basis for reflection on partial or piecemeal means as to the law on security rights. Smits notes first that the functional orientation of European legislation hampers its incorporation into national legal systems. This means that directives are based on the rationality of the internal market and provide special rather than general rules. As a result, ‘fragments of European law’ in the shape of special rules ‘are often out of tune within the national legal order’. Smits generally refers to complexity arising in a situation where two legislatures, national and European, deal with the same substance area.63 Here, the viewpoint of the law on security rights provokes immediate comments. It is a truism that all unification or harmonisation involves changing at least

60 Veneziano (n 46) 124. cf A Veneziano, ‘European Secured Transactions Law at a Crossroad: The Pitfalls of a “Piecemeal Approach” to Harmonisation’ in L Gullifer and S Vogenauer (eds), English and European Perspectives on Contract and Commercial Law: Essays in Honour of Hugh Beale (Oxford, Hart Publishing, 2014) 409–10. While still rejecting piecemeal harmonisation, Veneziano subscribes to the idea of ‘an optional European instrument’, which could possibly be developed on the basis of DCFR Book IX. 61 See Veneziano (n 60) 409. 62 J Smits, ‘Dutch Report: Coherence and Fragmentation of Private Law’ (2012) 20 European Review of Private Law 153, 155–57. 63 ibid 157–58.

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some aspects of some legal systems. Moreover, in the EU context, these changes are often bound to follow the rationality of the internal market. In these respects, both comprehensive and partial or piecemeal means alike may cause changes of rationality and out-of-tuneness in Member State legal systems.64 To the extent that European legislation takes the form of directives, Member States themselves can do a great deal in the implementation phase to alleviate the problem of two legislatures inconsistently dealing with the same substantive area. Rank neatly puts this point as follows: The fact that a directive does not have direct effect and must first be implemented in national law means that it can be moulded to fit into the various national legal systems and that national legal concepts can be taken into account. As a result, the continuity of national systems can be preserved and the chance of fragmentation decreases.65

The second reason noted by Smits for the European ‘disturbance’ of national legal systems relates to legal terminology. In particular, rules in directives often deviate from national terminology. They are typically, and quite consciously, expressed in neutral terms such as the ‘right to withdraw’ or ‘reduction of the price’.66 Considering the above quotation from Rank, this would not seem to be much of an issue, at least at first sight. However, Smits detects a particular problem in it. According to him, Member States are not always free either to transpose directives in the way they want or to refrain from implementing them even if national law is interpretable in accordance with the directive in question. Smits draws this experience from consumer law matters, where the ECJ has required that the consumer should be able to immediately recognise their ‘European’ rights.67 For any unification or harmonisation of the law on security rights, the use of neutral or ‘functionalist’ language appears to be necessary. Thus, it is easy to agree with Rank’s analysis that the only way to cope with differences between the various legal systems and traditions ‘is to depart as much as possible from traditional legal concepts and to focus on the economic function of the various types of security rights’. He elaborates that harmonised rules ‘must be formulated by reference to facts and in neutral language’ and that they ‘should describe the result desired and not the way in which that result should be achieved’.68

64 Even if internally coherent, instruments of substantive unification or harmonisation would cause irritation and out-of-tuneness in their interfaces with pre-existing national law, eg, where the (European) law on security rights and (national) insolvency law have to operate together. 65 Rank (n 19) 210. 66 Smits (n 62) 158. 67 ibid 158–59. With reference to Case C-144/99 Commission of the European Communities v Kingdom of the Netherlands [2001] ECR I-3541, Smits explains: ‘Thus, if European law allows a right to price reduction in case of non-conformity in consumer sales, it is not sufficient if the national court allows partial termination of the contract: the national legislature must explicitly enact a right to reduction of the price. This duty to implement detailed provisions reinforces the disruption of the national system: what already follows from the system of national law still needs to be explicitly codified.’ 68 Rank (n 19) 214–15. Rank continues: ‘References to the multitude of traditional legal concepts must be replaced by terms that are as descriptive as possible.’

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In a parallel discussion on contract law, Thomas Wilhelmsson has put forward fairly similar ideas. He calls for greater emphasis on real-life circumstances in the conceptual world of law and a move away from traditional, more abstract categories. In a purely commercial context, with no consumers involved, ‘real life’ would mean the realities of commercial life, expressed in language understandable to the actors of the sector in question. Compared to Rank’s views above, Wilhelmsson’s justification for his plea goes further, beyond the mere need to cope with differences between various legal systems and traditions. Indeed, Wilhelmsson recognises a growing social demand for understandable legal language. Further, and significantly for the purposes of this book, he suggests that such a shift of emphasis is needed in order to promote ‘extensive sharing of experiences in a continuously changing environment’. This connects with his ‘wish for an experimental law based on the free movement of legal ideas and doctrines’.69 This wish, in turn, comes close to the idea of learning based on experimentation and comparison, which is a central aspect of the objective of responsiveness. In sum, neutral or functionalist language should be accepted as a general good in terms of the efforts to unify or harmonise the law on security rights. Moreover, as regards the harmonisation (mere approximation) of laws on security rights by directives, it is unlikely that any recognisability of one’s ‘European’ rights would be required. This is so because, with national types of security right sufficiently harmonised, cross-border problems could quite satisfactorily be resolved by the recognition and enforcement of foreign national security rights. As noted above on several occasions, a willingness to recognise and enforce follows the ‘liberality or illiberality’ of the domestic system of security rights in the jurisdiction whose courts will adjudicate on the matter.70 Consequently, in theory, if it were possible to remove all policy differences underlying the liberal–illiberal divide (or continuum), then all cross-border problems could be dealt with by way of recognition and enforcement. Two brief anecdotal notes can be added to address Smits’ point on Member States’ lack of freedom in terms of directive implementation. Both concern Finnish law. First, the Finnish Act on Financial Collateral (11/2004), implementing the Financial Collateral Directive,71 can be read as regulating and modifying existing domestic types of security right rather than introducing new ‘European’ types.72 Second, in implementing the Late Payment Directive,73 the Finnish government stated that 69 T Wilhelmsson, ‘The Design of an Optional (Re)statement of European Contract Law: Real Life Instead of Dead Concepts’ in Grundmann and Stuyck (n 29) 370–72. 70 U Drobnig, ‘Recognition and Adaptation of Foreign Security Rights’ in Drobnig, Snijders and Zippro (n 19) 106–14. 71 Parliament and Council Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements [2002] OJ L168/43. 72 See Government Proposal, ‘Hallituksen esitys Eduskunnalle rahoitusvakuuslaiksi ja eräiksi siihen liittyviksi laeiksi’ HE 133/2003, 5–6, 19–20. 73 Parliament and Council Directive 2000/35/EC of 29 June 2000 on combating late payment in commercial transactions [2000] OJ L200/35. The current version is Parliament and Council Directive 2011/7/EU of 16 February 2011 on combating late payment in commercial transactions (recast) [2011] OJ L48/1.

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domestic law already fulfilled the Directive’s (rather modest) requirements on retention of title clauses, so that amending the law was unnecessary in that respect.74 The third reason for the European ‘disturbance’ of national legal systems discussed by Smits is that national law and implemented European law are often interpreted in different ways. While the interpretation of national law emphasises ‘legislative history and the system of law as a whole’, the primary modes of interpretation of European law are ‘textual and teleological’.75 Some inconsistencies resulting from this difference might also be inescapable in interpreting the law on security rights. However, at least some inconsistencies might be avoided by careful drafting of harmonisation measures, in particular by attempting to map all potential problems and to provide a clear solution to each of them, so as to minimise the need for future judicial interpretation. This idea lies behind the detailed regulation in UCC Article 9.76 While models following Article 9 would count as comprehensive unification or harmonisation of substantive law, nothing should prevent similar attention to detail in more restricted approaches. Overall, how severely the issues Smits raises are experienced may depend on national legal systems. Indeed, legal systems differ as to whether and to what extent private law can be perceived as a ‘self-contained and self-referential’ system.77 One instance of this is that jurisdictions with a general civil code have to decide whether directives should be implemented within or outside that code. Smits’ summary of the Dutch discussion is telling: [T]here is no easy way out of the dilemma posed by the Europeanization of private law: a coherent implementation inside the Civil Code is never fully possible, whereas implementation outside the Code would damage the idea of the Code as a complete and consistent whole.78

To a Finnish (or more generally a Nordic) lawyer, who is used to an open-ended system of private law, the question ‘within or outside the civil code’ may feel like a pseudo-problem. In this respect, non-codified private law systems (those without a general civil code) may seem better equipped to function as part of a transnational multi-level system like EU private law.79 Then again, we may reflect whether this question should be felt as a pseudo-problem in codified private law systems as well, and whether that should give reason to relax the ideal of a ‘complete and consistent’ code. 74 Government Proposal, ‘Hallituksen esitys Eduskunnalle viivästyskorkoa koskevan lainsäädännön muuttamisesta’ HE 232/2001, 19–20. See Case C-302/05 Commission of the European Communities v Italian Republic [2006] ECR I-10597. This case can be read as confirmation of the Finnish government’s position. 75 Smits (n 62) 159–60. 76 Sigman (n 54) 58–59. 77 See P Legrand, ‘Against a European Civil Code’ (1997) 60 MLR 44, 45–46. 78 Smits (n 62) 163. 79 T Juutilainen, ‘Finnish Private Law: Statutory System without a Civil Code’ in JC Rivera (ed), The Scope and Structure of Civil Codes, Ius Gentium: Comparative Perspectives on Law and Justice 32 (Dordrecht, Springer Science+Business Media, 2013) 156–59. See T Wilhelmsson, Critical Studies in Private Law: A Treatise on Need-Rational Principles in Modern Law, Law and Philosophy Library 16 (Dordrecht, Kluwer Academic Publishers, 1992) 16–20.

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To refocus on fragmentation in terms of the law on security rights, one point made by Veneziano is particularly intriguing. According to her, a plea for common rules on secured transactions ‘is also justified from an equitable point of view, in order to prevent the piecemeal development of legislation only favourable to certain categories of creditors’. She suggests that recent European instruments in this area show ‘a tendency to carve out exceptions from the general insolvency regime to which the debtor is subject … with the practical effect of ensuring the insulation of assets from the reach of other creditors’. Her examples are the Financial Collateral Directive, as amended,80 and, to a lesser extent, the provision on simple retention of title clauses in the Late Payment Directive.81 She argues that while these exceptions may be justified to a certain extent, for example, due to the special character of the financial market, on the other hand a more widespread use of piecemeal legislation of this kind should be prevented by developing ‘a coherent, general scheme’. In her vision for a scheme, ‘priorities are fairly evaluated in the context of the rights of other participants and easily determined even in a crossborder situation’.82 To assess Veneziano’s point, we can start from her examples. The reference to the Late Payment Directive is an easy target for criticism. Its provision on retention of title, in the watered-down form that ended up in both the original and recast Directives, does not concern third-party relations or effects on insolvency.83 Therefore, the provision probably cannot be thought to contribute to insulating assets from the reach of other creditors. In fact, it is questionable whether the Directive has had any harmonising effect on retention of title. Quite the opposite is true with respect to the Financial Collateral Directive. This has certainly harmonised Member State substantive laws in a way that favours secured creditors within its scope of application. However, it is another question to what extent a general scheme as meant by Veneziano could prevent the introduction of similar special legislation in the future or the amendment of the general scheme according to the interests of a particular group of creditors. As a general proposition, the more technical and complex the subject matter is, as indeed the law on security rights tends to be, the easier it is for those who master that subject matter to camouflage private interests as a public good. Most importantly, though, we can reject the notion that building a coherent, general scheme should necessarily happen at once, as Veneziano’s plea seems to imply. Indeed, it should be possible to determine the place of certain individual elements needed in a general scheme and to build those elements before the rest. For example, we could start with the premise that the general scheme needs to

80 Parliament and Council Directive 2009/44/EC of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims [2009] OJ L146/37. 81 The provision on retention of title in the recast remains the same as in the original Directive. Both versions of the Directive were cited in n 73 above. 82 Veneziano (n 46) 125–27. 83 Discussed in ch 2, section III.E.i.

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include a device for acquisition security (including what is now generally known as retention of title) and that on insolvency, this device should be accorded priority over general security devices.84 After this kind of policy groundwork, it would hardly constitute undue favouring of ‘acquisition secured creditors’ to draft, and introduce, the rules on acquisition security before dealing with other security devices. This approach would enable the construction of a general scheme, and eventually a comprehensive system of security rights, but in a modular way. After the first module, acquisition security, a line could be drawn between two further modules, namely general ‘fixed’ security over individual assets and general ‘floating’ (or ‘blanket’) security over changing assets. The modules needed and their interrelations could be roughly set by following the ‘common core’ that emerges in the comparison of modern national systems of security rights and the various international instruments on security rights. These systems and instruments, taken together, can be viewed as a collective learning process. All in all, the above discussion suggests that problems connected with the partial or piecemeal substantive unification or harmonisation may have been exaggerated.

ii. Spontaneous Convergence as a Starting Point: Simple Retention of Title One general idea that partial or piecemeal means could pursue is to start substantive unification or harmonisation from those areas within the law on security rights where a considerable degree of spontaneous (or ‘natural’) convergence already exists. Although at first it might seem a ‘pointillist’ solution, this idea could lead to modular unification or harmonisation as outlined in the previous section. As discussed next, the idea performs well in terms of foreseeability and responsiveness. Therefore, it is suitable for the European legislator. Importantly for this purpose, Eva-Maria Kieninger’s Common Core study reveals considerable similarity in Member State substantive laws on simple retention of title. While attempts at centralised harmonisation have so far failed, European states themselves have meanwhile been aligning their laws with each other.85 Indeed, simple retention of title is the primary instance of existing spontaneous convergence within the law on security rights in Europe. Accordingly, Kieninger identifies it as an area, alongside leasing, ‘where harmonisation will be comparably easily attainable’.86 Based on the findings of her study, Kieninger proposes a ‘mini-directive’, according to which ‘a retention of title clause, mutually agreed by the parties to the contract of sale prior to the delivery of the goods’, would be ‘valid and enforceable, not only as between the parties but also as against third parties such as the creditors of 84 Justifications for the typical ‘superpriority’ of acquisition security were discussed in ch 2, section IV.B.ii.c. 85 E-M Kieninger, ‘Evaluation: A Common Core? Convergences, Subsisting Differences and Possible Ways for Harmonisation’ in Kieninger (ed) (n 13) 658–59. 86 ibid 664.

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the buyer in execution and insolvency’. The directive could, she adds, clarify that retention of title remains valid even where goods sold subject to it are incorporated into other goods, insofar as separation is possible without difficulty or damage.87 Kieninger’s own justifications for introducing such a directive clearly resonate with the objectives of foreseeability and responsiveness, as developed in this book. Kieninger suggests that even without the further harmonisation of property law, ‘a mini-directive would have considerable merits for intra-community trade’.88 More than anything, these merits would consist in increased foreseeability. After implementation, sellers could rest assured that simple retention of title clauses remain fully enforceable, including against third parties and in all insolvency proceedings, irrespective of where in the EU the sales object is exported, or moved by the buyer. Thus, the directive would reduce uncertainty as to whether a retention of title clause intended to be enforceable abroad actually is enforceable abroad, simultaneously dealing with ‘unwanted cross-border situations’ caused by a move of the sales object, which may occur unexpectedly for the seller and even in breach of the agreement between the parties. Evidence on the significance of retention of title as a security device is reported in various studies, often in terms of national law and with additional remarks to the effect that substantive diversity prevents taking full advantage of retention of title in cross-border contexts.89 Indeed, the questionnaire part of Christian von Bar and Ulrich Drobnig’s study, undertaken for the European Commission, supports these views. This is clear from answers by business, trade, industrial and professional associations. These respondents identify retention (‘reservation’) of title ‘in all its forms’ as a type of security ‘commonly used in domestic transactions’, yet ‘inappropriate or less suitable for foreign transactions’. While the different legal regimes on retention of title were not explicitly pointed out as limitations of trade and commerce with other Member States, a strong desire was nevertheless expressed for ‘further-reaching legal alignment measures’ in this area.90 Moreover, it is unlikely that such a directive would be objected to by Member States on responsiveness-related grounds. Indeed, in all probability, a directive proposal would not attract much criticism on any grounds. As Kieninger notes, the directive would only require ‘minor changes in some of the Member States’ laws’.91 At the time of her study, published in 2004, exceptions included the following. First, France, Belgium, Luxemburg and Portugal would have to give up the requirement that a retention of title clause must be agreed in writing. Second, Italy and Spain would have to give up the requirement of ‘certain date’ (data certa or fecha cierta), 87

ibid 664–65.

88 ibid.

89 See, eg, A von Ziegler, C Debattista, ABK Plegat and J Windahl (eds), Transfer of Ownership in International Trade, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2011) ‘Retention of Title Clauses’ sections of the national reports; Rutgers (n 13) 1–12. 90 C von Bar and U Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe: A Comparative Study (Munich, Sellier European Law Publishers, 2004) 431–32, 441 (questions 12 and 13). 91 Kieninger (n 85) 664. cf Rutgers (n 13) 10–11.

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and Spain would also have to give up the registration requirement in certain instalment sales situations. And, third, the Nordic countries could no longer reject thirdparty effectiveness of retention of title clauses concerning sales objects meant to be resold or used in a manufacturing process, nor could they require these arrangements to be framed as a commission agreement or credit consignment.92 According to several commentators, harmonisation of simple retention of title in connection with the enactment of the original Late Payment Directive failed due to a misinterpretation of Article 295 TEC (now Article 345 TFEU).93 However, since the prevailing view does not regard Article 345 TFEU as an obstacle to development of EU property law,94 one might have expected harmonisation to be attempted again in connection with the recast of the Directive. But this was not the case. Despite the missed opportunity, a separate directive should be considered along the lines of Kieninger’s proposal. The above observations on foreseeability and responsiveness strongly support this solution. Even so, some modifications to Kieninger’s proposal might be in order. In particular, if the hope is that the directive will become a starting point for modular harmonisation as envisioned in the previous section, then it would be best to use the more general and functionalist terminology of acquisition security instead of the traditional terminology involving ‘title’ or ‘ownership’. Parties could continue agreeing on retentions of title, should they so wish, but these would be characterised as acquisition security devices in the system of the directive and implementing national laws. Of course, this legislative terminological choice would not dictate the scope of the directive or the situations in which acquisition security devices can be used. By way of a conscious policy choice, their possible uses could either be made to match the traditional uses of simple retention of title or broadened to other situations of acquisition financing (and financiers other than the seller). Another matter is that the directive proposal might be easier for Member States to accept if they were left to decide on the exact effects of an acquisition security right in the event of debtor default under their domestic law implementing the directive. For example, rather than requiring that the holder of an acquisition security right must be able to repossess the sales object or that protection must come in the shape of preferred payment out of realisation proceeds, Member States could be allowed to choose between these options (or use both, depending on the situation).

iii. The Separation of Cross-border and Domestic Security Arrangements Another general idea that partial or piecemeal means could pursue is to start substantive unification or harmonisation from cross-border security a rrangements and, at least for the time being, leave domestic ones as they are. This idea is found in the recommendations of the von Bar and Drobnig study prepared for

92

Kieninger (n 85) 658, 664–65. See Kieninger, ‘Introduction’ (n 13) 21–24; Milo (n 13) 383–85. 94 See Van Erp and Akkermans (n 13) 173. For a comprehensive analysis, see Ramaekers (n 8) 101–27. 93

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the Commission. According to Drobnig, in the long run, a fully effective internal market requires a level playing field for both cross-border and domestic security arrangements. However, as the first step, he proposes a ‘uniform regime for b order-crossing trade’, meaning a ‘uniform regime for cross-border security rights’, which could be optional but should especially cover effects against third parties. Only in a second step, based on experience from the first, could ‘the general introduction of a unified or harmonized regime of security’ be envisaged.95 This model laudably emphasises experimental (or at least experiential) learning, but otherwise shows considerable weaknesses when assessed in the light of foreseeability and responsiveness. In fact, foreseeability problems and responsiveness problems seem to be intertwined in this case. To begin with foreseeability issues, the distinction between cross-border and domestic situations is not always clear or knowable in advance.96 In particular, the model does not solve the problem of security arrangements that are initially meant, at least by the secured creditor, to be purely domestic, but acquire a cross-border nature because the security-provider debtor, in possession, moves the encumbered asset to another jurisdiction. Indeed, the domestic security right may prove wholly or partially unenforceable in the new location.97 One solution would be to also allow domestic security arrangements to involve cross-border security devices, that is, those of the uniform regime. However, this could lead to domestic security devices becoming obsolete, especially if the uniform regime is more liberal than the domestic regime (the domestic system of security rights). Member States might well regard this as a responsiveness problem and accordingly disapprove of using cross-border security devices to circumvent the domestic regime.98 Further responsiveness issues result from the fact that even though it would often be possible to distinguish between cross-border and domestic security arrangements, and thus correctly choose between cross-border and domestic security devices, the resulting cross-border and domestic security rights would still have to be dealt with in the same domestic insolvency proceedings. Most impor-

95 Von Bar and Drobnig (n 90) 469 (see the note on authorship at 21–22). As discussed in ch 1, s ection II.B.ii, a ‘uniform’ regime for cross-border security rights could be uniform to a greater or lesser extent, with at least two possible basic models: first, the regime could introduce new uniform security devices, perhaps with new uniform means of publicity; and, second, the regime could be based on the recognition of security rights, introducing uniform maximum rules on the creation of those rights and achieving third-party effectiveness as well as uniform minimum rules on the effects of those rights. 96 See K Kreuzer, ‘Die Harmonisierung des Rechts der Mobiliarsicherheiten’ in J Basedow, O Remien and M Wenckstern (eds), Europäisches Kreditsicherungsrecht: Symposium im Max-Planck-Institut für ausländisches und internationales Privatrecht zu Ehren von Ulrich Drobnig am 12. Dezember 2008 (Tübingen, Mohr Siebeck, 2010) 56. 97 See E-M Kieninger, ‘European Regulation of Security Rights’ in Drobnig, Snijders and Zippro (n 19) 167. 98 See Verstijlen (n 26) 30. In Verstijlen’s view, a jurisdiction may legitimately aim to prevent bypassing of its system of property rights, including security rights, which ‘reflects the balance that has been struck between the parties involved in view of local social circumstances and local opinions on the relevant interests’.

