ON THE PROSPECTS OF CONTINENTAL EUROPE ADOPTING A UCC
ARTICLE 9-TYPE UNITARY SECURED TRANSACTIONS SYSTEM
- A Synopsys –
by Tibor Tajti (Thaythy)1 ©
1. The Targeted Jurisdictions
This paper aims to speculate on whether Continental Europe is ready and would be
willing to follow the suit of Australia and adopt a unitary personal property security law (PPSL)
– the Unitary PPSL Model2 (hereinafter: Unitary Model) – any time soon? As it is well-known,
the jurisdictions of this part of Europe belong to the civil (or civilian) law tradition (legal family)
and sharing quite a number of features, principles and legal categories; including property and
security law. This includes, for example, the importance attributed to civil codes and general
principles of law both of pivotal importance for any discussion on PPSL. The discrepancies are
normally even bigger compared to common laws including the Unitary System.
My presumption is that only the European Union (EU), and if supported by its
economically strongest Member States, would be in the position to set the ball rolling in the said
direction. Now the prevailing mood is best characterized by disinterest if not hostility. The
otherwise very fragmented and differing national laws are one of the major stumbling blocks
what is further aggravated by non-negligible reform fatigue, aversion towards initiatives coming
from Brussels and incomprehension of what the Unitary Model is about is. The situations is not
hopeless though as more indicia suggest that.
First, obviously the position of the leading economies and legal systems will be
determinative. This applies primarily to Germany and France what requires heightened attention
to these laws exactly. Admittedly the future of the Unitary Model in the United Kingdom (UK) is
an important though not decisive factor for the entire continent; the degree of what additionally
is bound to lessen should the UK referendum end with the UK leaving the Union. Secondly, one
should not forget that PPSL reforms have been ongoing on the continent quite intensively during
the last two decades. These were to a great extent influenced by the Unitary Model and common
law. This applies especially to France and to a number of Central and Eastern Europe (CEE). The
latter have already introduced elements from common law-inspired PPSLs – lead by the
European Bank for Reconstruction and Development (EBRD) and other international
organizations though with varying success. As a result of organic growth and internationallyorchestrated changes quite a number of countries have a local version of the floating lien though
1
Professor of law and Director of the Doctoral Program, Legal Studies, Central European University, Budapest,
Hungary. Contact by email: [email protected] or by telephone +361 327 3275 (office in Budapest). The author would
like to express his gratitude for the exchanges related to some of the topics discussed in this paper to Prof. Ronald C.
Cumming (University of Saskatchewan).
2
The designation „Unitary Model‟ is herein used as a shorthand reference to all those legal systems that have been
influenced by the comprehensive secured transactions system of the US in UCC Article 9 – resting on the unitary
concept of security interests. These include in particular the common law provinces of Canada, New Zealand and
Australia though differences and idiosyncratic solutions exists in case of each. The reform countries of Europe have
all taken over elements, if not entire building blocks, form the Unitary Model, yet none of them has taken over the
system with all of its building blocks what was the case in the mentioned common law jurisdictions.
1
with differing designations and features (France and Sweden: enterprise mortgage, Hungary:
property encumbering charge). The biggest contrast seems to subsist, however, between German
law and the Unitary Model because the former tolerates latent (non-registered) securities.
Thirdly, a quite large group of EU experts have recently completed a sort law document named
the Draft Common Frame of Reference (DCFR) Book IX of which represents nothing else but an
adapted version of the Unitary Model. In other words, top European experts – undoubtedly led
by Germans – have recommended to Europe a unitary secured transactions system. The
discouraging development is that this code-like instrument was shortly upon appearance doomed
to soft law status.
2. Present State of PPSL in Europe
Obviously all projections on the prospects of the Unitary Model in Europe must set out
from what has already been achieved. On the level of the EU PPSL has not become an issue and
thus no legislative act, or proposal, exists specifically on PPSL; this domain is therefore remains
the bailiwick of national states. Consequently, no farther reaching projects could be found than
the hinted at national reforms and the DCFR. The latter proposes a system that requiring
perfection for all security interest in personal property – including a common European registry,
subjection of all hereinbefore known security devices to the same regime and increased reliance
on out-of-court enforcement (self-help).
