учебный год 2023 / Drobnig, Present and Future of Real and Personal Security

European Review of Private Law 5-2003 [623–660] © Kluwer Law International | Printed in the Netherlands

Present and Future of Real and Personal Security

ULRICH DROBNIG

Abstract: In this General Report presented at the XVIth Congress of Comparative Law in Brisbane (July 2002), the author discusses two basic types of security. First, he addresses personal security, understood as an obligation assumed by a third party as security for the principal debtor’s obligation. By contrast, real security is a property right granted, as a rule, by the principal debtor itself in its own assets; its peculiar feature is the fact that it conveys, with respect to the charged assets, a privileged position to the secured creditor. The author concludes his report with some “informed speculation” about the future development of the law of security.

Résumé: Dans son rapport Général présenté au 16e Congrès de Droit Comparé à Brisbane (juillet 2002), l’auteur examine deux types fondamentaux de sûreté. Il aborde tout d’abord le cas de la sûreté personnelle autrement dit de l’engagement d’un tiers envers le créancier à titre de sûreté pour l’obligation du débiteur principal. Par opposition, la sûreté réelle consiste, en principe, pour le débiteur principal à conférer au créancier un droit réel sur ses biens propres ; conférant ainsi au créancier garanti un droit de préférence sur ces biens. L’auteur conclut son rapport par quelques conjectures approfondies relatives aux développements futurs du Droit des Sûretés.

Zusammenfassung: Dieser Beitrag, der bei dem XVI. Kongress der Rechtsvergleichung in Brisbane (Juli 2002) präsentiert wurde, erörtert zwei grundlegende Arten von Sicherheiten. Zuerst diskutiert der Autor persönliche Sicherheitsrechte, d.h. Verpflichtungen einer Drittpartei als Sicherheit für die Hauptverpflichtung eines Schuldners. Im Gegensatz dazu stehen dingliche Sicherheitsrechte, die in aller Regel vom Schuldner in seine eigenes Vermögen gewährt werden; diese Rechte zeichnen sich dadurch aus, daß dem gesicherten Gläubiger in Bezug auf die betroffenen Vermögensgegenstände eine besondere sachenrechtliche Position eingeräumt wird. Der Beitrag wird mit einem Ausblick auf die Zukunft des Rechtes der Sicherheiten abgeschlossen.

I. INTRODUCTION

1The National Reports

This General Report could not have been written without the conscientious and copious support of National Reports that I received in reply to a General Note sent out to all the national reporters. National reports came from 16 jurisdictions, spread over four continents: eleven jurisdictions in Europe; three jurisdictions in the Americas; one jurisdiction in Asia and one in Australia.

Arranged alphabetically by countries, I gratefully acknowledge the following reports, many of which are quite long and comprehensive:

ARGENTINA by Prof. Julio César Rivera, Buenos Aires; AUSTRALIA by Senior Lecturer Anne Wallace, Brisbane;

623

BELGIUM by Prof. Michèle Grégoire on real movable and personal security and by M. Eric van den Haute on real estate mortgages, both Brussels;

CANADA by Prof. Roderick Macdonald and Prof. Catherine Walsh, Montreal; specifically for QUEBEC by Prof. Denise Pratte, Sherbrooke;

GERMANY by Prof. Rolf Stürner, Freiburg;

GREECE by Prof. Achilles Koutsouradis, Thessaloniki;1 ITALY by Prof. Mauro Bussani, Trieste;2

JAPAN by Prof. Osamu Morita, Tokyo;

NETHERLANDS by Prof. Sjef van Erp and Dr. Lars van Vliet, Maastricht;3

POLAND by Prof. Malgorzata Pyziak-Szafnicka, Lódz; SPAIN by Prof. Elena Sánchez Jordán, La Laguna;4 SWEDEN by Mr. Justice Prof. Torgny Håstad, Uppsala; SWITZERLAND by Dr. Thomas Werlen, London;5

UNITED KINGDOM by Prof. Gerard McCormack, Manchester;6 specifically for SCOTLAND by Prof. Carey Miller, Aberdeen.

