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Remedies in Case of Default

In the Spanish jurisdiction, parties[1] are allowed to define the meaning of default that entitles the creditor to exercise remedies from the legal catalogue of available remedies in each case.

Interestingly, the Convention widens the remedies traditionally available to creditors in case of default under Spanish legal system - auction and more rarely enforcement agreements (convenios de realization)[2] take possession or control,

sell or grant a lease, collect or receive any income or profits arising from the management or use of the object (Article 8 Convention). All said remedies should be exercised in a commercially reasonable manner. The standard of commercial reasonability is measured in conformity with the provisions of the security agreement provided that they are not manifestly unreasonable. According to Spanish legal provisions in force and judicial practice, foreclosure in auction, public tender or bidding process would be deemed commercially reasonable.[3] Other than those cases, any procedure implying a competitive bidding might be predictably declared reasonable as well.

As regards Article 10, remedies available to conditional sellers and lessors (terminate the agreement and take possession or control of the object) do not differ substantially from remedies provided for domestic legislation to date. Nevertheless, according to domestic legislation in force, conditional sellers and lessors cannot request a speedy relief from the court enabling the creditor to manage the object and collect income therefrom.[4] Such a remedy is only provided for in favour to chargees.[5] Regardless of that divergence between both legal regimes, Article 13 configures a uniform concept of interim reliefs distinct from those ones provided for by domestic rules. Therefore, interim reliefs will be exercised in accordance with Convention provisions and, if applicable, relevant Protocol ones, instead of being subject to domestic procedural rules. In the absence of any declaration under Article 55, such uniform interim reliefs are applicable under their own conditions along with those reliefs additionally provided for by domestic legislation. Spain has not made any declaration under Article 55 at the time of accession to the Convention, but the declaration made by the European Community pursuant to the said provision has to be taken into account.[6]

In the vesting of object in satisfaction as set out in Article 9, another historical controversy, likely to also explain the cautious move of Spain by making the Article 54(2) declaration when accessing to the Convention, is latent. As per Article 9(1) the chargee and all the interested persons may agree that ownership of (or any other interest of the chargor in) any object covered by the security interest shall vest in the chargee in or towards satisfaction of the secured obligations. If no leave of court is required, the possibility that the chargee may become the owner of any object covered by the security in satisfaction of the secured obligations has been always seen with suspicion. A wide range of reasons of moral, legal or procedural nature have been traditionally argued by scholars[7] to support and justify the strict classical prohibition of the so called “pacto comisorio”[8] in our legal systems. With the declaration made under Article 54(2), all concerns would be totally averted. The subsequent declaration under Article 53, as it has been interpreted, does not change that assertion.

However, it may be well worth taking the opportunity to carry out a more careful analysis of the provisions of the Convention regulating the remedies under debate and assess whether the apparent frontal contradiction with the national ban of “pacto comisorio” is indeed real. It is my contention[9] that the Convention contains rules framing the exercise of the controversial remedy that might, as a matter of fact, elude a direct collision with the said prohibitive rule. As per Article 9, the agreement for the vesting of object in or towards satisfaction of the secured obligations is to be adopted at any time after default according to Article 11. When the agreement is adopted after default, many of the concerns underlying the banning do significantly temper insofar as the freedom to deal is not compromised and creditors’ interests are not menaced by the fact that the prospective appropriation of the object is not actually conditioning any more the prior financing decision. As a consequence, the judgement about the validity of the agreement does essentially become a matter of time. Accordingly, the so called “pacto comisorio ex intervallo”, agreed at any time after the conclusion of the main financing agreement involving a security device, has been traditionally deemed valid and enforceable or at least it has been argued that it should not be null and void per se.[10] More conclusive is the previous affirmation of validity if the vesting of the object is agreed when the secured obligation is already due. In such a case, parties are only agreeing on an alternative way to fulfil the obligation.[11]

In conclusion, an agreement for the vesting of object in or towards satisfaction of the secured obligations, provided that is adopted at any time after default, would manage to elude the confrontation with the rule banning the “pacto comisorio”. Given that a declaration requiring leave of court has been made by Spain together with the instrument of accession to the Convention with the above-discussed implications of the subsequent declaration under Article 53, the collision has been in any case avoided at its roots.

  • [1] Some limits on parties’ freedom to define “default” might be relevant in case of consumer transactions that are not however falling within the scope of application of the Cape Town system. Forinstance, the non-payment of two fees or the non-payment of the last fee is needed in consumerleasing agreements to declare “default” able to activate some remedies in favour to the creditor.
  • [2] According to Article 64 of Civil Procedure Act, Ley 1/2000 de Enjuiciamiento Civil as citedabove.
  • [3] In compliance with rules on auctions as stated in Articles 643-654 Civil Procedure Act, Ley1/2000 de Enjuiciamiento Civil.
  • [4] As remarked by Encarna Cordero, ‘Garantias internacionales sobre elementos de equipo movil’,p. 5.
  • [5] Article 676 and following Civil Procedure Act, Ley 1/2000 de Enjuiciamiento Civil.
  • [6] Declaration by the European Community pursuant to Article 55 of the Convention: Pursuant to Article 55 of the Cape Town Convention, where the debtor is domiciled in theterritory of a Member State of the Community, the Member States bound by CouncilRegulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition andenforcement of judgments in civil and commercial matters will apply Articles 13 and 43 ofthe Cape Town Convention for interim relief only in accordance with Article 31 ofRegulation No 44/2001 as interpreted by the Court of Justice of the European Communitiesin the context of Article 24 of the Brussels Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters.
  • [7] Manuel Ignacio Feliu Rey, La prohibition del pacto comisorio y la option en garantia, Civitas,Madrid 1995, pp. 74, 75; Federico de Castro y Bravo, ‘La accion pauliana y la responsabilidadpatrimonial. Estudio de los articulos 1911 y 1111 del Codigo Civil’ Revista de Derecho Privado,1932, p. 193; Francisco Capilla Roncero, La responsabilidad patrimonial universal y el fortaleci-miento de la protection del credito, Fundacion Universitaria, Jerez, 1989, p. 206.
  • [8] The traditional prohibition of pacto comisorio is however limited by two exceptions: financialcollateral arrangements and pledges of credit rights. In both cases, public auction is not required.Royal Decree-Law 5/2005, of March 11, which implements in Spain Directive 2002/47/EC of theEuropean Parliament and of the Council of June 6, 2002, on financial collateral arrangements,regulates, among other matters, financial collateral arrangements.
  • [9] As reasoned as well in Rodriguez de las Heras Ballell, ‘The accession by Spain to the Cape TownConvention: a first assessment’ and previously in Rodriguez de las Heras Ballell, Las garantiasmobiliarias sobre equipo aeronautico en el comercio international.
  • [10] Angel Carrasco Perera, and others, Tratado de los Derecho de Garantia, Tomo II: GarantiasMobiliarias, p. 208.
  • [11] Reglero Campos, ‘El pacto comisorio’ I-XVI Aranzadi Civil, 2007, pp. 1907, 1921-1922.
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