Faculty of Law | University of Oxford - 1 January – … · Web view(b)with effect from 1 March...

Commercial Law CentreHarris-Manchester CollegeMansfield RoadOxford OX1 3TDUnited [email protected]

Update - November 2015

Comparative Commercial Law Project

This document summarises initial steps in the comparative commercial law project (the CCL Project), a research undertaking under the auspices of the Commercial Law Centre (the Centre) at Harris Manchester College, University of Oxford (HMC).

Transnational commercial law (TCL) is taught in many jurisdictions and law schools worldwide. Research developed through the CCL Project aims to fill a critical gap in the teaching of TCL. That gap is the limited knowledge of the students about (i) the underlying transactions (except contracts, which they are likely to have studied) that are the subject of TCL instruments, and (ii) the basic legal principles, more so on a comparative basis, that govern such transactions. Such comparative commercial law (including the underlying transactions, CCL) is central to understanding the process of creating, and content of, TCL instruments, even where the latter seek to advance best international rules rather than set out a common denominator of legal approaches.

There is a need for, if not a complete companion course for TCL, at least a set of basic materials that TCL teachers can provide students, on CCL.

This project, headed by Jeffrey Wool, condon-falknor professor of global business law at the University of Washington School of Law and senior research fellow at HMC, will develop such basic and/or course materials on CCL. This is an open project in the sense of inviting collaboration with interested others. Collaboration with UW law school is being explored. The results of the CCL Project would be shared globally, including, without restriction, with teachers of TCL.

Separate from its key linkage to TCL, CCL merits study and development as an academic end in itself.

Annexed hereto are:

-- A schematic depiction of the CCL Project (Annex I)

-- An outline of first step in the CCL Project: the development of basic materials for a new course, which, alternatively, can be assigned materials in TCL, called ‘Comparative Commercial Law: Transactional Perspectives’ (Annex II)

1

mailto:[email protected]

-- The initial archetype transaction and fact pattern to be used in that new course (described further below)(Annex III)

-- The template for jurisdictional outlines and bibliographies related to that transaction and fact pattern (described below) and the form for compiling the jurisdictional replies (Annex IV-A and IV-B, respectively)

To make CCL Project both practical and efficient, we have secured the support of major international law firms with global expertise (the supporting firms) to provide support in terms of content. These firms, listed alphabetically, are: Abogados Sierra y Vazques; Clyde & Co.; Freshfields Bruckhaus Deringer; Holland Knight; King & Wood Mallesons; and Weil, Gotshal & Manges. The University of Paris has also contributed on equal footing with the supporting firms and is viewed in similar terms in the balance of this memo. Others may be added.

The supporting firms will be publicly recognised as the firms supporting the CCL Project, including on the HMC/Centre website and in correspondence and communications.

The supporting (each doing pieces, not jointly) have done the following (the supporting firms’ tasks) under Professor Wool’s supervision:

(1) drafted sets of transaction documents (transaction documents) reflecting hypothetical fact patterns covering archetype transactions and raising basic legal issues in such transactions (as set out below, and which correspond to TCL instruments, the archetype transactions),

(2) prepared outlines, following a common format based on a set of questions, on the basic legal concepts applicable to, and sources of law that govern, the archetype transactions and applied the same to the fact pattern under the laws of each of England New York, France, Germany, Mexico, New York, United Arab Emirates, and China (the subject jurisdictions), and helped to build the bibliography and provided source materials relating to the foregoing for each subject jurisdiction (jurisdictional outlines and bibliographies). The subject jurisdictions were selected to cover a cross section of common law, civil law (Napoleonic and Roman-Germanic), Islamic-impacted law, and developing jurisdictional law.

The initial archetype transaction and fact pattern covers contracts, security, insolvency, and surety. It is set out in Annex III.1 The initial jurisdictional outlines and bibliographies would follow the template attached as Annex IV-A.

These materials – in draft form – were used in a CCL tutorial [Comparative Commercial Law: Transactional Perspective] taught this summer at the University of Washington School of Law. Student (JD and (non-US) LLM) . Feedback from the students was obtained. That feedback, and the observations from the tutorial set on in Annex V, will be considered in further development of the materials.

1 In due course, there would be other archetype transactions, including payment systems, transport of goods, and intermediated securities.

A presentation on the CCL Project will be made to the next TCL teachers’ conference (Perth, November), where others will be asked to develop other archetype transactions and fact patterns and more generally become involved in the CCL Project.

END

SEE ANNEXES

4

Annex I

Objectives

Courses Comparative Commercial Law

Substantive and Comparative Commercial

Law

Transnational Commercial Law

Extracting General Principles of Commercial

LawUnderstanding

Commercial Transactions

Transaction / DoingBusiness / Lawyering

Comparative Commercial Law Project(Commercial Law Centre, HMC, Oxford)

Annex II

Comparative Commercial Law: Transactional Perspectives

Subject Matter Overview

There are three objectives of this course / these materials (CCL):

i) to introduce students to the form, substance, and commercial purpose of a range of commercial transactions,

ii) to provide students with a comparative perspective on the rules of law applicable in major systems of law to such transactions, and

iii) to extract general principles of law applicable to such transactions, to be studied in a subsequent course, Transnational Commercial Law (TCL), which addresses harmonization of international commercial law.2

It is recommended that students take CCL prior to taking TCL, but, if that is not possible, materials from the former can be used as introductory and background reading in the latter.

The following will be addressed in the initial archetype transaction (the transaction): (1) basic contract, (2) secured transaction, (3) surety, and (4) insolvency. Dispute resolution issues will be included. The transactions will be domestic (or, at least, domestic law will be deemed to apply), given the comparative law objective. The students will work through the transactions, the intended commercial objectives of the parties, and the role of lawyers in such transactions.

The comparative element will be addressed through outlines, materials, and reading introducing basic rules of law applicable to the transactions from (a) common law jurisdictions (New York and England), (b) civil law jurisdiction (France, Germany, and Mexico), (c) an Islamic law jurisdiction (United Arab Emirates), and (d) a mixed law systems (China)(the subject jurisdictions).

Fundamental and recurring themes, concepts, questions will be identified and assessed (the commercial law themes).3 The resulting synthesis or lack thereof

2 Materials would be prepared with the assistance of major international law firms with global expertise.

3 Such as (1) ex ante commercial predictability versus ex post fairness, (2) the scope and limits of party autonomy and sanctity of contracts, (3) form versus function in commercial transactions, and its regulatory counterpart of prescriptive rules versus evolving standards, (4) the role and contours of good faith and similar concepts, (5) the recognition of trade usage as a source of contractual rights and duties, (6) the balancing of vested rights and the interests of third parties, (7) cost/benefit, including the facilitation of trade, in commercial law rulemaking, (8) the role, power and responsibilities of trusted parties and intermediaries in commercial transactions, (9) the permissibility and regulation of extra-judicial activity, including in cases of non-performance, (10)

5

regarding general principles applicable to commercial transactions would be taken up in the TCL course.

Format and Materials

Each archetype transaction would be the subject of a detailed hypothetical transaction, which raises core legal issues in many of the subject jurisdictions.

There will be an outline from each of the subject jurisdictions, addressing the basic legal concepts applicable to, and sources of law that govern, the archetype transactions under the laws of that jurisdiction. They will be centred on a set of legal questions posed for each hypothetical.

Topics for Course / Materials

A. Preliminary General Topics

Introduction

Topic 1 Introduction to commercial transactions

Topic 2 Comparative law and its relevance to international commercial law

B. Archetype Transactions

Topic 3 Contract

Topic 4 Secured transaction

Topic 5 Surety / guarantees

Topic 6 Insolvency

C. Commercial Law Themes

Topic 7 Identification and assessment of commercial law themes

the effect of public notice of interests and notorization in their creation, and (11) the effect of insolvency on rights and obligations, including security and setoff.

Basic Resource Materials 4

Abbreviation

Citation

Dalhuisen, Comp. Commercial law J. Dalhuisen, Dalhuisen on Transactional and Comparative Commercial, Financial and Trade law (Hart, 2013), volumes 1 – 3

Goode, Commercial law R. Goode, Commercial Law (Fourth Edition, Penguin, 2010). Editor E. McKendrick

Goode at al, TCL R. Goode, H. Kronke, and E. Mckendrick, Transnational Commercial law (Oxford University Press, 2007)

Kozolchyk, Comp. Commercial Contracts

V & K, Int'l Commercial Contracts

B. Kozolchyk, Comparative Commercial Contracts (West Academic Publishing, 2014)

S. Vogenauer & Jan Kleinheisterkamp, Commentary on the Unidroit Principles of International Commercial Law Contracts, Oxford University Press, 2009)

Wood, Principles of Insolvency P. Wood, Principles of International Insolvency (2nd Edition, Sweet & Maxwell, 2007)

Wood, Legal Maps P. Wood, Maps of World Financial Law (2th Edition, Sweet & Maxwell, 2008)

Wood, Comp. Security Law P. Wood, Comparative Law of Security Interests and Title Finance (2nd Edition, Sweet & Maxwell, 2007)

END

4 3 To be developed, by adding outlines from each of the subject jurisdictions and bibliographies and source materials from such jurisdictions.

Annex III: ARCHETYPE TRANSACTION

CONTRACTS, SECURITY, GUARANTEES, INSOLVENCY

1 JANUARY – 15 FEBRUARY 2010

1. Cyber Systems (‘Supplier’) develops, manufacturers, services, and sells computer networks designed to prevent cyber-attacks. It is an industry leader. On 1 January 2010, it entered into preliminary discussions to sell its main product, the Cyber Attach Prevent Network (‘CAP’), to a small but profitable company, Investco, that invests and manages funds for high net-worth individual. During these negotiations, Investco’s external lawyer was told that there was a ‘very small probability’ that CAP might be included in a government inquiry relating to cyber security. CAP uses a component (‘progressive scanner 7’) that could initiate, as well as defend, cyber attacks. Within Supplier, there were some speculation that, if so included, the government might take steps to regulate, or increase the cost of owning, progressive scanner 7.

2. On 15 January 2010, Investco’s external lawyer and Supplier’s legal department verbally agreed that, to minimize the risks associated with the low-probability government inquiry, Investco should lease, rather than purchase, CAP. That, it was thought, would avoid the risk of an ownership-based restriction or cost. Moreover, the lease should be between parties without knowledge of this regulatory risk. The lease would be from an independent intermediary leasing company, Financo (‘Lessor’), to a new subsidiary of Investco, InvestX (‘Lessee’). Lessor is in the business of buying, then leasing, sophisticated computer systems and networks.

3. On 1 February 2010, senior executives of Supplier and Investco initiated a broadly worded memorandum of understanding setting out the basic structure and financial and select other terms of contemplated transaction. No mention was made of the regulatory risk associated with progressive scanner 7, and no party assumed that risk. The contemplated structure is as follows. Supplier would sell CAP to Lessor, would provide product support to Lessee or its assignee, under a supply and support contact. Lessor would finance that purchase by borrowing funds from Global Credit (a bank, acting as agent and security trustee for several lenders, ‘Bank’) as further advance under an existing credit and security facility between Bank and Lessor. Lessor would lease CAP to Lessee under a ten (10) year leasing contract. Investco would have its relationship bank, Surety National (‘Guarantor’) issue a guarantee in favour of Lessor payable in the event Lessee defaulted under the leasing contract.

4. On 15 February 2010, definitive documents effecting the contemplated transactions (the ‘transactions’) were signed. They were neither notarized nor formally witnessed. Lessor’s signatures on all documents were forged by the personal assistant to Lessor’s President after signed originals were lost during the closing. All parties assumed the signatures were authentic and relied on them in taking actions under the transactions.

All of the parties are all companies organized under the laws of, and located in, the same country. That country’s laws govern the transactions. That country’s courts settle all disputes relating to the transactions.

[The transactions are depicted in appendix 1-A. The memorandum of understanding is set out as appendix 1-B. The commercial and legal objectives

of the parties are summarized in appendix 1-C. The documentation for the transactions is set out as appendix 2.]

1 JANUARY – 15 APRIL 2014

5. On 1 January 2014, the government sent a letter to Supplier advising that –

a) further to its letter to Supplier dated 10 February 2010, the result of the government’s cyber security product assessment is that progressive scanner 7 has been placed on the restricted product list (the ‘restricted list’),

b) since the interim use of progressive scanner 7 pending finalization of the assessment was not discontinued, as demanded by the government in the 10 February 2010 letter, the owner of any system that uses progressive scanner 7 must pay a substantial monthly penalty (the ‘penalty’),

c) from 1 March 2016, the continued use of progressive scanner 7 is prohibited.

6. On 5 January 2014, Supplier informed Lessor, Lessee, and Invesco of the content of the government’s letter of 1 January 2014, and offered to modify CAP by replacing progressive scanner 7 with progressive scanner 8, a new component (which cannot initiate cyber attacks) that is not on the restricted list. Progressive scanner 8 is 15% percent less effective that progressive scanner 7 in preventing a breach of cyber security.

7. On 10 January 2014, Lessee wrote to Lessor demanding that –

(a) as formal owner and title holder of CAP, and, thus of progressive scanner 7, Lessor is obligated to pay the penalty (which, if payable by Lessee, would effectively increase the cost to Lessee of using the CAP by 500%, making it an economic hardship and producing a contractual imbalance),

(b) with effect from 1 March 2016, the leasing contract must be renegotiated to include a substantial reduction of rent to reflect to inferior quality of progressive scanner 8, and

(c) pending resolution of this matter, Lessee would hold back 50% of its monthly rental payments.

The letter concluded by stating that absent Lessor’s agreement to points (a) and (b) above by 15 January 2014, Lessee would view the leasing contract as (i) requiring judicial modification, or (ii) given the forged signatures on the contract (which were since discovered), void ab initio, in the latter case, with no further rights or obligations for either party.

8. On 15 January 2014, Lessor wrote a response to Lessee’s letter of 10 January 2014 stating that –

(a) given the terms of the leasing contract, Lessee was, in fact, the economic owner of CAP (as a financial lease, the transaction was properly construed as sale to Lessee with Lessor retaining title as security for performance by Lessee), or, alternatively

(b) under the express terms of leasing contract, Lessee is responsible for all increased costs and has indemnified Lessor for any such costs.

In either case, the letter concluded, Lessee is responsible for the penalty. In addition, Lessor views Lessee’s letter as an advance repudiation of the leasing contract, and, now, demands assurances of future performance of that contract by Lessee by 1 February 2014.

9. On 1 February 2014, Lessee responded to Lessor’s letter of 15 January 2014 by –

(a) iterating the content of the Lessee letter of 10 January 2014, and

(b) rejecting contents of Lessor’s letter of 15 January 2014.

The letter added that the cited (increased cost and indemnification) leasing contract provisions were set out in fine print in a Lessor form standard contract, were not negotiated, were abusive, and are unenforceable.

10. On 5 February 2014, Lessor wrote to Lessee declaring a default under the leasing contract. It also sought to terminate the contract and demanded the return of CAP, citing a provision permitting such action on the occurrence of any default. Simultaneously, Lessor, attaching a copy of its default letter to Lessee, wrote to Guarantor demanding full and immediate payment of all amounts owed under the guarantee.

11. On 10 February 2014, Guarantor wrote to Lessor refusing to pay under the guaranty on grounds that –

(a) Lessor made an abusive call on the guarantee by not (i) fully assessing whether there was a default under the leasing contract, or (ii) first diligently pursuing legal remedies against the lessee, and

(b) there was fraud in the underlying transaction and procurement of the demand guarantee.

12. On 1 April 2014, Lessor brought legal action against –

(a) Lessee, for (i) damages for breach of contract and a termination of the contract, and, in addition, (ii) specific performance of a clause in the leasing contract requiring Lessee to publish a notice in Cyber Security Weekly, a leading industry journal, announcing the successful closing of the original transaction and Lessor’s first rate provision of services (an obligation Lessee has refused to perform and which Lessor now views as essential to its reputation given the problems surrounding CAP),

(b) Investco, on grounds that Lessee was effectively an agent of Investco, or alternatively, that the corporate veil between them is not substantive, and, in either case, Lessor has a direct claim against Investco, and

(c) Guarantor, for non-payment under the guarantee.

13. On 15 April 2014, Lessee filed legal papers which –

(a) denied all charges,

(b) claimed that if there was a breach, it was not a fundamental breach justifying contractual termination,

(c) asserted that, as Lessor claimed Lessee was the economic owner of CAP, Lessor cannot demand its return, and

(d) counterclaimed, seeking damages for breach by Lessor of its obligation to (i) provide a 30 thirty grace period following any alleged default, an accepted usage in the IT leasing industry (which was discussed during negotiation of, but was not expressly included in, the leasing contract), and, in addition (ii) act in accordance with principles of good faith and fair dealing as required as a matter of law.

Lessee also asserted that, in any event, its (and Lessor’s) performance is excused from 1 March 2016 on grounds of impossibility, given the prohibited use of progressive scanner 7 from that time forward.

14. At the same time, Lessee sought to join Supplier in the proceeding, claiming that Lessee was a third party beneficiary of (i) the supply and support contract between Supplier and Lessor, and (ii) Supplier’s obligation to engage in pre-contractual negotiations in good faith (both of which Supplier breached by its failure to disclose the content of the government letter of 10 February 2010).

15 May 2014 –

15. As the above litigation was progressing, several other parties that leased CAPs from Lessor made similar demands for Lessor to pay the penalty. That large cumulative liability triggered a technical ‘solvency test’ default (and, in Bank’s view, a material adverse change default) under the credit and security facility.

16. As a result, on 1 May 2014, Bank declared a default under the credit and security facility, and, in accordance with the terms of that agreement, took judicial and extra-judicial action against Lessor to repossess then sell the security granted to it by Lessor (which was all Lessor’s current and future assets of any kind, ‘security collateral’). Lessor resisted the extra-judicial action on grounds that it violated public order and its right to due process under law, which are mandatory rules and/or procedural which cannot overridden by contract.

17. To prevent further legal actions and provide an opportunity to reduce its liabilities and reorganize its business, Lessor sought protection on 15 May 2014 under national insolvency/bankruptcy legislation.

18. In the resulting insolvency proceedings, the Lessor’s insolvency/bankruptcy administrator, in addition to claiming that various preferred creditors had superior claims to the security collateral or a share in it:

(a) demanded that Bank cease all legal action to enforce the security collateral, given the stay on enforcement actions under national insolvency/bankruptcy law, and

(b) attacked Bank’s claim to the security collateral as being invalid since the credit and security facility –

(i) was entered into by Bank as trustee, not in its own name and individual capacity,

(ii) did not specifically identify the security collateral, which was acquired by Lessor following the closing of original credit and security agreement, but, rather was swept in through an ‘after-acquired property clause’,

(iii) included as security collateral intangible contract rights (an assignment of the leasing contract) made without proper notice to Lessee (it was send to the wrong address), which, in any event, allegedly violated of a provision in the leasing contract prohibiting an assignment without the consent of Lessee where such would have a material adverse effect on Lessee,

(iv) did not specify a maximum amount secured, and purported to secure performance of any future obligation of Lessor or a third party to Bank,

(v) was only properly perfectly by registration under national law on 15 April 2014, and was therefore considered voidable as preference or fraudulent transfer under national insolvency/bankruptcy law, and

(vi) secured obligations to pay high rates of interest and penalties, which violates public policy.

19. In the insolvency/bankruptcy proceedings, the following additional claims were made:

(a) Lessee sought to set off amounts owed under the leasing contract by amounts it claimed as damages from Lessor, both against the insolvency/bankruptcy estate and against Bank (to the extent it had a proper assignment of the leasing contract);

(b) Supplier claimed a superior right to that of the Bank in the assigned leasing contract, citing a clause in the supply and support contract. That clause stated that Lessor is deemed to have automatically assigned payments under the lease contract to Supplier as security for amounts owed by it to Lessor, such amounts (for non-payment of product support and transaction expenses for which Lessor was contractually responsible) now being claimed; and

(c) Guarantor claimed the, in addition to the guarantee being unenforceable [see point 11 above], the assignment of the guarantee was invalid, as the Guarantee did not expressly permit an assignment.

Appendix 1-A: Comparative Commercial Law

TRANSACTION SCHEMATIC

13

Appendix 1-B: Comparative Commercial Law

MEMORANDUM OF UNDERSTANDING

for a secured term loan facility of up to US$50,000,000

and the Cyber Attach Prevent Network

to be leased to InvestX

1 February 2010

The terms set out in this Memorandum of Understanding are indicative only and do not constitute an offer to arrange or finance the transaction. The provision of the Cyber Attach Prevent Network or funding is subject to satisfactory documentation and to internal approvals of the Parties. The terms set out in this Memorandum of Understanding are not meant to be, nor shall they be construed as, an attempt to define all of the terms and conditions of any Transaction Document.

PARTIES AND DOCUMENTATION

CAP: Cyber Attach Prevent Network including progressive scanner 7.

Borrower/ Lessor: Financo, a company incorporated in Ruritania.

Guarantor: Surety National, a company incorporated in Ruritania.

Structure Diagram: Is attached at Exhibit A. Borrower is defined therein as “Borrower/Lessor”.

Lessee: InvestX.

Lessee Parent: InvestCo.

Arranger: Global Credit.

Lender(s): Bank 1, Bank 2, and Bank 3.

A Lender may assign any of its rights or transfer by novation any of its rights and obligations to another bank or financial institution, subject to Borrower's consent which is not to be unreasonably withheld, provided that the Borrower shall not suffer any cost or expense and, by reference to circumstances existing at the date of the transfer, no increased obligation or liability shall result for the Borrower.

Facility Agent: Global Credit.

Security Trustee: Global Credit.

Supplier: Cyber Systems.

Finance Parties: Together, the Lenders, the Arranger, the Facility Agent and the Security Trustee.

Majority Lenders: More than 67% of Lenders' commitments / advances.

Transaction Document(s): Together, the Credit and Security Facility, the Guarantee, the Leasing Contract and the Supply and Support Contract.

1. CREDIT AND SECURITY FACILITY (the “Facility Agreement”)

Facility: Revolving Loan Facility which may be utilised by way of drawing of loans.

Each Loan shall be made available wholly in US dollars made on delivery of each CAP.

Termination Date: 31 December 2025

Purpose: The proceeds of each loan shall be used to finance the Borrower's purchase of CAP systems together with all product support relating thereto.

Availability Period: The period from and including the date of the Facility Agreement up to and including the Termination Date or such later date as the Borrower may agree with the Facility Agent (acting on the instructions of the Lender(s)).

Minimum Amount of each Loan:

US$10,000,000.

Maximum Number of Loans:

No more than eight Loans may be outstanding.

Repayment: Each Loan shall be repaid on the last day of its Interest Period.

Voluntary Prepayment Loans may be prepaid in whole or in part on 5 Business Days’ prior notice (but, if in part, by a minimum of US$1,000,000). Any prepayment shall be made with accrued interest on the amount prepaid and, subject to breakage costs, without premium or penalty.

PRICING

Agency Fee: US$50,000 per annum.

Commitment Fee: 1% per cent. per annum on the unused and uncancelled amount of the Facility for the applicable Availability Period. Accrued commitment fee is

payable quarterly in arrear during the relevant Availability Period, on the last day of the relevant Availability Period and on the cancelled amount of the Facility at the time a full cancellation is effective.

Interest Rate: US 3 month LIBOR (as quoted on Bloomberg page BBAM 4) plus Margin.

Margin 6% per cent. per annum.

Interest Periods for Loans: In relation to any Loan, quarterly. Payment dates shall be aligned to fall on the same quarterly date to the extent possible.

Payment of Interest on Loans:

Interest is payable on the last day of each Interest Period (and, in the case of Interest Periods of longer than six months, on the dates falling at six-monthly intervals after the first day of the Interest Period).

SECURITY

Security Documents: 1. A perfected first priority Ruritanian law share mortgage/pledge over the entire issued share capital of the Borrower.

2. A first priority Ruritanian law mortgage/charge over all current and future assets of the Borrower, including, without limitation, all CAP systems.

3. A first priority security interest in the Lessor's right, title and interest in, to and under any Lease.

4. A first priority assignment of CAP warranties and consents from the supplier or direct agreements with the supplier.

5. Assignments of insurances for the benefit of the Security Trustee in the forms as appended to any Lease.

6. A first priority charge over the bank account utilised for the purpose of collecting the rent from any Lessee (Collections Account). The Collections Account will be provided by a bank appointed by the Borrower (and acceptable to the Security Trustee acting reasonably). Subject to no Events of Default having occurred and continuing, the Collections Account will be

freely available for the Borrower.

7. Assignments of any guarantee given pursuant to the Borrower’s Purpose for the benefit of the Security Trustee.

Insurances: The Borrower shall, at its own cost and expense, maintain, or procure that the Lessee maintains, insurance to fully cover the value from time to time of all CAP systems and third party liability resulting from its use. The Security trustee shall be the loss payee under such insurances.

OTHER TERMS

Financial Information: The Borrower shall provide the following financial information:

1. Within 180 days of the end of the Borrower's financial year, a copy of the Borrower's audited consolidated financial accounts for the relevant financial year.

2. Within 90 days after the end of the Borrower's quarterly accounting periods, a copy of the Borrower's unaudited consolidated management accounts for the relevant quarterly period.

Special Purpose Undertakings:

The Borrower's only business shall be that of owning, leasing and disposing of CAP systems, and activities related or incidental thereto.

Responsibilities: The Supplier shall provide all technical and product support relating to the CAP. The Borrower shall manage the lease and monitor the Lessees’ performance in accordance with its customary practises.

The Borrower shall notify Facility Agent upon becoming aware of certain notifiable events of default under a lease — to be agreed in documentation.

The Borrower shall notify the Facility Agent if it is repossessing the CAP from a Lessee.

Mandatory Prepayment Events:

Illegality or finance documents or security ceases to be in full force and effect (subject to usual mitigation provisions).

Financial Covenants: 1. The value of the Borrower’s assets must not be less than the amount of its liabilities, taking into

account its contingent and prospective liabilities.

2. Financial indebtedness of the Borrower of US$15,000,000 or more in aggregate or its equivalent in other currency is accelerated by reason of an event of default and is not discharged forthwith excluding (a) financial indebtedness in respect of which recourse is limited to particular assets and (b) such accelerations which are being disputed or contested in good faith.

General Undertakings: The following undertakings will be included in the Agreement in respect of the Borrower:

(a) authorisations

(b) compliance with laws

(c) negative pledge subject to agreed exceptions

(d) restriction on disposals subject to agreed exceptions

(e) restriction on merger

(f) no change of business

Events of Default: 1. The Borrower fails to pay any amount due within 5 Banking Days of the due date (if that amount is a scheduled payment of principal or interest) or within 10 Banking Days after written notice from the Facility Agent of such failure (in all other circumstances).

2. The Borrower knowingly creates (or consents to the creation of) any non-permitted lien or sells, transfers or otherwise disposes of title or purports to do so without making a mandatory prepayment as provided above.

3. The Borrower fails to observe or perform in any material respect any of its other obligations for a period of 30 days of written notice from the Facility Agent.

4. Any representation or warranty given by the Borrower is incorrect in any material respect and is not remedied within 30 days of written notice from the Facility Agent.

5. Bankruptcy/liquidation (whether voluntary or involuntary) of the Borrower or similar or analogous events to be agreed in documentation

(including appointment of receiver(s) or administrator(s) with respect to all or substantially all of its assets), subject to customary exclusions for vexatious proceedings and to cure periods for involuntary proceedings.

6. The Borrower repudiates or disclaims any of its obligations and liabilities or evidences in writing an intention to do so.

7. The Borrower ceasing to meet the provisions of any Financial Covenants.

8. There has been no material adverse change since entrance into the Facility of the financial condition of the Borrower or in the Borrower’s ability to perform its obligations under the Facility.

An event of default under a lease shall not, in and of itself, be a Events of Defaults under the facility.

If a Events of Default occurs and is continuing, the Facility Agent may notify the Borrower that the Facility is immediately payable and/or enforce any or all rights, remedies and powers available (subject to the quiet enjoyment rights of the Lessee). Following such notice, the Security Trustee shall be entitled to enforce the security (subject to the quiet enjoyment rights of the Lessee).

Quiet Enjoyment: So long as no event of default under the lease occurs and is continuing, the Security Trustee will agree with the Lessee that neither the Security Trustee nor any person claiming through it shall interfere with the quiet enjoyment and peaceful possession of the CAP by the Lessee, and the Security Trustee shall upon request provide a quiet enjoyment letter directly in favour of the Lessee.

Costs and Expenses: All reasonable and documented costs and expenses (including legal fees subject to caps) by the Arrangers and the Agent in connection with the preparation, negotiation and execution of the documentation and all filings, notarisations and recordings in respect of the documentation or the CAP shall be paid by the Borrower whether or not the documentation is signed and whether or not the Drawdown Date occurs so long as the failure to sign the documentation or the failure of the Drawdown Date to occur does not result from the failure of the Lenders to obtain internal

approvals for the financing contemplated hereby or a breach by the Lenders of their obligation to fund once the definitive documentation has been signed.

Governing Law: Ruritania.

Jurisdiction: Ruritania.

2. SUPPLY AND SUPPORT CONTRACT (the “Supply Contract”)

Agreement: Supplier agrees to sell the CAP to the Lessor and Lessor agrees to purchase the CAP from the Supplier on the Delivery Date.

Title: Supplier agrees to transfer good and marketable title to the CAP to the Lessor.

Payment: US$10,000,000 in a single payment payable on delivery.

All payments to be made in US $ and in immediately available funds settled through the New York Clearing House System. No payment shall be considered made by Purchaser until it is received in the said account.

Product Support: The Supplier shall provide to the Lessor or any other beneficiary so designated by the Lessor CAP product support services. Periodic Payments for such support services on the dates as to be agreed between the Parties.

Third Party Beneficiary: The Lessor may assign and Product Support services under each CAP to any third party beneficiary so notified to the Supplier.

Appropriation: If any sum paid or recovered by Supplier in respect of the liabilities of Lessor under the Supply Contract is less than the amount then due, Supplier may take security of those payments and proceeds received by Lessor arising from any further lease, sale or assignment of the CAP by the Lessor.

Representations: Lessor representations covering the status, incorporation and corporate power of the Lessor, legal validity of the Supply Contract, non-conflict with relevant laws or Lessor’s constitutional documentation, valid authorisations, consents and registrations in connection with the entry into the Supply Contract, no material adverse change, no

litigation which would materially effect the Supply Contract and that the obligations of the Lessor rank at least parri passu with all other present and future unsecured obligations of the Lessor.

Conditions Precedent: At a minimum the Supplier shall have received:

1. Legal Opinions.

2. Payment.

3. Confirmation that the sale in the delivery location does not give rise to any taxes other than those taxes anticipated under the Supply Contract.

4. The Representations being true and accurate at the time of sale.

5. No Default having occurred and continuing.

6. No change having occurred after the date of the Supply Contract and before the Delivery Date in any applicable Law or regulation policy which would make it illegal or substantially increase the cost for the for the Parties to perform any of its obligations under the Supply Contract.

Delivery: Supplier shall effect the transfer of title to the CAP to the Lessor on the Delivery Date by executing and delivering the Bill of Sale to the Lessor.

Indemnification: Lessor shall indemnify the Supplier in respect losses incurred by the Supplier in connection with purchase of the CAP save those losses that are caused by the wilful misconduct or recklessness of the Supplier or any of its employees or agents.

Events of Default: Events of default will include, but not be limited to:

1. Failure to pay any Periodic Payment for services.

2. Lessor is in breach of any of the terms of the Supply Contract.

3. Lessor becomes insolvent or bankrupt or becomes unable to pay its debts as they fall due.



3. GUARANTEE

Beneficiary: Financo as Lessor under the Leasing Contract.

Guaranteed Party: InvestX as Lessee under the Leasing Contract.

Guarantee: The Guarantee will be provided in favour of the Beneficiary.

Guarantee Amount: All amounts payable by the Guaranteed Party under the Leasing Contract.

Form of Guarantee: Guarantor will guarantee to the Beneficiary the due and punctual performance of all present and future obligations of the Guaranteed Party under the Leasing Contract if and when they become performable in accordance with the Leasing Contract.

To the extent required by law, the Beneficiary must use reasonable endeavours to pursue the Lessee under the Leasing Contract before such guarantee can be called.

Guaranteed Obligations: Performance of all present and future obligations of the Guaranteed Party under the Leasing Contract if and when they become performable in accordance with the Leasing Contract.

Availability: From satisfaction of the conditions precedent until the Guarantee Expiry Date.

Reduction: The liability of the Guarantor under the Guarantee shall not be reduced, discharged or otherwise adversely affected by any act, omission, matter or thing which would have discharged or affected the liability of the Guarantor had it been a principal borrower instead of guarantor, or by anything done or omitted by any person which might otherwise reduce or extinguish its liability under the Guarantee.

Guarantee Expiry Date: The date on which all the payment obligations of the Guaranteed Party under the Leasing Contract are irrevocably and unconditionally satisfied or performed in full.

Variation to the Leasing Contract:

Guarantor authorises the Supplier and the Guaranteed Party to make any addendum or variation to the Leasing Contract.



4. LEASING CONTRACT

Form: The Lease form shall be based on Lessor’s standard form equipment leasing contracts for tangible moveable property.