National PPSLs now in a sense resemble the conditions that had existed in the Unitary
Systems prior to adoption of the Unitary Model: e.g., differing or no perfection, more places for
registration, or unpredictable priorities. Interestingly, in the leading jurisdiction of
Germany, the most valuable security devices exploiting personal property as collateral are,
indeed, based on case law. This is an anomaly because even though German law in principle still
only recognizes those few proprietary security devices that are perfected by possession or
registration (numerus clausus of property rights), courts have given green light to such
contractual arrangements that allowed for exploitation of personal property as collateral yet
without perfection. In other words, theoretically the coming into being and the very existence of
the famous German contract-based-security devices (“kautelarische Sicherheiten”) is the proof
that German economy is as well in need of a proper PPSL. The problem is now how to subject
all the widely used – non-registered or otherwise non-perfected – security devices to the Unitary
Model? Giving up the existent and introducing of a new comprehensive law is the key issue in
other developed EU legal systems as well.3
It is also of relevance that the full charting of all the differences that exist and should be
tackled in the process of the domestication of the Unitary Model, as well as whether and how
could the two be reconciled has not been completed yet. Apart from isolated scholars and mainly
local publications related to national reforms, the Comments to the mentioned DCFR seem to be
good yet incomplete first attempts leading in that direction. In that respect UK scholars are much
ahead of their Continental European colleagues.
3. The Factors that Determine in which Direction Continental Europe will Go
3
See also Tibor Tajti, Testing the Equivalence of the New Comprehensive Australian Personal Property Securities
Act, its Segmented European Equivalents and the Draft Common Frame of Reference, Bond Law Review, vol. 24,
No. 1 (June 2012), pp. 85-148.
2
No simple answer could be given to this query. The sheer complexity of Europe prevents
that. Yet when pondering on the future of PPSL it seems that three main groups of factors should
be focused upon in the following order of importance: 1/ economic necessities and
considerations, 2/ the attitude of affected industries and interest groups, and 3/ the position of the
academe. Politics is not mentioned specifically because Brussels at the moment is not just busy
with handling the sovereign debt crisis and fighting the centrifugal forces to save the Union but
its harmonization efforts have largely failed in other fields of law as well. Thus, to expect a
major volte face at the sole initiative of Brussels as far as harmonization of PPSL is concerned is
at the moment highly unrealistic. The fate of the most recent initiative, the Common European
Sales Law (CESL),4 an optional instrument that could be chosen by parties to cross-border sales
(including online) transactions will be indicative also of the prospects of a potential PPSL
harmonization project.
3.1. The Attitude and Stance of Scholars and the Academe
Two points ought to be investigated here: how powerful the position of these interest
groups is and what their prevailing stance – to the extent reducible to a single voice – is? As far
as the first is concerned, in Continental Europe scholars seem to be equally influential as their
American or Australian colleagues. Hence major changes in domains such domains as PPSL –
especially if requiring amendment of such venerable sources of law as civil codes – hardly could
occur without their support. For example, compared to the United States (US), many of these
countries have Academies of Sciences which are capable to speak with a single voice and may
tend to have a meaningful say. Notwithstanding the relatively strong position of these institutions
or renowned experts of law, however, hardly could meaningful realignment with the Unitary
Model be expected solely from the hands of the academe. In fact, as the DCFR was the product
of scholars (in German named as “Professorenrecht” – or the „law of professors‟) with only
isolated and indirect input from the industry, notwithstanding of what the product was shelved
and has not been transposed into a civil code. This is telling not just of the resistance and
disinterest of the affected industries and the politicians siding with them but also of the extreme
hardships such major reforms of laws might face in Europe.
