Dalhuisen on International Commercial,Financial and Trade Law

Jan Dalhuisen

Professor of Law, King's College London,Visiting Professor at the University of California at Berkeley,

and the University of New South Wales, Sydney

•HART-PUBLISHING

OXFORD AND PORTLAND OREGON

Contents

Preface to the Second Edition viiPreface to the First Edition xiiiTable of Cases xxxixTable of Legislation liii

1 MODERN INTERNATIONAL COMMERCIAL ANDFINANCIAL LAW AND ITS SOURCES

PART I NATIONAL AND TRANS-NATIONAL OR INTERNATIONALCOMMERCIAL AND FINANCIAL LAW

1.1 Introduction 11.1.1 The Meaning of Modern International Commercial and

Financial Law 11.1.2 The Antecedents of Modern International Commercial Law 61.1.3 The Impact of Civil and Common Law Traditions on the Modern

Transnational Law Merchant and its Formation 121.1.4 Civil and Common Law Notions of Commercial Law 161.1.5 The Development of a Separate Commercial Law in

France and Germany 221.1.6 Old and New Commercial and Financial Law:

International Professional Law and the Revival of theInternational Law Merchant or Lex Mercatoria 26

1.1.7 International Commercial Arbitration andInternational Commercial Courts 33

1.2 The Origin and Evolution of Civil and Common Law.The Sources of Private Law. Statist and Non-statist Views 371.2.1 The Evolution of Modern Private Law and its Sources and their

Importance for the Development of Modern InternationalCommercial and Financial Law 37

1.2.2 The Early Roman Law Development 381.2.3 The Classical Roman Law and the Corpus Iuris Civilis 411.2.4 The Revival of Roman Law in Western Europe, the Ius Commune 451.2.5 The Ius Commune and Local Law 471.2.6 Natural Law and the Natural Law School: Grotius' De lure

Belli ac Pacts, its Approach and Impact 511.2.7 Natural Law, Legal Principle and Positive Law:

The Status of State Law in the Philosophies of Grotius,Hobbes, Locke, Kant and Hegel 58

1.2.8 The German Historical or Romantic School 601.2.9 The Nineteenth-Century Civil Law Concept of

National Codifications and the Role of Interpretation 631.2.10 Twentieth-Century Continental European Legal Thinking in

Private Law: Begriffs- and Interessenjurisprudenz 671.2.11 The Development of the Common Law 70

xx Contents

1.2.12 The Common Law Approach to Scholarship, Precedent,Legislation and Statutory Interpretation 74

1.2.13 Intellectualisation and Conceptualisation in Common Law.Modern American Academic Attitudes towards the Law and itsDevelopment: Legal Formalism and Realism. Post-realism orLegal Functionalism: The 'Law and..." Movements 80

1.3 Civil and Common Law Compared. The Impact of Modern Regulatory andMandatory Laws on Both. Public and Governmental Interests 901.3.1 The Relation between Statutory and Non-statutory Law in

Civil and Common Law. Sources of Law: General Principles,Custom and Statutory Positivism 90

1.3.2 Legal Attitudes in Civil and Common Law: The Role ofInterpretation and the Attitude to Fact and Law-Finding 97

1.3.3 Twentieth-Century Governmental Intervention in Private Law.Governmental Policies, Regulation and MandatoryDomestic Rules. The Effect of Globalisation and theDenationalisation of Private Law 103

1.4 Cultural, Sociological and Economic Undercurrents in theFormation of the Law. Legal Orders and their Manifestation 1091.4.1 The Concept of Legal Orders 1091.4.2 Law as Cultural Phenomenon 1101.4.3 Sociological and Economic Considerations in the Law.

The Competition with Mandatory State Laws orNational Public Policies. States as Counterparties 117

1.4.4 The International Commercial and Financial Legal Order and itsRelevance: The Role of Legal Theory, Legal History and Comparative Law 125

1.4.5 The Operation of Different Legal Orders: Evolution of a FederalCommercial Law in the US, of Transnational Private Law Conceptsin the EU, and of International Human Rights Law in theCouncil of Europe (European Court of Human Rights) 129

1.5 The Transnational Private Law amongst Professionals 1321.5.1 The Guiding Function of International Commercial and

Financial Law. The New Legal Order in the Professional Sphere.The Lex Mercatoria v Ius Commune Approach 132

1.5.2 Spontaneous Sources of Law: Fundamental andGeneral Legal Principle. Custom 138

1.5.3 Uniform Substantive Law as Alternative to Private International Law 1421.5.4 The Hierarchy of Norms in Modern International Commercial and

Financial Law: The Role of Fundamental and General Principles,of Custom, Uniform Treaty Law, Comparative Domestic Law,and Private International Law 146

1.5.5 Agents of International Convergence and Harmonisation:The Role of Unidroit, Uncitral, the ICC, The Hague Conference,the EU, and the American Law Institute and Commissioners onUniform State Laws in the USA; and the Impact of InternationalLegal Practice and Scholarship 150

Contents xxi

1.5.6 The Role of National Courts and of InternationalCommercial Arbitration 154

PART II THE NATURE, STATUS AND FUNCTION OF PRIVATEINTERNATIONAL LAW

2.1 Modern Private International Law 1562.1.1 The Underlying Concept of Modern Private International Law:

Party Autonomy 1562.1.2 Drawbacks of Conflict Rules 159

2.2 The Modern European and US Approaches to Conflicts of Laws 1652.2.1 Refinement of the European Model 1652.2.2 The Development in the USA 1662.2.3 The Various Modern US Conflict Theories 1682.2.4 The European Approach of Exception Clauses: Reasonable and

Fair Solutions in the Dutch Proposals 1702.2.5 The Emphasis on the Facts rather than on the Rules:

The Nature of the Relationship and of the Transaction.Modern Interpretation Techniques and the Effects ofInternationalisation 173

2.2.6 The Issue of Public Policy or Governmental Interests and theirImpact. The Notion of Comity and its Application. Competitionbetween Transnational and State Laws 177

2.2.7 Practical Issues Concerning Conflicting Public Policies: Effect on theLex Mercatoria and the Importance of Forum non Conveniens 179