Rent: US$500,000 per quarter.

Lease: The Lessor shall lease the CAP and the Lessee shall take the CAP on lease for the Period of Lease.

Period of Lease: Ten (10) years from the date of the Lease Agreement unless otherwise agreed between the Parties.

Exhibit A: Structure Diagram

Appendix 1-C: Comparative Commercial Law

COMMERCIAL AND LEGAL OBJECTIVES OF THE PARTIES

The following document sets out a high level overview of the legal and commercial objectives of the Parties to the Transaction Documents (as defined in the Memorandum of Understanding dated 1 February 2010).

GLOBAL CREDIT (Agent & Security Trustee)

1. Ensure minimal liability to any party the under the Transaction Documents when acting in an agency or trust capacity.

2. Ensure clear and circumscribed legal responsibilities and indemnification for liabilities and costs save those caused by its failure to perform.

THE BANKS

1. Ensure that the trust structure (Global Credit as Security Trustee) would be respected in the event Global Credit became insolvent, and that the property it holds in trust would not be available to creditors of Global Credit. These objectives apply to Lessor and Lessee as well, and are not repeated below.

2. Ensure that their lending margin provides sufficient profit given the risk of default by Lessor and that they are protected from increased funding or regulatory costs (like requirements to hold capital against loans).

3. Ensure that, in event of default by the Lessor (its borrower), it holds collateral security of sufficient value (when sold) to pay the amount outstanding under the loan documents (the credit and security facility). It will take security over all assets of the Lessor and acquire security over all future assets of the Lessor, including the CAP and the income from the leasing thereof.

4. Ensure that no other party has a competing claim to the property that it holds as collateral security (or, if one does, that such party has a lower priority than that of the Banks).

5. Ensure that they have the legal ability to take possession of and sell (to offset amounts owed under the loan documents) the security collateral in the event of default by the Lessor, including a default caused by the insolvency of the Lessor.

6. Ensure that the value of the collateral security (including the CAP) is maintained and insured (in the event that it needs to repossess and sell the assets following a default).

7. Ensure that the Lessor’s assets (despite the grant of security) may be used by the Lessor in the ordinary course of its business to generate profit, thus permitting it to remain solvent and repay the loan.

8. Ensure that the level of control over the Lessor does not expose the Banks to claims of lender liability, either to the Lessor or third parties.

FINANCO (Lessor)

1. Ensure that the revenues from the leasing of the CAP asset are greater than the obligations for payment under the credit and security facility, thus providing a profit.

2. Ensure that no other parties (save the Banks (security) and the Lessee (use right)) have a competing claim to the CAP, which it owns. That includes preventing the sale of the CAP, or unauthorised sub-leasing, by the Lessee.

3. Ensure that in the event of a default by the Lessee under the leasing contract, it has unconditional and immediate recourse against the Guarantor, and need not take action first against the Lessee. It will seek that recourse free of any defences, including ones that could be raised by the Lessee under the leasing contract.

4. Ensure that in the event of a default by the Lessee under the leasing contract, including a default caused by the insolvency of the Lessee, it has the legal ability to take possession of and redeploy (for profitable use) or sell the CAP.

5. Ensure that the value of the CAP is maintained and insured, and that it has contractual rights to monitor such value, as it will redeploy or sell it at the end or upon an early termination of the leasing contract.

6. Ensure that the Lessor’s assets (despite the grant of security to the Banks) may be used by the Lessor in the ordinary course of its business.

7. Ensure that it limits its responsibility as much as possible for defects, maintenance, or support of or relating to the CAP, that is, that operational responsibility is with the Lessee and product quality responsibility is with the Supplier (through direct a direct undertaking to warrant and support the CAP).

CYBER SYSTEMS (Supplier)

1. Ensure that it sells the CAP at a profit, and receives all amounts owing in connection with that sale.

2. Ensure that its product assurances in favour of the Lessor and the Lessee are clear and circumscribed and do not include items attributed to the misuse of the CAP by the Lessee. That includes acceptance by the Lessee of the physical condition and technical capacity of the CAP at the time of delivery.

SURETY NATIONAL (Guarantor)

1. Ensure payment of a guarantee fee sufficient to compensate it, at a profit, for its risk of payment under the guarantee.

2. Ensure its obligations under the guarantee are restricted to those of the Lessee’s under the leasing contact, and that it can raise defences thereunder of the Lessee. It would prefer that the Lessor first take action against the Lessee prior to making a claim under the guarantee.

3. Ensure recourse against Investco, a creditworthy party, in event it makes payments under the Guarantee.

INVESTX (Lessee)

1. Ensure that increase in profitability from the use of the CAP is greater than its rental payments under the leasing contract.

2. Ensure that is has full recourse against the Supplier, and, if possible, the Lessor, for defects, maintenance, or support of or relating to the CAP. It seeks to ensure that the CAP can perform to agreed technical specifications.

3. Ensure that its use of the CAP is not limited under the leasing contract, so that it can maximise profitability and minimise costs associated with that use. It will seek full operational flexibility for its use of the CAP.

4. Ensure that, if the terms of the leasing contract effectively constitute a sale to it under applicable law, it has the right to acquire ownership of the CAP at the end of the leasing contract, and that no action can be taken by the Lessor to create a competing claim to the CAP by a third party.

INVESTCO

1. Ensure that its involvement with the Supplier does not adversely impact the rights of the Lessee (above), which it benefits from as parent company.

2. Ensure that the corporate veil between it and the Lessee is legally respected, so it is not liable for the obligations of the Lessee.

Annex IV-A: Comparative Commercial Law

Jurisdictional Response Template

The following questions are to be answered in the four parts set out below.

1. Were the supply and support contract and the leasing contract binding on and enforceable between the parties to them on 15 February 2010, and, if not, on what legal theory?

a) Basic legal principles.

b) Citations to main sources of law.

c) Bibliographical references (secondary sources).

d) Application of legal principles [see (a) above] to the question above.

2. Did non-disclosure by Supplier of the 10 February 2010 letter [para 5] expose it to liability, and, if so, to whom and on what legal theory?





3. Who was responsible for penalty and why?





4. Was Lessee’s action [para 7] demanding contractual modification based on changed circumstances legally justified, and, if so, on what legal theory?





5. Was Lessor claim that Lessee repudiated the leasing contract, warranting assurances of future performance [para 8], legally justified?





6. Assuming Lessee defaulted under the leasing contract, were Lessors action seeking to terminate the contract [para 10] and demanding the return on CAP legally justified, taking into account Lessee’s asserted defenses and claims [para 15]?





7. To the extent that Lessee was liable to Lessor, was Investco liable as well [para 12(b)]?





8. Would a court grant specific performance as demanded by Lessor [para 12]?





9. Was Guarantor liable to Lessor under the guarantee?





10. Was Supplier liable to Lessee [para 14], and, if so, on what theory?





11. Was Bank legally justified in declaring a default under the credit and security agreement and could it take extra-judicial action based on the contract [para 16]?





12. Would each of the six lines of attach on Bank’s security collateral be upheld as a matter of law [para 18]?





13. Would Lessee’s set off claim [para 19(a)] be permitted?





14. Would Supplier or Bank have a superior right to the payment under the assigned leasing contract?





Commercial Law CentreHarris-Manchester CollegeMansfield RoadOxford OX1 3TDUnited [email protected]

Annex IV To comparative commercial law project materials being developed as a research undertaking under the auspices of the Commercial Law Centre at Harris Manchester College, University of Oxford.


Jurisdictional Responses for England, New York, Mexico, France Germany, China, and United Arab Emirates

mailto:[email protected]

Annex IV: Comparative Commercial Law


Questions Common Law Jurisdictions

Civil Law Jurisdictions Islamic Law Jurisdiction

s

Mixed Legal

Jurisdictions

Legal Question

Guidelines for response

England New York France Germany Mexico U.A.E./ Saudi Arabia

China

Q1 - Were the supply and support contract and the leasing contract binding on and enforceable between the parties to them on 15 February 2010, and, if not, on what legal theory?

Basic Legal Principles that apply.

See Part 1, page 15

See Part 2, page 33

See Part 7, page 118and See Part 8, page 131

See Part 3, page 69

See Part 4, page 83

See Part 5, page 94

See Part 6, page 106

Citations to Main sources of law that apply.

See Part 1, page 15

See Part 2, page 35

See Part 7, page 118 and See Part 8, page 131

See Part 3, page 69

See Part 4, page 83

See Part 5, page 94


Bibliographical law References (secondary sources) that apply.

See Part 1, page 15

See Part 2, page 35


See Part 3, page 69

See Part 4, page 83

See Part 5, page 94


Application of legal principles to the question.

See Part 1, page 15

See Part 2, page 36


See Part 3, page 69

See Part 4, page 83

See Part 5, page 94


3



s

Mixed Legal

Jurisdictions

Legal Question



China

Q2 - Did non-disclosure by Supplier of the 10 February 2010 letter [para 5] expose it to liability, and, if so, to whom and on what legal theory?

Basic Legal Principles that

apply.

See Part 1, page 16

See Part 2, page 36


See Part 3, page 70

See Part 4, page 84

See Part 5, page 95



See Part 1, page 16

See Part 2, page 36


See Part 3, page 70

See Part 4, page 84

See Part 5, page 95



See Part 1, page 16

See Part 2, page 36


See Part 3, page 70

See Part 4, page 84

See Part 5, page 95



See Part 1, page 16

See Part 2, page 38


See Part 3, page 70

See Part 4, page 84

See Part 5, page 95


Q3 - Who was responsible for penalty and why?


See Part 1, page 17

See Part 2, page 38


See Part 3, page 71

See Part 4, page 84

See Part 5, page 96


4



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 17

See Part 2, page 38


See Part 3, page 71

See Part 4, page 84

See Part 5, page 96



See Part 1, page 17

See Part 2, page 39


See Part 3, page 71

See Part 4, page 84

See Part 5, page 97



See Part 1, page 17

See Part 2, page 39


See Part 3, page 71

See Part 4, page 85

See Part 5, page 97


Q4 - Was Lessee’s action [para 7] demanding


See Part 1, page 18

See Part 2, page 39


See Part 3, page 72

See Part 4, page 85

See Part 5, page 97


5



s

Mixed Legal

Jurisdictions

Legal Question



China

contractual modification based on changed circumstances legally justified, and, if so, on what legal theory?


See Part 1, page 19

See Part 2, page 40


See Part 3, page 72

See Part 4, page 85

See Part 5, page 97



See Part 1, page 19

See Part 2, page 40


See Part 3, page 72

See Part 4, page 85

See Part 5, page 98



See Part 1, page 19

See Part 2, page 40


See Part 3, page 72

See Part 4, page 86

See Part 5, page 98


Q5 - Was Lessor claim that Lessee repudiated the leasing contract, warranting assurances of future performance [para 8],


See Part 1, page 19

See Part 2, page 41


See Part 3, page 72

See Part 4, page 86

See Part 5, page 98



See Part 1, page 20

See Part 2, page 41


See Part 3, page 72

See Part 4, page 86

See Part 5, page 98


6



s

Mixed Legal

Jurisdictions

Legal Question



China

legally justified? Bibliographica

l law References (secondary sources) that apply.

See Part 1, page 20

See Part 2, page 42


See Part 3, page 73

See Part 4, page 86

See Part 5, page 99



See Part 1, page 20

See Part 2, page 42


See Part 3, page 73

See Part 4, page 86

See Part 5, page 99


Q6 - Assuming Lessee defaulted under the leasing contract, were Lessors action seeking to terminate the contract


See Part 1, page 21

See Part 2, page 42


See Part 3, page 73

See Part 4, page 87

See Part 5, page 99



See Part 1, page 21

See Part 2, page 43


See Part 3, page 73

See Part 4, page 87

See Part 5, page 99


7



s

Mixed Legal

Jurisdictions

Legal Question



China

[para 10] and demanding the return on CAP legally justified, taking into account Lessee’s asserted defenses and claims [para 15]?


See Part 1, page 21

See Part 2, page 43


See Part 3, page 73

See Part 4, page 87

See Part 5, page 99



See Part 1, page 21

See Part 2, page 43


See Part 3, page 74

See Part 4, page 87



Q7 - To the extent that Lessee was liable to Lessor, was Investco liable as well [para 12(b)]?


See Part 1, page 23

See Part 2, page 44


See Part 3, page 74

See Part 4, page 87




See Part 1, page 24

See Part 2, page 44


See Part 3, page 74

See Part 4, page 87



8



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 24

See Part 2, page 45


See Part 3, page 74

See Part 4, page 88




See Part 1, page 25

See Part 2, page 45


See Part 3, page 75

See Part 4, page 88



Q8 - Would a court grant specific performance as demanded by Lessor [para 12]?


See Part 1, page 25

See Part 2, page 46


See Part 3, page 75

See Part 4, page 88




See Part 1, page 26

See Part 2, page 47


See Part 3, page 75

See Part 4, page 88



9



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 27

See Part 2, page 47


See Part 3, page 75

See Part 4, page 88



Application of legal principles to the question

See Part 1, page 27

See Part 2, page 47


See Part 3, page 75

See Part 4, page 88



Q9 - Was Guarantor liable to Lessor under the guarantee?


See Part 1, page 27

See Part 2, page 48


See Part 3, page 76

See Part 4, page 89




See Part 1, page 27

See Part 2, page 48


See Part 3, page 76

See Part 4, page 89



10



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 28

See Part 2 page 49


See Part 3, page 76

See Part 4, page 89




See Part 1, page 28

See Part 2 page 49


See Part 3, page 76

See Part 4, page 89



Q10 - Was Supplier liable to Lessee [para 14], and, if so, on what theory?


See Part 1, page 28

See Part 2, page 49


See Part 3, page 77

See Part 4, page 89




See Part 1, page 28

See Part 2, page 50


See Part 3, page 77

See Part 4, page 89



11



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 28

See Part 2, page 51


See Part 3, page 77

See Part 4, page 89




See Part 1, page 29

See Part 2, page 52

See Part 7, 127 and See Part 8, page 146

See Part 3, page 77

See Part 4, page 89



Q11-Was Bank legally justified in declaring a default under the credit and security agreement and could it take extra-judicial action based


See Part 1, page 29

See Part 2, page 53


See Part 3, page 78

See Part 4, page 90




See Part 1, page 29

See Part 2, page 53


See Part 3, page 78

See Part 4, page 90



12



s

Mixed Legal

Jurisdictions

Legal Question



China

on the contract [para 16]?

Bibliographical law References(secondary sources) that apply.

See Part 1, page 29

See Part 2, page 54


See Part 3, page 78

See Part 4, page 90




See Part 1, page 29

See Part 2, page 54


See Part 3, page 78

See Part 4, page 90



Q12-Would each of the six lines of attach on Bank’s security collateral be upheld as a matter of law [para 18]?


See Part 1, page 30

See Part 2, page 54


See Part 3, page 79

See Part 4, page 90




See Part 1, page 30

See Part 2, page 54


See Part 3, page 79

See Part 4, page 90



13



s

Mixed Legal

Jurisdictions

Legal Question



China


See Part 1, page 30

See Part 2, page 54


See Part 3, page 79

See Part 4, page 91




See Part 1, page 30

See Part 2, page 54


See Part 3, page 80

See Part 4, page 91



Q13-Would Lessee’s set off claim [para 19(a)] be permitted?


See Part 1, page 31

See Part 2, page 64


See Part 3, page 81

See Part 4, page 91




See Part 1, page 31

See Part 2, page 65


See Part 3, page 81

See Part 4, page 91



Bibliographical law References (secondary sources) that

See Part 1, page 31

See Part 2, page 65


See Part 3, page 81

See Part 4, page 92



14



s

Mixed Legal

Jurisdictions

Legal Question



China

apply.


See Part 1, page 31

See Part 2, page 66


See Part 3, page 81

See Part 4, page 92



Q14-Would Supplier or Bank have a superior right to the payment under the assigned leasing contract?


See Part 1, page 32

See Part 2, page 66


See Part 3, page 82

See Part 4, page 92




See Part 1, page 32

See Part 2, page 67


See Part 3, page 82

See Part 4, page 92




See Part 1, page 32

See Part 2, page 67


See Part 3, page 82

See Part 4, page 92



Application of legal principles to

See Part 1, page 32

See Part 2, page 67


See Part 3, page 82

See Part 4, page 92



15



s

Mixed Legal

Jurisdictions

Legal Question



China

the question.

16


Part 1. English Law



Contract as an enforceable agreement, a contract is an agreement giving rise to obligations which are enforced or recognised by law; and

Illegality, the law may refuse to give full effect to a contract on the ground of illegality i.e. because the contract involves the commission of a legal wrong or is in some other way contrary to public policy.


Mohamed v Alaga & Co. [2000] 1 W.L.R. 1815; Hughes v Kingston upon Hull CC [1999] Q.B. 1193; see now para.11-

013; Bigos v Ousted [1951] 1 All E.R. 92; cf; Ashton v Turner [1981] Q.B. 137; and Pitts v Hunt [1991] 1 Q.B. 24.


Peel E, The Law of Contract (2011 Sweet and Maxell).


Prima facie, the supply and support and leasing contracts should have been binding and enforceable between the parties because all requisites of a contract were present. The fact that the only available copies of the contracts had forged signatures should not be relevant due to the fact that all parties assumed that the signatures were authentic and relied on them and it appears that on closing, the parties did sign the transaction documents and were only lost afterwards. Moreover, the parties performed their respective obligations in accordance with the terms provided in the Transaction Documents up until the moment the government finally notified the Supplier that the CAP was effectively now in the “restrictive list”. However, pursuant to the letter dated 10 February 2010, the government effectively required the Supplier to stop the use of CAP based on security risks. This effectively made the contracts “illegal and void” as there was a statutory provision that prohibited the commercialization of the CAP.



Rescission for misrepresentation, a misrepresentation makes the contract voidable at the option of the representee; Material misrepresentation, a misrepresentation has no legal effect unless it is material;Fraudulent statement, at common law a person who suffers loss as a result of acting in reliance on a fraudulent statement can recover damages in an action of deceit; andFiduciary relationship, a duty of disclosure may arise from the relationship of the parties.


With v O’Flannagan [1936] Ch. 575; McDowell v Fraser [1979] 1 Dougl. 247 at 248, per Lord Mansfield; Murad v Al-Saraj [2005] EWCA Civ 959; Polhill vs Walter (1832) 3 B. & Ad. 114; Suriya v Douglas v Midland Park Plc [1999] 1 All E.R. (Comm) 612; The Star Sea [2001] UKHL 1; [2003] 1 A.C. 469 at [50]; The Mercadian Continent [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep.

563 at [14]. Misrepresentation Act 1967.


Peel E, The Law of Contract (2011 Sweet and Maxell).


The non-disclosure by Supplier of the 10 February 2010 letter exposes the Supplier to liability to the Lessor based on the right of a person who suffers loss a result of acting in reliance on a fraudulent statement under an action of deceit. Indeed, the lack of disclosure of a letter that required the Supplier to stop marketing the CAP that was sent to it in the middle of negotiation of the Transaction Documents has to be construed as fraudulent. Even if there was no bad motive on the Supplier in the non-disclosure of the 10 February letter, the Supplier may be held liable under an action of deceit since a statement may be fraudulent (i.e. being able to market and offer the CAP to Lessee) although it was made without a bad motive and without intention to cause loss. Finally, assuming that there was an agency relationship between the Lessor and the Supplier, it could be argued that there was a fiduciary duty between them and therefore, the Lessor could also hold the Supplier liable based on the non-disclosure of the letter. However, the Lessor as agent of the Supplier would also be liable vis-à-vis to the Lessee for his own fraud in entering into the transaction.


18

Under a finance lease the lessor is the legal owner of the relevant equipment but economic risk attaching to the equipment is transferred to the lessee. During the term of this lease, the ownership title remains with the lessor as security for the obligations of the lessee. The lessee, alongside bearing the risk associated with ownership, exercises control over the equipment and claims the economic benefits of its use. In general under a finance lease, the lessor, as the legal owner, is entitled to claim for tax depreciation of the equipment. However, under certain finance leases known as hire-purchase transactions, where the title of ownership transfers to the lessee at the end of the term of the lease, the lessee is treated as the owner for tax depreciation purposes from the beginning of the lease. Under hire-purchase transactions the transfer of title may occur upon payment of the final rent instalment or through a purchase option, depending on the agreement between the parties. Even so, the lessor remains the legal owner during the period of the lease.

The risk that the lessee bears in respect of the equipment includes 'loss, destruction and depreciation (fair wear and tear only excepted) and of its obsolescence or malfunctioning…the costs of maintenance, repairs, and insurance'. 0


On Demand Information plc and another v Michael Gerson (Finance) plc and another [2002] UKHL 13; [2003] 1 AC 368 (HL)

Supply of Goods and Services Act 1982


Chitty on Contracts 31st Ed. Volume 2 – Specific Contracts, Chapter 33 – Bailment, Section 4 – Bailments for Valuable Consideration, Sub-section (c) – Hire, Sub-section (ii) – Equipment Leasing

Kronke H, Financial Leasing and its Unification by Unidroit – General Report (2011) Uniform Law Review 23

Adams J, Commercial Hiring and Leasing (1989, Butterworths Law)


The party responsible for the penalty is the owner of any system that uses progressive scanner 7, as stipulated in the government's letter of 10 February 2010. The Lessee argues that the Lessor is the formal owner and title owner of CAP, the system in this case that uses progressive scanner 7. The Lessor argues in turn that the Lessee is responsible for the penalty. The Lessor argues that this is the case because the Lessee is the economic owner of CAP based on the fact that, as a finance lease, the transaction was properly construed as sale to Lessee with Lessor retaining title as security for performance by Lessee; or alternatively, under the express terms of the leasing contract, the Lessee is responsible for all increased costs and has indemnified the Lessor for such costs.

0 Chitty on Contracts 31st Ed. Volume 2 – Specific Contracts, Chapter 33 – Bailment, Section 4 – Bailments for Valuable Consideration, Sub-section (c) – Hire, Sub-section (ii) – Equipment Leasing 33.

19

In the case of a finance lease, the economic risks rest with the lessee. Although the Lessor is the legal owner of CAP, under finance lease arrangements, the risks associated with ownership are passed on to the lessee. In the absence of further details about the leasing contract, in this case, the Lessee, as the economic owner of CAP, is responsible for the penalty. This will, however, ultimately be determined by the terms of the lease.



The doctrine of hardship, available in many civil law jurisdictions, does not exist under English law. The International Institute for the Unification of Private Law (UNIDROIT) Principles 2010 define hardship as existing where 'the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of performance a party receives has diminished'. Under the doctrine of hardship, a court may allow for contractual modification to reflect the change in circumstance.

Contractual clauses addressing hardship, such as force majeure clauses, can provide relief where it is not available under the common law or otherwise. It is well established under English law that damage to the profitability or performance of a contract due to a change in economic circumstances does not generally constitute frustration at common law or a force majeure.

The doctrine of frustration applies when a fundamental change of circumstance renders it physically or legally impossible for the parties to perform their obligations under the contract. It is not sufficient that it merely makes it more difficult for the obligations to be fulfilled. Frustration allows the contract to be set aside, relieving the parties of their future obligations. If a contract is found to have been frustrated it must come to an end and so it does not provide an option for modification of the contract.

The doctrine of misrepresentation can provide grounds for relief where a misrepresentation has induced the representee to enter into the contract. The misrepresentation may be fraudulent, negligent or innocent. Misrepresentation gives the representee the right to rescind the contract and in some cases damages may be awarded in lieu of or in addition to rescission. It does not allow for contractual modification.

Mistake arises where there has been a misapprehension relating to the facts or law at the time of the formation of the contract. The court will generally only grant relief under the doctrine of mistake where there has been a mistake based on a positive belief that turned out to be incorrect rather than a failure to consider a potential issue. The effect of common mistake is that the contract is found to be void ab initio. Rectification of written agreements exists under the doctrine of mistake but only to correct the written agreement to reflect what was actually agreed to between the parties, rather than to alter the terms of the initial agreement.

20


Tandrin Aviation holdings Ltd v Aero Toy Store LLC and another [2010] EWHC 40 (Comm)

Thames Valley Power v Total Gas and Power [2006] 1 Lloyd's Rep 441 Agip SpA v Navigazione Alta Italia SpA (The Nai Genova and the Nai

Superba) [1984] 1 Lloyd's Rep. 353 Bell v Lever Brothers Ltd [1932] AC 161 Great Peace Shipping v Tsavliris (International) Ltd [2002] EWCA Civ

1407


Chitty on Contracts 31st Ed. Volume 1 – General Principles, Part 2 – Formation of a Contract, Chapter 5 – Mistake

Chitty on Contracts 31st Ed. Volume 1 – General Principles, Part 2 – Formation of a Contract, Chapter 6 – Misrepresentation

Chitty on Contracts 31st Ed. Volume 1 – General Principles, Part 7 – Performance and Discharge, Chapter 23 – Discharge by Frustration


The Lessee requested judicial modification based on changed circumstances. The changed circumstances are the imposition of the monthly penalty and the prohibition of progressive scanner 7 from 1 March 2016. As a result of the monthly penalty, the cost to the Lessee of using the scanner will increase by 500%. In relation to the prohibition of the scanner, the Lessee will be required to use a less effective scanner, progressive scanner 8, and requests a reduction in rent to reflect this.

In the absence of further information, it can be assumed that the Supplier had not let the Lessor know of the 10 February 2010 letter prior to 5 January 2014, when the Lessee was also informed. The Lessor and the Lessee has entered into their initial contract on 15 February 2010, that is, 5 days after progressive scanner 7 had been placed on the restricted list. Despite the fact that neither party was aware of this situation at the time of entering into the contract and that it later resulted in a change of circumstance that brought economic hardship for the Lessee and in a contractual imbalance between the parties, there is no doctrine that provides the Lessee with the remedy of judicial modification of the contract.



1.1 REPUDIATORY BREACH

21

A RIGHT TO TERMINATE A CONTRACT MAY ARISE WHERE THERE THE FOLLOWING OCCUR:

Breach of a condition (as opposed to a warranty), which is a breach of a term that goes to the ‘root’ of a contract;

a refusal to perform, otherwise known as ‘renunciation’ of a contract; or

a breach which deprives the innocent party of substantially the hole benefit of the contract.

1.2 RENUNCIATION

As the Lessee’s statements at 7(b) and (c) refer to the Lessee’s future performance of its obligations to pay rent, it is appropriate to consider whether the Lessee is making a ‘refusal’ to perform (i.e. renouncing the contract), as the facts do not suggest that the Lessee has failed to perform its obligations to date.

Renunciation of a contract occurs when one party demonstrates an intention, not to perform his or her obligations under the contract or expressly states that they will not do so. The renunciation may occur before or at the time performance is set to take place. An absolute refusal by one party to perform his or her obligations will entitle the other party to treat themselves as discharged from their obligations under the contract. If there is no absolute refusal, the test is to ascertain whether the actions of the party in default would lead a reasonable person to conclude that the defaulting party does not intend to perform his or her obligations. If renunciation is found to have occurred on the basis of this test, the innocent party will be entitled to treat himself as discharged or may refuse to perform the contract unless the defaulting party complies with new conditions.

In the above circumstances, the contract will be deemed to be renounced, however a deliberate breach (of a part of the contract) which can be compensated for in damages while other provisions continue to be performed, is unlikely to amount to renunciation. In order to constitute renunciation, a refusal to perform must apply to all of the defaulting party’s obligations or at least those obligations which form the substantial purpose of the contract.


McNair (1944) 60 L.Q.R. 160, Twentieth Century Fox Film Corporation v British Telecommunications Plc (No.2) [2011] EWHC 2714 (Ch) and the Law Reform (Frustrated Contracts) Act 1943.

Freeth v Burr (1874) LR 9 CP 208, Forslind v. Bechely-Crundall1922 SC (HL) 173 and Seadrill Management Services Limited, Seadrill Larissa Limited v OAO Gazprom Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168, [2011] 2 All E.R. (Comm) 223.

c) Bibliographical references (secondary sources). W Carter and JE Stannard in Furmston (ed.) (2015) The Law of Contract Joseph Chitty (2012) Chitty on Contracts 31st Edition Halsbury’s Laws of England 5th Edition


22

The lessee’s statements at paragraphs 7(b) and 7(c), that the ‘leasing contract must be renegotiated with effect from 1 March 2016 to include a substantial reduction in rent to reflect the inferior quality of progressive scanner 8, and pending resolution of the matter, Lessee would hold back 50% of its rental payments’ are unlikely to amount to an advance repudiation of the leasing contract as stated by the Lessor. As discussed at 4.5 below, it is likely that the contract will become frustrated on 1 March 2016 when the government prohibits the use of Progressive scanner 7.

Under the rule established by Keeting, J. in Freeth v Burr (1874) LR 9 CP 208:

It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his part of the contract.

In addition, Keeting, J. stated that regard must be given to all the circumstances of the case. In Freeth v Barr, the defendant failed to deliver goods according to the terms of the contract as well as delayed delivery, and the plaintiff’s refusal to pay for the goods delivered was accompanied by a requisition to fix a day for delivery of further goods. On this basis, Keeting, J. held that renunciation had not occurred as there was no absolute refusal to perform the contract by the plaintiffs. Accordingly, the defendant had no right to treat the contract as rescinded.

Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 confirms the application of this rule and furthermore, asserts that whether or not a repudiatory breach exists is highly fact sensitive and comparison with other cases may be of limited value.

The Lessee’s statement at 7(c) does not show intention to altogether refuse to perform and to abandon the contract under the test for renunciation/repudiatory breach. The Lessee’s withholding of 50% of the rent is not a complete failure to perform and the Lessee’s demand that the contract should be re-negotiated with effect from 1 March 2016 is irrelevant given that the contract will become frustrated at this time. The Lessee does not show an intention to abandon the contract altogether and taking into account the circumstances, withholding part of the rent might be deemed reasonable by an appropriate court. In addition, the withholding of rent by the Lessee could be compensated for by damages and this supports the conclusion that the Lessee’s statement at 7(c) will not be treated as a renunciation of the contract.

It is also likely that the Lease will become frustrated by supervening illegality when the government prohibits the continued use of progressive scanner 7. Twentieth Century Fox Film Corporation v British Telecommunications Plc (No.2) [2011] provides authority that the Law Reform (Frustrated Contracts) Act 1943 (“the Act”) is likely to apply in circumstances of supervening illegality. The consequence of frustration is that the contract will be brought to an end immediately upon the happening of the event and both parties are released from further performance of the contract according to s.1(1) of the Act. In addition, courts do not have the power at common law to allow the contract to continue and to adjust its terms to new circumstances.

23

6. Assuming Lessee defaulted under the leasing contract, were Lessor's action seeking to terminate the contract [para 10] and demanding the return on CAP legally justified, taking into account Lessee’s asserted defenses and claims [para 15]?


Has a right to terminate the contract arisen? Can Lessor demand the return of CAP? Did the contract incorporate an implied term creating an obligation to

provide a 30 day grace period following an alleged default? Does the concept of good faith and/or fair dealing apply to the

contract?


Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556 Tyson v Smith (1838) 9 Ad, R v Stoke-upon-Trent Inhabitants (1843) 5

QB 303 and Cf Brown v IRC [1965] AC 244. Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556


Halsbury’s Laws of England 5th Edition JW Carter and JE Stannard in Furmston (ed.) (2015) The Law of Contract Joseph Chitty (2012) Chitty on Contracts 31st Edition


Has a right to terminate the contract arisen?

The term ‘Fundamental Breach’ is largely redundant under English law as it is treated as referring to a breach of a fundamental term. The concept of a ‘fundamental term’ has been superseded by reference to such terms as conditions (which go to the root of the contract) as opposed to warranties (terms which do not go to the root of the contract).

Photo Production Ltd v Securicor Transport Ltd [1980] established that fundamental breach is no more than a repudiatory breach. As the answer to question 5 above shows that the Lessee’s actions and statements referred to at 7(b) and 7(c) of the facts do not amount to a repudiatory breach by renunciation, it appears that there were not sufficient grounds for the Lessor to terminate the contract.

Can Lessor demand the return of CAP?

Lessor is still the legal owner of CAP and Lessee should return CAP upon termination of the contract. If Lessee refuses to return CAP following termination, Lessor could apply to the courts to get an order for CAP to be returned by ‘specific performance’.

24

Lessor could also apply for an injunction prohibiting Lessee’s use of CAP until an application for specific performance is granted.

Does the contract incorporate an implied term creating an obligation to provide a 30 day grace period following an alleged default?

As regards the 30 day grace period, English law provides that contracts may incorporate implied terms as a matter of custom, implication by law or fact. Terms may be applied by fact, in circumstances where the intention of the parties is clearly that such a term should have been incorporated, or by custom in cases where it is standard business practice to do so. The case law addressing incorporation of terms by custom can be found in Tyson v Smith [1838], R v Stoke-upon-Trent Inhabitants [1843] and Cf Brown v IRC [1965]. As the facts state the Lessor and Lessee discussed the incorporation of a 30 day grace period term during negotiations, but did not incorporate it in the Lease. It is not clear that their intention was to include it (as the facts do not support this). It may be that the incorporation of such a term is standard business practice and on this basis, such a term could be implied, in which case Lessee might be able to seek damages or counterclaim and set off the amount of damages awarded against any amount awarded to Lessor.

