учебный год 2023 / Drobnig, Principles of European Law of Personal Security

Chapter 1: Common Rules

A.Personal Security – Litt. (a) and (b)

1.Personal security. The term “personal security” as a general term is not familiar to all European countries. It is to be understood as a broad counterpart to the term “proprietary security” (cf. infra I). Personal security comprises all those security rights in which a person (be it a natural person or a legal entity) is liable with all its assets in order to secure an obligation of another person, the principal debtor. By contrast, proprietary security if, as is usual (though not necessary) provided by the debtor of the secured claim, exposes the security provider only with respect to the specific encumbered asset(s) to a right for preferential satisfaction of the secured creditor. The contrast to personal security is obvious. This indicates why personal security is very attractive for creditors and plays a very important role in practice. However, as always, that attractiveness for creditors has to be paid for. It is paid for by an equivalent degree of risk for the provider of personal security. One may therefore legitimately expect that the proper protection of providers of personal security is an integral factor of any set of rules on personal security.

2.Two central institutions. Article 1:101 (a) and (b) define the two central contemporary institutions of personal security, i.e. the dependent and the independent personal security. Of these two, the dependent personal security is the oldest; its roots go back to ROMAN law (fideiussio). The centuries of practical experience have resulted in national rules that are relatively well settled, although they vary to some degree between the member states. By contrast, the independent personal security is a phenomenon of modern times which in some countries has not been recognised until very late in the twentieth century and which has only exceptionally been sanctioned by legislators. Most other modern functional types of personal security, such as binding comfort letters (Article 2:101 (2)) and stand-by letters of credit (Article 3:101 (2)) are covered by the one or the other of those two central institutions. The only exception is co-debtorship for security purposes (Article 1:101 (e)). According to Article 1:106, such co-debtorship is governed primarily by the rules in Chapters 1 and 4 of the present Part; subsidiarily, the general rules on co-debtorship in PECL Chapter 10 Section 1 apply.

3.Terminology. The terms “dependent” and “independent” personal security are not derived from any national legal system. They have been coined since they express the salient features of the two central institutions. Personal security may either depend upon major aspects of the secured claim – dependent personal security, cf. lit. (a); or it may be independent – at least in legal contemplation – of any possibly underlying claim – independent personal security, cf. lit. (b). The terms “dependent” and “independent” are thought to be both more commonly understandable and more closely connected to the ideas of the parties to the contract of personal security than the term “accessory” employed by PECL (cf. Articles 10:106 and 11:201 (1) (b)), which refers to the consequence rather than the reason for connecting the fate of two claims.

4.Creation of personal securities. In general, the present Rules do not deal with the creation of personal securities. This is left to general contract law, cf. PECL Chapters 2-4 or to applicable national law on the formation and validity of contracts (see also Introduction nos. 21 ss.). However, one major exception is to be found in Chapter 4 of these Rules on personal securities provided by consumers. The process of contracting securities

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constitutes one of the sensible areas where the consumer requires special protection, cf. infra Articles 4:103-4:105.

5.Validity of personal securities. The present Rules do not either deal with validity of a personal security – except indirectly, insofar as the validity of a dependent security may be affected by the invalidity of the secured claim, cf. infra nos. 20-23 and Article 2:103

(1). Of course, personal securities as such must not infringe general or specific legal prohibitions (PECL Chapter 15) nor specific restrictions which may be contained in European or national company or matrimonial (property) law.

6.Location of rules. Dependent security is dealt with in Chapter 2, the central and broadest Chapter of this Part on personal security. These rules are supplemented by specific provisions on consumer protection in Chapter 4 which are also applicable where consumers assume other types of personal security (cf. Article 4:102 (1)). The rules on independent security can be found in Chapter 3, which in fact will essentially be relevant for personal security granted by business and professional security providers. All three Chapters 2 to 4 are subject to a few general rules set out in Chapter 1.

