By Ralph Diederen
On the 13th of November 2013 another well visited M-EPLI Talk took place. This time Lars van Vliet presented a comparative and historical overview of the different approaches to a double sale situation. Van Vliet already addressed this issue at Stellenbosch University, South Africa. More specifically, the role of bad faith in transfer systems, the ius ad rem nature of actions which a first buyer might have against a transfer to a second buyer and the desired policy choices, were addressed.
Before commenting on the historical development and his comparative analysis, Van Vliet stressed that his M-EPLI talk on ‘double sales’ does not refer to subsales where a buyer sells the acquired item to a third party. Rather it concerns those situations where there is one seller, who sells one object subsequently to two (or more) different buyers. Simply put: one item and one seller, two contracts with two buyers. When I refer to ‘first buyer’ and ‘second buyer’ in this blog, it will always be in this context.
In the discussion of historical developments of law the common starting point is roman law. One way or another, this makes me immediately think of movies like Troy, 300 or Rome. This M-EPLI talk made me especially think of a scene in the 2000 blockbuster movie Gladiator: the main character (Maximus) is in disfavor of the new emperor, he loses everything and ends up in a slave market, from a legal perspective nothing more than a movable good. A man (Proximus) comes by, bargains with the slave handler, and negotiates a price to buy Maximus to become part of his possessions. The screen skips to the next scene where Maximus has been picked up and joins the caravan of Proximus that marches off towards distant lands. But what if this had gone differently? What if there had been a scene in between where the slave handler sells Maximus to another buyer for a better price, and immediately transfers the ‘property’. Proximus returns to the slave handler to pick up Maximus, but finds he has already been delivered to the second buyer. What of Proximus in that situation? would he have any legal action to see the contractual obligation of the slave handler preformed?
Scene from the movie gladiator where Proximus (on the left) inspects the slaves for sale at the market.
According to Van Vliets comments on roman law the case seems clear cut: there is a distinction between the law on obligations and property law. A sales contract does not constitute the transfer of ownership. It does not matter if the second buyer is in bad faith. All that Proximus is left with is a legal action against the seller, which can only result in Proximus receiving damages, seeing that roman law did not recognize a right to specific performance. For all of us who watched the movie it is a disappointing outcome: Proximus has no remedy to acquire the ownership of his best gladiator!
Van Vliet points out that when time went by, this dogmatic distinction between the law on obligations and the law on property becomes slightly less absolute. During the middle ages different remedies become available. A buyer could press legal charges against the seller exercising a right to specific performance -unheard-of under roman law- although this remains impossible if the seller already has transferred ownership. But there is more, a seller can also invoke a remedy which enables one to obtain the desired item itself. Baldus (a.c. 1320-1400) expanded the reach of the Actio Pauliana, still known today, to include cases of double sale where the item was transferred to the second buyer, but that buyer was in bad faith. The first seller could invoke this action to anull the transfer of ownership to the second buyer. An interesting development when one considers what this means: the personal right of the first buyer in his contractual relationship with the seller is protected against the real right of a third party (the second buyer). Besides the Ius in Ree (real rights) from the roman law era now there seems to be a sort of hybrid right in between a personal and real right: an ius ad rem.
Having sketched this remarkable development Van Vliet continues by pointing out that from around the 18th century onward, a countermovement can be seen in two important developments. Firstly, there is the development of registration systems. For a registration system to be of value it must be reliable; third parties must be able to rely on the information contained in the system. To ensure that information in the registry is correct one could make registration a requirement for the transfer of ownership: no registration no transfer. Giving the first buyer an action which would annul the transfer of ownership to the second buyer, would threaten the correctness of information in the registry. The impact of this cannot be denied. The Prussian Allgemeines landrecht of 1794 still sides with the approach of Baldus in protecting the first buyer. The French statute on land registration of 1798, as well as the Austrian civil code of 1811, side against Baldus: It is not important who is the first person to conclude the sales contract, but who is the first person to register the transfer of ownership. The second important development to be aware of is the ongoing discussion on the Ius ad rem. Should there be such a thing as hybrid rights. Dogmatically one could argue fiercely against the acceptance of hybrid rights. They do not fit into the system of real rights and personal rights. Following this approach it should not even be possible to give the first buyer a possibility to invoke a personal action (tort) against the second buyer. Because doing so would mean that the first buyer would be able to invoke personal rights originating from the contract between himself and the buyer against a third party.