Does the concept of good faith and/or fair dealing apply to the contract?

The principle of good faith and/or fair dealing will not apply to the Lease as under English law there is only a very limited application of the principle of good faith to contracts and this is in relation to a narrow range of agreements such as agency, partnership, insurance and others involving fiduciary obligations (see Yam Seng v International Trade Corporation (2013).

Conclusion

Given the answers to the above questions, the Lessor's action seeking to terminate the contract was not just, however if the contract were validly terminated, Lessor would be entitled to demand the return of CAP.


a) Basic legal principles. A company is a legal entity distinct from its individual members. As a

result, the creditors of a company are required to rely on the company's assets alone. Where a corporate group exists, the general principle is that each of the companies within the group is a separate entity each with their own rights and liabilities. However, the court may be willing to pierce the corporate veil in certain circumstances. It is not sufficient that it is in the interest of justice alone to do so.

25

The most commonly accepted circumstance for piercing the corporate veil is where the corporate structure is being used to shift legal liability from one entity to another. Where a company is merely a façade to avoid contractual obligations or liabilities, the corporate veil may be lifted. This includes, for example, where an entity is used as a device for avoiding limitations imposed by law.0 It has been interpreted as applying to situations where the company has been used as a device to escape existing liabilities as opposed to future liabilities. In reaching a decision the motive of those behind the entity is relevant.

An entity of a group can be found to be liable even without the corporate veil being pierced. This may occur, for example, in the existence of an agency relationship between the parent and subsidiary company. The existence of such relationship is not a presumption and depends on all aspects of the relationship, not just the control and ownership of the company. It is necessary that there is evidence of an express intention to create an agency relationship between the entities. The burden on the claimant of proving the relationship is high.

A parent company may also be liable in negligence for injuries caused to the employee of its subsidiary without the corporate veil being lifted. The existence of liability depended on the degree of the parent's involvement. The decision is fact-dependent and must be based on more than generalised evidence of a group identity.


Firestone and Rubber Co Ltd v Llewellin (Inspector of Taxes) [1957] 1 All ER 561, [1957] 1 WLR 464, HL

Smith, Stone and Knight Ltd v Birmingham Corpn [1939] 4 All ER 116 Re FG (Films) Ltd [1953] 1 All 615, [1953] 1 WLR 483 Kodak v Clark [1903] 1 KB 505 CA Gramophone & Typewriter v Stanley [1908] 2 KB 89 CA Atlas Maritime Co v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769 CA

(Civ Div) Adams v Cape Industries plc; Re Polly Peck International (No 3) [1996]

2 All ER 433 Yukong Line v Rendsburg Investment [1998] 1 WLR 294 Gilford Motor Co Ltd v Horne [1933] Ch 935 Albacruz v Albazero, The Albazero [1977] AC 774 Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 Woolfson v Strathclyde Regional Council [1978] SLT 159, HL Salomon v Salomon & Co Ltd [1897] AC 22 Chandler v Cape [2012] EWCA Civ 525 Thompson v the Renwick Group plc [2014] EWCA Civ 635 Jones v Lipman [1962] 1 All ER 442, [1962] 1 WLR 832

c) Bibliographical references (secondary sources). Reynolds F, Bowstead and Reynolds on Agency (2014, Sweet and

Maxwell 20th ed) Halsbury's Laws of England/Companies (Volume 14(2009) Paras 1-692;

Volume 15 (2009) Paras 693-1841)/2. Companies Regulated by the Companies Acts/(3) Company Formation and Registration/(ii)

0 Halsbury's Laws of England/Companies (Volume 14(2009) Paras 1-692; Volume 15 (2009) Paras 693-1841)/2. Companies Regulated by the Companies Acts/(3) Company Formation and Registration/(ii) Formation/C. Incorporation and its Effects/121. Piercing the Corporate Veil 121.

26

Formation/C. Incorporation and its Effects/121. Piercing the Corporate Veil.


InvestX is a new subsidiary of Investco. Investco had been advised to lease rather than purchase CAP, due to the risk associated with the upcoming government enquiry. It was also advised that the lease arrangement should be between two parties without knowledge of the associated risks. In this case, InvestX was used for this purpose.

Under the common law a parent company is liable for the actions of its agent when it is acting within the scope of authority. Courts are reluctant though, to ignore the separate existence of a subsidiary entity and therefore to recognise the existence of an agency relationship. Control and ownership are relevant considerations but are not sufficient alone to establish an agency relationship. In this case, InvestX is a wholly owned subsidiary of Investco. On the facts it is not possible to determine the level of control that Investco had over InvestX. There is also no evidence that InvestX was established with the intention of operating as the agent of Investco. In the absence of further information, it is unlikely that Investco and InvestX would be found to have agency relationship and therefore that Investco would be held to be directly liable for the actions of InvestX on these grounds.

If InvestX is found by the court to be merely a façade for Investco to avoid its liabilities, the corporate veil may be lifted. This would allow the assets of InvestX to be applied in satisfying the debts of Investco. In order for the court to be willing to lift the corporate veil, the acts of Investco need to be outside the ordinary course of business. InvestX must have been used to protect Investco from the liability and the liability needs to have arisen prior to the use of the InvestX. In this case, Investco used InvestX to enter into the lease as it was advised that it should use a company that did not have knowledge of the risk involved. It is unlikely that the court would be willing to lift the corporate veil in this situation. There is no evidence that InvestX was used to defraud creditors or that Investco began using InvestX after the liability had arisen for the purpose of avoiding it. Whilst Investco was aware of the regulatory risks associated with the transaction and did not pass on this knowledge to InvestX, it is likely that the court would view these acts as being within the ordinary course of business.



Specific performance is an equitable remedy awarded in the case of an actual or threatened breach of conduct. It is considered to be an exceptional remedy and the court has discretion whether to grant it. It is not the default remedy for breach of contract and instead, the test has traditionally been whether damages at common law are adequate. This test has now shifted to whether the claimant should be confined to a remedy in damages.

27

Specific performance is a remedy in personam, that is, attaching to the defendant rather than his or her property. Generally, it will not be granted to enforce a contract where it requires the defendant to maintain a personal relationship with the claimant. In addition, the court will not grant specific performance if it requires continuous acts and ongoing supervision. Furthermore, it will not be granted where the performance would result in hardship to the defendant to the extent that it would be inequitable to enforce the contract.

The contract must fall within the category of contract allowing specific performance, be is valid in its form, have been made between competent parties, and be unobjectionable in its nature and circumstances.0

In reaching its decision of whether to grant specific performance, the court will take into account lack of mutuality. That is, the court may not grant specific performance where the claimant has failed to perform obligations under the contract and where the court cannot ensure that these obligations will be fulfilled.

In addition, the court will not generally grant specific performance of part of a contract if it cannot grant performance of the contract as a whole. However, where the contract can be divided and treated as separate parts, it can be ordered for a part and not another.

The defendant may rely on a number of recognised equitable defences. Under such circumstances, the court may find it to be inequitable to enforce specific performance. There are not set categories for refusing specific performance but some instances include where the claimant has failed to perform conditions of the contract.

Furthermore, misrepresentation whether fraudulent, negligent or innocent, by the claimant may result in specific performance being unenforceable. If the defendant has a right to rescission as a result of the misrepresentation specific performance will not be granted. It may also be denied though, where rescission was not or is no longer possible, for example where the misrepresentation is not serious enough to result in rescission.

A claimant is required to elect between a claim for specific performance and damages. However, damages may be awarded in addition to specific performance where part of a contract is specifically enforced and the remainder claimed in damages.


Co-operative Insurance Society v Argyll Stores [1998] AC 1 Zucker v Tyndall Holdings plc [1993] 1 All ER 124 De Franceso v Barnum (1890) 45 ChD 430 Price v Strange [1978] Ch 337 Evans Marshall & Co Ltd v Bertola SA [1973] 1 All ER 992 Wedgwood v Adams (1843) 6 Beav 600v Clayton Pollard v Clayton (1855) 1 K & J 462 Gervais v Edwards (1848) 2 Dr & War 80 Wilkinson v Clements (1872) 8 Ch App 96

0 Halsbury's Laws of England/Specific Performance (Volume 95 (2013))/1. The Remedy and its Scope/(1) The Nature of Specific Performance/301. The Remedy by Specific Performance 301.

28

Brereton v Cowper (1972) 1 Bro Parl Cas 211 Farrant v Olver (1922) 91 LJ Ch 758

c) Bibliographical references (secondary sources). Chitty on Contract 31st Ed. Volume 1 – General Principles, Part 8 –

Remedies for Breach of Contract, Chapter 27 – Specific Performance and Injunction


In this case the Lessor is seeking specific performance of a clause in the leasing contract requiring the Lessee to publish a public notice to help protect the reputation of the Lessor. The Lessee has breached this clause of the contract by refusing to fulfil its obligations under the clause. Specific performance is an exceptional remedy, where damages are the default remedy. Generally a claimant is required to choose between making a claim for specific performance and damages. A court is also not usually willing to grant specific performance for part of a contract when it cannot grant specific performance of the contract as a whole. In this case, given that the Lessor has brought legal action against the Lessee for breach of contract it is likely that the court would include the Lessor's claim for breach of this clause together with the broader claim for damages. Furthermore, the Lessor has brought a claim for termination of the contract, whereas specific performance requires that the contract remains in place. Although courts may opt to divide a contract into parts and award specific performance to some part and not another, awarding specific performance of the relevant clause in this case would be inconsistent with the termination of the contract.



Performance of contract; the order in which contracting parties must perform their respective obligations depending on the distinction between conditions precedents, concurrent conditions, and independent promises; and

Condition precedent; the performance by one party, A, is a condition precedent to the liability of the other, B, when A has to perform before B’s liability accrues.


Société Générale de Paris v Milders (1883) 49.L.T. 55 at 59; cf.; Pioneer Concrete (UK) Ltd v National Employers Mutual, etc. [1985] 2

All E.R. 395; Kazakstan Wool Processors (Europe) Ltd v Nederlandsche

Credietverzerking Maatschappij NV [2000] C.L.C. 822.


29

Peel E, The Law of Contract (2011 Sweet and Maxell ); Standard J, Delay in the Performance of Contractual Obligations (2007

Oxford University Press); Carter, J.W., Breach of Contract (1984 The Law Book Company Limited).


Guarantor was not liable to Lessor under the guarantee based on the fact that the calling of the guarantee was conditional to the Beneficiary’s reasonable endeavours to pursue the Lessee under the Lease before the guarantee is called (see Appendix 1-B, Guarantee, “Form of Guarantee”). The guarantee appears to not have been a so-called “on demand guarantee” whereby a guarantor is required to pay a guarantee to a beneficiary on its first demand in case the primary obligor fails to perform a contract and thus required prior actions by the Beneficiary in order to be called. From the facts presented in the “Archetype Transaction” (see Annex III), it appears that the Beneficiary did not carry out reasonable actions to pursue the Lessee save for the filing of letters that were themselves contested by the Lessor. Therefore, it was not possible for the Guarantor to ascertain whether indeed there was a default of the Lessee under the Lease.



Privity of contract; the relationship between the parties to a contract, allowing them to sue each other but preventing a third party from doing so;

Agency; the relationship which arises when one person (the principal) authorises another (the agent) to act on his behalf and the agent agrees to do so; and

Liability of principal to third party; a principal, whether disclosed or not, is generally liable to the third party.


Boyter v Thomson [1995] 2 A.C. 629 at 632; Summers v Solomon (1857) 7 E. & B. 879; cf. Pole v Leask (1862) 33

L.J.Ch. 155; The Unique Mariner [1978] 1 Lloyd’s Rep. 438; Waugh v H B Clifford & Sons [1982] Ch. 374; First Sport Ltd v Barclays Bank Plc [1993] 1 W.L.R. 1229.


Peel E, The Law of Contract (2011 Sweet and Maxell ); Merkin R, Privity of Contract (2000 LLP).

30


Under a restrictive interpretation of the privity of contract doctrine, the Supplier should not be held liable to Lessee because its contractual relationship was only with the Lessor based on the agreed structure described in paragraphs 2 and 3 of the “Archetype Transaction” (see Annex III). Moreover, the Lessor was an “independent intermediary leasing company” that sought third-party financing to enter into the transaction providing additional substance to the fact that the Lessor was not an agent of the Supplier and thus acted independently from it. However, it could be construed that the structure of the transaction was merely a vehicle to overcome regulatory hurdles and that the true intent of the parties involved (i.e. the Supplier and the Lessee) was to conclude agreements with each other. Therefore, assuming that Lessor indeed acted as an agent of the Supplier in the lease of the CAP, then, Lessee could have a direct action against the Supplier and therefore could be held liable to the Lessee for damages arising from breach of its obligations as set out in the Transaction Documents.


a) Basic legal principles. The Bank was the Facility Agent in respect of the Credit and Security

Facility (the "Facility Agreement") entered into by the Lessor as Borrower.

The Facility Agreement set out what would constitute events of default under it, which included the Lessor failing to meet the provisions of any of its Financial Covenants.

The Facility Agreement also stated steps that could be taken by the Bank in such an event of default.


n/a


n/a


Further information on the actual financial situation of the Lessor would be required to confirm whether it had in fact defaulted under the Facility Agreement.

On the facts available it would appear that the Lessor may be in breach of its Financial Covenant to ensure that the amount of its liabilities (including prospective and contingent liabilities) does not exceed the value of its assets by virtue of:

31

12. Would each of the six lines of attack on Bank’s security collateral be upheld as a matter of law [para 18]?

The bank can justify declaring a default on the basis of a material adverse material change as a result of the cumulative effect of the claims brought by the parties that are leasing from the Lessor. However, it can be resisted on the basis that a default under the Lease Agreement is not automatically considered to be an Event of Default under the Credit and Security Facility Agreement.

the withholding of monthly rental payments to the Lessor by the Lessee;

the possible withholding of rental payments by other lessees; the burden of the penalty payable to the government by "the owner of

any system that uses progressive scanner 7"; and the Lessor's contingent liabilities in respect of potential claims against

it by the Lessee and other lessees.

The Lessor's breach of this Financial Covenant would amount to an Event of Default, entitling the Bank to "enforce any or all rights, remedies and powers available".


The Bank was the Facility Agent in respect of the Credit and Security Facility (the "Facility Agreement"), which it entered into as Agent of several lenders with the Lessor as Borrower.


Requirements for assignments of contractual rights, s.196 Law of Property Act 1925.

Requirements as to registration of floating charges – Companies Act 2006



In taking judicial and extra-judicial action against the Lessor to repossess security, the Bank was acting in its capacity as Security Trustee for the lenders and not as principal (this being subject to the terms of the arrangement between the Bank and those lenders). Its claim as Security Trustee was therefore valid.

The Facility Agreement provided for a floating charge over the assets of the Lessor and as such the Bank is not prevented from enforcing the security due to certain security collateral not being specifically identified.

As notice of assignment was not sent to the Lessee's last known place of business, the Lessee is not deemed to have been served the notice of assignment. The benefit of the lease has not therefore been

32


effectively assigned to the Bank under the provisions of the Law of Property Act 1925.

There is no need for a specific sum to be identified as the maximum sum secured under a floating charge. This does not prevent the Bank from enforcing the security.

It is unclear when the Facility Agreement came into being (some time before February 2010) and as such unclear when the floating charge over the Lessee's assets was created. If the Facility Agreement came into being after 1 October 2009, then the floating charge would have to be registered at Companies House (Companies Act 2006 s.860(7)(g)).

There are no public policy restrictions on the ability of two commercial entities to freely agree the terms of financing arrangements between themselves. The Bank is not prevented from enforcing security due to high interest rates payable under the Facility Agreement.


Assignment subject to equities, an assignee takes “subject to equities”, i.e. subject to any defects in the assignor’s title and subject to certain claims which the debtor has against the assignor; and

Ownership of contractual rights; the assignor must own the assigned right.


Ord v White (1840) 3 Beav. 357; Mangles v Dixon (1852) 3 H.L.C. 702 at 731; Law of Property Act 1925, s.136(1); Ex parte Nichols (1883) 22 Ch D 782; Ex parte Moss (1884) 14 QBD 310; Wilmot v Alton [1897] 1 QB 17; Robinson v Podosky [1905] State Reports (Queensland) (QSR) 118; and Re Inglis (1932) 5 Australian Bankruptcy Cases.

c) Bibliographical references (secondary sources). Peel E, The Law of Contract (2011 Sweet and Maxell ); and Tolhurst G, The Assignment of Contractual Rights (2006 Hart

Publishing).


Lessee’s set off claims against the insolvency/bankruptcy estate and against the Bank (to the extent it had a proper assignment of the leasing contract) should be permitted. The Lessee’s set off claim against the insolvency/bankruptcy would be based on the general capacity of a party to set off its liabilities against the other party vis-à-vis its own liabilities against the party and subject to the order of priority order of claims brought by other unsecured creditors. On the other hand, the Lessee’s set off claim against the Bank (as assignee)

33


would be based on an “assignment subject to equities” whereby the Lessee would be able to set off its damages claim against the Lessor (as assignor) arising from the CAP lease agreement because the Bank takes the assignment subject to the claims brought by the Lessee. An “assignment subject to equities” operates whether or not the assignee (i.e. the Bank) knew of the existence of the claims once he took the assignment of the Lessor’s rights against the Lessee. However, based on the timeline of events provided in “Archetype Transaction” (see Annex III), the Bank seems to have been aware of the claims brought by the Lessee against the Lessor and in any case, this would only be relevant if the claims brought against the Lessor arise from other transactions different from the lease agreement, which is not the case.

In addition, the matter of the ownership of the right is particularly relevant in case of a bankruptcy proceeding, since if there is a present assignment of an existing accrued right to payment which satisfies the validity requirements, it does not matter that the date for payment arises after commencement of the bankruptcy proceeding so long as the payment is earned by the assignor (i.e. Lessor) and not the trustee in bankruptcy as a result of the leasing contract.


Ownership of contractual rights; the assignor must own the assigned right.


Schneideman v Barnett [1951] NZLR 301.


Peel E, The Law of Contract (2011 Sweet and Maxell ). Tolhurst G, The Assignment of Contractual Rights (2006 Hart

Publishing).


Assuming that the “automatic assignment” provided in the supply and support contract was valid, the Supplier appears to have a superior right to the payment under the assigned leasing against the Bank based on the fact that the Lessor had the ownership of the contractual rights at the moment the Transaction Documents were concluded. It seems that after the “automatic assignment” of the payments under the leasing agreement, the Lessor had no capacity to actually assign the rights to the Bank under the Facility Agreement to triggering the security. Indeed, pursuant to the Facility Agreement, the Bank had a “first priority security interest in the Lessor’s right, tile and interest in, to and under any Lease”, but such right was already being assigned to the Supplier under the supply and support contract. Therefore the Bank is left with no proper rights over the payments arising from the

34

lease agreement and can solely rely in the other Security Documents provided in the Facility Agreement.

35

Part 2. New York Law



Enforceability of a Supply and Support Contract

Except as otherwise provided by the Statute of Frauds as set forth in the N.Y.U.C.C., a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.

That a signature is not notarized or witnessed does not make it unenforceable. Between merchants, if within a reasonable time a writing in confirmation of

the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of the Statute of Frauds against such party unless written notice of objection to its contents is given within ten days after it is received.

A contract that does not satisfy the requirements of the Statute of Frauds but which is valid in other respects is enforceable (a) if the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract for sale was made, or (b) with respect to goods for which payment has been made and accepted or which have been received and accepted.

There is an obligation to negotiate in good faith. A buyer that is fraudulently induced to enter into a contract by seller may sue

for rescission of the contract without waiving a claim for damages for breach. Under the N.Y.U.C.C. provisions governing sales contracts, a buyer may revoke

its acceptance of an item whose non-conformity substantially impairs its value to buyer if it has accepted it without discovery of such non-conformity if its acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances, and if buyer acts within a reasonable time after discovery of the non-conformity.

Enforceability and Characterization of a Lease

Sales contracts and lease contracts for tangible personal property are governed by the Uniform Commercial Code, as adopted in New York (N.Y.U.C.C.). Both types of contracts must contain consideration in order to be valid contracts.

In respect of a lease contract, a number of important features of enforceability may have different results depending on whether the lease is characterized as a true lease or as a lease that is a security interest and the lessee keeps the residual interest. This principle has ramifications in many of the following questions.

If it is determinable at the inception of the lease that a meaningful residual value in the goods would remain after the lease term and return of the goods to the lessor, then the lease is to be characterized as a true lease. If not, then the lease is likely to be characterized as a security interest.

36

Whether a lease transaction creates a lease or security interest is a question of the application of the transaction facts to the principles set out in N.Y.U.C.C. 1-203, which defines a security interest.

A lease transaction creates a security interest governed by Article 9 of the N.Y.U.C.C. on Secured Transactions (rather than a “true” lease governed by Article 2A of the N.Y.U.C.C. on Leases) if “the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the Lessee” and one of the following alternative scenarios exists at the inception of the lease contract:

(i) the original lease term equals or exceeds the useful life of the goods; or

(ii) at the end of the term, the Lessee is bound to renew the lease for the useful life of the goods, or to become the owner; or

(iii) the Lessee has the option to renew or to purchase the goods for “no additional consideration” or nominal additional consideration.

N.Y.U.C.C § 1-203(c) qualifies the foregoing by stating scenarios in which a transaction does not create a security interest “merely because it provides” that the lessee has certain lease obligations that are listed.

A finance lease is a subset of a true lease under N.Y.U.C.C. § 2-A-201. In order to constitute a finance lease, the lessor must not select, manufacture or supply the equipment described in the lease and must acquire the equipment in connection with the lease, and either:

(a) the lessee has been provided a copy of the supply contract through which the lessor acquired the equipment;(b) the lease has not become effective prior to the lessee approving the supply contract;(c) the lessee has received complete information about what equipment warranties are provided and who stands behind them; or(d), if the lease is not a consumer lease, prior to signing the lease, the lessor must have informed the lessee in writing:

(i) of the identity of lessor’s equipment supplier (unless the supplier was selected by the lessee);(ii) that the lessee is entitled under Article 2-A to the promises and warranties provided to the lessor by the supplier; and(iii) that the lessee can communicate directly with the supplier in order to receive information about supplier promises and warranties (including any disclaimers)

A lessee under a finance lease is a beneficiary of any promises and express or implied warranties in the supply contract made to the lessor, subject to the terms of the warranty and the supply contract, and any defenses arising therefrom. Such a benefit to the lessee does not modify the rights and obligations of the parties to the supply contract.

However, if a lease is determined to be a finance lease, all implied warranties against infringement, of merchantability, and of fitness for a particular purpose are automatically excluded as a matter of law.

Whereas it is standard practice for leases to be irrevocable and non-cancellable in all events, if it qualifies as a finance lease this is automatic.

In the event that the lease that a creates a security interest, any disclaimer of warranties by a lessor would be enforceable under N.Y.U.C.C. Article 2 (which governs conditional sales).

37


N.Y.U.C.C. § 1-203. N.Y.U.C.C. § 2-201 N.Y.U.C.C. § 2-608 N.Y.U.C.C. § 2-721 N.Y.U.C.C. § 2-A-201 N.Y.U.C.C. § 2-A-209(1)-(2) N.Y.U.C.C. § 2-A-407

Clearview Concrete Products Corp. v. S. Charles Gherardi, Inc., 88 A.D.2d 461 (1982), RAA Management, LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012), Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007), and Bates Advertising USA, Inc. v. McGregor, 282 F. Supp. 2d 209 (S.D.N.Y. 2003) (rescission and fraud)

The Inn Between, Inc. v. Remanco Metropolitan, Inc., 662 N.Y.S.2d 1011 (1997) (revocation of acceptance)

Computerized Radiological Services v. Syntex Corp., 786 F.2d 72 (1986) (continued use after revocation invalidates revocation).

Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir. 1989) (In New York, a duty to negotiate in good faith is a duty that binds parties to incomplete agreements by the parties’ mutual commitments to negotiate in good faith to reach final agreements within the scope of the preliminary agreement.)

Ogden Martin Sys., Inc. v. Tri-Cont’l Leasing Corp., 734 F. Supp. 1057, 1066-67 (S.D.N.Y. 1990) (“In a preliminary binding agreement there need not be a commitment to the underlying contract, but rather a commitment to negotiate the open issues of that agreement in good faith.”). In determining whether a duty to negotiate in good faith exists, courts look to the context of the negotiations. Courts consider “whether there are open terms, whether there has been partial performance, and the necessity or practice of the industry of putting an agreement in final form”. Ogden, 734 F. Supp. at 1067 (citing Arcadian, 884 F.2d at 72).


Michael W. Galligan, Choosing New York Law as Governing Law for International Commercial Transactions, 26 AUT Int’l L. Practicum (2013). Edwin E. Huddleson, III, Old Wine in New Bottles: UCC Article 2A-Leases, 39 Ala. L. Rev. 615 (1988). Roslyn K. Myers, § 2-201. Formal Requirements; statute of frauds – Case commentary, 5PT1 West’s McKinney’s Forms Uniform Commercial Code § 2-201 (last updated Feb. 2015). Gary L. Monserud, Measuring Damages After Buyer’s Affirmation of an Article 2 Sales Contract Induced by Fraud: A Study of Code Jurisprudence in Light of Section 2-721 and Pre-Code Conflicts in Remedial Theory, 1996 Colum. Bus. L. Rev. 423 (1996); Richard M. Contino, Overview of U.C.C. Article 2A, Goldbook: New York Commercial Law, § 2A-5[e]-[g] (Bender 2013 ed.) (detailed description and applicability of relevant finance lease provisions in Article 2-A).


38

The enforceability of the supply and support contract and the leasing contract depends on which party is attempting enforcement.

If Lessor sought to enforce the supply and support contract (which was signed by Supplier) against Supplier or the leasing contract (which was signed by Lessee) against Lessee, the absence of an authentic signature by Lessor does not render the contract unenforceable as against the Supplier or the Lessee.

If Supplier sought to enforce the supply and support contract against Lessor, or Lessee sought to enforce the leasing contract against Lessor before any performance or acts of reliance by any party, or before subsequent ratification by Lessor, Lessor may have an argument that there was no “meeting of the minds” because it had never evidenced its agreement to the supply and support contract or the leasing contract. Lessor, however, would in that circumstance face a claim for failure to negotiate in good faith, since it agreed to the term sheet and evidenced an intent to proceed, on which the other parties relied.

As a separate basis of enforceability, the leasing contract would be enforceable against Lessor when it brought a legal action against Lessee for damages for breach of contract and termination of the contract.

As a separate basis of enforceability, the supply and support contract would be enforceable against Lessor “with respect to goods for which payment has been made and accepted or which have been received and accepted”, unless Lessor could establish that it was fraudulently induced to enter into the contract by Supplier, in which case Lessor could rescind the contract if/when Lessor learned of Supplier’s intentional or negligent non-disclosure of the 10 February 2010 letter. On a similar basis, Lessor could revoke its acceptance of the CAP if its value is substantially impaired by the inability to use progressive scanner 7, and if Lessor acts promptly after discovering the problem.

As a separate basis of enforceability, the leasing contract would be enforceable against Lessee “with respect to goods that have been received and accepted by the lessee.”

The characterization of the leasing contract will be applicable in connection with other questions below.



In order to establish fraud, a party must establish: a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party in the misrepresentation or material omission, and injury. Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996).

A claim for fraud by omission must additionally establish that the other party had a duty to disclose the concealed fact.

A contract induced by fraud or misrepresentation is voidable and subject to rescission.

39

A claim for intentional or negligent misrepresentation requires the plaintiff to demonstrate: (1) the existence of a special relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was materially incorrect; and (3) reasonable reliance on the misinformation to plaintiff’s detriment.

Elements for equitable estoppel with respect to the party estopped: (1) conduct amounting to a false representation or concealment of material facts; (2) intention that such conduct will be acted upon by the other party; and (3) knowledge of the real facts. Elements with respect to a plaintiff asserting estoppel: (1) lack of knowledge of the true facts and of the means of knowing the true facts; (2) reliance upon the conduct of the party to be estopped; and (3) prejudicial change in plaintiff’s position in reliance on the estopped party’s conduct.


• N.Y.U.C.C. § 2-721 (party fraudulently induced to enter into contract may sue for rescission and damages)

• Merrill Lynch & Co. v. Allegheny Energy, Inc. (500 F.2d 171, 184 (2d Cir. 2007) (“New York distinguishes between a promissory statement of what will be done in the future that gives rise only to a breach of contract cause of action and a misrepresentation of a present fact that gives rise to a separate cause of action for fraudulent inducement”)

• Clearview Concrete Products Corp. v. S. Charles Gherardi, Inc., 88 A.D.2d 461 (1982) (discussing abandonment of rescission claims, and noting that: “Upon discovering fraud, a purchaser may tender return of the property and seek rescission or he may retain the property and seek recovery of damages deriving from the fraud.”)

• M & T Bank Corp. v. LaSalle Bank Nat. Ass’n, 852 F. Supp. 2d 324, 343 (S.D.N.Y. 2012) (contract induced by fraud or misrepresentation is voidable and subject to rescission);

• Congress Fin. Corp. v. John Morrell & Co., 790 F. Supp. 459, 472 (S.D.N.Y. 1992) (duty to disclose a necessary condition for fraud by omission).

• Tucker v. Wyckoff Heights Medical Center, 52 F. Supp. 3d 583, 594 (S.D.N.Y. 2014) (misrepresentation must involve material fact)

• J.A.O. Acquisition Corp. v. Stavitsky, 863 N.E.2d 585, 588 (N.Y. 2007) (elements of negligent misrepresentation claim).

• In re Vebeliunas, 332 F.3d 85, 93-94 (2d Cir. 2003) (equitable estoppel elements).


Gary L. Monserud, Recession and Damages for Buyer Due to Seller’s Fraudulent Inducement of an Article 2 Contract For Sale, 1998 Colum. Bus. L. Rev. 331 (1998). Kimberly D. Krawiec and Kathryn Zeller, Common-Law Disclosure Duties and the Sin of Omission: Testing the Meta Theories, 91 Va. L. Rev. 1795 (2005). N.Y. Practice Series – New York Law of Torts, § 7.17 Breach of duty of care for negligent misrepresentation of material facts, 14 N.Y. Prac., New York Law of Torts § 7.17 (last updated Aug. 2014). Carmody-Wait 2d New York Practice with Forms, Fraud in inducement, 5 Carmody-Wait 2d § 29:237 (last updated June 2015).

40


• Supplier is likely subject to liability for claims by the Lessor for rescission and/or damages based on fraud or negligent misrepresentation. Supplier also may be equitably estopped from asserting various claims or defenses against Lessor based on its omission of a material fact prior to the signing of the supply and support contract.

• Supplier is possibly subject to liability for fraud claims by the Lessee on the basis that Supplier knew that Lessee would rely on the nondisclosure of the government’s letter stating that progressive scanner 7 had been placed on the restricted list. Alternatively, Supplier may be able to establish third-party fraud liability against Supplier based on having been damaged by Lessor’s fraudulently-induced decision to purchase and lease the CAP to Lessee. See Answer to Question 10 below for further details.



Under a true lease, the lessor retains complete ownership of the leased goods. No ownership interest passes to the lessee.

Under a finance lease, which is a type of true lease, the lessor retains ownership of the goods but the lessee is the beneficiary of any promises and/or warranties made to the lessor in the supply agreement.

If Lessee has a security interest in the goods, Lessee would have an ownership interest in the goods under the N.Y.U.C.C.

Contractual indemnity permits a party to recoup claims, losses, or damages as set forth in the contract.

Common law indemnity is an equitable remedy reflecting that it is “nothing short of simple fairness to recognize that a person who has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity.” The gravamen of an action for indemnity is that both parties are subject to a duty to a third person under such circumstances that one of them, as between themselves, should perform it rather than the other.


N.Y.U.C.C. § 1-201(35) (definition of security interest); N.Y.U.C.C. § 1-203 (lease distinguished from security interest); N.Y.U.C.C. § 2-A-103(j) (definition of lease); N.Y.U.C.C. § 2-A-103(g) (definition of finance lease). N.Y.U.C.C. §2-A-209 (lessee benefits under finance lease). N.Y.U.C.C. § 9-601 (rights of secured party upon default) Chemical Bank v. Stahl, 272 A.D.2d 1, 19 (N.Y. App. Div. 2000) (explaining

rationale behind common law indemnity cause of action). Raquet v. Braun, 681 N.E.2d 404, 407 (N.Y. 1997) (everyone is responsible for

the consequences of his own negligence, even if another party is initially required to pay the damages for such negligence)

Broyhill Furniture Industries, Inc. v. Hudson Furniture Galleries, LLC, 61 A.D.3d 554, 55 (N.Y App. Div. 2009) (citing Rosado v. Proctor & Schwartz, Inc., 484

41

N.E.2d 1354, 1356 (N.Y. 1985)) (“An obligation to indemnify may be implied to prevent unjust enrichment.”).