2Selective Approach

The topics that are comprised by the title of this item of the Programme of the Congress are vast. If these topics should be fully covered, each national report might have required a more or less voluminous book, and this General Report might have required at least one very thick volume. Obviously, this cannot possibly have been intended by the organizers of the Congress.

Rather, the allusion to “the present and the future” indicates that what is expected is a summary of the contemporary state of the law and some informed speculation about its future development. This selective approach is pursued on two levels. First, on the level of the national reports. The National Reporters have been encouraged to choose those aspects of their legal rules on personal and real security which they regard as typical for their respective countries. In fact, it would have been impossible to make a binding general a priori selection. Admittedly, the approach chosen has the disadvantage that there are no uniform emphasizes. However, more important is that the decentralized choices reflect the specific and peculiar trends of development in the various countries. Their diversity is but a consequence of the

1Revue Hellénique de Droit International 55 (2002) 49-67.

2Rapports Nationaux au XVIème Congrès International de Droit Comparé/Italian National Reports to the XVIth International Congress of Comparative Law, Milan, 2002, 245-294; Spanish version in Revista de Derecho Comparado no. 6 (2002) 93-139.

3Vol. 6.4 Electronic Journal of Comparative Law (2002).

4Spanish version in Revista de Derecho Comparado no. 6 (2002) 59-91.

5Rapports suisses présentées au XVIème Congrès international de droit comparé/Swiss Reports Presented at the XVIth International Congress of Comparative Law I (2002) 229-273.

6Spanish translation in Revista de Derecho Comparado no. 6 (2002) 141-192.

624

diversity of legal as well as factual divergencies existing in the field of security rights between the nations of the world.

A few colleagues have used the discretion of concentrating on particularly relevant aspects to eliminate one or even two of the three branches of the total topic. By emphasizing security in movable assets or, as the English call it, personal property, real estate mortgages and/or personal security were eliminated altogether. Intentionally or not, such elimination(s) express, or at least coincide with, a widely shared feeling tht real security in movable assets, whether corporeal or incorporeal, is in our days the greatest challenge.

Some degree of a selective approach must also be claimed for this General Report. However, in its generalisations I have tried to reflect as truly as possible the major and most typical choices that have been made by the national reports.

3Structure of the General Report

This report will deal successively with personal security (infra II); real security in movables (infra III); and will terminate with a general conclusion (infra IV).

4Personal and Real Security

Since the title of the topic combines the two very basic types of security, it is legitimate and even necessary to briefly inquire into the distinctive features of personal as contrasted to real security.

A first answer can be derived from the terms themselves. Personal security – a term unknown to Anglophonic lawyers but very familiar to the Civil Law countries – is the security furnished by a person; since the principal debtor for whom security is to be furnished is already obliged vis-à-vis the creditor, personal security must be a personal obligation assumed by a person other than the debtor. Personal security, therefore, is an obligation assumed by a third party as security for the principal debtor’s obligation. Consequently, an additional personal obligation of the principal debtor himself, such as e.g. a penalty clause, is not a personal security in the meaning used here. Rather, it is the essence of personal security that an additional person assumes an obligation for security for whose performance it is liable with all its assets. By contrast, real security is a property right granted, as a rule, by the principal debtor itself in its own assets; its peculiar feature is the fact that it conveys, with respect to the charged assets, a privileged position to the secured creditor.

A second aspect follows from the preceding observation. Since personal security is a phenomenon of contract law, it is governed, as is confirmed by all reports, by freedom of contract. Some authors therefore distinguish between a typical kind of personal security, primarily the statutory institution of suretyship, and atypical forms that have been created in practice, such as the independent guarantee, stand-by letters of credit, comfort letters, etc. (cf. infra no. 5). As Professor Koutsouradis aptly observes, a surety stands, as a rule, after the principal debtor, an independent guarantor stands besides him and a co-debtor acting for the purpose of security stands

625

with him.7 By contrast, real security is dominated in most countries by the principle of numerus clausus which considerably restricts the autonomy of the parties.