B.Dependent Personal Security – Lit. (a)

7. Outline. The following Comments will deal successively with the term “dependent personal security” (sub a), the kinds of security obligation (sub b), some special kinds of secured obligations (sub c), the nature of the security obligation (sub d), and, finally and broadly, the dependency of the security obligation upon the secured obligation (sub e).

a.The Term Dependent Security

8.The term “dependent security” does not seem to be used by any national legal system in Europe. Instead, various names are given to designate the basic institution, i.e. suretyship or suretyship guarantee, cf. National Notes sub II B. Unfortunately, not even in the Anglophone member states the basic term is firmly rooted. For these reasons it was decided to coin the new functional and descriptive term of dependent security.

b. Types of Security Obligation

9.According to Article 1:101 (a) the security may take three forms. In the vast majority of cases, the security provider promises to make a payment of money. In some specific cases, the payment of damages is being promised. The most important example is the issue of a binding comfort letter.

Illustration 1

A, the majority shareholder of company Z, sends a letter to the major creditors of Z which is in financial straits saying: “I herewith undertake to settle all present and future indebtedness of company Z in order to save it from bankruptcy.” If, contrary

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to his promise, Z does not abide by his letter, the creditors of Z who have received the above undertaking may sue Z for damages based upon the breach of his undertaking.

A security provider may also promise to make a performance other than the payment of money, such as the delivery of marketable securities or even of other goods.

c.Special Types of Secured Obligations

10.General. In the vast majority of cases, the secured obligation will be a monetary obligation – repayment of a credit, payment of a purchase price or of rent, payment of damages, etc. These obligations – as all secured obligations – may already have come into existence upon assumption of the security obligation or they may arise in future, such as a claim for damages arising upon breach of a contract just concluded. Apart from these “ordinary” monetary obligations, two special types of obligations that may be secured deserve to be mentioned specifically in the following two paragraphs.

11.Obligation arising from a personal or proprietary security. The provider of a personal or a proprietary security may wish to be ensured that, if he or she would in future be pursued on his or her security, recourse against another person is possible. There is no objection against securing such a conditional secured obligation. Counter securities, such as counter guarantees or confirmations of a (stand-by) letter of credit are frequently used in commercial practice.

12.Security for public law claim. Less obvious is the answer to the question whether a private law security may be used to secure a claim rooted in public law. However, the case law of the European Court of Justice and of national courts furnishes ample support for admitting this variety. Two decisions of the European Court rendered in 2003 and 2004 and the underlying references by national courts dealt with dependent securities that may be furnished under the system of sealed cross-border road transport under carnet TIR in order to avoid or delay the payment of customs duties by the transport enterprises.1 In both cases the European Court held that claims based upon or derived from dependent personal securities granted for such customs duties could be brought under the rules of the Brussels Convention on Jurisdiction in civil and commercial matters of 1968 (now replaced by Regulation no. 44/2001). They qualified as ordinary private law claims since they are not tainted by special considerations of a public law nature – even though

possibly exceptions based upon the secured public law claim may be raised by the surety.2 Cf. also infra nos. 14 and 18 and infra Article 1:102 Comments nos. 22-25.

1The basic traits of the system of suretyships securing claims under carnets TIR are set out in the case Bundesverband Gu¨terkraftverkehr und Logistik eV (BGL) v. Bundesrepublik Deutschland (Case C – 78/01) of 23 September 2003, ECR 2003 I 9543 at nos. 6-11. Cf. also infra Article 1:102 Comment 23.

2Berliner Kindl Brauerei AG v. Siepert (case no. C-208/98) of 23 March 2000, ECR 2000 I 1741 at p. 1752 s. nos. 36-37; Pre´servatrice Foncie`re TIARD SA v. Staat der Nederlanden (case no. C-266/