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tantly, cross-border and domestic security rights would have to be fitted into the same priority order. To be sure, cross-border security devices, as with any security devices, would be useless if they were unable to achieve a high priority position. Cross-border security devices could be made fully functional by affording cross-border security rights priority over domestic security rights. Yet it is unlikely that Member States would accept this, because domestic security devices would literally become second class. Moreover, unequal treatment of cross-border and domestic security rights could be thought to violate Member States’ value commitments. With reactions (Hirschmanian ‘voices’) from domestic economic actors, Member States might be left with little choice other than to reform their domestic security regime along the lines of the uniform regime for cross-border security rights. This in turn could stir responsiveness-related objections because the impulses of change would then have little to do with, and have little regard to, the internal economic and social circumstances of the Member State in question, or indeed its value choices. Accordingly, the policy choices of the two security regimes might not be compatible with each other, resulting in complications for reform efforts. Another way would be to let cross-border and domestic security devices compete for the same priority positions, subject to the fulfilment of some set priority determinants. However, without unification or harmonisation of priority determinants between cross-border and domestic security devices, different priority determinants would generally be applied to them: for example, European-level registration for cross-border security devices and national-level registration for domestic security devices. In addition, national systems of security rights typically employ different priority determinants with respect to different domestic security devices and different kinds of encumbered asset (registration, notification, possession or mere agreement, possibly combined with rules on good faith protection). A situation involving multiple priority determinants might entail excessive difficulty for prospective secured creditors in ascertaining the priority position they can achieve. This, again, is a foreseeability issue. Taken together, the foreseeability and responsiveness problems discussed above cast serious doubt over the model discussed. Therefore, the model can hardly be recommended to the European legislator.

D. Optional or Supplementary Instruments i. The ‘European Security Right’ a. Content The best-known proposal for an optional or supplementary instrument in the area of security rights is the ‘European Security Right’ (ESR) over movable assets. This concept, originally presented by Karl F Kreuzer in 1990, has later been explored by other commentators. In addition, it has recently been revisited by

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Kreuzer himself.99 In the latest take, he formulates the content of the proposal more closely, drawing on the Convention on International Interests in Mobile Equipment (Cape Town Convention) and the Protocols thereto, on the one hand, and DCFR Book IX, on the other.100 We will discuss Kreuzer’s proposal, including his latest modifications to it, as the primary and representative example of ideas for an optional instrument in the area of security rights. In particular, we will examine the proposal in the light of the objectives of foreseeability and responsiveness. In terms of both objectives, the foremost doubts relate to priority questions, especially those of fitting the ESR in with national (Member State) security devices. After examining the main features of Kreuzer’s proposal in this section, we will focus on those doubts in section II.D.i.b, drawing on the work of Moritz Brinkmann. Kreuzer regards the unification of substantive law as the optimal solution to cross-border problems in the use of security rights, and sees potential in DCFR Book IX as a proposal in that respect. Clearly, the substantive unification he means would be ‘comprehensive’, in the terminology of this book. However, he believes that substantive unification lies beyond the foreseeable time horizon. For, besides not being simple in terms of EU competence, it would be immensely difficult to convince all Member States of the need for unification. Indeed, some initial Member State reluctance would be understandable since laws on security rights are deeply rooted in national legal systems and inextricably interwoven with other areas such as debt enforcement and insolvency law. Against this backdrop, the ESR presents itself as a second-best option. The ESR would not replace national security rights, at least formally, but would exist alongside them. As for a legal basis, Kreuzer relies on Article 352 TFEU (Article 308 TEC).101 The creation, content and effectiveness of the ESR would largely be modelled on DCFR Book IX, while Cape Town Convention solutions would inform fitting the ESR in with national security rights and priority regimes. For Kreuzer, the introduction of an ESR statute would amount to a partial test run of Book IX. To turn Book IX into an ESR statute, he notes two necessary modifications: first, Book IX should be made independent of ‘the other Books of the nascent Civil Code’ by removal of references; and, second, the function of Book IX should be changed, from replacing national security rights to supplementing them. In turn, compared to the Cape Town Convention, the ESR statute would be narrower in geographical scope, limited to EU Member States, but broader in substantive scope, especially as to assets eligible to be encumbered.102 The ESR would be an independent stand-alone security right rather than a bundle of national security rights.103 As for whether the ESR should be available for 99

Discussed in ch 1, section II.B.iii. Kreuzer (n 96) 52–53. 101 ibid 51–52, 60–61. 102 ibid 52–54. 103 ibid 55. For a bundle solution, see Verstijlen (n 26) 34–35. This option will be discussed in section II.D.ii below. 100

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cross-border transactions only or also for purely domestic transactions in individual Member States, Kreuzer supports the latter. According to him, experience from drafting the Cape Town Convention suggests that it is impossible to know in advance whether an initially domestic transaction will remain so or turn into a cross-border one, and vice versa. Another reason is that he subscribes to the idea of the ESR functioning like ‘a Trojan horse’, in Kieninger’s words, in relation to national systems of security rights. In other words, Kreuzer believes that, due to its persuasive authority, the ESR could become an optional model to compete with national security rights and might through practice replace them over time.104 Kreuzer proposes a broad scope of application for the ESR. It should in principle be available to all kinds of party, and for encumbering all kinds of tangible movable, except for those subject to special regulation, as is the case with aircraft equipment. In Kreuzer’s view, the question whether intangibles, particularly claims, should also be included needs further examination, while security for micro-credits could be excluded under certain conditions, as in DCFR IX.—1:105. The ESR statute would not regulate exclusively, but would complement existing and future universal conventions on security over particular types of asset. These conventions would thus take precedence over the ESR statute.105 Kreuzer does not give a clear answer as to whether the ESR should be a unitary security device or a differentiated one, with special provisions for retention of title and leasing. Yet he remarks that functionalist thinking supports a unitary security device, along the lines of UCC Article 9. Importantly, he stresses that legal-technical questions should be separated from legal-political ones. This means, for example, that choosing a unitary security device would not prevent affording acquisition security (‘purchase-money security’) priority over an even earlier-registered general security. At the same time, it should be decided whether this ‘superpriority’ only concerns simple retention of title or equivalent security arrangements, or even (some or all) extended forms of retention of title or equivalent security arrangements.106 An ESR would be created by an agreement, with creation entailing effectiveness between the parties. In turn, effectiveness against third parties would be achieved by entry in a European register, which would be electronically operated and searchable by anyone (direct online access). For Kreuzer, the reason to separate relations inter partes from third-party relations is ‘primarily pragmatic’. By this he means that most Member States would probably be unwilling to accept the German ‘all or nothing’ solution, where creation with inter partes effects and effectiveness against third parties coincide. The time of register entry would act as the priority determinant between two or more validly created (existing or future)

104

Kreuzer (n 96) 56. See Kieninger (n 97) 167. Kreuzer (n 96) 57, 59–60. 106 ibid 57. 105

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ESRs. In addition, registration of a created ESR would exclude the possibility of a third party acquiring unencumbered ownership in the assets, whereas before registration, such an acquisition could occur even if the third party was aware of the earlier-created ESR. The register would be debtor-based (indexed by person) rather than asset-based. Registered data would include the name and contact details of the security provider and secured creditor, the time of register entry, a description and categorisation of the assets encumbered, and possibly also the security device (type of security right), the time of expiration of the register entry, and the maximum amount covered by the security right. Kreuzer notes that the international registry operated by Aviareto, which serves the Cape Town Treaty system, shows that such a registry can function at low cost.107 Ostensibly, the ESR promises increased foreseeability without concerns over loss of responsiveness. As a product of substantive EU legislation, an ESR would be recognised in all Member States. Even so, the ESR would leave national types of security right as they are and ‘just compete’ with them, offering parties to security arrangements an alternative security device. However, the ESR idea involves a stumbling block that threatens to frustrate these advantages, namely the need to settle priority questions with national security rights. Kreuzer himself has noted the difficulty of this point,108 as have several others commenting on the ESR idea.109 In the original ESR proposal, Kreuzer’s solution was only to allow encumbering one and the same asset either by one or more ESRs or by one or more national security rights, but not by both cumulatively (‘eine strenge Alternativität zwischen dem ESR und nationalen Sicherungsrechten’, with the ESR and national security rights strictly as alternatives).110 For the recent incarnation of the proposal, though, he has backed away from this requirement. He would now allow ‘mixed’ encumbrance of an asset by both ESRs and national security rights because the use of assets as security for credit would otherwise be unreasonably restricted, which would be too expensive a way to avoid priority conflicts.111

107 ibid 58–59. Aviareto’s register is asset-based, so it cannot be a direct model for the European register. 108 K Kreuzer, ‘Conflict-of-Laws Rules for Security Rights in Tangible Assets in the European Union’ in Eidenmüller and Kieninger (n 9) 316. 109 M Brinkmann, Kreditsicherheiten an beweglichen Sachen und Forderungen: Eine materiell-, insolvenzund kollisionsrechtliche Studie des Rechts der Mobiliarsicherheiten vor dem Hintergrund internationaler und europäischer Entwicklungen, Jus Privatum: Beiträge zum Privatrecht 156 (Tübingen, Mohr Siebeck, 2011) 480–83; H Beale, ‘The Future of Secured Credit in Europe: Concluding Remarks’ in Eidenmüller and Kieninger (n 9) 380–81; K ieninger (n 97) 167. 110 KF Kreuzer, ‘Europäisches Mobiliarsicherungsrecht oder: Von den Grenzen des Internationalen Privatrechts’ in WA Stoffel and P Volken (eds), Conflits et harmonisation: Mélanges en l’honneur d’Alfred E. von Overbeck à l’occasion de son 65ème anniversaire (Fribourg, Editions Universitaires Fribourg Suisse, 1990) 638. 111 Kreuzer (n 96) 61. See HJ Snijders, ‘Access to Civil Securities and Free Competition in the EU: A Plea for One European Security Right in Movables’ in Drobnig, Snijders and Zippro (n 19) 161.

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Only situations involving a registered ESR would call for ‘European’ priority rules.112 Here, Kreuzer resorts to the Cape Town Convention priority rules and proposes the following. A validly created ESR recorded in the European register takes priority over later registered ESRs as well as over ESRs that are no longer registered or not registered at all. This priority extends to proceeds, especially to surrogates for a destroyed security object. The priority of an earlier-registered ESR stands, irrespective of whether or not the holder of that ESR knew either of an earlier-created but only inter partes-effective ESR or of a national security right.113 Further, a national security right effective against third parties would be treated like an inter partes only-effective ESR in relation to a later-created ESR recorded earlier in the European register. In Kreuzer’s view, legal certainty requires that no exceptions be allowed to the prior tempore prior iure principle in terms of the effects of registration in the European register. Rigour in this respect would at the outset exclude all disputes concerning the good or bad faith of the holder of the first-registered ESR over earlier-created but non-registered ESRs. Kreuzer sees no injustice here because the holder of an ESR can acquire protection by registering the ESR immediately after its creation, thus fixing its priority against any later-created ESRs. The same justification applies to holders of a national security right because they could choose to register an ESR. Kreuzer notes that one might consider opening the European register to national security rights. In this way, national security rights could be afforded the same priority treatment as registered ESRs. Kreuzer himself finds this option inadvisable, on the presumed basis that the incentive to register an ESR would be diminished, as would the harmonising effect of the ESR statute.114 Kreuzer accepts chapter 7 of DCFR Book IX as a model for rules on enforcement in the case of debtor default. At the same time, though, he suggests that European regulation is also needed on relations between the holder of an ESR and an unsecured creditor seeking distraint of the security object in individual enforcement proceedings. Otherwise, holders of an ESR might be treated differently in different Member States. The main feature of regulation would be that an ESR is again effective against third parties only if recorded in the European register, with the time of register entry fixing the priority position between the holder of an ESR and an unsecured creditor.115 This apparently means that an unsecured creditor

112 Kreuzer (n 96) 61–62. Kreuzer notes that a non-registered and thus only inter partes-effective ESR may be treated by the applicable Member State law as a domestic security right effective against third parties. In his example, a non-registered ESR, created in the shape of retention of title, fulfils the conditions for a retention of title clause effective against third parties under German law. 113 ibid 62. 114 ibid 62–63. Kreuzer also discusses (at 63–65) the suitability of the Cape Town Convention rules on Contracting State declarations concerning ‘Rights having priority without registration’ (Art 39) and ‘Registrable non-consensual rights or interests’ (Art 40) for inclusion in the ESR statute. He is reserved about the former, but recognises the need for the latter. 115 ibid 65–66. Kreuzer further outlines the content of the effectiveness of an ESR in these situations and the remedies available to the holder of an ESR.

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prevails in a priority contest with the holder of an ESR by seeking distraint before the ESR is registered. A further concern for Kreuzer is that divergences between Member State insolvency laws could subvert the ESR idea. Indeed, the ESR can only be uniform if treated similarly across the EU, including in collective insolvency proceedings. Therefore, Kreuzer calls for European regulation, at any rate of remedies for holders of an ESR, but preferably also of an insolvency administrator’s powers, privileged claims and grounds for asset recovery actions, insofar as these matters affect the treatment of ESRs. Where uniform regulation proves unattainable, European law should at least establish, for each Member State, which provisions apply to ESRs in insolvency proceedings commenced there.116 Rather than merely stating the effectiveness of a registered right in insolvency proceedings, as does Article 30(1) of the Cape Town Convention in terms of registered ‘international interests’, the ESR statute should in Kreuzer’s view specify the legal effects as follows. The holder of an ESR has a right, as against unsecured creditors, to preferential satisfaction of the secured claim out of the value of the security object, provided that the ESR was recorded in the European register at the time of opening the insolvency proceedings. Similarly effective, but below registered ESRs in the ranking of claims, would be a non-registered ESR which, however, is insolvency-proof (effective on insolvency) under the applicable Member State law. Examples include non-registered ESRs which, assuming that German law is applicable, fulfil the conditions to count as an effective German retention of title or security transfer of title. Treatment would be the same for national security rights which are effective against third parties under the law of the Member State in question, but which have not been created as an ESR. In turn, if a security object is simultaneously encumbered by a national security right effective against third parties and an as yet unregistered and thus only inter partes-effective ESR, then, in insolvency proceedings commenced before registration of the ESR, the national security right should be enforceable against third parties in accordance with the applicable national lex concursus.117 Considering the controversial policy choices that priority questions necessarily involve,118 one of Kreuzer’s insolvency law-related proposals is of particular interest. In his view, the ESR statute should follow Recommendation 187 of the UNCITRAL Legislative Guide on Insolvency Law. Thus, he proposes that priorities accorded to unsecured claims be reduced as far as possible and at least clearly defined. Typically, these priorities concern wages, taxes, costs of insolvency proceedings, and liabilities of the insolvency estate.119

116

ibid 66–67. ibid 67–68. 118 Discussed in ch 2, section IV.B.ii. 119 Kreuzer (n 96) 68–69. 117

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b. Critique The ESR idea has recently been critically examined by Brinkmann.120 Unsurprisingly, his most crucial points concern the relationship between ESRs and national security rights. As he observes, an optional instrument in the shape of the ESR would expand the numerus clausus of property rights in Member States and would consequently require adjustments to national law. The effectiveness of ESRs in collective insolvency proceedings and individual enforcement proceedings could be arranged by way of substitution. However, actual problems would arise in priority conflicts between ESRs and national security rights, particularly German non-publicised ones.121 Brinkmann’s discussion of potential solutions to these problems, transposed into the conceptual framework of this book, offers a near-complete analysis of foreseeability and responsiveness. Brinkmann distinguishes two conceivable solutions, namely ‘weak’ and ‘strong’ variants. In the weak variant, the ESR would be adapted to the general national rules on ranking of claims. As for German law, this would mean determining priority chronologically, according to the time of creation of the security rights concerned. As a result, an earlier security transfer of title would prevail over a later-created ESR (apparently even if the ESR is recorded in the European register).122 The idea of the weak variant could probably be generalised to concern all jurisdictions so that the decisive point for priority purposes would be the time when a validly created security right becomes effective against third parties.123 Consequently, if the third-party effectiveness of a national security right depends on recording the right in a national register, then that registration affords the holder of the right priority over all unregistered ESRs, as well as over all ESRs registered at a later point in time. In the strong variant, a registered ESR would prevail even over earlier-created national security rights whose third-party effectiveness does not require registration (‘nationalen, nicht-registerpflichtigen Sicherungs rechten, selbst wenn diese älter sind’), such as a German security transfer of title.124 Generalised to concern all jurisdictions, the strong variant would probably also mean that a registered ESR would prevail over security rights recorded earlier in a national register (but not in the European register). The priority principle of the weak variant, Brinkmann argues, would undermine the European register for the following reasons. To function as a priority indicator, a security rights register must provide exhaustive information on whether a security object is (or may be or become, as we might add to take into account notice filing) encumbered by rights occupying a better priority position. But this

120

Brinkmann (n 109) 468–87. ibid 480. 122 ibid. 123 As noted in section II.D.i.a above, under German law, creation with inter-partes effects and effectiveness against third parties coincide in an ‘all or nothing’ manner, but this is not the case in all jurisdictions. 124 Brinkmann (n 109) 480. 121

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would not be the case with the European register in the weak variant. Indeed, the register would lack a negative publicity function, meaning the function of showing that no higher ranking rights exist. Higher ranking non-registrable (or nationally registered) national security rights could exist, without the register telling the searcher anything about them. The register would have no information value for the holder of an ESR under threat of being outranked by other secured creditors whose rights cannot be found in that register. Anyone seeking to acquire an ESR over an object could not just check the European register, but would also have to try to find out whether the object is encumbered by national security rights whose third-party effectiveness does not require registration (or by nationally registered security rights). For the ESR idea, the possibility that these national rights might rank above a registered ESR would have a system-breaking effect. Brinkmann notes that a similar effect explains why jurisdictions that have introduced a register for non-possessory security rights are unwilling to recognise German security transfers of title.125 Brinkman acknowledges that even the weak variant would entail some improvement to the present situation, especially where cross-border transactions are concerned. Parties agreeing on an ESR could be sure that it would be recognised in all Member States.126 Nevertheless, an ESR could turn out to be worthless in a priority conflict with national security rights. Even with registration in the European register, an ESR might rank below earlier national security rights whose thirdparty effectiveness does not require registration and probably also below earlier nationally registered security rights. As a consequence, the weak variant of the ESR could only offer a negligible increase in foreseeability. Therefore, this option cannot be recommended for adoption. Brinkmann, too, rejects the weak variant as unconvincing. From the viewpoint of German law, he notes that the coexistence of a registered charge (the ESR) and security transfer of title would combine the drawbacks of both systems: the current uncertainty and the costs of establishing and maintaining a register.127 The strong variant, which follows the contours of Kreuzer’s proposal, comes with other problems. Brinkmann rejects that option as well. He makes a compelling argument that the strong variant would intervene in national laws comparably to unification. In Germany, while security transfer of title would not be forbidden outright, it would no longer bring about a reliable security right. A secured creditor (‘security owner’) would have to live with the constant risk that a third party might acquire a higher-ranking registered charge (an ESR) over 125 ibid 480–81. According to Brinkmann, a legal system which decides to introduce a registered charge (Registerpfandrecht) cannot sensibly tolerate non-publicised security rights at the same time. 126 ibid 481–82. As a domestic matter, Brinkmann remarks that the ESR would offer more legal certainty than current German security devices. This is because registration effectively excludes the possibility of good faith acquisition, which threatens non-publicised security rights. It also avoids the problems of proving the time of creation of a security right, which may otherwise arise in priority conflicts and disputes over recovering assets to an insolvency estate. 127 ibid 482. See Beale (n 109) 380.

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the security object. This would render security transfer of title obsolete, in effect abolishing it.128 Brinkmann calls the expected result of the strong variant ‘unification of law through the back door’ and considers it unconvincing both methodologically and politically. In his view, the strong variant involves almost the same drawbacks as substantive unification through a regulation.129 Here, Brinkmann touches on the core of the notion of responsiveness, as understood in this book. Indeed, by making national security devices obsolete and intruding into national priority orders, the strong variant entirely ignores local economic and social circumstances and local value choices that have affected the design of local law on security rights. Even worse than in substantive unification, all this may go unnoticed because the ESR can be presented as a ‘mere option’ for parties to consider and use, should they so wish. Considering the priority treatment, the ESR in the strong variant would come close to the original meaning and purpose of a ‘Trojan horse’: a stealthy means of coercive infiltration.130 In addition, Brinkmann critically reviews the notion of competition between jurisdictions in connection with the ESR.131 This is highly relevant from the responsiveness viewpoint because (genuine) competitive processes promote local innovation and experimental learning.132 We should also note that Kreuzer emphasises the nature of the ESR as an ‘optional competition model’.133 However, Brinkmann’s analysis shows that the strong variant, an essential feature of Kreuzer’s proposal, would rig the game to the advantage of the ESR, so that one could not really speak of genuine competition between the ESR and national security devices. Indeed, parties planning a security arrangement could not freely choose between an ESR and a national security right because only an ESR would amount to reliable security. Again, the reason is that an earlier national security right effective against third parties could be outranked by a later (registered) ESR.134 The above issues strongly suggest that the ESR cannot be recommended for adoption in its strong version either. While the weak variant fails to increase foreseeability to any significant degree and is therefore unacceptable, the strong variant should be rejected due to its disregard of responsiveness. It also seems unlikely that any middle way between the two variants would prove feasible and satisfactory from the viewpoint of foreseeability and responsiveness. 128

Brinkmann (n 109) 482–83. ibid 483. 130 cf Kreuzer (n 96) 56. Granted, Kreuzer explicitly rejects the coercive—indeed, violent— connotations of the ‘Trojan horse’ metaphor and explains that it is rather about the ‘persuasive authority’ of the ESR. However, we should keep in mind that this persuasion would not work without ESRs being afforded favourable—indeed, overriding—priority treatment at the expense of national security rights. 131 Brinkmann (n 109) 483. 132 Discussed in ch 2, section IV.C.iii.c. 133 Kreuzer (n 96) 56. 134 Brinkmann (n 109) 483. Brinkmann argues that the monopoly position of the ESR would rule out any competition. 129

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For example, Hugh Beale has attempted a ‘different approach to registration and priority’, where an ESR (in his terms, ‘European Security Instrument’ or ‘ESI’) would not be recorded in a pan-European register, but in the same register as national security rights. He does not go into very much detail, so the approach cannot be fully assessed. However, in his view, it would in any case require the harmonisation of rules on registration and priority.135 But this could become an issue from the responsiveness viewpoint. Indeed, questions of publicity, including registration, and priority feature among the main instances of controversial policy choices that designing a system of security rights necessarily involves.136 Beale also envisions a harmonised rule as to where registration should take place—for example, in the jurisdiction of the debtor.137 But registration in just one jurisdiction raises concerns as to foreseeability. One concern is whether that jurisdiction can be defined in such an exclusive way that creditors would always know where to look. In a more general view, Beale aptly remarks that ‘opting for the European Security Instrument approach seems to involve domestic law either being heavily amended or being superseded’, touching on some of the main issues in terms of foreseeability and responsiveness.138

ii. ‘Community Security Right’ a. Content Verstijlen suspects that an ESR-type solution (‘a uniform security right next to the local security rights’) could not be introduced within a reasonable timeframe. In particular, he would expect difficulties in reaching the required ‘consensus on the scope and content of this uniform security right and the position it gives the security holder vis-à-vis all other parties’. This probably holds true even today, with DCFR Book IX as a potential model for scope and content, because no acceptable way has been proposed to settle priority questions with national security rights, as discussed in section II.D.i above. As a ‘more modest’ alternative to ESR-type solutions, Verstijlen proposes a ‘Community Security Right’ (CSR), inspired by the Community Patent.139 This would mean introducing ‘the possibility to create a bundle of national security rights with one single act’. The formalities related to creation and effectiveness of a CSR would be comparable to those for national security rights. Thus, parties could create a bundle of national security rights by fulfilling one uniform set of formalities, but without the need to fulfil the corresponding formalities under all national laws involved. Verstijlen envisions that a CSR ‘could be created

135

Beale (n 109) 381. Discussed in ch 2, section IV.B. Beale (n 109) 381. 138 ibid. 139 Verstijlen (n 26) 33–34. 136 137

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by agreement and registration in a public European register’,140 whereby the register entry would satisfy the policy of some jurisdictions to require a certain date and of others to require publicity. As a result of registration, the bundle of national security rights would come into existence to the extent that this security right can be created at that time on the assets concerned and between the parties involved and with the specificity with which the assets are described in the registration.141

The CSR would not affect the possibility to create purely national security rights. Conversion and assimilation problems, which are typical in the recognition and enforcement of foreign security rights, would be avoided ‘because the secured creditor already would have the relevant local security right, insofar that security right is available in that legal system’. This follows from the notion of a bundle of national security rights. Verstijlen also emphasises that the CSR would retain the possibility that legal systems compete, which may lead them to ‘a further level of natural harmonisation’ and possibly pave the way for ‘a further harmonisation or unification of security rights or even property law’.142 b. Critique Kreuzer has discussed a somewhat similar idea in connection with the latest version of his ESR proposal, asking whether the ESR should be introduced as a unitary European right or a bundle of national rights (‘ESR-Bündel’). As noted in section II.D.i.a above, he ends up by proposing a unitary European right. More precisely, he rejects the bundle notion due to two issues.143 We will see in the following that these issues are probably not fatal to the CSR proposal, but they are also not the only relevant issues. First—and in Kreuzer’s view sufficient to wreck the bundle notion—security rights, unlike patents, are not granted by the state (as territorially limited complete rights), but by the owner of the security object (as subjective rights limited in terms of content), while Member State laws generally enable the use of not just one but several types of security right (security devices). Therefore, so Kreuzer argues, a general unqualified reference to Member State law would not suffice, but entries to the European register should each time specify the type of national security right granted.144 This requirement sounds impractical and complicated in terms of identifying the (other) types of national security right making up the bundle. Then again, we might ask whether the requirement should even be necessary. The CSR statute, whatever its form, could provide that a validly created CSR (or CSR subtype if available) can count in each Member State, assuming that it 140 ibid 34. One difference from Kreuzer’s ESR proposal would thus be that registration is required even for the creation of a CSR, and not as a separate step for effectiveness against third parties and priority purposes. See Kreuzer (n 96) 58. 141 Verstijlen (n 26) 34. 142 ibid 34–35. 143 Kreuzer (n 96) 55. 144 ibid.

