Max Planck Private Law Research Paper No. 12/26

A Plea for European Conflict Rules on Proprietary Security

Ulrich Drobnig

Abstract:

Ole Lando – to whom this paper is dedicated – has enriched mainly two legal fields: the comparison and unification of the conflict of laws and of substantive contract law. His work and his publications have centred on the European aspects of these two fields. It is therefore appropriate to offer a few ideas on a branch of the European conflict of laws that so far has found little attention – but, in the author’s view, not only deserves, but requires more attention: European conflict rules on movable property.

The necessity of such European conflict rules on proprietary security rights is not new. In fact, they have been debated since the middle of the 1960s, soon after the creation of the Common Market. The Association of European Banks elaborated even a draft Convention on rules dealing with the extraterritorial effects of foreign non-possessory pledges. However, all these efforts failed – primarily, one may assume, because the Romanic countries were not willing to recognize non-possessory, but unregistered security rights in assets imported from other member states. The existing or planned Rome Regulations – from I to V – deal or plan to deal with various matters. But property is not (yet?) mentioned.

Keywords: Conflict of laws, security rights, possessory pledge, retention of ownership, European regulations

ULRICH DROBNIG*

A Plea for European Conflict Rules on Proprietary Security

Ole Lando – a personal and professional friend since more than 55 years

– has enriched mainly two legal fields: the comparison and unification of the confl ict of laws1 and of substantive contract law.2 His work and his publications have centred on the European aspects of these two fields. It is therefore appropriate to offer a few ideas on a branch of the European conflict of laws that so far has found little attention – but, in the author’s view, not only deserves, but requires more attention: European conflict rules on movable property.

The necessity of such European conflict rules on proprietary security rights is not new. In fact, they have been debated since the middle of the 1960s, soon after the creation of the Common Market.3 The Association of European Banks elaborated even a draft Convention on rules dealing with the extraterritorial effects of foreign nonpossessory pledges.4 However, all these efforts failed – primarily, one may assume, because the Romanic countries were not willing to recognize non-possessory, but unregistered security rights in assets imported from other member states.

*Prof. Dr. Dr. h.c. mult., Max Planck Institute for Comparative and International Private Law, Hamburg.

1.From the wealth of his publications only one can be mentioned here: Lando, Contracts: Int.Enc.Comp.L. III/2 ch. 24 (159 p.); this contribution was based upon his Danish thesis, entitled Kontraktstatuttet (Copenhagen, 1962).

2.The fruit of decades of efforts to prepare uniform European rules on contract law are the three volumes of the series „Principles of European Contract Law“, coedited by Ole Lando: Part I (1995), co-edited with H. Beale; Parts I and II (2000), also co-edited with H. Beale; and Part III (2003), co-edited with E. Clive, A. Prüm and R. Zimmermann.

3.See Coing, “Probleme der Anerkennung besitzloser Mobiliarpfandrechte im Raum der EWG”, Zeitschrift für Rechtsvergleichung 8 (1967) 65-82.

4.Unpublished.

The existing or planned Rome Regulations – from I toV – deal or plan to deal with contracts, torts, and divorce;5 subsequent, more or less progressed topics will be matrimonial property, support and succession.6 But property is not (yet?) mentioned.

1. Existing European Conflict Rules

The necessity of having European confl ict rules on property is confirmed by the fact that at present a certain number of diverse such rules does already exist. However, they are specifi c and supplement European legislation on various substantive issues. The more important pieces of these spread rules must here briefly be summarized.

1.1. Recognition of retention-of-title clauses in intra-Community trade

This topic is dealt with byArticle 9 (1) of the Directive against late payment of commercial monetary obligations.7 The provision obliges member states to “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.”

A more general formulation of the same idea is to be found in the Regulation on Insolvency Proceedings of 2000Article 7 paragraphs (1) and (2):An insolvency proceeding does not affect the rights of the seller as the holder of the retained right of ownership, if at the time of opening the proceeding against either the buyer or the seller the sold asset was located in another member state.8

5.The enacted instruments are Rome I on contracts of 17 June 2008, Rome II on torts of 11 July 2007 and Rome III on divorce of 22 Dec. 2010 (for only 14 member states).