Talking of the stance of scholars, it should be admitted no matter how unpleasantly it
may sound that a substantial part of the local scholars of civilian systems is directly against
intrusion of common law; especially of US law. Hence one should also reckon with a substantial
hostility even to the idea of learning about and understanding the Unitary Model. Unlike
Australia, language is an extra stumbling block in Europe for scholars, too. This deficiency
coupled with the complexity of the Unitary Model then turns into a next to insurmountable
obstacle. Even if one looks favorably on the idea of harmonization of European PPSL, a host of
questions should be answered because of a non-negligible number of civilian concepts that raise
doubts as to the compatibility of the two models.5 Interestingly, comparative scholars have failed
so far to come up with proper in-depth analyses of the sort and hence it would be erroneous to
4
Text
with
prefatory
remarks
available
at
<
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0635:FIN:en:PDF >.
5
One of the textbooks lists as the common features of security rights the following: 1/accessoriness; 2/ specific of
the secured claim; 3/ prohibition of unjustified enrichment; 4/publicity of proprietary security rights; and 5/
prohibition of excessive security (or of disproportionate security rights). See Sjef van Erp and Bram Akkerman
(eds.), Property Law (Hart 2012), Chapter 5, sub-chapter II.
3
claim that there is nothing meaningful to be researched.6 This is of utmost importance because
the only chance in Europe for the Unitary Model is by its proper accommodation even if not
reaching full consensus on all the possible queries.
3.2. The Position of the Affected Industries and Interest Groups
The stance of the banking sector is obviously crucial for the case of the Unitary Model
given that Continental European systems are all bank-based models with weak or at least lessrobust capital markets as that of the US or the UK. In other words, in these countries everything
revolves around the so-called universal banks in the world of finance. Consequently hardly could
changes in laws that affect the zone of their interest be changed without asking them – this
applies also to PPSL. Apart from the City of London‟s rejection of reform along the Unitary
Model, however, very little is known about the opinion of banks on that. Even less is known
about the potential role nonbanking financial organizations might play in Europe with the
Unitary Model in hand even though in the US in particular they represent that business sector
that benefits from PPSL the most. Given the omnipotence of universal banks – forced to
withdraw from a substantial portion of the market due to the ever stricter Basel rules and the
calamities caused by the debt crisis – in many of the EU states simply now there is nobody to fill
the vacuum. Paradoxically now successful small businesses with all-time high orders from
abroad – incapable of raising finance from banks – are forced to stop investing in growth (if not
closing the business).7 In brief, the present calamities surrounding European banks show that in
economic terms the Unitary Model could bring in some fresh air.
Other interest groups should be reckoned with as well, from attorneys‟ bars to the
competing yet potentially benefiting established organizations like public notaries or
organizations that make a meaningful part of their income for registration. As the experiences of
the reform countries show they may, indeed, play a role in the process, both positive and
negative. Erection of a common European register for security interests based on a version of the
Unitary Model would be frowned at by those losing part of their established market as a result. I
am not aware of whether the opinion of the least homogeneous group of PPSL-exploiters is: the
many suppliers that routinely add retained title (ROT) to their contracts.
3.3. Economic Necessities
As it is well-known Europe is now in a crisis ongoing for at least five years now. Unlike
Australia or Canada, Europe was first directly hit by the US Credit Crunch and then by the
subsequent global financial crisis. The myriad problems that cause the most worries – in
particular the sovereign-debt and the EuroZone crises – grew out of these leaving Europe no time
for consolidation. It is not far-fetched to claim that even the mere survival of the EU is at stake.
As Europe has realized by now, its cherished social-market economy model must suffer serious
alterations. High unemployment rates (especially amongst the youth), shrinking financing
6
For example, the first comparative textbook on European property laws – including also a chapter on security
interests – has been published only in 2012. See Sjef van Erp and Bram Akkerman (eds.), Property Law (Hart 2012).
Yet even this book asks for improvements because essentially it covers only a few western European jurisdictions
and only mentions in no more than a single page all the secured transactions reform projects of the past two decades
in Europe. Id. 1117.
7
See, e.g., Miles Johnson, Ham Maker Shows Rajoy the Need for Cure to Credit, in: Financial Times, 18 October
2012 issue, at 3, with a story on the financing misadventures of the famous Spanish small firm, Joselito, a gourmet
ham factory near Salamanca.
4
opportunities (in particular for small and mid-scale industries making the gist of European
economies), and decline of the welfare state are not only threats but realities here.