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counts at all, as a national security right of only one type, as specified in that statute. The relevant national types could, for example, be listed in an annex to the statute. Such ‘standardisation’ would of course limit parties’ freedom to customise the content of a CSR, but this seems necessary for the feasibility of the bundle notion. The second issue Kreuzer raises is that the bundle notion does not necessarily require common European conditions for creation of a security right, which would result in even further divisions. According to him, it would be simpler to allow the recording of national security rights in the European register and to use this register as a recognition register for national security rights with their national legal effects (‘als Anerkennungsregister für mitgliedstaatliche Mobiliarsicherheiten mit ihren mitgliedstaatlichen Rechtswirkungen’). Yet he dismisses this option as politically unfeasible because each Member State would (then) have (had) to be prepared to receive 26 foreign security rights or to handle as many kinds of transposition situation.145 This line of argumentation can be questioned due to its premise, namely that direct recognition of national security rights recorded in a European register is simpler than using common European conditions for creating security rights. Indeed, the opposite seems to be true: for an individual Member State, the CSR (or each CSR subtype) would involve finding a national counterpart (the content and effects of a domestic security right) for just one security device, that is, one set of conditions for creating a bundle of national security rights. At least in terms of simplicity, but probably also in terms of political feasibility, this seems preferable to the alternative of having to deal with the security devices of all the other Member States. More serious than these two issues, and more of a threat to the feasibility of the CSR proposal, are publicity and priority issues of the relationship between the envisioned European register and existing national registers, or indeed the absence of a national register. What follows is a rough, non-exhaustive account of these publicity and priority issues. The CSR proposal implies that a centralised European register would coexist with the national registers kept in Member States.146 From the viewpoint of an individual Member State with one or more national registers for security rights, a similar registered security right could often be brought about in two ways: the traditional domestic way with entry in the relevant national register, or the ‘CSR’ or ‘bundle’ way with entry in a European register. But without coordination between the European and national levels, and assuming the time of registration (or application for registration) to be the main priority determinant, both the European and national registers would encounter problems similar to those of the weak variant of the ESR.147 In other words, both would lack a negative publicity

145 ibid. 146 147

See Verstijlen (n 26) 34. The weak and strong variants were discussed in section II.D.i.b above.

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function: the European register could not reveal whether earlier entries (that is, affording a better priority position) have been made in a national register and vice versa. Worryingly from the perspective of foreseeability, the available solutions do not seem very promising. One solution would be simply to accept the inconvenience that anyone seeking information on security rights over another person’s assets would have to examine the European register as well as the relevant national registers. However, this could be cumbersome and prone to error, especially as it could prove difficult to identify the relevant national registers. Sometimes difficulties might arise in finding the right Member State, but more often in finding the right register within that Member State. In addition, sometimes the information needed might have to be collected from registers kept in different Member States. Information technology might be able to offer a more user-friendly and less error-prone solution. For example, this could involve integrating (connecting) the European register and national registers, so that an entry in the European register would immediately be duplicated or at least noted (with priority-fixing effect) in the relevant national register and vice versa. As a result, examining either the European register or the relevant national register (or registers) would suffice. However, creating this network of registers would be a formidable task due to differences in Member State register systems (various asset-based and person-based registers, involving various authorities, procedures, techniques and documents) and registrable security rights.148 The greatest challenges would lie in creating detail-level compatibility between the European register and national registers, a necessary feature for operability of the network. Considering the size and complexity of the task, a successful result could hardly be guaranteed. Even if the relationship between the European register and national registers could be satisfactorily settled, for example, by either of the above two solutions, issues would still remain in the relationship between the European register and national security rights that do not require registration for third-party effectiveness. These issues would be similar to those discussed in section II.D.i.b above in terms of the weak and strong variant of the ESR. Accordingly, the issues would boil down to whether a registered CSR should take priority over an earlier nonregistrable national security right effective against third parties (a strong variant of the CSR) or whether it should not (a weak variant of the CSR). Similarly to our conclusions in section II.D.i.b, both variants of the CSR would be problematic: the weak variant from the foreseeability perspective (the European register without a

148 One rather peculiar register system that would well exemplify the difficulty of the task is the Finnish mortgage system for means of transport (vessels, aircraft and certain land-based vehicles) with its ‘system of two promissory notes’, which involves using bearer bonds as a mortgage instrument. See T Juutilainen, ‘Finnish Mortgage System for Means of Transport: Outdated and Overly Complex?’ in S Kozuka (ed), Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions, Ius Comparatum: Global Studies in Comparative Law 22 (Cham, Springer International Publishing, 2017) 207–15.

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negative publicity function) and the strong variant from the responsiveness perspective (national security rights considerably weakened or even made obsolete). By this stage, the above account of publicity and priority issues may already be turning opinions against the CSR proposal. However, even further issues exist, and it is unlikely that the proposal will be considered worthwhile when they are taken into account. This is so because they quite substantially reduce the increase in foreseeability that the CSR could bring about. These further issues stem from the feature that registration of a CSR in a European register would bring a bundle of national security rights into existence ‘to the extent that this security right can be created at that time on the assets concerned and between the parties involved and with the specificity with which the assets are described in the registration’ and that the bundle would include ‘the relevant local security right, insofar that security right is available in that legal system’.149 This feature clearly entails that not all Member States may always have a security right in the bundle, while at least the scope of the national security rights making up the bundle varies. Moreover, the priority treatment of national security rights varies between Member States, a situation that the CSR would not change. Due to all this variation, combined with uncertainty as to where a potential thirdparty conflict may arise and become adjudicated, a (prospective) secured creditor would have difficulty in assessing whether a CSR fulfils the need for security. In sum, the expected increase in foreseeability seems too modest to merit adoption of the CSR proposal.

III. The Centralised Conflicts-Approach A. Uniform Conflict Rules and Other Means of Coping with Substantive Diversity The centralised conflicts-approach consists of means that could, similarly to those under the centralised substantive approach, be adopted at the EU level. Unlike in the case of the centralised substantive approach, though, these means would not remove the diversity of substantive law by unification or harmonisation, nor would they introduce uniform additional security devices. Instead, they would facilitate coping with substantive diversity. They would increase compatibility between systems of security rights despite, and especially in conditions of, underlying conflicts of substantive law. Most of these means, the primary ones among them, would introduce uniform private international law, that is, common European conflict rules. Others would introduce common European complementary rules of a more substantive nature. 149

Verstijlen (n 26) 34.

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These complementary rules concern the application of substantive law in particular types of cross-border situation, as exemplified by the so-called ‘grace-period’ solution.150 Unification of conflict rules pursues the Savignian aim of ‘decisional harmony’ (Entscheidungseinklang). This is a formal ideal of private international law, which requires that cases with a choice-of-law aspect should have a similar outcome irrespective of where they are adjudicated.151 The ideal can be achieved if courts of different jurisdictions determine the applicable substantive law in a similar way. Uniform conflict rules serve exactly that purpose. As a general proposition, decisional harmony increases foreseeability. One notable instance is that it improves the ability of prospective secured creditors to ascertain which law it is whose substantive preconditions for effectiveness, especially against third parties, they need to fulfil to assure a reliable security right.152 We should note that ascertaining the applicable law may be impossible if different jurisdictions use different conflict rules. Indeed, the potentially applicable substantive laws that a prospective secured creditor would have to take into account may be too numerous, or even unknowable.153 And even if ascertaining the applicable law were not outright impossible, having to comply with the substantive laws of several jurisdictions is nevertheless cumbersome and incurs additional costs.154 In turn, uniform complementary rules may help where uniform conflict rules fail, for one reason

150 The complementary rules function in connection with the choice-of-law process, but they may not be considered as part of that process in the strict sense. See Kreuzer (n 108) 311. Kreuzer cites the grace-period rule in Recommendation 45 of the UNCITRAL Legislative Guide on Secured Transactions as ‘a specific substantive law rule’. See also UNCITRAL Legislative Guide on Secured Transactions, ch X, para 5, where the solution is called ‘a matter of substantive law rather than conflict of laws’. Still, it may be difficult to draw a clear line between conflict rules (choice-of-law rules) and substantive law rules. eg, the content of grace period solutions could be described in terms of choice of law. Another example is the ‘principle of import country law’, discussed in ch 2, section V.C.ii. See U Rammeskow Bang-Pedersen, Internationale aspekter af insolvens- og tingsretten (Copenhagen, Forlaget Thomson, 2002) 532–33. Rammeskow Bang-Pedersen finds in it both choice-of-law and substantive aspects. 151 J Kropholler, Internationales Privatrecht einschließlich der Grundbegriffe des Internationalen Zivilverfahrensrechts, 6th revised edn (Tübingen, Mohr Siebeck, 2006) 36–40; FC von Savigny, System des heutigen Römischen Rechts, vol 8 (Berlin, Veit und Comp., 1849) 27. Although decisional harmony is central to von Savigny’s system of private international law, he cannot be credited as the inventor of this notion. See FK Juenger, Choice of Law and Multistate Justice (Dordrecht, Martinus Nijhoff Publishers, 1993) 39. Juenger notes that medieval maxims already suggested ‘that different fora should not apply different laws to the same transaction’. 152 T Juutilainen, ‘Coherence through Uniform Private International Law of Property’ in P Letto-Vanamo and J Smits (eds), Coherence and Fragmentation in European Private Law (Munich, Sellier European Law Publishers, 2012) 105–06. 153 A prospective secured creditor would have to take into account all substantive laws that may become applicable by virtue of the relevant conflict rules of all jurisdictions in which a third-party conflict concerning the security right may arise and be adjudicated, or perhaps, even broader, all jurisdictions in which enforcement of that right may occur. See UNCITRAL Legislative Guide on Secured Transactions, ch X, para 2. 154 ibid ch X, para 7; M Deschamps, ‘Conflict-of-Laws Rules for Security Rights: What Should Be the Best Rules?’ in Eidenmüller and Kieninger (n 9) 288.

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or another, to yield satisfactory results. For example, a grace period can be used to alleviate problems of the lex rei sitae rule, which is already largely uniform by spontaneous development, but built on an unstable connecting factor. The importance of the mere uniformity of conflict rules should not be overemphasised, because the functioning and results of a conflict rule essentially depend on its content design, most notably on its connecting factor.155 The lex rei sitae rule perfectly illustrates that uniformity alone cannot guarantee the good functioning of a conflict rule. In the following, we will proceed on the hypothesis that the objectives identified and developed in chapter two can guide reasoned choices in content design. Indeed, different connecting factor options fare differently when evaluated in the light of the objectives of foreseeability and responsiveness. Here, loss of responsiveness is a rare threat, so the main question is: which of the options most increases foreseeability? Then again, as argued in chapter two, section IV.C.iii, some connecting factors more than others may increase responsiveness in competitive processes between jurisdictions by internalising the costs and benefits of substantive law in the jurisdiction that enacts or otherwise produces that law. Analysis of foreseeability and responsiveness may similarly help to choose between different options for complementary rules. In these choices, the third objective—the division of unforeseeability costs—should additionally play a major role. Not everyone may regard the unification of conflict rules as an acceptable way to remove cross-border problems.156 We can expect two main arguments against unification. First, as suggested by some commentators, the relevant conflict rules are in effect already uniform, so that further unification by the EU would be superfluous and incapable of dealing with remaining problems.157 What these commentators have in mind is the lex rei sitae rule, which only concerns rights with respect to tangible movables (and, of course, immovables). It would be incorrect to stretch the same uniformity argument to rights with respect to receivables.158 But even in terms of rights with respect to tangible movables, uniformity may often be more apparent than real. This results from ‘national developments’ of the lex rei sitae rule,159 on the one hand, and introduction of asset type-specific special conflict rules that erode its position as a general conflict rule, on the other hand.160

155 cf FJ Garcimartín Alférez, ‘Assignment of Claims in the Rome I Regulation: Article 14’ in F Ferrari and S Leible (eds), Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (Munich, Sellier European Law Publishers, 2009) 248. Garcimartín Alférez gives a slight appearance of such over-emphasis, arguing that legal certainty requires a uniform conflict rule for third-party relations in the assignment of claims (the notion of ‘assignment’ including security rights) ‘even if it is “the second best”’. Even so, he thoroughly discusses the merits of the connecting factor options available. 156 See Juutilainen (n 152) 102–03. 157 See Rutgers (n 9) 73; von Bar and Drobnig (n 90) 468. 158 See Garcimartín Alférez (n 155) 233–49. 159 B Akkermans and E Ramaekers, ‘Lex Rei Sitae in Perspective: National Developments of a Common Rule?’ in B Akkermans and E Ramaekers (eds), Property Law Perspectives, Ius Commune Europaeum 106 (Cambridge, Intersentia, 2012). 160 Juutilainen (n 152) 110.

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The second likely argument against the unification of conflict rules is that, at best, these rules can provide only partial solutions to cross-border problems.161 This argument implies the premise that only a perfect solution can be accepted. As we have already seen, this premise can be strongly questioned, at least insofar as ‘perfect’ is equated with the comprehensive (‘full’) unification or harmonisation of substantive law. In the discussion of the integrated approach in chapter one, section IV, it was argued that any such attempts would probably fail in the foreseeable future. For that reason already, the goals should be more modest and probably combine means from different approaches discussed in this book (the centralised substantive approach, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach). The discussion of the objective of responsiveness, in chapter two, section IV identified several reasons why comprehensive substantive unification or harmonisation may not be a desirable goal at present, even if it were somehow achievable. Among these were that a single model of a system of security rights may not fit all jurisdictions, due to a number of points internal and external to local laws, and that the removal of substantive diversity would reduce possibilities for local innovation and experimental learning. At the same time, a single model would prevent competition between jurisdictions and a potential ‘slow race to the top’ in the quality of substantive law. Our discussion of the centralised conflicts-approach will proceed as follows. Section III.B reviews EU competence relevant to this approach. Section III.C discusses general requirements for the design of conflict rules meant to deal with third-party conflicts (or ‘proprietary questions’). Finally, sections III.D and III.E delve into the specifics of conflicts treatment of security rights over tangible movables and receivables.

B. Competence The competence of the EU to employ means under the centralised conflictsapproach is generally easily established. The relevant legal basis is Article 81 TFEU, which makes up title V, chapter 3 of the Treaty, headed ‘Judicial Cooperation in Civil Matters’. According to Article 81(2)(c) TFEU, following the ordinary legislative procedure, the European Parliament and the Council have the power to ‘adopt measures, particularly when necessary for the proper functioning of the internal market, aimed at ensuring … the compatibility of the rules applicable in the Member States concerning conflict of laws and jurisdiction’.162 This wording is broader than that in the Article’s predecessor, Article 65(b) TEC, which enabled such measures ‘insofar as necessary for the proper functioning of the

161 See U Drobnig, HJ Snijders and E-J Zippro, ‘Divergences of Property Law: An Obstacle to the Internal Market?’ in Drobnig, Snijders and Zippro (n 19) 12; Kieninger (n 13) 18. 162 See Ramaekers (n 8) 212. Ramaekers notes that ‘measures’ leaves it up to the EU legislature to decide between a regulation and a directive.

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internal market’.163 Among others, Rutgers has marked the power conferred by Article 65(b) TEC to ‘harmonise conflict of laws rules’ with respect to security rights.164 For the purposes of our discussion, it is important to establish that both conflict rules and what have above been termed ‘complementary rules of a more substantive nature’ fall within EU competence. As for conflict rules, the case is clear. As for complementary rules, the conclusion is the same, but needs to be supported by additional arguments, as will be presented next. First, although ‘conflict of laws’ in Article 81(2)(c) TFEU is not used in the widest possible sense,165 this term can still be understood more broadly than as a reference to mere conflict (choice-of-law) rules in the strictest possible sense. Moreover, according to the wording of the Article, measures may concern ‘the compatibility of the rules … concerning conflict of laws’, which is certainly broader than saying that measures may only introduce conflict rules. This is so because complementary rules may improve the ‘compatibility’ of conflict rules by dealing with situations in which conflict rules fail to function properly or to yield acceptable results. Second, it would be difficult to clearly distinguish ‘genuine’ conflict rules from ‘more substantive’ complementary rules. For example, grace-period solutions, which are often understood as substantive rules, can be explained in choice-of-law terms as follows: during a set period after an encumbered asset moves from jurisdiction A to jurisdiction B, the substantive law of jurisdiction A governs the effectiveness of the security right against third parties. If further proof is needed, we might add that the Rome I Regulation, adopted on the basis of Article 65(b) TEC,166 mixes choice of law and substantive aspects. Perhaps the best example is Article 9 of the Regulation on ‘overriding mandatory provisions’.167 Rutgers notes a specific issue with the use of Article 65(b) TEC (now Article 81(2)(c) TFEU), namely that measures based on it ‘do not bind all M ember States’.168 By this she means the special position of the UK and Ireland, and also 163 K Boele-Woelki, Unifying and Harmonizing Substantive Law and the Role of Conflict of Laws, A Collection of Law Lectures in Pocketbook Form (Leiden, Martinus Nijhoff Publishers, 2010) 102–03. Boele-Woelki notes that the Lisbon Treaty enlarged the competence as to private international law because the adoption of measures on the basis of Art 81 TFEU ‘no longer only depends on the internal market criterion’. 164 Rutgers (n 9) 73. However, Rutgers does not regard conflict rule harmonisation as a proper solution because ‘the same conflict rule, the lex rei sitae, is applied in most Member States’, ‘the problems … are also the effect of the closed system of real rights which is included in the substantive law of most legal systems to which the conflict rule refers’ and ‘it does not seem feasible that another conflict of law rule will be introduced’. 165 ie, ‘jurisdiction’ which could be considered as part of ‘conflict of laws’ is mentioned separately. On variance as to the scope of these terms, see M Reimann, Conflict of Laws in Western Europe: A Guide through the Jungle (Irvington, Transnational Publishers, 1995) 87. 166 Parliament and Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. See Recital 2. 167 These are substantive provisions that are applicable irrespective of the substantive law otherwise applicable to the contract under the Regulation. The ‘overriding mandatory’ status stems from the importance of the provisions for safeguarding the public interests of the country in question, including its political, social or economic organisation. See Rome I Regulation, Art 9(1). 168 Rutgers (n 9) 73. Similarly, see Ramaekers (n 8) 212–13.

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Denmark. But this should not be too much of a problem, considering the small number of non-bound Member States (especially with the UK now, as it seems, leaving the EU) and their opt-in possibilities. The UK and Ireland have been able to opt in on a case-by-case basis since the Treaty of Amsterdam. Indeed, a path to a similar position was opened for Denmark by the Treaty of Lisbon.169 However, in a referendum in 2015, the Danes rejected that path.170 For opt-in incentives to exist, the measures (to be) adopted must credibly promise to solve cross-border problems or improve ways of dealing with them.171 Such incentives can be expected to be acted upon, as exemplified by the Irish and, after some hesitation, the UK opt-in to the Rome I Regulation.172

C. General Design Requirements for Conflict Rules on Third-Party Relations i. Definite and Predictable Choice of Law a. Choice of Connecting Factors Where substantive laws in different jurisdictions share clear common aims, uniform conflict rules should also be designed to facilitate achieving these aims in cross-border relations.173 Although European systems of security rights partly pursue different policies,174 at the same time they share the ultimate aims, namely to increase the availability and reduce the cost of credit, thereby stimulating economic activity.175 These aims, then, can be used to derive certain general design requirements for uniform conflict rules on security rights.176 The crucial question with respect to the aims is whether (prospective) secured creditors can trust security rights to actually reduce their credit risk. If so, then

169 See Protocol (No 21) on the position of the United Kingdom and Ireland in respect of the area of freedom, security and justice [2016] OJ C202/295; Protocol (No 22) on the position of Denmark [2016] OJ C202/298. See also Boele-Woelki (n 163) 103. 170 See P Arnt Nielsen, ‘Denmark and EU Civil Cooperation’ (2016) 24 Zeitschrift für Europäisches Privatrecht 300, 309. 171 See J Harris, ‘Understanding the English Response to the Europeanisation of Private International Law’ (2008) 4 Journal of Private International Law 347, 356–57, 394. Harris discusses a number of reasons for the English circumspect or outright negative attitude towards the Europeanisation of private international law. Among other things, he suggests that reforms should be more rigorously justified as to evidence of their expected impact. 172 See Commission Decision 2009/26/EC of 22 December 2008 on the request from the United Kingdom to accept Regulation (EC) No 593/2008 of the European Parliament and the Council on the law applicable to contractual obligations (Rome I) [2009] OJ L10/22. 173 See UNCITRAL Legislative Guide on Secured Transactions, ch X, paras 1, 6. 174 The instances of priority and publicity were discussed in ch 2, section IV.B. 175 Discussed in ch 2, sections III.C and III.D. 176 Here, ‘general’ means that the design requirements are valid irrespective of distinctions that probably have to be made for conflict rules concerning security rights over different types of asset.

