366 s e c u r i t y r i g h t s i n m o v a b l e p r o p e r t y

Discussions

g e r m a n y

(a)Since the contract contains only a simple retention of title clause, the statutory rules on the effects of a manufacturing process (specificatio) must be applied. According to § 950 BGB, ownership of a newly produced movable vests in the manufacturer, not in the owner(s) of the material, unless the value of the manufacturer’s work is considerably lower than that of the material(s). The BGH has decided that up to a ratio of 100:60 (value of the material: value of the work), the manufacturer will become owner pursuant to § 950 BGB.1 § 950 BGB does not define who should be regarded as manufacturer. Generally,2 this is to be decided objectively, according to the general view of the business community.3 The question of who bears the risk of manufacturing will be one of the criteria used in this assessment.

In the present case, B is undoubtedly to be regarded as the manufacturer for the purposes of § 950 BGB. Since the value-ratio between the material and the work is 3:2 (about 100:66), B becomes sole owner of the curtains. The supplier (A) can claim remuneration only according to the rules on unjust enrichment (§§ 951 s. 1, 812 ff. BGB).

(b)The products are owned by B, therefore they may be subjected to execution on behalf of C.

(c)In cases such as the present, it is general business practice to add a products clause to the retention of title agreement. Usually, the seller (A) stipulates that if the buyer (B) produces new goods out of the material supplied, then this will take place for the seller as manufacturer, but the seller will not be obliged to buy the goods nor incur any obligations arising from the process of manufacture.4 By virtue of such a clause, which has been held clearly to be valid by a long line of cases,5 A will

4See the model retention of title clause in: Hoffmann-Becking/Schippel, Beck’sches Formularbuch zum Bürgerlichen, Handelsund Wirtschaftsrecht 101.

5BGH 3 Mar. 1956, BGHZ 20, 159; BGH 23 Oct. 1963, BB 1963, 1354 (1355); BGH 15 Oct. 1966, BGHZ 46, 117 (118): ‘It is to be regarded as undisputed that a supplier who delivers raw materials to a manufacturer under retention of title may extend such retention of title into the products through the insertion of a so-called products clause despite § 950 BGB.’ (Translation by the author.) See also BGH 12 Jan. 1972, BB 1972, 197 (198); BGH 9 Dec. 1970, BB 1971, 17.

acquire security ownership6 in the products. This acquisition takes place not only inter partes but also erga omnes.

There remains, however, a question as to how the products clause should be construed. There are three broad positions. The first regards § 950 BGB as non-mandatory.7 Therefore, the parties can derogate from it and simply stipulate that ownership of the products shall vest in the seller. The other two positions regard § 950 BGB as mandatory, for the simple reason that rules of property law generally have a mandatory character. However, these two positions differ as to the way in which the identity of the manufacturer should be determined. According to a number of scholars, this question has to be decided on a purely objective basis, disregarding entirely the agreement between seller and buyer.8 By way of contrast, the BGH and other academic writers hold that parties’ agreements should be taken into account.9 This third opinion, which predominates in practice, produces practical results very similar to the first one (non-mandatory character of § 950 BGB).

The most significant difference between the second opinion (determination of manufacturer on a purely objective basis) and the other two is this: if one denies to the parties the right to define who is the manufacturer, the seller cannot directly acquire title to the products. Instead, title will necessarily vest in the buyer. But as German law accepts the security transfer of ownership,10 it would also be possible to draft a products clause as an anticipatory security transfer of ownership of the future products.11 This would transfer ownership in the products to the seller the very second that the buyer acquired ownership through the manufacturing process. Nevertheless, in practice, it is not necessary to word a products clause this way,12 because German courts consistently

6 See also infra, German report, case 10(a).

7Flume, NJW 1950, 841 at 843 f.; Laufke, in: Festschrift für Alfred Hueck 69 (74 f.); Franke, BB 1955, 717 (718); Baur/Stürner, Sachenrecht § 53 n. 20; Soergel/Mühl § 950 BGB n. 3; the jurisdiction of the Reichsgericht: RG 14 June 1932, Juristische Wochenschrift 1932, 2634; RG 21 Dec. 1938, Juristische Wochenschrift 1939, 563; RG 17 Aug. 1939, RGZ 161, 109 (113).

8Palandt/Bassenge § 950 BGB n. 8; Westermann/Gursky/Eickmann, Sachenrecht § 53 III 2 e; Erman/Hefermehl § 950 BGB n. 7; Säcker, JR 1966, 51; Wadle, JuS 1982, 477 (482 f.); Staudinger/Wiegand § 950 BGB nn. 27--30; Wilhelm, Sachenrecht nn. 974 f.

9BGH 3 Mar. 1956, BGHZ 20, 159 (163)f.; BGH 28 June 1954, BGHZ 14, 114 (117); Serick,

Eigentumsvorbehalt und Sicherungsübertragung IV § 44 III 6 b; Hofmann, NJW 1962, 1798 (1802).

10See infra, German report, case 10(a).

11As to the anticipatory security transfer of ownership, see infra, German report, case 11(a).

