Dalhuisen on International Commercial, Financial and Trade Law

Dalhuisen on International Commercial, Financial and Trade Law Jan H. Dalhuisen LL. M (UC at Berkeley), Dr. Jur. (Amsterdam), Fcl Arb. (London) Professor of Law, King's College, London and Visiting Professor U.C. School of Law Berkeley HART PUBLISHING OXFORD AND PORTLAND, OREGON 2000

Table of Cases Table of Legislation xxix xliii CHAPTER I. THE SOURCES OF MODERN INTERNATIONAL COMMERCIAL AND FINANCIAL LAW 1 PART I NATIONAL AND TRANS-NATIONAL OR INTERNATIONAL COMMERCIAL AND FINANCIAL LAW 1 1.1 Introduction 1 1.1.1 The Development of Civil and Common Law 1 1.1.2 Civil and Common Law Notions of Commercial Law 5 1.1.3 The Development of a Separate Commercial Law in France and Germany 9 1.1.4 Old and New Commercial and Financial Law. International Professional Law 13 1.2 The Origin of Civil and Common Law 17 1.2.1 The Early Roman Law Development 17 1.2.2 The Classical Roman Law and the Corpus Iuris Civilis 20 1.2.3 The Revival of the Roman Law in Western Europe, the Ius Commune 24 1.2.4 The Ius Commune and Local Law 26 1.2.5 Natural Law and the Natural Law School. Gotius' De lure Belli ac Pads, its Approach and Impact 30 1.2.6 The German Historical School 36 1.2.7 The Nineteenth Century Civil Law Concept of National Codifications and the Role of Interpretation 37 1.2.8 The Development of the Common Law 40 1.2.9 The Common Law Approach to Precedent, Codification and Statutory Interpretation 44 1.3 Civil and Common Law Compared 48 1.3.1 The Relation between Statutory and Non-statutory Law in Civil and Common Law. General Principles, Custom and Statutory Positivism 48 1.3.2 Legal Thinking in Civil and Common Law. The Role of Interpretation. Begriffs- and Interessenjurisprudenz in Civil Law. Legal Formalism and Realism in Common Law 52 1.3.3 Twentieth Century Governmental Intervention in Private Law. Mandatory Domestic Rules. The Effect of Globalisation and the Denationalisation of Private Law 57 1.4 The Transnational Private Law amongst Professionals 61 1.4.1 The Guiding Function of International Commercial and Financial Law. The New Legal Order in the Professional Sphere. The Lex Mercatoria v. Ius Commune Approaches 61

xii 1.4.2 Spontaneous Sources of Law: Fundamental and General Legal Principle. Custom 65 1.4.3 Uniform Substantive Law as Alternative to Private International Law 70 1.4.4 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 73 1.4.5 Agents of International Convergence and Harmonisation. The Role of Unidroit, Uncitral, the Hague Conference, the EU, and the ALI and Commissioners on Uniform State Law in the USA. Impact of the International Legal Practice and Scholarship 77 1.4.6 The Role of National Courts and of International Commercial Arbitration 81 PART II THE NATURE STATUS AND FUNCTION OF PRIVATE INTERNATIONAL LAW 82 2.1 Modern Private International Law 82 2.1.1 The Underlying Concept of Modern Private International Law 82 2.1.2 Drawbacks of Conflict Rules 83 2.2 The Modern European and US Approaches to Conflicts of Laws 87 2.2.1 Refinement of the European Model 87 2.2.2 The Development in the USA 88 2.2.3 The Various Modern US Conflict Theories 90 2.2.4 The European Approach of Exception Clause. Reasonable and Fair Solutions in the Dutch Proposals 92 2.2.5 The Emphasis on the Facts rather than on the Rules: the Nature of the Relationship and of the Transaction. Modern Interpretation Techniques 94 2.3 Private International Law and Harmonised Law 97 2.3.1 Private International Law and the Application of Uniform Law 97 2.3.2 The Situation with regard to EU Directives 97 PART III THE DEVELOPMENT OF TRANSNATIONAL OR INTERNATIONAL COMMERCIAL AND FINANCIAL LAW 98 3.1 The Lex Mercatoria, Interrelation with Private International Law 98 3.1.1 The Concept of the Modern Lex Mercatoria as a Hierarchy of Norms 98 3.1.2 The Major Protagonists of the Lex Mercatoria and their Views. Legitimation 102 3.2 The Hierarchy of Norms. Elaboration 104 3.2.1 Fundamental Legal Principle. Transnational Rules of Contract Formation and the Normative Interpretation Technique. Procedure 104 3.2.2 Fundamental Principles. The Notion of Transnational Ownership 107 3.2.3 Mandatory Customs and Practices HO 3.2.4 Mandatory Uniform Treaty Law, Contractual Provisions, Directory Trade Practices, Directory Uniform Treaty Law, Common Legal Notions, Domestic Laws and their Mandatory Provisions H3

