Dalhuisen on International Commercial, Financial and Trade Law. Jan Dalhuisen

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

Preface to the Second Edition Preface to the First Edition Table of Cases Table of Legislation vii xiii xxxix liii 1 MODERN INTERNATIONAL COMMERCIAL AND FINANCIAL LAW AND ITS SOURCES PART I NATIONAL AND TRANS-NATIONAL OR INTERNATIONAL COMMERCIAL AND FINANCIAL LAW 1.1 Introduction 1 1.1.1 The Meaning of Modern International Commercial and Financial Law 1 1.1.2 The Antecedents of Modern International Commercial Law 6 1.1.3 The Impact of Civil and Common Law Traditions on the Modern Transnational Law Merchant and its Formation 12 1.1.4 Civil and Common Law Notions of Commercial Law 16 1.1.5 The Development of a Separate Commercial Law in France and Germany 22 1.1.6 Old and New Commercial and Financial Law: International Professional Law and the Revival of the International Law Merchant or Lex Mercatoria 26 1.1.7 International Commercial Arbitration and International Commercial Courts 33 1.2 The Origin and Evolution of Civil and Common Law. The Sources of Private Law. Statist and Non-statist Views 37 1.2.1 The Evolution of Modern Private Law and its Sources and their Importance for the Development of Modern International Commercial and Financial Law 37 1.2.2 The Early Roman Law Development 38 1.2.3 The Classical Roman Law and the Corpus Iuris Civilis 41 1.2.4 The Revival of Roman Law in Western Europe, the Ius Commune 45 1.2.5 The Ius Commune and Local Law 47 1.2.6 Natural Law and the Natural Law School: Grotius' De lure Belli ac Pacts, its Approach and Impact 51 1.2.7 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 60 1.2.9 The Nineteenth-Century Civil Law Concept of National Codifications and the Role of Interpretation 63 1.2.10 Twentieth-Century Continental European Legal Thinking in Private Law: Begriffs- and Interessenjurisprudenz 67 1.2.11 The Development of the Common Law 70

xx 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 its Development: Legal Formalism and Realism. Post-realism or Legal Functionalism: The 'Law and..." Movements 80 1.3 Civil and Common Law Compared. The Impact of Modern Regulatory and Mandatory Laws on Both. Public and Governmental Interests 90 1.3.1 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 of Interpretation and the Attitude to Fact and Law-Finding 97 1.3.3 Twentieth-Century Governmental Intervention in Private Law. Governmental Policies, Regulation and Mandatory Domestic Rules. The Effect of Globalisation and the Denationalisation of Private Law 103 1.4 Cultural, Sociological and Economic Undercurrents in the Formation of the Law. Legal Orders and their Manifestation 109 1.4.1 The Concept of Legal Orders 109 1.4.2 Law as Cultural Phenomenon 110 1.4.3 Sociological and Economic Considerations in the Law. The Competition with Mandatory State Laws or National Public Policies. States as Counterparties 117 1.4.4 The International Commercial and Financial Legal Order and its Relevance: The Role of Legal Theory, Legal History and Comparative Law 125 1.4.5 The Operation of Different Legal Orders: Evolution of a Federal Commercial Law in the US, of Transnational Private Law Concepts in the EU, and of International Human Rights Law in the Council of Europe (European Court of Human Rights) 129 1.5 The Transnational Private Law amongst Professionals 132 1.5.1 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 and General Legal Principle. Custom 138 1.5.3 Uniform Substantive Law as Alternative to Private International Law 142 1.5.4 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 on Uniform State Laws in the USA; and the Impact of International Legal Practice and Scholarship 150

xxi 1.5.6 The Role of National Courts and of International Commercial Arbitration 154 PART II THE NATURE, STATUS AND FUNCTION OF PRIVATE INTERNATIONAL LAW 2.1 Modern Private International Law 156 2.1.1 The Underlying Concept of Modern Private International Law: Party Autonomy 156 2.1.2 Drawbacks of Conflict Rules 159 2.2 The Modern European and US Approaches to Conflicts of Laws 165 2.2.1 Refinement of the European Model 165 2.2.2 The Development in the USA 166 2.2.3 The Various Modern US Conflict Theories 168 2.2.4 The European Approach of Exception Clauses: Reasonable and Fair Solutions in the Dutch Proposals 170 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 and the Effects of Internationalisation 173 2.2.6 The Issue of Public Policy or Governmental Interests and their Impact. The Notion of Comity and its Application. Competition between Transnational and State Laws 177 2.2.7 Practical Issues Concerning Conflicting Public Policies: Effect on the Lex 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 187 2.3.1 Private International Law and the Application of Uniform Law 187 2.3.2 The Situation with Regard to EU Directives of a Private Law Nature 188 PART III THE DEVELOPMENT OF TRANSNATIONAL OR INTERNATIONAL COMMERCIAL AND FINANCIAL LAW 3.1 The Lex Mercatoria, Interrelation with Private International Law 191 3.1.1 The Concept of the Modern Lex Mercatoria as a Hierarchy of Norms 191 3.1.2 The Major Protagonists of the Lex Mercatoria and their Views: Legitimation 196 3.2 The Hierarchy of Norms: Elaboration 198 3.2.1 Fundamental Legal Principle. Transnational Rules of Contract Formation and the Normative Interpretation Technique. Procedure 198 3.2.2 Fundamental Principles. The Notion of Transnational Ownership. A Fractured System of Proprietary Rights 201 3.2.3 Mandatory Customs and Practices 205