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security rights probably bring about the desired microeconomic and macroeconomic effects referred to above. But in order to support that trust among secured creditors, conflict rules have to fulfil at least the following two requirements. First, in combination with the applicable substantive law, they need to resolve priority conflicts between the secured claim and any competing claims, and to do so with certainty. In this joint task, the role of conflict rules is to provide a definite choice of law, that is, an unambiguous determination of the applicable substantive law. Second, conflict rules need to perform their part in the priority conflict-resolving function, and to do so predictably. In sum, choice of law should be both definite and predictable.177 It is hardly surprising that these requirements resemble, and indeed concretise, the objective of foreseeability.178 A somewhat more difficult question is how the requirements of definiteness and predictability of choice of law should concretise actual design of conflict rules. Their main role must be to guide the choice of connecting factors, making some available options more appealing than others. Connecting factors in ‘proprietary’ conflict rules have traditionally been asset type-specific, and probably for good reason. Nevertheless, some observations of a general nature are in order here before exploring asset type-specific distinctions. As regards connecting factors, a general observation to start with is that options incapable of providing a definite choice of law should be rejected altogether. Such connecting factors are prone to cause deadlock, where the applicable law cannot be determined. A related matter is that conflict rules on security rights should coincide with conflict rules on outright (‘absolute’) transfers of ownership and with conflict rules on other transactions without a security purpose, insofar as these transactions may conflict with a security right. Conflicts of those kinds may be difficult or even impossible to resolve if the conflicting rights or claims are governed by different substantive laws. Further, all transactions with a security purpose should be included in the scope of common European conflict rules on security rights by employing functionalist definitions.179 All in all, definiteness of choice of law is a necessary requirement, even an absolute one. Absoluteness here means that a connecting factor either qualifies or does not qualify. In turn, predictability of choice of law, while necessary in general terms, seems less than an absolute requirement. Indeed, some of its aspects can be regarded as more important than others. Its overall significance is recognised, for example, in the argument that conflict rules ‘should reflect the reasonable expectations of

177 See

UNCITRAL Legislative Guide on Secured Transactions, ch X, para 6; Deschamps (n 154)

286.

178 It

is worth emphasising that definiteness and predictability of choice of law are two separate requirements and not a single one. This can be demonstrated by the lex rei sitae rule: moving an encumbered asset across the border, or the possibility of doing so, typically weakens the predictability of choice of law under this rule, but the rule generally provides a definite choice of law even in these situations if the question of the relevant time for the purpose of applying the rule is settled. 179 See UNCITRAL Legislative Guide on Secured Transactions, ch X, paras 10–11; Deschamps (n 154) 287–88.

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interested parties (that is, creditor, grantor, debtor and third parties)’ and, to that end, ‘the connecting factor that indicates the law applicable to a security right must have some real relation to the factual situation that will be governed by such law’.180 However, its actual importance appears to vary at least with the type of interested party. Let us consider, say, the category of ‘third parties’. That, as a starting point, includes all persons other than the parties to a particular security arrangement. Within this category, for the sake of example, let us consider two subcategories, that is, two types of interested parties: competing (prospective) secured creditors on the one hand and general unsecured creditors on the other. Now, predictability of choice of law concerning the parties’ security arrangement is not equally important to these types of interested (third) parties. To be sure, predictability of choice of law may be of the essence to competing secured creditors. This is because they need to be able to ascertain earlier encumbrances over the assets to be encumbered, so as to assess their credit risk and especially how acquiring a security right affects that risk. Indeed, knowing the applicable law probably also plays a role in doing so. In contrast, predictability of choice of law is likely to be less important to unsecured creditors because they typically have not relied on the (security-provider) debtor’s assets in extending credit. In addition, they may count on the domestic creditor regime to guard against foreign security rights that are ‘too different’.181 A further aspect relativising the importance of predictability of choice of law, though not negating it, is that information on the law applicable to potentially existing security rights does not automatically turn into information on whether, and what kind of, security rights actually exist. Therefore, information on the applicable law may be more useful if that law also pursues an active publicity policy, notably if the law requires security rights (or at least some information on security arrangements) to be recorded in a register. Then again, if registration is generally considered desirable, uniform conflict rules may create incentives to develop registration and related substantive law, provided that the connecting factors chosen maximise predictability of choice of law to all interested parties. Put differently, register systems might be developed with a view to taking full advantage of uniform conflict rules.182 b. The Exclusion of Renvoi Like connecting factors, renvoi calls for some general observations. For a brief definition, renvoi is a doctrine according to which the law indicated by a conflict rule 180 UNCITRAL Legislative Guide on Secured Transactions, ch X, para 6. Similarly, see Deschamps (n 154) 287. 181 The notion of a creditor regime was discussed in ch 1, section IV.D.iv. 182 This might result, say, from the introduction of a uniform conflict rule for the assignment of claims, according to which third-party relations are governed by the law of the assignor’s (security provider’s) habitual residence. This kind of conflict rule functions best in connection with a register system, so that the assignor’s habitual residence can function as an ‘information centre’ for anyone having dealings with the assignor. See Garcimartín Alférez (n 155) 239.

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also includes the conflict rules of that law.183 Thus, if the relevant conflict rule in jurisdiction A, which adheres to renvoi, refers to the law of jurisdiction B, then the applicable law may be that of jurisdiction A or B, or of a third jurisdiction, C, depending on the relevant conflict rule in jurisdiction B. The UNCITRAL Legislative Guide on Secured Transactions recommends exclusion of renvoi,184 noting that many jurisdictions have already done so ‘for the sake of predictability and also because renvoi may lead to results that run contrary to the expectations of the parties’.185 Michel Deschamps endorses this view, arguing that renvoi ‘would unduly complicate the analysis and thereby undermine predictability as the conflict-of-laws rules of the State B might point to the law of a third State (eg State C)’. He adds that ascertaining the applicable law ‘could prove to be an insurmountable task if the conflict rules of State B also include renvoi, meaning that the applicable law might be that of a fourth State (eg State D)’.186 The case against renvoi by UNCITRAL and Deschamps is compelling. More over, it appears to remain so when applied to the context of unification of conflict rules in the EU. Therefore, common European conflict rules should be designed to determine and indicate the most suitable substantive law by a single choice of law, without the possibility of referring to another law, back or forward. Of course, renvoi, and its exclusion for that matter, would be irrelevant if the conflict rules were entirely uniform in the EU and if all situations covered by them were of an intraEU nature. However, the unification of conflict rules is likely to proceed step by step, while common European conflict rules should also be prepared to deal with situations not confined to Member States. Therefore, exclusion of renvoi is in order.

ii. Rejection of Party Autonomy as a General Solution Party autonomy has traditionally been regarded as irreconcilable with the foundations of ‘proprietary’ choice of law. Accordingly, conflict rules dealing with third-party relations have been based on objective connecting factors, such as the physical location of an asset in the case of tangible movables, instead of allowing parties to agree on the applicable law.187 Although the traditional view is 183 See generally M Bogdan, Private International Law as Component of the Law of the Forum: eneral Course, A Collection of Law Lectures in Pocketbook Form (The Hague, Hague Academy of G International Law, 2012) 202–13. 184 Recommendation 221 reads: ‘The law should provide that a reference in the conflict-of-laws provisions to “the law” of another State as the law applicable to an issue refers to the law in force in that State other than its conflict-of-laws provisions.’ 185 Ch X, para 14. 186 Deschamps (n 154) 286–87. cf C Forsyth, ‘Certainty versus Uniformity: Renvoi in the Context of Movable Property’ (2010) 6 Journal of Private International Law 637, 639, 646. Forsyth shows that in individual cases, even concerning security rights over movable property, renvoi may be an avenue to ‘uniformity of decision, ie the same result wherever a dispute is litigated’. 187 See R Westrik and J van der Weide, ‘Introduction’ in R Westrik and J van der Weide (eds), Party Autonomy in International Property Law (Munich, Sellier European Law Publishers, 2011) 2. Westrik and Van der Weide write: ‘Then we come to (International) Property Law. Traditionally, within this area of law, party autonomy is not allowed, not to say strongly rejected.’

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increasingly being challenged,188 it still remains a stable starting point. For one authoritative instance, the UNCITRAL Legislative Guide on Secured Transactions subscribes to it: A corollary to recognizing party autonomy with respect to the personal obligations of the parties is that the conflict-of-laws rules applicable to the property aspects of secured transactions are matters that are outside the domain of freedom of contract. For example, the grantor and the secured creditor are normally not permitted to select the law applicable to priority, since this could not only affect the rights of third parties, but could also result in a priority contest between two competing security rights being subject to two different laws leading to opposite results.189

Deschamps specifies the second issue raised by UNCITRAL as follows: Allowing the parties to select the applicable conflict rule would also defeat one of the main purposes of the conflict-of-laws rules which is to identify the State whose substantive law will apply in the event of a dispute between competing claimants. In a priority dispute between secured creditor X and secured creditor Y, it would be impossible to ascertain the law applicable to the resolution of the dispute if each of X and Y had been permitted to choose in their security agreement with the grantor a different governing law for the ranking of their respective security right.190

If we rephrase this in the terms of section III.C.i.a above, Deschamps thus argues that party autonomy should be rejected as a connecting factor due to its inability to provide a definite choice of law. We should examine this argument more closely because not all commentators agree with it. For example, a forcefully argued differing view is that advanced by Axel Flessner and Hendrik Verhagen in the European debate on choice of law with respect to assignment of claims.191 Since the same conflict rules on assignment of claims are meant to cover both outright transfers and security rights over claims alike,192 Flessner and Verhagen’s argumentation extends to choice of law regarding security rights over receivables and other claims. In their view, a conflict rule based on party autonomy also resolves priority contests between several assignees of the same claim and of the same assignor. According to them, this remains so even if 188

ibid 3–6; Rutgers (n 13) 164–65, 210–11. Ch X, para 13. 190 Deschamps (n 154) 285. Proposals to introduce party autonomy in choice of law on property law matters typically involve allowing parties to directly select the applicable substantive law, not the applicable conflict rule. Deschamps writes of the latter, defending the ‘mandatory character’ of conflict rules. In the final analysis, of course, both give the same result: the applicable substantive law is determined by a decision of the parties to a security agreement. 191 A Flessner and H Verhagen, Assignment in European Private International Law: Claims as Property and the European Commission’s ‘Rome I Proposal’, GPR Praxis: Schriften zum Gemeinschaftsprivatrecht (Munich, Sellier European Law Publishers, 2006). This debate had a special momentum in connection with drafting the Rome I Regulation. However, the quest for a conflict rule on third-party relations failed at the time. See PMM van der Grinten, ‘Article 14 Rome I: A Political Perspective’ in Westrik and Van der Weide (eds) (n 187) 160–61. 192 See Rome I Regulation, Art 14(3). In this book, security transfers, mentioned separately in the Article, are included in the notion of ‘security right’. 189

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the relevant contracts of assignment are governed by different substantive laws. For them, the contrary view ‘is a fallacy, albeit widely held’.193 Their solution is to consider multiple assignments by the same assignor in chronological order. In the case of two such competing assignments, the law governing the subsequent assignment would govern the intrinsic validity of that assignment and determine the subsequent assignee’s position towards any prior assignees or chargees. However, the law governing the subsequent assignment would have to recognise the property effects achieved under the law governing the prior assignment and then decide on its own terms as to the effects of the subsequent assignment.194 In fact, this solution demonstrates that a conflict rule based on party autonomy is capable of providing definite choice of law, thus avoiding deadlock, contrary to the above assumptions by UNCITRAL and Deschamps. Granted, definiteness is only possible here with the help of a meta-rule through which conflicts are to be resolved in chronological order. But no apparent reason exists to hold the need for a meta-rule against this conflict rule option.195 Indeed, it is rather typical that conflict rules require meta-rules in order to function properly. As just one example, the lex rei sitae rule requires a meta-rule defining the relevant time for its application.196 However, the notion of a conflict rule based on party autonomy should also be tested in terms of the requirement of predictable choice of law. This is where the main problems of this notion lie. Flessner and Verhagen themselves recognise one issue: Of course, for the first assignee the cross-border character of the second assignment and the resulting application of some other law may sometimes come as a disappointment, particularly where the law governing the second assignment would give priority to a subsequent assignment (e.g. Belgian or English law), while the law under which he acquired the claim would not protect a bona fide second assignee (e.g. German law and Dutch law).197

Yet Flessner and Verhagen downplay this issue, regarding it as ‘an intrinsic risk of moving in a world of different laws, adding not much to the basic risk of competing assignments’. In this connection, they explain that as every assignment carries the risk of previous or subsequent assignments by the assignor, so, in the European market and in the WTO-bound global system, the assignee 193

Flessner and Verhagen (n 191) 32.

194 ibid. 195

cf E-M Kieninger, ‘General Principles on the Law Applicable to the Assignment of Receivables in Europe’ in J Basedow, H Baum and Y Nishitani (eds), Japanese and European Private International Law in Comparative Perspective, Materialien zum ausländischen und internationalen Privatrecht 48 (Tübingen, Mohr Siebeck, 2008) 160. According to Kieninger, the chronological order solution follows a German rule of substantive law (solving priority conflicts by the rule ‘first in time, first in right’), but it is not a universal rule. She notes that in many European jurisdictions, and under Art 11:401(1) of the Principles of European Contract Law (PECL), the claim belongs to the assignee who first notifies the debtor, whereas in other jurisdictions, registration or notice filing is regarded as the decisive point in time. For Kieninger, this constitutes a ‘systematic argument’ against Flessner and Verhagen’s solution. 196 Discussed in ch 2, section V.B.iii. 197 Flessner and Verhagen (n 191) 33.

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must reckon not only with competing assignments (as in a purely local situation), but also with other laws applying to them.198

This reasoning is difficult to accept, especially since other available conflict rule options avoid this issue. Indeed, the law of the assignor’s habitual residence or the law applicable to the assigned claim gathers successive assignments of the same claim by the same assignor under the same substantive law. Of course, where one substantive law governs the priority conflict between successive assignees, no assignee will be ambushed by application of an additional substantive law. As a consequence, each assignee knows how to maximally secure their position and what the potentially remaining risks are. In most cases, no or few risks remain. For example, if priority under the applicable substantive law belongs to the assignee who first notifies the debtor of the assignment (and, as may be required, at the time of the assignment neither knew nor ought to have known of prior assignments), then the first-notifying assignee (who, if required, at the time of the assignment neither knew nor ought to have known of prior assignments) is protected from prior and subsequent assignees. The risks that may result from difficulties in obtaining correct information on (the absence of) earlier notifications should be remedied at the level of substantive law. These risks could be removed altogether by replacing the notification requirement with a requirement of public registration. Verhagen has recently defended the notion of a conflict rule based on party autonomy as follows: The principle is exactly the same as with tangible property, where ownership acquired by one person under the original lex situs may be defeated by the rights acquired by another person under the rules on bona fide purchases of the new lex situs.199

This analogy can be challenged for two reasons, assuming that it is intended as a general defence of the notion of a conflict rule based on party autonomy rather than, say, mere rejection of the deadlock assumption noted above. First, if these problems really, in practice, impair the functioning of the lex rei sitae rule, then their existence hardly supports the adoption of a conflict rule with similar problems for receivables and other claims. If anything, the problems support the view that the lex rei sitae rule should be replaced by a better-functioning conflict rule and suggest that a rule based on party autonomy cannot qualify for this purpose. Second, choice of law on tangible movables does not appear to be fully analogous with choice of law on receivables and other claims. Importantly, in the case of tangible movables and the lex rei sitae rule, the asset in question has to be moved across the border to trigger the application of another substantive law. This is

198 ibid (footnote omitted). cf MV Polak, ‘Recognition, Enforcement and Transformation of Foreign Proprietary Rights: A Handful of Observations and Suggestions’ in Drobnig, Snijders and Zippro (n 19) 125–26. 199 H Verhagen, ‘Party Autonomy and Assignment’ in Westrik and Van der Weide (eds) (n 187) 197. Similarly, by way of examples, see Flessner and Verhagen (n 191) 33–35.

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g enerally more cumbersome than achieving the same result in the case of claims and is thus likely to require more planned fraudulent activity. Moreover, in terms of tangible movables, the rules on good faith acquisition typically require that the acquirer ‘has proceeded to acquire visible control over the movable’,200 which usually means possession. Focusing on security rights, the circumstances are often such that a third-party acquirer cannot take possession and is therefore excluded from good faith protection. That is, in the case of possessory security rights, secured creditors typically hold encumbered assets in their possession, while in the case of non-possessory security rights, security providers are often unwilling to surrender possession of encumbered assets because they need those assets to conduct their own business. Flessner and Verhagen’s solution may disappoint subsequent assignees, too. This has been demonstrated by Kieninger using the following example. A, located in Austria, assigns his present and future claims against C, also located in Austria, to German bank B. A and B select German law to govern the assignment. One day later, A assigns the same claims to Austrian bank X. Since this assignment is purely domestic, no contractual choice of law is made. Upon X’s request, C informs X that he has not been notified of any assignment. X then notifies C of the assignment between A and X, as notification of the debtor, or entry into the assignor’s books, is a precondition for effectiveness of an assignment against third parties under Austrian law. Now, Flessner and Verhagen’s solution indeed disappoints X, ‘who has done everything in his power to secure his position’. The first assignment, including its third-party effects, is governed by German law, under which B has acquired the claims against C. The second assignment, including its third-party effects, is governed by Austrian law. But Austrian law has to recognise the property effects achieved under German law. Thus, at the time of the assignment between A and X, A was no longer holder of the claims. Since good faith acquisition of claims is unknown in Austrian law, the assignment by A cannot transfer to X any rights with respect to the claims.201 The above discussion suggests that conflict rules based on party autonomy would underperform in terms of predictability of choice of law in third-party relations. In particular, predictability would be lacking from the standpoint of (prospective) secured creditors or assignees, who would need it most. As a result, conflict rules based on party autonomy would be unlikely to increase secured creditors’ trust in the effectiveness of security rights in cross-border contexts. In sum, party autonomy cannot be expected to increase foreseeability in this setting and should therefore be rejected as a general solution.

200 AF Salomons, ‘How to Draft New Rules on the Bona Fide Acquisition of Movables for Europe? Some Remarks on Method and Content’ in Faber and Lurger (n 13) 154. 201 Kieninger (n 195) 159–60. See E-M Kieninger, ‘Collateralisation of Contracts’ (2013) 9 European Review of Contract Law 430, 440–41.

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Further arguments for rejection can be based on the objective of responsiveness. This is so because conflict rules based on party autonomy would enable the circumvention of publicity requirements and other preconditions for or restrictions on third-party effects. As Verstijlen notes, national systems of property law reflect the balance struck between the parties involved, taking into account local social circumstances and opinions on the relevant interests. ‘It is legitimate’, he argues, ‘that a country aims to prevent this system to be bypassed by the recognition of foreign property rights.’202 In a similar tone, Kieninger asserts that ‘one must accept … that in the absence of unified or harmonized substantive law, different jurisdictions will pursue their goals in different ways’.203 Nevertheless, rejection of party autonomy as a general solution should not necessarily mean rejecting it altogether in more limited senses. It should thus remain possible, at least in principle, to use party autonomy to complement conflict rules based on objective connecting factors in situations where these rules fail to yield acceptable results (provided that situations are limited enough not to frustrate the general idea of the rules). Examples might include solutions that allow parties to select the law of destination to govern creation of security rights over goods to be exported.204

iii. Asset Type-Specificity in Choosing Connecting Factors Traditional thinking would have it that tangible movables and receivables call for different conflict rules. Accordingly, the search for the most suitable connecting factors for these types of asset has been understood as two separate tasks.205 But asset type-specificity is not an absolute necessity. For example, according to the UNCITRAL Legislative Guide on Secured Transactions, simplicity and certainty could support adopting the same conflict rules for tangible and intangible assets. However, this is not what the Legislative Guide ends up recommending.206 The best way forward is to keep open the possibility that conflict rules for tangible movables and receivables might coincide in the end, but to search for the most suitable connecting factors for the two types of asset separately. Put differently, one and the same connecting factor should not be imposed on both types if it is not

202

Verstijlen (n 26) 30. Kieninger (n 195) 161. Kieninger refers to the English requirement to register charges, including security assignments, over companies’ book debts with the Registrar of Companies, and the Dutch denial of the effectiveness of security assignments. 204 A Dutch solution to that effect was discussed in ch 1, sections III.B and III.C. 205 The division between tangible and intangible assets is not clear-cut in terms of choice of law. In particular, certain intangible assets are incorporated into and exercised through a document, namely rights under negotiable instruments and negotiable documents. The documents themselves are tangible objects, have a physical location and are capable of being in one’s possession. Therefore, these intangible assets can be treated as tangible assets for choice-of-law purposes. See Deschamps (n 154) 291. 206 Ch X, paras 22–25, Recommendations 203–08. For tangible assets, as a general rule, the Legislative Guide recommends the law of the location of the assets, but the law of the location of the grantor for intangible assets. 203

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the best available option for both types. Separation of the tasks is in order because the characteristics of the two types of asset differ in ways that may be relevant for choice-of-law purposes. In particular, this concerns the role of physical location as a connecting factor. For tangible movables, physical location may be the most natural option, whereas for receivables, physical location would be more or less fictional and would require an additional rule defining what is to be regarded as the location of a receivable.207 A potential point of coincidence could be the law of the location of the grantor (security provider), a connecting factor option that has indeed been seriously considered for both types of asset.

D. Conflicts Treatment for Security Rights over Tangible Movables i. The General Conflict Rule: Lex Rei Sitae Challenged by Security-Provider Location An organised way to design uniform European conflicts treatment for security rights over tangible movables is to begin with searching for a general conflict rule. Only after establishing the best available and feasible general conflict rule is it time to ask whether certain types of tangible movable or certain situations call for special conflict rules, and whether the general conflict rule needs to be complemented, whether by rules of a substantive nature or otherwise. Here, too, we should consider the potential to increase foreseeability as a leading criterion in justifying rule choices. Additionally, responsiveness-related assessment may prove significant, say, in that the combined effect of some conflict rules and substantive law is likely to be unacceptable, at least to some Member States.208 We can narrow down the search for a general conflict rule to a choice between the traditional lex rei sitae rule and a challenger, namely the law of the location of the security provider (hereinafter the security-provider location rule). Even knowing the problems of conflit mobile situations, the lex rei sitae rule cannot, as the prevailing rule that it is, be disregarded in discussion. As for conceivable challengers, then, the security-provider location rule may be the only option. Indeed, party autonomy was ruled out in section III.C.ii, while registration-based conflict rules cannot offer a general solution because most tangible movables are not registrable, nor indeed can they practicably be made so. The UNCITRAL Legislative Guide on Secured Transactions also briefly plays the security-provider location rule (‘grantor’s location rule’) against the

207

289.