2.2.8 Party Autonomy and Contractual Choice of Law 184

2.3 Interaction of Private International Law and Harmonised Law 1872.3.1 Private International Law and the Application of Uniform Law 1872.3.2 The Situation with Regard to EU Directives of a Private Law Nature 188

PART III THE DEVELOPMENT OF TRANSNATIONAL ORINTERNATIONAL COMMERCIAL AND FINANCIAL LAW

3.1 The Lex Mercatoria, Interrelation with Private International Law 1913.1.1 The Concept of the Modern Lex Mercatoria as a

Hierarchy of Norms 1913.1.2 The Major Protagonists of the Lex Mercatoria and their Views:

Legitimation 196

3.2 The Hierarchy of Norms: Elaboration 1983.2.1 Fundamental Legal Principle. Transnational Rules of

Contract Formation and the NormativeInterpretation Technique. Procedure 198

3.2.2 Fundamental Principles. The Notion ofTransnational Ownership. A Fractured System ofProprietary Rights 201

3.2.3 Mandatory Customs and Practices 205

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3.2.4 Mandatory Uniform Treaty Law, Contractual Provisions(Party Autonomy), Directory Trade Practices, DirectoryUniform Treaty Law and Common Legal Notions 208

3.2.5 Domestic Laws, Private International Law:Mandatory Provisions or Public Policy Issues 212

3.3 Operation of the Lex Mercatoria and Objections to it 2123.3.1 Operation of the Lex Mercatoria 2123.3.2 Direct References to the Lex Mercatoria 2143.3.3 Parties' Choice of a Domestic Law v the Lex Mercatoria 2153.3.4 Objections to the Lex Mercatoria Approach 2163.3.5 Application and Enforcement of the Lex Mercatoria 217

2 DOMESTIC CONTRACT LAWS, UNIFORM INTERNATIONALCONTRACT LAW AND INTERNATIONAL CONTRACT LAW PRINCIPLES:

INTERNATIONAL SALES AND CONTRACTUAL AGENCY

PART I DOMESTIC CONTRACT LAWS

1.1 Introduction 2191.1.1 Modern Contract Law: Emphasis on Nature of the

Parties or on Type of Contract? 2191.1.2 Modern Contract Theory 2231.1.3 The Challenge of E-Commerce 226

1.2 Formation and Interpretation or Construction of Contracts inCivil and Common Law 2281.2.1 The Role of Parties' Intent in Civil Law. The Normative or

Teleological Interpretation Method. The Common LawApproach Compared 228

1.2.2 The Civil Law Notion of Good Faith and itsModern Use in Interpretation 234

1.2.3 Consensus in Civil Law and its Normative Interpretation:Alternative Views 238

1.2.4 Intent in Common Law: Offer and Acceptance,the Notions of Consideration, Exchange or Bargain 241

1.2.5 The Practical Significance of the Consideration Requirement inCommon Law 245

1.2.6 Contracts: Construction and Remedies in Common Law.The Parole Evidence Rule 246

1.2.7 The Common Law Notion of Consideration and theCivil Law Notion of Causa. International Aspects 249

1.2.8 Custom and the Interpretation of Contracts 2521.2.9 Other Aspects of Contractual Validity: Capacity and Authority 2531.2.10 Other Aspects of Contractual Validity: Formalities 2541.2.11 Other Aspects of Contractual Validity: Definiteness 254

1.3 The Civil Law Notion of Good Faith and the Common Law Alternatives ofImplied Terms, Nature of the Relationship of the Parties, and Reliance 2551.3.1 The Notion of Good Faith in Civil Law 255

Contents xxiii

1.3.2 Good Faith in Common Law. Alternatives. Equity andFiduciary Duties Distinguished 264

1.3.3 Good Faith in the Unidroit and European Contract Principles 2671.3.4 EU Notion of Good Faith 2681.3.5 The Lesser Need for Legal Refinement in the Professional Sphere:

Interpretation, Mistake, Gross Disparity and Disclosure Duties 2691.3.6 The Status of Commercial Letters of Intent 2711.3.7 Pre-contractual Negotiation and Post-contractual

Implementation Duties of Professionals: Abuse of Rights 2711.3.8 Force Majeure, Re-negotiation Duties and

Hardship Adjustments in Professional Relationships 273

1.4 Performance of the Contract, Defences, Default and Excuses, Termination 2741.4.1 Performance in Kind or Specific Performance 2741.4.2 Lack of Consensus or Defences to Performance-

Invalidity and Rescission 2771.4.3 The Significance of Promises, Conditions and Warranties in

Connection with Performance in Common Law:Representations and Covenants 281

1.4.4 Default or Breach and Damages 2831.4.5 Excuses 2861.4.6 The Definition of the Concept of Force Majeure. Frustration and

Economic Impossibility. Development in Civil and Common Law 2871.4.7 Unforeseen Circumstances and the Balance of the Contract: Hardship 2901.4.8 Modern Legislative Approaches to a Change in Circumstances:

Contractual Hardship Clauses 292

1.5 Privity of Contract 2951.5.1 Privity of Contract or Third-Party Rights and Duties under a Contract 2951.5.2 Development of Contractual Third-Party Rights and

Duties in Civil Law 3011.5.3 The Situation in Common Law and the Changes in the

USA and England 302

1.6 The Unidroit and European Principles of Contract Law:Vienna Convention and UCC Compared 3051.6.1 The Applicability, Reach, and the Directory or

Mandatory Nature of the Principles 3051.6.2 Approach to Contract Formation: Capacity, Formalities and Specificity 3131.6.3 Notions of Good Faith and Reasonableness: Interpretation and

Supplementation of the Principles and Contracts thereunder 3151.6.4 The Impact of Custom 3201.6.5 Consensus and its Failure: Defences and the Question of

Continued Validity 3211.6.6 Performance, Default and Force Majeure Excuses: Hardship 3221.6.7 Privity of Contract 3231.6.8 The Nature and Impact of the Principles 323