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d.Legal Nature of Security

13.The wording of Article 1:101 (a) suggests that a dependent personal security is a contractual obligation of the security provider to make payment or render another performance to the creditor. As a rule, the security provider, especially if not a professional, will not ask or receive any counter-performance from the creditor. By contrast, professional security providers, such as banks or insurance companies, charge a commission for issuing a dependent personal security. Typically, therefore, such security is granted in the framework of a bilateral contract and creates an obligation at least on the part of the security provider. The debtor of the secured obligation as the factual beneficiary of the security is usually indirectly involved under two aspects: In its relationship with the creditor, e.g. under a credit agreement, which gives rise to the obligation to be secured, the debtor is usually obliged to engage the provider of a personal security which must fulfil certain minimum conditions set by the creditor. On the other hand, the debtor must ask a security provider to assume a security towards the creditor meeting the latter’s conditions. Thus, in fact a triangular relationship comes into being. However, the contents and objectives of each of the three sides of this triangle differ. Two sides can easily be classified as well-known types of bilateral contract: The credit relationship between creditor and debtor (usually including the security agreement, cf. Introduction nos. 16 ss.), and the mandate or service contract between debtor and security provider. What remains, is the third side, that between creditor and security provider: this is the contractual dependent personal security.

14.In the practice of the European Court of Justice occasionally divergent views have been expressed. In the case Berliner Kindl Brauerei, Attorney-General Le´ger, invoking a French legal dictionary, expressed the view that a suretyship is a unilateral contract. On the other hand, in the later case of TIARD the Court of Justice, invoking “the general principles which stem from the legal systems of the contracting States” regarded a suretyship contract as a “triangular process”. Since, however, in fact the Court dealt only with the surety’s obligation towards the creditor this may be regarded as a mere obiter dictum. By contrast, the last relevant case Frahuil implicitly seems to be based on the idea of a trilateral contract. Here the Italian surety company, after having paid the customs duties sought recourse from the French debtor, the importer of the goods. The Court stated that the French debtor was not a party to the suretyship contract. The Court then inquired whether the transport company which had mandated the surety, had done so “for the account of the importer” (no. 25). If the national courts cannot find that the debtor has become a party to the suretyship contract, the national courts in Italy have no jurisdiction under the exceptional head of Art. 5 no. 1 (for contractual claims) of the Brussels Convention.3

01)of 15 May 2003, ECR 2003 I 4867 at p. 4893 no. 36, p. 4895 no. 40 and p. 4896 nos. 41 and 43; Frahuil SA v. Assitalia SpA (case no. C-265/02) of 5 Feb. 2004, ECR 2004 I 1543 at p. 1554 no. 21.

3Berliner Kindl Brauerei AG v. Siepert (supra fn. 2) at p. 1752 s. nos. 36-37; Pre´servatrice Foncie`re

TIARD SA (supra fn. 2) at p. 4891 no. 27; case Frahuil (supra fn. 2) at p. 1555 no. 25.

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e.Dependency

i.The Principle

15.On the reason for choosing the term “dependent” rather than “accessory”, cf. supra no. 3. Article 1:101 (a) in fine enumerates the most important elements to which the dependency between security and secured obligation relates. Mere correspondence of terms and conditions, though, does not suffice to constitute dependency. Rather, the terms of the security must establish a connection with the secured claim.

16.The all-important element of the definition is the verb “depend upon”: the basic type of personal security is characterized by the fact that in almost all respects it depends upon the debtor’s obligation to the creditor which is secured by the provider of the personal security towards the creditor. The only major exception is to be found in the debtor’s insolvency: any reduction or discharge of the debtor’s obligation(s) does not affect the security provider’s obligation (cf Article 2:102 (2) sent. 2) since this would run counter to the fundamental purpose and function of security. The principle of dependency is not limited to personal security but dominates also proprietary security, both in movables and in immovables. However, today this principle is no longer the only maxim of personal and proprietary security; rather it is more and more supplemented by security rights that are independent from any specific secured obligation.

17.In Chapter 2 on dependent personal security, the principle of dependency informs essential provisions, especially Articles 2:103 on terms and extent of the security provider’s obligations and 2:104 on the debtor’s defences which the security provider may invoke.