3.3 Operation of the Lex Mercatoria and Objections to it 117 3.3.1 Operation of the Lex Mercatoria 117 3.3.2 Direct References to the Lex Mercatoria 118 3.3.3 Parties' Choice of a Domestic Law v. the Lex Mercatoria 119 3.3.4 Objections to the Lex Mercatoria Approach 120 CHAPTER II. DOMESTIC CONTRACT LAWS, UNIFORM INTERNATIONAL CONTRACT LAW AND INTERNATIONAL CONTRACT LAW PRINCIPLES. INTERNATIONAL SALES AND CONTRACTUAL AGENCY 123 PARTI DOMESTIC CONTRACT LAWS 123 1.1 Introduction 123 1.2 Formation and Interpretation or Construction of Contracts in Civil and Common Law 126 1.2.1 The Role of Parties' Intent in Civil Law. The Normative or Teleological Interpretation Method. Common Law Approach 126 1.2.2 The Civil Law Notion of Good Faith and its Modern Use in Interpretation 132 1.2.3 Consensus in Civil Law and its Normative Interpretation 136 1.2.4 Intent in Common Law. Offer and Acceptance, the Notions of Consideration, Exchange or Bargain 139 1.2.5 The Practical Significance of the Consideration Requirement in Common Law 142 1.2.6 Contracts: Construction and Remedies in Common Law 144 1.2.7 The Common Law Notion of Consideration and the Civil Law Notion of Causa. International Aspects 146 1.2.8 Custom and the Interpretation of Contracts 149 1.2.9 Other Aspects of Contractual Validity: Capacity and Authority 150 1.2.10 Other Aspects of Contractual Validity: Formalities 150 1.2.11 Other Aspects of Contractual Validity: Definiteness 151 1.3 The Civil Law Notion of Good Faith and the Common Law Alternatives of Implied Terms, Nature of the Relationship of the Parties, and Reliance 152 1.3.1 The Notion of Good Faith in Civil Law 152 1.3.2 Good Faith in Common Law. Alternatives. Equity and Fiduciary Duties Distinguished 159 1.3.3 Good Faith in the Unidroit and European Contract Principles 163 1.3.4 EU Notion of Good Faith 163 1.3.5 The Lesser Need for Legal Refinement in the Professional Sphere. Interpretation, Mistake, Gross Disparity and Disclosure Duties 164 1.3.6 The Status of Commercial Letters of Intent 166 1.3.7 Pre-contractual Negotiation and Post-contractual Implementation Duties of Professionals. Abuse of Rights 166 1.3.8 Force Majeure, Re-negociation Duties and Hardship Adjustments in Professional Relationships 168 1.4 Performance of the Contract, Defences, Default and Excuses, Termination 169 1.4.1 Performance in Kind or Specific Performance 169 1.4.2 Defences to Performance. Invalidity and Rescission 172 xiii

xiv 1.4.3 The Significance of Promises, Conditions and Warranties in connection with Performance in Common Law. Representations and Covenants 176 1.4.4 Default or Breach and Damages 178 1.4.5 Excuses 180 1.4.6 The Definition of the Concept of Force Majeure. Frustration and Economic Impossibility. Development in Civil and Common Law 181 1.4.7 Unforeseen Circumstances and the Balance of the Contract. Hardship 184 1.4.8 Modern Legislative Approaches to a Change in Circumstances. Contractual Hardship Clauses 186 1.5 Privity of Contract 188 1.5.1 Privity or Third Party Rights and Duties under a Contract 188 1.5.2 Development of Contractual Third Party Rights and Duties in Civil Law 193 1.5.3 The Situation in Common Law and the Changes in the USA and England 194 1.6 The Unidroit and European Principles of Contract Law 196 1.6.1 The Applicability, Reach and the Directory or Mandatory Nature of the Principles 196 1.6.2 Approach to Contract Formation. Capacity, Formalities and Specificity 199 1.6.3 Notions of Good Faith and Reasonableness. Interpretation and Supplementation of the Principles and Contracts thereunder 201 1.6.4 The Impact of Custom 205 1.6.5 Consensus and its Failure. The Question of Continued Validity 205 1.6.6 Performance, Default and Force Majeure Excuses. Hardship 206 1.6.7 Privity of Contract 207 1.6.8 The Nature and Impact of the Principles 207 1.7 Directory and Mandatory Rules of Contract 208 1.7.1 Directory and Mandatory Conflict Rules in Domestic Laws 208 1.7.2 Treatment of Directory and Mandatory Contract Rules in Private International Law 210 1.7.3 Mandatory Uniform International Contract Rules 211 1.7.4 The Effect of the Freedom of Movement and the Freedom of Establishment on the Application of Domestic Mandatory Rules 211 PART II THE CONTRACT FOR THE INTERNATIONAL SALE OF GOODS 212 2.1 The Main Aspects of the International Sale of Goods 212 2.1.1 Introduction 212 2.1.2 The Minimum Requirements of the Sales Agreement. Special Features and Risks of International Sales 214 2.1.3 Legal Risk in International Sales 216 2.1.4 Special Arrangements to Cover the Risks in International Sales 218 2.1.5 International Sales as Contracts between Professionals. Applicable Law 220 2.1.6 Currency and Payments in International Sales. Free Convertibility and Transferability of Money 223