See UNCITRAL Legislative Guide on Secured Transactions, ch X, para 20; Deschamps (n 154)

208 This assessment provided a secondary reason to reject party autonomy as a general solution in section III.C.ii, while the primary reason was lack of predictability in choice of law. Then again, we should keep in mind that conflict rules based on objective connecting factors may contribute to beneficial competitive processes between jurisdictions, as suggested in ch 2, section IV.C.iii. This is a responsiveness-related argument for such conflict rules.

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lex rei sitae rule, but ends up rejecting it on rather slender grounds. The Legislative Guide first points out that not all states regard the law of the location of the security provider ‘as sufficiently connected to security rights in tangible assets’.209 This argument lacks content since it does not specify the reasons for the alleged absence of sufficient connection. On the contrary, the location of the security provider is a proper connection, and it is difficult to see why it should be regarded as any weaker than a connection provided by the location of the encumbered assets. Another, more serious point that the Legislative Guide makes is that the security-provider location rule would often not coincide with conflict rules governing a transfer of ownership of the same assets. Yet, as the Legislative Guide notes, these situations could be avoided by adopting a similar conflict rule for transfers of ownership.210 In fact, this idea is already included in Ulrik Rammeskow Bang-Pedersen’s proposal to apply the law of the ‘intermediary person’s home country’ (mellemleddets hjemland), discussed below. This would be a general ‘proprietary’ conflict rule, not limited to security rights.211 Further, Maurice V Polak has proposed introducing ‘a European regulation containing choice of law rules for proprietary rights’, also not limited to security rights.212 However, the Legislative Guide presents yet another point against the security-provider location rule: In addition, it is almost universally accepted that a possessory security right should be governed by the law of the place where the assets are held, so that adopting the law of the grantor for possessory rights would run against the reasonable expectations of secured creditors.213

For that reason, states the Legislative Guide, even if the security-provider location rule were to be the general rule, an exception would be needed for possessory security rights.214 But this is not necessarily so. Indeed, it is hard to find reasons why the preconditions for third-party effects of a possessory security right could not be subject to the security-provider location rule, even if enforcement of that right would otherwise have to be governed by the law of the location of the encumbered assets. In sum, stronger arguments are needed if the security-provider location rule is to be rejected outright. Then again, since the lex rei sitae rule is time-honoured, soundly established and well known, the security-provider location rule would need to offer significant improvements so as to justify itself as a replacement. This is so especially because such a major change of choice-of-law regime can be expected to cause confusion in practice. Rammeskow Bang-Pedersen has proposed replacing the lex rei sitae rule by applying the law of the intermediary person’s home country, provided that this 209

Ch X, para 23.

210 ibid. 211

Rammeskow Bang-Pedersen (n 150) 592–619. Polak (n 198) 128. 213 Ch X, para 24. 214 ibid. 212

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can be achieved by way of international regulation (for reasons of decisional harmony).215 By ‘intermediary person’, he means the party from whom the ‘parties’ to a third-party relation derive their conflicting claims or rights. This, in cases concerning security rights, would typically be the security-provider debtor.216 ‘Home country’ he defines as the centre of main interests.217 In terms of security rights, applying the law of the intermediary person’s home country by and large means the same as the security-provider location rule. Therefore, many of Rammeskow Bang-Pedersen’s points on the comparison between the lex rei sitae rule and the application of the law of the intermediary person’s home country remain valid in a comparison between the lex rei sitae rule and the security-provider location rule. Indeed, the security-provider location rule seems highly appealing because it avoids all problems characteristic of the lex rei sitae rule. Importantly, as the location of encumbered assets would be irrelevant to the law governing third-party relations, moving the assets across the border to another jurisdiction could not cause conflit mobile. Consequently, insofar as choice of law is concerned, secured creditors would not need to worry about the location of encumbered assets. Moreover, if the security provider’s home jurisdiction requires registration of security arrangements, it would be easy for prospective secured creditors to search for earlier encumbrances of the security provider’s assets, also taking into account that financing agreements are usually made in the location of the security provider rather than in the location of the assets to be encumbered, if these locations differ. In addition, the security-provider location rule would obviate the need to differentiate choice of law between means of transport and ordinary tangible mov ables. Finally, if generalised to cover all proprietary rights, the security-provider location rule would simplify matters in cross-border insolvency proceedings. That is, all rights and third-party conflicts with respect to an insolvent securityprovider debtor’s assets would be governed by the same substantive law, which would usually coincide with the lex concursus.218 Each of these advantages would improve the predictability of choice of law, thus promoting the objective of foreseeability. But despite all these advantages, the security-provider location rule involves its own drawbacks. Some of these raise doubts as to whether replacing the

215 Rammeskow Bang-Pedersen (n 150) 606–07, 617–19. Rammeskow Bang-Pedersen contrasts the proposal with the mobilia sequuntur personam maxim, which was replaced by the lex rei sitae rule in the nineteenth century. See Akkermans and Ramaekers (n 159) 125–28. 216 Rammeskow Bang-Pedersen (n 150) 595. 217 ibid 607, 610. Rammeskow Bang-Pedersen rejects (at 604–05) the use of the registration state of a company for this purpose because of the threat of a ‘race to the bottom’ in terms of the content of rules on security rights. In particular, he is concerned about strengthening the position of secured creditors, which would also benefit security-provider debtors, but at the expense of unsecured creditors, some of whom might be unable to deal with the increased credit risk by raising their interest rates. For him, developments in the field of tax law show that these concerns are not unfounded. He notes that the problem could be avoided by substantive minimum harmonisation, but is pessimistic about states being able to agree on questions of content. 218 ibid 608.

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lex rei sitae rule with the security-provider location rule would actually result in any net increase of foreseeability. That is, to begin with, if the security provider moves to another jurisdiction, problems may arise that are similar to those caused by a move of encumbered assets under the lex rei sitae rule. Rammeskow Bang-Pedersen downplays this risk, pointing out that changing one’s home country, which according to his definition requires a move of the centre of main interests, is significantly more difficult and rarer than moving individual assets across borders.219 While this is of course true, a similar risk has been recognised as problematic in the discourse on ‘proprietary’ choice of law as to assignment of claims. For example, Lilian Steffens, commenting on the option of applying the law of the assignor’s habitual residence, notes that ‘[a] problem is that the assignor may re-locate its residence from one state to another in between the two competing assignments’. Then she brings up another issue that may be even more significant for assessing the security-provider location rule, namely that ‘an assignor may have more than one establishment located in different states, which could each qualify as residence for the purpose of applying the rule’. She also refers to experience with the European Insolvency Regulation to show that the centre of main interests is not always easy to ascertain.220 A related issue is that the law applicable under the security-provider location rule might depend on whether, from the viewpoint of a forum jurisdiction, the security provider is a branch of a foreign company (foreign law applies) or a domestic subsidiary of a foreign company (domestic law applies).221 This might be confusing to the parties to a security arrangement or might at least give a sense of arbitrariness. The choice-of-law implications of the distinction between branch and subsidiary could easily be overlooked when entering into a security arrangement. This might especially be so where the assets to be encumbered are more ‘mundane’ and the parties themselves less ‘sophisticated’. The lack of intuitiveness in the security-provider location rule, as exposed by this issue, can also be understood as lack of predictability. This problem could be avoided by adopting a solution similar to that in Article 19 of the Rome I Regulation. This concerns the definition of ‘habitual residence’ for the purposes of the Regulation. The main rule is that the habitual residence for companies is the place of central administration (Article 19(1)). As an exception, though, if the contract is concluded in operations of, or performance is the responsibility of, a branch, agency or any other establishment, then ‘the place where the branch, agency or any other e stablishment 219

ibid 609–10. L Steffens, ‘The New Rule on the Assignment of Rights in Rome I: The Solution to All Our Proprietary Problems? Determination of the Conflict of Laws Rule in Respect of the Proprietary Aspects of Assignment’ (2006) 14 European Review of Private Law 543, 571–72. 221 See Rammeskow Bang-Pedersen (n 150) 611–12. In Rammeskow Bang-Pedersen’s view, this is not a significant problem for the application of the law of the intermediary person’s home country. He notes that the distinction between branch and subsidiary also plays a role in purely domestic contexts, namely concerning the question who actually owns the asset subject to a disposition. 220

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is located shall be treated as the place of habitual residence’ (Article 19(2)). However, a solution of this kind would entail additional problems. For example, two conflicting security arrangements concerning the same asset of a company could end up governed by two different substantive laws if one of the arrangements is concluded through the company’s central administration office in the home jurisdiction and the other through the company’s branch in another jurisdiction.222 This would be problematic in view of the requirements of definite and predictable choice of law. In the light of the above discussion, it remains unclear whether the securityprovider location rule could significantly increase foreseeability if introduced to replace the lex rei sitae rule as a general conflict rule on security rights over tangible movables. In sum, the problems of the lex rei sitae rule would be replaced by other problems, whose full implications are as yet unknown. Therefore, from the viewpoint of the objective of foreseeability, the risks of changing the choice-of-law regime do not seem worth taking. In addition, the security-provider location rule would probably also face responsiveness-related objections. Indeed, introduction of the security-provider location rule might require jurisdictions to surrender their ‘property law sovereignty’, that is, open up to foreign proprietary rights and property laws, more than they are willing to surrender. Here, we should take into account that the security-provider location rule would probably have to be introduced as a general ‘proprietary’ conflict rule in order to be workable in a broader choice-of-law context. Accordingly, the rule could not be limited to security rights.223 One possible model would thus be Rammeskow Bang-Pedersen’s proposal to apply the law of the intermediary person’s home country. In that light, responsiveness-related objections may be expected, at least in the following instances. First, a ‘host’ jurisdiction would have to accept that dispositions of tangible movables in its territory by a foreign actor are governed by foreign property law, for example, in terms of good faith acquisition. Second, a foreign company operating in the host jurisdiction through a branch might be able to exploit security devices available under the law of the company’s home jurisdiction. This might be unacceptable to the host jurisdiction because if the system of security rights of the company’s home jurisdiction were more liberal than that of the host jurisdiction, then in the host jurisdiction’s credit market, the foreign company might be better placed than domestic actors. Besides obvious equality concerns, the host jurisdiction might resent the circumvention of its policies, notably on priority and publicity. Third, the courts would have to apply foreign law more often as compared to the current situation with the lex rei sitae rule. Fourth, the host jurisdiction would have to accept the application of foreign

222 223

See Kieninger (n 195) 167–68. See Deschamps (n 154) 287–88.

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law even in situations where the connection to that foreign law appears particularly weak.224

ii. Improvement through the Unification of Conflict Rules Retaining the lex rei sitae rule as a general conflict rule for security rights over tangible movables does not imply that the current situation could not be improved. On the contrary, significant improvements appear to be available, especially through the unification of conflict rules. This concerns the lex rei sitae rule, which functions less uniformly than is commonly thought, as well as special conflict rules for particular types of tangible movable. Unification can be expected to improve decisional harmony and predictability of choice of law, thus advancing the objective of foreseeability.225 At the very least, unification reduces incentives to wasteful litigation where (third) parties’ expectations of the outcome of choice of law match each other. A suitable instrument for unifying conflict rules would be ‘a European regulation containing choice of law rules for proprietary rights’ as suggested by Polak.226 The aspects of the lex rei sitae rule that would benefit from unification are at least threefold. One aspect would be definition of the scope of application, with a new standard characterisation for ‘proprietary’ questions or, better, a more neutral and descriptive definition based on relational analysis. A second aspect would be treatment of conflit mobile situations. And a third aspect would be the transposition of foreign proprietary (security) rights into a domestic system of proprietary (security) rights.227 Polak, too, envisioning the content of a European proprietary choice-of-law regulation, proposes the lex rei sitae rule as the general conflict rule on the creation, transfer and enforcement of proprietary rights. In addition, for situations requiring recognition and enforcement of a foreign security right, he proposes ‘a general rule, providing for the transformation of the foreign right into the equivalent right existing under the law of the state of recognition and enforcement’. In keeping with the objective of responsiveness, one guiding principle in drafting should be that the non-recognition and non-enforcement of a foreign

224 cf Rammeskow Bang-Pedersen (n 150) 610–17. Rammeskow Bang-Pedersen discusses or at least touches on each of these points. In his view, only the situations meant in the fourth-mentioned point justify some criticism against applying the law of the intermediary person’s home country. He gives two examples of these situations. First, an Estonian tourist commits burglaries in Denmark and sells the stolen goods to a Danish buyer. As the seller’s (intermediary person’s) home country is Estonia, Estonian law governs the question of the original owner’s right to claim and recover the goods. Second, a Danish company leases a digger to a US entrepreneur to be used in Denmark. As the lessee’s (intermediary person’s) home country is the US, US law governs the question whether the lessee’s creditors can extinguish the lessor’s right as an unperfected security interest. 225 Juutilainen (n 152) 107–13. 226 See Polak (n 198) 128. 227 See generally Akkermans and Ramaekers (n 159) 128–31. Akkermans and Ramaekers recognise variation between jurisdictions in the functioning of the lex rei sitae rule in these respects, among others.

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security right can only be permitted if the right in question is inconsistent with an essential policy of the lex fori.228 As for special conflict rules, a significant improvement would be to unify the lex registrationis rule, especially in terms of its scope. This would involve creating a uniform list of (so far typically major) means of transport, where rights are governed by the law of the jurisdiction where the relevant register is kept, instead of the lex rei sitae. Uniform scope would prevent the type of problem exemplified by the case of Blue Sky One Ltd and Others v Mahan Air and Another,229 namely a lack of decisional harmony and predictability, exacerbated by renvoi.230 Unification would also provide a chance to consider whether the lex registrationis rule should be extended to ‘more mundane’ assets than has so far been the case.231 More generally, if better-functioning alternatives to the lex rei sitae rule are discovered, they should be introduced as uniform conflict rules so as to preserve decisional harmony.

iii. The Grace Period Sticking with the lex rei sitae rule implies that conflit mobile situations continue to occur. While the uniform enactment of the lex rei sitae rule would add a degree of predictability, it can never solve the problems caused by the rule’s unstable connecting factor. In other words, the possibility that the encumbered asset might be moved to another jurisdiction would still entail the risk that the security right could prove wholly or partly unenforceable, in the worst case meaning that the right is lost. An often-suggested partial solution to these problems is a grace period, a period of some (usually three to four) months after the encumbered asset has been moved to a new jurisdiction that is unwilling to recognise or enforce the (foreign) security right. During that period, the security right would retain the validity and effects it had under the law of the initial location, thus giving the parties to the security arrangement an opportunity to (try to) comply with the effectiveness requirements under the law of the new location.232 Drobnig, who supports this solution, refers 228

Polak (n 198) 128. Blue Sky One Ltd and Others v Mahan Air and Another [2010] EWHC 631 (Comm), discussed in ch 1, section IV.B. 230 To be sure, the Cape Town Convention, within its scope of application, offers more advanced solutions. See S Kozuka, ‘The Cape Town Convention and Its Implementation in Domestic Law: Between Tradition and Innovation’ in Kozuka (n 148). 231 Polak (n 198) 126–27. Polak’s main example is automobiles, for which the required legal framework could be created by adapting national automobile registers to enable the registration of proprietary rights. See Kieninger (n 201) 446–47. Kieninger calls for the introduction of a common European conflict rule ‘for proprietary rights in all registered vehicles’, resorting to the state of registration as a connecting factor. In her view, this would be a ‘first small yet efficient step’. cf U Drobnig, ‘German Conflict Rules on Security Interests in Movable Assets’ in M Bridge and R Stevens (eds), Cross-border Security and Insolvency (Oxford, Oxford University Press, 2004) 150. 232 Von Bar and Drobnig (n 90) 469. See UNCITRAL Legislative Guide on Secured Transactions, Recommendation 45, which proposes a grace period of ‘a short period of time to be specified’. 229

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to Article 102(2) of the Swiss Federal Act on Private International Law (1987), which provides for a grace period of three months, but only for retention of title. In his view, a European provision inspired by the Swiss rule should cover all security rights, as indeed is the case in DCFR IX.—3:108.233 The grace-period solution has been criticised for being discriminatory towards holders of a domestic security right and traders in the new jurisdiction.234 But in a broader conflit mobile context, this analysis would be unsound because foreign secured creditors find themselves in an unfavourable position to begin with. We should rather regard a grace period as operating to allocate disadvantages between domestic and foreign secured creditors. Indeed, since conflit mobile situations involve costs caused by uncertainty, the grace-period solution presents itself as an instance of dividing unforeseeability costs. Accordingly, the objective of dividing unforeseeability costs, grounded as it is on a transnational conception of justice,235 supports this solution. At the same time, the grace period solution may provoke responsiveness-related objections, on the basis that the solution enables the circumvention of the new jurisdiction’s policy choices.236 These objections are largely justified. Therefore, the focus of the solution should not be on situations that can be perceived as conscious circumvention, but on situations of ‘legal ambush’ caused by an unexpected move of the encumbered asset.237 Now, the objections could be addressed in three ways. First, the length of the grace period could be adjusted to fit the purpose. That is, if the period is made shorter than is usual for credit periods (and security arrangements), conscious circumvention is generally not possible. Second, where the secured creditor’s purpose has plainly always been to move the encumbered asset to the new jurisdiction, it would be possible to declare clear import situations ineligible for a grace period. And, third, the effects of foreign security rights during a grace period could be limited to the effects of the closest domestic equivalent. These three approaches are not necessarily mutual alternatives, but could perhaps be applied simultaneously.238 Then again, we might ask whether the grace-period solution actually helps foreign secured creditors. For example, Kreuzer criticises the solution for its disadvantage that the ‘secured creditor has to examine, whenever encumbered assets

233 U Drobnig, ‘A Plea for European Conflict Rules on Proprietary Security’ in MJ Bonell, M-L Holle and P Arnt Nielsen (eds), Liber Amicorum Ole Lando (Copenhagen, DJØF Publishing, 2012) 102. cf Kreuzer (n 108) 311–12. Kreuzer anticipates reluctance among jurisdictions to spontaneously introduce a grace period as it ‘may not be in the interest of domestic business circles, especially those in States which are strongly committed to publicity of security rights’. As regards the Swiss rule, he notes that the government’s draft also covered fiduciary transfers of title, but the parliament narrowed the scope down to mere retentions of title. 234 Snijders (n 111) 156–57, 159. 235 Discussed in ch 2, section V. 236 Snijders (n 111) 159. 237 See PR Wood, Comparative Law of Security Interests and Title Finance, Law and Practice of International Finance 2, 2nd edn (London, Sweet & Maxwell, 2007) 143. 238 See von Bar and Drobnig (n 90) 469. According to Drobnig, due to the disadvantages caused to traders in the new jurisdiction, ‘the grace period must be limited in time and perhaps even in its effects’.

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cross national borders, whether the new lex situs requires a “re-perfection” and if so, what conditions need to be fulfilled’.239 In turn, Torben Svenné Schmidt remarks that the solution does not help the holder of a security right who is unaware that the asset has been moved to another jurisdiction.240 Both points are correct, but again, the fact that a solution is not perfect in all respects should not make it entirely useless. Indeed, in some security arrangements, the secured creditor may regularly check the location (and condition) of the encumbered asset, or have ways of finding out if something alarming occurs, such as an unauthorised move of the encumbered asset. And after a move of the encumbered asset, checking the effectiveness requirements under the law of the new location may be a relatively slight inconvenience compared to losing the security right altogether.241 In these kinds of situation, at least, the grace period solution certainly helps.242

E. Conflicts Treatment for Security Rights over Receivables Europe is currently lacking a uniform conflict rule for third-party relations in the assignment of claims, including security rights over receivables.243 We should recall that the chance to enact a uniform conflict rule as part of the Rome I Regulation was missed because no consensus was reached on the most suitable connecting factor. These negotiations were essentially a contest between three conflict rule options, namely the law governing the contract of assignment, the law of the assignor’s habitual residence and the law governing the assigned claim.244 An option ruled out at an early stage was the law governing the contract of assignment, which was proposed and supported only by the Netherlands.245

239

Kreuzer (n 108) 311. Svenné Schmidt, International formueret, 2nd edn (Copenhagen, Forlaget Thomson, 2000) 323 fn 31. 241 It may also be difficult or impossible for the secured creditor to ‘re-perfect’ if the security- provider debtor is uncooperative. However, this would not always be the case, and the secured creditor may have credit relation-related ways to pressure cooperation. 242 See Rammeskow Bang-Pedersen (n 150) 523–24. 243 Security rights over receivables are generally thought to be covered by conflict rules on the assignment of claims. Accordingly, the concept of assignment in Art 14(3) of the Rome I R egulation ‘includes outright transfers of claims, transfers of claims by way of security and pledges or other security rights over claims’. 244 Van der Grinten (n 191) 154–61; TC Hartley, ‘Choice of Law Regarding the Voluntary Assignment of Contractual Obligations under the Rome I Regulation’ (2011) 60 ICLQ 29, 51. On the probable reasons why a fourth option, the law of the assigned debtor’s habitual residence, was not even considered, see Garcimartín Alférez (n 155) 245–46. 245 Van der Grinten (n 191) 156. The Rome I Regulation negotiator on behalf of the Netherlands, Van der Grinten, writes: ‘In fact, the Dutch plea for a third-party effect rule based on party autonomy was received with considerable hostility, and was not supported by any other Member State. It was quite clear that the European Union was not ready for any such rule. The UK delegates and legal practitioners regarded the Dutch solution to be outrageous and quite wrong.’ The law of the assignor’s habitual residence was the Commission’s initial proposal, while the law applicable to the assigned claim was proposed by the UK. 240 T

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The analysis in this book, too, suggests rejecting the law governing the contract of assignment. The matter was discussed in section III.C.ii, which concerns party autonomy-based solutions more generally. The reasons for rejection relate to the objectives of foreseeability and responsiveness. Of particular importance is the foreseeability-related reason that unlimited party autonomy, of which the law applicable to the contract of assignment is an instance, cannot provide predictable choice of law. If this analysis is accepted, we can narrow down the conflict rule options to two: the law of the assignor’s habitual residence (hereinafter the law of the assignor) and the law governing the assigned claim (hereinafter the law of the claim).246 However, it seems evident that our main methodological tool in this book, analysis in the light of the objectives developed in chapter two, cannot determine which of the two remaining options should be chosen. Indeed, the tool is too blunt to discriminate between the advantages and drawbacks of these options. The objective of foreseeability appears unhelpful because both options draw support from it, only with different emphases. In the law of the assignor, attention focuses on the assignor’s habitual residence as an ‘information centre’ for third parties on transfers or encumbrances of claims. Additionally, the law of the assignor provides a single applicable law for third-party relations in assignments of future claims and bulk assignments of claims. In turn, the law of the claim is celebrated for its ‘unique and immutable’ connecting factor. This means that the applicable law cannot change even if the assignor changes habitual residence, or if the assignor has assigned the same claim to different assignees, or if subsequent assignments of the same claim by different assignors have occurred (that is, where the assignee becomes the assignor). What is more, most arguments in this debate seem to have counter-arguments. For example, the ‘information-centre’ argument can be downplayed by pointing out that such a centre helps only if the jurisdiction of the assignor’s habitual residence has introduced an objective publicity system, basically a public register. Similarly, the merits of the ‘unique and immutable’ connecting factor can be partly contested on the basis that the law governing the assigned claim may sometimes be difficult to identify (especially if the contract out of which the claim arises contains no choice-of-law clause) and that the connecting factor may not deal effectively with future claims and pools of claims (bulk assignments).247

246 See Hartley (n 244) 51. Hartley also recognises the law of the assignor and the law of the claim as the ‘two main contenders’. cf Commission, ‘Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person’ COM(2016) 626 final, 9–10. The Commission lists one party autonomy-based solution among ‘possible approaches’. However, party choice is limited ‘to either the law of the country in which the assignor has his habitual residence or the law governing the assigned or subrogated claim’. 247 Garcimartín Alférez (n 155) 239–40, 244–45.