18.In at least three cases, the European Court of Justice has also recognized the principle of dependency as the characteristic element of suretyships: The surety’s obligation does not fall due until maturity of the secured obligation and the surety’s obligation may not surpass that of the debtor. These statements were made in order to ascertain whether certain Directives on consumer protection or the Brussels Convention of 1968 on jurisdiction in civil and commercial matters were or were not applicable to suretyships.4

ii.Reverse Dependency?

19. While the dependency of the personal security upon the secured obligation is generally recognized, one must not overlook that there may also be reverse dependency. A personal security right may for some reason be invalid, e.g., due to a legal prohibition (infra nos. 20-23) or disregard of the protective provisions for consumer dependent securities established in Chapter 4 of these Rules or under national law. Such invalidity or avoidance may give rise to the issue whether this may have repercussions on the secured

4Pre´servatrice Foncie`re TIARD SA (supra fn. 2) at p. 4891 s. no. 29 ; cf. also p. 4893 no. 34. Earlier in more general form in Bayerische Hypothekenund Wechselbank AG v. Dietzinger (case no. C-45/96) of 17 March 1998, ECR 1998 I 1199 at p. 1221 nos. 18 and 20 and in Berliner Kindl Brauerei AG (supra fn. 2) at p. 1744 no. 26.

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obligation. This issue was alluded to in a decision of the European Court of Justice (Dietzinger case, supra fn. 4, p. 1221 no. 21). This issue is beyond the reach of the present Rules and must be solved under the applicable national law.

iii.Validity

20.Elements. The first element to which the definition of Article 1:101 (a) expressly refers is validity. There cannot be a valid and effective dependent personal security unless the secured claim is valid. The validity of the secured claim may be affected by subjective and objective factors.

21.Subjective factors may be the personal qualities of the parties to the transaction from which the claim to be secured arises. One of the parties, if it purports to be a legal entity, may not have come into existence. Or a natural person, due to age or sickness, may be legally incapable to enter into legal transactions. Any incapacity of this kind may under the applicable national law have the consequence of invalidating the underlying transaction and therefore also the claim to be secured. This rule also protects the security provider: After having performed the security, the chances of recovery on its claim for recourse against a debtor who is incapable would be small.

22.There is one exception to this general rule. According to Article 2:103 (3) the security provider may not invoke the debtor’s lack of capacity or the non-existence of the debtor legal entity if the relevant facts were known to the security provider at the time when the security became effective. For details, reference is made to the Comments to this provision.

23.Objective factors that may affect the validity of the secured claim are illegality or avoidance. These may affect the secured claim or the underlying transaction in which it is rooted. On illegality, cf. PECL Chapter 15; otherwise, the applicable national rules govern the conditions and effects of illegality. On avoidance due to defective consent, cf. PECL Chapter 4; otherwise, the applicable national rules govern the conditions and effects of an avoidance of the contract.

iv. Terms and Extent

24.In practice more important than validity are the terms and extent of the debtor’s obligation that is to be covered by the security. “Extent” refers primarily to the amount of money that is usually involved: capital, interest and cost of recovery (cf. Article 2:104). However, in the case of a global security (cf. Article 1:101 (f)) the amount of the secured claim may be open-ended and fluctuating, especially if a current account is secured.

25.The “terms” of the secured obligation cover all its conditions, especially its maturity and other conditions upon which it may depend.

26.“Dependency” of the personal security upon the extent and terms of the secured obligation implies that the latter is not identical with the security obligation. There are two separate obligations, owed by two different persons, the security provider, on the one

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hand, and the debtor of the secured obligation, on the other hand. Neither is it necessary that these two obligations are identical in terms of extent and conditions. The security obligation can be lower than the secured obligation and on less extensive terms. By contrast, its amount cannot be higher and on more demanding terms than the secured obligation. Any such surplus would no longer depend upon the secured obligation and is therefore void.

v.Transfer of Secured Obligation

27. One consequence of the principle of dependency is that upon transfer of the secured obligation the attendant security also passes to the transferee. For contractual transfers of obligations, i.e. assignments, this has been spelt out in PECL Article 11:201 (1) (b) since dependent securities are “accessory rights securing ... performance.” One may assume that the same rule obtains upon legal transfers, unless the contrary is provided.