2.1.7 The Transfer of Title in International Sales 225 2.1.8 Conform Delivery and the Passing of Risk in International Sales 226 2.1.9 The Passing of Risk in Civil and Common Law 228 2.1.10 Propriety Sale Price Protection in Civil and Common Law 233 2.2 The Role of Intermediaries and Documents in International Sales 239 2.2.1 The Safe Harbour Function. Agents and Documents of Title 239 2.2.2 The Use of Agents. Their Position 240 2.2.3 The Use of Negotiable Documents of Title. Bills of Lading and Warehouse Receipts 241 2.2.4 Documents of Title in Payment Schemes 244 2.2.5 The Use of Negotiable Instruments: Bills of Exchange 245 2.3 The Uniform International Sales Laws 247 2.3.1 Origin and Scope 247 2.3.2 The System of the Vienna Convention: Directory or Mandatory Rules 251 2.3.3 Applicability of the Vienna Convention 252 2.3.4 The Sales Law of the Vienna Convention 253 2.3.5 Supplementation and Interpretation of the Vienna Convention 258 2.3.6 The Interpretation of International Sales Contracts under the Vienna Convention. Meaning of Conduct and Custom 262 2.3.7 Supplementation of the Vienna Convention: Private International Law and the Rome Convention on the Law Applicable to Contractual Obligations 264 2.3.8 The Main Rules of the Rome Convention on the Law Applicable to Constructual Obligations 266 2.3.9 The Vienna Convention and the Different Trade Terms in International Sales 270 2.3.10 The Incoterms, their Status and Relation to the UCC and Vienna Convention 272 2.3.11 The Vienna Convention and the ICC Model International Sale Contract 274 2.4 The Law Merchant Concerning International Sales 275 PART III AGENCY 276 3.1 The General Notion of Agency 276 3.1.1 The Use of Agents. Their Position 276 3.1.2 The Role of the Agent. Explicit and Apparent Authority 278 3.1.3 The Notion of Independence, Apparent Authority and Agencies of Necessity 281 3.1.4 The Consequences of Agency, Conflicts of Interests and Duties of the Agent 283 3.1.5 Undisclosed and Indirect Agencies 284 3.1.6 The Civil Law Indirect Agency. The Relationship between the Principal and Third Party. Customers' Assets 286 3.1.7 The Economic Importance of Modern Agency 289 3.2 International Aspects of Agency 290 3.2.1 Private International Law Aspects of Agency 290 xv

xvi 3.2.2 Treaty Law concerning the Law Applicable to Agency 291 3.2.3 The Lex Mercatoria and Agency 294 3.2.4 The EU Commercial Agent Directive 294 CHAPTER III. INTERNATIONAL PAYMENTS AND PAYMENT SYSTEMS 297 PART I THE NOTION AND MODALITIES OF PAYMENT 297 1.1 Payment and Ways and Means of Payment 297 1.1.1 What is Payment? 297 1.1.2 The Notion of Money as Unit of Account and Unit of Payment. Money as Store of Value 300 1.1.3 Paper Currencies and Modern Currency Election Clauses 301 1.1.4 Freely Convertible and Transferable Currency 303 1.1.5 The Different Ways and Means of Payment. Pull and Push Systems of Payment 304 1.1.6 Cash Payments and the Bank Transfer Option in Commerce and Finance 305 1.2 Payment Through Bank Transfers 306 1.2.1 The Nature of Bank Accounts and their Use in the Payment Circuit 306 1.2.2 When is a Bank Payment Made? The Question of Acceptance and the Liberating Effect of the Payment 307 1.2.3 The Legal Characterisation of Bank Transfer Payments. Assignment, Novation or Own Legal Status 311 1.2.4 Modern Electronic Payment Systems. Clearing. Fedwire, CHIPS and CHAPS 311 1.2.5 The Risks in Modern Payment Systems. Payment Mistakes and Restitution 313 1.3 Set-off as Method of Payment 314 1.3.1 Legal Nature and Characterisation 314 1.3.2 Eligibility 316 1.3.3 Contractual Adaptations of the Set-off. Settlement, Novation and Close-out Netting 317 1.3.4 Use of Contractual Netting Clauses. Contractual Netting and Bankruptcy 319 1.3.5 The Evolution of the Set-off Principle 322 1.3.6 The ISDA Swap Master Agrements and Swap Netting 325 PART II INTERNATIONAL PAYMENTS 326 2.1 International Payment Arrangements to Minimise Payment Risk 326 2.1.1 Cross-border Payments and their Risks 326 2.1.2 Payment in Open Account 327 2.1.3 Ways to Reduce Payment Risk 329 2.1.4 Ways to Reduce Payment Risk: The Accepted Bills of Exchange 329 2.1.5 Ways to Reduce Payment Risk: Collection Arrangements 330 2.1.6 Ways to Reduce Payment Risk: Letters of Credit. The Different Banks Involved 332 2.1.7 The Types of Letters of Credit 335