1.7 Directory and Mandatory Rules of Contract 3251.7.1 Directory and Mandatory Contract Rules in Domestic Laws 325

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1.7.2 Treatment of Directory and Mandatory Contract Rules inPrivate International Law 327

1.7.3 Mandatory Uniform International Contract Rules 3291.7.4 The Effect of the Freedom of Movement and the Freedom of

Establishment on the Application of Domestic Mandatory Rules 329

PART II THE CONTRACT FOR THE INTERNATIONAL SALE OF GOODS

2.1 The Main Aspects of the International Sale of Goods 3302.1.1 Introduction 3302.1.2 The Minimum Requirements of the Sales Agreement:

Special Features and Risks of International Sales 3322.1.3 Legal Risk in International Sales 3342.1.4 Special Arrangements to Cover the Risks in International Sales 3362.1.5 International Sales as Contracts between Professionals:

Applicable Law 3382.1.6 Currency and Payments in International Sales:

Free Convertibility and Transferability of Money 3412.1.7 The Transfer of Title in International Sales 3422.1.8 Conform Delivery and the Passing of Risk in International Sales 3432.1.9 The Passing of Risk in Civil and Common Law 3452.1.10 Proprietary Sale Price Protection in Civil and Common Law 350

2.2 The Role of Intermediaries and Documents in International Sales 3562.2.1 The Safe Harbour Function: Agents and Documents of Title 3562.2.2 The Use of Agents: Their Position 3572.2.3 The Use of Negotiable Documents of Title: Bills of Lading and

Warehouse Receipts 3592.2.4 Documents of Title in Payment Schemes: Bills of Lading 3592.2.5 The Use of Negotiable Instruments: Bills of Exchange 360

2.3 The Uniform International Sales Laws 3622.3.1 Origin and Scope 3622.3.2 The System of the Vienna Convention: Directory or Mandatory Rules 3662.3.3 Applicability of the Vienna Convention 3672.3.4 The Sales Law of the Vienna Convention 3682.3.5 Supplementation and Interpretation of the Vienna Convention 3732.3.6 The Interpretation of International Sales Contracts under the

Vienna Convention: Meaning of Conduct and Custom 3772.3.7 Supplementation of the Vienna Convention:

Private International Law and the Rome Convention on theLaw Applicable to Contractual Obligations 379

2.3.8 The Main Rules of the Rome Convention on theLaw Applicable to Contractual Obligations 381

2.3.9 The Vienna Convention and the Different Trade Terms inInternational Sales 385

2.3.10 The Incoterms, Their Status and Relation to the UCC andVienna Convention 388

2.3.11 The Vienna Convention and the ICC Model InternationalSale Contract 390

Contents xxv

2.4 The Law Merchant Concerning International Sales 390

PART III AGENCY

3.1 The General Notion of Agency 3913.1.1 The Use of Agents: Their Position 3913.1.2 The Role of the Agent: Explicit and Apparent Authority 3953.1.3 The Notion of Independence, Apparent Authority and

Agencies of Necessity 3983.1.4 The Consequences of Agency: Conflicts of Interests,

Rights and Duties of the Agent 3993.1.5 Undisclosed and Indirect Agencies 4013.1.6 The Civil Law Indirect Agency. The Relationship between the

Principal and Third Party. Customers' Assets 4033.1.7 The Economic Importance of Modern Agency 407

3.2 International Aspects of Agency 4073.2.1 Private International Law Aspects of Agency 4073.2.2 Treaty Law Concerning the Law Applicable to Agency 4093.2.3 The Lex Mercatoria and Agency 4113.2.4 The EU Commercial Agent Directive 412

3 INTERNATIONAL PAYMENTS, PAYMENT SYSTEMS ANDMISTAKEN PAYMENTS

PART 1 THE NOTION AND MODALITIES OF PAYMENT

1.1 Payment and Ways and Means of Payment 4151.1.1 What is Payment? 4151.1.2 The Notion of Money as Unit of Account or Unit of Payment;

Money as Store of Value 4201.1.3 Paper Currencies and Modern Currency Election Clauses 4211.1.4 Freely Convertible and Transferable Currency 4221.1.5 The Different Ways and Means of Payment:

Pull and Push Systems 4241.1.6 Cash Payments and the Bank Transfer Option in

Commerce and Finance: The Notions of Independence orAbstraction and Finality 426

1.2 Payment through Bank Transfers 4271.2.1 The Nature of Bank Accounts, the Current Account and its

Use in the Payment Circuit 4271.2.2 When is a Bank Payment Made? The Question of

Acceptance and the Liberating Effect of the Payment. Finality 4301.2.3 The Legal Characterisation of Bank Transfer Payments:

Assignment, Novation or Independent Legal Status 4341.2.4 Modern Electronic Payment Systems. Clearing. Fedwire,

CHIPS and CHAPS. Gross and Net Payment Systems.International Banktransfers (SWIFT) 435

1.2.5 The Risks in the Modern Payment Systems:Payment Mistakes and Restitution 438

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1.2.6 Finality, Independence or Abstraction and the EUSettlement Finality Directive 440

1.3 Set-off as Method of Payment: Netting 4401.3.1 Legal Nature and Characterisation 4401.3.2 Eligibility 4421.3.3 Contractual Adaptations of the Set-off: Settlement,

Novation and Close-out Netting 4441.3.4 Use of Contractual Netting Clauses:

Contractual Netting and Bankruptcy 4481.3.5 The ISDA Swap and Derivatives Master Agreements. Swap and

Repo Netting. The Notion of Conditionality and the 'Flawed Asset'as an Alternative to the Set-off. The EU Collateral Directive 451

1.3.6 The Evolution of the Set-off Principle 453

PART II INTERNATIONAL PAYMENTS

2.1 International Payment Arrangements to Minimise Payment Risk 4562.1.1 Cross-border Payments and their Risks 4562.1.2 Payment in Open Account 4582.1.3 Ways to Reduce Payment Risk 4592.1.4 Ways to Reduce Payment Risk: The Accepted Bill of Exchange 4602.1.5 Ways to Reduce Payment Risk: Collection Arrangements 4612.1.6 Ways to Reduce Payment Risk: Letters of Credit.