6.See the broad annual surveys in the fi rst issue of each year in the journal IPRax.

7.Directive 2011/7/EU of 16 Feb. 2011 (O.J. 2011, L 48, 1) Art. 9 par. 1, replacing Directive 2000/35/EC of 29 June 2000 on combating late payment of commercial transactions Art. 4 par. 1.

8.Regulation no. 1346 of 29 May 2000 (O.J. 2000, L 160, 1).

other types of security rights (infra 2.3); foreign security rights unknown to the importing country (infra 2.4).

2.1.Retention of ownership

2.1.1Austria

No fewer than four decisions of the Supreme Court rendered between 1989 and 2002 have recognized retentions of title created in other member states, especially in Germany and Italy.10 Also two Swiss-Austrian cases relating to a sale of goods by a Swiss seller to an Austrian buyer living in Austria deserve to be mentioned: The validity of the retention of title agreed by the parties was doubtful since under Swiss law a retention of ownership must be registered at the buyer’s residence, whereasAustrian law does not require any registration.The Supreme Court heldAustrian law to be applicable to the issue and therefore affi rmed the validity of the retention of title in Austria.11

2.1.2. Belgium

There seems to be only one relevant fi rst-instance case: A German exporter, under a contract subject to German law, had reserved title in goods exported to a Belgian buyer. The latter transferred the imported assets to a Belgian bankassecurity.IntheBelgianimporter’sinsolvencyproceedingstheeffects of the German seller’s retention of title were held to be subject to Belgian law and therefore ineffective.12 The result is not amazing since at that time Belgium did not have any legislative rules on retentions of ownership. In the meantime, the legal situation has changed since the Bankruptcy Code of 2001 Article 101 has introduced it into Belgian law. A retention of title validly created abroad will now be recognized.13

2.1.3. Denmark

A retention of ownership created in another country is recognized if the “encumbered” asset is brought to Denmark and is used or consumed by the buyer.14 By contrast, an exception applies, if the Danish buyer is a merchant

10.S.Ct.: 19 Jan. 1989, IPRE 3 (1988-1990) no. 97; 31 March 1989, ibid. no. 98; 29 May 1990, SZ 63 no. 85 and IPRE 3 (1988-1990) no. 99; 30 Aug. 2002, ÖBA 2003, 536, 537 (implied recognition).

11.S.Ct.: 26 April 1961, SZ 34 (1961) no. 67 (p. 183); 13 May 1987, IPRE 2 (19831987) no. 114 at p. 243.

12.Trib.com. Kortrijk 25 June 1964, R.W. 1964/65, 271.

13.Expressly Dirix, “Belgium” in: H. Sigman and E.M. Kieninger, Cross-Border Security over Tangibles (Berlin, 2007) 240.

14.English seller’s retention of title in machine for use in the Danish buyer’s enterprise valid: S.Ct. 3 Nov. 1983, UfR 1984 A 8.

who is entitled to dispose of the imported asset by reselling it to a sub-buyer and the latter is a merchant.15 This means, in effect, that retention of title clauses vis-à-vis merchants are valid only if the buyer can resell the goods bought only to consumers or to producers.

2.1.4. France

The unwritten French confl ict rules with respect to the recognition of foreign non-possessory security rights have undergone a radical change. This development reflects the evolution of French substantive law on non-possessory security rights since the 1970s. While leading cases of the French Supreme Court from 1933 and 1969 had refused to recognize non-possessory security rights created abroad,16 this attitude changed as French substantive law graduallystartedtoadmitsuchrights,especiallytheretentionofownership.17 According to a relatively recent decision of the French Supreme Court, a simple retention of ownership created abroad is effective in the buyer’s insolvency.18 The broadening scope of the French domestic rules on retention of ownership allows the prognosis that French writers and courts will in future also become still more liberal on the level of the conflict of laws.