2 James J. White & Robert S. Summers, Uniform Commercial Code § 13.3 (4th ed. 1995). Michael J. Abatemarco and Anthony Michael Sabino, “True Lease” Versus Disguised Security Interest: Is the United Trilogy Truly the Last Stand, 40 No. 4 UCC L. J. Art. 2 (Spring 2008). Barry A. Graynor, Edwin E. Huddleson, III, Lawrence F. Flick, II and Stephen T. Whelan, The Uniform Commercial Code Survey: Leases, 60 Bus. Law. 1659 (2005). New York Practice Series – New York Contract Law, § 4.22 Indemnity, 28 N.Y. Prac., Contract Law § 4.22 (last updated Apr. 2015).


• The government imposed the penalty on “the owner of any system that uses progressive scanner 7.” If the leasing contract is considered to be a true lease, Lessor retains complete ownership and is thus responsible to the government for the penalty in the first instance as the “owner.” Also, if the lease provides that it is a finance lease, then it will be treated as a true lease regardless of how it might otherwise be characterized. It is likely that Lessor would be able to pass the cost on to Lessee by virtue of an indemnification provision. If the lessor is determined to have a lease that is a security interest, then the lessee will likely be considered the owner for purposes of the government penalty. However, a government-imposed penalty may not necessarily follow a characterization principle under the N.Y.U.C.C. Although the bank has a security interest in the goods, if Lessor is the owner under a true lease principle, the bank is not considered an “owner” under the N.Y.U.C.C. unless and until such time that it forecloses on the collateral.

• To the extent that the supply and support contract contained an indemnification clause in favor of Lessor for any damages or claims related to the goods, Supplier would be responsible to indemnify Lessor for any losses incurred by Lessor as a result of the penalty.

• Lessor may be entitled to common law indemnification if there is no indemnification clause in the supply and support contract.



• If a lessor fails to deliver goods in conformity with a lease contract or repudiates the lease contract, a lessor is in default under the lease contract and the lessee may cancel the lease contract, recover damages as to all goods affected, and exercise any other rights or pursue any other remedies provided in the lease contract. If a lessor has breached a warranty, whether express or implied, the lessee may recover damages.

In the case of a true lease that is a finance lease, the lessee may recover damages against the supplier depending on any promises or warranties made to the lessor in the supply contract. In the case of a finance lease that is not a consumer lease, the lessee’s promises under the lease contract becomes

42

irrevocable and independent upon the lessee’s acceptance of the goods in the absence of fraud by the lessor. Under the N.Y.U.C.C. principle of a “hell or high water” clause, a promise that has become irrevocable and independent is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.

• The doctrine of frustration of purpose is a narrow one which does not apply unless the frustration is substantial. Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Frustration of purpose excuses performance when a “virtually cataclysmic, wholly unforeseeable event” renders the contract valueless to one party. It is not enough that the transaction has become less profitable for the affected party or even that it will sustain a loss. Where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused.


• N.Y.U.C.C. 2-A-508• N.Y.U.C.C. 2-A-407• Direct Capital Corp. v. New ABI Inc., 822 N.Y.S.2d 684, 684 (N.Y. Sup. Ct. 2006)

(citing Wells Fargo Bank v. BrooksAmerica Mortgage Corp., 419 F.3d 107, 110 (2d Cir. 2005)) (only fraud will preclude enforcement of “hell or high water” clauses).

• General Electric Capital Corp. v. National Tractor Trailer School, Inc., 667 N.Y.S.2d 614, 619 (N.Y. Sup. Onondaga Cnty.) (explaining rationale behind “hell or high water” clauses)

• Gander Mountain Co. v. Islip U-Slip LLC, 923 F. Supp. 2d 351, 359-60 (N.D.N.Y. 2013) (standard for frustration of purpose doctrine).


Peter Breslauer, Finance Lease, Hell or High Water Clause, and Third Party Beneficiary Theory in Article 2A of the Uniform Commercial Code, 77 Cornell L. Rev. 318 (1992). Williston on Contracts, § 70:167. Impracticability, impossibility, and frustration, 28 Williston on Contracts § 70:167 (4th ed. last updated May 2015). 2 James J. White & Robert S. Summers, Uniform Commercial Code § 13.3 (4th ed. 1995). Melvin A. Eisenberg, Impossibility, Impracticability and Frustration, 1 J. Legal Analysis 207 (Winter 2009).


• As a basic premise, it appears that Lessor was unaware that progressive scanner 7 had been placed on the restricted list. Thus, there would be no basis for an allegation of fraud against Lessor. The fact pattern does not specify whether an express warranty concerning the goods was set forth in the leasing contract. Even if there was such an express warranty, the N.Y.U.C.C. does not provide contractual modification as a remedy for a lessor’s default. Accordingly, the remedy of contractual modification would need to be expressly set forth in the leasing contract in order for Lessee to have such a right.

43

• In the event that the leasing contract is deemed a finance lease, Lessee’s promises to perform under the finance lease became irrevocable upon its acceptance of the goods. Having made an irrevocable promise to Lessor, Lessee may not cancel, terminate, modify, or repudiate its obligations without Lessor’s consent.

• If the leasing contract is not deemed a finance lease, the parties may covenant that the Lessee’s promises are irrevocable and independent upon Lessee’s acceptance of the goods.

• Lessee’s common law rationales for renegotiation are not likely to warrant renegotiation of the terms of the Lease. Judicial modification is only exercised in extraordinary circumstances. It is unlikely a court would find the existence of such circumstances when the government letter does not render the benefit to the Lessee non-existent, but merely less profitable. Frustration of purpose is likely to be unsuccessful because there is no evidence that a lesser version of CAP would render the lease valueless to the Lessee.



• If either party repudiates a lease contract with respect to a performance not yet due under the lease contract, the loss of which performance will substantially impair the value of the lease contract to the other, the aggrieved party may make demand and await assurance of future performance adequate under the circumstances of the particular case.

• To establish anticipatory repudiation under New York law, a party must identify an overt communication of intention not to perform.

• Between merchants, the reasonableness of grounds for insecurity and the adequacy of such assurance offered must be determined according to commercial standards.

• A repudiation of a lease contract occurs if assurance of due performance adequate under the circumstances of the particular case is not provided to the insecure party within a reasonable time, not to exceed thirty days after receipt of a demand by the other party.


• N.Y.U.C.C. 2-A-401• N.Y.U.C.C. 2-A-402• Xerox Corp. v. Graphic Management Services Inc., 959 F. Supp. 2d 311, 318

(W.D.N.Y. 2013) (because of the “hell or high water clause,” a lessee is required to make all payments even if the lessor is arguably in breach).

• Stanford Square, L.L.C. v. Nomura Asset Capital Corp., 228 F. Supp. 2d 293, 299-300 (S.D.N.Y. 2002) (laying out “overt communication” standard)


Michael J. Borden, The Promissory Character of Adequate Assurances of Performance, 76 Brook. L. Rev. 167 (Fall 2010). Garth E. Flygare, Anticipatory Repudiation: A Clear Barrier to Communication, 38 S. Ill. U. L.J. 85 (Fall 2014).

44

Keith A. Rowley, A Brief History of Anticipatory Repudiation in American Contract Law, 69 U. Cin. L. Rev. 565 (Winter 2001). Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress and Cognition, 69 U. Colo. L. Rev. 71 (Winter 1998)


• The Lessor’s claim that the Lessee repudiated the contract was legally justified because Lessee stated that it would “hold back 50% of its monthly rental payments,” which is an overt communication of its intention not to perform under the lease contract.

6. Assuming Lessee defaulted under the leasing contract, were Lessor’s actions seeking to terminate the contract [para 10] and demanding the return on CAP legally justified, taking into account Lessee’s asserted defenses and claims [para 15]?

• [Note: The reference in the question to paragraph 15 is likely intended to be a reference to paragraph 13.]


• With respect to a true lease and finance lease, the N.Y.U.C.C. provides: “If a lessee . . . fails to make a payment when due or repudiates with respect to a part or the whole, then, with respect to any goods involved, . . . the lessee is in default under the lease contract and the lessor may: cancel the lease contract . . . and take possession of goods previously delivered.”

• With respect to a lease that is a security interest, the N.Y.U.C.C. provides: “After default, a secured party . . . may take possession of the collateral.”

• Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented (a) by course of dealing or usage of trade or by course of performance; and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Every contract or duty governed by the N.Y.U.C.C. imposes an obligation of good faith in its performance or enforcement.

Good faith in the case of a merchant as including the observance of reasonable commercial standards of fair dealing in the trade.

There is no breach of a covenant of good faith where a party has done what the contract permits.

Under New York law, there is not a separate cause of action for breach of the implied warranty of good faith and fair dealing arising out of the same allegations as a claim for breach of contract.


N.Y.U.C.C. 1-203 (good faith) N.Y.U.C.C. 2-103 (good faith in case of merchants) N.Y.U.C.C. 2-A-202 (final written expression) N.Y.U.C.C. § 2-A-523(1) (list of lessor remedies upon default). N.Y.U.C.C. 9-609 (rights of secured party to take possession after default)

45

Merit Group, LLC v. Sint Maarten Int'l Telecommunications Servs., NV, No. 08 Civ. 3496, 2009 WL 3053739, *2 (S.D.N.Y. Sept. 24, 2009)

Times Mirror Magazines, Inc. v. Field & Stream Licenses Co., 294 F.3d 383, 394-295 (2d Cir. 2002).


Michael Korybut, The Uncertain Scope of Revised Article 9’s Statutory Prohibition of Exculpatory Breach of Peace Clauses, 10 Hastings Bus. L. 271 (Summer 2014). Ryan McRobert, Defining “Breach of the Peace” in Self-Help Repossession, 87 Wash. L. Rev. 569 (June 2012). Kathy Cabral and Teresa Wilton Harmon, Remedies Outside the Box: Enforcing Security Interests under Article 9 of the Uniform Commercial Code, 2012-AUG Bus. L. Today 1 (Aug. 2012). New York Practice Series – Commercial Litigation in New York State Courts, § 76.23. Exercise of Remedies, 4B N.Y. Prac., Com. Litig. in N.Y. State Courts § 76.23 (3d ed. last updated Sept. 2014).


Presuming that Lessor failed to make the monthly rent payment due before February 5, 2014, Lessor was entitled to cancel the leasing contract and seek return of the goods.

Even if no monthly rent payment was due between January 10, 2014 (the date of Lessee’s anticipatory repudiation) and February 5, 2014, Lessee’s failure to cure its repudiation would constitute a default permitting Lessor to exercise its rights to repossess the goods. Lessor’s January 15, 2014 letter demanded adequate assurances by Lessee of Lessee’s future performance under the leasing contract by February 1, 2014. This 17-day period would likely be deemed “reasonable time” pursuant to N.Y.U.C.C. 2-A-401(3), given that whether time “required by [the N.Y.U.C.C.] is reasonable depends on the nature, purpose, and circumstances of the action.” Here, there should be no dispute that the time was “reasonable,” given that Lessee not only responded by the February 2, 2014 date set forth by Lessor but actually reaffirmed its intent not to perform on the February 1, 2014 date.

The Lessee’s asserted defense in paragraph 13(b) that there “was not a fundamental breach justifying contractual termination” is untenable because a failure to make payment or repudiation is sufficient grounds to cancel the leasing agreement. The N.Y.U.C.C. does not use the term “fundamental” (or “material”) breach as the justification for Lessor to exercise its rights. Instead, it uses the term “default.”

If the leasing contract is deemed to create a security interest governed by N.Y.U.C.C. Article 9, the Lessee’s asserted defense in paragraph 13(c) that Lessor cannot demand the return of the goods because Lessor claimed Lessee was the economic owner of the goods is irrelevant because the N.Y.U.C.C. provides that after default a secured party may take possession of the collateral.

It is very unlikely that the Lessee’s first counterclaim in paragraph 13(d), which seeks damages for Lessor’s breach of its obligation to provide a 30-day grace period, is meritorious. Assuming that the leasing contract contains a “merger clause” (e.g., “this writing contains the entire agreement between lessor and lessee”), Lessee would have no basis to assert that the 30-day grace period is a contract term because writings that are a complete integration of the parties’ agreement may not be

46

supplemented, contradicted, or varied by parol evidence under the N.Y.U.C.C.

Even if the leasing contract does not contain a “merger clause,” Lessee has an extremely weak argument because trade usage may be used to explain or supplement a term. Here, the leasing contract does not contain a term addressing a grace period that requires explanation of supplementation. By way of contrast, if the leasing contract provided that there would be grace period before Lessor could declare a default without actually defining the grace period, the court could then look to trade usage to determine that a 30-day period was intended by the parties.

There is no cause of action for breach of the implied covenant of good faith and fair dealing because the actions taken by Lessor in declaring the default were in accordance with the agreement between the parties.



Based on the facts, the potential bases of Investco’s liability would be agency, alter ego, or direct liability.

The “essential characteristic” of an agency relationship is that the agent acts subject to the principal’s direction or control. This relationship requires three elements: (1) manifestation by the principal that the agent shall act for him; (2) the agent’s acceptance of the undertaking; and (3) the understanding that the principal is to be in control of the undertaking.

A party may be an agent by virtue of “apparent authority” if the principal, whether intentionally or by a lack of ordinary care, induces a third-party to believe that individual has been authorized to act on his behalf. Apparent authority requires specific communications to the third party that give a reasonable and appearance that the agent possesses the requisite authority.

A finding of alter ego liability requires there to be a “piercing of the corporate veil,” which is permitted only in extraordinary circumstances. Such a finding requires both that the corporate form has been disregarded and used to perpetuate a fraud or unfairness on a third party. Factors that indicate disregard of the corporate form include but are not limited to: undercapitalization and disregard of corporate formalities.


In re Shulman Transport Enterprises, Inc., 744 F.2d 293, 295 (2d Cir. 1984) (citing Restatement (Second) of Agency § 1(1)) (noting that control is the sine qua non of this relationship).

Cabrera v. Jakabovitz, 24 F.3d 372, 387 (2d Cir. 1994) (delineating agency elements).

Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1088 (2d Cir. 1997) (apparent authority standard).

USHA Holdings, LLC v. Franchise India Holdings, Ltd., 11 F. Supp. 3d 244, 268 (E.D.N.Y. 2014) (expounding on specific communications requirement to sustain apparent authority).

Kashfi v. Philbro-Salomon, Inc., 628 F. Supp. 727, 735 (S.D.N.Y. 1986). Bravado Intern. Group Merchandising Services, Inc., 655 F. Supp. 2d 177,

195 (E.D.N.Y. 2009) (veil piercing justified only in extraordinary

47

circumstances); American Fuel Corp. v. Utah Energy Development Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997). Id. (alter ego factors)


Edward P. Yankelunas, The Alter Ego Article Doctrine, 87-MAY N.Y. St. B. J. 10 (May 2015). New York Practice Series – New York Law of Torts, § 9.7. Vicarious Liability of principal for acts of agent, 14 N.Y. Prac., New York Law of Torts § 9.7 (last updated August 2014). Peter B. Oh, Veil-Piercing Unbound, 93 B.U. L. Rev. 89 (Jan. 2013). Jonathan Macy and Joshua Mitts, Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil, 100 Cornell L. Rev. 99 (Nov. 2014)


It is unlikely that Lessor would be able to establish that an agency relationship exists between Lessee and Investco. The facts state that Lessee was a subsidiary of Investco, which in and of itself does not signify an agency relationship. The facts further indicate that Lessor and Lessee negotiated and performed under the leasing contract themselves, and there are no facts that suggest that the letters sent by Lessee that, inter alia, threatened to void the lease or withhold payment were done at the direction of Investco. Lessor itself always treated the economic substance of the transaction as having consideration that flowed entirely between Lessee and Lessor.

It is unlikely that Lessor would be able to assess liability against Investco on a theory of alter ego because there appear to be no factors that would demonstrate a disregard of the corporate form.

The direct liability claim, likely predicated on some sort of civil conspiracy between Investco and the Supplier to defraud the Lessor by hiding the “very small probability” that “CAP might be included in a government inquiry relating to cyber security”, will probably fail. This vague information, communicated only to Investco’s outside counsel, seems too remote and speculative to sustain a conspiracy claim by the Lessor against Investco. The Lessor could aver that Investco had a duty to disclose this “very small probability” of the CAP inquiry to the Lessee (or that Investco’s knowledge of the inquiry was attributable to Lessee) and that Investco hid this information from Lessee to keep it from being disclosed to Lessor. However, unless Lessor could show that Investco knew about the February 10 letter, Lessor’s claim is likely to fail because it is too attenuated from any actions related to the breach of the Lease.



In New York, an award of specific performance is discretionary. See Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 414 (2001) (“The decision

48

whether or not to award specific performance is one that rests in the sound discretion of the trial court.”).

Specific performance is “an appropriate remedy for a breach of contract concerning goods that ‘are unique in kind, quality or personal association’ where suitable substitutes are unobtainable or unreasonably difficult or inconvenient to procure.” Id. at 415 (quoting Restatement [Second] of Contracts § 359 [1], comment c).

Specific performance will not be granted where money damages ‘would be adequate to protect the expectation interest of the injured party.’” Solokoff , 96 N.Y.2d at 414 (quoting Restatement [Second] of Contracts § 359 [1]). To decide whether money damages would be adequate, courts consider “the difficulty of proving damages with reasonable certainty and of procuring a suitable substitute performance with a damages award.” Solokoff, 96 N.Y.2d at 415.


Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 414 (2001)

Van Wagner Adver. Corp. v. S & M Enters., 67 N.Y.2d 186, 193 (1986)


Restatement [Second] of Contracts §§ 357-369.


As discussed above, the leasing contract is governed by either N.Y.U.C.C. Article 2-A or 9. Because the requested specific performance is ancillary to the lease, a court would likely apply common law principles of specific performance.

Lessor wants the court to enforce a clause requiring Lessee to publish a notice in an industry journal announcing the closing of the transaction and Lessors’ “first rate provision of services.” Importantly, courts are less likely to award “positive” specific performance, i.e., compelling a party to take action, than restraining a party from taking an action.

Factors that the court would likely consider are (1) that this publication would be unique in personal association; (2) there do not seem to be suitable substitutes for this publication; and (3) money damages do not appear to be adequate. Proving damages for breach of this clause of the contract seems difficult and uncertain. Sokoloff at 415 (“In determining whether money damages would be an adequate remedy, a trial court must consider, among other factors, the difficulty of proving damages with reasonable certainty.”)


49


Under New York law, a guaranty may be a separate written instrument that refers to another contract.

The N.Y.U.C.C. recognizes two types of guarantees. Guarantees of payment and guarantees of collection.

A guarantee of payment means that the guarantor will pay the debt according to the instrument if the guaranteed instrument is not paid when due. Courts construe words of guarantee that do not specify the type of guarantee as a guarantee of payment.

For guarantees of payment, a creditor does not need to pursue a debtor before collecting from a surety unless the creditor and surety have otherwise agreed in writing.

A guarantee of collection means the guarantor will pay the debt only after the creditor has reduced his claim against the debtor to judgment and execution has been unsatisfied, the debtor becomes insolvent, or it is otherwise apparent that it is useless to proceed against the debtor.


N.Y. Gen. Oblig. Law § 15-701

N.Y.U.C.C. § 3-416


2 New York Practice Guide: Business and Commercial §§ 11.12, 12.07, 12.17, 12.18 12.24


Guarantor refused payment on three grounds: (1) Lessor did not fully assess whether there was a default; (2) Lessor did not diligently pursue legal remedies against the lessee; and (3) there was fraud in the underlying transaction and procurement of the guarantee.

The guarantee does not clearly specify whether it is a guarantee of payment or a guarantee of collection. As such, a court would likely consider the guarantee as a guarantee of payment. See, UCC-3-416.

The language of the contract also seems to read as a guarantee of payment. It states: “Guaranteed obligations: Performance of all present and future obligations of the Guaranteed Party under the Leasing Contract if and when they become performable.” (emphasis added). Under the plain language of the guarantee, performance of the guarantee is due when the performance is due. This is the essence of a guarantee of payment. See UCC-3-416 (In a guarantee of payment “the [guarantor] engages that if the instrument is not paid when due he will pay it according to its tenor.”).

To collect on a guarantee of payment, Lessor does not first have to pursue Lessee unless the parties specifically agreed that Lessor must do so in writing. See, NY CLS Gen Oblig § 15-701, 2 New York Practice Guide:

50

Business and Commercial § 12.07 [10] (“Unless otherwise specified in the guaranty, a creditor does not have a duty to pursue the principal obligor upon the demand of a guarantor of payment.”).

This guarantee is likely not an agreement that Lessor must pursue Lessee before demanding payment by Guarantor. The guarantee contract states, “[t]o the extent required by law, the Beneficiary must use reasonable endeavors to pursue the Lessee under the Leasing Contract before such guarantee can be called.” This clause is conditional. The clause requires Lessor to first pursue Lessee only if the law requires Lessor to do so. The clause does not, by itself, require Lessor to first pursue Lessee.

Because a court will likely construe this guarantee as a guarantee of payment without an agreement, Guarantor’s first and second reasons for denying payment are without merit.

It is also unlikely that Guarantor’s third reason for denying payment would prevent liability because Guarantor appears to have waived defenses sounding in fraud. The guarantee provides:

The liability of the Guarantor under the Guarantee shall not be reduced, discharged or otherwise adversely affected by any act, omission, matter or thing which would have discharged or affected the liability of the Guarantor had it been a principal borrower instead of a guarantor, or by anything done or omitted by any person which might otherwise reduce or extinguish its liability under the Guarantee.



1. Contract/Warranty Claims by Lessee Against Supplier

If a lease is a finance lease, then “[t]he benefit of a supplier’s promises to the lessor under the supply contract and of all warranties, whether express or implied . . . extends to the lessee . . . but is subject to the terms of the warranty of the supply contract and all defenses or claims arising therefrom.” N.Y.U.C.C. § 2-A-209(1). Whether the lease is a finance lease depends on the factors discussed in answer to Question 1 above and also on whether the parties have agreed in the lease that it is a finance lease.

Even if a lease is not a finance lease, Lessee can recover under the supply contract if it is an intended third-party beneficiary of the supply contract. To do so, the beneficiary must show: (1) the existence of a valid and binding contract between other parties; (2) that the contract was intended

51

for [its] benefit, and (3) that the benefit to [it] is sufficiently immediate . . . to indicate the assumption by the contracting parties of a duty to compensate [it] if the benefit is lost. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011).

The Court of Appeals adopted the Restatement (2d) of Contracts § 302 as an accurate statement of New York third-party-beneficiary law. Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 44-45 (N.Y. 1985). Section 302 (1) clarifies when a beneficiary is an intended beneficiary:

Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

In determining whether the parties intended a party to be a third-party beneficiary, a court should consider the circumstances surrounding the transaction as well as the actual language of the contract. Subaru Distribs. Corp. v. Subaru of Am., Inc., 425 F.3d 119, 124 (2d Cir. 2005) (citing Cutler v. Hartford Life Ins. Co., 22 N.Y.2d 245 (1968)).

When a contract requires promisor to render performance directly to a third party, that contract shows the third party is an intended beneficiary. See, Levin v. Tiber Holding Corp., 277 F.3d 243, 249 (2d Cir. 2002) (applying New York law).

A third-party intended beneficiary can enforce a contract even if the contract does not identify the beneficiary at the time of contracting. See, Airco Alloys Div., Airco, Inc. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 79 (App. Div. 1980) (citing Associated Teachers of Huntington, Inc. v. Bd. of Educ., 33 N.Y.2d 229, 234 (1973)).

If Lessee is a third-party beneficiary of the contract between Supplier and Lessor, its rights are no greater than those of Lessor under the sales contract.

2. Fraud Claims by Lessee Against Supplier

See first four bullet points in response to Question 2a.


1. Contract Claims

N.Y.U.C.C. § 2-A-209 N.Y.U.C.C. 2-711 to 2-715 (buyer’s remedies unless waived by agreement) N.Y.U.C.C. 2-719 (contractual modification or limitation of remedies)

52

2. Fraud Claims

Banque Arabe v. Maryland National Bank, 57 F.3d 146 (1995) (In the absence of an affirmative representation, a duty to disclose may still arise where one party has superior knowledge that is not available to the other party and the non-disclosing party knows that the second party is acting on the basis of mistake)

Eaves v. Designs for Finance, Inc., 785 F. Supp. 2d 229 (2011) (Where there is no actual privity between defendant and plaintiff, plaintiff must show awareness by defendant that its misrepresentation will be relied upon by a known party for a known purpose, and some conduct by defendant “linking it to the relying party and evincing its understanding of that reliance.”

Sykes v. RFD Third Avenue 1 Associates, LLC, 15 N.Y.3d 370 (2010) (Plaintiff in an action for misrepresentation must either show privity of contract or a relationship “so close as to approach that of privity”, which can be done by showing (1) awareness that the misrepresentations were to be relied upon by others, (2) that the identity of the relying party was known to the defendant, and (3) some conduct linking the defendant to plaintiffs which evinces defendant’s understanding of the plaintiff’s reliance.

Prestige Builder & Management LLC v. Safeco Insurance Co. of America, 896 F. Supp. 2d 198 (2012) (Acknowledging ongoing disagreements among both federal and state courts in New York but finding that the “third-party reliance doctrine is good law in New York”. Under the third-party reliance doctrine, Lessee might argue that Supplier’s fraud induced Lessor to purchase the CAP for purpose of leasing it to Lessee, and that Lessee was damaged by Lessor having been induced to buy the CAP when it was on the restricted product list. This argument might also apply if Lessor is liable to the government for fines and claims those back against Lessee under the lease.

Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) (Claim for fraudulent omission and third-party beneficiary status fails where plaintiff cannot show that plaintiff was actually known to defendant at the time of the non-disclosure).


Restatement (2d) of Contracts § 302

22 N.Y. Jur.2d Contracts § 304

3 New York Practice Guide: Business and Commercial § 15.06

53


1. Contract Claims

Lessee can likely hold Supplier liable as a third-party beneficiary to the supply-and-support contract if Supplier was in breach of that contract.

Lessee is likely an intended third-party beneficiary. The supply-and-support contract runs between Lessor and Supplier. In it, Supplier agreed to “provide Lessor or any other beneficiary so designated by the Lessor CAP product support services.” It specifically has a clause entitled “Third Party Beneficiary” which reads, “Lessor may assign [] Product Support services under each CAP to any third party beneficiary so notified to the Supplier.”

The contract requires Supplier to render performance in the form of support to any third party beneficiary so notified to Supplier by Lessor. It is likely that Lessor notified Supplier that Lessee was a third party beneficiary. The parties discussed this relationship in their memorandum of understanding.

In the event that the parties do dispute Lessee’s standing, the fact that the contract does not identify Lessee will not bar Lessee from enforcing the contract as a third-party beneficiary. See, Airco, 76 A.D.2d at 79. Courts will consider the circumstances of the transaction. Subaru, 425 F.3d at 124.

Lessee also sought to hold Supplier liable for breaching a duty to negotiate in good faith. Under New York law (discussed in Question 1 above), this duty arises in the context of agreements that are agreed in principle where one party seeks to renege in bad faith without finalizing the agreement. Hence, there was a duty to negotiate in good faith after the parties issued their memorandum of understanding, but the parties ultimately effected those contemplated transactions, so no party breached the duty to negotiate in good faith. This does not mean, however, that Supplier is not liable for fraud (discussed below).

Lessee’s remedies will depend upon the terms of the written sales contract, including particularly any warranties or limitations or disclaimers of warranties. Limitations of warranty could include limitations on duration (e.g., 1 year), remedy (e.g., repair and replace only), amount (e.g., purchase price) and type of loss (e.g., exclusion of incidental or consequential damages). Such limitations generally are enforced as between merchants under N.Y.U.C.C. 2-719 unless “unconscionable”, and cases finding such limitations unconscionable are exceedingly rare. N.Y.U.C.C. 2-719 does not, however, bar claims for fraud in the inducement to enter into the sales contract.

2. Fraud Claims

While Lessee’s third-party beneficiary claims may well prove useless if Supplier drafted its sales contract with the customary disclaimers of warranties and limitations of remedies for breach, it has a more promising claim for fraud against Supplier given the facts presented.

Because Supplier apparently structured the sales transaction with the lease to Lessee specifically in mind, and also had “peculiar knowledge” of the 10 February 2010 letter that was not available to Lessee, as well as knowledge that Lessee would not knowingly have agreed to lease the CAP while a critical component was on the “restricted list”, Supplier is subject to a fraud claim by Lessee despite the lack of direct privity of contract between Supplier and Lessee. Damages could include punitive damages.

54

While the law in New York is unsettled regarding “third-party reliance” fraud claims, Supplier may also have a viable fraud claim based on Lessor having been fraudulently induced to purchase the CAP for lease to Lessee.



• With respect to a security interest, the N.Y.U.C.C. provides: “After default, a secured party . . . may take possession of the collateral.” Such a seizure can be accomplished “without judicial process, if it proceeds without a breach of the peace.”

The N.Y.U.C.C. does not define or explain the conduct that will constitute a breach of the peace.

Courts hold the secured party responsible for the actions of others taken on the secured party’s behalf, including independent contractors engaged by the secured party to take possession of the collateral.


Manufacturers Hanover Leasing Corp. v. Ace Drilling Co., 726 F. Supp. 966, 969-70 (citing Honeywell Information Sys., Inc. v. Demographic, Sys., Inc., 396 F. Supp. 273, 276 (S.D.N.Y. 1975)) (default undefined in U.C.C.); see also Bankers Trust Co. v. J.V. Dowler & Co., Inc., 390 N.E.2d 766, 769 (N.Y. 1979) (same). See Bankers Trust Co., 390 N.E.2d at 768; see also Jacket House, Inc. v. Bank Leumi Trust. Co. of New York, 503 N.Y.S.2d 941, 943 (N.Y. App. Div. 1986) (same). Prudential Securities CreditCorp., LLC v. TeeVee Toons, Inc., 16 A.D.3d 192, 193 (N.Y. App. Div. 2005) (citing Bankers Trust, 390 N.E.2d at 768)) (secured parties have broad discretion in exercising default remedies).

N.Y. U.C.C. § 9-601(a) (emphasis added) (secured party rights upon default). Id. § 9-609(a)(1) (permitting secured party to take possession of collateral). Id. § 9-609(b)(2) (granting extrajudicial remedies). Id. § 9-609 cmt. 3 (breach of peace definition is left for “continuing development by the course”); see also Barrett v. Harwood, 189 F.3d 297, 300 (2d Cir. 1999) (judicial process is required when repossession cannot be accomplished without a breach of the peace). See Crouse v. First Trust Union Bank, 86 A.D.2d 978, 978 (N.Y. App. Div. 1982). Jefferds v. Ellis, 132 A.D.2d 321, 324-25 (N.Y. App. Div. 1987) (Fourteenth Amendment inapplicability).


55


The Bank was likely justified in declaring a default based on the claim that the “insolvency test” triggered a breach of financial covenants under (7) and a material adverse change under (8) in the Events of Default section of the Security Agreement. In Bankers Trust, when the debtor was facing losses in the bond market, the secured party could “deem itself insecure,” thereby triggering a default under the security agreement. Likewise, the Bank could claim that the cumulative liability potentially facing the Lessor in light of the uncertain situation around its potential liability for the penalty was sufficient to trigger a material adverse change in its ability to pay its obligations under the security agreement. If the Lessor was forced to pay the penalty under all of its agreements, it could prioritize repayment under those transactions over the facility agreement, which would then potentially prevent the Bank from receiving full payment.

Under the N.Y.U.C.C., upon a valid default the Bank would be permitted to take extrajudicial action provided that such action did not breach the peace. Such a right is granted by UCC § 9-609(b)(2), and a number of cases have rejected due process defenses as raised by the Lessor. Such a defense is per se inapplicable since the Bank is not a state actor, and is thus not subject to requirements that it act under the due process of law. But if Lessor is correct that the extra judicial action “violated public order,” such action would be deemed to violate the N.Y.U.C.C. as a breach of the peace.


Question 12 addresses the likelihood that any of the 6 arguments asserted by Debtor’s bankruptcy trustee/administrator will succeed as a basis for avoiding the Bank’s security interest in the collateral, and demonstrates the interplay between federal bankruptcy law and state commercial law. The question assumes that the Lessor previously has filed a petition for relief under applicable insolvency law.

General Legal Principles:

Insolvency proceedings in the United States are governed by the U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”), a uniform federal statute, and overseen by Bankruptcy Courts, which are specialized federal courts of limited jurisdiction. The filing of a petition for relief under the Bankruptcy Code automatically triggers a stay of most proceedings and actions against a debtor and its property and creates a bankruptcy estate, generally comprised of all of the debtor’s interests in property and any other assets, including causes of action, that exist as of the petition date. A debtor’s bankruptcy case is managed by a trustee or, in reorganization cases filed under chapter 11 of the Bankruptcy Code, by the debtor as a “debtor-in-possession.”

Although the Bankruptcy Code is a federal statute, Bankruptcy Courts generally look to state and other applicable law in determining the nature and extent of the rights that the estate, creditors and other parties-in-interest have with respect to a debtor’s assets. In this case, the applicable underlying law is the New York Uniform Commercial Code (U.C.C.) and particularly Article 9 thereof, which governs secured transactions, as well as other aspects of NY state common and statutory law. We note that the U.C.C. is a uniform statute enacted, with minor

56

alterations, in all 50 states. In general, Article 9 of the U.C.C. sets out the rules governing the granting, attachment and perfection of security interests in collateral.