The Different Banks Involved 4632.1.7 The Types of Letters of Credit 4672.1.8 The Documents Required under a Documentary Letter of Credit 4682.1.9 The Right of Reimbursement of the Issuing Bank under a

Letter of Credit 4692.1.10 The Letter of Credit as Independent and

Primary Obligation: Legal Nature of Letters of Credit.The 'Pay First, Argue Later' Notion 470

2.1.11 Non-performance under Letters of Credit:The Exception of'Fraud' 472

2.1.12 Transferable Letters of Credit and Back-to-BackLetters of Credit 474

2.1.13 Ways to Reduce Payment Risks: Autonomous Guarantees.Examples. Standby Letters of Credit 474

2.1.14 The Law and/or Rules Applicable to Collections, Letters ofCredit and Bank Guarantees. The ICC Rules and their Status.The Lex Mercatoria • 476

1.2.15 The Uncitral Convention on International Guarantees and theWorld Bank Standard Conditions 477

2.2 International Set-offs 4782.2.1 The Law Applicable to Set-offs and Contractual Netting 4782.2.2 The Law Applicable to Novation Netting and Swap Transfers 479

Contents xxvii

PART III MONEY LAUNDERING

3.1 Techniques and Remedies 4813.1.1 Objectives and Mechanisms 4813.1.2 Why Action? Objectives of Combating

Money Laundering. Remedies 483

3.2 International Action 4853.2.1 The Group of Ten, the Council of Europe, and the United Nations 4853.2.2 The EU. 486

4 OWNERSHIP, POSSESSION AND LIMITED, FUTURE,CONDITIONAL OR TEMPORARY LEGAL OR EQUITABLE

PROPRIETARY RIGHTS IN CHATTELS AND INTANGIBLES

PART I LAWS OF MOVABLE PROPERTY

1.1 Proprietary Laws in Common and Civil Law 4891.1.1 Types of Assets 4891.1.2 Chattels and Intangibles, Land. 4901.1.3 Proprietary Aspects. Claims 4931.1.4 The Importance of the Law of Chattels and Intangibles.

The Physical and Anthropomorphic Approach toProperty Rights. Modern Developments. The Effect ofFinancial Law and New Financial Structures 496

1.2 The Types of Proprietary Rights in Civil Law 5021.2.1 The Nature and Limited Number of the Traditional Proprietary

Rights in Civil Law. The Numerus Clausus Notion 5021.2.2 The Way Proprietary Rights are Expressed and Protected in Civil Law.

The Notions of Ownership, Possession and Holdership or Detention.Constructive Possession and Holdership 507

1.2.3 The Acquisitive Prescription and its Importance in Civil Law.Procedural and Substantive Law Aspects. AcquisitivePrescription and the Protection of Bona Fide Purchasers 510

1.2.4 The Proprietary Defences in Civil Law 5121.2.5 The Civil Law Relativity or Priority Principle in Respect of Proprietary

Rights. The Difference with the Relativity of Obligatory Rights 515

1.3 The Types of Proprietary Rights in Common Law.The Practical Differences with Civil Law 5181.3.1 Legal and Equitable Interests in Chattels 5181.3.2 Ownership and Possession of Chattels in Common Law 5211.3.3 Equitable Proprietary Interests in Chattels 5231.3.4 The Common Law System of Proprietary Defences.

Tort Actions Based on Better Rather Than on Absolute Rights 5241.3.5 Constructive Possession in Common Law. The Absence of

Acquisitive Prescription. Statutes of Limitation 5271.3.6 Practical Difference between the Common and Civil Law

Approaches to Proprietary Rights in Chattels 528

xxviii Contents

1.3.7 Approximation of the Common and Civil Law Systems ofProprietary Law in Chattels. User, Enjoyment and Income Rights.The Unifying Impact of Modern Financial Structures 530

1.4 Trusts, Constructive Trusts, Tracking and Tracing. Agency.The Civil Law Response 5341.4.1 The Basic Features of the Common Law of Trust 5341.4.2 The Practical Significance of Trusts in Common Law Countries 5401.4.3 Constructive Trusts, Tracking and Tracing, Resulting Trusts,

Statutory Trusts and Charitable Trusts 5411.4.4 Trust and Agency. Trust and Bailment 5431.4.5 Related Civil Law Structures 5441.4.6 Private International Treaty Law and Trust Law Principles 546

1.5 The Transfer of Proprietary Rights in Chattels 5491.5.1 The Legal Requirements for a Transfer of Chattels 5491.5.2 The Formalities of a Sale: Contract or Delivery. Double Sales 5501.5.3 The Importance of Identification. Effect on the Transfer.

Sales of Future Assets, Bulk Transfers, and De Facto Transfers of Title 5541.5.4 The Development of the Rules Concerning Delivery as a Formal

Requirement of Title Transfer in Civil and Common Law 5561.5.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity.

Effect on the Title Transfer. Future, Conditional and Temporary Sales 5581.5.6 The Transfer Agreement. The Abstract and Causal System of

Ownership Transfer 5611.5.7 The Origin of the Abstract and Causal Views of Title Transfer 5661.5.8 Disposition Rights. The 'Nemo Dat' Rule and the

Protection of Bona Fide Purchasers 5721.5.9 Origin of the 'Nemo Dai Rule and of the Principle of

Bona Fide Purchaser Protection 5741.5.10 The Retention Right of the Seller in the Case of Default of the Buyer 579

1.6 Secured Transactions and Conditional Sales 5831.6.1 The Difference between Secured Transactions and Conditional Sales 5831.6.2 What are Sale-Repurchase Agreements or Finance Sales? The

Characterisation Issue. Property-based and Security-based Funding 5831.6.3 When are Finance Sales Converted into Secured Transactions? 5861.6.4 The Operation of Finance Sales. Effect of the Conditionality of the

Transfer. Proprietary Effect of Conditions. Duality of Ownershipand of Possession in Civil Law. Openness of Proprietary Systems? 592

1.6.5 Examples of Finance Sales: Finance Leases, Repos and Factoring.Finance Sales as Executory Contracts, Cherry Picking and Netting 595