2.1.8 The Documents Required under a Documentary Letter of Credit 336 2.1.9 The Right of Reimbursement of the Issuing Bank under a Letter of Credit 337 2.1.10 The Letter of Credit as Independent and Primary Obligation. The 'Pay First, Argue Later' Notion 338 2.1.11 Non-performance under Letters of Credit. The Exception of'fraud' 340 2.1.12 Transferable Letters of Credit and Back to Back Letters of Credit 341 2.1.13 Ways to Reduce Payment Risks: Autonomous Guarantees. Examples. Standby Letters of Credit 342 2.1.14 The Law and/or Rules Applicable to Collections, Letters of Credit and Bank Guarantees. The ICC Rules and their Status. The Lex Mercatoria 344 2.1.15 The Uncitral Convention on International Guarantees and the World Bank Standard Conditions 345 2.2 International Set-offs 345 2.2.1 The Law Applicable to Set-offs and Contractual Netting 345 2.2.2 The Law Applicable to Novation Netting and Swap Transfers 347 PART III MONEY LAUNDERING 348 3.1 Techniques 348 3.2 International Action 349 xvii CHAPTER IV. OWNERSHIP, POSSESSION AND LIMITED OR CONDITIONAL LEGAL OR EQUITABLE PROPRIETARY RIGHTS IN CHATTELS AND INTANGIBLES (31/3/00) 351 PARTI LAWS OF MOVABLE PROPERTY 351 1.1 Proprietary Laws in Common and Civil Law 351 1.1.1 Types of Assets 351 1.1.2 Chattels and Intangibles 352 1.1.3 The Proprietary Aspects of Claims 354 1.1.4 The Importance of the Law of Chattels and Intangibles 358 1.2 The Types of Proprietary Rights in Civil Law 360 1.2.1 The Nature and Limited Number of the Proprietary Rights in Civil Law. The Numerus Clausus Notion 360 1.2.2 The Way Proprietary Rights are Expressed and Protected in Civil Law. The Notions of Ownership, Possession and Holdership or Detention. Constructive Possession and Holdership 365 1.2.3 The Acquisitive Prescription and its Importance in Civil Law. Procedural and Substantive Law Aspects. Acquisitive Prescription and the Protection of Bona Fide Purchasers 368 1.2.4 The Proprietary Defences in Civil Law 370 1.2.5 The Civil Law Relativity or Priority Principle in Respect of Proprietary Rights. The Difference with the Relativity of Obligatory Rights 373

xviii 1.3 The Types of Proprietary Rights in Common Law. The Practical Differences with Civil Law 376 1.3.1 Legal and Equitable Interests in Chattels 376 1.3.2 Ownership and Possession of Chattels in Common Law 379 1.3.3 Equitable Proprietary Interests in Chattels 381 1.3.4 The Common Law System of Proprietary Defences. Tort Actions based on Better rather than on Absolute Rights 382 1.3.5 Constructive Possession in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation 385 1.3.6 Practical Difference between the Common and Civil Law Approaches to Proprietary Rights in Chattels 386 1.3.7 Approximation of the Common and Civil Law Systems of Proprietary Law in Chattels. User and Income Right 387 1.4 Trusts, Constructive Trusts, Tracing and Agency. The Civil Law Response 390 1.4.1 The Basic Features of the Common Law of Trust 390 1.4.2 The Practical Significance of Trusts in Common Law Countries 395 1.4.3 Constructive Trusts and Tracing Resulting Trusts, Statutory Trusts and Charitable Trusts 395 1.4.4 Trust and Agency. Trust and Bailment 397 1.4.5 Related Civil Law Structure 398 1.4.6 Private International Treaty Law and Trust Law Principles 400 1.5 The Transfer of Proprietary Rights in Chattels 402 1.5.1 The Legal Requirements for a Transfer of Chattels 402 1.5.2 The Formalities of a Sale: Contract or Delivery. Double Sales 403 1.5.3 The Importance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and De Facto Transfers of Title 407 1.5.4 The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law 408 1.5.5 Capacity. Causes of Contractual Invalidity. Effect on the Title Transfer 410 1.5.6 The Transfer Agreement. The Abstract and Causal System of Ownership Transfer 412 1.5.7 The Origin of the Abstract and Causal Views of Tittle Transfer 417 1.5.8 Disposition Rights. The 'Nemo Da? Rule and the Protection of Bona Fide Purchasers 422 1.5.9 Origin of the 'Nemo Daf Rule and of the Principle of Bona Fide Purchaser Protection 424 1.5.10 The Retention Right of the Seller in the Case of Default of the Buyer 429 1.6 Secured Transactions and Conditional Sales 432 1.6.1 The Difference between Secured Transactions and Conditional Sales 432 1.6.2 What are Sale-Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding 433 1.6.3 When are Finance Sales Converted into Secured Transactions? 436 1.6.4 The Operation of Finance Sales. Effect of the Conditionality of the Transfer. Proprietary Effect of Conditions. Duality of Ownership and of Possession in Civil Law. Openess of Proprietary Systems? 441