2.1.5. Germany

The leading case is a decision of the Federal Supreme Court of 1966 dealing with a sales contract between an Italian exporter and a German importer. The Italian exporter had retained ownership of the exported goods; however, that clause did not fully comply with the relevant Italian provisions and therefore was not effective against third parties. After arrival in Germany, a creditor of the German importer brought an execution against the goods. The Italian seller objected, invoking its retention of ownership. The Federal Supreme Court took great pains to protect the Italian exporter against the German execution creditor: it “construed” a tacit agreement between exporter and importer about a fully valid and effective retention of title concluded upon the goods crossing the German border.19 Commentators,

15.S.Ct. 8 Feb. 1983, UfR 1983 A 311; 21 Aug. 1987, UfR 1987 A 766; Vestre Landsret 31 Jan. 1992, UfR A 373; Østre Landsret 6 April 1998, UfR 1998 A 1073.

16.Cass. 24 May 1933, J.D.I. (Clunet) 1935, 380; Cass. 8 July 1969, ibid. 1970, 916; Bull.civ. 1969 I 213. Comment by Patzel, “Zur Frage der Wirksamkeit eines deutschen Sicherungseigentums in Frankreich”, DB 1970, 577 f. Generally s. Witz, “Das französische Internationale Privatrecht der Mobiliarsicherheiten”, Qu.GZ 21 (1986) 113-122.

17.Cass. 22 Dec. 1975, Bull.civ. 1975 IV no. 313.

18.Cass. 5 March 1996, Bull.civ. 1996 IV no. 73.

19.Fed.S.Ct. 2 Feb. 1966, BGHZ 45, 95; IPRspr. 1966-1967 no. 54.

while fully approving the result, refuted the court’s reasoning and replaced it by invoking a change of the lex situs: after crossing of the German border, the retention of ownership became subject to German law and enjoyed the latter’s broader protection.20 In other terms, the reinforced position of the seller was an automatic consequence of the change of the lex rei sitae, i.e. of the governing law.

Many German courts that later had to deal with the effects of a retention of title agreed upon in the exporter’s home country in goods that later were imported into Germany relied upon the Supreme Court case of 1966. The legal effects of a retention of ownership in the exporter’s country had become irrelevant. Relevant was only the fact that the parties had agreed upon a retention of ownership; its effects in Germany were governed by German law.21

Based upon this case law, the German legislator in 1999 adopted the result achieved by the courts, although couched in rather abstract language: “If an interest in property brought into this state has not yet been perfected, events that occurred in another state are to be considered like local events for the determination of the perfection of such an interest in this state.”22 This was an indirect way of saying that in these import cases the governing law changes and German law becomes applicable.

2.1.6. Ireland

Two Irish cases have become known, but although – or rather because – involved, they deserve attention. The facts, the reasoning of the courts and the decisions reached are very similar and can therefore be related in parallel.

20.Cf. Kropholler, Internationales Privatrecht, 6th ed. (2006) 563 s.; Kegel/Schurig,

Internationales Privatrecht, 9th ed. (2004) 773; von Hoffmann/Thorn, Internationales Privatrecht, 9th ed. (2007) 527 ff.

21.Fed.S.Ct. 30 Sept. 1970, IPRspr. 1970 no. 43 (French seller; rights after resale by German buyer and after sub-buyer’s good-faith acquisition of ownership); Superior App.Ct. (OLG) Hamm 13 July 1989, IPRspr. 1989 no. 76 (Italian seller’s simple retention of title expanded to a current account-retention of title!); Super.App.Ct. (OLG) Koblenz 16 Jan. 1992, IPRspr. 1992 no. 72 (Dutch seller); Super.App.Ct. (OLG) Karlsruhe 23 Dec. 1988, IPRspr. 1988 no. 35 (Belgian seller); Superior First Inst. Court Köln 24 March 1992, IPRspr. 1992 no. 73 (Belgian seller); Superior First Inst. Court Hamburg 28 June 1978, IPRspr. 1978 no. 42 (Spanish seller). A good survey in English is offered by Rakob, Germany, in Sigman and Kieninger (ed.) (supra note 13) 92-96.