Finally, it may be noted that the division between personal and real security rights is not an absolute one. Rather, there are several situations where the two major branches of security overlap. First, if a third party – and not, as usual, the debtor – creates a real security in favour of the creditor; or if a third party assumes both a personal security and, to secure it, also a real security. Second, the two branches also come into contact if an obligation is secured by a plurality of security rights, one or some of which of a personal nature and one or some of a proprietary nature. Is the creditor free to choose against which of these security rights to proceed? And after having received performance, is any recourse allowed between the several security givers and how is it to be quantified? These hints may assist in concluding provisionally that the borderline between the two main branches of security must not be regarded as impenetrable but that at least sometimes a symbiosis exists. And perhaps it will even be possible to find certain common principles for personal as well as real security.

II. PERSONAL SECURITY

5Structure of this Part

I have resisted the temptation of distilling from the various types of personal security a set of general rules on personal security. Interesting as such a general view might be, it would risk confusing the specific features of the individual instruments, the more so since, at least in theory, up to 16 national variations have to be presented.

This report, therefore proceeds from institution to institution since there is very wide conformity in the identification and, so it seems, the contours of the individual instruments serving as personal security. The following institutions will be discussed successively:

–suretyship (the dependent guarantee) (no. 6-11);

–independent guarantee (no. 12-15);

–stand-by letter of credit (no. 16);

–binding comfort letter (no.17); and

–codebtorship with security function (no. 18-20);

While this catalogue is not and cannot be exhaustive (think of the aval of negotiable instruments), it covers those institutions which are presently of greatest practical importance. This will be followed by a short discussion of certain over-arching issues:

–consumer protection (no. 21-23); and

–a common denominator for personal security (no. 24).

7 KOUTSOURADIS (supra n. 1) 50.

626

A Suretyship

6The Basic Institution

Both historically and still in our days suretyship is the basic institution of personal security. It seems to be universally known and is regulated in all civil codes – at any rate of all codified systems of law represented by national reports – and by some legislation in most of the Scandinavian countries. It is an institution also of the English common law and as such has spread to all (present and past) members of the British Commonwealth. The fundamental rôle of suretyship is confirmed by two facts: First, it appears that suretyship still plays a major rôle in practice, as is expressly asserted for Germany. Secondly, all other forms of personal security are related – positively or negatively – to suretyship.

7Legal Nature

While most countries regard suretyship as an autonomous institution, the recent Dutch civil code qualifies it as a species of co-debtorship. Consequently, suretyship is primarily governed by the rules for this institution, except where express provisions say otherwise.8 However, the number and scope of such express rules is impressive so that the legislator’s primary qualification appears to play a modest rôle. The only major exception is with respect to the surety’s recourse after payment against the principal debtor; however, on this specific issue the relevant rules of co-debtorship are invoked also by other legal systems.

A more substantive issue relates to the rôle of the creditor in a suretyship. According to the traditional approach, the creditor had only rights, while all obligations were imposed upon the surety. In some countries, especially Germany and Sweden, this uneven distribution of rights and duties is being questioned by charging the creditor with certain duties of information towards the surety, especially in the precontractual phase (e.g. on the nature of a suretyship – cf. also infra no. 9 – and the principal debtor’s creditworthiness) – even outside the special field of consumer protection (infra no. 21). Consequently, in Sweden suretyship is conceived as a bilateral contract.

8Omnibus Suretyships

Omnibus or all-sums suretyships are increasingly recognised and utilised. This is expressly affirmed for Argentina, Belgium, Germany and Spain. By contrast, Italy requires for suretyships covering future obligations the indication of a maximum amount.9 It would seem that commercial sureties are versed enough to recognise the risks of an omnibus suretyship, while consumers definitely require protection on this point.