1.6.6 The Outward Signs of Security and Ownership-basedFunding Interests. Possession or Filing. Attachment andPerfection of Security Interests under the UCC 597

1.6.7 Floating Charges in Common and Civil Law.Extended Reservations of Title. The Concepts of Bulk Transfers,Asset Substitution and Tracing and the Inclusion of Future Assets.The Facility to Sell Goods Free and Clear. 604

1.6.8 Uniform Security Law and Principles of Security Laws 606

Contents xxix

1.7 Proprietary Rights in Intangible Assets, their Creation and Transfer 6061.7.1 Proprietary Rights in Intangible Assets and the Possibility and

Method of their Transfer. The Meaning of Notification and theSituation in Double Assignments. The Civil Law Development 606

1.7.2 The Development in Common Law 6121.7.3 The Transferability of Claims and Contracts. Assignment of

Rights and Delegation of Duties. The Debtor's Defences and theImpact of Contractual Restrictions on the Transfer 614

1.7.4 The Assignability of Future Claims 6201.7.5 Assignment, Novation, Amendment, Subrogation and Subcontracting 6231.7.6 Different Types and Objectives of Assignments 6261.7.7 The Better Right of the Assignee. The Notion of Abstraction and

Finality. The Comparison with Negotiable Instruments 6281.7.8 The Notion of Abstraction and the Liberating Effect of

Payment by the Debtor 6301.7.9 The Ranking between Assignees, The Nemo Dat Rule in Assignments 6331.7.10 Contractual and Proprietary Aspects of Assignments.

Mandatory Rules. Applicable Law and Party Autonomy 6361.7.11 Special Assignment Issues. Warranties, Conditions and Default 6371.7.12 Bankruptcy Aspects of Assignments 6381.7.13 Uniform Rules Concerning Assignments 641

1.8 Private International Law Aspects of Chattels 6421.8.1 Application of the Lex Situs 6421.8.2 The Notions of Equivalence and Adaptation.

Conditional Ownership, Security and Retention Rights 6481.8.3 Trusts. The 1985 Hague Convention on the Law Applicable to

Trusts and their Recognition 6501.8.4 Uniform Law Concerning the Proprietary Aspects of Chattels 6551.8.5 The Lex Mercatoria Concerning Chattels 656

1.9 Private International Law Aspects of Assignments 6561.9.1 The Various Aspects of Assignments. Characterisation Issues.

Mandatory Law 6561.9.2 Current Approaches to Choice of Laws Issues in Assignments.

The Situs of Debts 6601.9.3 Treaty Law Approaches to the Law Applicable to

Assignments. The Choice of Law Provision of Article 12 ofthe Rome Convention and the Draft Uncitral ReceivableFinancing Convention 665

1.9.4 Uniform Law Concerning Proprietary Rights in Intangibles 6661.9.5 The Lex Mercatoria Concerning Bulk Assignments 667

PART II NEGOTIABLE DOCUMENTS OF TITLE ANDNEGOTIABLE INSTRUMENTS

2.1 The Role of Documents 6672.1.1 Bills of Lading and Warehouse Receipts 6672.1.2 The Origin and Nature of the Bill of Lading and its

Operation in the Proprietary Aspects of the Transfer of Goods 671

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2.1.3 The Status of the Bill of Lading in Legal Systems that RequireDelivery for Title Transfer. Abstraction and the ConclusiveEvidence Rule. The Situation in Germany and the Netherlands 673

2.1.4 The Status of the Bill of Lading in Legal Systems that do Not NormallyRequire Delivery for Title Transfer. The Situation in France 675

2.1.5 Bills of Lading as Quasi-negotiable Instruments in the UK.The Situation in the USA 676

2.1.6 Consequences of the Different Attitudes to Documents ofTitle when Goods are Transferred to Transferees other thanthrough a Transfer of the Bill of Lading 678

2.1.7 The Transfer of Risk 6792.1.8 The Named Bill of Lading and Sea-way Bills 6792.1.9 Private International Law Aspects of Bills of Lading 6802.1.10 Lex Mercatoria and Uniform Treaty Law concerning Bills of Lading 681

2.2 Negotiable Instruments 6842.2.1 Bills of Exchange 6842.2.2 Acceptance and Discounting of Time Drafts 6872.2.3 The Persons Liable under a Bill of Exchange. Recourse 6882.2.4 The Principle of Independence or Abstraction 6892.2.5 The Holder in Due Course. Personal and Real Defences.

Other Types of Holders 6902.2.6 Cheques 6912.2.7 Modern Use of Bills of Exchange and Cheques 6922.2.8 Bills of Exchange and Competing Assignments of the

Underlying Claim 6922.2.9 Position of the Holder in Due Course of a Bill of

Exchange Compared to the Bona Fide Holder of a Bill of Lading 6932.2.10 Foreign Bills of Exchange. Private International Law Aspects 6942.2.11 Uniform Treaty Law 6972.2.12 The Lex Mercatoria Concerning Bills of Exchange 698

2.3 The Dematerialisation of Documents of Title and Negotiable Instruments.Electronic Transfers 6982.3.1 The Traditional Use of Documents of Title and Negotiable

Instruments. Their Inconveniences and Risks. Seaway Bills 6982.3.2 Electronic Systems and Their Importance in

Replacing Transportation Documents 7022.3.3 The Situation with Regard to Bills of Exchange.

Electronic Bank Transfers 705

PART III INVESTMENT SECURITIES

3.1 The Different Types of Shares and Bonds 7053.1.1 Traditional Distinctions. Negotiable Instruments and

Transferable Securities. Dematerialisation and Immobilisation.Securities Entitlements. 705

3.1.2 Negotiability and Transferability of Investment Securities.Use of Securities Entitlements to Enhance Transferability 712

Contents xxxi

3.1.3 The Risk Factors in the Holding and Transfer ofInvestment Securities. Bankruptcy Issues andRisk Reduction Techniques . 715

3.1.4 Modern Clearing and Settlement Systems. Internationalisation 7193.1.5 Book-Entry Systems for Shares and Bonds. Depository Receipts.

The Develoments towards Dematerialisation and Immobilisation 7223.1.6 The Legal Characterisation of Book-Entry Entitlements.