12Serick, Eigentumsvorbehalt und Sicherungsübertragung IV 162.

meeting onwards, the creditor receives interest for the period during which the administrator fails to sell or otherwise realise the value of the collateral (§ 169 sent. 1 InsO). Secondly, the administrator must notify the secured creditor if he decides to sell the collateral. The secured creditor may, within a week of such notification, bring to the attention of the administrator any potential for sale at a higher price. In such a case, the administrator is obliged to make use of the opportunity presented by the creditor or -- alternatively -- to indemnify him against any losses. After the sale or other realisation has taken place, the administrator will deduct the costs (9 per cent of the proceeds: see § 171 InsO) and will use the rest to pay off the secured claim. As to the possibility of setting up an insolvency plan, see the German report, case 6(b).

a u s t r i a

(a) As A’s contract with B contains a reservation of title clause,18 A and B become co-owners of the curtains. This was first acknowledged by the OGH in SZ 49/138.19 This decision (which bears similarities to the present case, involving clothes produced from fabrics) represented a shift in the jurisprudence of the OGH, which previously had held that retention of title became invalid if the goods sold were changed into something different by the manufacturing process.20 The court changed its position after heavy criticism by legal scientific writers.21 These writers argued that the position of the OGH was contrary to the rule of § 416 ABGB.22 The new practice of the courts was, of course, applauded by those businessmen who sell goods to manufacturers. The size of the shares of A and B depend on their respective contributions (i.e. materials and labour, in the present case 60 per cent and 40 per cent respectively).

If the agreement between A and B purported to accord to A a share larger than that represented by his contribution, then a problem would arise due to the publicity principle. According to Austrian law, only the goods sold under a retention of title clause secure the seller’s claim arising from the contract of sale in respect of these goods. It is only to

18 The result would be the same if a short-term reservation of title was used.

21See Spielbüchler, JBl 1968, 589; Frotz, Aktuelle Probleme des Kreditsicherungsrechts 91 and

Klang/Bydlinski IV/2 624.

22According to this rule, a new product, produced by the use of materials and labour, is co-owned by the owner of the material and the producer. The size of each share depends on their respective contributions.

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this extent that Austrian law accepts a non-possessory security right. If other goods are intended to secure the claim, then they must be handed over to the seller. Therefore, an agreement which purports to grant A a security right more extensive than the proportion of the value of the curtains represented by his contribution of the cloth would be invalid, because of a conflict with the publicity principle.

It does matter who bears the risk of the manufacturing process. If A, and not B, bears the risk (i.e. if B manufactures for A), then A will be owner of the curtains.23 In such a case it is not necessary for the contract between A and B to contain a reservation of title clause.

(b)The newly produced items may be subjected to execution on the behalf of C, to the extent that they belong to B.

(c)A cannot obtain more than 60 per cent of the final value of the curtains, unless A and B make use of an arrangement which respects the publicity requirement. This could, for example, be done by handing over the curtains to A.

(d)The same answers apply.

g r e e c e

(a)If a retention of title clause is included in the contract, the vendor will remain the owner of the thing sold, even after delivery, until the purchaser pays the price in full. In this case, A is the owner of the curtains. Article 1061 A.K., which regulates specification, establishes that a person who, using material owned by another, produces a new movable, will only acquire ownership of it if the value of the work done is obviously greater than the value of the material. As in the present case the value of the work, i.e. the manufacturing process, is not greater than the value of the material, the question of who bears the risk of the manufacturing process is irrelevant.

(b)If C, the creditor of B, executes against the curtains, A, as owner, is entitled to resist the execution (article 936 KPolD).24

23Cf. Koziol/Welser, Grundriß des bürgerlichen Rechts II 70.

24Brinias, Anagastiki ektelesis § 178, 499 and § 679, 2313; Georgiadis, Empragmato Dikaio II 219.

(c)Only the fiduciary (re)transfer of full ownership of the curtains to A would accord to him a superior right (i.e. full ownership) over the products. Of course, should A lose ownership of the cloth because of the manufacturing process, B will become owner and the solution will differ. In this case, it is usually stipulated that, until the purchaser pays the price in full, ownership of the new products will rest with the supplier (extended retention of title or retention of title with a products clause).25 The validity of this clause is disputed, because it presupposes that article 1061 A.K. is not a mandatory rule, that is to say it can be displaced by the agreement of the parties.26 According to the most persuasive view,27 article 1061 is mandatory, thus a products clause can only be drafted as a security transfer of ownership of the future products with a resolutive condition of the full payment of the purchase price. Delivery is substituted by an anticipated constitutum possessorium, which is generally accepted as valid under Greek law. No further prerequisites are required. In the case of an extended retention of title, A can claim ownership of the clothing against which execution is made, which has been transferred to him (article 936 KPolD).28 If the curtains had been sold, he would simply be entitled to preferential payment from the proceeds of the sale.29

Products clauses are not used in practice.

(d)It is evident that B’s creditors may not execute against the assets of a third party, i.e. A. Nor do such assets form part of the insolvency estate. A is, in any case, fully protected against them (see part (c), supra).

f r a n c e

(a) A retention of title clause can be used for any type of asset, in so far as the assets are individualised by delivery. The present case differs from the previous cases because of the nature of the assets, viz. rolls of cloth. Textile fabrics are raw materials, intended to be used in the

25See Gazis, ErmAK 532 n. 71; Georgiadis, Kyriotis 277; Livanis, Diathesi mellondikou dikaiomatos 16; Roussos, in: Miscellany in Honour of Michailidis -- Nouaros 397 ff.

26For the different views which have been advanced, see Georgiadis, Kyriotis 278.

27Georgiadis, Kyriotis 278. Different views are suggested by Gazis, ErmAK 532 n. 74 and Roussos, in: Miscellany in Honour of Michailidis -- Nouaros 397 (410).

28Georgiadis, Kyriotis 222; Kornilakis, I katapisteutiki ekchorisi ton apaitiseon 126; Mazis, Empragmati exasphalisi trapezon kai anonymon etairion para. 450.

29For the rights of the vendor, when the purchaser who transferred security ownership goes bankrupt, see in detail infra, case 8.

