International Leasing
- Spain
- 07/01/2002
CONTRACTUAL AND GUARANTEE ASPECTS OF LEASING
Contractual Aspect
In a typical leasing transaction, a credit institution (leasing company), acquires the leased property from the original seller or supplier, often upon the selection and instructions of the lessee, and in turn, assigns the right to use the leased property (collateral) to the lessee in exchange for irrevocable lease payments for a specified time period, upon expiration of which the lessee has the option of returning the collateral, extending the lease under new payment terms, or purchasing the collateral for a residual value determined at lease inception. This transaction involves several legal relationships (purchase and sale between the original seller and the leasing company, assignment of the use of the collateral to the lessee, as well as pre and post-contractual relationships between the lessee and the original seller).
Leasing is an atypical concept to which it is difficult to apply traditional contractual and other legal principles. Yet the concept of leasing has taken hold due to the utility of its tax-advantageous features. The typicalities or atypicalities of the leasing concept have diminished importance at the time of contracting as considerable flexibility exists with respect to crafting lease-agreement content and obligations.
Leasing as a Guarantee
The leasing concept is based on the use of the collateral as a guarantee method. Title to the collateral remains with the leasing company, and does not pass to the lessee until the lessee exercises the option to purchase the collateral at its residual value after completing the payment schedule under the lease agreement. Leasing represents a credit or financial transaction, and in addition constitutes a guarantee without possession of the collateral, as the lessee remains in possession of the collateral.
Under the American legal system leasing is treated as a guarantee in movable personal property (security interest). It possesses two much-needed characteristics in European legal systems: Functionality and Flexibility.
VALIDITY OF LEASING AS A CONTRACT
Breakdown of the Leasing Transaction
From the commercial perspective, the leasing transaction appears solitary, although from the legal perspective it involves several distinct legal relationships. Leasing is a complex transaction involving differing legal relationships, established in one or several contracts. The application of private international law to leasing transactions allows and brings about its fragmentation. The rules applicable to contracts (Article 10.5 Civil Code or the 1980 Rome Convention) derive from the legal relationships created, not only from the terms of the contract itself. A separate lex contractus review should be applied to each component of a leasing transaction. As between the leasing company and the lessee, in the absence of an applicable law chosen by the parties, the conflicts of law framework of the Rome Convention will be applied, resulting in the application of the law of the habitual residence of the leasing company. The law of the place of residence of the original vendor will be applied to the sales contract between the original vendor and the leasing company.
With regard to a legal action brought directly against the original supplier by the lessee, the Ottawa Convention of 28 May 1988 regarding international leasing maintains the principle of autonomy of the parties. The Ottawa Convention will apply when the leasing company and the lessee reside in different countries.
Limitations and Problems in Applying Lex Contractus to Leasing Transactions
The governing lex contractus principles will be applied to the leasing transaction, as well as the obligations it creates. The Ottawa Convention establishes a series of mandatory and nonderrogable rules which invalidate inequitable adhesion clauses regarding liability for latent defects, relating to the fault or gross negligence of the leasing company, or limitation of damages in the event of the fault of the lessee.
CONTENTS OF AND OPPOSITION TO GUARANTEE RIGHTS
In effect, the nature of the leasing company’s position is that of a holder of guarantee rights. The validity of this position is based on the contract between the leasing company and the lessee. The extent of the leasing company’s rights is governed by the lex rei sitiae, which initially corresponds to the habitual residence of the original vendor. However, the leasing transaction involves the transfer of possession of the collateral from the original vendor to the lessee without the intervening possession of the leasing company. The lex futuri situs is the law of the habitual residence of the lessee who is going to remove the collateral from its initial location.
If the original vendor and the lessee reside in different countries, the most proper analysis is the application of the analogous framework applicable to property which is the subject of export transactions, in which case, the lex sitiae prospectiva mandates application of the law of the place of destination.
