2. Rules on pledge

2.1. The Concept of the pledge and

the scope of the provisions

There are a number of problems with draft article 334 (in both its 2010 and 2012 versions), which deals with the concept of the "pledge" and the bases for its creation. First, draft article 334.1 does not clearly distinguish between the pledge as a property right and the obligation, payment or other performance of which it secures. This may be due to the fact that the provisions of the Civil Code on pledge are part of the section on obligations and not property rights. Still this problem is so fundamental for the clarity of all these provisions that it should be addressed, which could be done with minor changes. Second, draft article 334.1 does not clarify sufficiently what types of devices are covered by the concept of "pledge" (e.g., possessory and non-possessory pledge), but instead makes general reference to contractual and statutory pledge. This is done in a later article, article 338, but for reasons of certainty and transparency, the scope should ideally be addressed in one and the same article. Third, draft article 334.1 fails to cover devices that perform the same security functions as the pledge (e.g., transfer of ownership of tangible assets for security purposes, assignment of receivables for security purposes, retention-of-title sales and financial leases). Fourth, as a matter of drafting, before having clarified the logically first issues (what a pledge means, what types of rights are covered and how they are created), draft article 334.1 unexpectedly deals with the legal consequence of the pledge, that is, priority in the case of default and enforcement. The reason may be that the "concept" is defined by reference to its legal effects, that is, draft article 334.1 is not a real definition. And fifth, as a matter of both policy and structure, draft article 334.2 is surprising in providing that the rules on pledge may apply even to mortgages to the extent that the Civil Code or other statute has not established rules on mortgages.

As a policy matter, addressing pledges in movable property and mortgages in immovable property in the same set of rules is inappropriate because of the difference in the assets and the financing transactions involved. Unlike inventory or equipment financing in which the assets are typically many, of low value and future assets are included, immovable property financing refers to one, high-value, present asset. As a result, inventory or equipment may be described generically in the pledge agreement and the notice to be registered, while immovable property has to be described specifically. In addition, in the case of a pledge registry, the legal consequence of registration is thirdparty effectiveness and priority (or only priority as in the case of the new Russian pledge registration law), while, in the case of a mortgage registry, the legal consequence is the creation of the mortgage. This results in another important difference. Pledge registration involves the registration of a notice with limited information about the transaction, while mortgage registration requires the registration of the transaction document. The time, cost and complexity of the two types of registry are significantly different. Finally, information in a pledge registry is organized so as to be retrieved on the basis of the pledgor name, while information in a mortgage registry is organized so as to be retrieved on the basis of the asset description.

As a matter of drafting, it may be possible to address pledges in movable assets and mortgages in immovable property in one and the same chapter, but this should be done in separate sections to avoid confusing the reader giving the impression that pledges and mortgages are regulated in the same way (for comments on draft article 334.3, see below).

The Guide first uses the general term "security right" to denote a pledge (the term "grantor" is used for the "pledgor" and the term "secured creditor" for the "pledgee" or "pledgeholder"). Of course, there is nothing wrong with the use of the term "pledge" as long as it is defined properly. Specifically, under the Guide, the term "security right" means "a property right in a movable asset that is created by agreement and secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security right" <1>.

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<1> Guide, Introduction, Section B.

The definition is general enough to cover all types of security right, in all types of movable asset, to secure all types of secured obligation, by all types of parties. The definition is also functional in the sense that the term "security right" covers not only the devices that are denominated by the parties as such but also those devices that actually perform security functions (i.e. retention-of-title sales, financial leases, assignments of receivables by way of security and, to a limited extent, even outright assignments.

In this way, following a functional, integrated and comprehensive approach to secured transactions, the Guide is intended to address one of the main problems of traditional pledge laws, that is, the multiplicity of devices and statutes that create gaps and inconsistencies <1>. This is the main problem in many secured transactions laws of the world, that is, a multiplicity of laws and multiplicity of regimes with gaps and inconsistencies. This is crucial because gaps and inconsistencies are likely to have a negative impact on the availability and the cost of credit. Of course, the economic impact of these deficiencies of the law is not easy to measure. And, in some developed countries, courts, lawyers and market participants rise to the challenge and address these problems. However, it is reasonable to assume that the result of these deficiencies is legal uncertainty, which is bound to have a negative impact on the availability and the cost of credit. Thus, where possible, the legislator should try to avoid taking a piecemeal approach and take a functional, integrated and comprehensive approach to secured transactions.

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<1> Guide, chapter I, paras. 101 - 112.

The scope of the law recommended in the Guide is dealt with in a separate chapter. In its texts, UN CITRAL has always tried to separate the definitions from scope provisions and substantive rules. This results in a more logical structure of a legal text, which is easier to follow, which enhances the certainty and transparency of the text.

So, while the definition of the term "security right" is general enough, the Guide includes elaborate scope provisions providing that it covers all types of security right, possessory and non possessory, including transfers of ownership in tangible assets for security purposes, assignments of receivables for security purposes, retention-of-title rights and financial-lease rights. All types of movable asset are also covered, tangible (such as equipment and inventory) and intangible (such as receivables, rights to payment of funds credited in a bank account, rights to receive the proceeds of letters of credit, negotiable instruments, negotiable documents and intellectual property rights), with limited exceptions (see below). In addition, security rights covered in the Guide are those created by agreement (although the priority with statutory rights is also covered) to secure all types of secured obligation, present or future, determined or determinable, including fluctuating obligations and obligations described in a generic way. Moreover, a security right under the Guide may encumber specific assets or all of the assets of a grantor, present and future, including a changing pool of assets. Finally, security rights may be created or acquired by any legal or natural person, including a consumer (but consumer-protection legislation prevails) <1>. Outright assignments are also covered to some extent without being re-characterized as secured transactions <2>. The Guide also deals in separate chapters with acquisition financing devices (retention-of-title sales and financial leases), conflict-of-laws, transition and insolvency-related matters.

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<1> For a discussion of the salient features of the Guide, see: Spiros V. Bazinas, The UN CITRAL Legislative Guide on Secured Transactions - Key Objectives and Fundamental Policies, Uniform Commercial Code Law Journal, Vol. 42, N 2 (February 2010). P. 123 - 155.

<2> Recommendation 3.

The scope chapter of the Guide also foresees limited exceptions. Accordingly, the Guide does not apply to: (a) securities, payment rights arising under financial contracts governed by netting agreements other than receivables owed on the termination of all outstanding transactions or payment rights arising under foreign exchange transactions; (b) aircraft, railway rolling stock, space objects and ships or other similar categories of mobile equipment if matters covered in the law are covered in national law or international agreements adopted by the State enacting the law; (c) to intellectual property, if the provisions of the law are inconsistent with law relating to intellectual property; or (d) immovable property, it does apply, however, to attachments to immovable property <1>. As already mentioned, immovable property is not covered in the Guide (with the exception of attachments to immovable property), because: (a) immovable property is a different kind of asset and mortgages are typically addressed differently in the law; (b) immovable property law is generally settled law that raises national public policy issues that not lend themselves to global harmonization.

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<1> Recommendations 4 and 5.