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manufacturing process, and therefore will not remain in the condition in which they were supplied. The problem that confronts A concerns the individualisation and the transformation of the fabrics. The question is whether retention of title can survive the transformation by means of the manufacturing process of the cloth into curtains. French law again demonstrates the very narrow scope it accords to reservation of title. Pursuant to C. com, article L. 621-122, para. 2, rei vindicatio of assets sold under reservation of title is possible only when they can be found in kind. This rule applies in the event of the buyer’s insolvency, but also outside insolvency proceedings, according to general property law.30 The question of whether the assets remain in kind (specificatio) has been widely discussed.

Case law takes the view that once the goods have reached their ‘final stage of transformation’, they cannot be claimed by a seller pursuant to a retention of title clause. It was decided that cattle, once slaughtered, could not be found in kind on the buyer’s premises.31 With regard to fabrics, the Cour d’appel of Paris decided that, once fabrics were cut into clothing, they could not be claimed back by the seller.32 The same applied to wool knitted into jumpers.33 On the other hand, it was decided that yarn bought by a tapestry manufacturer, which had been dyed but had not yet been woven into fabric (and where the dyeing process had not transformed the thread), was perfectly identifiable and could be returned to the owner. All that was required was to roll the yarn back into balls.34 In fact, one could argue that it may very often be possible to reverse the transformation of the assets, especially when the seller is prepared to accept the return of his property as such, that is, deknitted wool or cut and tailored fabrics. The real argument, which underpins the court decisions, lies not in the analysis of the transformation but in the value added by the manufacturing process. Allowing the return of the assets would mean that the added value would benefit the seller only (or, if the transformation is reversed, then the added value

30See C. civ, article 1593, as confirmed in Com 20 June 1989, D 1989, 431, note Pérochon; RTDC 1990, 121, obs. Brandac, which states that: ‘Goods sold under retention of title are affected by the guarantee of the seller. The seller can claim the return of the goods for as long as the goods exist in kind within the buyer’s hands, and, after

their resale in the same state, the seller can claim a right on the proceeds of the sale.’

31Com 22 Mar 1994, Bull civ IV, No 121; D 1996, Som, 219.

32Paris, 28 Nov. 1984, Juris-Data No 026 561.

33Toulouse, 27 Nov. 1984, D 1985, J., 185, note Mestre; Com 27 May 1986, Rev jur com 1986, No 1158, note Gallet.

34Com 6 Mar. 1990, D 1991, Som, 46.

is lost to other creditors, especially the unsecured).35 Therefore, given that, in the present case, the fabric has been transformed into curtains and only 60 per cent of the final value is attributable to the cloth, it is unlikely that the court will recognise A’s title to the curtains. As a result of the transformation, B has become the owner of the curtains, in spite of the retention of title clause.

If the case had involved the incorporation of the assets sold into another asset (i.e. commingling), rather than their transformation, C. com, article L. 621-122 (previously IA 85, article 121 para. 3 as amended in 1994) would apply. It provides that, where the assets have been incorporated into other movable assets, rei vindicatio is possible if it can be done without damaging either asset.36

(b)As B is regarded as the owner of the fabric once it has been cut into curtains, the curtains may be subjected to the execution procedure initiated by C, under the same procedure of saisievente, as described in case 2.

(c)If A wishes to retain ownership of the fabrics, and not to be deprived of it by the manufacturing process, he can conclude a contract with B (contrat d’entreprise) under which B is paid a fixed and agreed price for manufacturing the curtains. In such circumstances, A will remain the owner of the cloth. Then, pursuant to C. civ, article 570:

if a crafts man or anyone used some material which did not belong to him to make a thing of a new form, whether or not the material is able to revert to its initial form, the owner has the right to claim the return of the transformed things, paying back the price of the work at the date of the reimbursement.

35See Ghestin/Desché, La Vente n. 648.

36It is still too early to assess how strictly this requirement will be applied by the courts. The previous decisions looked to the extent to which the assets retained their individuality and the ease with which they could be returned to the owner. For example, in a case involving the affixation of tyres to vehicles, the Cour de cassation confirmed the decision of the Cour d’appel that the affixation did not affect the identity or the autonomy of the goods and therefore the tyres could be returned

(see Com 18 July 1989, D 1991, Som, 45). In a case, however, involving an aluminium ceiling structure used to support concrete plates of the ceiling, the court held that, although it was physically possible to remove the structure from the plates, the consequence of that would be to destroy the ceiling, since together they constituted a single item. The ceiling structure had, therefore, lost individuality and autonomy (Paris, 30 Apr. 1993, D 1993, Som, 291). Clearly, the 1994 amendment to the former IA 85, article 121, now C. com, article L. 621-122, has eliminated the concepts of autonomy and individuality, retaining only the criterion of whether disassociation would damage the final product.

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A, having remained owner, could thus claim ownership of the curtains, on the condition that he paid to B the price for the manufacturing (as agreed in the contract). It is unclear whether this type of arrangement is used in practice, however.

(d) In the event of the debtor’s insolvency, whether the assets remain in kind or not is to be assessed at the time of the commencement of insolvency proceedings. Should the assets subsequently be transformed or disappear, then the owner will still have title to them or will be entitled to receive compensation for their loss. He will be, as it were, a creditor guaranteed by C. com, article L. 621-32.37

b e l g i u m

(a)According to article 565 C.civ., questions about specificatio and accessio must be answered in a way that accords with the principles of natural justice. Certain cases are dealt with by specific provisions. When, for example, a manufacturer creates a new movable out of material that did not belong to him, the owner of the material becomes the owner of the newly created good, except to the extent that the manufacturer becomes entitled to compensation (article 570 C.civ.). These rules are however of little practical use in case of reservation of title.