xxii 3.2.4 Mandatory Uniform Treaty Law, Contractual Provisions (Party Autonomy), Directory Trade Practices, Directory Uniform 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 212 3.3.1 Operation of the Lex Mercatoria 212 3.3.2 Direct References to the Lex Mercatoria 214 3.3.3 Parties' Choice of a Domestic Law v the Lex Mercatoria 215 3.3.4 Objections to the Lex Mercatoria Approach 216 3.3.5 Application and Enforcement of the Lex Mercatoria 217 2 DOMESTIC CONTRACT LAWS, UNIFORM INTERNATIONAL CONTRACT LAW AND INTERNATIONAL CONTRACT LAW PRINCIPLES: INTERNATIONAL SALES AND CONTRACTUAL AGENCY PART I DOMESTIC CONTRACT LAWS 1.1 Introduction 219 1.1.1 Modern Contract Law: Emphasis on Nature of the Parties or on Type of Contract? 219 1.1.2 Modern Contract Theory 223 1.1.3 The Challenge of E-Commerce 226 1.2 Formation and Interpretation or Construction of Contracts in Civil and Common Law 228 1.2.1 The Role of Parties' Intent in Civil Law. The Normative or Teleological Interpretation Method. The Common Law Approach Compared 228 1.2.2 The Civil Law Notion of Good Faith and its Modern 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 in Common 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 the Civil Law Notion of Causa. International Aspects 249 1.2.8 Custom and the Interpretation of Contracts 252 1.2.9 Other Aspects of Contractual Validity: Capacity and Authority 253 1.2.10 Other Aspects of Contractual Validity: Formalities 254 1.2.11 Other Aspects of Contractual Validity: Definiteness 254 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 255 1.3.1 The Notion of Good Faith in Civil Law 255

xxiii 1.3.2 Good Faith in Common Law. Alternatives. Equity and Fiduciary Duties Distinguished 264 1.3.3 Good Faith in the Unidroit and European Contract Principles 267 1.3.4 EU Notion of Good Faith 268 1.3.5 The Lesser Need for Legal Refinement in the Professional Sphere: Interpretation, Mistake, Gross Disparity and Disclosure Duties 269 1.3.6 The Status of Commercial Letters of Intent 271 1.3.7 Pre-contractual Negotiation and Post-contractual Implementation Duties of Professionals: Abuse of Rights 271 1.3.8 Force Majeure, Re-negotiation Duties and Hardship Adjustments in Professional Relationships 273 1.4 Performance of the Contract, Defences, Default and Excuses, Termination 274 1.4.1 Performance in Kind or Specific Performance 274 1.4.2 Lack of Consensus or Defences to Performance- Invalidity and Rescission 277 1.4.3 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 283 1.4.5 Excuses 286 1.4.6 The Definition of the Concept of Force Majeure. Frustration and Economic Impossibility. Development in Civil and Common Law 287 1.4.7 Unforeseen Circumstances and the Balance of the Contract: Hardship 290 1.4.8 Modern Legislative Approaches to a Change in Circumstances: Contractual Hardship Clauses 292 1.5 Privity of Contract 295 1.5.1 Privity of Contract or Third-Party Rights and Duties under a Contract 295 1.5.2 Development of Contractual Third-Party Rights and Duties in Civil Law 301 1.5.3 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 305 1.6.1 The Applicability, Reach, and the Directory or Mandatory Nature of the Principles 305 1.6.2 Approach to Contract Formation: Capacity, Formalities and Specificity 313 1.6.3 Notions of Good Faith and Reasonableness: Interpretation and Supplementation of the Principles and Contracts thereunder 315 1.6.4 The Impact of Custom 320 1.6.5 Consensus and its Failure: Defences and the Question of Continued Validity 321 1.6.6 Performance, Default and Force Majeure Excuses: Hardship 322 1.6.7 Privity of Contract 323 1.6.8 The Nature and Impact of the Principles 323 1.7 Directory and Mandatory Rules of Contract 325 1.7.1 Directory and Mandatory Contract Rules in Domestic Laws 325