While economists, think-tanks and politicians continue their quest for finding the magical
„grand theory’ that would solve all the problems and restore the prosperous times that had been
characteristic of the EU (though not necessarily also of the easternmost Member States) with a
slay of a hand, gradually it must be recognized that no such single formula exists. Rather only
sector-specific, micro-level and thus many partial answers should be strived at only. If adjudged
based on what issues have been focused upon in the Financial Times since the 2008 financial
crises, one could easily realize that economists and finance experts hardly see in the Unitary
Model a panacea. While admittedly PPSL law is predominantly a legalistic topic, less understood
and of lesser interest to economists, their support for the cause of the Unitary Model is lacking.
At the same time, newspapers are full with complaints on the devastating effects of shortage of
financing of small and mid-scale businesses.
4. The Main Dividing Points
It is important to realize that the degree to which civil laws differ from the Unitary Model
is much bigger than what was the case with the Unitary Systems – each being a common law
system. The same applies to the structure of the industries exploiting PPSL which affected also
local PPSLs. In other words, the platform needed for the adoption of the Unitary Model is
significantly different from the one that had existed in the Unitary Systems and which was
sufficient and more readily adaptable to the requirements of Unitary Model. This dictates what
Continental European scholars should focus upon: as complete as possible charting of variouslevel distinctions.8
From among the differences the following deserve special attention because these
represent those specific aspects of PPSL on which the differences are the deepest.
4.1. Acquisition (Title) Finance
What is going to happen in Europe is to a great extent depended on whether consensus
could be reached what to do with this economically important segment of the Unitary Model.
The gist of the problem stems from the fact that these devices are widely used yet only few laws
make some specific forms of these transactions subject to registration. Though subjection to
registration (or filing) is not the only source of unease: the Unitary Model‟s recharacterization
(or “degradation”) of retained “ownership” into a mere “security interests is equally troublesome.
Suffice to take a look at the DCFR – as the expression of some common European position – as
a manifestation of the differing European view: the secured creditor to an acquisition
transactions is looked upon as an owner (or close to it) and has larger entitlements compared to
secured creditors to non-acquisition finance transactions. Such a position of civilian systems is a
bit anachronistic as these systems often cannot guarantee that a retained ownership could always
be given full recognition especially in the context of bankruptcy.
4.2. Notification-Based Receivables Financing
8
I have tried to forge a transparent chart to visualize that differences exist on all levels of abstraction and that each
of these should be scrutinized and dealt with in the process towards the Unitary Model. See the slides with the
REVERSE DISCREPANCY TRIANGLE of my power point presentation.
5
The commonality of acquisition and receivables financing is that in Continental European
systems they are not subject to registration. Yet they differ also because most systems make the
validity of the use of receivables as collateral subject to notification of obligors (account
debtors). In other words, notification is the method of perfection which however cannot satisfy
the Unitary Model because the notification remains secret to the outside world. Giving up of this
established practice and introduction of filing in lieu of it (even if not applicable to all types of
assignments) is dependent on the maturity and sophistication of the industries resorting to
receivables financing. Hence a transition to a non-notification but registration-based receivables
financing would require more than mere changing of the law.
4.3. Floating Lien and Purchase-Money Security Interests
As already hinted at, not a few civil law countries already has a version of floating lien
(e.g., France, Sweden, Hungary, and Croatia). It is unfortunate that German law knows not for
such a nominated secured transaction but has instead court-recognized contractual extensions of
the reach of security interests. Yet these may only very conditionally be looked upon as
substitutes; suffice to mention civil laws‟ limited concept of fruits and products (local equivalent
of the common law concept of proceeds) and a few conflicting doctrines (e.g., German law‟s
rules obliging secured creditors to release collateral whenever it becomes excessive). This
feature of German law is reflected also on the DCFR.