Article 101 Bankruptcy Act requires that the goods are still in natura in the estate of the buyer and have not been mixed with other goods. This means that they should remain identifiable. The ownership of the seller will not therefore survive the transformation of the goods or their use in the creation of a new product. The legislature has not defined the criteria of identification. Whether the object of a preferential right can be identified must be determined according to common sense. In this case, the courts will consider the curtains to be a different asset and the security right of the seller will therefore be extinguished.38 Under these circumstances, and for the same reasons, the seller will also lose his statutory preference in respect of the goods (see Belgian report, case 1).

(b)The newly produced items can be subjected to execution on the behalf of C. According to the principle of article 2279 C.civ., a creditor may

37Com 9 June 1987, Bull civ IV, No 142, RTDCom 1988, 120, obs. Hémard and Bouloc; Com 9 June 1992, D 1992, IR, 211. See case 3.

38Fredericq, Traité de droit commercial belge VIII 679 n. 477.

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A and B could stipulate that B manufactures and sells the products for A (mandate) but this kind of agreement is not common in practice.

(d) In the event of the buyer’s insolvency, the reservation of title clause would be effective against the insolvency administrator, if it was stipulated in an act under private signature before the delivery of the goods (article 155◦ n◦ 4 CPEREF). If this requirement as to form was met in the present case, the answers to parts (a) and (b) would be identical.

s p a i n

(a)A can elect to claim either the payment of the debt or the recovery of the manufactured items. According to article 383/II CC, A is the owner of the curtains, since the value of the raw materials represents a greater proportion of the value of the finished product than that attributable to the manufacturing process. If the converse were so, the owner would be B, the producer of the curtains. Nevertheless, B should compensate A, the seller of the material, to the extent of its value. In this case, the value is the nominal price uprated to reflect inflation.

Reservation of title clauses are not enforceable in respect of manufactured goods, since the material transformation of the object means that the original title to the raw materials has been extinguished and replaced by a new species of property, namely the curtains. There exists a specific solution to this case, found in article 383 CC. The issue of the identifiability of the cloth is so difficult that it seems unlikely that the reservation of title clause would be effective to secure payment for the material, and still less if the transaction falls within the scope of Law 28/1998.

(b)If the bailiff tries to execute against B (on behalf of C), A may claim rei vindicatio (article 595 LEC). A could bring an action in court against B to enforce his debt, called a declaratory suit, which is both lengthy and hedged around with more procedural guarantees.

(c)A could obtain a better right in respect of the products, but only if

the contract has been formalised through the use of an executive public deed or as a bill of exchange (article 517.4◦--5◦--6◦ LEC). The issue arising

in respect of the sale of the material and its subsequent transformation is that of its identifiability. It is very difficult to establish real securities when the manufacturing process transforms the raw material into a

new product. The particulars that the seller would need to specify in the public deed include: the quantity (in metres) of the cloth concerned, its quality and its price. However, this would not ensure that a real security is taken over the curtains, if their value exceeds that of the cloth.

Theoretically, A could also obtain a better right in respect of the goods if the contract was secured by means of a real right, i.e. a charge over movables (hipoteca mobiliaria) or a non-possessory pledge (prenda sin desplazamiento). However, in this case, A could not take a charge over the products, since they are no longer capable of being identified separately. A charge over movables is only possible in certain circumstances, which are not present in this case. The same is true of a non-possessory pledge. Although Spanish law admits a pledge on commodities and on stored raw materials (article 53.2 LHMPSD), such a pledge could not be granted in the circumstances of this case, since the cloth sold is not, strictly speaking, a commodity (unlike the manufactured curtains themselves), and because the cloth ceased to be a raw material on being transformed into the curtains.

Nevertheless, a non-possessory pledge could be granted over the curtains once they have been manufactured to secure B’s claim. In such cases, the security should be executed in a public deed. In accordance with article 57 LHMPSD, the following requirements must be satisfied. First, certain particulars must be recorded: (1) a description of the pledged goods specifying their nature, quantity, quality, condition and other circumstances which might help to distinguish or identify them;

(2) the location of the building in which the goods are stored (together with an indication of their provenance, use, storage and whereabouts in the depot where they are held); (3) the insurance contracts, which must bear a number referring to the corresponding policy. Secondly, the owner is obliged to take care of the pledged goods and to make them freely available to the creditor so that the latter can, at any moment, inspect them and verify their existence and condition.

(d) As to part (b): If B goes bankrupt, A has the following choice. If he chooses to recover the curtains, they will be excluded from the insolvency estate. If, on the other hand, A chooses to claim the payment of the debt, the curtains will form part of the insolvency estate and A’s rights will be subject to the insolvency procedural rules (article 1922.1◦ LEC).

As to part (c): A’s position in B’s insolvency proceedings depends on whether or not he has chosen to recover the curtains. In such a situation,

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it is advisable for A to elect to recover the manufactured items by means of a rei vindicatio because this would exclude them from the insolvency estate.

i t a l y

(a) According to the rule on specificatio (article 940 c.c.), as soon as the cloth supplied by A is manufactured by B into curtains, it becomes the property of B. Article 940 c.c. provides an exception for situations where the value of the textile significantly exceeds the cost of its transformation into clothing. In such a case, the owner of the textile may claim ownership of the clothing, on the condition that he pays for the cost of its manufacture.