8CC Art. 7:850 (3).

9CC Art. 1938, as amended in 1992.

627

9Suretyship on First Demand

The independent guarantee on first demand has obviously served as source of inspiration for the suretyship on first demand which is mentioned for Germany and Spain. Initial scepticism against this kind of clause may to some degree be allayed by the observation that this form of “sharp” suretyship has been introduced in practice as a substitute for a cash deposit that used to be required in certain industries, such as construction, to secure the employer’s potential claims for non-performance. Rather than using cash funds which are expensive, a form of suretyship was invented that would ensure the same measure of speed and security as the recourse to a cash deposit. The German reporter would admit this sharp form of suretyship only if the surety has been clearly informed about this special risk.

10Essential Feature: Accessority

All reports emphasize that the distinctive characteristic of suretyship is its accessority to the secured obligation. There is no valid suretyship, unless there is a valid obligation to be secured – with one exception (cf. infra). The conditions and the extent of the surety’s obligation may not exceed those of the secured obligation. Consequently, the surety is entitled to invoke vis-à-vis the creditor those exceptions to which the principal debtor is entitled against the creditor. The legal implications of accessority are very well summarised by the English reporter: the surety’s liability is “conditional on the liability of a principal debtor and co-terminous with that liability”.10 The Greek and the Quebec reporters emphasize that a waiver by the surety of all these exceptions is inadmissible.

However, two qualifications of accessority must be mentioned. The first occurs in Sweden: if in the principal debtor’s insolvency the secured debt is extinguished through composition, the suretyship nevertheless remains valid. One may add that the same probably is true everywhere if the insolvent debtor’s debts are extinguished through the debtor’s discharge. To let the surety benefit from any such discharge would run counter to the basic purpose of suretyship, scil. to insure the creditor against the debtor’s inability to pay.

Another exception to accessority which is traditionally made in many Romanic countries but also in Greece and Japan relates to a suretyship for an obligation assumed by a principal debtor without (full) capacity. If the surety in full knowledge of this fact assumes a suretyship, this is valid.11 The Swedish reporter convincingly proposes to regard such a “suretyship” as an independent obligation (or an independent guarantee).

10MCCORMACK, manuscript p 36; cf. the Spanish version (supra n. 6) 184.

11Greek CC Art. 850 lit. b); Japanese CC Art. 449; cf. also Belgian, French and Luxembourgian CC Art. 2012 par. 2.

628

11Subsidiarity

That the surety is merely subsidiarily liable to the creditor is by many authors regarded as another typical feature of suretyship. Curiously, not all reporters distinguish properly subsidiarity from accessority: While the latter delimits the extent of the surety’s liability, subsidiarity determines its rank, scil. that the creditor must first turn to the principal debtor before it may invoke the surety’s liability.

A more substantive objection is that subsidiarity is not by all countries regarded as part of the ordinary regime of suretyship, e.g. in England and Italy. And in the many other countries that start from subsidiarity this is usually expressly allowed to be waived, and such waiver regularly occurs in practice, as is reported for Argentina, Japan and Sweden and is true in many other countries as well.

Finally it is often overlooked that subsidiarity has not everywhere the same meaning. In most European continental countries, the Latin term beneficium excussionis indicates the substance of subsidiarity: the creditor must have attempted to obtain satisfaction by execution into the principal debtor’s assets.12 By contrast, in the Netherlands, subsidiarity does not require a preceding attempt of execution; rather, the creditor must merely first demand performance from the principal debtor.13

B Independent Guarantee

12Character and Source

The independent guarantee is the first and most prominent of the growing number of “atypical” personal securities. While it was known in England and Germany at least since the end of the 19th century, its formal recognition by court practice in major Romanic countries did not take place until towards the end of the 20th century. A major stumbling block for these countries was the “abstract” nature of the independent guarantee, i.e. the absence of that accessority which is the essential feature of suretyship (supra no. 10). The search for the causa of the independent guarantee was finally successful. Only the Spanish reporter briefly deals with the point; her explanation, relying upon a well-known author, argues from the result: if the secured debt does not exist, the guarantor’s payment to the creditor is sine causa (and can therefore be reclaimed by the guarantor).14 This is certainly not the only possible solution; however, this peculiar point cannot be pursued here.