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Further, it is difficult to find responsiveness-related reasons to prefer one option over the other. As suggested in chapter two, section IV.C.iii, both may play a role in beneficial competition between jurisdictions by helping to internalise the costs and benefits of substantive law in the enacting or otherwise law-producing jurisdiction (although the law of the assignor seems a clearer case in this respect). At least in theory, though, jurisdictions that require assignments of claims to be recorded in a public register might have a responsiveness-related preference for the law of the assignor, because not having all assignments by residents registered could be regarded as a weakening of publicity policy in those jurisdictions. In sum, the criteria for choosing between the two options must go beyond the mere foreseeability and responsiveness analysis.248 Additional criteria should at least take into account the expected costs of the options to different parties. For example, the law of the assignor has been criticised for incurring extra costs, because the assignee may have to take into account three different applicable laws: one for the relation to the assignor, one for the relation to the assigned debtor and one for the relation to third parties.249 In contrast, the law of the claim implies that at least the two last-mentioned applicable laws coincide. Matters are further complicated in that different branches of the financial services industry favour different options.250 It is also possible that the technique of a main rule and exceptions has to be used. However, drafting of exceptions has so far proved difficult, leading to excessive complexity and risks of over- or under-inclusiveness.251 In any case, the pursuit of a ‘perfect’ conflict rule should not be allowed to prevent adoption of a workable option. As Kieninger sums up the message of many commentators, ‘nearly every clear cut rule whatever connecting factor it chooses is better than the present state of affairs’.252 In fact, two developments justify optimism that a common European conflict rule will eventually be introduced: first, the topic has been the focus of continuous research, so that a lack of reasoned views should not be an issue;253 and, second, the search for a common rule may 248 In other words, the value of this analysis here is limited to supporting the prima facie suitability of both options. 249 Garcimartín Alférez (n 155) 243. See Steffens (n 220) 570–71. 250 Hartley (n 244) 51–52. Hartley notes that the factoring industry prefers the law of the assignor, while the securitisation industry, at least in the UK, prefers the law of the claim. On the reasons for preferences, see J Perkins, ‘A Question of Priorities: Choice of Law and Proprietary Aspects of the Assignment of Debts’ (2008) 2 Law and Financial Markets Review 238, 239–42. 251 Garcimartín Alférez (n 155) 246–47. cf COM(2016) 626 final, 9–12. The Commission outlines three ‘possible approaches’, all of which include a general rule (the law of the contract between assignor and assignee, the law of the assignor’s habitual residence, or the law applicable to the assigned claim) modified and complemented with a fallback or specific rule. In the Commission’s view, a combination of connecting factors may be appropriate to ‘accommodate the interests of various stakeholders’, but sector-specific rules should be avoided as much as possible because they ‘carry the risk of inherent complexity and characterisation problems’. cf also HLE Verhagen and S van Dongen, ‘Cross-border Assignments under Rome I’ (2010) 6 Journal of Private International Law 1, 19–20. 252 Kieninger (n 201) 438. 253 For a recent study, see H Labonté, Forderungsabtretung International: Art. 14 Rom I-Verordnung und seine Reform, Studien zum ausländischen und internationalen Privatrecht 346 (Tübingen, Mohr Siebeck, 2016). In Labonté’s proposal for a new Art 14 of the Rome I Regulation (at 263-64), all thirdparty relations would be covered by the law of the claim.

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have gained new momentum and new political opportunities in the context of the Commission’s Capital Markets Union programme.254

IV. The Local Conflicts-Approach A. Residual Nature Means chosen in different jurisdictions within the local conflicts-approach should be of a residual nature. In other words, they should only focus on matters not dealt with by the centralised conflicts-approach. Even within that focus, they should avoid adopting means that deviate from common European solutions spontaneously adhered to by a substantial number of jurisdictions, unless this is achievable without impeding decisional harmony. As Polak aptly warns, ‘the more revolutionary and idiosyncratic a choice of law system is made, the less it has to offer in terms of legal certainty and predictability’.255 In that light, the local conflictsapproach serves the objective of foreseeability by obeying its residual nature and striving towards decisional harmony within the limits of that nature. By way of a rough case study, sections IV.B and IV.C below outline what Finland could do under the local conflicts-approach to promote the compatibility of its system of security rights with those of other EU Member States.

B. Security Rights over Tangible Movables i. The Treatment of Conflit Mobile Situations In conflicts treatment of security rights over tangible movables, the starting point in terms of third-party relations should be sticking with the lex rei sitae rule.256 However, as long as the treatment of conflit mobile situations is not unified by the EU, and without a spontaneously developed common European solution, Finland is free to develop its means as it sees fit. Put more generally, insofar as it does not exist in the first place, decisional harmony cannot be impeded by measures taken by an individual jurisdiction. Finnish scholarship in this area is scarce and largely outdated. Indeed, the only in-depth study dealing with it so far is a doctoral thesis by Kaarina Buure-Hägglund published in 1978.

254 In this connection, the Commission organised a public consultation on ‘conflict of laws rules for third party effects of transactions in securities and claims’ between 7 April and 30 June 2017. 255 Polak (n 198) 125. 256 Discussed in section III.D.i above.

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Buure-Hägglund starts with the usual idea that the mere physical move of an encumbered asset to a new jurisdiction should not affect a security right. Therefore, the law of the new jurisdiction can become applicable only if something new and ‘legally relevant’ occurs in the new jurisdiction while the encumbered asset is located there. The question Buure-Hägglund phrases is: what events in the new jurisdiction should be regarded as relevant enough to justify a change of applicable law, from the law of the old jurisdiction to the law of the new jurisdiction? She notes that one such instance is a new disposition in the new jurisdiction with respect to the encumbered asset, such as transfer of ownership or creation of a right of pledge. Actions taken by creditors in the new jurisdiction may amount to further instances. Strikingly, though, Buure-Hägglund differentiates between bankruptcy (collective liquidation proceedings) and distraint (individual enforcement proceedings) in this respect.257 Her argument is that the commencement of the security-provider debtor’s bankruptcy should trigger the application of the law of the new jurisdiction, whereas distraint against the encumbered asset should not. She justifies this differentiation, for example, by the ‘strong public law nature’ of bankruptcy and the expedience of dealing with all creditor claims under the rules of a single jurisdiction. According to her, bankruptcy ‘may also cause changes in substantive legal relations’, whereas distraint is ‘a mere enforcement measure’ and should therefore not affect formulation of the conflict rule.258 Moreover, she explicitly rejects using subjective choice-of-law criteria, such as the intention or awareness of the secured creditor as to the future location of the encumbered asset. In her view, employing such criteria would weaken the basic idea of the lex rei sitae rule, which is based on an objective connecting factor.259 In developing conflict rules, Buure-Hägglund’s aim was to strike a balance between the interests of all parties involved.260 We might even suggest that her proposal was motivated by something to the effect of the objective of dividing unforeseeability costs, as developed in this book. However, the differentiation of choice of law between bankruptcy and distraint does not seem to be an appropriate means to these ends. Indeed, we can raise several critical points challenging this solution. First, the differences in nature between bankruptcy and distraint hardly justify differentiation as to the choice of law.261 To elaborate, in terms of substantive law, both involve applying the debtor’s assets to satisfy creditor claims, and in both a secured creditor’s position may be exposed to and threatened by claims from third parties.

257 K Buure-Hägglund, Irtaimiin esineihin kohdistuvat reaalivakuudet kansainvälisen yksityis oikeuden kannalta, Lakimies-sarja A 127 (Vammala, Suomalainen Lakimiesyhdistys, 1978) 123–31. 258 ibid 141–46, 167–70. 259 ibid 199–200. Similarly, see HT Klami and E Kuisma, Suomen kansainvälinen yksityisoikeus, 3rd revised edn (Helsinki, Kauppakaari, 2000) 115. 260 Buure-Hägglund (n 257) 99, 119. 261 T Esko, ‘Esinevakuusoikeudet’ in BG Eriksson et al (eds), Encyclopædia Iuridica Fennica VI: Kansainväliset suhteet (Helsinki, Suomalainen Lakimiesyhdistys, 1998) 97–98.

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And surely both are partly of a ‘public law nature’ and typically result in ‘changes in substantive legal relations’. Second, the differentiation of choice of law between bankruptcy and distraint could lead to situations where a third-party creditor can affect, or indeed decide, the enforceability or unenforceability of a foreign security right by choice of the type of enforcement, that is, by choosing whether to apply for bankruptcy or distraint. Third-party creditors should probably not be afforded this kind of power. And, third, a foreign seller aiming at the Finnish market could not know which law governs potential third-party conflicts in Finland because this would depend on the type of enforcement. At least in theory, then, even fulfilling the Finnish effectiveness requirements might not guarantee the effectiveness of retention of title or other security right over the sales objects if the security right nevertheless fails to fulfil the relevant foreign effectiveness requirements.262 The real paradox in Buure-Hägglund’s argumentation is that she insists on sticking to objective choice-of-law criteria as the basic idea of the lex rei sitae rule, even in situations where this conflict rule is known to fail to provide predictable choice of law—and where that failure is precisely attributable to the objective connecting factor of the rule. Such resistance to subjective choice-of-law criteria appears to be ill-founded. On the contrary, subjective choice-of-law criteria should be given a chance in Finland, especially since their position is well established in the more modern doctrines of other Nordic countries.263 These doctrines distinguish between moves of encumbered assets that the secured creditor intended or could expect to occur, and moves that were unintended and unexpected by the secured creditor. In the case of the former, the law of the new jurisdiction (‘import country law’) governs potential third-party conflicts in that jurisdiction. In the case of the latter, the secured creditor may be protected even if the security right in question fails to fulfil the effectiveness requirements of the new jurisdiction.264 This solution would promote all three objectives developed in this book. Foreseeability would be promoted because foreign secured creditors would know for certain in advance which law governs potential third-party conflicts if they intentionally move the encumbered asset or allow it to be moved to Finland. In situations involving an intentional or permitted move, it would hardly be reasonable

262 T Juutilainen, Omistuksenpidätys ja esineoikeudellinen lainvalinta (Helsinki, University of elsinki Conflict Management Institute, 2005) 76–77. See Buure-Hägglund (n 257) 203. According to H Buure-Hägglund, the law of the new jurisdiction (the subsequent location of the encumbered asset) would not be applicable ‘at all’ in relations between a secured creditor and a creditor seeking distraint. 263 Discussed in ch 2, sections V.B.iii, V.C.i and V.C.ii. 264 T Juutilainen, ‘Security Rights and the Lack of a Priority Debate: How to Proceed with Choice of Law and Harmonization?’ in T Wilhelmsson, E Paunio and A Pohjolainen (eds), Private Law and the Many Cultures of Europe, Private Law in European Context Series 10 (Alphen aan den Rijn, Kluwer Law International, 2007) 360. See T Mikkola, Trust: Oikeusvertaileva tutkimus, Forum Iuris (Helsinki, Hel singin yliopiston oikeustieteellinen tiedekunta, 2003) 180–97. Mikkola discusses ways in which Finnish law could deal with different kinds of trust, an institution unknown to the domestic legal system. In terms of the judicial creativity and flexibility required, this exercise may resemble the development of means to protect foreign security rights in Finland. However, the case of security rights is easier in that close domestic equivalents often exist and are easy to identify.

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for foreign secured creditors to expect a better position than that accorded to domestic secured creditors. In turn, responsiveness would be promoted in that intentional circumvention or avoidance of domestic policies on priority and publicity would be prevented.265 Finally, the additional protection provided to ‘victims’ of an unintentional and unexpected move of the encumbered asset (typically away from the safety of the home jurisdiction) would introduce a way to divide unforeseeability costs.266

ii. The Scope of the Lex Registrationis Rule Under Finnish law, the scope of the lex registrationis rule is currently unclear. In other words, it is unknown exactly what means of transport and possibly other assets are covered by the rule. Rights with respect to the assets covered are supposed to be governed by the law of the registration state rather than the location of the asset.267 A statutory provision defining the scope would increase the predictability of choice of law, thus promoting foreseeability. Where the conflict rule for a certain type of asset varies in Europe between the lex registrationis and the lex rei sitae, Finland should prefer the lex registrationis rule. Use of this rule would probably prevent cross-border problems because in most cases applying Finnish substantive law to a right with respect to an asset registered elsewhere could be expected to ambush the holder of that right.

C. Security Rights over Receivables It is difficult to estimate the lead time for making a common European conflict rule for third-party relations in the assignment of claims (including security rights over receivables), even considering renewed efforts in the context of the Capital Markets Union programme. And, of course, a successful result cannot be guaranteed. While the need for a common European rule is widely recognised, different commentators, jurisdictions and even branches of the financial services industry appear to hold rather rigid, and indeed differing, views on which connecting factor option should be chosen.268 In Finland, the situation is worse than in Europe

265

See Verstijlen (n 26) 30. cf R Koulu, Kansainvälinen varallisuusoikeus pääpiirteittäin (Helsinki, WSOY, 2005) 213. Koulu correctly notes that the solution involves practical difficulties in that the secured creditor’s awareness of plans to move the encumbered asset may be difficult to prove. One way around this problem would be to start with a presumption of an intention to move the encumbered asset or an expectation for a move to occur. The presumption would be rebuttable, conditional on the secured creditor furnishing proof of absence of any such intention or expectation. The threshold for rebuttal should not be set too high. In particular, where present, an intention to move is usually clearly visible in most cases. 267 See ibid 198–200; T Esko, ‘Esinestatuutti’ in Eriksson et al (n 261) 95; Buure-Hägglund (n 257) 254–70. 268 Discussed in sections III.C.ii and III.E above. 266

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generally, namely in that the relevant domestic conflict rule is currently unknown, as no binding legal source deals with this point.269 In these circumstances, enacting a conflict rule in national statutory law would increase the predictability of choice of law, thus promoting the objective of foreseeability. As our discussion in section III.E above suggests, the two most likely options (or bases) for a common European conflict rule are the law of the assignor’s habitual residence and the law governing the assigned claim, both of which are also represented in the national laws of other European jurisdictions. Therefore, basing the Finnish conflict rule on either of these options would be in accordance with striving towards decisional harmony.270

V. The Local Substantive Approach The local substantive approach in the case of Finland would first require a systematic review of the Finnish law on security rights. The aim of this review would be to find deviations from spontaneously developed common European solutions, and in particular features that could be aligned with these solutions. In other words, the idea would be to look for national peculiarities and idiosyncrasies that could be dispensed with so as to advance spontaneous harmonisation. Like all harmonisation in principle, spontaneous harmonisation reduces the possibility of cross-border problems, thus promoting foreseeability. Importantly, this is not inconsistent with the objective of responsiveness because spontaneous harmonisation would not have to be advanced ‘at all costs’, but rather would retain those features that embody policy choices regarded locally as essential. Moreover, the conceivable points of spontaneous harmonisation might well often coincide with reform needs. Systematically conducted, such a review would require a study of its own, or perhaps several. For the purposes of this book, it suffices to demonstrate that opportunities for spontaneous harmonisation exist. One example is readily available, namely on simple retention of title. This is the provision in chapter 5, section 7(2) of the Finnish Bankruptcy Act (120/2004), according to which a seller’s retention 269 See J Tepora, Rahoitusmuodot ja vakuudet (Helsinki, Lakimiesliiton Kustannus, 2013) 323–24. One of the few scholarly opinions on the point is found in J Tepora and T Takki, Factoring (Helsinki, Lakimiesliiton Kustannus, 1994) 182–84. In a factoring context, Tepora and Takki carefully propose applying the law of the assignor’s (seller’s) country. See also COM(2016) 626 final, 7. The Commission notes: ‘In other Member States, for example Finland, there is no clear rule.’ 270 cf J Lookofsky and K Hertz, International privatret på formuerettens område, 5th edn (Copenhagen, Jurist- og Økonomforbundets Forlag, 2015) 143–44. According to Lookofsky and Hertz, most Danish private international law scholarship considers that the relevant connecting f actor should be the assigned debtor’s home jurisdiction. cf also M Bogdan, Private International Law in S weden, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2015) 77. Bogdan, too, mentions this connecting factor as an option. Finnish law most probably could not follow this strand of Nordic private international law theory.

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of title (or equivalent) clause is ineffective against a buyer’s other creditors if the buyer is entitled to transfer the assets to a third party notwithstanding the retention of title, that is, say, to resell the sales objects before paying the purchase price. The same applies if the buyer is entitled to attach these assets to other assets, or otherwise dispose of the assets as if an owner. Importantly, mere entitlement to transfer, attach or dispose suffices to render the clause ineffective, irrespective of whether the entitlement has been exercised. This and other (more or less) similar Nordic provisions have been noted in comparative legal literature.271 For example, Kieninger writes on the conditions for European harmonisation as to simple retention of title as follows: Finally, the Nordic countries would have to accept the validity and enforceability of simple retention of title in goods destined to be resold or used in a manufacturing process without requiring the contract to be framed as a commission agreement or credit consignment.272

The rule of (what is now) chapter 5, section 7(2) of the Finnish Bankruptcy Act is known to have caused cross-border problems, and indeed ambushed foreign retention-of-title sellers, who were probably unaware of the rule.273 The (domestic) justifications for this kind of rule are under debate in the Nordic countries and are at least partly outdated.274 In other words, the rules and their justifications do not necessarily reflect essential policy choices in today’s perspective, as will be discussed next. According to one justification, a retention of title clause should not be effective against third parties in these situations because the seller has given up owner’s rights to the extent that retention of ownership cannot have been seriously intended. This justification is certainly outdated because the prevailing thinking does not derive the effectiveness of retention of title from the seller’s position as owner; indeed, a seller with retention of title is generally not regarded as the owner of the sales object.275 A more current justification has it that retention of title should not be effective in these situations because it fails to provide the seller with a reliable security right and is therefore unlikely to incentivise the seller to extend more credit or offer improved credit terms, notably lower interest rates.276

271

Some of these provisions were briefly discussed in ch 2, section IV.B.ii.b. Kieninger (n 85) 664. See Finnish Supreme Court decision KKO 1971 II 102. See also Juutilainen (n 262) 45–46. 274 T Håstad, ‘General Aspects of Transfer and Creation of Property Rights, Including Security Rights’ in Drobnig, Snijders and Zippro (n 19) 41–42. 275 J Tuomisto, ‘Irtaimen kauppaan liittyvä omistuksenpidätysehto ja uusi konkurssilaki’ in T Lohi (ed), Kaavoitus, rakentaminen, varallisuus: Juhlajulkaisu Vesa Majamaa 1945–28/12–2005 (Helsinki, Edita, 2005) 509. See Håstad (n 274) 41. According to Håstad, this justification ‘is very formal and ancient, and relates to the time when even in Scandinavia it was assumed that “ownership” must be reserved’. 276 Tuomisto (n 275) 509. See Håstad (n 274) 41–42. Håstad also notes the distributional effects of this kind of rule, observing that it favours banks, which often have an enterprise charge or equivalent security covering goods purchased. 272 273

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As a result, no notable stimulation of economic activity is expected to occur. Now, this assumption sounds far too categorical. The value of retention of title to a seller depends, at least, on how long the buyer is expected to hold the sales object before disposing of it, and on whether the security can be extended to cover surrogate assets. Moreover, even without any of the entitlements meant in chapter 5, section 7(2) of the Finnish Bankruptcy Act, a retention of title clause cannot be regarded as a fully reliable security arrangement. Indeed, the buyer may, say, destroy or dispose of the object regardless of any agreement prohibiting such actions. In fact, we might argue that no non-possessory security right is entirely reliable, while any threshold of ‘reliable enough’ is bound to be arbitrary. Another opportunity for spontaneous harmonisation relates to the option of becoming a party to the Cape Town Convention and its Aircraft Protocol,277 if it can be assumed that most other EU Member States eventually become parties.278 While enabling an effective way (depending on the number of other jurisdictions as parties) to prevent cross-border problems, becoming a party would also provide a chance for, and indeed require, a thorough reform of the Finnish law on security rights over aircraft.279 In particular, the Finnish institution of aircraft mortgage is generally considered to be outdated, as are those of vessel and vehicle mortgages. Dissatisfaction partly relates to the so-called ‘system of two promissory notes’, which has developed through the interplay between the rather old statutory framework, financing practice and registration authorities. Somewhat oddly, the system involves using bearer bonds as mortgage instruments.280 Overall, the rigidities and uncertainties of the mortgage system raise questions as to its suitability for contemporary finance. To give an example concerning aircraft finance, one shortcoming of the system is that rights in valuable parts of aircraft, such as engines, cannot be separately registered.281 This is problematic in the light of industry practice of pooling aircraft engines and spare parts.282 The related question of what belongs to an aircraft as a component or accessory, thus falling within the scope of an aircraft mortgage, would need a legislative solution to improve legal certainty.283 277 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, Signed at Cape Town on 16 November 2001. 278 See B Crans, ‘The Implications of the EU Accession to the Cape Town Convention’ (2010) 35 Air and Space Law 1, 5–6. Crans notes that ‘[r]atification or accession by the Member States is required in order for the Cape Town Convention to have its desired effect’. See the Aircraft Protocol status table at www.unidroit.org/status-2001capetown-aircraft. 279 H Wassgren, ‘Rights of Financiers in Aircraft: A Finnish Perspective on the 2001 Cape Town Instruments’ (2004) 9 Uniform Law Review 557, 565–71. 280 J Tepora, J Kaisto and E Hakkola, Esinevakuudet, 2nd edn (Helsinki, Kauppakamari, 2016) 176–77; E Havansi, Esinevakuusoikeudet: Panttioikeus. Pidätysoikeus. Omistuksenpidätys. Vakuusluovutus, 2nd revised edn (Helsinki, Lakimiesliiton Kustannus, 1992) 278–86. See Juutilainen (n 148) 207–15. 281 Tepora, Kaisto and Hakkola (n 280) 179. 282 Wassgren (n 279) 563. 283 Tepora (n 269) 227–32.