22.Introductory Law to the Civil Code Art. 43 par. 3, added in 1999. Translated by P. Hay, Am.J.Comp.L. 47 (1999) 652.

InbothcasesIrishfi rmshadimportedgoodsfromGermanmanufacturers, electrical appliances in the earlier and steel in the latter case. The parties had agreed on reservations of ownership extended into future products and to be governed by German law. Both fi rms also had used loans from Irish banks which were secured by debentures. After receivers had been appointed for both fi rms, controversies about the respective rights arose.

In the fi rst case the Irish High Court held that the German seller’s reservation of ownership was valid under German law and therefore also effective in Ireland. The Irish buyer was merely a possessor of the unpaid imported goods; only that possession could be transferred to the Irish bank. The appointment of a receiver for the debtor company implied that the insolvent company’s assets were transferred to the holder of the debenture; however, the German owner of the assets which the debtor company held, had preference over the Irish debenture creditor.

As regards the extended reservation of ownership covering the monetary claims resulting from the sales of the German seller’s products by the insolvent companies, this was held not to be an absolute assignment, but merely one by way of security. Since it had not been registered as a company charge (according to Irish Company Act 1963, s. 99), this assignment was not effective as against the company’s creditors. By contrast, the proceeds of sales of merchandise effectively covered by the seller’s retention of ownership enjoyedpreferenceoverthedebenturecreditors.23 Twoconvincingdecisions!

2.1.7. Italy

This country, like other South European countries such as Spain (infra 9), has rather strict rules on all non-possessory security rights. Especially aggravating is the requirement of a “data certa” for the contract stipulating the retention of ownership because this clause must be in writing, having a “certain”, i.e. a certified date in order to be effective against third persons24

– a time-consuming and expensive requirement that tends to be forgotten or to be bluntly disregarded in commercial transactions.25

In applying the aforementioned Italian provisions to motor vehicles passing through Italy, three Italian courts, including the Supreme Court, came to disregard the retentions of title that had been created abroad.26

23.In re Interview, Ltd., [1975] I.R. 382 (High Ct.); Kruppstahl AG v. Quitmann Products Ltd. a.o., Ir.L.Rep. 2 (1982) 551 (High Ct.).

24.CC Arts. 1524 par. 1 and 2704.

25.Cf. the case of the German Federal Supreme Court of 1966, supra 2.1.5.

26.Cass. 21 June 1974 no. 1860, Riv.dir.int.priv. 1975, 335 (Austrian lorry in transit); Corte di Appello di Milano 6 April 1956, Foro it. 1957 I 1856 (German lorry, de-

Based upon a complaint received by the EU Commission, in 2005 the Commission brought a proceeding against Italy. It claimed that additional requirements to those established by CC Article 1524 paragraph 1 that had been introduced by the Italian Legislative Decree of 9 October 2002 converting the EU Directive into Italian law, contradicted the Directive on recognition of retention-of-title clauses (supra 1). These additions referred to cases of successive deliveries and successive bills under one contract, each of which had to mention the retention of ownership.27 The complaint asserted that the new Italian provisions will cause an unduly high burden for sellers. However, this action was not successful. The European Court of Justice drew a distinction between, on the one hand, the effects of the retention of ownership as between the parties to the sales contract, and, on the other hand, its effects as against third persons. It maintained that third parties should not be affected by the Directive.28 This assertion does not appear to be convincing, since neither the terms of Article 4 nor the definition inArticle 2 of the Directive justify this distinction. Moreover this distinction runs counter to the very purpose of the Directive since the main aim of the retention of ownership is to protect the seller against the insolvency of the buyerandagainsttheinsolvencycreditors.Ontheotherhand,thepainstaking analysis of the deliberations of the text ofArticle 4 of the Directive by Kieninger29 has shown that its text had been highly controversial in the Council and therefore a narrow interpretation of its terms may have suggested itself.