C.Independent Personal Security – Lit. (b)

a.Introductory

28.The independent personal security is a close relative to, but in one decisive respect completely differs from a dependent personal security, defined in preceding lit. (a). The one distinguishing feature is the independence of the security provider’s obligation to the creditor in contrast to the dependency of the dependent security on the secured obligation. In all other respects the independent and the dependent personal security share the same features, as the parallel wording of litt. (b) and (a) confirms. In this respect, therefore, reference can be made to supra Comments nos. 7-14. On the reason for choosing the term “independent” rather than “non accessory”, cf. supra no. 3.

29.The detailed rules on independent personal security are to be found in Chapter 3 of these Rules.

b.Special Feature

30.The decisive special feature of the independent personal security is its independence from any other agreement, especially an underlying contract between the creditor and the debtor. This independence is laid down and specified in lit. (b). In particular it is irrelevant for the security provider’s obligation whether the underlying obligation (such as a seller’s obligation to deliver or a customer’s obligation to pay the price under a contract of sale or for services) is valid or not, which terms it contains and the extent of the debtor’s obligations.

31.On the other hand, the validity of the security provider’s undertaking itself is an indispensable condition for the security provider’s obligation to honour its security. Thus

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it must have full capacity and its undertaking must have been created without violation of any legal rules or any defects of consent which might give rise to a right of avoidance under PECL Chapter 4 (supra nos. 4 s.).

32.The independent character of an independent personal security must be “expressly or impliedly declared”. This rule dovetails with Article 2:101 which establishes a presumption for any personal security being a dependent security, “unless the creditor shows that it was agreed otherwise.” For letters of credit and stand-by letters of credit, UCP 500 (1993) art. 3 and 4 explicitly and broadly emphasize the independence of the “credit” from underlying contracts or the objects of those contracts, such as goods, services and other performances. More succinctly in the same sense is UN Convention on Independent Guarantees of 1995 art. 3. Apart from these specific types of an independent personal security, the latter requires an express or implied declaration. An express declaration can usually be found if the title or body of a personal security contains the words “independent guarantee”. An implied declaration of independence can be presumed if an instrument does not make any reference to a secured obligation, as is usual in any dependent personal security; such silence may be treated as an implied declaration of independence.

33.Article 3:101 (1) specifies and confirms the independent character of a security. A merely general reference to an underlying transaction does not impair the independence of an independent undertaking. Usually, an independent security refers to an underlying contract (e.g., of sale or services) or another security (e.g., a default security to the security provided by the bank opening a letter of credit; or a “counter security” to the security issued by the security provider on the instruction of the issuer of the counter security) in order to specify the event upon the occurrence (or non-occurrence) of which performance of the security may be demanded by the creditor. Any such general reference to an underlying obligation does not affect the independent character of a security, since the decisive point is that the security provider’s obligation to perform is independent of the obligation(s) of the principal as debtor of the underlying contract with the creditor.

c.Advantages and Risks of Independent Undertakings

34.At least for professional security providers, such as banks and insurance companies, the independence of their security undertakings has clear economic advantages: they can easily calculate their risk and this risk is a reliable basis for calculating their charges for assuming this risk. While it seems to be more advantageous to assume a dependent personal security since this allows the security provider to invoke the debtor’s exceptions and defences, the administration of these counter-rights is difficult, time consuming and uncertain as to its success.

35.On the other hand, it is precisely the independence of such undertakings which creates a risk for the persons who have caused the issuance of such undertakings in favour of the creditor. Demanding performance of an abstract security or of another independent security does not require the creditor to prove any default on the part of the debtor.

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This has invited abusive presentations of independent security instruments. In order to counter such practices, defensive provisions had to be instituted along the lines of Articles 3:103 (2) and 3:104.