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VI. Conclusion This chapter applied the three objectives developed in chapter two—that is, foreseeability, responsiveness and the division of unforeseeability costs—to guide choices of concrete means to promote compatibility between systems of security rights. This was undertaken separately within each of the four main types of means—that is, the centralised substantive approach, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach. Assessment of means in the light of the three objectives resulted in the following proposals and observations within the centralised substantive approach. ‘Forced’ comprehensive substantive unification and harmonisation should be rejected, while comprehensive substantive unification or harmonisation should be attempted, if at all, by way of a ‘strongly recommended’ model law, or by enhanced cooperation among Member States that are willing to participate. Partial and piecemeal means offer ways forward, while their disadvantages seem to have been exaggerated in legal literature. However, optional and supplementary means, including the ‘European Security Right’, are in the final analysis unpromising. This is due to difficulties in reconciling supranational priority and publicity regimes with their national counterparts, as required by the envisioned coexistence of the regimes. Within the centralised conflicts-approach, the following proposals and observations emerged. As for security rights over tangible movables, the development of choice of law should continue on the basis of the lex rei sitae rule because the most promising competing conflict rule, namely the security-provider location rule, cannot guarantee significant net improvements with sufficient certainty. Then again, the supposedly spontaneously uniform lex rei sitae rule does not actually function entirely uniformly. This should be corrected by European-level legislation. Where possible in keeping with the aim of decisional harmony, the lex rei sitae rule should be eroded by better-functioning special conflict rules, in particular the lex registrationis rule. The grace-period solution, as introduced by European-level legislation, appears to be a suitable way to mitigate problems of conflit mobile. In terms of third-party relations in assignment of claims (including security rights over receivables), the search for a suitable common European conflict rule should continue, as is currently the case in the context of the Capital Markets Union programme. In this chapter, two conflict rule options were found to be prima facie suitable. These are the law of the assignor’s habitual residence and the law governing the assigned claim. The following proposals and observations concern the local conflicts-approach, with Finnish law as a case study. The treatment of conflit mobile situations should be reformed along the lines of Nordic doctrines enabling the use of subjective choice-of-law factors. The scope of the domestic lex registrationis rule should be clearly defined. And a domestic conflict rule for the assignment of claims should be enacted in the meantime, before a common European conflict rule is introduced.

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This domestic rule should be based on either of the two main options for the European rule. Finally, the following proposals and observations concern the local substantive approach, again with Finnish law as a case study. The Finnish law on security rights should be systematically reviewed, searching for instances where spontaneous harmonisation could be advanced by removing unnecessary national peculiarities and idiosyncrasies, that is, features not embodying conscious and justifiable policy choices. Such instances are likely to coincide with other reform needs. Potential instances were recognised regarding simple retention of title and the law on security rights over aircraft and other means of transport.

Conclusions This book proposes a way to promote compatibility between systems of security rights in Europe. The focus is on security rights over tangible movables and receivables. Compatibility is understood as the absence of cross-border problems, most notably uncertainty of enforceability and the unexpected loss of security rights, or the availability of workable solutions to these problems. The proposed way consists of practical recommendations as to what concrete means legislators at the EU and Member State levels should adopt, and what they should abstain from adopting. However, the main part of the study develops a theoretical foundation on the basis of which the proposed way can be regarded as optimal for the current stage of European private law integration. We began building this theoretical framework in chapter one, which also functions as a literature review. Going beyond a mere literature review, though, chapter one proposed reconstructing the European discourse on security rights as a dynamic between four main groups of concrete means through which compatibility can be promoted. Indeed, these means can be broadly categorised as a centralised substantive approach and three ‘gentler approaches’, separately called the centralised conflicts-approach, the local conflicts-approach and the local substantive approach. Means within the centralised approaches can be introduced at the EU level, while means within the local approaches can be introduced at the Member State level. The substantive approaches seek to eliminate diversity by unifying or harmonising substantive law, whereas the conflicts approaches mainly rely on private international law. In search of the optimal way to promote compatibility, chapter one went on to examine the feasibility of an integrated approach. This would combine the advantages but avoid the disadvantages of all four approaches. The integrated approach would thus involve selectively introducing means belonging to each of the four approaches. We found this concept prima facie feasible for three reasons. First, both the centralised substantive approach and the gentler approaches promise significant improvements to the current situation, which is fraught with cross-border problems. Second, through their interrelations and interaction, the four approaches together may become something more than their sum. Optimally, they constitute a framework for the desirable development of substantive law. This prospect rests on notions of local innovation, experimental learning and competition between jurisdictions. And, third, it is unlikely that EU internal market law would pose obstacles to the integrated approach, even though the recognition and enforcement of foreign security rights could not be guaranteed in all situations.

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However, the gap between the mere prima facie feasibility and the actual, content-determined feasibility of the integrated approach can only be bridged by way of a detailed division of labour between the four approaches. This in turn requires choices between the concrete means within each of the four approaches. We should here recall our central hypothesis, namely that the optimal division of labour between the approaches can be determined through an objective-based assessment. This requires that the objectives capture what can be regarded as the essence of desirable development towards greater compatibility between systems of security rights. Having discussed the epistemic issues that this kind of exercise involves, chapter two identified three objectives fit for the purpose, namely foreseeability, responsiveness and the division of unforeseeability costs. We elaborated the content and importance of each objective. In addition, we established that the objectives draw ‘institutional support’, meaning that they resonate with the efforts and ideas of institutions in a position to shape future law. The objective of foreseeability requires that the parties to a security arrangement be able to know in advance the legal treatment that the security right they create will receive, even in a cross-border context. Accordingly, this objective addresses the credit markets’ need for certainty and predictability. Its importance stems from the fact that both the microeconomic and macroeconomic functions of security rights depend on certainty and predictability, as indeed do the most convincing justifications for the priority of secured over unsecured claims on insolvency. In turn, responsiveness means sensitivity to reasons and rationales to resist changes in the law as well as to impulses that call for changes in the law. As an objective, responsiveness emphasises law’s adaptability to different and changing economic and social circumstances and value choices. Indeed, its importance partly rests on the observation that a single model of a system of security rights may not fit all jurisdictions because those circumstances and choices vary between jurisdictions. Additionally, the objective of responsiveness stresses the role of local innovation, experimental learning and competition between jurisdictions in the evolution of law. Foreseeability and responsiveness are both indispensable for desirable development towards greater compatibility between systems of security rights. At the same time, however, they are largely contradictory objectives. Although we may regard foreseeability as the leading objective, foreseeability nevertheless has to leave room for responsiveness. What results from this preservation of responsiveness is a foreseeability deficit, which is prone to incur additional costs for creditors in certain situations. The third objective, the division of unforeseeability costs, is intended to address these situations, as a corrective based on a transnational conception of justice. The gist of this objective is that jurisdictions should not impose all unforeseeability costs on foreign creditors. A central aspect of this notion is that part of the negative externalities caused by an idiosyncratic system of security rights should be internalised in the jurisdiction maintaining that system. Of course, we should not lose sight of the fact that the constellation of the three objectives is unlikely to remain static. In particular, introducing concrete means to

Conclusions

303

promote compatibility, regardless of the approach that those means represent, can be expected to lead to convergence and consensus-building as to desirable features of the law on security rights. As a result, responsiveness-related objections to further means may arise less often in the future. For example, modest partial substantive harmonisation may pave the way for more comprehensive efforts. In chapter three, with added practice-orientation, the three objectives were applied in order to guide choices between concrete means within each of the four approaches. In the context of the centralised substantive approach, where the threat to responsiveness is most imminent, it was argued that individual jurisdictions should have the last word about the need to preserve responsiveness in particular cases. In other words, a Member State that has a responsiveness-related reason to object, say, to comprehensive unification of substantive law should be allowed to reject measures to that effect. Procedural mechanisms were envisioned so as to explore how this prerogative could be included in the EU legislative- political process. In other respects, the three objectives demonstrably provide reasons both for and against particular concrete means. For example, it is often possible to say which of two conflict rule options better advances foreseeability, and whether these options are likely to give rise to responsiveness-related objections by Member States. Further, in cases where the removal of substantive diversity is unlikely to succeed and conflict rules fail to produce predictable results, the objective of dividing unforeseeability costs sets a standard for choice of means. Our objective-based assessment of concrete means resulted in the following proposals and observations. Under the centralised substantive approach, no ‘forced’ comprehensive unification or harmonisation of substantive law should be undertaken. However, comprehensive means could be attempted by way of a model law or enhanced cooperation. Partial and piecemeal means, while sometimes discredited in legal literature, are actually promising ways forward. Importantly, these means do not necessarily cause fragmentation. On the contrary, they could perhaps be used even in building a comprehensive system of security rights, but in a modular way. Optional and supplementary means, including the famous proposal for a ‘European Security Right’, are likely to fail due to difficulties in reconciling supranational priority and publicity regimes with their national counterparts. Under the centralised conflicts-approach, the development of choice of law on security rights over tangible movables should continue, retaining the lex rei sitae rule as the general conflict rule. While the lex rei sitae rule is far from perfect, its most promising challenger, the security-provider location rule, would not seem to function significantly better and would introduce problems of its own kind. The functioning of the lex rei sitae rule should be unified by European-level legislation, as several aspects of the rule have developed independently in different jurisdictions. However, the tendency should be to gradually narrow down the scope of the lex rei sitae rule by special conflict rules, particularly by broadening the scope of the lex registrationis rule. The problems of conflit mobile situations could be mitigated by a grace-period solution. The search for a common European conflict

304

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rule for third-party relations in the assignment of claims (including security rights over receivables) should continue, as it currently does as part of the Commission’s Capital Markets Union programme. The law of the assignor’s habitual residence and the law governing the assigned claim both proved prima facie suitable for this purpose. Under the local conflicts-approach, with Finnish law as a case study, the treatment of conflit mobile situations should be reformed along the lines of the Nordic doctrines, which enable the use of subjective choice-of-law factors. And the scope of the domestic lex registrationis rule should be clarified. Moreover, a domestic conflict rule should be enacted for third-party relations in assignment of claims, since the search for a common European conflict rule may be lengthy. This domestic rule should be based on one of the main options for a European rule. Finally, under the local substantive approach, with Finnish law as a case study, the whole of Finnish law on security rights should be systematically reviewed. In particular, this would involve searching for unnecessary national peculiarities and idiosyncrasies that could be removed or reformed so as to advance spontaneous harmonisation. Here, potential instances include restrictions as to use of simple retention of title and an outdated mortgage system for aircraft and certain other means of transport. The objectives of foreseeability, responsiveness and the division of unforeseeability costs were thus successfully applied as criteria for choices of concrete means within the centralised substantive approach, the centralised conflicts-approach, the local conflicts-approach and the local substantive approach. If the objectives are accepted as correct and sufficient premises, then the choices make up the optimal division of labour between approaches and thus the optimal way to promote compatibility between systems of security rights. We can extract two general lessons from this exercise. First, certainty and predictability, and to that end unity and harmony, should be forcefully promoted, but not at the expense of policy choices that individual jurisdictions regard as essential. These choices may differ due to varying economic and social circumstances and value commitments, so that a single model of a system of security rights may not fit all jurisdictions. Second, specific concrete means of promoting compatibility should not be rejected on the basis that they are imperfect or only partial solutions. Indeed, modest means may pave the way for more ambitious means, while combinations of partial solutions may have significant effects.

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INDEX

accessories 298 acquisition security devices 87, 95, 153–54, 249–50, 252 priority 153–58, 256 publicity 166–67 see also purchase-money security interests; retention of title advance filing 45, 164–65 adverse selection 110–11 after-acquired assets 10, 42, 151, 154 see also future assets aircraft 12, 14, 49, 51, 61, 73, 160, 189, 256–66, 298, 300, 304 aircraft mortgages 73–74, 266, 298, 304 Akkermans, B 84, 89, 96 all-sided conflict rules 29–31 all-sums clauses 157 American Law Institute (ALI) 39, 142, 242–43 antedating 95, 159–60 Argentina 116–17 Armour, J 149, 165 assignment of claims 113 conflict rules 15, 62, 72, 183, 190, 228, 276, 284, 289, 295, 299, 303–04 see also security assignment asymmetric information 110–11 Australia 164 Austria 9, 91, 95, 156, 279 automobiles 61, 111, 117, 150–51, 155, 219, 287 Aviareto 257 bank guarantees 81–82 bankruptcy 2, 53, 67, 130, 132, 140, 142–44, 146–50, 179, 210, 213, 216–20, 293–94 banks 109, 111, 113–14, 116–17, 137, 139, 141, 143, 145, 148–49, 153, 155, 161–62, 169–70, 213–14, 218, 279, 297 Bar, C von 251–53 bargaining power 126, 140, 173 Barnard, C 88, 202 Beale, H 263 Bebchuk, LA 138 Belgium 9, 150, 155–56, 163, 251, 277 Bergh, R Van den 203 Bergström, C 148 Bogdan, M 205, 207–08, 210–11 Bolivia 117–18

Brinkmann, M 125–26, 141, 161–62, 255, 260–62 Buure-Hägglund, K 207, 209–10, 292–94 Canada 39, 164 Cape Town Treaty (Convention and Protocols) 24, 49, 53, 163, 178, 255–59, 287, 298 see also Table of International Instruments Capital Markets Union 15, 63, 292, 295, 299 cars see automobiles carve-out provisions 11, 136, 142–50, 171, 176–79 centralised conflicts-approach 21, 57–63, 267–92, 299, 303–04 competence 270–72 connecting factors 58–62 decisional harmony 58, 268 foreseeability 268 design of conflict rules, general considerations for 272–81 asset type-specificity and connecting factors 280–81 choice of connecting factors 272–74 definite and predictable choice of law 272–75 exclusion of renvoi 274–75 party autonomy 61–62, 275–80 grace periods 60–61, 269 receivables 62–63, 276–79, 289–92, 299, 303–04 foreseeability 290 law governing the assigned claim 62, 278, 289–91, 304 law governing the contract of assignment 62, 276–79, 289–90 law of the assignor’s habitual residence 62, 278, 284, 289–91, 304 responsiveness 291 tangible movables 59–62, 281–89 grace periods 287–89, 299, 303 improvements through the unification of conflict rules 286–87 law of the intermediary person’s home country 282–83, 285–86 lex rei sitae and security-provider location rule 281–86, 299, 303

326

Index

uniform conflict rules 57–58, 268–70 see also unification of conflict rules centralised substantive approach 21, 28–54, 228–67, 299–303 categories of means within the approach 37–54 comprehensive means 37–47 optional or supplementary means 49–54 partial or piecemeal means 47–49 competence 229–34 potential legal bases 229–33 proportionality 233–34 subsidiarity 233–34 criticism of 54–57 detrimental effects 56–57 unnecessity 55–56 ‘eternal crisis’ of private international law, and 28–37, 69–70, 98 all-sided conflict rules 29–31 flexibility in choice of law (Europe) 31–32, 34 multitude of choice of-law methods (US) 32–34 group of gentler approaches, and attitude towards substantive diversity 98 concrete means within the approaches 98–99 preservation of responsiveness 228–38, 240–44, 303 competence 229–34 deciding on 228–29, 234–36 procedures to preserve responsiveness 236–38 see also unification or harmonisation of substantive law Cerqueiro, G 149 charges 6, 7, 40, 93, 125, 144–50, 156, 164–65, 171, 179, 261, 277, 297 company 125, 164 enterprise 6, 147, 171, 297 fixed 6, 150, 153, 250 floating 6, 40, 93, 144–50 civil law jurisdictions 68, 194 coherence 24, 57, 89, 98, 178 collateral 1, 6, 39–43, 48, 111–12, 114, 116, 131–33, 138–40, 144, 149, 152, 167–68, 171, 247, 249 common law jurisdictions 68, 123, 174 ‘Community Security Right’ (CSR) 54, 182, 232–33, 263–67 bundle of national security rights 54, 182, 232, 263–65, 267 foreseeability 266–67 publicity and priority issues 265–67 registration 263–65 responsiveness 267 company charges 125, 164

comparative studies 3, 15–16, 43, 48, 144, 147, 155–57, 209 compatibility 5, 20, 301 promoting 5, 19–26, 301, 304 centralised conflicts-approach 21 centralised substantive approach 21 integrated approach 25 local conflicts-approach 21 local substantive approach 21 optimal division of labour between approaches 22 private law 21 trade-offs between approaches 22 see also objectives; optimal division of labour between approaches competition as to the law on security rights see responsiveness; competition as to the law on security rights competition between jurisdictions 180–88, 301–02 experimental learning 183 modifications to the Tiebout Model 185–88 theoretic fragments 181–84 Tiebout Model 184–85 conflict rules 3–4, 13–16 all-sided 29–31 contractual relations 16 receivables 3–4, 15–16 tangible movables 3, 13–15 lex registrationis 14 lex rei sitae rule 3, 13–14 problem of successive locations 13–14 see also conflit mobile third-party relations ‘proprietary’ conflict rules 3 conflicts approaches 5, 21–22, 27, 35, 75, 97–98, 301 see also centralised conflicts-approach; local conflicts-approach conflit mobile 13, 38, 46, 59–60, 63–64, 73–74, 104, 207–12, 215, 219, 281, 283, 286–88, 292–95, 299, 303–04 consensus 15, 19, 25, 62–63, 68, 72, 74–75, 102–04, 115–16, 122, 127, 163, 189, 192, 224, 234, 263, 289, 303 constructive notice 125 consumers 32, 40–41, 45–46, 76, 86, 88, 114, 151, 167, 177, 184–86, 190, 245–247 contract freedom see freedom of contract control 41, 45 Cork Committee Report on Insolvency Law and Practice 145 credit cultures 162, 169–70 credit markets 9, 110–11, 161–62, 169, 225, 233, 235, 285, 302 credit rationing 111, 114 credit risk 9, 17, 91, 94–95, 107–08, 112, 114, 132, 152, 159, 170, 214, 272, 274, 283

Index creditor regimes 50, 90–97 cross-border third-party conflicts 12–19, 24, 47, 104, 208 enforceability against third parties 2–3 preconditions 3, 9–11 restrictions 3, 11 EU internal market 18–19 microeconomic and macroeconomic viewpoints 17–18 receivables 15–16 security-provider debtors, problems for 17–18 tangible movables 13–14 transaction costs 17, 47 uncertainty of enforceability 2, 16–18 unexpected loss of security rights 2, 17 CSR see ‘Community Security Right’ ‘cultural constraints’ argument 172 cultures 24, 26, 29, 57, 148, 162, 168–70, 172, 205 credit 162, 169–70 legal 24, 26, 29, 148, 205 Currie, B 32–33 Darmon, Advocate General 85–86 data certa 94–95, 251 DCFR see Draft Common Frame of Reference decisional harmony 58–59, 61–64, 72–74, 223, 268, 283, 286–87, 292, 299 centralised conflicts-approach 58, 268 foreseeability 268 local conflicts-approach 63–64, 292 default 1, 7, 17, 42, 46, 53, 108–113, 118–21, 154, 159, 171, 252, 258 delivery 61, 64, 130–31, 166, 218, 250 Denmark 9, 59–60, 64–65, 156, 211–12, 216–19, 221, 272, 286, 296 see also Table of Cases Deschamps, M 275–77 directives 48, 245–49 dispossession see possession requirements distributional fairness of secured credit 20, 136–37, 139–42, 159 division of unforeseeability costs 23, 203–22, 302 content of objective 204 importance of the objective 203–04 institutional support for 212–22 Danish Supreme Court 216–19 EU internal market law 221–22 expected and unexpected moves of an encumbered asset 212–19 German Federal Court of Justice 219–21 import country law, principle of 216–19 proportionality 222 Swedish Supreme Court 213–16

327

transnational conception of justice 104, 204–12, 302 conflicts justice 205–07 conflit mobile situations 207–12 justice pluralism 204–05 material justice 205–06 Draft Common Frame of Reference (DCFR) Book IX 43–46, 53, 68, 133–34, 164–67, 197, 239, 255–56, 258, 263, 288 see also Table of International Instruments Drobnig, U 46–47, 49, 52, 161, 166, 212, 219, 221, 251–53, 287–88 Dworkin, R 128–29 Easterbrook, FH 196 EBRD 43, 48, 116, 164–65, 171, 179 see also Table of International Instruments economic efficiency of secured credit 136–41 economic functions of security rights 107–21 cross-border problems impeding the economic functions 119–21 foreseeability as a solution to problems 121 macroeconomic effects 115–18 relations between and among the functions 118–19 secured creditors, standpoint of 107–13 security-provider debtors, standpoint of 113–15 effectiveness against third parties meaning 13 Eidenmüller, H 141 Eigentumsvorbehalt 64, 82 mit Verarbeitungsklausel 64 verlängerter 82 see also retention of title Eisenberg, T 148 empirical studies 1, 118, 141, 149, 171 employees 11, 20, 91, 137, 140, 143, 154 encumbered assets definition 1 see also collateral enforceability against third parties meaning 13 England 9, 20, 31, 40, 73–74, 93, 123, 144, 154, 156–57, 174, 193–94, 218, 272, 277, 280 enhanced cooperation 54, 241–43, 299, 303 enterprise charges 6, 147, 171, 297 enterprise mortgages 146–47, 150 ‘ESI’ 263 ESR see ‘European Security Right’ Esty, DC 197 European Bank for Reconstruction and Development (EBRD) 43, 48, 116, 164–65, 171, 179 see also Table of International Instruments European Civil Code 34, 43, 182 European Law Institute 243