In none of the 16 jurisdictions represented by reports are the rules on independent guarantees laid down by legislation, not even in the very recent civil codes. Relevant legislative provisions have recently been officially drafted in Argentina but enactment has been delayed or even prevented by the recent political and economic turmoil in this country.

12Cf., e.g., Greek CC Art. 855; Japanese CC Art. 453; Spanish CC Art. 1830.

13CC Art. 7:855 (1).

14SÁNCHEZ JORDÁN (supra n. 4) 63-64.

629

13Essential Feature: Non-Accessority and Its Limits

In stark contrast to the accessory nature of suretyship (supra no. 10), the independent guarantee – as its name suggests – defines itself by being non-accessory to a secured claim. This is clearly emphasised by the Australian, English, German, Greek, Spanish and Swedish reports, without dissent from any other country. In other terms, contrary to the dependence of a suretyship upon the existence of a valid secured claim and its terms (supra no. 10), the obligations of an independent guarantee are defined exclusively by the letter of guarantee, without recourse to another external obligation.

In view of the very considerable differences which due to the presence or absence of the principle of accessority exist between suretyship and independent guarantee, the distinction between the two institutions is of considerable relevance. However, in practice proper qualification is also of considerable difficulty since the parties often act without paying special attention to the properties of the two institutions. Two of the three reporters who deal with the issue, namely those from Belgium and England agree that major, although not exclusive weight must be attached to the fact that the parties use the formula “on first demand” as indicating their intention to create an independent guarantee. Beyond this, generally accepted criteria for the distinction do not seem to have been developed.

In spite of the fundamental autonomy of the independent guarantee there is one outer limit to it, which is recognised by the reporters from Belgium, Germany, Spain and Sweden: an obvious abuse of law, i.e. a manifest and grave violation of the obligation for whose security the independent guarantee had been assumed. In addition, since this issue usually arises and has to be settled on short term after (or shortly before) a demand under the independent guarantee has been made, practice in many countries demands liquid and immediate proof of the fundamental breach. The Swedish reporter’s opinion, being that of a judge of the Supreme Court, on the proper remedy deserves special mention: Justice Håstad doubts whether the principal should be entitled to obtain a judicial prohibition against the issuer of the guarantee to perform to the beneficiary since such a decision “ought to have no binding effect on the beneficiary. The relief claimed should instead be a declaration that the bank, if it pays, will have no recourse against the principal.” In view of lack of relevant material in the reports, a full discussion of this procedural aspect is not possible in the present context.

14The Subsidiary Legal Regime

Which rules apply to issues that may arise between the parties involved, if and insofar as these are not covered by agreement? The German reporter correctly remarks that after payment the guarantor may claim reimbursement from its principal; but on which ground?

Only the Greek reporter addresses the more general issue as to the applicable regime. He starts out by referring to the general rules of contract law and rejects the idea of applying by analogy the rules on suretyship; he then adds, however, that the

630

latter rejection should not be taken too absolutely.15 Indeed, it would seem that many rules and provisions dealing with suretyship are perfectly adequate also for independent guarantees – except, of course, those that are based on the principles of accessority and subsidiarity. We will revert to this observation in the further survey of various forms of personal security and especially in the general conclusion (infra no. 24).

In addition, a regime for transborder independent guarantees has been laid down by the UN Convention on Independent Guarantees and Stand-By Letters of Credit of 1995 which entered into force for five states in 2001. It has to be noted, though that the present six contracting states16 do not belong to the major players in international trade so that the factual impact of the Convention is limited so far.