And that is the point where Van Vliet enters in to a modern day comparative approach of the double sale. The explanatory notes belonging to the German civil code (Motive Zwei zum BGB) explicitly state that there is no place in the German legal system for a Ius ad rem. There is a clear distinction between the law on obligations and the law on property. Even if the second seller knew of the previous sale he still acquires ownership. The first buyer also has no delictual action, with the exception of extreme cases such as where the second buyer would have exercised illegal pressure on the seller to act in breach with his contract with the first buyer. The Dutch civil code adheres the same approach. So one could conclude that under the current Dutch and German civil code the outcome for Proximus would be the same as under ancient roman law, ignoring the obvious incompatibility of current law with slave trade.
Another approach has to be taken wen analyzing French law because of the consensual system of transfer in the French civil code (article 1583 CC). The consensual system entails that the conclusion of a sales contract constitutes the transfer of ownership. No separate action has to be undertaken. At first this would seem as an easy solution to the whole problem, because when at the time the second buyer concludes a sale contract with the seller the ownership already has passed to the first seller. But this situation changes when we take as example the sale of a piece of land; this is where the French registration system kicks inn. Although the mere sale brings with it the transfer of ownership, only after having registered the transfer its effect is fully erga omnes. So the question arises: what if there is a double sale and a run to the registry. If the second buyer registers first, is he or she protected against the first buyer, even if he is in bad faith? Under the French land registration acts of 1798 and 1855 the answer would be that the second buyer is protected against the transfer of ownership to the first buyer. As time went on, the Cour de cassation changed its course resulting in case law in which the second buyer, who was the first to register, was not protected against the first buyer if he was in bad faith. But this development seems to mimic the evolution Van Vliet pointed out in this historical approach of the subject matter. For the French Cour de cassation has altered its course once more, the latest judgments show that in the present time the second buyer, being the first to register, is protected against the first buyer, even if he is in bad faith. Only in the case of fraud can the transfer to the second buyer be annulled.
Looking at the legal doctrine in the Dutch, German and French civil codes one could conclude that the situation looks grim for the first buyer. But this is not the case in all jurisdictions, Van Vliet points out the Scottish and South African legal approach. Scottish law has the so called ‘offside goals rule’ if the second buyer either: knows of the sale to the first buyer or, the concerned good was given to him for no value, the first buyer can annul the transfer of ownership to the second buyer. This approach was derived from the old Ius Commune. A similar situation can be seen when studying South African case law. The most recent case (September 2013) is the case Le Roux and Another v Nell and Another it is pointed out that the first buyer who is confronted with the transfer of ownership to a second buyer, who is in bad faith, has two options. Firstly, he has an action which avoids the transfer between the seller and the second buyer. And secondly, in extreme cases he has a direct delictual action against the second seller, similar to the situation under Dutch and German Law.
The presentation gave rise to a vivid discussion which in itself led to new questions: Even if the first seller claims damages of the seller or the second buyer, what would these damages comprise of if the first buyer has not yet paid the seller? Which policy choice is to be preferred: one where the certainty of registry’s is guaranteed or one where first buyers are offered protection? And if the choice is made to protect the first buyer, how is this goal best achieved: by giving the first buyer a delictual action against the second buyer or by giving him a means to anull the transfer of ownership between the seller and the second buyer? The participants of the discussion seemed to agree that in order to give an opinion about which legal solution is ‘the best’ one cannot suffice with only comparative research. Criteria have to be chosen by which the different legal approaches are judged, for instance: what is the best solution from an economical approach? At least it is clear that probably not all roads lead to Rome anymore, but some still do.