The Bankruptcy Code provides the trustee/debtor-in-possession with certain avoidance powers, which can be used as a basis to challenge another party’s rights in or to a debtor’s assets or to avoid certain payments or other transfers made by the debtor, subject to any defenses that such party may have.

In this question, the trustee asserts six reasons why the Bank’s security interest in and lien upon the assets of the debtor’s estate comprising the Bank’s collateral may be avoided. For convenience and brevity, the next sections present each argument separately, followed by the salient legal issue or principle (question 12(a)); citations to main sources of law (question 12(b)); secondary sources (questions 12(c)) and paragraph prose applying the law to the fact pattern (question 12(d)) for each line of attack as a cluster.)

12(a) Basic legal principles

The question here concerns the enforceability of a security interest and lien established in the name of a trustee, here the Bank, for the benefit of one or more lenders, who are beneficiaries of the trust established for their benefit. Under New York law, provided that the document creating the trust provides the trustee with such authority, a trustee acting on behalf of a trust may bind the trust to obligations and create rights in favor of the trust, including a perfected security interest in collateral, for the benefit of the beneficiaries of the trust.

New York law (and US law generally) also recognizes trust relationships.

12(b) Citations to main sources of law

New York Estates Powers and Trusts Law, Section 11-1.1.

Restatement of Trusts §186.

12(c) Bibliographical references (secondary sources)

The Law of Trusts, Scott & Frachter (4th Ed. 1998).

12(d) Application of legal principles

The question here is whether the Bank can create a valid and binding security interest for the benefit of the lenders who are the beneficiaries of the trust for which it is trustee. In order to determine the answer to this question, the Bankruptcy Court would need to review the trust agreement to determine whether the trustee has this authority. Once this authority has been determined, the only other question would be whether this authority violates public policy. As this is very common structure, it would not be held to violate public policy, in which case the security interest, as long as it was properly created and perfected, would be proper and not subject to attack, whether in bankruptcy or otherwise. As a general matter, trusts are very useful and frequently used under New York law (and throughout the Unites States), and trustees can create and hold many different interests on behalf of third party beneficiaries, provided that the applicable documents so provide.

57

(ii) did not specifically identify the security collateral, which was acquired by Lessor following the closing of original credit and security agreement, but, rather was swept in through an ‘after-acquired property clause’.


1. Extent of specificity required for the description of collateral in a security agreement and related perfection documents.

2. Enforceability of an “after-acquired property clause” in a security agreement and related perfection documents.


1. Specificity of security agreement description of collateral.

N.Y.U.C.C. Law § 9–203(b)(3)(A) (a security interest attaches to collateral and is enforceable only if “the debtor has authenticated a security agreement that provides a description of the collateral....”)

N.Y.U.C.C. Law § 9–108(a) (“[A] description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”).

o N.Y.U.C.C. Law § 9–108(a) cmt. 2 (“The purpose of requiring a description of the collateral in a security agreement ... is evidentiary. The test of sufficiency of a description ... is that the description do the job assigned to it: make possible the identification of the collateral described. This section rejects any requirement that a description is insufficient unless it is exact and detailed (the so-called “serial number” test)”).

o In re Bucala, 464 B.R. 626, 630 (Bankr. S.D.N.Y. 2012) (citing In re Numeric Corp., 485 F.2d 1328, 1331-32 (1st Cir. 1973)) (“[T]he purpose of filing a financing statement is to put third parties on notice that the secured party who has filed it may have a perfected security interest in the collateral described.”).

2. Enforceability of an “after-acquired property clause” in a security agreement.

In re Kerner Printing Co., Inc., 178 B.R. 363, 373 (Bankr. S.D.N.Y. 1995) (“The interest was perfected by virtue of the after-acquired property clause in the Financing Statement.”); see also, e.g., Smith v. Mark Twain Nat’l Bank, 805 F.2d 278, 286 (8th Cir. 1986) (bank's interest in certificates of deposit and repurchase agreements which came into existence after security agreement created constituted perfected after-acquired property because security agreement described such assets as bank's collateral and also provided that the bank would have an interest in assets subsequently obtained by debtor); United States v. Fullpail Cattle Sales, Inc., 640 F. Supp. 976, 981 (E.D. Wis. 1986) (secured creditor had interest in entire dairy herd because security agreement adequately described existing cattle and also provided for interest in cattle subsequently acquired together with all increases, replacements, substitutions and additions thereto)

58

N.Y.U.C.C. Law §§ 9-203(f), 9-315(2): Security interests attach to proceeds of a party’s collateral.

N.Y.U.C.C. Law § 9-204(a): Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral.

N.Y.U.C.C. § 9-204 cmt. 2: After-Acquired Property; Continuing General Lien. Subsection (a) makes clear that a security interest arising by virtue of an after-acquired property clause is no less valid than a security interest in collateral in which the debtor has rights at the time value is given. A security interest in after-acquired property is not merely an “equitable” interest; no further action by the secured party-such as a supplemental agreement covering the new collateral-is required. This section adopts the principle of a “continuing general lien” or “floating lien.” It validates a security interest in the debtor's existing and (upon acquisition) future assets, even though the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. Id. § 9-205. Subsection (a) of 9-204, together with subsection (c), also validates “cross-collateral” clauses under which collateral acquired at any time secures advances whenever made.

11 U.S.C. § 552: Section 552 of the Bankruptcy Code provides that property acquired by the estate post-petition is not subject to a pre-petition security interest and lien unless (i) such pre-petition security interest and lien covers proceeds or profits; (ii) such post-petition property constitutes the proceeds, profits, etc. of the pre-petition collateral; and (iii) the Bankruptcy Court orders otherwise based on the equities of the case after notice and a hearing.



Ray D. Henson, Proceeds Under the Uniform Commercial Code, 65 Colum. L. Rev. 232, 235 (1965).

Peter F. Coogan, The Lazy Lawyer's Guide to Secured Transactions Under the Code, 60 Mich. L. Rev. 685, 716 (1962).

John C. Miller, Farm Collateral under the UCC: Those Are Some Mighty Tall Silos, Ain't They Fella.?, 20 S.D. L. Rev. 514, 520-21 (1975).


9A Hawkland UCC Series § 9-204:1 (last updated Jan. 2015) (“The Code broadly validates the use of these clauses, enabling secured parties to enter into long-term financing arrangements with a debtor by means of a single security agreement and a single filed financing statement. After-acquired property clauses and future-advance clauses are standard provisions in most security agreements.”).

96 N.Y. Jur.2d Secured Transactions § 248 (last updated May 2015).

5 Collier on Bankruptcy ¶ 552.

59



While the trustee is correct that the security agreement must describe the collateral that is the subject to the security interest, the statute does not require a high degree of specificity, but rather simply that the description be reasonable. In this case, the agreement reasonably specified the collateral in that it provided that the collateral included “any and all assets of the Debtor, “ which a common description of collateral in secured transactions governed by under New York law (and by the U.C.C. in general). As a result, it is relatively certain that any Bankruptcy Court would find that this description satisfies the N.Y. U.C.C. specificity requirement, in that it is clear which assets of the Debtor are intended to be included —all of them. Also, Section 9-204 of the N.Y. U.C.C. Law adopts the principle of a “continuing general lien,” which provides that a creditor may assert a security interest in the assets of the Debtor generally.


The Bankruptcy Court also very likely would find that the description adequately covers after acquired property, and such a provision is enforceable under N.Y. U.C.C. Law § 9-204. Assuming any after acquired property that is obtained post-petition constitutes proceeds of the pre-petition collateral, then it also is likely that the Bankruptcy Court would hold that the pre-petition security interest would extend to such property under Section 552 of the Bankruptcy Code, subject to any countervailing equities that may be present in the case.

(iii) included as security collateral intangible contract rights (an assignment of the leasing contract) made without proper notice to Lessee (it was send to the wrong address), which, in any event, allegedly violated of a provision in the leasing contract prohibiting an assignment without the consent of Lessee where such would have a material adverse effect on Lessee.


1. Intangible property may be collateral.

2. Freedom to assign property rights without notice to other parties.

3. Enforceability of anti-assignment clauses.


1. Accounts and Intangible property as collateral.

N.Y. U.C.C. § 9-102(42) (defines a “general intangible” broadly as “any personal property,” including things in action, other than accounts, instruments, and chattel paper.) The term includes payment intangibles, which are a subset of “general intangibles” under which the account debtor’s principal obligation is a monetary obligation.

2. Freedom to assign property rights without notice to other parties.

ImagePoint, Inc. v. JPMorgan Chase Bank, N.A., 27 F. Supp. 3d 494, 507-08 (S.D.N.Y. 2014) (because JPM has not asserted that it has fulfilled its obligation to the original assignor, ImagePoint, it makes no

60

difference under N.Y. U.C.C. Law § 9-406 whether or not it has received adequate notification of the assignment.”)


N.Y.U.C.C. § 9–406(d)(1) (“[A] term in an agreement between an account debtor and an assignor ... is ineffective to the extent that it: (1) prohibits, restricts, or requires the consent of the account debtor ... to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account, [or] chattel paper ….”).

o N.Y.U.C. § 9–406 cmt. 5. (“Former Section 9–318(4) rendered ineffective an agreement between an account debtor and an assignor which prohibited assignment of an account (whether outright or to secure an obligation).... Subsection (d) essentially follows former Section 9–318(4), but expands the rule of free assignability ... and explicitly overrides both restrictions and prohibitions of assignment. The policies underlying the ineffectiveness of contractual restrictions under this section build on common-law developments that essentially have eliminated legal restrictions on assignments of rights to payment as security and other assignments of rights to payment such as accounts.... Like former Section 9–318(4), subsection (d) provides that anti-assignment clauses are “ineffective.” The quoted term means that the clause is of no effect whatsoever; the clause does not prevent the assignment from taking effect between the parties and the prohibited assignment does not constitute a default under the agreement between the account debtor and assignor....”).

ImagePoint, Inc. v. JPMorgan Chase Bank, N.A., 27 F. Supp. 3d 494, 508-09 (S.D.N.Y. 2014) (“[T]he anti-assignment clause in the Procurement Agreement did not affect Wachovia's security interest in the JPM account or any subsequent assignments of that interest.”).

N.Y. U.C.C. Law § 9-408 renders ineffective contractual or legal provisions relating to general intangibles and certain receivables to the extent such provisions “impair the creation, attachment, or perfection of a security interest or provide that assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination or remedy.” (e.g., intellectual property licenses and cable franchise regulation).


1. Intangible property as collateral.

Peter F. Coogan, Intangibles as Collateral Under the Uniform Commercial Code, 77 Harv. L. Rev. 997, 999-1000 (1964).

2. Freedom to assign property rights without notice to other parties

Peter F. Coogan, The Lazy Lawyer's Guide to Secured Transactions Under the Code, 60 Mich. L. Rev. 685, 716 (1962).

61

Charles Bunn, Freedom of Contract Under the Uniform Commercial Code, 2 B.C. L. Rev. 59, 66 (1960).


G. Ray Warner, Non-assignable rights, contracts and leases as collateral under revised Article 9, 19 Am. Bankr. Inst. J. 18 (2000).


The Bankruptcy Court would not avoid the Bank’s security interest in and lien upon the Lease based on the debtor’s failure to give notice to the lessee or on account of the anti-assignment provisions in the Lease. The N.Y. U.C.C. permits a party to grant a security interest in and lien upon its rights in and to a lease. Where the right in question is to collect payments for a financial obligation, the assignor (here the Lessor) has no material duty to notify the debtor (here the Lessee). Similarly, the anti-assignment provision is not enforceable here under the N.Y. U.C.C. sections cited above.

(iv) did not specify a maximum amount secured, and purported to secure performance of any future obligation of Lessor or a third party to Bank.


1. Whether security agreement must specify a maximum amount secured and may secure performance of future obligations.

2. Does New York law recognize and permit the enforcement of an agreement by one party to secure the obligations of another? Is there another basis upon which the trustee may avoid an otherwise enforceable guarantee?

3. The Bankruptcy Code authorizes a trustee to avoid a pre-petition transfer by the debtor for the benefit of a third party (including the grant and perfection of a security interest in collateral to secure the debtor’s obligations under a guarantee), to the extent that the debtor does not receive sufficient consideration in return for that security interest.


1. Whether security agreement must specify a maximum amount secured and may secure performance of future obligations.

N.Y.U.C.C. § 9-204(c): Future advances and other value. A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to the same commitment. There is no obligation to specify a maximum amount secured by the collateral.

2. Enforceability of agreement to secure obligations of third parties.

Haynes v. Kleinewefers & Lembo Corp., 921 F.2d 453, 455-56 (2nd Cir. 1990) (contractual agreements to indemnify are enforceable in New York).

Heimbach v. Metropolitan Transp. Auth., 553 N.E.2d 242, 246 (N.Y. 1990) (articulating the standard one must satisfy in order to have a valid and

62

enforceable indemnity agreement); Bank of Am. Corp. v. Braga Lemgruber, 385 F. Supp. 2d 200, 226 (S.D.N.Y. 2005) (same; such agreements are strictly construed, however, and a duty to indemnify will not be found unless there is manifestation of a “clear and unmistakable intent to indemnify”).

11 U.S.C. §§ 544(b) and 548 (authorizing the trustee to avoid intentional and constructive fraudulent transfers).


1. Security agreement requirement to specify maximum/ limits in a revolving loan of credit or creditor’s consideration.

Homer Kripke & Carl Felsenfeld, Secured Transactions: A Practical Approach to Article 9 of the Uniform Commercial Code, 17 Rutgers L. Rev. 168 (1962).

2. Whether security agreement may secure performance of future obligations or advances

William B. Johnson, Annotation, Construction and effect of “future advances” clauses under U.C.C. Article 9, 90 A.L.R.4th 859 (Originally published in 1991) (“This annotation collects and analyzes the cases in which courts have construed or discussed the effect of "future advances" clauses authorized by § 9-204(3) of the Uniform Commercial Code (UCC).”).

Peter F. Coogan, Article 9 of the Uniform Commercial Code: Priorities Among Secured Creditors and the" Floating Lien", 72 Harv. L. Rev. 838, 852 (1959).

3. Enforceability of agreements to secure obligations of third parties

Weinberg Wheeler, et al., Agreements to Indemnify & General Liability Insurance: A Fifty State Survey (Oct. 2008), available at: http://www.wwhgd.com/assets/attachments/50%20State%20Survey%2000810220.PDF.

Charles Bunn, Freedom of Contract Under the Uniform Commercial Code, 2 B.C. L. Rev. 59, 66 (1960).

4. Fraudulent Conveyances in Bankruptcy

5 Collier on Bankruptcy ¶¶ 544, 548.


Here, the debtor apparently granted the Bank a security interest in the collateral to secure its own present and future obligations to the Bank, as well as the obligations of an unspecified third party. N.Y.U.C.C. § 9-204 permits parties to agree that collateral may secure present, past or future obligations or advances, and there is no requirement that the parties specify a maximum secured amount. As such, this is not likely to be a basis upon which the trustee can avoid the Bank’s security interest and lien in the collateral.

63

In addition, under New York law, a party may agree to guarantee the obligations of another party or otherwise to grant a security interest in its assets for the benefit of a third party. Because it is not clear who the third party is or what the terms of the guarantee or granting of the security interest are, it is difficult to determine whether the guarantee itself would be enforceable in the event of the bankruptcy. Even assuming that the Bank could enforce its security interest in the collateral outside of bankruptcy, the trustee potentially may be able to avoid the Bank’s security interest in the collateral as a “fraudulent conveyance,” to the extent the trustee can prove that the debtor intentionally granted the security interest for the purpose of hindering delaying or defrauding its other creditors, or if granted the security interest for the benefit of a third party at a time when it was or thereby became insolvent and did not receive reasonably sufficient consideration in exchange for the transfer. In order to determine whether the debtor received reasonably equivalent consideration in return for the grant, the Bankruptcy Court may consider any relationships between the debtor and the third party that benefited from the grant, as well as any cash or non-cash benefits that the debtor may have received from the third party or the Bank. For example, while a parent entity may guaranty or grant a security interest for the benefit of its subsidiaries, a security interest granted by a subsidiary to its parent in an “upstream guaranty” may be avoided as a fraudulent conveyance, if it is determined that the subsidiary did not receive sufficient benefit as a result of this grant.

(v) was only properly perfectly by registration under national law on 15 April 2014, and was therefore considered voidable as preference or fraudulent transfer under national insolvency/bankruptcy law.


Generally, a transfer (including perfection of a pre-existing security interest) that is made on account of an antecedent debt during the 90 days before a debtor files for bankruptcy is subject to avoidance as a preference.


Avoiding a security interest that is perfected on April 15, 2014, two weeks before the petition date, as a preference.

11 U.S.C. § 547

Avoiding a security interest that is perfected on April 15, 2014, two weeks before the petition date, as a fraudulent transfer.

11 U.S.C. §§ 544, 548 - Fraudulent transfers and obligations


John C. McCoid, II, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, 67 Va. L. Rev. 249, 259-61 (1981).

Isaac Nutovic, The Bankruptcy Preference Laws: Interpreting Code Sections 547(c)(2), 550(a)(1), and 546(a)(1), 41 Bus. Law. 175, 180 (1985).

Norman Williams & Robin Taft, Bankruptcy Preference Laws: The Scope of Section 547(c)(2), 99 Banking L.J. 55, 56 (1982).

64

https://www.jstor.org/stable/40686676


http://www.jstor.org/action/showPublication?journalCode=virglawrevi



Richard B, Levin, Introduction to the Trustee's Avoiding Powers, 53 Am. Bankr. L.J. 173 (1979)


Based on the facts as stated, it is likely that a Bankruptcy Court would avoid the Bank’s security interest as a preference because of the timing of perfection of the lien. As noted above, a trustee may avoid as a preference any transfer of an interest of the debtor in property to or for the benefit of a creditor for or on account of an antecedent debt that is made when the debtor is insolvent on or within 90 days before the date of the filing of the petition; that enables the creditor to receive more than it would otherwise receive in a liquidation. Here, the facts indicate that the original loan and security agreement between the Bank and the debtor existed before February 1, 2010, but the Bank failed to perfect its rights in the collateral until two weeks or less than 90 days before the petition date. Perfection of the lien qualifies as a transfer of rights in the debtor’s assets (i.e. the collateral) that was made on account of a pre-existing (i.e. antecedent) debt. If the Bank had perfected its lien when the loan originally was made (before 2010) or even at the time it advanced the funds that the debtor/lessor used to buy the equipment at issue (2010), the lien likely would not have been subject to avoidance as a preference, as the transfer would have been made outside the statutory look back period.

By contrast, it is unlikely that the Bankruptcy Court would avoid the lien as a fraudulent transfer simply because it was perfected two weeks before the petition date. There is no evidence that the debtor made the transfer at issue with the intent to hinder, delay or defraud creditors. Also, a transfer made on account of an antecedent debt by definition provides reasonably equivalent value to the debtor (in this case, application of the collateral to the bank’s claim would result in a dollar for dollar reduction of that claim), so it would not satisfy the requirements for a constructive fraudulent transfer.

(vi) secured obligations to pay high rates of interest and penalties, which violates public policy.


Whether the interest and penalties provisions of the loan documents violate the provisions of the New York Usury law, which apply to most loans made in the State of New York or otherwise governed by New York law.


NY Gen. Oblig. Law § 5-501(6)(b): “No law regulating the maximum rate of interest which may be charged, taken or received, including section 190.40 and section 190.42 of the Penal Law, shall apply to any loan or forbearance in the amount of two million five hundred thousand dollars or more.” (Usury laws do not apply to large commercial transactions).

The remedy for a usurious loan is to void the agreement, with the lender forfeiting all principal and interest. See id. § 5-511(1) (unless lender is a savings bank, savings and loan association, or federal savings and loan association). See also Eikenberry v. Adirondack Spring Water Co., 490 N.Y.S.2d 484, 486-87 (N.Y. 1985).


65

Joshua Stein, Confusury Unraveled: New York Lenders Face Usury Risks In Atypical or Small Transactions, 73 N.Y. St. B. J. 25, 26 (July/August 2001).

Paul Golden, Evolution of Corporate Usury Laws Has Left Vestigial Statutes That Hinder Business Transactions, 73 N.Y. St. B. J. 20 (May 2001). (“[The remaining usury restrictions on corporate loans are like] the appendix in humans and wings on flightless birds… [and as an economic issue] not only useless, but unsound as well.”) .

Fairfax Leary, Jr., Secured Transactions-Revolution or Evolution, 22 U. Miami L. Rev. 54 (1967).


It is quite unlikely that the Bankruptcy Court could avoid the Bank’s lien on the grounds that it is usurious or calls for excessive fees, because New York’s usury laws do not apply to commercial loans in excess of $2,500,000, which is the size of the loan at issue here.



Set off is a common law defense to payment or the basis for a counterclaim by which a party may seek to deduct from the amount the party owes any amounts that its counterparty owes to it. The amounts set off need not arise out of the same transaction or transactions that occurred at the same time, but rather may arise out of separate transactions between the parties as long as the debts are “mutual”, i.e. involve the same parties, be in the same right, with each party acting in the same capacity.

The Bankruptcy Code does not establish a separate right of set off, but rather preserves any right of set off that may exist under applicable law. To that end, subject to the automatic stay, section 553 of the Bankruptcy Code permits a creditor to offset a debt it owes to the debtor against a debt due to it from the debtor if the debts are mutual. The requirement of mutuality is strictly construed against the creditor seeking setoff. In addition, Bankruptcy Courts have interpreted the mutuality requirement to mean that a debt owed by the creditor pre-petition may not be set off against a debt owed by the debtor post-petition or vice versa. In other words, to be considered mutual, the debts to be set off both must have been incurred pre-filing or post-filing, or they will not be deemed to be mutual. Also, if the same parties are involved but they stand in different relationships in the various transactions, mutuality will not exist and setoff will not be permitted. Where, for example, one party owes a fiduciary duty to the other, or has a claim for trust funds, and the other side's claim is a simple unsecured debt, mutuality is lacking. Finally, before exercising a set-off right in bankruptcy, the non-debtor asserting the setoff right must first apply to the Bankruptcy Court to lift the automatic stay.

66


11 U.S.C. § 362 – Automatic Stay

11 U.S.C. § 553- Setoff

In re Westchester Structures, Inc., 181 B.R. 730, 739 (Bankr. S.D.N.Y. 1995) (citation omitted) (“Section 553 permits a creditor to offset a prepetition debt it owes to a debtor against a prepetition debt due to it from the debtor if the debts are mutual. Debts are mutual when the debts and credits are in the same right and are between the same parties, standing in the same capacity.”)


John C. McCoid II, Setoff: Why Bankruptcy Priority?, 75 Va. L. Rev. 15, 29-41 (1989).

Robert B. Morton, Creditor Setoffs in Business Reorganization and Relief Cases Under the Bankruptcy Act, 50 Am. Bankr. L.J. 373, 373-87 (1976).

Stephen L. Sepinuck, The Problems with Setoff: A Proposed Legislative Solution, 30 Wm. & Mary L. Rev. 51, 54-65 (1988).


Under these facts, the Lessee seeks to set off amounts it owes under the Lease against damages it claims are owed to it by the Lessor. The Lessee claims a right of set off against both the Lessor and the Bank, to the extent that the Lessor properly assigned its right to collect payments under the Lease to the Bank.

The facts indicate that the amounts owed by the Lessee generally relate to the period before the bankruptcy case was filed, commencing in January 2014 when the Lessee cut its rent payments in half, but presumably some payments would have continued to be due and owing post-petition. Lessee seeks to set off these amounts against the “debt” it claims is owed to it by the Lessor, in this case damages for the Lessor’s failure to pay the governmental penalty and arising out of the Lessor’s failure to renegotiate the contract to address the fact that access to progressive scanner 7 will be prohibited after March 2016. Assuming for purposes of this question that Lessee has a valid claim for damages against Lessor, then Lessee would have to demonstrate all of the requirements for “mutuality” in order to set off the amounts it owes the debtor/Lessor against the amount the debtor/Lessor allegedly owes to it. To the extent that both debts were incurred pre-petition, it is likely that the set off would be permitted. To the extent that one debt, such as lease payments due post-petition, relates to the post-petition period and one debt relates to the pre-petition period, the

67

mutuality requirement would not be fulfilled. Of course, as noted above, any attempt by the Lessee to assert the right of set-off would require that the Lessee first apply to the Bankruptcy Court to get the automatic stay lifted, at which point it would be permitted to assert its set-off right against the Lessor, which is a debtor in bankruptcy.

The Lessee also seeks to set off its claims against the Bank. The Bank is not a debtor, so the automatic stay would not apply, nor would the pre and post-petition issues arise in this context. Also, as assignee, the Bank is subject to any defenses to payment that the Lessee would otherwise have had as against the Lessor. Assuming that the Lessee has valid claims against the Lessor, then the Lessee likely would have a basis for a setoff for amounts it owes under the Lease against the Bank.



This question raises issues relating to the rules for determining the priority of competing claims to the same collateral as well as the requirement that a security interest be perfected in order for such interest to be prior to the rights of other creditors. Because the collateral at issue here is personal, rather than real property, both issues are governed by the U.C.C. Assuming that each competing lien was properly perfected and no other agreements concerning priority exist (such as a subordination agreement), the lien that gets perfected first chronologically will have priority in the collateral, regardless of when either security interest was created or granted.

Outside of bankruptcy, in the event that a first priority lien is found to be unenforceable (e.g., because it was not properly perfected or based on some other defect in the documents), then the next lien would move up in priority with respect to the particular collateral. By contrast, if a bankruptcy trustee successfully avoids a first priority lien, the avoided lien is preserved for the benefit of the estate and the next in line secured creditor does not move up in priority.


N.Y.U.C.C. § 9-310 – When Filing Required to Perfect Security Interest or Agricultural Lien: Security Interests and Agricultural Liens to Which Filing Provisions Do Not Apply

N.Y.U.C.C. § 9-322 -- Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral

11 U.S.C. § 551 – Automatic Preservation of a Avoided Transfer

68

In re Montagne, 417 B.R. 214, 229 (Bankr. D. Vt. 2009) (citation omitted) (“Section 9–322 sets out the priorities among competing secured creditors who claim security interests in the same collateral. This Court has applied this statute to competing perfected security interests, holding that as between two valid perfected security interests, the priorities are determined based on the “first in time, first in right” rule.”)


Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among Creditors, 88 Yale L.J. 1143, 1182 (1979).

Homer Kripke, The Last Event Test for Perfection of Security Interests under Article 9 of the Uniform Commercial Code, 50 NYU L. Rev. 47, 51 (1975).

Steve H. Nicklas, Rights and Remedies Between U.C.C. Article 9 Secured Parties with Conflicting Security Interests in Goods, 68 Iowa L. Rev. 217, 220 (1982).


The facts indicate that the Bank perfected its security interest and lien upon the lease on April 15, 2014. There is no indication that the Supplier ever actually perfected its lien. Under these circumstances, the Bank has a superior right in the lease. Because the commencement of the bankruptcy case will stay any attempt by the Supplier to perfect its lien after the petition date, the Supplier’s claim will most likely be treated as unsecured in the bankruptcy case.

By contrast, if the Supplier had perfected its security interest and lien at any time prior to April 15, 2014, the Supplier’s claim would be “first in time,” and thus it would have the first priority interest in the lease, subject to potential avoidance as a preference by the bankruptcy if perfection occurred within ninety days before the bankruptcy filing. This would be true even though the debtor/lessor granted the Bank a security interest in the debtor/lessor’s assets before the agreements between the debtor/lessor and the Supplier were executed, because the facts indicate that the Bank did not perfect its security interest in and lien upon the debtor/lessor’s assets until April 15, 2014.

Assuming that Supplier perfected after the Bank and that the trustee is successful in avoiding the Bank’s lien as a preference (see question 18), then the estate would succeed to the Bank’s first priority position pursuant to section 551 of the Bankruptcy Code, which preserves any avoided lien for the benefit of the bankruptcy estate.

Finally, the facts indicate that in its dispute with the Lessee, the debtor/Lessor had argued that the Lease itself was really a financing agreement rather than a true lease. If the debtor/Lessor is correct, the lease is recharacterized as a financing agreement and assuming that the debtor/lessor properly perfected its interest in the Lease before the

69

Supplier and the Bank, then the bankruptcy estate would succeed to that interest and would have priority.

70

See Part 3. German Law

GENERAL NOTE: The answers below are based on the (limited) factual information in the case study as well as general legal principles of German law. The answers are outlines of the general legal principles of German law which a German court may apply when confronted with the case. The answers are intended to permit a generic comparative analysis of several jurisdictions and may solely be used for such educational purposes. In accordance with the instructions given to us any IT and IP specific legal issues have not been given any consideration. The answers are not, and must not be considered, conclusive legal analyses based on an exhaustive analysis of all published case law and legal literature. In addition, the answers do not constitute legal advice.



Conclusion of contracts by means of reciprocal declarations of intent issued to the relevant other party/-ies (wechselseitige, in Bezug aufeinander abgegebene Willenserklärungen)

Discretionary written form (gewillkürte Schriftform) of contracts


Conclusion of contracts: Secs. 145 et seq. of the German Civil Code (Bürgerliches Gesetzbuch – BGB)

Discretionary written form of contracts: Secs. 126, 127 BGB


Conclusion of contracts: Ellenberger in Palandt, BGB, 74th ed. 2015, Intro. Sec. 145 no. 1; Mansel in Jauernig, BGB, 15th ed. 2014, Intro. Sec. 145 no. 2

Discretionary written form of contracts: Hertel in Staudinger, BGB, 2011, Sec. 127 no. 8; Wendtland in Bamberger/Roth, BGB, 3rd ed. 2012, Sec. 125, no. 1

Exchange of signatures by mail or e-mail: Einsele in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 127 no. 10; Ellenberger in Palandt, BGB, 74th ed. 2015, Sec. 127 no. 2; Marly in Siebert/Soergel, BGB, 13th ed. 2002, Sec. 127 no. 8


There is no mandatory formal requirement for the conclusion of supply and support contracts or leasing contracts. In theory they can be concluded orally which would obviously entail evidentiary problems in case of dispute.

The parties to the relevant contracts have opted for written form in the written contracts.

71

Unless expressly stipulated otherwise in the contracts, exchange of signatures by mail or e-mail is sufficient, provided that the contract and the signing party can be identified.

Assuming that the above requirements had been met at closing and all signatures to the support contract and the leasing contract had been distributed and released, the contracts have been bindingly concluded. The subsequent loss of the original signatures is irrelevant with respect to the valid and binding conclusions of the contracts.



Culpa in contrahendo (fault in contractual negotiations), more particularly breach of pre-contractual disclosure duties

Judicial review of general terms and conditions (Inhaltskontrolle allgemeine Geschäftsbedingungen).


Fault in contractual negotiations: Secs. 311 para. 2, 280 para. 1 241 para. 2 BGB

Judicial review of general terms and conditions: Secs. 305 et seq. BGB


Culpa in contrahendo (fault in contractual negotiations): Emmerich in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 311 nos. 35 et seq.; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 311 nos. 11 et seq.; Löwisch/Feldmann in Staudinger, BGB, 2013, Sec. 311 nos. 96 et seq.

Exclusion of liability in general terms and conditions: Becker in Bamberger/Roth, BGB, 3rd ed. 2012, Sec. 309 Nr. 7 nos. 12 et seq.; Christensen, Ulmer/Brandner/Hensen, AGB-Recht, 11th ed. 2011, Sec. 309 Nr. 7 nos. 23 et seq.; Wurmnest in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 309 nos. 23, 26 et seq.


As a general rule, in contract negotiations each party must protect its own legal and commercial interests. But each party is obliged to respect the rights, assets and interests of the relevant other party. This includes the obligation of each party to disclose to the other party in the process of negotiations all material information that is not obvious or available to the other party and concerning which such party can in good faith and taking into account customary market practice expect to be informed.

As an exemption to the general rule, upon non-compliance with the aforestanding and under certain additional circumstances contractual rights and obligations can already arise in the context, and as a consequence of, contract negotiations.

72

In the event that a transaction party wilfully or negligently violates this obligation it can be held liable by the relevant other contract parties. The remedy for the damaged party will be to be placed into the same economic position it would have be in had the breach of duty not occurred (so called negative interest (negatives Interesse)).

On the basis thereof and depending on the relevant market practice Lessee, Lessor and Bank may be entitled to damages, unless Supplier is able to prove that such non-disclosure was not intentional or negligent.

If the terms and conditions of the supply and support contract qualify as general terms and conditions, Supplier’s outright exclusion of its liability would be void, if Supplier’s liability in case of its wilful misconduct, gross negligence and non-compliance with its core contractual obligations (Kardinalpflichten) has also been excluded.



Primary liability for penalty under applicable public law and under the administrative order.

Recourse on the basis of contractual provisions or mandatory law.


Public law: VwVfG (Verwaltungsverfahrensgesetz) and public law provision specifically applicable to defence goods and IT

Recourse: see answers to 2. above


Interpretation of administrative orders: Kopp/Ramsauer, VwVfG, 15th ed. 2014, Sec. 35 nos. 53 et seq.; Stelkens in Stelkens/Bonk/Sachs, VwVfG, 8th

ed. 2014, Sec. 35 nos. 71 et seq.; Windoffer in Mann/Sennekamp/Uechtritz, VwVfG, 1st ed. 2014, Sec. 35 no. 9


Interpretation of the administrative order is required to identify the primary obligor of the administrative penalty. This will either be the owner of CAP, i.e. Lessor, or the operator, i.e. Lessee. The wording of the administrative is not without doubt (“… owner of any system that runs CAP …”)

Regarding recourse claim by Lessor against Supplier see answer to 2. above.