xxiv 1.7.2 Treatment of Directory and Mandatory Contract Rules in Private International Law 327 1.7.3 Mandatory Uniform International Contract Rules 329 1.7.4 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 330 2.1.1 Introduction 330 2.1.2 The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales 332 2.1.3 Legal Risk in International Sales 334 2.1.4 Special Arrangements to Cover the Risks in International Sales 336 2.1.5 International Sales as Contracts between Professionals: Applicable Law 338 2.1.6 Currency and Payments in International Sales: Free Convertibility and Transferability of Money 341 2.1.7 The Transfer of Title in International Sales 342 2.1.8 Conform Delivery and the Passing of Risk in International Sales 343 2.1.9 The Passing of Risk in Civil and Common Law 345 2.1.10 Proprietary Sale Price Protection in Civil and Common Law 350 2.2 The Role of Intermediaries and Documents in International Sales 356 2.2.1 The Safe Harbour Function: Agents and Documents of Title 356 2.2.2 The Use of Agents: Their Position 357 2.2.3 The Use of Negotiable Documents of Title: Bills of Lading and Warehouse Receipts 359 2.2.4 Documents of Title in Payment Schemes: Bills of Lading 359 2.2.5 The Use of Negotiable Instruments: Bills of Exchange 360 2.3 The Uniform International Sales Laws 362 2.3.1 Origin and Scope 362 2.3.2 The System of the Vienna Convention: Directory or Mandatory Rules 366 2.3.3 Applicability of the Vienna Convention 367 2.3.4 The Sales Law of the Vienna Convention 368 2.3.5 Supplementation and Interpretation of the Vienna Convention 373 2.3.6 The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom 377 2.3.7 Supplementation of the Vienna Convention: Private International Law and the Rome Convention on the Law Applicable to Contractual Obligations 379 2.3.8 The Main Rules of the Rome Convention on the Law Applicable to Contractual Obligations 381 2.3.9 The Vienna Convention and the Different Trade Terms in International Sales 385 2.3.10 The Incoterms, Their Status and Relation to the UCC and Vienna Convention 388 2.3.11 The Vienna Convention and the ICC Model International Sale Contract 390

1.2 Payment through Bank Transfers 427 1.2.1 The Nature of Bank Accounts, the Current Account and its Use in the Payment Circuit 427 1.2.2 When is a Bank Payment Made? The Question of Acceptance and the Liberating Effect of the Payment. Finality 430 1.2.3 The Legal Characterisation of Bank Transfer Payments: Assignment, Novation or Independent Legal Status 434 1.2.4 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 xxv 2.4 The Law Merchant Concerning International Sales 390 PART III AGENCY 3.1 The General Notion of Agency 391 3.1.1 The Use of Agents: Their Position 391 3.1.2 The Role of the Agent: Explicit and Apparent Authority 395 3.1.3 The Notion of Independence, Apparent Authority and Agencies of Necessity 398 3.1.4 The Consequences of Agency: Conflicts of Interests, Rights and Duties of the Agent 399 3.1.5 Undisclosed and Indirect Agencies 401 3.1.6 The Civil Law Indirect Agency. The Relationship between the Principal and Third Party. Customers' Assets 403 3.1.7 The Economic Importance of Modern Agency 407 3.2 International Aspects of Agency 407 3.2.1 Private International Law Aspects of Agency 407 3.2.2 Treaty Law Concerning the Law Applicable to Agency 409 3.2.3 The Lex Mercatoria and Agency 411 3.2.4 The EU Commercial Agent Directive 412 3 INTERNATIONAL PAYMENTS, PAYMENT SYSTEMS AND MISTAKEN PAYMENTS PART 1 THE NOTION AND MODALITIES OF PAYMENT 1.1 Payment and Ways and Means of Payment 415 1.1.1 What is Payment? 415 1.1.2 The Notion of Money as Unit of Account or Unit of Payment; Money as Store of Value 420 1.1.3 Paper Currencies and Modern Currency Election Clauses 421 1.1.4 Freely Convertible and Transferable Currency 422 1.1.5 The Different Ways and Means of Payment: Pull and Push Systems 424 1.1.6 Cash Payments and the Bank Transfer Option in Commerce and Finance: The Notions of Independence or Abstraction and Finality 426

xxvi 1.2.6 Finality, Independence or Abstraction and the EU Settlement Finality Directive 440 1.3 Set-off as Method of Payment: Netting 440 1.3.1 Legal Nature and Characterisation 440 1.3.2 Eligibility 442 1.3.3 Contractual Adaptations of the Set-off: Settlement, Novation and Close-out Netting 444 1.3.4 Use of Contractual Netting Clauses: Contractual Netting and Bankruptcy 448 1.3.5 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 456 2.1.1 Cross-border Payments and their Risks 456 2.1.2 Payment in Open Account 458 2.1.3 Ways to Reduce Payment Risk 459 2.1.4 Ways to Reduce Payment Risk: The Accepted Bill of Exchange 460 2.1.5 Ways to Reduce Payment Risk: Collection Arrangements 461 2.1.6 Ways to Reduce Payment Risk: Letters of Credit. The Different Banks Involved 463 2.1.7 The Types of Letters of Credit 467 2.1.8 The Documents Required under a Documentary Letter of Credit 468 2.1.9 The Right of Reimbursement of the Issuing Bank under a Letter of Credit 469 2.1.10 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-Back Letters 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 of Credit and Bank Guarantees. The ICC Rules and their Status. The Lex Mercatoria 476 1.2.15 The Uncitral Convention on International Guarantees and the World Bank Standard Conditions 477 2.2 International Set-offs 478 2.2.1 The Law Applicable to Set-offs and Contractual Netting 478 2.2.2 The Law Applicable to Novation Netting and Swap Transfers 479