1.6.5 Examples of Finance Sales: Finance Leases, Repos and Factoring. Finance Sales as Executory Contracts, Cherry Picking and Netting 444 1.6.6 The Outward Signs of Security and Ownership-based Funding Interests. Possession or Filing. Attachment and Perfection of Security Interests under the UCC 446 1.6.7 Uniform Security Law and Principles of Security Laws 452 1.7 Proprietary Rights in Intangible Assets, their Creation and Transfer 452 1.7.1 Proprietary Rights in Intangible Assets and the Possibility and Method of their Transfer. The Meaning of Notification and the Situation in Double Assignments. The Civil Law Development 452 1.7.2 The Development in Common Law 458 1.7.3 The Transferability of Claims and Contracts. Assignment of Rights and Delegation of Duties. The Debtor's Defences and the Impact of Contractual Restrictions on the Transfer 460 1.7.4 The Assignability of Future Claims 466 1.7.5 Assignment, Novation, Amendement, Subrogation and Subcontracting 469 1.7.6 Different Types and Objectives of Assignments 471 1.7.7 The Better Right of the Assignee. The Notion of Abstraction and the Comparison with Negotiable Instruments 474 1.7.8 The Notion of Abstraction and the Liberating Effect of Payment by the Debtor 476 1.7.9 The Ranking between Assignees, The Nemo Dat Rule in Assignments 478 1.7.10 Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and Party Autonomy 481 1.7.11 Special Assignment Issues. Warranties, Conditions and Default 482 1.7.12 Bankruptcy Aspects of Assignments 483 1.7.13 Uniform Rules Concerning Assignments 486 1.8 Private International Law Aspects of Chattels 487 1.8.1 Application of the Lex Situs 487 1.8.2 The Notions of Equivalence and Adaptation. Conditional Ownership, Security and Retention Rights 493 1.8.3 Trusts. The 1985 Hague Convention on the Law Applicable to Trusts and their Recognition 495 1.8.4 Uniform Law concerning the Proprietary Aspects of Chattels 500 1.8.5 The Lex Mercatoria concerning Chattels 500 1.9 Private International Law Aspects of Assignments 500 1.9.1 The Various Aspects of Assignments. Characterisation Issues. Mandatory Law 500 1.9.2 Current Approaches to Choice of Laws Issues in Assignments 504 1.9.3 Treaty Law Approaches to the Law Applicable to Assignments. The Choice of Law Provision of Article 12 of the Rome Convention and the Draft Uncitral Receivable Finance Convention 508 1.9.4 Uniform Law concerning Proprietary Rights in Intangibles 510 1.9.5 The Lex Mercatoria concerning Bulk Assignments 510 xix

xx PART II NEGOTIABLE DOCUMENTS OF TITLE AND NEGOTIABLE INSTRUMENTS 510 2.1 The Role of Documents 510 2.1.1 Bills of Lading and Warehouse Receipts 510 2.1.2 The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods 514 2.1.3 The Status of the Bill of Lading in Legal Systems that Require Delivery for Title Transfer. Abstraction. The Situation in Germany and the Netherlands 514 2.1.4 The Status of the Bill of Lading in Legal Systems that do Not Normally Require Delivery for Title Transfer. The Situation in France 518 2.1.5 Bills of Lading as Quasi-negotiable Instruments in the UK. The Situation in the USA 519 2.1.6 Consequences of the Different Attitudes to Documents of Title when Goods are transferred to Transferees other than though a Transfer of the Bill of Lading 521 2.1.7 The Transfer of Risk 522 2.1.8 The Named Bill of Lading 522 2.1.9 Private International Law Aspects of Bills of Lading 523 2.1.10 Lex Mercatoria and Uniform Treaty Law concerning Bills of Lading 524 2.2 Negotiable Instruments 526 2.2.1 Bills of Exchange 526 2.2.2 Acceptance and Discounting of Time Drafts 529 2.2.3 The Persons Liable under a Bill of Exchange. Recourse 530 2.2.4 The Principle of Independence and Abstraction 531 2.2.5 The Holder in Due Course. Personal and Real Defences. Other Types of Holders 532 2.2.6 Cheques 533 2.2.7 Modern Use of Bills of Exchange and Cheques 534 2.2.8 Bills of Exchange and Competing Assignments of the Underlying Claims 535 2.2.9 Position of the Holder in Due Course of a Bill of Lading Compared to the Bona Fide Holder of a Bill of Lading 535 2.2.10 Foreign Bills of Exchange. Private International Law Aspects 536 2.2.11 Uniform Treaty Law 539 2.2.12 The Lex Mercatoria concerning Bills of Exchange 540 2.3 The Dematerialisation of Documents of Title and Negotiable Instruments. Electronic Transfers 540 2.3.1 The Traditional Use of Documents of Title and Negotiable Instruments. Their Inconveniences and Risks. Seaway Bills 540 2.3.2 Electronic Systems and their Importance in Replacing Transportation Documents 543 2.3.3 The Situation with Regard to Bills of Exchange. Electronic Bank Transfers 544