Whether it is possible to derogate from this rule by way of contract is a matter of controversy. Some authors argue that the parties should be able to do so,40 but there are also opinions to the contrary.41 The latter view is adopted by the only case in point on this issue.42 Such doubts are intelligible in the light of the hostile stance prevailing in the Italian legal system towards the transfer of property for security purposes, which lies at the root of the current, expansive interpretation of the Civil Code rule banishing pactum commissorium (article 2744 c.c.).43 In different contexts, there is little doubt that the rule on specificatio can be derogated by way of contract (see below, part (c)). As a matter of fact, ‘prolonged’ title reservation clauses, in the mould of the German verlängerter Eigentumsvorbehalt mit Verarbeitungsklausel or the English

Romalpa clauses, must be a rarity in practice because they are not litigated in Italian courts, though Italian authors are aware of foreign

40Bianca, La vendita e la permuta 602, is rather cautious on this point: reservation of

title to the new product is valid (for the amount of the value of the original res) to the extent it is possible to derogate from article 939 c.c.; Gambaro, in: Cicu/Messineo/ Mengoni, Trattato di diritto civile e commerciale 840 ff., supports the rule which is more favourable to party autonomy.

41Carpino, in: Trattato di diritto privato 324, note 32.

42App. Napoli, 5 July 1955, Foro it., 1956, I, 101, affirms Trib. Salerno, 30 July 1954, Foro it., 1955, I, 618. According to these decisions, any reservation of title clause that would put the debtor under excessive pressure should be avoided. For their critique see Bonomi, Der Eigentumsvorbehalt in Österreich und Italien.

43Article 2744 c.c.: ‘Any agreement establishing that, upon failure to pay the claim within the fixed time limit, ownership of property subject to hypothec or given in pledge shall pass to the creditor, is void. Such an agreement is void even if subsequent to the establishment of the hypothec or the pledge.’ (Translation by the author.) On article 2744 c.c. see infra, Italian report, case 9(b), (c); case 12(a), (b).

developments concerning them.44 On the relevance of the distribution of risk in the manufacturing process, see part (c).

(b)If it is not possible to derogate from the rule described above, the newly produced items would be susceptible to execution on behalf of C, on the assumption that they are owned by B.

(c)A could probably get a better right to the product if the contract with B was regarded as a contratto d’appalto. This is the contract by which an independent contractor undertakes to perform a piece of work (or render a service) by organising the necessary means and operating at his own risk (articles 1655--1677 c.c.). If the raw materials to be used in the manufacturing process are provided to the independent contractor by the party who wants to acquire title to the new product, ownership will pass to the independent contractor simply because they are delivered to him, inasmuch as they are considered as fungibles.45 On the contrary, if the parties agree that the materials are to be treated as infungibles, commentators hold that the owner of the materials will acquire ownership of the new thing as soon as it is produced.46 Proof of the relevant intention, however, may be difficult to establish if the parties did not express their intention to regard the raw materials as infungibles.47

(d)The answers to parts (b) and (c) do not change in the event of B’s insolvency.

t h e n e t h e r l a n d s

(a) B became the owner of the curtains by virtue of specificatio. Specificatio is governed by article 5:16 BW, which lays down who is to be regarded as

44Candian, Le garanzie mobiliari 1 ff.; Veneziano, Le garanzie mobiliari non possessorie 16 ff. Chianale, Obbligazione di dare e trasferimento della proprietà 215 ff.; Sulpasso, in: Vacca II 782 ff.

45Cass. 20 Feb. 1984, n. 1200, Fallimento, 1163; Dir. fall., II, 424 (use of silver to manufacture new objects).

46Rubino/Iudica, in: Commentario del codice civile Scialoja-Branca 340--341; Rubino, in:

Trattato di diritto civile italiano 808--809 (see also 241--242); Giannattasio, L’appalto, in Trattato di diritto civile e commerciale 282--283. App. Messina, 5 Oct. 1956, Foro it., Repertorio 1957, sub ‘Appalto’ n. 18. Cass. 21 June 1974, n. 1823, Giust. civ, 1974, I, 1740, cannot be cited to the contrary, because the materials in questions were provided by the manufacturer. On these cases: Cagnasso, Diritto privato, 1995, 35.

47Cf. Cass. 20 Feb. 1984, n. 1200, Fallimento, 1163; Dir. fall, II, 424.

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owner of a newly created thing. A thing is considered new when, according to general opinion, it has its own, separate and new identity. The curtains will be regarded as a newly created thing.48

The rule provided by the Dutch Code is complex and perhaps rather unfortunately drafted. The main rule, which is stated almost as an exception in the second paragraph of article 5:16 BW, is that, if somebody creates a new thing, or has it made for himor herself, out of one or more movable goods which do not belong to himor herself, he or she will become the owner of the newly created thing. In other words, one may become owner through specificatio by either creating a thing for oneself or having a thing created for oneself by somebody else.

Occasionally it will be difficult to determine whether the actual ‘creator’ created the thing for himor herself or whether somebody else had the thing created by the actual ‘creator’. Nevertheless, the question of ownership depends on this distinction. The judgment of the Supreme Court in Breda/St Antonius provides a necessary illustration of the Dutch law on this matter.49

Breda/St Antonius concerned the manufacturing of machine parts by St Antonius according to the order of Breda. Breda gave detailed instructions as to the productive process and provided the raw materials for the parts to be produced, namely steel plates. Breda was not, however, the owner of the steel plates, which in fact belonged to a third party (the bank was fiduciary owner). Following production, the machine parts were handed over to Breda, who shortly thereafter experienced financial difficulties. Subsequently, both Breda and St Antonius claimed to have become the owner of the machine parts by reason of specificatio. St Antonius claimed to have created the parts for itself, while Breda claimed it had had the parts created for itself by St Antonius.