xxvii PART III MONEY LAUNDERING 3.1 Techniques and Remedies 481 3.1.1 Objectives and Mechanisms 481 3.1.2 Why Action? Objectives of Combating Money Laundering. Remedies 483 3.2 International Action 485 3.2.1 The Group of Ten, the Council of Europe, and the United Nations 485 3.2.2 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 489 1.1.1 Types of Assets 489 1.1.2 Chattels and Intangibles, Land. 490 1.1.3 Proprietary Aspects. Claims 493 1.1.4 The Importance of the Law of Chattels and Intangibles. The Physical and Anthropomorphic Approach to Property Rights. Modern Developments. The Effect of Financial Law and New Financial Structures 496 1.2 The Types of Proprietary Rights in Civil Law 502 1.2.1 The Nature and Limited Number of the Traditional Proprietary Rights in Civil Law. The Numerus Clausus Notion 502 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 507 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 510 1.2.4 The Proprietary Defences in Civil Law 512 1.2.5 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 518 1.3.1 Legal and Equitable Interests in Chattels 518 1.3.2 Ownership and Possession of Chattels in Common Law 521 1.3.3 Equitable Proprietary Interests in Chattels 523 1.3.4 The Common Law System of Proprietary Defences. Tort Actions Based on Better Rather Than on Absolute Rights 524 1.3.5 Constructive Possession in Common Law. The Absence of Acquisitive Prescription. Statutes of Limitation 527 1.3.6 Practical Difference between the Common and Civil Law Approaches to Proprietary Rights in Chattels 528

xxviii 1.3.7 Approximation of the Common and Civil Law Systems of Proprietary 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 534 1.4.1 The Basic Features of the Common Law of Trust 534 1.4.2 The Practical Significance of Trusts in Common Law Countries 540 1.4.3 Constructive Trusts, Tracking and Tracing, Resulting Trusts, Statutory Trusts and Charitable Trusts 541 1.4.4 Trust and Agency. Trust and Bailment 543 1.4.5 Related Civil Law Structures 544 1.4.6 Private International Treaty Law and Trust Law Principles 546 1.5 The Transfer of Proprietary Rights in Chattels 549 1.5.1 The Legal Requirements for a Transfer of Chattels 549 1.5.2 The Formalities of a Sale: Contract or Delivery. Double Sales 550 1.5.3 The Importance of Identification. Effect on the Transfer. Sales of Future Assets, Bulk Transfers, and De Facto Transfers of Title 554 1.5.4 The Development of the Rules Concerning Delivery as a Formal Requirement of Title Transfer in Civil and Common Law 556 1.5.5 Legal Capacity and Disposition Right. Causes of Contractual Invalidity. Effect on the Title Transfer. Future, Conditional and Temporary Sales 558 1.5.6 The Transfer Agreement. The Abstract and Causal System of Ownership Transfer 561 1.5.7 The Origin of the Abstract and Causal Views of Title Transfer 566 1.5.8 Disposition Rights. The 'Nemo Dat' Rule and the Protection of Bona Fide Purchasers 572 1.5.9 Origin of the 'Nemo Dai Rule and of the Principle of Bona Fide Purchaser Protection 574 1.5.10 The Retention Right of the Seller in the Case of Default of the Buyer 579 1.6 Secured Transactions and Conditional Sales 583 1.6.1 The Difference between Secured Transactions and Conditional Sales 583 1.6.2 What are Sale-Repurchase Agreements or Finance Sales? The Characterisation Issue. Property-based and Security-based Funding 583 1.6.3 When are Finance Sales Converted into Secured Transactions? 586 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. 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-based Funding Interests. Possession or Filing. Attachment and Perfection 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