The PMSI – as a concept the justification of which is linked to the floating lien and the
need to break its monopoly – is a largely unheard-of concept to civil lawyers especially for
systems which do not know for floating lien with which one could cover all the present and
future assets of the debtor. To system-oriented civil lawyers it may not be obvious that bringing
all security devices under the same roof - in particular the comprehensive floating security –
implies the introduction of a version of PMSIs. However, on closer scrutiny one may realize that
the separation of acquisition finance and the consequent treatment of retained ownership as close
to full ownership is a method employed by civil systems exactly for the same reasons that
justified the invention of PMSI by the Unitary Model. In other words, the differing vocabulary
might be disastrous. Yet as German courts have felt and noted in case of the conflict of a security
interest of a bank (typically with a security interest stretching in both directions: future advances
and after-acquired property) and that of a supplier (i.e., contract with a ROT), the latter should
prevail.9
4. Self-Help and its Functional Equivalents
As self-help is clearly a sine qua non for the efficient functioning of the Unitary Model,
the hostility civilian laws display vis-à-vis this institution is not something that could be
bypassed. This applies especially to self-help repossession. Virtually all civil codes (or
equivalents) contain a very limited concept of self-help which in fact hardly goes beyond
averting imminent threats to one‟s property or life – additionally – only with proportionate
measures. What Continental European systems have, in other words, is a far cry from their
common law kin. On this level, one may conclude, the two legal families and thus the respective
PPSLs are irreconcilable.
The truth is, however, that in reality the discrepancies are diminishing even if only in a
piecemeal and by scholars unnoticed manner. On one hand, the role of self-help has shrunken
9
See Stefan A. Riesenfeld & Walter J. Pakter, Comparative Law Casebook (Transnat. Publishers, New York, 2001),
at 421.
6
even in the UK due to the increasing consumer protection regulation in particular. In Continental
European systems, private debt collection companies have appeared and have very shortly
become quite powerful international corporations (e.g., Intrum Justitia, EOS). This is an
important development irrespective that these multinationals do not engage in self-help
repossession as of yet. What has not been properly noted either is that private debt collection is
long present in Scandinavia as evidenced by the related regulation. Furthermore, the swiftly
growing market share of private debt collection companies is also a fact in Continental Europe.
In CEE countries, on the other hand, with the penetration of the common law-inspired PPSL,
some forms of out-of-court enforcement have become accepted; like disposition of the collateral
by a professional auctioneer. Here, the existence of private businesses specialized to self-help
repossession is commonly known of.
None of this should be understood that full reconciliation is near. However, not noting the
changes would be mistaken either. Continental scholars have written extremely little about selfhelp what could be attributed to the narrow concept that otherwise is not thought to have many
connections to credit securities. Very little is known also about the potential functional
equivalents of self-help : i.e., those devices that could be resorted to for prompt protection of the
secured creditors‟ interests. This concretely means the law on various preliminary and
provisional measures, no matter whether issuable ex parte or not. The civil procedure acts of all
civil laws contain a chapter on them notwithstanding of it is hard to figure out from the roughly
similarly formulated provisions exactly in what circumstances and with what chances could one
resort to them.
5. Conclusions
In the end, the prognosis on the chances of the Unitary Model in Continental Europe is
easy to answer: at this point in time nothing suggests that the Unitary Model will soon become
the common PPSL here. If the stance is to change, then that will ensue because of the economic
crisis threatening to undermine not just the so far known European welfare system but even the
Union itself. The declining competitive edge of Europe on the global scene is just additional
factor yet what is hardly linked by anybody so far to the benefits the import of the Unitary Model
may bring. The growing number of for-the-cause enthusiastic scholars is insufficient to jumpstart
the project as demonstrated by the cool reception of the DCFR – the product of (a part of the)
European scholarly elite
The above elaboration revealed also the contrary to beliefs comparative law still owes
proper answers on the discrepancies and the possible methods of reconciliation of civilian laws
with the Unitary Model. More problematic is that quantitative models for the comparison of
various PPSL models are still lacking. This is so as in all the countries that had embraced the
Unitary Model the pre-reform system functioned well and the economies did not start to build
the foundations for the Unitary Model from zero. It could have been thus presumed that the
economy will only benefit from a system not having four or five distinct registries but a single
centralized one. In Continental Europe, the starting position is different and thus statistical data
showing the positive results brought about by the Unitary Model would of utmost use. Australian
scholars would be now best in the position to come forward with such yet-to-be-forged yet useful
formulas.
7