PART III INVESTMENT SECURITIES 545 3.1 The Different Types of Shares and Bonds 545 3.1.1 Traditional Distinctions 545 3.1.2 Negotiability of Investment Securities 549 3.1.3 The Risk Factors in the Holding and Transfer of Investment Securities 551 3.1.4 Book Entry Systems for Shares and Bonds Depository Receipts. Dematerialisation and Immobilisation 553 3.1.5 The Legal Characterisation of Book Entry Entitlements 556 3.2 The Internationalisation of Custody and Settlement Systems and its Opportunities 558 3.2.1 The Leading Role of the Euromarket for Bonds and the Effect on International Share Trading. The Dominant Role of International Practices and the Bankruptcy Law Implications 558 3.2.2 Law Applicable to International Investment Securities Transactions 563 3.2.3 The Lex Mercatoria concerning International Investment Securities Transactions 565 CHAPTER V. SECURITY AND OWNERSHIP-BASED FUNDING TECHNIQUES 567 PART I SECURED TRANSACTIONS AND FINANCE SALES 567 1.1 Civil and Common Law Approaches 567 1.1.1 Secured Transactions 567 1.1.2 Modern Non-possessing Security Interests in Personal Property and the Alternative of Finance Sales 571 1.1.3 The Importance of Modern Finance Sales. Characterisation Problems 575 1.1.4 Major Differences in the Domestic Laws on Proprietary Financial Protection and the Impact of Bankruptcy Laws 578 1.1.5 Harmonisation Attempts. Principles of Security Laws? 581 1.1.6 Conditional and Temporary Ownership Transfers 587 1.1.7 The Duality of Ownership in Finance Sales 592 1.1.8 Autonomous Transnational and Domestic Legal Developments in Third Party or Proprietary Effects of Contractual Clauses 595 1.2 The Situation in the Netherlands 597 1.2.1 Introduction. The New Civil Code of 1992 597 1.2.2 Security Substitutes and Floating Charges. The Reservation of Title 599 1.2.3 Conditional and Temporary Ownership. The Lex Commissoria 601 1.2.4 Open or Closed System of Proprietary Rights 605 1.3 The Situation in France 606 1.3.1 Introduction. The Vente a Remere and Lex Commissoria 606 1.3.2 The Impact of the Notion of the 'Solvabilite Apparente 608 1.3.3 The Modern Repurchase Agreement or 'Pension Livree 609 1.3.4 The Reservation of Title 611 1.3.5 Finance Sales. Transfer of Receivables, Lot Dailly and Tritisation (Fonds Communs de Creances) 612 1.3.6 Open or Closed System of Proprietary Rights 615 xxi

xxii 1.4 The Situation in Germany 615 1.4.1 Introduction. The Development of the Reservation of Title and Conditional Transfers 615 1.4.2 Sicherungsubereignung and Conditional Sales 618 1.4.3 Finance Sales 621 1.4.4 Curbing Excess. Open or Closed System of Proprietary Rights. Curbing Excess 623 1.5 The Situation in the UK 625 1.5.1 Introduction. Differences from Civil Law 625 1.5.2 Basic Features of Conditional or Split Ownership Interests. Equitable Charges. Open System of Proprietary Rights 627 1.5.3 The Distinction between Conditional Sales and Secured Transactions. Publication Requirements 632 1.5.4 Reservation of Title 636 1.5.5 Finance Sales 637 1.6 The Situation in the USA 638 1.6.1 Introduction. The Approach of Article 9 UCC 638 1.6.2 The Unitary Functional Approach and Finance Sales. Problem Areas n Article 9 UCC 641 1.6.3 Proprietary Characterisations 645 1.7 Finance Sales as Distinguished from Secured Transactions in Civil and Common Law. The Recharacterisation Risks 647 1.7.1 Introduction. Loan and Other Types of Funding 647 1.7.2 The Practical Differences between Security- and Ownership-based Funding 649 1.7.3 Legal Differences between Security- and Ownership-based Funding 650 1.7.4 Concluding Remarks 659 1.8 International Aspects of Conditional or Finance Sales and Secured Transactions 662 1.8.1 Private International Law Approaches. Uniform Law Attempts of Unidroit and Uncitral 662 1.8.2 Model Laws. The EBRD Attempt 665 1.8.3 Other Efforts at International Harmonisation: The Draft Unidroit Convention on International Interests in Mobile Equipment 667 1.8.4 Model Laws or Uniform Law. Applicability 667 PART II MAJOR TYPES OF FINANCE SALES 668 2.1 Finance Leasing 668 2.1.1 Rationale of Finance Leasing 668 2.1.2 Legal Characterisation 669 2.1.3 Comparative Legal Analysis 673 2.1.4 International Aspects of Finance Leasing 675 2.1.5 Uniform Substantive Law. The Unidroit Convention 676 2.1.6 The Leasing Convention's Sphere of Application, Its Interpretation and Supplementation 678 2.1.7 The Definition of Financial Leasing under the Convention 680 2.1.8 The Proprietary Aspects 680