The Manner and Consequendces of their Transfer.Transfer Instructions and the Notion of theirAbstraction or Finality 724

3.2 The Internationalisation of Custody andSettlement Systems and its Opportunities 7323.2.1 The Role of the Euromarket for Bonds and the Effect on

International Share Trading. The Dominant Role ofInternational Practices and the Bankruptcy Law Implications 732

3.2.2 Law Applicable to International Investment Securities Transactions 7393.2.3 The Lex Mercatoria concerning International Investment

Securities Transactions 7443.2.4 Uniform Law. The EU Financial Collateral Directive 746

5 SECURITY AND OWNERSHIP-BASED FUNDING TECHNIQUES

PART I.I SECURED TRANSACTIONS AND FINANCE SALES

1.1 Civil and Common Law Approaches 7491.1.1 Secured Transactions 7491.1.2 Modern Non-possessory Security Interests in

Personal Property and the Alternative of Finance Sales 7531.1.3 The Importance of Modern Finance Sales.

Characterisation Problems 7571.1.4 Major Differences in the Domestic Laws on Proprietary

Financial Protection and the Impact of Bankruptcy Laws 7601.1.5 Harmonisation Attempts. Principles of Security Laws? 7641.1.6 Conditional and Temporary Ownership Transfers 7701.1.7 The Duality of Ownership in Finance Sales 7751.1.8 Autonomous Transnational and Domestic Legal Developments in

Third Party or Proprietary Effect of Contractual Clauses 778

1.2 The Situation in the Netherlands 7801.2.1 Introduction. The New Civil Code of 1992 7801.2.2 Security Substitutes and Floating Charges. The Reservation of Title 7821.2.3 Conditional and Temporary Ownership. The Lex Commissoria 7851.2.4 Open or Closed System of Proprietary Rights 788

1.3 The Situation in France 7911.3.1 Introduction. The Vente a Remere and Lex Commissoria 7911.3.2 The Impact of the Notion of the 'Solvabiliti Apparente' 7921.3.3 The Modern Repurchase Agreement or 'Pension Livree' 7931.3.4 The Reservation of Title 795

xxxii Contents

1.3.5 Finance Sales. Transfer of Receivables, Loi Dailly and Tritisation(Fonds Communs de Creances) 797

1.3.6 Open or Closed System of Proprietary Rights 799

1.4 The Situation in Germany 8001.4.1 Introduction. The Development of the Reservation of

Title and Conditional Transfers. Floating Charges 8001.4.2 Sicherungsubereignung and Conditional Sales 8041.4.3 Finance Sales 8071.4.4 Curbing Excess. Open or Closed System of Poprietary Rights 809

1.5 The Situation in the UK 8111.5.1 Introduction. Differences from Civil Law 8111.5.2 Basic Features of Conditional or Split Ownership Interests.

Equitable and Floating Charges. Open System ofProprietary Rights 813

1.5.3 The Distinction between Conditional Sales andSecured Transactions. Publication Requirements 818

1.5.4 Reservation of Title 8221.5.5 Finance Sales 823

1.6 The Situation in the USA 8241.6.1 Introduction. The Approach of Article 9 UCC 8241.6.2 The Unitary Functional Approach and Finance Sales.

Problem Areas in Article 9 UCC 8281.6.3 Proprietary Characterisations 832

1.7 Finance Sales as Distinguished from Secured Transactions in Civil andCommon Law. The Recharacterisation Risks 8351.7.1 Introduction. Loan and other Types of Funding 8351.7.2 The Practical Differences between Security- and

Ownership-based Funding 8361.7.3 Legal Differences between Security- and Ownership-based Funding 8381.7.4 Concluding Remarks 847

1.8 International Aspects of Conditional or Finance Sales andSecured Transactions 8501.8.1 Private International Law Approaches. Uniform Law Attempts of

Unidroit and Uncitral 8501.8.2 Models Laws. The EBRD Attempt 8531.8.3 Other Efforts at International Harmonisation: The 2001 Unidroit

Convention on International Interests in Mobile Equipment 8551.8.4 Model Laws or Uniform Law. Applicability 856

PART II MAJOR TYPES OF FINANCE SALES

2.1 Finance Leasing 8572.1.1 Rationale of Finance Leasing 8572.1.2 Legal Characterisation 8582.1.3 Comparative Legal Analysis 8612.1.4 International Aspects of Finance Leasing 8632.1.5 Uniform Substantive Law. The Unidroit Convention 864

Contents xxxiii

2.1.6 The Leasing Convention's Sphere of Application,Its Interpretation and Supplementation 866

2.1.7 The Definition of Financial Leasing under the Convention 8672.1.8 The Proprietary Aspects 8682.1.9 The Enforcement Aspects 8692.1.10 The Contractual Aspects 8702.1.11 The Collateral Rights 8722.1.12 Concluding Remarks 873

2.2 Repurchase Agreements 8762.2.1 The Repurchase Agreement as Prime Alternative to

Secured Lending. Its Legal Characterisation 8762.2.2 The Development of the Repo in Investment Securities.

Securities Lending and the Buy/Sell Back Transaction 8792.2.3 Margining 8822.2.4 The Netting Approach in Repos 8822.2.5 The TBMA/ISMA Global Master Repurchase Agreement 8832.2.6 Concluding Remarks 884

2.3 Factoring or Receivable Financing. The Unidroit Convention and theUncitral Receivable Financing Convention 8852.3.1 Receivable Financing and Factoring. International Attention 8852.3.2 Factoring. The Contractual Aspects 8882.3.3 Factoring. The Proprietary Aspects 8902.3.4 Bulk Assignments 8922.3.5 The Liquidity of Claims 8932.3.6 International Assignments. The Uncitral and

Unidroit Conventions. Their Content, Field of Application,Interpretation and Supplementation 897

2.3.7 Details of the Unidroit Factoring Convention 9022.3.8 Details of the Uncitral Convention 9042.3.9 Concluding Remarks 906

6 FINANCIAL SERVICES, FINANCIAL RISK,AND FINANCIAL REGULATION. INTERNATIONALISATION,

LIBERALISATION, AND RE-REGULATION OF CROSS-BORDERFINANCIAL SERVICES IN THE EU AND WTO/GATS

PART I INTRODUCTION: FINANCIAL SERVICES ACTIVITIES,SERVICE PROVIDERS AND FINANCIAL REGULATION

1.1 Domestic and Cross-border Financial Services. Regulatory Impact 9071.1.1 Financial Services and Financial Regulation 9071.1.2 Financial Intermediaries, their Operations and Regulation.