xxix 1.7 Proprietary Rights in Intangible Assets, their Creation and Transfer 606 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 606 1.7.2 The Development in Common Law 612 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 614 1.7.4 The Assignability of Future Claims 620 1.7.5 Assignment, Novation, Amendment, Subrogation and Subcontracting 623 1.7.6 Different Types and Objectives of Assignments 626 1.7.7 The Better Right of the Assignee. The Notion of Abstraction and Finality. The Comparison with Negotiable Instruments 628 1.7.8 The Notion of Abstraction and the Liberating Effect of Payment by the Debtor 630 1.7.9 The Ranking between Assignees, The Nemo Dat Rule in Assignments 633 1.7.10 Contractual and Proprietary Aspects of Assignments. Mandatory Rules. Applicable Law and Party Autonomy 636 1.7.11 Special Assignment Issues. Warranties, Conditions and Default 637 1.7.12 Bankruptcy Aspects of Assignments 638 1.7.13 Uniform Rules Concerning Assignments 641 1.8 Private International Law Aspects of Chattels 642 1.8.1 Application of the Lex Situs 642 1.8.2 The Notions of Equivalence and Adaptation. Conditional Ownership, Security and Retention Rights 648 1.8.3 Trusts. The 1985 Hague Convention on the Law Applicable to Trusts and their Recognition 650 1.8.4 Uniform Law Concerning the Proprietary Aspects of Chattels 655 1.8.5 The Lex Mercatoria Concerning Chattels 656 1.9 Private International Law Aspects of Assignments 656 1.9.1 The Various Aspects of Assignments. Characterisation Issues. Mandatory Law 656 1.9.2 Current Approaches to Choice of Laws Issues in Assignments. The Situs of Debts 660 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 Financing Convention 665 1.9.4 Uniform Law Concerning Proprietary Rights in Intangibles 666 1.9.5 The Lex Mercatoria Concerning Bulk Assignments 667 PART II NEGOTIABLE DOCUMENTS OF TITLE AND NEGOTIABLE INSTRUMENTS 2.1 The Role of Documents 667 2.1.1 Bills of Lading and Warehouse Receipts 667 2.1.2 The Origin and Nature of the Bill of Lading and its Operation in the Proprietary Aspects of the Transfer of Goods 671

xxx 2.1.3 The Status of the Bill of Lading in Legal Systems that Require Delivery for Title Transfer. Abstraction and the Conclusive Evidence 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 Normally Require 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 of Title when Goods are Transferred to Transferees other than through a Transfer of the Bill of Lading 678 2.1.7 The Transfer of Risk 679 2.1.8 The Named Bill of Lading and Sea-way Bills 679 2.1.9 Private International Law Aspects of Bills of Lading 680 2.1.10 Lex Mercatoria and Uniform Treaty Law concerning Bills of Lading 681 2.2 Negotiable Instruments 684 2.2.1 Bills of Exchange 684 2.2.2 Acceptance and Discounting of Time Drafts 687 2.2.3 The Persons Liable under a Bill of Exchange. Recourse 688 2.2.4 The Principle of Independence or Abstraction 689 2.2.5 The Holder in Due Course. Personal and Real Defences. Other Types of Holders 690 2.2.6 Cheques 691 2.2.7 Modern Use of Bills of Exchange and Cheques 692 2.2.8 Bills of Exchange and Competing Assignments of the Underlying Claim 692 2.2.9 Position of the Holder in Due Course of a Bill of Exchange Compared to the Bona Fide Holder of a Bill of Lading 693 2.2.10 Foreign Bills of Exchange. Private International Law Aspects 694 2.2.11 Uniform Treaty Law 697 2.2.12 The Lex Mercatoria Concerning Bills of Exchange 698 2.3 The Dematerialisation of Documents of Title and Negotiable Instruments. Electronic Transfers 698 2.3.1 The Traditional Use of Documents of Title and Negotiable Instruments. Their Inconveniences and Risks. Seaway Bills 698 2.3.2 Electronic Systems and Their Importance in Replacing Transportation Documents 702 2.3.3 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 705 3.1.1 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

xxxi 3.1.3 The Risk Factors in the Holding and Transfer of Investment Securities. Bankruptcy Issues and Risk Reduction Techniques. 715 3.1.4 Modern Clearing and Settlement Systems. Internationalisation 719 3.1.5 Book-Entry Systems for Shares and Bonds. Depository Receipts. The Develoments towards Dematerialisation and Immobilisation 722 3.1.6 The Legal Characterisation of Book-Entry Entitlements. The Manner and Consequendces of their Transfer. Transfer Instructions and the Notion of their Abstraction or Finality 724 3.2 The Internationalisation of Custody and Settlement Systems and its Opportunities 732 3.2.1 The Role of the Euromarket for Bonds and the Effect on International Share Trading. The Dominant Role of International Practices and the Bankruptcy Law Implications 732 3.2.2 Law Applicable to International Investment Securities Transactions 739 3.2.3 The Lex Mercatoria concerning International Investment Securities Transactions 744 3.2.4 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 749 1.1.1 Secured Transactions 749 1.1.2 Modern Non-possessory Security Interests in Personal Property and the Alternative of Finance Sales 753 1.1.3 The Importance of Modern Finance Sales. Characterisation Problems 757 1.1.4 Major Differences in the Domestic Laws on Proprietary Financial Protection and the Impact of Bankruptcy Laws 760 1.1.5 Harmonisation Attempts. Principles of Security Laws? 764 1.1.6 Conditional and Temporary Ownership Transfers 770 1.1.7 The Duality of Ownership in Finance Sales 775 1.1.8 Autonomous Transnational and Domestic Legal Developments in Third Party or Proprietary Effect of Contractual Clauses 778 1.2 The Situation in the Netherlands 780 1.2.1 Introduction. The New Civil Code of 1992 780 1.2.2 Security Substitutes and Floating Charges. The Reservation of Title 782 1.2.3 Conditional and Temporary Ownership. The Lex Commissoria 785 1.2.4 Open or Closed System of Proprietary Rights 788 1.3 The Situation in France 791 1.3.1 Introduction. The Vente a Remere and Lex Commissoria 791 1.3.2 The Impact of the Notion of the 'Solvabiliti Apparente' 792 1.3.3 The Modern Repurchase Agreement or 'Pension Livree' 793 1.3.4 The Reservation of Title 795