xxiii 2.1.9 The Enforcement Aspects 680 2.1.10 The Contractual Aspects 681 2.1.11 The Collateral Rights 683 2.1.12 Concluding Remarks 685 2.2 Repurchase Agreements 688 2.2.1 The Repurchase Agreement as Prime Alternative to Secured Lending. Its Legal Characterisation 688 2.2.2 The Development of the Repo in Investment Securities. Securities Lending and the Buy/Sell Back Transaction 690 2.2.3 Margining 693 2.2.4 The Netting Approach in Repos 693 2.2.5 The PSA/ISMA Global Master Repurchase Agreement 694 2.2.6 Concluding Remarks 695 2.3 Factoring or Receivable Financing. The Unidroit Convention and the Uncitral Receivable Financing Convention 696 2.3.1 Receivable Financing and Factoring. International Attention 696 2.3.2 Factoring: The Contractual Aspects 699 2.3.3 Factoring: The Proprietary Aspects 700 2.3.4 Bulk Assignments 703 2.3.5 The Liquidity of Claims 704 2.3.6 International Assignments. The Uncitral and Unidroit Conventions. Their Content, Field of Application, Interpretation and Supplementation 707 2.3.7 Details of the Unidroit Factoring Convention 712 2.3.8 Details of the Uncitral Convention 714 2.3.9 Concluding Remarks 716 PART I CHAPTER VI. LIBERALISATION AND RE-REGULATION OF CROSS-BORDER FINANCIAL SERVICES. THE SITUATION IN THE EU AND WTO/GATS 717 INTRODUCTION: FINANCIAL SERVICES ACTIVITIES, SERVICE PROVIDERS AND FINANCIAL REGULATION 717 1.1 Domestic and Cross-border Financial Services. Regulatory Impact 717 1.1.1 Financial Services and Financial Regulation. Cross-border Financial Services and International Capital Flows 717 1.1.2 The Objectives of Modern Financial Regulation 720 1.1.3 The Institutional and Functional Approaches to Regulation 722 1.1.4 International Aspects of Financial Services Regulation 724 1.1.5 Focus of International Financial Regulation 726 1.1.6 Home and Host Country Rule 727 1.1.7 The EU Model and GATS. The Basle Concordat concerning International Banking Regulation 728 1.2 The Essentials of the Banking Business and its Regulation 729 1.2.1 The Major Aspects of Banking. Supervision and Banks of Last Resort 729 1.2.2 Types of Banks and their Operations 731

xxiv 1.2.3 Banking Risks 732 1.2.4 Broad and Narrow Banking 734 1.2.5 Banking Regulation and Banking Regulators. International Aspects 735 1.2.6 Intermediation and Desintermediation of Banks and the Development of the Securities Markets 736 1.2.7 The Banking or Current Account Agreement 737 1.3 The Essentials of the Securities Business and its Regulation 741 1.3.1 Major Types of Securities. Negotiable Instruments. Transferable Securities and Investments 741 1.3.2 Securities Markets and their Organisation. Official Markets 745 1.3.3 Unofficial Markets, Globalisation of Markets, Euro-markets 747 1.3.4 Secondary Market Trading Systems 749 1.3.5 Internet or Electronic Trading 750 1.3.6 The Role of Investment Banks as Underwriters and Market Makers 751 1.3.7 The Role of Security Brokers and Investment Managers 754 1.3.8 The Risks in the Securities Business. Securities Regulation and its Focus. The European and American Approaches 756 1.3.9 Insolvency of Securities Brokers. The Notion of Tracing 759 1.3.10 International Aspects of Securities Regulation 762 1.3.11 Securities Regulators 763 1.4 Modern Financial Products. Derivatives and Securitisations. Hedge Funds and Their Operations 764 1.4.1 Modern Developments in Financial Products 764 1.4.2 The Use of Derivatives 765 1.4.3 The Valuation of Derivatives. Contracts for Differences 768 1.4.4 Derivative Markets and their Operations. Clearing and the Notion of Margin 769 1.4.5 Derivatives Risk, Netting and the Regulation of Derivatives Activity 772 1.4.6 Legal Aspects of Swaps. Integration and Conditionality, Acceleration and Close Out. The ISDA Swap Master Agreement 773 1.4.7 Asset Securitisation. Legal Aspects and Risks 775 1.4.8 Hedge Funds and their Operations 778 PART II INTERNATIONAL ASPECTS OF FINANCIAL SERVICES REGULATION; DEVELOPMENTS IN GATTS, THE EU AND BIS/IOSCO/IAIS 779 2.1 Free Movement of Goods, Services, Current Payments and Capital after World War II 779 2.1.1 Cross-border Movement of Goods. GATT 779 2.1.2 Cross-border Current Payments and Movement of Capital. IMF 780 2.1.3 The Cross-border Movement of Services. GATS 780 2.1.4 The WTO 782 2.2 The Creation of the EEC 783 2.2.1 The Common Market and Monetary Union. The Various Pillars of the EU 783

2.2.2 The EU Institutional Framework and Forms of Legislation 787 2.2.3 Definition of Cross-border Services. Connection with Free Movement of Goods and Persons and with the Right of Establishment 789 2.2.4 Restrictions on the Basic Freedoms. Regulated Services and the General Good Concept 791 2.2.5 The Use of the Notion of the General Good in the EU 793 2.2.6 Failure of the Harmonisation Approach in the Regulated Financial Services 794 2.3 Early EU Achievements in the Regulated Financial Service Industry 796 2.3.1 Banking 796 2.3.2 Details of the Early Banking Directives and Recommendations 796 2.3.3 Mortgage Credit 797 2.3.4 Details of the Early Securities and Investment Recommendations and Directives 798 2.3.5 UCITS 800 2.3.6 Early Directives in the Insurance Area 801 2.3.7 The System of Branching-Out under the First Banking and Insurance Directives. Non-Discrimination under Host Country Rule. Regulatory Co-operation 801 2.4 The Globalisation of the Financial Markets and the Effect on the Liberalisation of Financial Services 801 2.4.1 Autonomy of the International Capital Markets 801 2.4.2 The Early Development of the Eurobond Market and its Main Features. Eurodeposits 802 2.4.3 Further Delocalisation, Competitive Deregulation. Situation in the USA 804 2.4.4 The Legal Status of Euromarket Instruments and Underwriting Practices 805 2.4.5 Central Bank Involvement 805 2.4.6 Effects of the Free Flow of Capital on the EU. The 1988 Directive on the Free Movement of Capital 806 2.4.7 The 1988 Directive and the Redirection of Savings and Tax Avoidance Issues 806 2.4.8 The 1988 Directive and the Movement of Financial Products and Services 808 2.4.9 The 1988 Directive and Monetary and Exchange Rate Aspects of the Free Flow of Capital 808 2.5 Developments in the BIS, IOSCO and LAIS 809 2.5.1 The Functions of the BIS, IOSCO and IAIS 809 2.5.2 The BIS Capital Adequacy Approach for Banks. The Basle Accord. Criticism. Other Regulatory BIS Initiatives 810 2.5.3 Credit Risk, Position Risk and Settlement Risk. Off-balance Sheet Exposures 811 2.5.4 The Risk Asset Ratios, Risk Weightings and Qualifying Capital 812 xxv