73


Disruption of implicit basis of contract (Störung der Geschäftsgrundlage)


Sec. 313 BGB


Change in law and administrative orders as acts of disruption of implicit basis of contract: Finkenauer in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 313 no. 230 et seq; Grüneberg in Palandt, BGB, 74th

ed. 2015, Sec. 313 no. 34; Krebs in Dauner-Lieb/Langen, BGB, 2nd ed. 2012, Sec. 313 nos. 71 et seq.; Unberath in Bamberger/Roth, BGB, 3rd ed. 2012, Sec. 313 nos. 56 et seq.


The leasing contract does not allocate the risk of prohibitive administrative orders to either of the parties.

Neither of the parties to the leasing contract knew about such risk. The quiet enjoyment/use by Lessee of the CAP for the entire term of the

leasing contract implicitly formed part of the basis on which Lessor and Lessee entered into the leasing contract.

On that basis the administrative ban of the use of CAP constitutes an unforeseen economic hardship (Äquivalenzstörung) which generally justifies an amendment of the contract, as – in view of, amongst others, the remaining term of the leasing contract – it cannot be reasonably expected that Lessee is held to the terms and conditions of the existing contract for its entire term.



Repudiation of contract (endgültige Erfüllungsablehnung)


Secs. 281 para. 2, 286 para. 2 no. 2, 314 para. 2 BGB


Ernst in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 323 nos. 94 et seq., Gaier in Säcker/Rixecker, Münchener Kommentar,

74

BGB, 6th ed. 2012, Sec. 314 no. 17; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 281 no. 14, Sec. 314 no. 8; Krebs in Dauner-Lieb/Langen, BGB, 2nd ed. 2012, Sec. 314 no. 45; Otto/Schwarze in Staudinger, BGB, 2009, Sec. 323 no. B 87.


As a matter of German law a repudiation of contract does not justify the non-defaulting party’s request for assurance of future performance, but grants the non-defaulting party certain easements with respect to its termination right and its claims for default interest and damages. In essence the non-defaulting party does not have to notify the defaulting party and await the unremedied expiry of a grace period. As a matter of German law Lessor cannot successfully request assurance of future performance of the leasing contract from Lessee.

6. Assuming Lessee defaulted under the leasing contract, were Lessors action seeking to terminate the contract [para 10] and demanding the return on CAP legally justified, taking into account Lessee’s asserted defences and claims [para 13]?


Termination of contract Contractual and mandatory termination rights Principle of good faith (Treu und Glauben) Ownership rights/title


Mandatory termination right: Sec. 314 BGB Principle of good faith: Sec. 242 BGB Ownership rights/title (Eigentum): Secs. 985, 986 BGB


Legal consequences of extraordinary termination of a leasing contract: Berninghaus in Martinek/Stoffels/Wimmer-Leonhardt, Handbuch des Leasingrechts, 2nd ed. 2008, Secs. 38 et seq.; Graf v. Westphalen, Der Leasingvertrag, 6th ed. 2008, pp. 555 et seq.; J. Koch in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Finanzierungsleasing nos. 137 et seq.; Skusa, Handbuch Leasing, 1st ed. 2012, pp. 418 et seq.; Stoffels in Staudinger, BGB, 2014, Leasing nos. 308 et seq.


If Lessee’s default triggers the requirements of a contractual termination right under the leasing contract, Lessor may terminate.

Absent contractual termination provisions, according to mandatory law (Sec. 314 para. 1 sent. 2 BGB) Lessor may terminate, if based on all factual circumstances of the case at hand it cannot be reasonably expected that

75

Lessor continues the leasing contract until the time of a contractually agreed termination right or the agreed expiry date. In this context the industry practice alleged by Lessee (30 days grace period) can be considered. As such grace period was discussed during the negotiation of the leasing contract, but was ultimately not included in the leasing contract, it is practically impossible to re-introduce it on the grounds of general market practice.

Lessee’s repudiation of the contract would allow Lessor to terminate with immediate effect without the need for a default notice and the expiry of a grace period (see Sec. 314 para. 2 BGB and answer to 5. above).

Following rightful termination of the leasing contract Lessor is entitled to claim return of the CAP both on the contractual basis of the leasing contract (Sec. 546 para. 1 BGB) as well as on the grounds of its title in CAP (Sec. 985 BGB).



„Relativity“ of contractual relationships (Relativität der Schuldverhältnisse) Agency (Stellvertretung) Joint and several liability (gesamtschuldnerische Haftung) Piercing the corporate veil (Haftungsdurchgriff)


Agency: Secs. 164 et seq. BGB Joint and several liability: Sec. 421 BGB


“Relativity” of contractual relationships: Grüneberg in Palandt, BGB, 74th

ed. 2015, Intro. Sec. 241 no. 5; Olzen in Staudinger, BGB, 2015, Sec. 241 no. 299

Agency: Ellenberger in Palandt, BGB, 74th ed. 2015, Sec. 164 no. 1 Joint and several liability: Grüneberg in Palandt, BGB, 74th ed. 2015, Sec.

421 nos. 3 et seq.; Looschelders in Staudinger, BGB, 2012, Sec. 421 nos. 10 et seq.

Piercing the corporate veil: Altmeppen in Roth/Altmeppen, GmbHG, 7th ed. 2012, Sec. 13 nos. 128 et seq.; Bitter in Scholz, GmbHG, 11th ed. 2012, Sec. 13 nos. 55 et seq.; Fastrich in Baumbach/Hueck, GmbHG, 20th ed. 2013 no. 43; K. Schmidt in Gesellschaftsrecht, 4th ed. 2002, Sec. 9 IV; Michalski/Funke in Michalski, GmbHG, 2nd ed. 2010, Sec. 13 nos. 339 et seq.; Weick in Staudinger, BGB, 2005, Intro. Sec. 21 nos. 37 et seq.


Investco is not a party to the leasing contract, Lessor is not a party to the memorandum of understanding. Whether the memorandum of understanding can be read to avail rights and remedies to Lessor depends on its wording, but usually the non-binding nature of a memorandum of

76

understanding is expressed therein and would contradict such rights and remedies of Lessor against Investco. Therefore there is no contractual relationship between Lessee and Investco the violation of which could form the basis of damage claims.

No indication that Lessee acted as agent for Investco when entering into the leasing contract, i.e. Lessee did not act on behalf and for the benefit of Investco.

No indication that the leasing contract expressed the joint and several liability of Lessee and Investco.

Piercing the corporate veil is a theory which is only used by very few authors in German legal literature in the context of intentionally thin equity capitalisation of limited liability companies, but not in the context of default under contract.



Specific performance (Vertragserfüllung) Cessation of contractual obligations (Entfallen der Hauptleistungspflicht)


Specific performance: Sec. 241 BGB Cessation of contractual obligation: Sec. 281 Abs. 4 BGB


Specific performance: Bachmann in Säcker/Rixecker, Münchener Kommentar, BGB, Secs. 241 nos. 10 et seq.; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 241 no. 5; Olzen in Staudinger, BGB, Sec. 241 nos. 133 et seq.

Cessation of contractual obligations: Schwarze in Staudinger, BGB, 2014, Sec. 281 no. D 1


As a matter of German law the claim for specific performance is the primary remedy for the non-defaulting party. Termination rights, default interest and damages are subject to additional prerequisites.

Lessor can generally claim for publication of the article on the basis of the leasing contract, provided that the content of such article is correct and would not constitute a violation of mandatory law.

A court will not grant such specific performance if the content of the article is not sufficiently precisely described in the leasing contract.

The remedy of specific performance is no longer available to Lessor following its termination of the leasing contract (see Sec. 281 para. 4 BGB). Following the termination of the leasing contract Lessor cannot request from Lessee publication of the article.

77



Defences available to the provider of surety or to the guarantor Contest of declarations of intent (Anfechtung von Willenserklärungen), in

particular contest on the basis of deception (Täuschungsanfechtung)


Sureties: Secs. 765 et seq. BGB Interpretation of contracts: Secs. 133, 157 BGB Contest on the basis of deception: Secs. 123, 142 para. 1 BGB


Regarding guarantees: Beckmann in Dauner-Lieb/Langen, BGB, 2nd ed. 2012, Intro. Sec. 765 nos. 14 et seq.; Habersack in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2013, Intro. Sec. 765-778 nos. 16 et seq.; Horn in Staudinger, BGB, 2012, Intro. Sec. 765-778 nos. 207 et seq.; Sprau in Palandt, BGB, 74th ed. 2015, Intro. Sec. 765 nos. 16 et seq.


The main distinction between a guarantee and a surety (Bürgschaft) under German law generally is that under a guarantee any defences by the original obligor against the creditor are not available to the guarantor, but would generally (subject to certain limitations) be available to the surety provider (Bürge) (Sec. 768 para. 1 BGB). However, if the surety provider grants the surety as part of his business, the potential defence that the beneficiary must pursue his rights against the primary obligor is not available to the surety provider (Sec. 349 of the German Commercial Code (Handelsgesetzbuch – HGB)).

Based on the terms of the guarantee the beneficiary must use reasonable endeavours to pursue its rights against Lessee under the leasing contract before the guarantee can be called, but only to the extent required by law. German law does not impose such requirement in connection with guarantees. Lessor may therefore immediately seek performance by Guarantor.

Given that Investco did not disclose the risk of a ban of the use of CAP to Guarantor, its relationship bank, may allow Guarantor to contest its declaration of intent to Lessor regarding the granting of the guarantee on the grounds of deception. Irrespective whether Investco’s behaviour would ultimately qualify as deception, the contest vis-à-vis Lessor would only be successful, if Lessor knew or should have known about such deception (Sec. 123 para. 2 BGB). This is not the case (in this context also see answer to 7. above). Guarantor can therefore not defend against Lessor’s claim under the guarantee by contesting its declaration of intent regarding same.


78


Fault in contractual negotiations „Relativity“ of contractual relationships (Relativität der Schuldverhältnisse) Contract to the benefit of a third party (echter Vertrag zugunsten Dritter) Contract that protects third party interests (Vertrag mit Schutzwirkung

zugunsten Dritter) Damage claims on the grounds of breach of contract in connection with

either of the aforestanding concepts.


Fault in contractual negotiations: Secs. 311 para. 2, 280 para. 1 241 para. 2 BGB

Contract to the benefit of third parties: Sec. 328 BGB


“Relativity” of contractual relationships: Grüneberg in Palandt, BGB, 74th ed. 2015, Intro. Sec. 241 no. 5; Olzen in Staudinger, BGB, 2015, Sec. 241 no. 299

Contract to the benefit of a third party: Gottwald in Münchener Kommentar, BGB, 6th ed. 2012, Sec. 328 nos. 19 et seq.; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 328 nos. 1 et seq.; Jagmann in Staudinger, BGB, 2009, Intro. Sec. 328 nos. 2 et seq.; Stadler in Jauernig, BGB, 15th ed. 2014, Sec. 328 nos. 1 et seq.

Contract that protects third party interests: Gottwald in Münchener Kommentar, BGB, 6th ed. 2012, Sec. 328 nos. 186 et seq.; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 328 nos. 13 et seq.; Jagmann in Staudinger, BGB, 2009, Sec. 328 nos. 96 et seq.; Stadler in Jauernig, BGB, 15th ed. 2014, Sec. 328 no. 19


There is no direct contractual relationship between Supplier and Lessee. It is also assumed that Supplier and Lessee have not directly negotiated the supply and support contract. Therefore we see no grounds for damage claims on the grounds of fault in contractual negotiations.

Depending on the wording and interpretation of the supply and support contract, the supply and support contract may avail direct rights to Lessee. If this is not expressed in the contract, interpretation based on the parties’ intentions (Sec. 133 BGB) may lead to such conclusion. For a supply contract as presumably used in the case at hand such interpretation would be rather unusual.

The supply and support contract may allow for certain protections for Lessee in case of (i) a close connection of Lessee to the subject matter of the contract, (ii) a certain proximity between Lessor and Lessee from the perspective of Supplier and (iii) recognisability of (i) and (ii) for Supplier. While (i) may be given based on the fact that the supply and support contract and the leasing contract were negotiated and entered into as part of the same transaction structure and based on the same memorandum of understanding, (ii) appears to be rather remote given the basic principle

79

that in contract negotiations each party needs to protect its own legal and commercial interests and that lessor and lessee of a leasing contract have rather adverse positions.



Contractual and mandatory termination rights for loan agreements.


Sec. 490 BGB


Berger in Münchener Kommentar, BGB, 6th ed. 2012, Sec. 490 nos. 2 et seq.; Mülbert in Staudinger, BGB, 2010, Sec. 490 nos. 11 et seq.; Weidenkaff in Palandt, BGB, 74th ed. 2015, 490 nos. 2 et seq.


Bank’s action may be justified based on the contractual default and termination provisions of the facility agreement.

Absent contractual default provisions under the facility agreement a default may be declared and the loan may be terminated upon the occurrence of a substantial deterioration of the economic power (wesentliche Verschlechterung der Vermögensverhältnisse) of the borrower.

Also, Bank may avail itself of the rights and remedies under the security documents in accordance with the relevant provisions of the security documents.

As a general rule, self-help/extra-judicial enforcement is not available under German law, but the realization of collateral usually requires the involvement of courts or specifically designated officials such as bailiffs (Gerichtsvollzieher). Only in very restricted circumstances, but not in the case at hand, the secured party may seek to discharge the secured obligations by means of private sale, netting or appropriation.



Stay of enforcement action upon insolvency

80

Security trustee concept, parallel debt/abstract acknowledgement of debt (abstraktes Schuldversprechen)

Prohibition of assignment Perfection of security interests Insolvency avoidance action (Insolvenzanfechtung) Usury (Wucher)


Stay of enforcement action: Secs. 21 para. 2 sent. 1 no. 3, 89 of the German Insolvency Code (Insolvenzordnung – InsO)

Security trustee concept, parallel debt: Secs. 164 et seq., 780, 781 BGB Prohibition of assignment: Sec. 399 BGB, 354a HGB Insolvency avoidance action: Secs. 129 et seq. InsO Usury: Sec. 138 BGB


Stay of enforcement action: Böhm in Braun, InsO, 6th ed. 2014, Sec. 21 nos. 48 et seq.; Haarmeyer in Kirchhof/Eidenmüller/Stürner, Münchener Kommentar, InsO, 3rd ed. 2013, Sec. 21 nos. 70 et seq.; Mönning in Nerlich/Römermann, InsO, 27th ed. 2014, Sec. 21 nos. 186 et seq.; Vallender in Uhlenbruck/Hirte/Vallender, InsO, 14th ed. 2015, Sec. 21 nos. 26 et seq.

Security trustee concept, parallel debt: Diem in Diem, Aquisitionsfinanzierungen, 3rd ed. 2013, Sec. 42 nos. 2 et seq.; Hoffmann in WM 2009, 1452; Schnauder in NJW 2010, 3132; Willer in AcP 209, 807

Prohibition of assignment and Sec. 354a HGB: E. Wagner in Ebenroth/Boujong/Joost/Strohn, HGB, 2nd ed. 2009, Sec. 354a no. 6; Hopt in Baumbach/Hopt, HGB, 36th ed. 2014, Sec. 354a no. 1; K. Schmidt in K. Schmidt, Münchener Kommentar, HGB, 3rd ed. 2013 nos. 1 et seq.

Insolvency avoidance action: Hirte in Uhlenbruck/Hirte/Vallender, InsO, 14th

ed. 2015, Sec. 129 nos. 1 et seq.; Kirchhof in Kirchhof/Eidenmüller/Stürner, Münchener Kommentar, InsO, 3rd ed. 2013, Intro. Sec. 129-147 nos. 1 et seq.

Usury: Armbrüster in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 138 nos. 27 et seq.; Sack/Fischinger in Staudinger, BGB, 2011, Sec. 138 nos. 4 et seq.


ad 18(a): According to Sec. 89 InsO enforcement actions are prohibited following the formal opening of insolvency proceedings (Eröffnung des Insolvenzverfahrens) and are automatically stayed. The insolvency court may order such stay as part of the set of preliminary measures for the time period between the insolvency filing and the opening of insolvency proceedings (Sec. 21 para. 2 sent. 1 no. 3 InsO). It is commonly understood, however, that the above rule does not prevent a creditor from the enforcement of security interests granted on the basis of security agreements, but only to the general enforcement into the debtor’s assets on the basis of the rights under the German Law on Civil Procedures (Zivilprozessordnung).

ad 18(b)(i): On the basis of general principles of civil law the security trustee concept and the concept of parallel debt for so called accessory security interests (akzessorische Sicherungsrechte) are broadly accepted

81

in the German practice, but have – to our knowledge – not yet been tested at least before the German Federal Court of Justice (Bundesgerichtshof).

ad 18(b)(ii): The collateral must be clearly identifiable at the time it is granted or – in the case of future rights and assets – they are acquired by the security grantor. The commingling of assets which form part of the collateral and assets which do not may lead to a loss of the security interest.

ad 18(b)(iii): Contractual assignment restrictions generally hinder an effective assignment. The assignability of payment claims deriving from contracts between businessmen (beiderseitiges Handelsgeschäft) cannot be validly contractually excluded. Hence the intangible contract rights could be validly assigned from Lessor to Bank.

ad 18(b)(iv): German law does not require a specific maximum amount of the collateral or the secured claims in order for the security interest to be validly granted.ad 18(b)(v): Other than wen taking security in real estate and certain ships and aircraft, German law does not impose registration requirements for the perfection of security interests. The security was granted on 15 February 2010 and Lessor filed for insolvency on 15 May 2014. Except for Sec.133 InsO, no insolvency avoidance rights would be available to the insolvency administrator of Lessor regarding the transaction security. On the grounds of Sec. 133 InsO legal actions can be avoided which the debtor took with the intent to discriminate against its creditors while the other party at the same time knew of such intention or knew that the debtor was threatened by cash-flow insolvency at the time of such action and that the action would discriminate against the other creditors. This does not seem to have been the case in the matter at hand.

ad 18(b)(vi): Whether the penalties and interest violate public policy needs to be assessed against the relevant market environment at the time of the conclusion of the relevant contract and the customary practice in the relevant industry. In addition thereto, even amongst businessmen claims for liquidated damages in general terms and conditions undergo specific judicial scrutiny.



Set-off in insolvency and restrictions thereto Restrictions on set-off vis-à-vis the assignee


Set-off in insolvency: Secs. 94 et seq. InsO Set-off vis-à-vis the assignee: Sec. 406 BGB


Set-off in insolvency: Kroth in Braun, InsO, 6th ed. 2014, Sec. 94 nos. 5 et seq.; Sinz in Uhlenbruck/Hirte/Vallender, InsO, 14th ed. 2015, Sec. 94 nos. 3 et seq.; Wittkowski/Kruth in Nerlich/Römermann, InsO, 27th ed. 2014, Sec. 94 nos. 3 et seq.

82

Set-off vis-à-vis the assignee: Busche in Staudinger, BGB, 2012, Sec. 406 nos. 13 et seq.; Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 406 nos. 5 et seq.; Roth in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Sec. 406 nos. 1 et seq.


Set-off by Lessee vis-à-vis Lessor: In principle, set-off vis-à-vis an insolvent party is only possible if the set-off would have been possible prior to the formal opening of insolvency proceedings. Beyond that the permissibility of a set-off vis-à-vis an insolvent party is broadly restricted and depends on when the relevant claims came into existence and fell due. In order to assess the situation at hand it would have to be assessed for each claim under the leasing contract and the damage claims as to when they came into existence and when they fell due. Irrespective thereof and in view of the fact that Lessor assigned its rights and claims under the leasing contract to Bank (or to Supplier (see 14. below)) set-off vis-à-vis Lessor would no longer be available to Lessee, unless Lessee has not been notified of the assignment.

Set-off by Lessee vis-à-vis Bank: Lessee may only be able to set off its damage claims against Lessor against the contractual claims under the leasing contract which were assigned to Bank, if Lessee did not know about the assignment by Lessor to Bank of the claims under the leasing contract at the time Lessee’s damage claims which it seeks to set off vis-à-vis Bank came into existence. In view of the overall set-up of the transaction such ignorance appears to be unlikely. Also, it would be customary that Lessee would have been notified of the assignment either at the commencement of the transaction or at least following Lessor’s default under the facility agreement.



Assignment or rights Principle of priority (Prioritätsprinzip)


Assignment of rights: Sec. 398 BGB


Grüneberg in Palandt, BGB, 74th ed. 2015, Sec. 398 no. 28; Martinek in Schimansky/Bunte/Lwowski, Bankrechts-Handbuch, 4th ed. 2011, Sec. 102 no. 50; Oechsler in Säcker/Rixecker, Münchener Kommentar, BGB, 6th ed. 2012, Annex to Sec. 929-936 no. 22; Sack/Fischinger in Staudinger, BGB, 2011, Sec. 138 nos. 426 et seq.

Judgements of the German Federal Court of Justice (Bundesgerichtshof) on conflict between global assignment and extended retention of title

83

arrangement: BGHZ 30, 149, 153; BGHZ 32, 361, 365; BGHZ 72, 308, 310; BGHZ 98, 303, 315; BGHZ 109, 240


An assignment of rights and claims even by way of security results in an outright transfer of such rights and claims. The original creditor can only assign them once, with the general rule that the prior assignment generally supersedes the later. Based on judgements of the German Federal Court of Justice (Bundesgerichtshof) an exemption from such rule is made for a conflict between an assignment of receivables as part of a so called extended retention of title arrangement (verlängerter Eigentumsvorbehalt) and a prior global assignment of receivables to a bank. In this case the assignment as part of the extended retention of title arrangement shall prevail and the global assignment agreement is void to the extent it conflicts. As this is an exemption granted by case law and is based on specific considerations for such situation, it cannot be applied to the situation at hand.

84

Part 4. Mexican Law


a) Basic legal principles.Existence of a contract - a contract exists when there is consent and when the object of the agreement is legal and possible.Vices of consent – produces the invalidity of the agreementVoluntary Compliance – ratifies the terms of the agreementb) Citations to main sources of law.Articles 17940, 17950, and 22340 of the Federal Civil Code

c) Bibliographical references (secondary sources).Thesis I.6o.C.156 C, Volume XV, February 19950

Thesis I.3o.C.295, Volume 295 C, March 20020

d) Application of legal principles [see (a) above] to the question above.It is pivotal to understand the difference between a contractual relationship and a contract itself. The validity of the contract and its terms could be doubted and discussed given, as in this specific case, the forged signatures, though the contractual relationship between the parties is credited consensually by the voluntary compliance of their respective obligations. In this specific case, both parties acknowledge the terms of the agreement, though generally, that does not mean that if a contractual relationship exists it is necessarily governed under a specific contract. A contractual relationship might be consensual and validly existent without a written contract to support it, or else, without a valid contract to support it.Therefore, the Supply and Support Contract and the Leasing Contract are binding from the moment there is an agreement by the parties and the object of the contract is legal possible as stated in articles 1794 and 1795 above. As stated in Article 2234, if the parties to a certain agreement comply voluntarily with their obligations under such, through payments, novation, or any other form it would be considered as tacit ratification of the agreement in all of its terms. Thus, considering the signatures on all documents were forged, the compliance with obligations by the parties ratifies the content of the agreement, therefore making it legal, binding and enforceable to all parties involved. As for enforceability, it is noted that documents were neither notarized nor formally witnessed. In accordance with Mexican law, it is not required to follow

0 For the existence of a contract, it is required: (i) consent, and (ii) the object of such contract being legal and possible. 0 A contract may be invalidated: (i) by the lack of legal capacity of either of the parties involved; (ii) by vices in consent; (iii) by the objective of the contract being illegal; and (iv) when consent was not manifested in the from required by law. 0 The voluntary fulfillment of the contract’s obligations through payment, novation, or any other

form, would be considered as tacit ratification and extinguished the action for annulment.

0 In a lease agreement, if one of the parties complies voluntarily with its payments obligations and

the other party accepts such payments, either partially or totally, it would be considered as tacit ratification of the agreed therefore extinguishing the action for annulment.

0 ‘….the words ‘payments’ and ‘compliance’ are synonyms, therefore whoever pays an amount of

money tending to comply with its obligations it is ratifying such obligation by means of such payment and extinguishing as a consequence the action for annulment.

85

any formality for the perfection of a lease agreement. As stated above, the agreement is perfected when there is consent and the object of the agreement is legal and possible, and it that sense, the contract is absolutely valid and enforceable. Although, it is not necessary, certain formalities could improve procedural enforcement of the agreement that would grant procedural benefits.


a) Basic legal principles.Vices of consent – produces the invalidity of the agreement0

No person should be benefitted by their own deceit or maliceb) Citations to main sources of law.Articles 18120 and 18150 of the Federal Civil Code.

c) Bibliographical references (secondary sources).Thesis 269412 Volume CXXVII, Chapter Fourth0.

d) Application of legal principles [see (a) above] to the question above.Yes, the Supplier is liable as it acted with deceit by the non-disclosure of information that results fundamental to the consent given by the counterparty, as if, the counterparty had had the full information it might not have entered into such agreement. It is mentioned that the parties verbally discussed the slight risk the product carried, though the formal letter by the government was sent to Supplier prior to the signature and closing of the transaction, which documents do not mention the risk in any way nor does it mention the letter received by the Supplier from Government. The Supplier will be liable to all parties involved in the transaction, as for any damages or lost profits caused, given the non-disclosure of the information and the vices in consent.


a) Basic legal principlesPacta sunt servanda – the parties must comply with the terms of the agreement

b) Citations to main sources of law.Article 4080 and 4140 of the General Law of Titles and Credit Operations;


0 See footnotes 4 and 5 above

0 The consent is not valid when such has been subject to mistake, deceit, or duress.

0 Deceit in an agreement means, any misleading, suggestion or artifice used by one of the parties to

induce its counterparty to a mistake or remain in the mistake, any bad faith, the dissemblance of an error by one of the parties to its counterparty, when there is awareness of such error.

0 Absence of consent and vices of consent are not be considered equal. The absence of consent

produces the inexistence of the agreement, while the vices of consent only produces the relative nullity which can be validated thereafter.

86

Thesis I.3o.C.654 C, Volume XXVI, December 20070.

d) Application of legal principles [see (a) above] to the question above.First and foremost, it must be determined if the lease is a financial lease or not, given that under Mexican law financial leases are subject to different legislation. The case does not provide enough information to fully determine and confirm that the lease is in fact a financial lease under Mexican law. The Lessor claims it is a financial lease, though this is not acknowledged expressly by the Lessee. The full clauses of the lease must be disclosed in order to determine what kind of lease the parties entered into and the applicable provisions in respect thereof. Without prejudice of the possible responsibility Lessor could incur in case it made any representations on the agreement resulting in liability, the responsible party for paying the penalty, as stated in the case above, is the owner of any system that uses progressive scanner 7, therefore, assuming the lease is a financial lease, the responsible party for the penalty would be the Lessee, given that in accordance with the articles mentioned above, the lessee carries all the risk of any hidden vices or defects that prevents the use of the asset. The Lessor will transfer its rights as owner to the Lessee in order for Lessee to exercise them against the seller, which would be the supplier in the present case.The Lessee would be responsible for paying the penalty on grounds of article 414 mentioned above, though not on the basis that the financial lease is a sale agreement with holding of title as Lessor exposes in the letter to lessee; according to the isolated thesis referenced above. Under Mexican law, there are main differences between a financial lease and a sale agreement with holding of title, and these figures should not be confused or used analogically. Also, it must be noted that it was agreed between the parties that the lease form shall be based on Lessor’s standard form equipment leasing contracts for tangible movable property, the Lessor claims the lease to be a financial lease and as such it is regulated under the General Law of Titles and Credit Operations. It is also mentioned that the Lessee has as objective the assurance that, if the lease effectively constitutes a sale, that Lessee would have the right to acquire ownership of CAP at the end of the leasing contract.


0 Through a financial lease the lessor is obliged to acquire certain goods and grant its temporal use,

for a certain period of time, to the lessee. Lessee is obligated to pay the full amount of the product partially for concept of rent and liquidate the acquisition of the product at the end the lease.

0 Article 414 clearly states that unless agreed otherwise, the lessee carries the risks: (i) for hidden

vices or defects of the assets that impede the partial or total use of the same. In this case, the lessor will transfer the lessee with the rights he holds as owner, so that lessee exercises such against the seller, (ii) the total or partial loss of the assets, even if caused by force majeure, and (iii) generally, all risks, losses, thefts, destruction or damages the assets under a financial lease suffer. When any of these events occur, the lessee will not be deemed free of its payment obligations, having to cover such in the form agreed on the contract. This article also states that lessee is not exempt from its payment obligations in any way.

0 This thesis discusses the similarities and differences between financial leases and sale agreements,

specifically when the latter involves the holding of title. In that sense, the thesis concludes that even though these two legal structures are very similar and some may interpret the lessee on a financial lease as being the buyer/owner of the object of the contract, they are not the same and should not be misinterpreted.

87

a) Basic legal principles.Objective responsibility Product liabilityb) Citations to main sources of law.Article 17960, 21060 of the Federal Civil Code.Article 4140 of the General Law of Titles and Credit Operations.Article 79 and 93 of the Federal Law for the Protection of the Consumer0. c) Bibliographical references (secondary sources).Thesis I.4o.C.327 C, Volume V, January 20120

d) Application of legal principles [see (a) above] to the question above.As it is true that in accordance with article 414 of the General Law of Titles and Credit Operations, referenced above, the Lessee carries all the risk in case of hidden vices or defected that prevents the partial or total use of the asset, the final responsibility lies within the Supplier concerning the product liability, for which Lessor is not responsible unless certain representations where made in the lease agreement in respect to the guaranty of the asset or product. Therefore, Lessee’s action is not legally justified as Lessor is not responsible for the change in circumstances, and Lessee would be obligated to fulfil its payments obligations as initially agreed. If Lessee holds back totally or partially its monthly rental payments, it will incur in an event of default under law and under the lease itself. Action from Lessee should be against Supplier in accordance with the law. The main obligations of the Lessor under lease agreement is to grant the use and quiet enjoyment of the product object of the lease. In that sense, the Lessor is not responsible if the product is not ideal for the use Lessee intended or if the product has a defect or cannot be used as a consequence of an act not attributable to Lessor.


a) Basic legal principles.Civil Responsibility – in case of default the defaulting party is liable for damages and lost profits


0 Article 1796 establishes that contracts are perfected by mere agreement between the parties,

except those that need to fulfil certain formal requirements. Since the moment of perfection of the contract, the parties are obligated to fulfil all obligations.

0 The responsibility derived from deceit or malice is enforceable in all obligations. The disclaimer to

such is null.

0 See footnote 11 above.

0 The compliance with guaranties is enforceable indistinctively to the manufacturer, importer or

supplier of the product, except in the cases where a third party has committed in writing the obligation to comply with the guaranties relating to the product.

0 Commercial practice reveals that in the sale of certain products, specifically, electronic products, it

is the manufacturer or supplier who provides guaranty for such product. However, the Seller of the product would be responsible of any representations made in respect to the guaranty of the product.

88

Article 21040 of the Federal Civil Code

c) Bibliographical references (secondary sources).Thesis 1a. CXXXV/2014, Volume 1, April 20140

d) Application of legal principles [see (a) above] to the question above.It is not legally justified. As long as there is no material change in the compliance with obligations by the Lessee, the Lessor cannot argue a repudiation of the contract and request further assurances. If the Lessee fails to comply as agreed, then it would be considered an event of default under the lease agreement and Lessee would be liable for all damages caused to its counterparty.In this specific case, Lessor is assuming the Lessee will not comply with its obligations given the threat posed by Lessee in the letter sent on 10 January 2014, though Lessor has not certainty that Lessee will not comply until there is a material change in the fulfilment of obligations. Lessor cannot demand any damages or further assurances as long as Lessee complies with its obligations under the contract, regardless of any threats or fear of non-compliance.


a) Basic legal principles.He who confirms is obligated to prove.

b) Citations to main sources of law.Article 21040 and 21070 of the Federal Civil Code;Article 4160 of the General Law of Titles and Credit Operations.

c) Bibliographical references (secondary sources).Thesis 1a./J.53/98, Volume VIII, September 19980

0 Article 2104 states that the party obligated to comply with an obligation and fails to do so totally or

does so in a different manner than that agreed on the contract, will be responsible for all damages caused.

0 In accordance with the legal theory of civil responsibility the party that causes damage to its

counterparty is obligated to repair it. The contractual responsibility of the parties is linked prior to the event causing the damage that derives in responsibility. Therefore, the contractual responsibility becomes effective when one of the parties has not complied with its obligations under the contract.


0 Liability for default in obligations will result in the return of the asset or its equivalent price, and the

repair for all damages caused and lost profits.

0 Article 416 states that Lessor could request at the claim or during trial the repossession of the

leased object, given the default of Lessee’s obligations under the lease agreement.