xxxii 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 800 1.4.1 Introduction. The Development of the Reservation of Title and Conditional Transfers. Floating Charges 800 1.4.2 Sicherungsubereignung and Conditional Sales 804 1.4.3 Finance Sales 807 1.4.4 Curbing Excess. Open or Closed System of Poprietary Rights 809 1.5 The Situation in the UK 811 1.5.1 Introduction. Differences from Civil Law 811 1.5.2 Basic Features of Conditional or Split Ownership Interests. Equitable and Floating Charges. Open System of Proprietary Rights 813 1.5.3 The Distinction between Conditional Sales and Secured Transactions. Publication Requirements 818 1.5.4 Reservation of Title 822 1.5.5 Finance Sales 823 1.6 The Situation in the USA 824 1.6.1 Introduction. The Approach of Article 9 UCC 824 1.6.2 The Unitary Functional Approach and Finance Sales. Problem Areas in Article 9 UCC 828 1.6.3 Proprietary Characterisations 832 1.7 Finance Sales as Distinguished from Secured Transactions in Civil and Common Law. The Recharacterisation Risks 835 1.7.1 Introduction. Loan and other Types of Funding 835 1.7.2 The Practical Differences between Security- and Ownership-based Funding 836 1.7.3 Legal Differences between Security- and Ownership-based Funding 838 1.7.4 Concluding Remarks 847 1.8 International Aspects of Conditional or Finance Sales and Secured Transactions 850 1.8.1 Private International Law Approaches. Uniform Law Attempts of Unidroit and Uncitral 850 1.8.2 Models Laws. The EBRD Attempt 853 1.8.3 Other Efforts at International Harmonisation: The 2001 Unidroit Convention on International Interests in Mobile Equipment 855 1.8.4 Model Laws or Uniform Law. Applicability 856 PART II MAJOR TYPES OF FINANCE SALES 2.1 Finance Leasing 857 2.1.1 Rationale of Finance Leasing 857 2.1.2 Legal Characterisation 858 2.1.3 Comparative Legal Analysis 861 2.1.4 International Aspects of Finance Leasing 863 2.1.5 Uniform Substantive Law. The Unidroit Convention 864

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 867 2.1.8 The Proprietary Aspects 868 2.1.9 The Enforcement Aspects 869 2.1.10 The Contractual Aspects 870 2.1.11 The Collateral Rights 872 2.1.12 Concluding Remarks 873 2.2 Repurchase Agreements 876 2.2.1 The Repurchase Agreement as Prime Alternative to Secured Lending. Its Legal Characterisation 876 2.2.2 The Development of the Repo in Investment Securities. Securities Lending and the Buy/Sell Back Transaction 879 2.2.3 Margining 882 2.2.4 The Netting Approach in Repos 882 2.2.5 The TBMA/ISMA Global Master Repurchase Agreement 883 2.2.6 Concluding Remarks 884 2.3 Factoring or Receivable Financing. The Unidroit Convention and the Uncitral Receivable Financing Convention 885 2.3.1 Receivable Financing and Factoring. International Attention 885 2.3.2 Factoring. The Contractual Aspects 888 2.3.3 Factoring. The Proprietary Aspects 890 2.3.4 Bulk Assignments 892 2.3.5 The Liquidity of Claims 893 2.3.6 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 902 2.3.8 Details of the Uncitral Convention 904 2.3.9 Concluding Remarks 906 6 FINANCIAL SERVICES, FINANCIAL RISK, AND FINANCIAL REGULATION. INTERNATIONALISATION, LIBERALISATION, AND RE-REGULATION OF CROSS-BORDER FINANCIAL 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 907 1.1.1 Financial Services and Financial Regulation 907 1.1.2 Financial Intermediaries, their Operations and Regulation. Capital Flows and Monetary Policies 912 1.1.3 Objectives of Modern Financial Regulations 915 1.1.4 Regulatory Objectives and Moral Hazard. Statutory Regulatory Aims 920 1.1.5 Official and Unofficial Financial Markets and the Institutional and Functional Approaches to Regulation. Objective Based Regulation 924