15Independent Guarantees and Letters of Credit

The English, Greek and Spanish reporters raise the question of the relationship between independent guarantees and letters of credit.17 All three reporters emphasize the close relationship between the two institutions: common elements are, first, their independence from, i.e. lack of accessority with, any underlying relationship; secondly, the recognition of the (same) outer limit of that independence in the event of an abuse of right or fraud in whose definition and procedural implications independent guarantees have even explicitly been influenced by the court practice on letters of credit; and, thirdly, the necessity of strict compliance with the terms of the document.

On the other hand, one important difference is also unanimously stressed: a letter of credit has a primary payment function so that always performance first is demanded from the issuing bank and not from the principal on whose behalf the letter of credit had been issued. That is different for the stand-by letter of credit (infra C).

C Stand-by Letter of Credit

16Evolution of a New Personal Security

The stand-by letter of credit (stand-by L/C) is essentially a creature of American banks and insurance companies to serve as a substitute for independent guarantees since those institutions were precluded by banking legislation from issuing suretyships or independent guarantees. The differences between pure and stand-by L/C are well demonstrated by the English reporter: In adapting the stand-by L/C to the demands of a personal security, certain typical features of a pure letter of credit were dropped, such as the advice to the beneficiary about the opening of a stand-by L/C and its confirmation by a second bank. Also the role of the two banks is reversed: The beneficiary usually wishes to turn to a bank in its own country which therefore issues

15KOUTSOURADIS (supra n. 1) 55-56.

16Belarus, Ecuador, El Salvador, Kuwait, Panama and Tunisia.

17MCCORMACK (supra n. 6) 185-187; KOUTSOURADIS (supra n. 1) 56-57; SÁNCHEZ JORDÁN (supra n. 4) 66-67.

631

the stand-by L/C, whereas a bank in the principal’s country may back up the issuing bank by a counter stand-by L/C.18

These changes mean that the payment function of the pure letter of credit (cf. supra no. 15) disappears; instead, the stand-by L/C fulfils a security function, like an independent guarantee, as several reporters confirm. Additional proof of this new qualification is furnished by the emancipation of the stand-by L/C from its original regulatory source, the Uniform Rules and Practices for Documentary Credits (UCP 500) of 1993, to their new specific regimes in the International Standby Practices (ISP 98) and in the UN Convention on (international only!) Independent Guarantees and Stand-by Letters of Credit of 1995 (cf. supra no. 14).

The transformations which the traditional letter of credit has undergone on its way to the stand-by L/C offer a fascinating example of how an institution can be adapted to fulfil new functions.

D Binding Comfort Letter

17The youngest branch on the tree of personal security – whose qualification as a personal security is not even generally agreed – is the binding comfort letter, a phenomenon of corporate finance: A parent company (or a sole or majority shareholder) assures the creditor of a subsidiary (or of the shareholder’s company) that it will furnish sufficient financial means to the subsidiary (company) so as to keep it going. The breach of a hard, i.e. a legally binding comfort letter (as contrasted to a soft one which creates only a moral obligation) obliges the issuer of the letter to compensate the creditor for the resulting damage.

The parties usually choose this specific instrument in order to avoid that in the books of the subsidiary (company) an obligation of reimbursement must be entered. Nevertheless, if in case of a breach of the undertaking the creditor sues the issuer, the proper qualification of the instrument and of the claim for damages based upon it are at issue. Only one of the three reporters who briefly mention such undertakings touches upon their legal qualification. According to the Australian reporter a comfort letter, if binding, may contain a suretyship. This indeed appears to be correct since the author of the letter can only be held liable for the damage resulting from its breach of the obligation undertaken and that was directed at making whole the creditor for extending credit to the subsidiary (company).

E Co-debtorship with Security Function

18 A Mixed Pickle

This type of atypical personal security has attracted considerable attention among the reporters and seems to play quite some practical role in several countries. The Quebec Civil Code of 1991 appears to be the only code devoting a few rules to this institution.

18 MCCORMACK (supra n. 6) 187.

632