0 In financial leases, upon an event of default by the Lessee of any of its obligations in the lease

agreement, the lessor could request judicially the repossession of the asset under the lease. It is not necessary to request the termination of the lease in order to request the repossession of the asset, given that the objective of requesting repossession of the asset is to secure it while the claim is resolved at court.

89


Lessor’s action is legally justified in terms of the articles cited above, regardless of Lessee’s asserted defenses and claims. As Article 416 states, lessor could request the repossession of the asset under a financial lease once an event of default occurs under the contract. Once the repossession is ordered by the relevant authority, the lessor is free to lease the asset to other parties or make use of the asset as Lessor sees fit.The argument made by Lessee, that Lessor claimed Lessee was the economic owner of CAP would not be applicable in this specific case, given article 416. Lessee is responsible for paying the penalty, though Lessor can request for the asset to be returned to his possession.Conceptually, it can be argued before a court of law that the treatment given to a financial lessee cannot be the same as an operative lessee undergoing a judicial process. Through a financial lease, it is understood that the lessee is acquiring the object under the lease through the monthly payment considered as rent, therefore, it could be argued that lessee is in part, owner of the object under the lease. In the case of repossession by the Lessor in terms of the articles mentioned above, the judge might consider the Lessee as legal owner of part of the asset, and such percentage should be given to Lessee as rightful owner.


a) Basic legal principles.Solidarity is never presumed on the fulfilment of obligations

b) Citations to main sources of law.Article 1140 of the General Law of Titles and Credit Operations.Article 19880 of the Federal Civil Code.

c) Bibliographical references (secondary sources).Thesis 1.5o.C.27 C, Book XXIII, Volume 3, August 20130

d) Application of legal principles [see (a) above] to the question above.If InvestoCo expressly agreed to be a joint obligor in Lessee’s obligation, then yes, InvestCo would be liable to Lessor as well. The lease agreement was from an independent intermediary leasing company to a new subsidiary of InvestCo, but in the documents referenced there is no mention of a joint obligor nor does InvestCo appears to have agreed to be serving as joint obligor to Lessee. Therefore, InvestCo would not result liable. Even if the corporate veil between Lessee and InvestCo is not substantive, under Mexican law, solidarity in performing obligations is never assumed. Even more so, there are not actions by InvestCo that presume that InvestCo was in fact taking decisions in the name of Lessee or Lessee was acting by orders of

0 The guarantor is a joint obligor of the party to whom the obligation has been guaranteed.

0 Solidarity is not presumed in any way, it either results from the law or from the agreement of the

parties.

0 When a society is used with the intention of committing fraud to third parties or avoid the law or

where the material actors of any actions taken by the society are others than those established, the piercing of the corporate veil proceeds.

90

InvestCo, etc., therefore, the piercing of the corporate veil does not proceed under Mexican law.


a) Basic legal principles.Civil Responsibility - in case of default the defaulting party is liable for damages and lost profits

b) Citations to main sources of law.Articles 19160, 2104, 2107, 2108, 2109, 2110 and 2112 of the Federal Civil Code0.

c) Bibliographical references (secondary sources).Thesis 1a. CCXLI/2014 Book 7, Volume 1, June 20140

d) Application of legal principles [see (a) above] to the question above.The specific performance argued by Lessor, under Mexican law, would fall under the concept of moral damage stated in Article 1916 of the Federal Civil Code. In order for moral damage to be determined and applicable, there must be proof that indicates without reasonable doubt that the actions of one person affected directly the reputation or damages the impression others might have of the affected person, among others. In this specific case, there is no real evidence that the default by Lessee, or the termination of the lease agreement affects Lessor’s reputation. Lessee has made no public comments on the matter and has not published any documents that attempt against the reputation of Lessor. Under Mexican law, direct proof is needed in order for moral damages to proceed. No court would grant the specific performance requested by Lessor.


a) Basic legal principles.Civil Responsibility - in case of default the defaulting party is liable for damages and lost profitsGuarantor is responsible for he who he guaranteesb) Citations to main sources of law.

0 It is understood as moral damage the adverse effects a person suffers in his feelings, beliefs,

honour, reputation, etc. When such moral damage has affected the victim in its honour or reputation, the judge will order a publication of an extract of the corresponding sentence that reflects the nature or scope of such sentence, through the informative means it deems appropriate. When the damage derives from an act that has been on the media, the judge will order that the same give publicity to an extract of the sentence with the same relevance as the original publication.

0 These articles state specifically that derived from a default in the obligations of any of the parties to

a contract, the defaulting party would be liable to the counterparty of all losses and damages caused.

0 Moral damage can be credited by the judge upon review of proofed events and the damage caused

to the victim.

91

Article 19880 of the Federal Civil Code

c) Bibliographical references (secondary sources).See footnote 19.

d) Application of legal principles [see (a) above] to the question above.As stated in the Guaranty Agreement itself, the Beneficiary must use all reasonable endeavors to pursue the Lessee under the contract before such guarantee con be called. In that sense, the Lessor did not seek to pursue Lessee before calling on the guaranty. Therefore, before the guaranty can be paid to the Beneficiary, other courses of action must be taken. In a broader sense, the guarantor would be legally liable to Lessee under the guarantee assuming there was a certain event of default. The default exists when the Lessee does not comply with its obligations under the contract, but in this specific case, there is no certainty that such event actually occurred. If there was no material change in the obligations, and Lessor assumed the Lessee would not comply based on the letter received and threats made thereon, the Guarantor would not be liable given there was no default, only an assumption of default by Lessor.


a) Basic legal principles.Objective ResponsibilityProduct Liability

b) Citations to main sources of law.Article 4140 of the General Law of Titles and Credit Operations.


d) Application of legal principles [see (a) above] to the question above.Yes, the Supplier will result liable to Lessee given (i) the non-disclose of the information which results in vices to the consent, and (ii) the product liability, given that the Supplier is obligated to guarantee the product in accordance with Mexican law, as explained in footnote 17. Also, in accordance with article 414 mentioned above the lessor will transfer its rights as owner to the Lessee in order for Lessee to exercise them against the seller, which would be the supplier. Lessee would exercise the rights of the Lessor against the Supplier.


a) Basic legal principles.No one is to be condemn without being Heard (Due Process)He who confirms is obligated to prove.

0 See footnote 25 above


92

b) Citations to main sources of law.Article 140 of Mexican ConstitutionArticle 21040 of the Federal Civil Code


d) Application of legal principles [see (a) above] to the question above.The Bank is not legally justified in declaring a default under the Credit and Security agreement, as in accordance with the terms of such agreement “an event of default under a lease shall not, in and of itself, be an Event of Default under the facility. If an event of default occurs and is continuing, the Facility Agent may notify the Borrower, and following such notice, it is the Security Trustee who would be entitled to enforce the security.” No event of default has occurred under the Credit and Security Agreement, the only assumed default would be under the lease. Even if the Bank had the right to declare the default, seeking extra judicial action would violate the right to ‘due process’ which is set in Article 14 of the Mexican Constitution. Even more so, the Bank would only be entitled to execute any action in an event of default by the Lessor (its borrower), if such event of default actually takes place. There is no evidence that there has been an adverse change since the entrance into force of the Credit and Security Agreement, the Bank makes such assumption as a consequence of the litigation and the technical ‘solvency test’ default, but there is no material change in the compliance of borrower in its obligations to the Bank.


a) Basic legal principles.He who confirms is obligated to prove.

b) Citations to main sources of law.(i) Article 381 to 393 of the General Law of Titles and Credit Operations0.(ii) Articles 1825 and 1826 of the Federal Civil Code0.(iii) Articles 2033 and 2036 of the Federal Civil Code0.(iv) See section (ii) immediately above.(v) Article 3007 of the Federal Civil Code0.

0 Second paragraph of article 14 states that ‘no person shall be deprived of its liberty or its

properties, possessions, or rights, unless through a trial taking place before the previously established courts, in which the essential formalities of the procedure are complied with, and following the laws established prior to the act’.


0 These articles set the nature and function of trusts and their legal capacities.

0 The object of a contract must: (i) exist in nature, (ii) be determined or determinable, and (iii)

involved in fair trade. Article 1826 clearly states that future objects or goods can be the object of a contract.

0 In the case of assignment of credits, in order for the assignee to enforce its rights against the

debtor, proper notification of the assignment must be made to the debtor, either judicially, before a notary public or witnessed.

93

(vi) Articles 2392, 2394, and 2395 of the Civil Federal Code0.

c) Bibliographical references (secondary sources).Thesis V.2o.42 K, Volume XXI, January 20050

Thesis I.3o.C.823 C, Volume XXXII, July 20100

d) Application of legal principles [see (a) above] to the question above.In respect to:

(i) No, it would not uphold as a matter of law, since the trust is created with independent nature to fulfill certain objectives. The trustee has all the right to claim the security collateral as it was the Bank as trustee who entered into the Credit and Security Agreement with Lessor.

(ii) No, it would not uphold as a matter of law, since in accordance with articles 1825 and 1826 of the Federal Civil Code future objects or goods can be the object of a contract, and even though the security collateral was not determined at the time of execution of the agreement, it is determinable thereafter.

(iii) Yes, it would uphold as a matter of law, given that notification was not made according with law. If the lease assignment does in fact contain a provision prohibiting an assignment without the consent of Lessee where such would have a material adverse change on Lessee, the absence of notification would make the assignment unlawful.

(iv) See section (ii) immediately above.(v) It depends on whether this specific agreement requires to be registered

by law. If it is not necessary under Mexican law to have certain formalities and registration of the contract, then the agreement is completely valid, but, if the agreement needs to be registered as a matter of law it would have to be registered before the Lessor undergoes an insolvency procedure, as if that formality is complied with after the Lessor has entered into an insolvency procedure, it would be deemed fraudulent as the case states.

(vi) It would be considered by the judge if the conventional interest is disproportionate or if it violates public policy. In the case that the interest rate is in fact disproportionate the judge will reduce it but it will not affect the validity of the contract in any way.

0 The documents that according with law are susceptible of registration, but are not registered, will

not produce any effects against third parties.

0 The parties to an agreement can agree on the interest rate to be paid. There are two types of

interests (i) legal, and (ii) conventional. The legal interest is 9% per annum, the conventional interests is the one agreed by the parties, which can be grater or smaller than the legal interest. If the conventional interest is disproportionate and it is considered an abuse of public policy, abuse of the inexperience or ignorance of debtor, the debtor could request the judge to consider the specific circumstances of the case and reduce the interest equitably.

0 Based on the assessment of articles 381 to 393 of the General Law of Titles and Credit Operations,

it can be concluded that trusts are a mean through which the trustors constitute an independent patrimony from their own through the trust agreement, having the trustee all the rights to exercise any actions necessary for the compliance of its objective.

0 The jurisdictional organ could reduce the conventional interests if it results disproportionate in

respect to legal interest, though that faculty will be reserved upon the assessment of specific aspects of the case.

94


a) Basic legal principles.Integrity of Payment Obligation – payments under an obligations are to be fulfilled in its entirety, partial payments would constitute a defaultNo one is to be condemn without being Heard (Due Process)

b) Citations to main sources of law.Articles 21040, 2185 and 2186 of the Federal Civil Code0.Article 140 of Mexican Constitution.

c) Bibliographical references (secondary sources).Thesis I.4o.C.37 C, Volume XII, September 20000

d) Application of legal principles [see (a) above] to the question above.A set-off claim under Mexican law operates as follows:

(i) A set-off claim could be agreed between the parties. If this is the case, and after an event of default or upon an occurrence of an event that credits the set-off claim, both parties completely and fully acknowledge to the amounts owed by each other, then the set-off would proceed.

(ii) If one the parties to an agreement which includes a set-off claim, does not acknowledge to the amounts owed, the other party cannot make this claim effective without undergoing a judicial process, as the other party has the right to prove before a court its reason. If one of the parties makes the set-off effective without acknowledgment and consent from the other party it would be violating to the right of due process and considered as a self-help remedy which under Mexican law is unconstitutional.

(iii) If the parties undergo a judicial process to settle the matter, the judge, who is the only person with the faculty to determine if the amounts argued by the parties are correct, will assess the facts and determine the amount owed by the parties to each other. Therefore, if Lessor results liable for damages and Lessee also results liable, compensation of the amounts owed as repair of damages would be compensated by sentence of a judge.


a) Basic legal principles.Pacta sunt Servanda - the parties must comply with the terms of the agreementValidity of the contract – if the law requires formalities for the validity of the contact, non-compliance with the formalities would result in an invalid contractb) Citations to main sources of law.


0 Compensation occurs when two parties are debtor and creditor reciprocally. The effects of

compensation is to extinguish by law both debts up until the lesser amount.


0 The judge is obligated to proceed with compensation when both parties are sentenced reciprocally

to certain payments in accordance with articles 2185 and 2186.

95

Article 17960 and 20360 of the Federal Civil Code


d) Application of legal principles [see (a) above] to the question above.First, if an assignment agreement was not rightfully notified to the Lessee, in accordance with Mexican law, the assignee will not be able to exercise its rights against the debtor, as the latter had no knowledge of the assignment.Therefore, if in this specific case the assignment was not notified properly to debtor neither the Bank nor the Supplier would have a right over the leasing contract and cannot request debtor to comply with obligations that are unknown due to lack of notification.In the case, that the assignment was notified properly to debtor, and given the case that a clause in the supply and support contract provides that the Lessor is deemed to have automatically assigned payments under the lease contract to Supplier as security for amounts owned by it to Lessor, the Supplier would hold a superior right over the leasing contract.



96

Part 5. UAE LawNOTE: The answers have been based on the following two statutes:

1. Federal Law No. 5 of 1985 Civil Code of the UAE (UAE Civil Code)2. UAE Federal Commercial Companies Law No. 8 of 1984 (UAE CCL)3. Dubai Contract Law of 1971 (this law remains in force in Dubai to the

extent that its provisions do not contract the laws implemented on a federal level, such as the Civil Code) (Dubai Contract Law).



A binding and enforceable contract contains all the elements of an offer, acceptance and consideration. The subject matter of the contract should be definitive and there should be no vitiating factors such as mistake, misrepresentation or incapacity or duress.


Article 129 of the UAE Civil Code provides that 'for a contract to exist, there must be agreement on the "essential elements," the subject matter must be defined and there should be a lawful purpose to the contract.'

Article 130 of the UAE Civil Code provides that 'a contract shall be made by confluence of offer and acceptance.'

Article 208 of the UAE Civil Code provides that 'there must be consideration.'

Article 209 of the UAE Civil Code provides that 'a valid contract is a contract which is lawful in its essence and description, being made by a competent person in respect of a subject matter properly falling within the ambit of a contract, having an existing, valid and lawful purpose and in proper form, unaccompanied by any vitiating condition.'

Article 212 of the UAE Civil Code – The defective contract(1) 'A voidable contract is one which is lawful in its essence but not in

form, and if the cause of the voidability is removed, the contract shall be valid.

(2) A transfer of ownership under a voidable contract shall only be effective if the property itself has been received.

(3) A voidable contract shall only have effect within the area laid down by the provisions of the law.

(4) Each of the parties to the contract and their heirs shall have the right to cancel the contract after giving notice to the other contracting parties.'



97

The supply and support contract and the leasing contract were both entered into on 15 February 2010. At this point each of the contracts were lawful in both their essence and form.

As the signed originals were lost during closing there will be an evidential issue as the existence of a contact. Further, as the signatures were subsequently forged by the Lessor's personal assistant, the contracts both become voidable pursuant to Articles 209 and 212 of the UAE Civil Code. The Lessee is therefore entitled to argue that the leasing contract is voidable as it is not lawful in form, having been executed by an individual who lacks authority to bind the Lessor (Financo) and can give notice to the Lessor to cancel the contract.



There is nothing under UAE law which is comparable to the concept of disclosure under English law. In our research, we have been unable to find any case law that shows how the UAE courts have applied these principles in practice.

As a general principle, the onus is placed on the buyer to investigate and make itself aware of the nature of the goods/commodities it is acquiring. However, there are some statutory provisions which provide for the remedy of rescission where a party has been induced to enter into a contract on the basis of fraudulent misrepresentation.


Article 185 of the UAE Civil Code provides that 'misrepresentation is when one of two contracting parties deceives the other by means of fraud by word or deed which leads the other to consent to what he would not otherwise have consented to.'

Article 186 of the UAE Civil Code provides that 'deliberate silence concerning a fact or circumstance shall be treated as a misrepresentation if it is proved that the person misled thereby would not have made the contract had he been aware of that fact or circumstance.'

Article 187 of the UAE Civil Code provides that 'if one of the contracting parties makes a misrepresentation to the other and it transpires that the contract was concluded by a gross cheat, the person so misled may cancel the contract.'

Article 246 of the UAE Civil Code provides that 'the contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.'



98

It is important to note that misrepresentation under UAE law only covers fraudulent misrepresentation: the UAE Civil Code does not provide remedies for negligent or innocent misrepresentation. A UAE court will require both the elements of misrepresentation and a 'gross cheat' by the Supplier before allowing the Supply and Support contract to be rescinded. Lessor will only have recourse to this remedy if the Supplier deliberately and fraudulently failed to disclose a relevant matter. The possibility of progressive scanner 7 being recalled by the Government can be considered a relevant matter and thus would constitute failure to disclose by the Supplier. This could constitute false representation under the Supply and Support Contract as there is a possible breach of the local laws and there is a material adverse change to the subject matter of the contract.

Unlike the UAE Civil Code, the Dubai Contracts Law includes within the scope of fraud, recklessness as to accuracy in addition to dishonest statements or omissions.

Therefore the Dubai Contracts Law would provide the right to rescind the Supply and Support Contract as there was an omission by the Supplier in failing to disclose the Government's letter dated 10 February 2010. This implies pre-contractual negotiations were not undertaken in good faith. However, Article 246 of the UAE Civil Code would not impose any sort of duty of 'utmost good faith' comparable to that owed by parties in a contract of insurance.

It should not be assumed that a failure to act in good faith will constitute a breach of contract giving rise to a claim for damages.



Under a lease agreement, ownership of the property, right or benefit remains with the lessor. There is no transfer of title pertaining to ownership but rather the transfer of the right of enjoyment of the subject matter under the lease agreement.


The Arabic language vocabulary does not distinguish between leasing (of real property) and hiring (of chattels). The words “hire” and “lease” and their derivatives are used interchangeably throughout. Likewise, the word “rent” is used irrespective of whether the subject matter of the contract is real property or a chattel.)

Article 742 of the UAE Civil Code provides 'A hire shall be the conferring by the lessor on the lessee of the right of use intended for the thing hired for a specified period in consideration of an ascertained rent.'

Article 762 of the UAE Civil Code provides that 'If the contract of hire has been validly made, the right of enjoyment of the thing hired shall pass to the lessee.'

Article 770 of the UAE Civil Code states 'It shall not be permissible for the lessor to expose the lessee to anything which may disturb his enjoyment during the period of the hire, nor to effect any alteration in the thing hired which may prevent use being made thereof or which

99

may prejudice the beneficial use contracted for, and if he does so, he shall be liable therefor.'

Article 771 states 'If the interference results in the lessee being deprived of his use of the thing hired in accordance with the contract, he may require that the contract be cancelled or that the rent be reduced, and shall have a claim in damages for the detriment he has suffered.'

Article 773 provides that 'If as the result of a defect the lessee is prevented from enjoying the thing leased, it shall be permissible for him to require that the contract be cancelled or that the rent be reduced, and he shall have a claim for any loss suffered by him.'

Article 782 provides the following: (1) If by any act of the competent authorities it becomes impossible to

derive full enjoyment from the thing hired through no cause on the part of the lessee, the lease shall be cancelled and the obligation to pay the rent shall cease as from the date of the impossibility arising.

(2) If the impossibility affects the enjoyment of part of the property hired in such a way as to affect the enjoyment intended, the lessee may cancel the contract and his obligation to pay the rent shall cease as from the time he notifies the lessor.'



As supported by Article 762, the leasing contract transfers the right of enjoyment of CAP from the Lessor to the Lessee. As CAP contains the component progressive scanner 7, the resulting penalty consists of interference to the Lessee as it disturbs his enjoyment (the use of CAP) during the period of the lease. Article 770 states that the Lessor remains liable for such interference. Article 773 permits the Lessee to cancel the leasing contract, or require that the rent be reduced and provides a claim for any loss suffered.

Therefore, the Lessor would be responsible for the penalty stemming from the use of the subject matter, CAP, under the least agreement.



When the subject matter of the contract can no longer be performed due to circumstances beyond the control of both parties to the contract, this may be categorised as a force majeure event.

Frustration occurs when the purpose of the contract has been destroyed.


100

Article 273 of UAE Civil Code provides that(1) 'In contracts binding on both parties, if force majeure supervenes

which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.

(2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.'

Article 773 provides that 'If as the result of a defect the lessee is prevented from enjoying the thing leased, it shall be permissible for him to require that the contract be cancelled or that the rent be reduced, and he shall have a claim for any loss suffered by him.'

Article 782 provides the following: (1) 'If by any act of the competent authorities it becomes impossible to

derive full enjoyment from the thing hired through no cause on the part of the lessee, the lease shall be cancelled and the obligation to pay the rent shall cease as from the date of the impossibility arising.

(2) If the impossibility affects the enjoyment of part of the property hired in such a way as to affect the enjoyment intended, the lessee may cancel the contract and his obligation to pay the rent shall cease as from the time he notifies the lessor.'



The leasing contract entered into by the Lessee was for CAP which contained progressive scanner 7. The prohibition of progressive scanner 7 by the government has an effect similar to that of a force majeure event as it is beyond the control of the Lessor and the Lessee.

The subject matter of the contract, CAP, has to be modified to replace progressive scanner 7 with progressive scanner 8. Without the modification, the leasing contract cannot continue as it is, without becoming illegal.

Additionally, the provision governing leases, Article 773 states that due to 'impossibility' the Lessee may cancel the contract and his obligation to pay the rent shall cease upon notice to the Lessor.

Pursuant to Article 773 and on the above sources of law, the Lessee's letter dated 10 January 2014 was justified in seeking payment of the penalty by the Lessor and requiring a renegotiated leasing contract to reflect a reduction of rent.


a) Basic legal principles. Repudiation of the leasing contract by warranting assurances of future

performance.

101


Article 247 of the UAE Civil Code provides 'In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.'

Article 249 of the UAE Civil Code states that 'If exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge, in accordance with the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.'



Based on the above sources of law, arguably the Lessor is not justified in warranting future performances due to the prohibition of progressive scanner 7. Replacing progressive scanner 7 with progressive scanner 8, makes the CAP 15% less effective in preventing a breach of cyber security. Therefore performance of the leasing contract does become oppressive for the Lessee and threatens him with substantial loss.



On the termination of the leasing contract the subject matter of the contract must be transferred back to the lessor.


Article 781 of the UAE Civil Code provides (1) 'If the whole of the enjoyment of the thing leased is lost, the lessee

shall not be obliged to pay the rent in respect of the period of the loss of enjoyment.

(2) If the loss of the enjoyment is partial and is such as to affect the enjoyment intended, he shall have the right to cancel the contract and the obligation to pay the rent shall lapse as from the date of the cancellation.'

Article 784 of the UAE Civil Code provides(1) 'The lessee must return the thing hired to the lessor upon the

expiration of the period of the hire in the condition in which he took delivery of it, with the exception of such loss or damage as the property may have suffered through no cause of his.

(2) If he retains possession of it without right he shall be bound to pay the lessor a fair rent, and he shall be liable for any loss suffered.'

102



The Lessor can be considered as legally justified in wanting a return of CAP following the termination of the leasing contract.


a) Basic legal principles. The principle of corporate veil is that the assets and liabilities of a

corporation are separate from the assets and liabilities of its shareholders. This rule protects shareholders from being liable personally for the company's debts and other obligations.

The limited liability of shareholders in companies is the logical sequence of the concept of separate legal personality of companies.


UAE CCL states that there are various types of legal entities, namely:o General Partnership; Simple limited Partnership; Public and

Private Joint Stock Company and Company Limited by Shares. Article 64 of the CCL provides 'Any company whose capital is divided

into negotiable shares of equal value shall be considered a public joint-stock company and a partner therein shall be liable only to the extent of his capital share.'

Article 218 of the CCL states 'A limited liability company is an association of a maximum number of fifty and minimum of two partners. Each of them shall be liable only to the extent of his share in the capital, and the partners’ shares are not made in the form of negotiable instruments.'



As we do not know what type of legal entity Investco is, the application of the corporate veil principle will be general.

It is unlikely that Investco will be liable to the Lessee. The Lessee is a separate legal entity in its own right. Additionally, as shareholders of the Lessee, they have not given Lessor a personal or corporate guarantee for full payment of debts.

Surety National (Guarantor) has issued a guarantee in favour of the Lessor and by virtue of this will be liable to pay the Lessor in the event of a default by the Lessee under the leasing contract.

103



Failure by an obligor to voluntarily perform obligations under a contract means that the contract must be compulsorily performed by specific performance or the payment of compensation.


Article 380 of the UAE Civil Code provides (1) 'An obligor shall, after being given notice, be compelled to

discharge his obligation by way of specific performance, if that is possible.

(2) Provided that if specific performance would be oppressive for the obligor, the judge may, upon the application of the obligor, restrict the right of the obligee to a monetary substitute unless that would cause him serious loss.'

Article 385 of the UAE Civil Code states 'If specific performance has taken place, or if the obligor persists in refusing performance, the judge shall determine the amount of compensation to be paid by the obligor, having regard therein to the prejudice suffered by the obligee, and the unreasonableness of the attitude of the obligor.'



In practice, we understand that orders for specific performance are rarely, if ever, granted by the UAE Courts.

It is more likely, that pursuant to Article 385, the court would ask the Lessee to pay an amount by way of compensation to the Lessor for failing to publish a notice in Cyber Security Weekly.



Under UAE law, guarantees are defined as a suretyship with ‘the joining of the liability of a person called the surety (the guarantor) with the liability of the obligor (the principal debtor) in the performance of his obligations.’


Article 1056 of the Civil Code:

104

'Suretyship is the joining of the liability of a person called the surety with the liability of the obligor in the performance of his obligations.'



Yes, according to the guarantee, the Guarantor will provide a guarantee to the Lessor in respect of the due and punctual performance of all present and future obligations of the Lessee under the Leasing Contract, if and when they become performable in accordance with the Leasing Contract. However, to the extent required by law, the Beneficiary must use reasonable endeavours to pursue the Lessee under the Leasing Contract before the guarantee can be called.



A contract may not impose an obligation upon a third party but it may create a right in that third party.


Article 252 of the Civil Code'A contract may not impose an obligation upon a third party but it may create a right in him.'



On the basis of Article 252 of the Civil Code and the Supply and Support Contract, it can be argued that the Lessee was a third party to this contract, and therefore as a result a right was created in favour of the Lessee, including the "transfer of good and marketable title to the CAP". This contract would not necessarily impose an obligation on the Lessee, but rather create a right.



105

12. Would each of the six lines of attack on Bank’s security collateral be upheld as a matter of law [para 18]?


It may be justified by stating that there has been a material adverse change as a result of the cumulative effect of the claims brought by other parties that are leasing from the Lessor (an Event of Default). However, it may be resisted on the grounds that an event of default under a lease is not in and of itself an Event of Default.




The bank can justify declaring a default on the basis of a material adverse material change as a result of the cumulative effect of the claims brought by the parties that are leasing from the Lessor. However, it can be resisted on the basis that a default under the Lease Agreement is not automatically considered to be an Event of Default under the Credit and Security Facility Agreement.


New Insolvency Law in the UAE to be announced soon. There are bankruptcy provisions in the Civil and Commercial Codes of the UAE, but they remain largely unused. Even after the financial crash of 2008, the existing bankruptcy provisions were not used. Therefore, the government of the UAE has decided to bring into force a comprehensive Insolvency Law (expected to be announced soon). The current bankruptcy provisions remain unused, and are typically seen as being impractical and led by expensive, court-driven processes. As a result, most companies in the UAE resort to informal arrangements and insolvent restructuring camouflaged as "refinancing negotiations". Finally, it is worth noting that when a cheque has been dishonoured in the UAE, a criminal offence has been committed by the signatory of that cheque. This is generally considered to be a safe and efficient method of obtaining security, but largely used for smaller amounts, rather than in bigger corporate transactions.




106



It can be permitted either as a voluntary arrangement, operation of law, or a court order.


Article 368 of the Civil Code provides that 'Set-off is the satisfaction of an obligation of the obligee by an obligation to be performed by the obligor.'

Article 369 of the Civil Code provides 'Set-off may either be mandatory, occurring by operation of law, or voluntary, occurring by agreement between the parties, or judicial, occurring by order of the court.'

Article 370 of the Civil Code states 'In the case of mandatory set-off, each of the parties must be both the obligor and the obligee of the other, and the obligations must be of the same type and description, must be equally due and of equal strength or weakness, and the making of the set-off must not be prejudicial to the rights of third parties, whether the cause of the arising of the obligations is the same or different.'

Article 371 of the Civil Code provides 'set-off may be made by agreement if any of the conditions for a mandatory set-off is not satisfied.'



The set off claimed by the Lessee would likely not be accepted as a voluntary arrangement, i.e. an agreement between the parties, but this could be accepted by the Courts of the UAE and hence made a Court order.


Typically under an assignment agreement, if there were an event of default, it would be the bank that would have the superior right and that could step into the shoes of the beneficiary of the assigned contract as a form of security. However, as previously stated, this is the typical situation in a common law jurisdiction such as England & Wales. However, bankruptcy law is practically non-existent in the UAE and a new Insolvency Law is set to be introduced soon.


107



108

Part 6. Chinese Law



Equality, voluntariness, fairness, good faith and public order


Article 32 of Contract Law, where the parties conclude a contract in written form, the contract is formed when it is signed the parties.

Article 37 of Contract Law, where a contract is to be concluded in written form, if one party has performed its principal obligation and the other party has accepted it before signing the contract, the contract is formed.

Article 44 of Contract Law, the contract formed according to law shall come in to effect upon its formation.

Article 52 of Contract Law, the contract shall not be binding or effective, if(1) one party enters into the contract by fraudulent or coercive means, and the

interest of the state is impaired;(2) the parties impair the interest of the state, the collective or the third party by

way of malicious collaboration;(3) the illegal purpose is disguised by the lawful means;(4) the social public interest is damaged; or(5) the mandatory provisions of laws and regulations are violated.


N/A


First, each of the parties to Supply and Support Contract and the Leasing Contract are duly established and validly existing legal persons under the laws of their respective jurisdiction of incorporation.

Second, each of the parties is capable of entering into and performing their respective obligations under the Supply and Support Contract and the Leasing Contract. According to the facts, the parties are not required to obtain (or otherwise have obtained) any approvals in order for the foregoing purposes.

Thirdly, the parties have executed the Supply and Support Contract and the Leasing Contract. Although the original signature pages on behalf of the Lessor were missing, the transaction documents have been signed by the Lessor. Even if the loss of signature page of the Lessor may cause the Lessor to be deemed as not having executed the transaction documents, the fact that the parties have commenced the performance of the transaction documents would render such documents being formed.

Finally, assuming that the transaction documents do not violate the then present laws and regulations (although the subject matter of the transaction documents is

109

restricted, its sale and lease is not prohibited by law or government orders), they would constitute legally binding and enforceable obligations of the parties.



Principle of Good Faith / Culpa In Contrahendo


Article 42 of Contract Law, the party shall be liable for damage if it is under one of the following circumstances in concluding a contract and thus causing losses to the other party:(1) pretending to conclude a contract, and negotiating in bad faith;(2) deliberately concealing important facts relating to the conclusion of the

contract or providing false information;(3) performing other acts which violate the principle of good faith.


N/A


The non-disclosure by Supplier of the 10 February 2010 letter does not observe the principle of good faith in concluding the transaction documents. The Supplier shall be liable for the damage of the parties resulting from such non-disclosure because it deliberately concealed the fact that the cost of using the subject matter of lease would increase.



Effectiveness of Standard Term


Article 39 of Contract Law, where standard terms are adopted in concluding a contract, the party supplying the standard terms shall define the rights and obligations between the parties abiding by the principle of fairness, and shall inform the other party to note the exclusion or restriction of its liabilities in a reasonable way, and shall explain the standard terms upon request by the other party.

110

Article 40 of Contract Law, when standard terms are under the circumstances stipulated in Articles 52 and 53, or the party which supplies the standard terms exempts itself from its liabilities, increases the liabilities of the other party, and deprives the material rights of the other party, the terms shall be invalid.

Article 6 of Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law, The party providing the standard clauses shall bear the burden of proof on its fulfilment of the obligation to make reasonable prompting and explanation.

Article 237 of Contract Law, a financial leasing contract is a contract whereby the lessor, upon purchase of the lessee-selected lease item from a lessee-selected seller, provides the lease item to the lessee for its use, and the lessee pays the rent.


N/A


On the assumption that the liability mentioned in our response in Q2 will not be taken into account, considering that the penalty is imposed on the owner of progressive scanner 7, Lessor is responsible for the penalty. Further, if the indemnification clause in the leasing contract is deemed as the standard term and is invalid, Lessee is not responsible for indemnifying Lessor against such penalty.