Capital Flows and Monetary Policies 9121.1.3 Objectives of Modern Financial Regulations 9151.1.4 Regulatory Objectives and Moral Hazard. Statutory Regulatory Aims 9201.1.5 Official and Unofficial Financial Markets and the Institutional and

Functional Approaches to Regulation. Objective Based Regulation 924

xxxiv Contents

1.1.6 Universal Banks, Conglomerate Risks and Supervision 9271.1.7 Market Abuse and Misleading Financial Structures 9291.1.8 International Aspects of Financial Regulation.

When Are Financial Services International? 9311.1.9 International Financial Regulation. The EU Model or

Passport and Concept of the General Good 9341.1.10 The International Capital Market and the EU Project for a

Single European Market for Financial Services 9361.1.11 The American Regulatory Approach to Issuing Activity and to Financial

Services Rendered in the US by Foreign Issuers and Intermediaries 9391.1.12 The Basle Concordat concerning International Banking

Regulation and the Efforts to Achieve InternationalFinancial Conglomerate Supervision 943

1.1.13 The Modern International Financial Architecture 945

1.2 The Essentials of the (Commercial) Banking Business and its Regulation 9461.2.1 Major Aspects of Banking. Supervision and the Role of

Banks of Last Resort 9461.2.2 Types of Banks and their Operations 9501.2.3 Commercial Banking Products, Unsecured and Secured Loans,

Leasing, Repos and Receivable Financing, Syndicated Loans,Trade Finance and Project Finance 952

1.2.4 Commercial Banking Risks 9551.2.5 Broad and Narrow Banking. Market Based Monitoring of Banks 9571.2.6 Commercial Banking Regulation and Banking Regulators.

International Aspects 9591.2.7 Intermediation and Desintermediation of Commercial Banks and

the Development of the Securities or Capital Markets 9611.2.8 The Banking or Current Account Relationship and Agreement.

A Public Function for Banks? 962

1.3 The Essentials of the Securities Business and its Regulation 9671.3.1 Major Types of Securities. Negotiable Instruments,

Transferable Securities and Investments.Book-entry Systems and Securities Entitlements 967

1.3.2 Securities Markets and their Organisation. Official Markets 9721.3.3 Unofficial Markets, Globalisation of Markets, Euromarkets 9751.3.4 The Primary Market and Security Issuers.

International Style Offerings 9771.3.5 Secondary Market and its Trading Systems 9781.3.6 Internet or Electronic Trading 9791.3.7 Modern Clearing, Settlement and Custody 9811.3.8 The Role of Investment Banks as Underwriters and Market Makers 9831.3.9 The Role of Security Brokers and Investment Managers.

Conflicts of Interests and Duty of Care 9861.3.10 Insolvency of Securities Brokers. The Notion of Segregation,

Tracing and Constructive Trust in Respect of Client Assets 9881.3.11 Investment Funds or Collective Investment Schemes 9921.3.12 Other Investment Banking Activities. Corporate Finance,

Mergers and Acquisitions, Company Valuations 993

Contents xxxv

1.3.13 The Risks in the Securities Business. Securities Regulationand its Focus. The European and American Approaches 995

1.3.14 Securities Regulators 9991.3.15 International Aspects of Securities Regulation 1000

1.4 Modern Financial Products. Derivatives and Securitisations.Hedge Funds and Their Operation 10011.4.1 Modern Developments in Financial Products 10011.4.2 The Use of Derivatives. Hedging 10031.4.3 The Valuation of Derivatives. Contracts for Differences 10061.4.4 Derivatives Markets and their Operations. Clearing and the

Notion of Margin 10081.4.5 Derivatives Risk, Netting and Regulation of Derivatives Activity 10121.4.6 Legal Aspects of Swaps. Integration and Conditionality,

Acceleration and Close Out. The ISDA Swap Master Agreement 10131.4.7 Asset Securitisation. Legal Aspects and Risks 10161.4.8 Synthetic Securitisation. Credit Derivatives or Credit Swaps 10191.4.9 Securities Lending, Short Selling and Prime Brokerage 10211.4.10 Hedge Funds and their Operations 1021

PART II INTERNATIONAL ASPECTS OF FINANCIAL SERVICES REGULATION;DEVELOPMENTS IN GATT, THE EU AND BIS/IOSCO/IAIS

2.1 Free Movement of Goods, Services, Current Payments andCapital after World War II 10222.1.1 Cross-border Movement of Goods. GATT 10222.1.2 Cross-border Payments and Movement of Capital. IMF 10242.1.3 Cross-border Movement of Services. GATS 10252.1.4 The WTO 1026

2.2 The Creation of the EEC and Evolution of the EU 10282.2.1 The Common Market and Monetary Union.

The Various Pillars of the EU 10282.2.2 The EU Institutional Framework and Legislation Instruments 10322.2.3 Definition of Cross-border Services. Connection with Free

Movement of Goods and Persons and with theRight of Establishment 1034

2.2.4 Restrictions on the Basic Freedoms. Regulated Services and theGeneral Good Concept 1037

2.2.5 The Use of the Notion of the General Good in the EU 10392.2.6 Early Failure of Full Harmonisation in Regulated Financial Services 1041

2.3 Early EU Achievements in the Regulated Financial Service Industries 10422.3.1 Banking 10422.3.2 Details of the Early Banking Directives and Recommendations 10432.3.3 Mortgage Credit 10442.3.4 Details of the Early Securities and Investments

Recommendations and Directives 10442.3.5 UCITS 10472.3.6 Early Directives in the Insurance Area 1048

xxxvi Contents

2.3.7 The System of Branching-Out under the First BankingDirective. Non-discrimination underHost Country Rule. Regulatory Co-operation 1048

2.4 The Globalisation of the Financial Markets and the Effect on theLiberalisation of Financial Services 10492.4.1 Autonomy of the International Capital Markets 10492.4.2 The Early Development of the Eurobond Market and its

Main Features. Eurodeposits 10492.4.3 Further Delocalisation, Competitive Deregulation.