The lower courts found in favour of St Antonius. The Supreme Court, however, reversed these decisions. It held that the answer depended on the relationship between Breda and St Antonius. It continued by saying that, in case of industrial production processes, relevant factors are who bears the economic risk of the manufacturing process and, also, which party decides on the production methods and the distribution of the products.

By far the majority of cases decided on the basis of specificatio will turn on the second paragraph of article 5:16 BW. There are only a few

48See e.g. the case law mentioned by Fikkers, Natrekking, vermenging en zaaksvorming 65.

49Hoge Raad 5 Oct. 1990, NJ 1992, 226 (Breda/St Antonius).

situations where the main rule does not apply and where recourse is necessary to the rule contained in the first paragraph.50 First, when somebody creates a new thing (or has it created for himor herself) out of his or her own goods, the main rule does not apply because it requires the use of one or more goods belonging to somebody else. In this case, the first paragraph provides the basis for the manufacturer’s new ownership. Secondly, and this is perhaps the most important exception to the main rule, when the costs of manufacturing are too marginal to justify the operation of the main rule, the newly created thing will belong to the owners of the original goods.51

Consequently, because B manufactured the curtains for himself, they have become his property. This result does not change because the materials were sold subject to a retention of title agreement. Dutch law does not recognise extended retention of title (verlängter Eigentumsvorbehalt) as such.52 A remains the owner only until the specificatio.53

(b)As the curtains have become the property of B, B’s creditors may execute against them.

(c)As noted above in part (a), Dutch law does not recognise extended retention of title as such. A products clause (purporting to extend retention of title to the newly created thing) is a legal impossibility. As the putative subject matter of such a clause is a new thing, and consequently a ‘new’ title, there is nothing for A to retain.

The alternative offered by the Civil Code is the creation ‘in advance’ of a pledge over future movables.54 It is possible to meet all the requirements necessary to create a pledge, except for the requirement that the pledgor possesses the power to dispose.55 The pledge will come into

50See Pitlo/Reehuis/Heisterkamp, Het Nederlands burgerlijk recht III nn. 522--525, who also include the situation of somebody mistakenly thinking he or she is creating a thing for somebody else (putative order).

51If the original goods belonged to different owners, the rules of accession apply, which may indicate either that only one of the original owners will become the owner of the newly created thing or that there will be co-ownership of it.

52This is not entirely true, but the verlengd eigendomsvoorbehoud is very limited in scope (cf. article 3:92 para. 2 BW). See Fikkers, Natrekking, vermenging en zaaksvorming 59 and, specifically on the issue in the present case, Fesevur, Goederenrechtelijke colleges 214.

53Hoge Raad 5 Dec. 1986, NJ 1987, 745 (gescheurde orchideeën).

54For instance, Fesevur, Goederenrechtelijke colleges 214; Fikkers, WPNR 6321 (1998) 465 (466); Pitlo/Reehuis/Heisterkamp, Het Nederlands burgerlijk recht III 560.

55Article 3:98 in conjunction with article 3:97 BW.

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existence without more when the new thing is created and B acquires, as the owner, the power to dispose.

Sometimes a different approach is encountered, where parties agree that the buyer (B) will create the new thing not for himor herself, but on behalf of the seller (A). As described above, according to the Dutch rule on specificatio, the seller and not the buyer becomes the owner of the newly created thing in such circumstances. A would therefore be the owner at all times -- though the old ownership is still being replaced by a new one -- and would not run the risk of B going bankrupt. Although such a clause would appear to be valid in principle, it may have a more limited application than might, at first sight, appear. It would usually imply that the manufacturing takes place on behalf of A, who would therefore bear the economic risk. This would obviously reduce the practicability of this type of clause for many categories of creditors, e.g. credit institutions or suppliers of raw materials.56

(d) As a rule, insolvency proceedings would make no difference to the position, except when a pledge on future movables was involved. In insolvency proceedings the debtor/creator loses the power to dispose. The pledge will therefore not come into existence when the debtor first acquires the movables after the commencement of insolvency proceedings.57

e n g l a n d

(a) The answer to this question is perfectly clear: new goods have been manufactured by the buyer who becomes the owner of those goods.58 This is a case of specification, where a new product is manufactured out of raw materials and labour, rather than accession. It will not matter how much of the value of the new product is attributed to the raw materials or to the manufacturing process (labour). Nor will it matter who bears the risk of the manufacturing process, where the buyer genuinely is a buyer and not someone manufacturing goods as agent for the seller, which is an unlikely way to characterise the relationship.

For the sake of completeness, though this question concerns goods that are altered to produce something new, the same type of problem

56Fikkers, Natrekking, vermenging en zaaksvorming 77--78. Although the risk may be allocated by contract, it would bring the clause dangerously close to the prohibition on fiduciary transfers, article 3:84(3) BW. Parl. Gesch. Boek 5 Inv. 1023.

57See articles 23 and 35(2) Fw.