xxxiv 1.1.6 Universal Banks, Conglomerate Risks and Supervision 927 1.1.7 Market Abuse and Misleading Financial Structures 929 1.1.8 International Aspects of Financial Regulation. When Are Financial Services International? 931 1.1.9 International Financial Regulation. The EU Model or Passport and Concept of the General Good 934 1.1.10 The International Capital Market and the EU Project for a Single European Market for Financial Services 936 1.1.11 The American Regulatory Approach to Issuing Activity and to Financial Services Rendered in the US by Foreign Issuers and Intermediaries 939 1.1.12 The Basle Concordat concerning International Banking Regulation and the Efforts to Achieve International Financial Conglomerate Supervision 943 1.1.13 The Modern International Financial Architecture 945 1.2 The Essentials of the (Commercial) Banking Business and its Regulation 946 1.2.1 Major Aspects of Banking. Supervision and the Role of Banks of Last Resort 946 1.2.2 Types of Banks and their Operations 950 1.2.3 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 955 1.2.5 Broad and Narrow Banking. Market Based Monitoring of Banks 957 1.2.6 Commercial Banking Regulation and Banking Regulators. International Aspects 959 1.2.7 Intermediation and Desintermediation of Commercial Banks and the Development of the Securities or Capital Markets 961 1.2.8 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 967 1.3.1 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 972 1.3.3 Unofficial Markets, Globalisation of Markets, Euromarkets 975 1.3.4 The Primary Market and Security Issuers. International Style Offerings 977 1.3.5 Secondary Market and its Trading Systems 978 1.3.6 Internet or Electronic Trading 979 1.3.7 Modern Clearing, Settlement and Custody 981 1.3.8 The Role of Investment Banks as Underwriters and Market Makers 983 1.3.9 The Role of Security Brokers and Investment Managers. Conflicts of Interests and Duty of Care 986 1.3.10 Insolvency of Securities Brokers. The Notion of Segregation, Tracing and Constructive Trust in Respect of Client Assets 988 1.3.11 Investment Funds or Collective Investment Schemes 992 1.3.12 Other Investment Banking Activities. Corporate Finance, Mergers and Acquisitions, Company Valuations 993

xxxv 1.3.13 The Risks in the Securities Business. Securities Regulation and its Focus. The European and American Approaches 995 1.3.14 Securities Regulators 999 1.3.15 International Aspects of Securities Regulation 1000 1.4 Modern Financial Products. Derivatives and Securitisations. Hedge Funds and Their Operation 1001 1.4.1 Modern Developments in Financial Products 1001 1.4.2 The Use of Derivatives. Hedging 1003 1.4.3 The Valuation of Derivatives. Contracts for Differences 1006 1.4.4 Derivatives Markets and their Operations. Clearing and the Notion of Margin 1008 1.4.5 Derivatives Risk, Netting and Regulation of Derivatives Activity 1012 1.4.6 Legal Aspects of Swaps. Integration and Conditionality, Acceleration and Close Out. The ISDA Swap Master Agreement 1013 1.4.7 Asset Securitisation. Legal Aspects and Risks 1016 1.4.8 Synthetic Securitisation. Credit Derivatives or Credit Swaps 1019 1.4.9 Securities Lending, Short Selling and Prime Brokerage 1021 1.4.10 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 and Capital after World War II 1022 2.1.1 Cross-border Movement of Goods. GATT 1022 2.1.2 Cross-border Payments and Movement of Capital. IMF 1024 2.1.3 Cross-border Movement of Services. GATS 1025 2.1.4 The WTO 1026 2.2 The Creation of the EEC and Evolution of the EU 1028 2.2.1 The Common Market and Monetary Union. The Various Pillars of the EU 1028 2.2.2 The EU Institutional Framework and Legislation Instruments 1032 2.2.3 Definition of Cross-border Services. Connection with Free Movement of Goods and Persons and with the Right of Establishment 1034 2.2.4 Restrictions on the Basic Freedoms. Regulated Services and the General Good Concept 1037 2.2.5 The Use of the Notion of the General Good in the EU 1039 2.2.6 Early Failure of Full Harmonisation in Regulated Financial Services 1041 2.3 Early EU Achievements in the Regulated Financial Service Industries 1042 2.3.1 Banking 1042 2.3.2 Details of the Early Banking Directives and Recommendations 1043 2.3.3 Mortgage Credit 1044 2.3.4 Details of the Early Securities and Investments Recommendations and Directives 1044 2.3.5 UCITS 1047 2.3.6 Early Directives in the Insurance Area 1048