D.Security Provider – Lit. (c)

36. This definition requires hardly any comment. The term “security provider” is neutral. It covers any person who is obliged to the creditor under a personal security, whether the latter is dependent or independent in the sense of litt. (a) or (b). A special situation may arise if the security provider wishes to secure its (potential) claim for reimbursement against the debtor. In such a case, the debtor may instruct a fourth party to provide a personal security in favour of the primary security provider. In the case of such a counter security provided by a fourth person to the primary security provider, the roles of the parties change: the primary security provider becomes the creditor of the counter security, who may claim performance of the counter security from the secondary security provider.

E.Debtor – Lit. (d)

37.In cases of dependent personal security (Article 1:101 (a)), two different persons owe obligations to the creditor: One is the debtor of the secured obligation, the other the debtor of the security obligation. The latter is in these Rules called the “security provider” – cf., supra no. 36 in order to avoid misunderstanding. By contrast, the obligor of the secured obligation can retain its designation as the – principal – debtor.

38.On the other hand, in an independent personal security (Article 1:101 (b)), only a security provider and a creditor are legally relevant. Since in these cases a secured obligation is not necessary, neither is a debtor, as defined in Article 1:101 (d). The two words “if any” refer to this possible absence of a debtor.

F.Co-Debtorship for Security Purposes – Lit. (e)

a.Policy

39. Co-debtorship for security purposes is, as the name suggests, not a traditional security device but rather a functional one. In order to achieve full protection of those persons who deserve it and to counter creditors’ attempts to evade protective provisions for “genuine” security providers, functional devices with security purposes must be covered by these Rules. In some countries, parties sometimes evade mandatory provisions of the national law on personal security (such as a simple or qualified writing) by agreeing on a co-debtorship for security purposes. If, apart from the principal debtor, another person assumes a corresponding obligation towards the creditor, a trilateral relationship comes into being. However, the position of the additional debtor may differ from that of

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the principal debtor: while the latter requires a credit for his business or professional activity, the additional debtor may, or may not, have any proper interest in the loan granted by the creditor.

Illustration 2a

A young medical doctor D wishes to acquire for his medical office a very expensive instrument and obtains a credit from his bank. D’s wife W is also a medical doctor who also practices in D’s medical office. Therefore the bank requires W’s co-sig- nature of the credit and security agreement. After D’s death in an accident, the bank requests payment of the credit from W who invokes the protective rules for consumer security providers.

Illustration 2b

The facts are as in Illustration 2a, except that W is an artist from a wealthy family.

Must W be treated as a genuine co-debtor or does she deserve to be treated as a mere security provider?

b.Criteria for Distinction

40. Illustrations 2a and 2b suggest that an important, if not the most important criterion is the economic interest which the two obligors have in the granting of the credit. While D’s interest is obvious, that of W obviously varies in the two hypothetical cases. It is nil in Illustration 2b, but is as great as that of D in Illustration 2a. In the latter case, W should be treated as a genuine co-obligor, whereas in the former case W clearly qualifies as a mere security provider. The fact that W even in the second case may indirectly benefit from the credit granted to D since the latter’s better financial position indirectly will benefit also W, does not meet the requirements of Article 1:101 (e): Decisive is the primary purpose of the assumption of debt (cf. “primarily” for purposes of security). As a co-debtor for security purposes acting primarily for purposes not related to her business or profession, W is in Illustration 2b entitled under Article 1:106 to the protection of a consumer according to Chapter 4 of the Rules. In the final analysis, the creditor’s contract(s) with the two obligors must be interpreted in light of all the circumstances.

c.Time of Assumption of Debt Irrelevant

41. The definition in Article 1:101 (e) does not distinguish whether the second obligation had been assumed at the same time as the other (or, possibly, the main) obligation or subsequently. The time element is here as irrelevant as it is for the provision of true personal (or proprietary) security.

d.Applicable Rules

42. Article 1:106 lays down which rules apply to a co-debtorship for security purposes. Most important is the reference in Article 1:106 to Chapter 4 of this Part containing rules for the protection of a co-debtor for security purposes who is a consumer (cf. infra nos. 47 ss., especially no. 50).

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