58Appleby v Myers [1867] LR 2 CP 651; Re Peachdart Ltd [1984] Ch 131; Chaigley Farms Ltd v Crawford Kaye & Grayshire Ltd [1996] BCC 957.

might arise where goods are supplied and then are irrevocably attached by the buyer to other goods. The question is who owns the new goods that arise upon the attachment. To the extent that this property rule favours the buyer, any attempt on the seller’s part to draft out of the rule will be characterised as a charge. The basic rule concerning attachment, or accession, is that the owner of the greater part retains ownership of the whole in the case of an irrevocable attachment59 but that the separate ownerships remain distinct if the attachment can be reversed without damaging the greater thing.60

(b)To the extent that the goods are owned by the buyer, then execution may be levied against them in the normal way. The position of the bailiff (sheriff ) who executes against goods that only appear to be owned by the buyer but in fact are not has been considered above. If the seller has taken a charge over the goods or over new goods manufactured with the goods supplied, then, in the case of an enterprise charge ( f loating charge), the position is as follows. When a f loating charge crystallises, the chargee will prevail against the execution creditor if crystallisation takes place before the sheriff sells the assets subjected to execution.61 It is likely (the point has not been settled) that the latter will also prevail if crystallisation occurs before the sheriff distributes to the execution creditor.62

(c)The debate in English law has not centred on the specification and attachment rules as such, which is perhaps why there is so little case law in this area. Rather, the focus has been upon attempts by sellers to draft reservation of title clauses that purport to vest in the seller the new goods as soon as they come into existence. The idea is that, if such clauses are successful in reservation terms, then they will not be characterised as charges with all of the systemic disadvantages suffered by trade creditors when seeking to register their charges.

Just as equitable tracing and artificial fiduciary relationships have not found favour in the years following the Romalpa decision,63 so too the courts have declined to recognise as title reservation clauses those clauses that purport to make the seller the original owner of new goods made

59Appleby v Myers [1867] LR 2 CP 651.

60Hendy Lennox Ltd v Grahame Puttick Ltd [1984] 2 All ER 152.

61Evans v Rival Granite Quarries [1910] 2 KB 979; Re Standard Manufacturing Co. [1891] 1 Ch 627.

62Morse, Palmer’s Company Law § 13.138.

63Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676: see case 5(c), supra.

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‘process’ by the buyer at the end of which ‘process’ they lost any significant value as raw material. The court concluded that the suppliers’ interest in the goods was lost and their interest in the processed goods was in the nature of a charge. On the other hand, there are cases which hold that minor manufacturing operations do not prejudice the title of the original supplier. An example is Armour v Thyssen Edelstahlwerke AG,69 where it was held that the supplier’s title remained unaffected by the cutting of the raw material, steel. The New Zealand case -- New Zealand Forest Products v Pongakawa Sawmill Ltd70 -- also merits attention in this context. There it was held that title to timber supplied on reservation of title terms did not disappear when the timber had been converted by a process of sawmilling into a different form.

While the Irish courts have not specifically addressed the precise points at issue in this problem, the basic message seems to be that any attempt to extend retention of title clauses into manufactured products is doomed to failure. In Somers v Allen,71 Carroll J held that if a contract deals with the future title of the buyer in the goods to be manufactured from the goods supplied, then, as regards that future title, the contract would be in the nature of a charge. Kruppstahl AG v Quitmann Products Ltd72 involved a detailed retention of title clause which dealt with, inter alia, handling, processing, blending and mixing the goods supplied (steel). While the contract was stated to be governed by German law, Gannon J held, as a matter of Irish law, that regarding the steel used in the manufacturing process, the interest of the suppliers was in the nature of an enterprise charge ( f loating charge).

Reverting to the facts of the problem, B probably has the best claim to the curtains and in this context the relationship between the value of the raw materials and the value created by the manufacturing process probably does not matter. If, however, A bears the risk of the manufacturing process, then it is submitted that he is entitled to the finished article.

(b)The answers are the same as to the previous question. In other words, the newly produced items will be subject to execution on behalf of C.

(c)A’s reservation of title clause will in all probability be ineffective. It is likely to be held to constitute a charge granted by the buyer, B. Assume

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buyer in this particular case when the financial condition of the latter became parlous.

In a number of Irish cases, the retention of title provision has addressed the products issue. Kruppstahl AG v Quitmann Products Ltd74 concerned a contract to supply steel between a German supplier and an Irish manufacturer. The contract stated:

In the case of processing, blending and mixing of the reserved goods with other goods by the buyer, we acquire a joint title to the new goods in accordance with the ratio of the invoice value of the reserved goods to the invoice value of the other goods used. If our title lapses due to blending or mixing, the buyer assigns to us already at this stage his title to the new goods in accordance with the invoice value of the reserved goods, and holds them in trust for us, without charge.

Gannon J held that the supplier’s interest in the manufactured steel was by way of security for the discharge of a potential indebtedness. Consequently, it was in the nature of a charge which required registration under the Companies Act 1963. The judge expressly concluded that the goods supplied fell within the definition of a bill of sale in s. 4 of the Bills of Sale (Ireland) Act 1879.

(d) The analysis is not affected if B has become bankrupt instead of unsecured creditors trying to make execution against B’s property.

s c o t l a n d

(a) If the fabric has passed through a manufacturing process sufficient to destroy its identity, so as to create a nova species, there has been specificatio, and the product is owned by B, who carried out the work. What amounts to the creation of a nova species will vary from case to case. Probably, manufacture into curtains would amount to specificatio.75

The relative value of (1) the material and (2) the work is of no relevance. Nor is it relevant who was to bear the risk.

The law on specificatio remains substantially as it was left by the Corpus Iuris Civilis.

74[1982] ILRM 551.

75In Armour v Thyssen Edelstahlwerke AG 1986 SLT 94, 1989 SLT 182, 1990 SLT 891, [1991] 2 AC 339 steel strip coils were cut into shapes. The judges took different views as to whether this amounted to specificatio. But the case for specificatio here (curtains out of cloth) is stronger.

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(c)There is no authority in South African case law that change of ownership can be excluded by agreement between the parties. There is, however, authority that reservation of title in a contract of sale of a movable (e.g. parts of an irrigation system) can prevent the movable from becoming a part of the land on attachment because it was never the intention of the owner to relinquish ownership until the full purchase price has been paid.77 Analogous application of this dogmatically unsound case law may result in the exclusion of the rules of specification on account of a reservation of ownership in an agreement between the parties.