xxvi 2.5.5 1993 BIS Proposals for Netting, Market Risk and Interest Rate Risk. The 1994 Amendment and 1996 Interpretation Document 813 2.5.6 The 1994 BIS Discussion Paper on Public Disclosure of Market and Credit Risk by Financial Intermediaries (Fisher Report) 814 2.5.7 The April 1995 BIS Amendements to its 1993 Proposals concerning Market Risk 814 2.5.8 Position and Settlement Risk. CAD. International Guidelines. BIS and IOSCO 814 2.5.9 The 1999 BIS Proposals 816 2.5.10 Capital Adequacy Calculations 817 2.5.11 The Level Playing Field for Banks and the Effect of a Change in the Minimum Capital Requirement 817 PART III THE NEW GENERATION OF EU DIRECTIVES COMPLETING THE INTERNAL MARKET IN FINANCIAL SERVICES 818 3.1 The New EU Approach towards the Regulated Financial Services Industries following the Liberalisation of the Capital Flows after 1988 818 3.1.1 The Essence of the New Approach. Mutual Recognition of Home Country Rule. Limited Harmonisation. The European Passport 818 3.1.2 Cross-border Activities through an Establishment or though Direct Services. Different EU and US Approaches 820 3.1.3 Residual Host Country Rules, The Concept of the General Good and its Abuses 823 3.1.4 Division of Tasks. No Single EU Regulator. Regulatory Competition 826 3.1.5 Interaction with GATS 827 3.1.6 The EU Reciprocity Requirements. Relation with Third Countries. National Treatment and Effective Market Access 827 3.2 The EU Second Banking Directive (SBD) and Investment Services Directive 828 3.2.1 SBD: Home Country Rule Reach. Residual Host Country Powers. The General Good 828 3.2.2 SBD: Scope of the Banking Passport. Universal Banking 830 3.2.3 SBD: Procedure for Obtaining the Passport. Home and Host Country Communications 830 3.2.4 ISD: Basic Structure. Background and Scope 831 3.2.5 ISD: Home Country Rule, Authorisation, Capital, Prudential Rules. Procedure for Obtaining the Passport 832 3.2.6 ISD: Conduct of Business 832 3.2.7 ISD: Residual Host Country Powers. The General Good 833 3.2.8 ISD: Regulated Markets Concentration Principle and Stock Exchange Membership. Price Reporting 834 3.2.9 ISD: Member States Committee 835 3.2.10 Long-distance Selling of Financial Products of Consumers 835 3.3 The EU Approach to Capital Adequacy 836 3.3.1 The Own Funds and Solvency Directives for Banks. Differences from the BIS Approach 836

xxvii 3.3.2 The Capital Adequacy Directive for Investment Services Firms. Market or Position Risk 836 3.3.3 General and Specific Risk. Off-balance-sheet Exposures 837 3.3.4 Settlement and Other Risk. The Treatment of Hedges. Netting 837 3.3.5 Qualifying Capital and Capital Adequacy 837 3.3.6 Influence of the Modern BIS Approach 838 3.3.7 The EU Approach to the Level Playing Field between Banks and Securities Houses 838 3.4 Other Recent EU Regulatory Initiatives in the Financial Area 839 3.4.1 Large Exposures 839 3.4.2 Deposit Protection and Investor Compensation 839 3.4.3 Winding-up of Credit Institutions 839 3.4.4 Pension Funds 839 3.4.5 Consolidated Banking Supervision. Basle Concordat and EU Implementation 840 3.4.6 Lead-regulator Concept. International Co-operation 842 3.5 The Liberalisation of the Insurance Sector 842 3.5.1 Non-Life 842 3.5.2 Life 842 3.5.3 Reciprocity 842 3.5.4 Combined Effect of the First and Second Insurance Directives 842 3.5.5 The Insurance Passport. Home and Host Country Powers. The General Good 843 3.5.6 Insurance Products and Mandatory Contract Rules 843 3.5.7 The Solvency Regime 844 3.5.8 Effect of the Insurance Liberatlisation 844 3.5.9 Other Insurance Directives: The Insurance Accounts and Insurance Brokers 844 3.5.10 Tax Benefits 845 3.5.11 Insurance Winding-up Directive 845 IV. CONCLUSION 845 Index 847