2.1.8. Netherlands

In several recent cases, Dutch courts recognized retentions of ownership created by German sellers; that recognition was taken for granted.30 In

spite dated notarial document); Trib. Latina 19 Feb. 1973, Giur.it. 1974 I 2, 421. Cf. also the leading case that was brought before the German Federal Supreme Court, supra 5.Very skeptical on the recognition of security rights created abroad also Veneziano, “Italy”, in H. Sigman and E.M. Kieninger (supra note 13) 192.

27.Case C-302/05, Commission v. Italy, [2006] ECR I-10597 (10603).

28.Commission v. Italy, cited preceding note, no. 30.

29.Kieninger, “Der Eigentumsvorbehalt in der Verzugsrichtlinie …” in Basedow, Drobnig, Ellger, a.o., Aufbruch nach Europa … (Tübingen, 2001), 151-166, esp. 158-160.

30.App.Ct. (Hof) Leeuwarden 3 March 2009, NIPR 2010, 292 dealing with the loss of a German reservation of title upon integration of the sold pieces into a machine; Rb. Rotterdam 28 Oct. 2008, NIPR 2010, 121. Also in earlier cases, Dutch courts have recognized retentions of ownership created in countries, in which the encumbered assets had been located at the time: Cf. e.g. Rb.Arnhem 15 Feb. 1979, N.J. 1979 no. 579; W.P.N.R. no. 5593, p. 35. Rb. Zutphen 28 Feb. 1991, NIPR 1991, 438.

one case, even an extended reservation of ownership, i.e. one extended to the proceeds of sale, was recognized by the Dutch Supreme Court.31 One German-DutchtransactioncameevenbeforetheEuropeanCourtofJustice.32 In an English-Dutch case, the court expressly declared the English seller’s [alleged!] obligation to have the reservation of ownership registered in England to be irrelevant: “According to Dutch law the [English seller’s] right of retained ownership is protected without registration, since this is the law of the present situs.”33 In an Italian-Dutch sale of a showboat the reservation of ownership was also recognized, but nevertheless remained without success: the Dutch buyer had resold the boat, but the fi nancer of the second buyer successfully intervened invoking acquisition based upon good faith; the court recognized this assertion.34

In the new Dutch Law on Private International Law of 19 May 2011 which introduced a new Book X into the Civil Code, Article 10.128 deals specifically with retention of ownership. According to the main rule, the proprietary effects of a retention of ownership are subject to the law of the country, in which the [sold] thing is located at the time of its delivery [to the buyer].35 However, the parties may agree that the proprietary effects of a retention of ownership in goods that are to be exported shall be subject to the law of the country of importation, provided that, fi rst, according to this law the retention of ownership does not become ineffective before complete paymentofthepurchasepriceand,second,thatthegoodsareinfactimported into that state.36 These rules apply correspondingly to the leasing of assets to be used abroad.37 One may wonder whether these rules will be helpful in practice: the preceding and the following survey of judicial practice shows that it is not the export of encumbered assets, but rather their treatment in the country of importation that may give rise to difficulties.

2.1.9. Spain

For this country, two decisions demonstrate similarities with the Italian attitude (supra 2.1.7). The first case also involved a foreign motor vehicle, in this instance a German bus which was touring Spain. The bus was subject

31.S.Ct. 16 May 1997, infra 2.2.1 note 46.

32.Case C-292/08, German Graphics, [2009] ECR I-8421; N.J. 2010 no. 541.

33.Pres. Rb. Amsterdam 30 July 1992, NIPR 1992, 381 with approving note Vlas/v.d. Weide.

34.Rb. Amsterdam 22 July 1976, N.J. 1978 no. 47; WPNR no. 5593 [1992] 54; NILR 1981, 199.

35.CC art. 10.128 par. 1 first sent.

36.CC art. 10.128 par. 2.

37.CC art. 10.128 par. 3.