328

Index

European private law multi-level structure of 21, 23 ‘European Security Instrument’ (‘ESI’) 263 ‘European Security Right’ (ESR) 4, 38, 50–54, 181, 232, 254–66, 299 competition between jurisdictions 181, 262 effectiveness against third parties 256–59 foreseeability 257, 261–62 independent stand-alone security right 255 legal effects on insolvency 259 non-registered ESRs 258–59 priority issues 257–62 register 256–57 responsiveness 257, 262 scope of application 256 ‘strong variant’ of 260–62 unitary or differentiated security device 256 ‘weak variant’ of 260–62 experimental learning 5, 23, 75, 99, 103, 180, 183, 198–200, 203, 227, 233, 253, 262, 270, 301–02 factoring 133, 182, 291, 296 fairness 20, 88, 136–42, 144, 159, 178, 206 ‘false conflicts’ 33 false wealth (ostensible ownership) 10, 158–59 fecha cierta 251 filing 41–42, 45, 161, 163–66 notice 41–42, 45, 161, 163–66 transaction 163–66 Financial Collateral Directive 131–33, 152, 247, 249 financial institutions 81, 91, 131–32, 135, 137, 161 see also banks Finland 5, 19, 25–26, 146–48, 150–52, 155–56, 207, 211, 247–48, 266, 292–96, 300, 304 see also Table of Cases; Table of Legislation fixed charges 6, 150, 153, 250 Fleisig, HW 116–18 Flessner, A 183, 240, 243, 276–79 floating charges 6, 40, 93, 144–50 floating liens 40, 42 foreseeability 23, 105–34, 302 centralised conflicts-approach 268, 290 ‘Community Security Right’ 266–67 content of objective 105 elimination of risk of legal ambush 105 predictability 105, 302 economic functions of security rights 107, 122 cross-border problems impeding the economic functions 118–21 foreseeability as a solution to problems 121–22 macroeconomic effects 115–18

relations between and among the functions 118–19 secured creditors, standpoint of 107–13 security-provider debtors, standpoint of 113–15 ‘European Security Right’ 257, 261–62 importance of the objective 105, 302 institutional support for 128–34 DCFR Book IX 133–34 Financial Collateral Directive 131–33 Late Payment Directive 130–31 preference for comprehensive means 105–07, 122 role in justifying the priority of secured claims 122, 127–28 unification or harmonisation of substantive law 239 företagshypotek 147–48 företagsinteckning 147–48 fragmentation 38, 48, 78, 241–42, 244–50, 303 France 9, 31–32, 38, 79, 92, 141, 155–56, 219, 251 see also Table of Legislation fraudulence 95, 159–60, 165, 167, 279 free movement of capital; free movement of goods see internal market law freedom of contract 123, 143, 145, 174–76, 276 Fried, JM 138 functionalism 40, 44, 92, 94, 154, 233, 246–47, 252, 256, 273 future assets 10, 40, 43, 125 see also after-acquired assets Gabor, B 192 gage 38, 92–93, 155, 219 sur véhicule 92–93, 155, 219 Garcimartín Alférez, FJ 62 Geradin, D 197 Germany 9, 10, 12, 31–32, 38, 52, 61, 64, 72, 79, 81–83, 89–90, 92–93, 96, 125, 141, 156–57, 160–62, 169–70, 191, 212–17, 219–21, 235, 256, 258–61, 277, 279 see also Table of Cases; Table of Legislation Giuliano–Lagarde Report 32 good faith acquisition 46, 51–52, 158, 170, 195, 254, 261, 279, 285 Goode, R 174 grace periods 47, 50–51, 60–61, 93, 166–67, 212, 215, 268–69, 271, 287–89, 299, 303 division of unforeseeability costs 288 responsiveness 288 Greece 9, 156 harmonisation meaning 231–33, 238 spontaneous 22, 65, 74–75, 104, 133, 166, 198, 244, 250, 296, 298, 304

Index Harris, SL 144 Hausbankprinzip 161–62, 170 Hazard, G 142 Håstad, T 92, 194 Hirschman, AO 186, 254 import country law, principle of 211, 216–19, 294 individualising method 216 insolvency proceedings 2, 8–9, 11–12, 14, 20, 46, 60, 91, 93, 95, 108, 113, 126, 146–47, 150–51, 155, 175, 179, 191, 210, 216–17, 251, 253, 258–60, 283, 293 see also bankruptcy institutional support for objectives division of unforeseeability costs 212–22 Danish Supreme Court 216–19 EU internal market law 221–22 expected and unexpected moves of an encumbered asset 212–19 German Federal Court of Justice 219–21 import country law, principle of 216–19 proportionality 222 Swedish Supreme Court 213–16 foreseeability 128–34 DCFR Book IX 133–34 Financial Collateral Directive 131–33 Late Payment Directive 130–31 responsiveness 199–203 EU Treaties presupposing or permitting diversity 200–03 private international law 200 resistance to harmonisation 199–200 subsidiarity and proportionality 201–03 integrated approach 25, 28, 66–101, 103–04, 221, 270, 301–02 conformity with EU internal market law see internal market law; conformity with interrelations and interaction between the approaches 67, 69, 75–77, 99–100, 301 long term 66–67, 69, 99 short and medium term 66–69, 99 unused potential of the gentler approaches 27, 69–75, 99 design of conflict rules 70–74 receivables 72–73 spontaneous harmonisation 74–75 tangible movables 73–74 interest groups 136, 187, 193 ‘exit-affected interest groups’ 187, 193 interest rates 9, 17, 111, 114–17, 138, 140–41, 149, 152, 154, 159, 283, 297 internal market law 18–19, 69, 77–97, 100, 213, 221–22, 231, 301

329

conformity with 77–97 grounds for justification of measures 87–90 proportionality of measures 90–97 trade barrier 78–87 cross-border third-party conflicts 18–19 division of unforeseeability costs 221–22 integrated approach, implications for 69, 77–78, 97–98, 100, 301 inventory 10, 42, 118, 163, 167–68 investments 8, 18, 87, 109, 115–18, 138–39, 171 involuntary creditors 123, 126, 140–41 see also non-adjusting creditors Ireland 9, 156–57, 271–72 Italy 9, 83–84, 94–95, 152, 156, 219–20, 241–42, 251 see also Table of Legislation Jackson, TH 137, 139–40 Jacobs, Advocate General 82 judgment liens 142 justification of the priority of secured claims 122–28 beneficial effects for the economy and society 127–28 freedom of contract 123 implicit consent 125–27 ‘new-value criterion’ 125–26 proprietary rights 123–24 transfer of ownership, less than 124 utilitarianism 127–28 Kennedy, D 173–75 Kieninger, E-M 37–38, 42–43, 46, 48, 53, 80–83, 85, 89–90, 93–95, 147, 155–57, 181, 198, 250–52, 256, 279–80, 291, 297 Kreuzer, KF 50–54, 58, 254–59, 261–62, 264–65, 288–89 Kronman, AT 137, 139–40 La Porta, R 171 Lando, O 28–37, 69–70, 98 Larouche, P 185–86 Late Payment Directive 130–31, 247, 249, 252 law governing the assigned claim 15, 62, 72–73, 189, 190–91, 197, 228, 278–91, 296, 299, 304 law governing the contract of assignment 15, 62, 72, 189, 228, 276–79, 289–90 law of the assignor see law of the assignor’s habitual residence law of the assignor’s habitual residence 15, 62, 72, 189, 190–91, 196–97, 228, 278–91, 296, 299, 304

330

Index

law of the claim see law governing the assigned claim law of the intermediary person’s home country 59, 71, 282–83, 285–86 leasing 43, 48, 120, 250, 256 legal ambush 16, 66, 74, 94, 105, 233, 288 legal certainty 24, 36, 62–63, 96, 105, 132, 194, 258, 292, 298 legal cultures 24, 26, 29, 148, 205 legal realism 32, 40, 123–24, 154 American 32, 40 Nordic methodological 154 Scandinavian 123–24 Legrand, P 200–01 Levmore, S 137 lex concursus principle 217 lex registrationis rule 14, 16, 61, 73, 189–90, 196, 287, 295, 299, 303–04 lex rei sitae rule 3, 13–14, 46, 51, 58–63, 70–71, 73–74, 81–82, 85–86, 89, 104–05, 119, 188, 190–91, 196, 207–11, 217, 219, 228, 231, 269, 277–78, 281–87, 292–95, 299, 303 centralised conflicts-approach 58–62, 269, 277–78, 281–87 lex rei sitae and security-provider location rule 281–86, 299, 303 local conflicts-approach 63, 292–95 unstable connecting factor 13, 37, 59, 70–71, 103, 119, 127, 207, 269, 287 see also conflit mobile liberalist contract law 176 liens 2, 40, 42, 142, 172 floating 40, 42 judgment 142 limited proprietary rights 11, 44–46 local conflicts-approach 21, 63–65, 292–96, 299–300, 304 decisional harmony 63–64, 292 party autonomy 64 receivables 295–96, 299–300, 304 law governing the assigned claim 296 law of the assignor’s habitual residence 296 residual nature of 292 secured creditor’s awareness 64–65 tangible movables 292–95, 299, 304 conflit mobile situations 292–95, 299, 304 lex registrationis rule 295, 299, 304 local innovation 99, 103, 192, 198–200, 203, 233, 243, 262, 270, 301 local substantive approach 21, 65–66, 296–98, 300, 304 spontaneous harmonisation 296–98, 300, 304 Lopez-de-Silanes, F 171 LoPucki, LM 9, 122 Louisiana 33 Luxemburg 251 Lwowski, H-J 170

Macdonald, RA 169 McCormack, G 55–57, 139, 161–62, 168, 174, 182–83, 194, 198 Miller, MH 137–38 Mills, A 205 Milman, D 145 model laws 21, 54, 66–68, 75, 169, 241–43, 299, 303 EBRD 160, 171 UNCITRAL 67, 115 Modigliani, F 137–38 Mond, DEM 145 Mooney, CW, Jr 144 moral 128–29, 204, 235 moral hazard 109–12 mortgages 40, 44, 73–74, 91, 117, 146–47, 150–52, 219, 266, 298, 304 aircraft 73–74, 266, 298, 304 enterprise 146–47, 150 real estate 44, 91, 117 vehicle 150–51, 266, 298 vessel 266, 298 Munch, M 217 National Conference of Commissioners on Uniform State Laws (NCCUSL) 39, 242–43 nationalism 177 negative pledge 125–27 Netherlands 9, 32, 36, 61, 64, 72–74, 82–83, 85–86, 93, 96, 156, 160, 182–83, 189, 248, 277, 280, 289 see also Table of Cases; Table of Legislation New Zealand 164 non-adjusting creditors 126, 140–42, 149, 159 see also involuntary creditors non-possessory security rights 7, 10, 38, 70, 93–95, 116, 150–51, 157, 196, 208, 261, 279, 298 Nonet, P 135 Nordic countries 5, 26, 60, 64, 123–24, 154, 171, 174, 179, 194, 209, 211, 248, 252, 294, 296–97, 299, 304 see also Denmark; Finland; Norway; Sweden Norway 152, 154–55, 157, 171, 211 see also Table of Legislation notice filing 41–42, 45, 161, 163–66 notification requirements 10, 156–58, 160, 167–68, 176, 182–83, 278–79 numerus clausus 57, 84, 88–89, 96–97, 221, 260 objectives 22–23, 102, 225 criteria for choosing 101–04 process orientation 102–03 respond to societal needs and wants 103–04

Index safeguarding the economic functions of security rights 103 transnational conception of justice 104 universality 102 interrelations between objectives 222–26 coexistence and reconciliation 222–23 dynamic model capable of changing 223–24 means for promoting compatibility, and 227–28 see also division of unforeseeability costs; foreseeability; responsiveness Ogus, A 195 O’Hara, EA 76–77, 186–87, 235–36 ‘one-size-fits-all’ assumption 162, 240 Ongena, S 149 optimal division of labour between approaches 5, 22, 69, 100, 302, 304 objective-based assessment 19, 22–23, 25, 69, 100, 102, 302–04 see also division of unforeseeability costs; foreseeability; responsiveness ostensible ownership see false wealth ownership 6, 11, 44, 123–24, 132, 154, 159, 195, 273, 278, 282, 293, 297 transfer of 6, 124, 132, 195, 273, 278, 282, 293 pari passu principle 8–9, 108–09, 122, 125–26, 174–76 party autonomy 16, 50, 61–62, 64, 71, 77, 174, 177, 183, 186, 189, 197, 199–200, 275–81, 289–90 centralised conflicts-approach 61–62, 275–81, 289–90 rejection of party autonomy as a general solution 275–81, 290 limited forms of 61–62, 64, 280 local conflicts-approach 64 path-dependence 193–94, 198 perfection 41–42, 45, 68, 102, 132, 163, 167, 286, 289 pledges 6, 7, 44, 52, 86, 92–95, 146, 160, 210, 215, 293 pluralism 201, 204–05, 222 justice pluralism 204–05, 222 legal pluralism 201 value pluralism 205 Polak, MV 55, 57–58, 61–63, 282, 286, 292 Portugal 9, 251 possession requirements 7, 10, 38, 41, 45, 77, 93, 95, 97, 151, 158–60, 167, 176, 190, 214, 279 possessory security rights 7, 279, 282 preliminary rulings 35–36 Principles of European Contract Law (PECL) 277 priority 142–58 carve-out provisions 142–49

331

conflicts 11, 90, 94–95, 257, 260–61, 273, 277–78 debates 142–49 different security devices 153–58 ‘European Security Right’ 257–59 scope of security devices 149–52 superpriority 153–54, 158 proceeds clauses 156–57 products clauses 156 project finance 109, 113, 127 proportionality 90–97, 201–03, 222, 229, 233–34, 237–38 ‘proprietary’ conflict rules 3 proprietary security rights 1, 6–12 creditor’s legal position, as 7–8 creditor and the security-provider debtor 7, 11–12 third parties, protection against 8–12 non-possessory security rights 7 possessory security rights 7 priority, and 8–9, 20 security devices 6 tangible movables and receivables 2, 7 types of 6 publicity 3, 9–10, 158–68 acquisition security devices and general security devices 166–68 functions of 158–60 necessity of 160–62, 169–70 notice filing 41–42, 45, 161, 163–66 registration systems 162–68 transaction filing 163–66 purchase-money security interests 41–44, 87, 153, 157–58, 167, 256 ‘puzzle of secured debt’ 138 ‘quasi-security rights’ 6, 154, 167 Raape, L 30 Rakob, J 160–62 Ramaekers, E 84, 89, 241 Rammeskow Bang-Pedersen, U 59, 71, 282–85 Rank, W 47–48, 68, 231, 246–47 real estate mortgages 44, 91, 117 receivables centralised conflicts-approach 62–63, 276–79, 289–92, 299, 303–04 foreseeability 290 law governing the assigned claim 62, 278, 289–91, 304 law governing the contract of assignment 62, 276–79, 289–90 law of the assignor’s habitual residence 62, 278, 284, 289–91, 304 responsiveness 291 conflict rules 3–4, 15–16 cross-border third-party conflicts 15–16

332 local conflicts-approach 295–96, 299–300, 304 law governing the assigned claim 296 law of the assignor’s habitual residence 296 registration systems 162–68 ‘regulatory co-opetition’ 197 regulatory competition see competition between jurisdictions renvoi 74, 274–75, 287 reservation of ownership see retention of title reservation of title see retention of title responsive law 135 responsiveness 23, 135–203, 302 centralised conflicts-approach 291 centralised substantive approach and preservation of responsiveness 228–38, 240–44, 303 competence 229–34 deciding on 228–29, 234–36 procedures to preserve responsiveness 236–38 ‘Community Security Right’ 267 competition as to the law on security rights 188–99 beneficial effects of 198–99 demand side of the ‘market for law on security rights’ 189–91 experimental learning 198–99 interdependence between technical and value-laden aspects of law 195–96 interest groups, role of 193 internalisation of the costs and benefits of substantive law in the enacting jurisdiction 196–99 jurisdictions’ incentives to compete 191–93 local innovation 198–99 mandatory nature of substantive law 188 objective connecting factors of conflict rules 188–89 path-dependence, fortified by strong systemic interconnections 194–95 ‘regulatory co-opetition’ 197 competition between jurisdictions 180–88, 301 experimental learning 183 modifications to the Tiebout Model 185–88 theoretic fragments 181–84 Tiebout Model 184–85 content of objective 135, 302 response to social needs and aspirations 135 controversial policy choices 136–80 adaptability to local circumstances 168–80

Index distributional fairness of secured credit 136–37, 139–42, 159 economic efficiency of secured credit 136–41 priority 142–58 publicity 158–68 economic and social circumstances value choices, and 168–79, 302 ‘European Security Right’ 257, 262 importance of the objective 135 institutional support for 199–203 EU Treaties presupposing or permitting diversity 200–03 private international law 200 resistance to harmonisation 199–200 subsidiarity and proportionality 201–03 priority 142–58 carve-out provisions 142–49 debates 142–49 different security devices 153–58 scope of security devices 149–52 superpriority 153–54, 158 publicity 158–68 acquisition security devices and general security devices 166–68 functions of 158–60 necessity of 160–62, 169–70 notice filing 161, 163–66 registration systems 162–68 transaction filing 163–66 ‘technicality thesis’, opposing 168, 171–75 legal-political decision-making 177–79 national jurisdictions as value communities 177–79 policy differences and value choices 173–77 political stakes 173–74 unification or harmonisation of substantive law 240, 244, 262, 267 unknowability of optimal features of law on security rights 179–80 retention of ownership see retention of title retention of title 6, 12, 43–45, 48, 52, 61, 64, 81–83, 85–87, 94–96, 125–26, 130–31, 133–34, 145, 152–57, 166–67, 191, 208, 210, 213, 216–20, 248–49, 250–52, 256, 259, 288, 294, 296–98, 300, 304 extended forms 64, 82–83, 156–57, 256 see also all-sums clauses; proceeds clauses; products clauses goods intended for export 61, 64 Ribstein, LE 76–77, 186–87, 235–36 Ross, A 123–24 Roszbach, K 149 Roth, W-H 83, 86–9, 93, 95 Rutgers, JW 81–83, 96–97, 231, 271

Index salgspant 154, 157 Schwartz, A 138 Scotland 9, 144, 157 Scott, RE 137 secured credit meaning 1 role of 19 see also economic functions of security rights secured creditors 1 securitisation 182, 291 security agreements 7–8, 12, 14, 16–17, 41–42, 44, 108, 119, 125, 151, 159, 163, 210, 276 security assignment 6, 160 security interests 1, 40–43, 67, 107, 124, 138–40, 163–64 security-provider location rule 281–85, 299, 303 security rights see proprietary security rights security transfer of ownership see security transfer of title security transfer of title 6, 38, 93–94, 96, 132–33, 156, 160, 213–15, 259–62 Selznick, P 135 ships 12, 14, 51, 61, 188–89 Shleifer, A 171 Sicherungsabtretung 160 Sicherungsübereignung 38, 92–93, 96, 160 see also security transfer of title Siesby, E 211, 216–17 Sigman, HC 39–40, 242 signalling theory 111–12 small and medium-sized enterprises 2, 56, 146, 161 Smits, JM 177, 245–48 Snijders, HJ 51–53, 68 solidarity 176 Spain 9, 156, 241–42, 251–52 specificity requirements 3, 9–10 spontaneous harmonisation 22, 65, 74–75, 104, 133, 166, 198, 244, 250, 296, 298, 304 Statutenwechsel see conflit mobile statutory privileges 11, 146–47, 149, 155, 174 Steffens, L 284 Stevens, RH 56 stil pandrecht 160 stock-in-trade see inventory Story, J 204 subsidiarity 201–03, 229, 233–34, 237–38 substantive approaches 5, 21, 97–98, 209, 301 see also centralised substantive approach; local substantive approach Sundgren, S 148 superpriority 42, 46, 153–55, 158, 167, 256 supranational security devices 49–50 Svenné Schmidt, T 289

333

Sweden 9, 60, 65, 84, 147–50, 152, 155–56, 207–08, 210–16, 219, 221, 296 see also Table of Cases; Table of Legislation Swedish Institute for Growth Policy Studies 148 Switzerland 288 tangible movables centralised conflicts-approach 59–62, 281–89 grace periods 287–89, 299, 303 improvements through the unification of conflict rules 286–87 law of the intermediary person’s home country 282–83, 285–86 lex rei sitae and security-provider location rule 281–86, 299, 303 conflict rules 3, 13–15 lex registrationis 14 lex rei sitae rule 3, 13–14 problem of successive locations 13–14 see also conflit mobile cross-border third-party conflicts 13–14 local conflicts-approach 292–95, 299, 304 conflit mobile situations 292–95, 299, 304 lex registrationis rule 295, 299, 304 ‘technicality thesis’ 168, 171–75 opposing legal-political decision-making 177–79 national jurisdictions as value communities 177–79 policy differences and value choices 173–77 political stakes 173–74 third parties types 8, 11, 274 effectiveness and enforceability against meaning 13 Tiebout, CM 181, 184–86, 191, 198 Town, LJ 120–21 transaction costs in cross-border contexts 4, 17, 19, 47, 55, 57, 119, 122, 239 transaction filing 163–66 transfer of ownership 6, 124, 132, 195, 273, 278, 282, 293 transnational conception of justice 5, 23, 101, 104, 204–12, 215, 225, 288, 302 conflicts justice 205–07 conflit mobile situations 207–12 justice pluralism 204–05 material justice 205–06 transposition 13, 46–47, 84, 93, 191, 200, 265, 286 ‘Trojan horse’ 53, 256, 262 ‘true conflicts’ 33 trusts 44, 157, 294

334

Index

UCC see Uniform Commercial Code UK 9, 20, 24, 31, 40, 73–74, 93, 109, 113, 123, 141, 144–45, 154, 156–57, 164, 174, 193–94, 218, 271–72, 277, 280, 289, 291 see also Table of Cases; Table of Legislation Ukraine 169 UNCITRAL 43, 67, 115–16, 153, 164, 179, 197, 240, 259, 275–77, 280–82 see also Table of International Instruments unification meaning 231, 238 unification of conflict rules 22, 29, 46, 51, 55, 58–62, 73–74, 99, 133, 189, 209, 223, 268–70, 275, 286–87 see also centralised conflicts-approach unification or harmonisation of substantive law 37–54, 231–33, 238–67, 303 comprehensive means 37–47, 238–43 DCFR Book IX as a blueprint 43–46, 239 elimination of need for choice of law 46–47 enhanced cooperation 241–42, 299, 303 prospects for foreseeability 239 risk to responsiveness 240 ‘strongly recommended’ model law 242–43, 299, 303 UCC Article 9 as a model 38–43, 239, 242–43 optional or supplementary means 49–54, 254–67, 299, 303 ‘Community Security Right’ 54, 263–67 ‘European Security Right’ 50–53, 254–63 supranational security devices 49–50 partial or piecemeal means 47–49, 244–54, 299, 303 directives 48, 245–49 favouring of certain categories of creditors 249–50 fragmentation of the law 245–46, 248–50 judicial interpretation 248 legal language 246–47

rejection on responsiveness-related grounds 244 separation of cross-border and domestic security arrangements 252–54 simple retention of title 250–52 spontaneous convergence as starting point 250–52 see also centralised substantive approach Uniform Commercial Code (UCC) Article 9 19, 38–45, 51, 68, 99, 139, 142, 144, 164, 167, 169, 239–40, 242–43, 248, 256 see also Table of Legislation United Nations Commission on International Trade Law (UNCITRAL) 43, 67, 115–16, 153, 164, 179, 197, 240, 259, 275–77, 280–82 see also Table of International Instruments unsecured creditors 8, 9, 11, 68, 109, 113, 122–23, 125–27, 136–37, 140, 142–46, 148–49, 151, 176, 194–95, 237, 258–59, 274 US 18–20, 32–34, 38–43, 116–17, 135–44, 153, 157, 164, 186, 206, 235, 240, 242–43, 286 see also Uniform Commercial Code; Table of Legislation US Virgin Islands 39 utilitarianism 127–28, 176 vehicle mortgages 150, 298 Veneziano, A 167, 245, 249 Verhagen, H 183, 276–79 Verstijlen, FMJ 54, 68, 91–92, 181–82, 191, 198, 232–33, 263–64, 280 vessel mortgages 298 vessels 61, 12, 14, 51, 61, 160, 188–89, 266, 298 Vishny, RW 171 Wales 144 warrant 38 Warren, E 140–44 Weatherill, S 234 Wilhelmsson, T 247 World Bank credit union 114–15