xxxvi 2.3.7 The System of Branching-Out under the First Banking Directive. Non-discrimination under Host Country Rule. Regulatory Co-operation 1048 2.4 The Globalisation of the Financial Markets and the Effect on the Liberalisation of Financial Services 1049 2.4.1 Autonomy of the International Capital Markets 1049 2.4.2 The Early Development of the Eurobond Market and its Main Features. Eurodeposits 1049 2.4.3 Further Delocalisation, Competitive Deregulation. Situation in the USA 1052 2.4.4 The Legal Status of Euromarket Instruments and Underwriting Practices. 1053 2.4.5 Central Bank Involvement 1054 2.4.6 Effects of the Free Flow of Capital in the EU. The 1988 Directive on the Free Movement of Capital 1054 2.4.7 The 1988 Directive and the Redirection of Savings and Tax Avoidance Issues 1055 2.4.8 The 1988 Directive and the Movement of Financial Products and Services 1056 2.4.9 The 1988 Directive and Monetary and Exchange Rate Aspects of the Free Flow of Capital. The 1997 Stability Pact 1057 2.4.10 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 1058 2.5.1 The Functions of the BIS, IOSCO and IAIS. 1058 2.5.2 The BIS Capital Adequacy Approach for Banks. The Basle Accord. Criticism. Other Regulatory BIS Initiatives 1060 2.5.3 Credit Risk, Position Risk and Settlement Risk. Off-balance Sheet Exposures 1062 2.5.4 The Risk Assets Ratios, Risk Weightings and Qualifying Capital 1063 2.5.5 1993 BIS Proposals for Netting, Market Risk and Interest Rate Risk. The 1996 Amendment 1064 2.5.6 Criticisms. The Building Block Approach. Derivatives Risk 1066 2.5.7 The 1999 BIS Consultation Document and the 2001 BIS Proposals. The American Shadow Committee 1068 2.5.8 Capital Adequacy Calculations under Basel I. The Level Playing Field for Banks and the Effect of a Change in the Minimum Capital Requirement 1071 2.5.9 Capital Adequacy Calculations under Basel II 1073 PART III THE THIRD GENERATION OF EU DIRECTIVES COMPLETING THE 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 Services Industries following the Liberalisation of the Capital Flows in 1988 1077 3.1.1 The Essence of the New Approach. Mutual Recognition of Home Country Rule. Limited Harmonisation. The European Passport 1077

xxxvii 3.1.2 Cross-border Activities through an Establishment or through Direct Services. Different EU and US Approaches 1079 3.1.3 Residual Host Country Rules, The Concept of the General Good and its Abuses 1081 3.1.4 Division of Tasks. No Single EU Regulator. Regulatory Competition 1085 3.1.5 Interaction with GATS 1085 3.1.6 The EU Reciprocity Requirements. Relation with Third Countries. National Treatment and Effective Market Access 1086 3.2 The EU Second Banking Directive (SBD Consolidated in the Credit Institutions Directive or CID of 2000) and Investment Services Directive (ISD) 1087 3.2.1 SBD/CID: Home Country Rule Reach. Residual Host Country Powers. The General Good 1087 3.2.2 SBD/CID: Scope of the Banking Passport. Universal Banking 1088 3.2.3 SBD/CID: Procedure for Obtaining the Passport. Home and Host Country Communications 1089 3.2.4 ISD/CID: Basic Structure. Background and Scope 1089 3.2.5 ISD: Home Country Rule, Authorisation, Capital, Prudential Rules. Procedure for Obtaining the Passport 1090 3.2.6 ISD: Conduct of Business 1091 3.2.7 ISD: Residual Host Country Powers. The General Good 1092 3.2.8 ISD: Regulated Markets, Concentration Principle, and Stock Exchange Membership. Price Reporting 1093 3.2.9 ISD: Member States Committee 1094 3.3 The EU Approach to Capital Adequacy 1094 3.3.1 The Own Funds and Solvency Directives for Banks. Differences from BIS Approach 1094 3.3.2 The Capital Adequacy Directive for Investment Services Firms. Market or Position Risk 1095 3.3.3 General and Specific Risk. Off-balance-sheet Exposures 1095 3.3.4 Settlement and Other Risk. The Treatment of Hedges. Netting 1095 3.3.5 Qualifying Capital and Capital Adequacy 1096 3.3.6 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 1097 3.4.1 Large Exposures 1097 3.4.2 Deposit Protection and Investor Compensation 1097 3.4.3 Winding-up of Credit Institutions 1098 3.4.4 Pension Funds 1098 3.4.5 Consolidated Banking Supervision. Basle Concordat and EU Implementation 1099 3.4.6 Lead-regulator Concept. International Co-operation 1100 3.4.7 The E-commerce Directive 1100 3.4.8 Long-distance Selling of Financial Products to Consumers 1101

xxxviii 3.5 The Financial Services Action Plan of 1998 1102 3.5.1 The 1998 Action Plan and its Objectives. Initial Lack of a Road Map for Key Issues 1102 3.5.2 Lamfalussy Report and the Role of Comitology 1105 3.5.3 Implementing Legislation: The New Prospectus Directive. The Issuer's Passport 1106 3.5.4 Implementing Legislation: The Transparency Directive 1108 3.5.5 Implementing Legislation: The Amendments to the ISD and Capital Adequacy Directives 1109 3.5.6 Implementing Legislation: The Take-over Bids Directive 1109 3.5.7 Implementing Legislation: The Market Abuse Directive 1109 3.5.8 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