Situation in the USA 10522.4.4 The Legal Status of Euromarket Instruments and

Underwriting Practices . 10532.4.5 Central Bank Involvement 10542.4.6 Effects of the Free Flow of Capital in the EU.

The 1988 Directive on the Free Movement of Capital 10542.4.7 The 1988 Directive and the Redirection of Savings and

Tax Avoidance Issues 10552.4.8 The 1988 Directive and the Movement of

Financial Products and Services 10562.4.9 The 1988 Directive and Monetary and Exchange Rate

Aspects of the Free Flow of Capital. The 1997 Stability Pact 10572.4.10 The Single European Market for Financial Services and its

Relationship to the Euromarkets 1058

2.5 Developments in the BIS, IOSCO and IAIS. Capital Adequacy 10582.5.1 The Functions of the BIS, IOSCO and IAIS . 10582.5.2 The BIS Capital Adequacy Approach for Banks.

The Basle Accord. Criticism. Other Regulatory BIS Initiatives 10602.5.3 Credit Risk, Position Risk and Settlement Risk.

Off-balance Sheet Exposures 10622.5.4 The Risk Assets Ratios, Risk Weightings and Qualifying Capital 10632.5.5 1993 BIS Proposals for Netting, Market Risk and

Interest Rate Risk. The 1996 Amendment 10642.5.6 Criticisms. The Building Block Approach. Derivatives Risk 10662.5.7 The 1999 BIS Consultation Document and the 2001 BIS Proposals.

The American Shadow Committee 10682.5.8 Capital Adequacy Calculations under Basel I. The Level Playing

Field for Banks and the Effect of a Change in theMinimum Capital Requirement 1071

2.5.9 Capital Adequacy Calculations under Basel II 1073

PART III THE THIRD GENERATION OF EU DIRECTIVES COMPLETINGTHE INTERNAL MARKET IN FINANCIAL SERVICES AND THE EU ACTION PLAN

FOR A SINGLE MARKET IN FINANCIAL SERVICES

3.1 The New EU Approach towards the Regulated Financial ServicesIndustries following the Liberalisation of the Capital Flows in 1988 10773.1.1 The Essence of the New Approach. Mutual Recognition of Home

Country Rule. Limited Harmonisation. The European Passport 1077

Contents xxxvii

3.1.2 Cross-border Activities through an Establishment or throughDirect Services. Different EU and US Approaches 1079

3.1.3 Residual Host Country Rules, The Concept of theGeneral Good and its Abuses 1081

3.1.4 Division of Tasks. No Single EU Regulator.Regulatory Competition 1085

3.1.5 Interaction with GATS 10853.1.6 The EU Reciprocity Requirements. Relation with

Third Countries. National Treatment and Effective Market Access 1086

3.2 The EU Second Banking Directive (SBD Consolidated inthe Credit Institutions Directive or CID of 2000) andInvestment Services Directive (ISD) 10873.2.1 SBD/CID: Home Country Rule Reach. Residual Host Country Powers.

The General Good 10873.2.2 SBD/CID: Scope of the Banking Passport. Universal Banking 10883.2.3 SBD/CID: Procedure for Obtaining the Passport. Home and

Host Country Communications 10893.2.4 ISD/CID: Basic Structure. Background and Scope 10893.2.5 ISD: Home Country Rule, Authorisation, Capital,

Prudential Rules. Procedure for Obtaining the Passport 10903.2.6 ISD: Conduct of Business 10913.2.7 ISD: Residual Host Country Powers. The General Good 10923.2.8 ISD: Regulated Markets, Concentration Principle,

and Stock Exchange Membership. Price Reporting 10933.2.9 ISD: Member States Committee 1094

3.3 The EU Approach to Capital Adequacy 10943.3.1 The Own Funds and Solvency Directives for Banks.

Differences from BIS Approach 10943.3.2 The Capital Adequacy Directive for Investment Services Firms.

Market or Position Risk 10953.3.3 General and Specific Risk. Off-balance-sheet Exposures 10953.3.4 Settlement and Other Risk. The Treatment of Hedges. Netting 10953.3.5 Qualifying Capital and Capital Adequacy 10963.3.6 The EU Approach to the Level Playing Field between

Banks and Securities Houses 1096

3.4 Other More Recent EU Regulatory Initiatives in the Financial Area 10973.4.1 Large Exposures 10973.4.2 Deposit Protection and Investor Compensation 10973.4.3 Winding-up of Credit Institutions 10983.4.4 Pension Funds 10983.4.5 Consolidated Banking Supervision. Basle Concordat and

EU Implementation 10993.4.6 Lead-regulator Concept. International Co-operation 11003.4.7 The E-commerce Directive 11003.4.8 Long-distance Selling of Financial Products to Consumers 1101

xxxviii Contents

3.5 The Financial Services Action Plan of 1998 11023.5.1 The 1998 Action Plan and its Objectives. Initial Lack of a

Road Map for Key Issues 11023.5.2 Lamfalussy Report and the Role of Comitology 11053.5.3 Implementing Legislation: The New Prospectus Directive.

The Issuer's Passport 11063.5.4 Implementing Legislation: The Transparency Directive 11083.5.5 Implementing Legislation: The Amendments to the ISD and

Capital Adequacy Directives 11093.5.6 Implementing Legislation: The Take-over Bids Directive 11093.5.7 Implementing Legislation: The Market Abuse Directive 11093.5.8 Other Parts of the Action Plan: Update UCITS, Distance Selling,

Pensions, Electronic Money and Commerce, Money Laundering,Financial Conglomerate Supervision Directive, Insolvency Directives,Clearing and Settlements, Cross-Border Use of Collateral,Taxation of Savings Income

Index 1111