THE FORMALISTIC EUROPEAN MODEL – AN IMPROVABLE EXAMPLE
The inutility of a conflictual solution lacking prior substantive harmonization has led the international projects on the subject to an intermediate solution which contains a minimum level of uniformity, providing conflictual formulas to achieve substantive solutions. When compared to the U.S. model, established in the Uniform Commercial Code (UCC), which takes the approach of classifying guarantees by their function, the European model can be labeled “formalistic.”
The difficulties encountered in reformulating the guarantee systems of different countries can be used as an excuse by the European Council, but not by the European Union, enwrapped in a framework of economic integration which should approximate the Northamerican model. What we find are unsatisfactory examples in the texts on the subject, all of which opt for establishing a minimum level of substantive legal uniformity.
The lack of harmonization that exists, as well as the substitution of conflictual solutions for substantive solutions, has given rise to incoherence and asystemization incompatible with the aspired benefits of economic integration. If the different harmonization proposals designed in the European Union are adopted they will only generate absolute incoherence within the guarantee systems of each Member State. The risks posed by fragmentation, in lieu of global solutions, and the misconception of conflictual solutions in lieu of substantive harmonization, are highly questionable when a ready model exists in the UCC: intracommunity substantive harmonization of the entire guarantee system with conflictual solutions applicable to foreign guarantees.
THE U.S. MODEL – AN EXAMPLE TO FOLLOW
The designation “functional” which the U.S. model merits, in comparison with the formalistic approach of the European system, is a result of the formulation of the guarantee system based on the economic function of each particular guaranty. Such substantive harmonization, establishes the legal effect of each particular guaranty, based on its economic function within the context of each credit transaction without regard to its particular form or nomenclature.
The purpose of the functional U.S. model is to establish rules with respect to the effects various types of security interests have as against third parties. The objective is to centralize the registration procedure necessary to perfect security interests. This functional categorized system enhances, particularly with respect to the application of rules of private international law, the economic coherence of the guarantee system of an integrated commercial market, establishing useful guidelines for guarantees created outside of the market.
The system has its flaws and is not comprehensive in some aspects, but this does not detract from its excellence as a model that accomplishes harmonization of the guarantee system of an integrated market, for two primary reasons:
(1) Because its rules of international private law incorporate solutions which provide a maximum degree of predictability with respect to foreign guarantee rights, and
(2) Because it establishes substantive harmonization of a credit and guarantee system which serves the economic policy of an integrated commercial market.
CONCLUSION
Leasing is becoming more and more prevalent due to its fiscal utility. A leasing arrangement involves several legal relationships between the original vendor, the leasing company and the lessor. Each of these parties possesses varying interests in the collateral at different points in time during the course of the leasing arrangement.
Leasing is a contractual relationship that also functions as a guaranty. The guaranty aspect arises from leasing company’s retention of ownership of the collateral, while the lessee possess the collateral and makes a predetermined series of payments in exchange for its use. Upon termination of the payments, the lessee may ultimately become the owner of the collateral by exercising its option to purchase the collateral at a predetermined residual value.
In the international context, leasing is a divisible arrangement to which several lex contractus principles of private international law may be applied - lex rei sitiae, lex futuri situs, lex sitiae prospectiva - not just to the terms of the contract itself, but more importantly to the obligations created by the contract. As between the leasing company and the lessee, in the absence of an applicable law chosen by the parties, the Rome Convention framework will often determine which law applies. In actions between the lessee and the original vendor, regarding negligence and indemnification claims arising from latent defects in the collateral, the Ottawa Convention will apply when the leasing company and the lessee reside in different countries.
The U.S. model applicable to guarantees created in movable personal property (security interests) establishes a classification and centralized registration system that is functional and flexible. In contrast, the texts on the subject in Europe establish minimal legal uniformity, and substitute conflictual solutions for substantive harmonization, which results in a formalistic and unworkable system which should be dispatched in favor of the proven U.S. model.