(d)The insolvency of the buyer would not alter the position of the seller. If B has become the owner by specification, the curtains will fall into his insolvency estate. If the effect of the reservation of title is to exclude the consequences of specification, the curtains will not fall into B’s insolvency estate.

d e n m a r k

(a)According to Danish law, it is possible to stipulate a reservation of title clause in a sort of credit consignment agreement if goods are sold to be manufactured. However, this clause will only be effective up to the point at which the goods are manufactured.

When the buyer uses the cloth to make curtains, the contract should stipulate that the buyer has to settle with the seller when the cloth is manufactured. Like other credit consignment agreements, the contract should allow A to check that B settles as agreed and A should do so. Furthermore, it is necessary that the cloth is kept apart from cloth of the same type supplied by other suppliers and from cloth which B has paid for already.

Even if the contract stipulates a valid reservation of title clause, this will only mean that the seller, A, can reclaim the cloth in the event of B’s non-payment up to the point at which the cloth is used for manufacturing. When the cloth is manufactured into curtains, A cannot claim any right to the curtains. The curtains belong to B, the manufacturer.

(b)As the curtains belong to B, they can be executed against by B’s creditor, C. This is a consequence of the fact that A cannot claim a right to the curtains.

77See e.g. Macdonald Ltd v Radin NO and the Potchefstroom Dairies & Industries Co. Ltd 1915 AD 454; Konstanz Properties (Pty) Ltd v Wm Spilhaus en Kie (WP) Bpk 1996 SA 362 (A).

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presumably because the seller was supposed to assist in the mounting of the doors.83 There may be a presumption that the seller has consented to resale or manufacture prior to payment when he sells to a retailer or manufacturer, respectively, but all the details of the rule are not entirely clear. In the present case, it would seem likely that the seller, A, will be presumed to have accepted manufacture prior to payment, and, therefore, the reservation of title will be invalid in relation to the creditors of the buyer, B. Otherwise, the change of identity from cloth to curtains (rather than the value ratio) would presumably render the reservation of title ineffective.84 The fact that the manufacturing process in this case might have been unauthorised (and otherwise the specification problem does not arise) does not seem to justify co-ownership having regard to the value ratio.85

(b)See part (a) above.

(c)A might enjoy an improved position if he contracts with B that the manufacture shall be on his behalf.86 This would require, however, that A assumes the business risk of manufacture (i.e. undertakes to compensate B for his costs if the goods are not sold), which he probably will not want to do, unless the seller and buyer belong to the same group of companies. If the business risk is placed on A, an analogy can be drawn with section 53 of the Commission Agency Act, which would suggest that A would be the owner.

In practice, sellers like A sometimes deposit raw materials with buyers like B without selling them but with an option, but not an obligation, for B to buy the raw materials on credit as and when he needs them for manufacture. The idea is that A will have a right to separate that part of the stock which B has not bought when insolvency or execution occurs. It is unclear whether such an arrangement is valid. On the one hand, according to section 53 of the Commission Agency Act, the principal has a right of separation even if the commission agent may buy the goods for himself, perhaps with deferred payment, but has not yet

83NJA 1974, 660.

84Cf. NJA 1959, 590; Unden, Svensk sakrätt I § 15; Håstad, Sakrätt 43 ff. and SOU 1988:63, 204 f.

85Cf. chapter 2 s. 4 of the Land Code, where a reservation of title or rescission is deemed to be invalid when the goods have become a fixture to immovable property.

86See further Almén/Eklund, Lagen om köp och byte av lös egendom § 2 (notes 10 and 16); Håstad, Studier i sakrätt 9 ff.

done so; there is no requirement that the agent must be solvent. On the other hand, according to the 1944 Entrusted Money Act (lagen om redovisningsmedel), which is applicable to fungible goods by analogy, a principal has a right of separation even if the agent (often a commission agent) is entitled to dispose of the entrusted monies for his own purposes. Such a permission, however, must be restricted to situations where the agent is solvent; should the principal have taken a credit risk, the right of separation is excluded from the beginning even if the monies have been kept separately at all times. Thus, the law seems to be contradictory. A legislative proposal has sought to resolve this issue,87 but no legislation has thus far been enacted.

A could have been granted security in the manufactured products under the registered enterprise charge. A (security) assignment or a pledge would not work, however, since actual delivery is required (a constitutum possessorium is not sufficient) and future goods cannot be registered under the Bills of Sales Act.

(d) See parts (a)--(c).

f i n l a n d

(a)The retention of title clause could, perhaps, bind the buyer, B, personally. The problem in this respect is, primarily, whether the retention of title clause is regarded as unreasonable or not. If the clause is binding between A and B, one could perhaps say that the curtains are owned by A. In Finnish doctrine, the question of ownership is, however, usually regarded as far too indefinite.88 It is not usual primarily to ask who owns an item, but who should be regarded as owner in certain specific relationships. So even if A was regarded as the owner inter partes, i.e. as between A and B, the answer may very well differ when it is asked who is to be regarded as the owner when B goes bankrupt or when a bailiff tries to execute against the item in question on behalf of B’s creditors.

(b)The seller can, in general, obtain protection against other creditors of the buyer by using a retention of title clause. If the subject matter of the purchase is, however, a raw material, and the buyer is entitled to use the material in question before full payment of the purchase price, the

87SOU 1988:63 Kommission och dylikt.

88See further e.g. Kartio, Esineoikeuden perusteet 160 ff.