Principle of Fairness / Change of Circumstances


Article 26 of Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law, where any major change which is unforeseeable, is not a business risk and is not caused by a force majeure occurs after the formation of a contract, if the continuous performance of the contract is obviously unfair to the other party or cannot realize the purposes of the contract and a party files a request for the modification or rescission of the contract with the people's court, the people's court shall decide whether to modify or rescind the contract under the principle of fairness and in light of the actualities of the case.


N/A


From the perspective of Lessee, the penalty imposed by the government is unforeseeable, is not a business risk and is not caused by a force majeure. Such

111

claim may be upheld by the court, provided that the court will not presume that Lessee has the knowledge of such penalty due to Investco.



Anticipatory Breach of Contract / Unstable Counter-argument Right


Article 108 of Contract Law, where one party express explicitly or indicates by its conduct that it will not perform its obligations under a contract, the other party may demand it to bear the liability for the breach of contract before the expiry of the performance period.

Article 68 of Contract Law, the party required to perform first may suspend its performance if it has conclusive evidence showing that the other party is under any of the following circumstances:(1) its business has seriously deteriorated;(2) it has engaged in transfer of assets or withdrawal of funds for the purpose of

evading debts(3) it has lost its business creditworthiness;(4) it is in any other circumstance which will or may cause it to lose its ability to

perform.

Article 69 of Contract Law, if a party suspends its performance in accordance with the provisions of Article 68 of this Law, it shall timely notify the other party. If the other party provides appropriate assurance for its performance, the party shall resume performance.

Guiding Opinions of the Supreme People's Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation, where a party which has performed all of its obligations of delivery requests the payer to make payment which is not due though the stipulated maturity of the payment has not come, if there is clear evidence that the payer has expressly refused to perform its payment obligation, the payer's business license has been revoked, the payer has been de-registered, has been cancelled by the relevant department or has been in a state of closedown, the payer has transferred its assets or withdrawn its capital to evade its debts, the payer has lost its business reputation or the payer has otherwise indicated through its acts that it will not perform its payment obligation, the court may, in accordance with the spirit of the provisions of paragraph 1 of Article 68, Article 69, Article 94(2), Article 108 and Article 167 of the Contract Law, rule that the payment has become due or accelerate the maturity of the payment, unless the payer has furnished appropriate guarantee.


N/A


112

The letter issued by Lessee on 10 January 2014 express explicitly that it will not pay the full rent due and payable. Lessor is entitled to take the actions in para 8.



Statutory Dissolution of a Contract / Customary Business Practices / Impossibility of Performance


Article 60 of Contract Law, the parties shall abide by the principle of good faith, and perform obligations of notification, assistance, and confidentiality, etc. in accordance with the nature and purpose of the contract and the customary business practices.

Article 7 of Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China, the people's court may determine the following circumstances as the “customary business practices” as mentioned in the Contract Law, provided that they are not in violation of the mandatory provisions of any law or administrative regulation: (1) the practice which is universally adopted at the place of transaction or in a

certain field or sector and is known or should be known by the other party to the transaction when the contract is concluded; and

(2) the customary practice often used by both parties.The claimant shall bear the burden of proof on a customary business practice.

Article 94 of Contract Law, the parties to a contract may terminate the contract under any of the following circumstances:(1) it is rendered impossible to achieve the purpose of contract due to an event

of force majeure;(2) prior to the expiration of the period of performance, the other party expressly

states, or indicates through its conduct, that it will not perform its main obligation;

(3) the other party delayed performance of its main obligation after such performance has been demand, and fails to perform within a reasonable period;

(4) the other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract;

(5) other circumstance as provided by law.

Article 96 of Contract Law, a party demanding termination of a contract in accordance with the provisions of Paragraph 2 of Article 93 and Article 94 shall notify the other party. The contract shall be terminated upon the receipt of the notice by the other party.

Article 97 of Contract Law, after the termination of a contract, performance shall cease if the contract has not been performed; if the contract has been performed, a party may, in accordance with the circumstances of performance or the nature of the contract, demand the other party to restore such party to its original state

113


or adopt other remedial measures, and such party shall have the right to demand compensation for damages.

Article 110 of Contract Law, where a party fails to perform the non-monetary obligations or its performance of non-monetary obligations fails to satisfy the terms of the contract, the other party may request it to perform it except under any of the following circumstances:(1) it is unable to be performed in law or in fact;(2) the subject matter of the obligation is unfit for compulsory performance or the

performance expenses are excessively high;(3) the creditor does not require performance within a reasonable time.

Article 113 of Contract Law, where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and cause losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interests receivable after the performance of the contract, provided not exceeding the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the party in breach concludes the contract.


N/A


Payment of rent under leasing contract is the main obligation of Lessee. According to the provisions above, subject to the prior notification, Lessor is entitled to terminate the leasing contract and demand Lessee to restore Lessor, as the owner of the CAP, to the original state (return of the CAP).

If the 30 grace period is deemed as the customary business practices, such period could be applicable.

In respect of the leasing contract, since the use of progressive scanner 7 is prohibited by the government, the Lessor could not perform its obligation under the leasing contract after 1 March, 2016, which will result in the breach of leasing contract by the Lessor. Lessee is entitled to claim compensation pursuant to Article 113 above or declare to terminate the leasing contract pursuant to Article 94 above.


Principle of Pierce the Corporate Veil


Article 26 of Company Law, the shareholders of a company shall abide by the laws, administrative regulations and bylaw and shall exercise the shareholder's rights under the law. None of them may injure any of the interests of the company or of other shareholders by abusing the shareholder's rights, or injure the interests of any creditor of the company by abusing the independent status of legal person or the shareholder's limited liabilities.

114

Where any of the shareholders of a company causes any loss to the company or to other shareholders by abusing the shareholder's rights, it shall be liable for compensation.

Where any of the shareholders of a company evades the payment of its debts by abusing the independent status of legal person or the shareholder's limited liabilities, if it seriously injures the interests of any creditor, it shall bear several and joint liabilities for the debts of the company.

Article 63 of Company Law, if the shareholder of a one-person limited liability company is unable to prove that the property of the one-person limited liability company is independent from his own property, he shall bear joint liabilities for the debts of the company.


N/A


If Lessor could provide supporting documents evidencing the abuse of the independent status of Lessee by Investco, Investco may also be liable.



N/A


N/A


N/A


There is no such remedy under the Contract Law, such specific performance will not be upheld by the court.



N/A

115


Article 5 of Security Law, a guarantee contract should be subordinated to the principal contract. When the principal contract is invalid, the guarantee contract should also become invalid.

Article 30 of Security Law, a guarantor assumes no civil responsibilities in the following two occasions:(1) the parties to the principal contract collaborate to cheat the guarantor into

giving guarantees;(2) the creditor of the principal contract, through means such as fraud and

coercion, prompts the guarantor to give guarantee in violation of the true conditions.

Article 40 of Judicial Interpretation of the Supreme People's Court on Some Issues Regarding the Application of Security Law of the People's Republic of China, where the debtor of principal contract causes the guarantor to provide a guarantee contrary to his will by means of fraud, intimidation or the like, and the creditor knows or should know about such fact, Article 30 of Security Law shall apply.


N/A


The leasing contract is not invalid. There is no substantial proof evidencing the fraud of Lessor or Lessee. Therefore, Guarantor is liable to Lessor.



Principle of Good Faith / Culpa In Contrahendo


Please refer to our response to Q2.


N/A


Please refer to our response to Q2.

116



Unstable Counter-argument Right


Please refer to our response to Q5 in respect of Unstable Counter-argument Right.

Article 195 of Property Law, when the debtor fails to pay its due debts or any circumstance for realizing the right to mortgage as stipulated by the parties concerned occurs, the mortgagee may, by concluding an agreement with the mortgagor, convert the property under mortgage into money or seek preferred payments from the money incurred from the auction or sale of the property under mortgage. In case the said agreement has damaged the interests of any other creditor, the creditor may request the people's court to cancel this agreement within one year after he/it has known or should know the cause for cancellation.

In case the mortgagee and the mortgagor fail to conclude an agreement on the means of realizing the right to mortgage, the mortgagee may request the people's court to auction or sell off the property under mortgage.

Article 53 of Security Law, when the deadline of a debt payment expires, the mortgagee can be paid off, with the agreement of the mortgagor, by converting the value of objects of pledge into money or by proceeds acquired through an auction, or sales of the objects; If the mortgagor and the mortgagee fail to reach an agreement, the mortgagee can file litigation with the people's court.

If there is a surplus of the money through conversion or the proceed through an auction or sales of objects of pledge in exceed of the sum of the creditor's rights, such surplus shall belong to the mortgagor, and the balance due shall be repaid by the mortgagor.


N/A


To the extent that events of default have taken place with respect to the Lessor as borrower, the Bank is capable of enforcing its remedies under the facility agreement. However, extra-judicial actions may not be permitted under the PRC law.



Floating Mortgage over Movables

117


Article 181 of Property Law, upon the written agreement between the parties concerned, an enterprise, individual industrial and commercial household or agricultural production operator may mortgage the manufacturing facilities, raw materials, semi-manufactured goods and products it has already owned or is going to own, and when the debtor fails to pay its due debts or any circumstance for realizing the right to mortgage as stipulated by the parties concerned occurs, the creditor shall be entitled to seek preferred payments from the movable properties that exist when the parties concerned stipulate to realize the right to mortgage.

Article 31 of Bankruptcy Law, within 1 year before the people's court accepts an application for bankruptcy, a bankruptcy administrator has the right to plead the court to revoke any act relating to the debtor's assets:(1) transferring the assets free of charge;(2) trading at an obviously unreasonable price;(3) providing asset guaranty to those debts without any asset guaranty;(4) paying off the undue debts in advance; or(5) giving up the creditor's right.


N/A


a. The trustee structure in the loan is not applicable under PRC law.b. In terms of the floating mortgage over movables of the Lessor, pursuant to

Article 181 above, Bank could enjoy the preferred payments from the movable properties then exist.

c. The assignment of a contract is not the recognized type of security under PRC law.

d. PRC law does not mandatorily require that the security agreement must specify the maximum secured amount.

e. Lessor does not perfect the security agreement until 15 April 2014. Under PRC law, the perfection of the security means such security has the effect against third party. Lenders could still enjoy the priority. Therefore, the bankruptcy administrator could not claim for the revocation of such security. On the other hand, if such security is not created until it is registered with component authority on 15 April 2014, the bankruptcy administrator is entitled to claim for the revocation of such security pursuant to Article 31 above..

f. PRC law does not set forth a ceiling of the interest rate of RMB loan.



Right of Set-off in Bankruptcy


118

Article 40 of Bankruptcy Law, where a creditor is indebted with its debtor before an application for bankruptcy is accepted, it may claim for offset against the bankruptcy administrator. However, under any of the following circumstances, the relevant debts shall not be offset:(1) where a debtor of the debtor obtains the creditor's right of any other party

against the debtor after the application for bankruptcy is accepted;(2) where a creditor learns that a debtor is incapable of paying off its due debts is

in the process of applying for bankruptcy and if it is indebted with the debtor; with the exception, however, that the creditor assumes its liabilities according to the provisions of law or for any reason as incurred 1 year before the application for bankruptcy is filed;

(3) where a debtor of the debtor learns that the debtor is incapable of paying off its debts or is in the process of applying for bankruptcy, and therefore obtains the creditor's right from the debtor, except where the debtor's debtor obtains the creditor's right according to law or for any reason as incurred 1 year before the application for bankruptcy.

Article 47 of Bankruptcy Law, as to any creditor's right attached with certain conditions or time limit or any creditor's right that fails to be settled through an action or arbitration, the relevant creditor may declare the creditor’s right with the people's court.

Article 119 of Bankruptcy Law, where the insolvent assets are distributed, as to any creditor's right that has not been settled by action or arbitration, a bankruptcy administrator shall preserve the distribution share in advance. Where any distribution share fails to be collected within 2 years as of the day when the procedures for bankruptcy are concluded, the people's court shall distribute the preserved distribution share to other creditors.


N/A


According to the provisions above, Lessee’s set-off claim is permitted.



Assignment of Creditor’s Right


Article 79 of Contract Law, the creditor may assign its rights under a contract, in whole or in part, to a third party, except under the following circumstances:(1) such rights may not be assigned in light of the nature of the contract;(2) such rights may not be assigned according to the agreement between the

parties;(3) such rights may not be assigned according to the provisions of the laws.

119

Article 80 of Contract Law, where the creditor assigns its rights, it shall notify the debtor. Such assignment will have no effect on the debtor without notice thereof.

Article 85 of Judicial Interpretation of The Supreme People's Court On Some Issues Regarding The Application Of Security Law of The People's Republic Of China, where the debtor or a third party transfers the possession of his special account, sealed money, deposit or other forms of money to the creditor as pledge for obligation after specifying the above money, the creditor shall be entitled to priority in receiving payment with such money if the debtor defaults.


N/A


The assignment of a contract is not the recognized type of security under PRC law. Therefore, Supplier or Bank does not have superior right towards the payment under the assigned leasing contract.

Bank has the security over the Collections Account under the transaction documents and Bank may have the priority towards the balance in the Collections Account. There are no laws or regulations to specify the requirements for security interests created by way of pledge over account, and there is currently no registration mechanism pursuant to which such security interests can be registered against third parties under PRC law. According to the above provisions, such pledge should be created over a specific account with a fixed amount. As such, it is possible that a PRC court would not recognize the priority of the creditor’s security interests in the pledged account and its balance if the pledge created over the account is not in accordance with the aforementioned interpretation of the Supreme People's Court

120

Part 7. French Law


a) Basic legal principles. Conclusion of contracts by way of forwarding the offer (the proposal to

conclude the contract) by one of the parties and of its acceptance (the acceptance of the offer) by the other party.

The contract shall be regarded as concluded, if an agreement has been achieved between the parties on all essential terms.

The contract may be concluded in any form, unless the law stipulates a definite form for the given kind of contract.

For the validity of the contract regarding the consent of the parties, see Question 2.

b) Citations to main sources of law. Contract in general :

Conclusion of contract : Article 1134 Code civil Proof of contract: Article 1341 Code civil

Leasing contract : L. 313-7 et s. Code monétaire et financier.


Code civil, 2015, 114e éd., Dalloz. F. Terré, Ph. Simler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, §

105 et seq. J. Flour, J.-L. Aubert, E. Savaux, Les obligations, 1. L’acte juridique, Sirey,

15e éd., 2012, § 132 et seq. Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd.,

2013, § 465 et seq. Ph. Malaurie, L. Aynès, P.-Y. Gautier, Les contrats spéciaux, Defrénois, 6e

éd., 2012, § 811 et seq.

d) Application of legal principles [see (a) above] to the question above. There is no mandatory formal requirement for the conclusion of supply and

support contracts or leasing contracts. In theory they can be concluded orally which would obviously entail evidentiary problems in case of dispute. However, for the leasing contract, registration is required, not for the validity but for the effectiveness of the contract against third parties (L. 313-10, R. 313-3 Code monétaire et financier).

The parties to the relevant contracts have opted for written form in the written contracts.

Unless expressly stipulated otherwise in the contracts, exchange of signatures by mail or e-mail is sufficient, provided that the contract and the signing party can be identified.

121

Assuming that the above requirements had been met at closing and all signatures to the support contract and the leasing contract had been distributed and released, the contracts have been bindingly concluded. The subsequent loss of the original signatures is irrelevant with respect to the valid and binding conclusions of the contracts.


a) Basic legal principles. The fault in contractual negotiations, more particularly the breach of

precontractual disclosure duties, can entail either the nullity of the contract or the liability of the party responsible for the breach or both.

b) Citations to main sources of law. For the validity : Article 1116 code civil For the liability : Article 1382 code civil

c) Bibliographical references (secondary sources). Code civil, 2015, 114e éd., Dalloz. F. Terré, Ph. Simler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, §


15e éd., 2012, § 211 et seq. Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd.,

2013, § 508 et s.


As a general rule, in contract negotiations each party must protect its own legal and commercial interests. But each party is obliged to respect the rights, assets and interests of the relevant other party. This includes the obligation of each party to disclose to the other party in the process of negotiations all material information that is not obvious or available to the other party and concerning which such party can in good faith and taking into account customary market practice expect to be informed.

In the event that a transaction party willfully violates this disclosure obligation, the other party can demand the nullity of the contract and damages in case it has suffered losses. In the event a transaction party negligently violates the disclosure obligation, it can only be held liable by the other party. No nullity claim can be raised.

The supply and support contract can therefore be void if the Supplier intentionally avoided to disclose the information on the progressive scanner 7 (article 1116 Civil code). In addition, the Supplier may be held liable (article 1382 Civil code).

122


a) Basic legal principles. Under a finance lease the Lessor is the legal owner of the relevant

equipment but economic risk attaching to the equipment is transferred to the lessee. During the term of this lease, the ownership title remains with the Lessor as security for the obligations of the lessee.

However, risk associated with ownership can be passed on the Lessee through a contractual provision.

b) Citations to main sources of law. Cass. com. 10 mai 1982, Gaz. Pal. 1982.2. panor. 370, obs.

A. Piedelièvre, RTD com. 1983.275, obs. J. Hémard et B. Bouloc

c) Bibliographical references (secondary sources). Répertoire Droit commercial, Dalloz, see “credit-bail mobilier”. Crédit-bail mobilier, Fascicule Jurisclasseur 640-641-642.


In the case of a finance lease, the economic risks rest with the Lessee. Although the Lessor is the legal owner of CAP, under provision 3e of the leasing contract, the risks are passed on to the Lessee. Therefore, the Lessee will be responsible for the penalty.


a) Basic legal principles. In French Law, there is no possibility to adapt or to terminate a private law

contract due to hardship, unless the parties themselves inserted an appropriate hardship clause. The French doctrine of “imprevision” is applied and the rule stems from a case in the middle of 19th century, the Cannal de Craponne of 6th March 1876.

Due to the difficulties raised by this rule, the current proposal for reform of contract law recommends its suppression.

b) Citations to main sources of law. Cass. 6 mars 1876, Canal de Craponne, D. 1876, p. 193.

c) Bibliographical references (secondary sources). F. Terré, Ph. Simler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, §


15e éd., 2012, § 404.

123

Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd., 2013, § 757 et seq.


The Lessee requested judicial modification based on changed circumstances. The changed circumstances are the imposition of the monthly penalty and the prohibition of progressive scanner 7 from 1 March 2016. As a result of the monthly penalty, the cost to the Lessee of using the scanner will increase by 500%. In relation to the prohibition of the scanner, the Lessee will be required to use a less effective scanner, progressive scanner 8, and requests a reduction in rent to reflect this.

Since there is no hardship clause in the contract, the Lessee cannot request the judicial modification of the contract.


a) Basic legal principles. In French Law, the breach of contract is not constituted by anticipation and

needs to be effective. Therefore, if the breach is not effective, the non-defaulting party can neither suspend its own obligation nor demand the termination of the contract.

However, the proposals for reform recommend the possibility for the non-defaulting party to suspend its contractual obligations if the future breach of the contract is certain and the consequences of this breach will be serious. Ex. 104 of the François Terré Proposal for reform of the law of contract.



650. Pour une réforme du droit des contrats, under the direction of François

Terré, Dalloz, coll. Thèmes et commentaires, 2009. A. Pinna, « L’exception pour risque d’inexécution », Rev. trim. droit civil,

2003, p. 31.


Under French Law, a repudiation of contract does not constitute a breach of contract and does not justify the non-defaulting party’s request for assurance of future performance. Therefore, the Lessor cannot successfully request assurance of future performance of the leasing contract from the Lessee.


124

a) Basic legal principles. The right to terminate a contract under French Law does not automatically

arise if there is a breach. To terminate a contract, there must be a sufficiently serious breach of an essential term of a contract. In principle, termination can only be ordered by the court (art. 1184 civil code). Exceptionally, case law admits unilateral termination in case of serious breach of the contract (Cass. Civ. 1ère, 13 oct. 1998 and Cass. Civ. 1ère, 28 oct. 2003).

Furthermore, the parties can insert a termination clause by which they agree upon the automatic termination of the contract under determined conditions.

The termination of the contract has retroactive effects. This means that the parties are deemed to return to the situation in which they were found before the conclusion of the contract. In addition, damages can be awarded to the party who suffered the breach.

b) Citations to main sources of law. Damages : Article 1147 civil code. Judicial resolution : Article 1184 civil code. Unilateral resolution : Cass. Civ. 1ère, 13 oct. 1998, Bull. civ. I, ° 300 and

Cass. Civ. 28 oct. 2003, Bull. Civ. I, n° 211.


645 et seq. Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd.,

2013, § 872 et seq.


If Lessee’s default triggers the requirements of a contractual termination right under the leasing contract, Lessor may terminate.

Absent contractual termination provision, under article 1185 al. 3 Civil code, termination must be judicially demanded and the defendant may be granted additional time to perform according to the circumstances.

French case law also admits unilateral termination but only under strict circumstances (serious breach and urgency), Cass. Civ. 1ère, 13 oct. 1998 and Cass. Civ. 1ère, 28 oct. 2003.

Following rightful termination of the leasing contract, the Lessor is entitled to claim return of the CAP as well as damages if he has suffered loss from the termination.


a) Basic legal principles. Privity of contract.

125

The breach of the contract by a member of a company does not imply the liability of the company. Piercing the corporate veil of the parent company is accepted only in exceptionally circumstances..

b) Citations to main sources of law. Privity of contract : Article 1165 civil code. Liability of third party :

Article 1382 civil code. Cass. Com. 13 mars 1979, Bull. Civ. IV, n° 100.


483 et seq. Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd.,

2013, § 788 et seq.


InvestCo is not a party to the leasing contract concluded between the Lessor and the Lessee. InvestCo can only be liable to Lessor if he has contributed to the breach of the contract by the Lessee. There is no indication that InvestCo has contributed to the breach of the leasing contract.

There is no indication that Lessee acted as agent for Investco when entering into the leasing contract, i.e. Lessee did not act on behalf and for the benefit of Investco.

There is no indication that the leasing contract expressed the joint and several liability of Lessee and Investco.

Piercing the corporate veil is a theory that is not used in the context of default under contract.


a) Basic legal principles

Specific performance is a remedy awarded in case of an actual breach of conduct. It is a remedy in personam, attached to the defendant rather than to his property.

Specific performance may be granted under a certain number of circumstances. The court will either grant or refuse the specific performance depending on the nature of the obligation of the contract. More precisely, French law distinguishes between the obligation to do something and the obligation to give something. Specific performance may be problematic when there is an obligation to do something.

When there is an obligation to do something, article 1142 of the Civil code states that the creditor should ask for damages. This rule depends on the existence of a material, moral or judicial impossibility to directly use specific performance. For instance, if there is a personal obligation, like the one of a specific painter who would not fulfill his obligation, the creditor cannot

126

petition to the court for specific performance. Otherwise, he would violate the privacy and the individual liberty of the debtor.

When specific performance is possible, there may be an injunction. Furthermore, when there is no personal obligation, the creditor may petition for another person to fulfill the obligation, at the expense of the debtor. The court may also order the payment of a penalty until the debtor fulfills its obligation.

A claimant is entitled to elect between a claim for specific performance and damages. However, damages may be awarded in addition to specific performance

b) Citations to main sources of law

Article 1142 Civil code. Article 1144 Civil code. Article 1184 Civil code. Article 1425-1 Civil code. Article L. 131-1 code des procédures civiles d’exécution. + See for instance Civ. 1ère, 11 mai 2005, Bull. civ. I, n° 103, RDC 2006, p.

323.

c) Bibliographical references (secondary sources)

Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, coll. Droit civil,6e. éd., 2013, § 1122 et s.

F. Terré, Ph. Simler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, § 1108 et seq.

Y.-M. Laithier, « La prétendue primauté de l’exécution en nature », RDC 2005, p. 161.

d) Application of legal principles to the question above

In this case, the Lessor is seeking specific performance of a clause in the leasing contract requiring the Lessee to publish a notice to help protect the reputation of the Lessor. The Lessee has breached this clause of the contract by refusing to fulfil its obligations under the clause.

The obligation is an obligation to do something. Therefore, the factor that the court would likely consider is that the Lessee may or may not be the only person to publish the notice. If the Lessee is the only person able to publish the notice, the court may issue an injunction or order the payment of a penalty until the Lessee publishes the notice. If the Lessee is not the only person able to publish the notice, the court may allow another person to do so at the expense of the Lessee.

127



A guarantee may be a separate instrument that refers to another contract. The guarantor will pay the debt according to the instrument if the guaranteed instrument is not paid when due.

Under French Law, two types of personal guarantee may be distinguished: The first one is an accessory guarantee, a surety. In this type of

guarantee, the creditor needs to pursue the debtor before collecting from the surety unless the creditor and surety have otherwise agreed in writing or unless the debtor and the surety are jointly and severally liable. Furthermore, the validity and the treatment of the guarantee depends on the validity and the treatment of the guaranteed instrument. The guarantor may raise against the creditor the defenses that the debtor himself may raise against the creditor.

The second one is an independent guarantee. The guarantor and the creditor have to express their will to an independent guarantee, otherwise the instrument may be considered as a surety. In this type of guarantee, the execution of the guaranteed instrument is not an impediment to the payment by the guarantor. This payment may only be prevented in tow occasions: fraud and manifest abuse when the guarantee is called.


- Article 2288 Civil code- Article 2289 Civil code- Article 2298 Civil code- Article 2299 Civil code- Article 2313 Civil code- Article 2321 Civil code- + See for instance Com. 20 janv. 1987, JCP 1987. II. 20764, note

J. Stoufflet ; et, dans la même affaire, Com. 18 déc. 1990, D. 1991, somm. 198, obs. M. Vasseur

. c) Bibliographical references (secondary sources)

- L. Aynès, P. Crocq, Les sûretés, La publicité foncière, Lextenso, coll. Droit civil, 8e éd., 2014.

128

- Ph. Simler, Cautionnement, garanties autonomes, garanties indemnitaires, 4e éd., 2008, LitecPrum, Mélanges Simler, Litec-Dalloz, 2006


Guarantor refused payment on three grounds: (1) Lessor did not fully assess whether there was a default; (2) Lessor did not diligently pursue legal remedies against the lessee; and (3) there was fraud in the underlying transaction and procurement of the guarantee.

The guarantee does not clearly specify whether it is a surety or an independent guarantee. As such, a court would likely consider the guarantee as a surety. The language of the contract also seems to read as a surety. It states: “the Guarantor guarantees to the Customer the due and punctual performance of all present and future obligations of the Lessee under the Leasing Contract if and when they become performable in accordance with the terms of the Leasing Contract” (emphasis added). The fact that the guarantor has to guarantee the future obligations of the Lessee does not affect the validity of the surety.

To collect on a surety, Lessor has to pursue Lessee unless the parties specifically agreed that Lessor must do so in writing or unless the debtor and the surety are jointly and severally liable. Neither one nor the other condition is stated in the guarantee.

Furthermore, the guarantee contract states, “[t]o the extent required by law, the Beneficiary must use reasonable endeavors to pursue the Lessee under the Leasing Contract before such guarantee can be called.” This clause is conditional. The clause requires the Lessor to first pursue the Lessee only if the law requires the Lessor to do so.

Because a court will likely construe this guarantee as a surety, Guarantor’s first and second reasons for denying payment are valid; he may invoke them in order to avoid paying the guarantee. Regarding the third reason, the answer depends on the Court’s analysis of the guaranteed instrument.

However, if the court construes the guarantee as an independent guarantee, Guarantor’s first and second reasons for denying payment may be without merit. On the contrary, the third ground could be invoked if a fraud is proved.


a) Basic legal principles. P rivity of contract. Fault in contractual negotiations. Contract to the benefit of a third party.

b) Citations to main sources of law. Privity of contract: Article 1165 Civil Code Fault in contractual negociations: Article 1382 Civil code Contract to the benefit of a third party: Article 1121 Civil code

c) Bibliographical references (secondary sources). F. Terré, Ph. Simler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, § 482

et seq.

129

Ph. Malaurie, L. Aynès, Ph. Stoffel-Munck, Les obligations, Lextenso, 6e éd., 2013, § 788 et seq.


There is no contractual relationship between the Supplier and the Lessee. Moreover, the Supplier and the Lessee have not negotiated the supply and support contract. Therefore, the Supplier is not liable to the Lessee on the grounds of fault in contractual negotiations.

In French Law, a contract may avail direct rights to third parties. In principle, this is expressed in the contract but judges may also avail these rights through interpretation of the contract based on the parties’ intentions. In our case, the contract does not contain an express clause and it is doubtful whether judges, absent this clause, would interpret the intentions of the parties in this direction.


a) Basic legal principles. Contractual termination rights for loan agreements. Mandatory termination rights: article 1188 Civil code. Principle of judicial realization of the collateral: article 2346 Civil code. Clauses allowing for out of court realization: article 2348 Civil code.

b) Citations to main sources of law. Déchéance du terme: Article 1188 Civil code Pacte commissoire : Article 2348 Civil code Clause de voie parée : Article 2346 Civil code

c) Bibliographical references (secondary sources). F. Terré, Ph. Simpler, Y. Lequette, Les obligations, Dalloz, 11e éd., 2013, §

1217. L. Aynès, P. Crocq, Les sûretés, Lextenso, 8e éd., 2014, § 512 et seq.


Bank’s action may be justified based on the contractual default and termination provisions of the facility agreement.

Absent contractual default provision in the facility agreement, a default may be declared only if the borrower is under insolvency proceedings or if the securities that he has provided to the lender have been diminished (déchéance du terme, artcile 1188 Civil code).

As a general rule, extrajudicial enforcement is not available under French Law, but the parties can insert a clause allowing the realization of collateral out of courts (Pacte commissoire, article 2348 Civil code). The creditor can

130

therefore either ask the judge to proceed to the realization of the collateral or realize it by himself if this is agreed with the debtor.

Absent a specific clause, the Bank can only take judicial action.


a) Basic legal principles. Stay of enforcement action upon insolvency. French Law does not acknowledge the security trustee and the parallel

debts concepts. The collateral can include future rights and assets but they should be clearly

identifiable. Nullity of contracts during the “suspect period” (“nullité de la période

suspecte”). Usury

b) Citations to main sources of law. L 622-21 Commerce code Article 2336 Civil code Article 2333, al. 2 Civil code L 632-1 et seq. Code de commerce L 313-3 et seq. Code monétaire et financier

c) Bibliographical references (secondary sources). L. Aynès, P. Crocq, Les sûretés, Lextenso, 8e éd., 2014, § 504 et seq. C. Saint-Alary-Houin, Droit des entreprises en difficulté, LGDJ, 9e éd., 2014, §

1135 et seq. F. Perochon, Entreprises en difficultés, LGDJ, 9e éd., 2012, § 1283 et seq.


18.a) According to L 622-21 Commerce code, enforcement actions are prohibited following the formal opening of insolvency proceedings and are automatically stayed. Only the legal representative of the creditors (mandataire judiciaire) can initiate enforcement actions. The Bank should therefore cease all legal action to enforce the security collateral.

18.b.i) The security trust concept and the concept of parallel debts are not acknowledged by French Law.

18.b.ii) The collateral can include future rights and assets but they should be clearly identifiable (article 2336 Civil code). In this case, the collateral was not specifically identified but it was identifiable. Therefore, there is no ground for invalidity of the collateral.

18.b.iv) French Law does not require a specific maximum amount of the collateral or the secured claims in order for the security interest to be validly granted. Therefore, there is no ground for invalidity of the collateral.

18.b.v) In principle, French Law does not impose registration requirements for the perfection of security interest. Registration requirements are required only in real estate and certain ships and aircrafts. The security

131

was granted on 15th February 2010 and the Lessor filed for Insolvency on 15th May 2014. If the security is concluded during the “suspect period”, it can be cancelled only if the Bank knew that the debtor was on default in payments (L 632-2 Commerce code).

18.b.vi) Whether the penalties and interests violate public policy needs to be assessed against the relevant market environment at the time of the conclusion of the contract. See L 313-3 Code monétaire et financier. If the interests violate public policy, judges are only entitled to replace them with the legal interests and not to declare the contract void.


a) Basic legal principles. Set off in insolvency proceedings

b) Citations to main sources of law. Articles 1290 et seq. Civil code. Article L. 622-7 Commerce code.

c) Bibliographical references (secondary sources). B. Fages, Droit des obligations, LGDJ, 4e éd., 2013, § 509 et seq. C. Saint-Alary-Houin, Droit des enterprises en difficulties, LGDJ, 9e éd., 2014,

§ 699 et seq. F. Perochon, Entreprises en difficultés, LGDJ, 9e éd., 2012, § 587 et s.


Set off by the Lessee vis-à-vis the Lessor: set off is possible in Insolvency proceedings if the relevant claims are connected (“compensation pour dettes connexes”). In this case they are connected because they derive from the same contract. Set off by the Lessee vis-à-vis the Bank: If the Lessor has assigned his rights and claims under the leasing contract to the Bank, set off, vis-à-vis the Lessor, would no longer be available to the Lessee, unless the Lessee has not been notified of the assignment.


a) Basic legal principles. Prior tempore, potior juris Formalities of assignment: article 1690 Civil code

b) Citations to main sources of law. Article 1690 Civil code

c) Bibliographical references (secondary sources). J. François, Régime général de l’obligation, 3e éd., 2013, § 339 et seq. B. Fages, Droit des obligations, LGDJ, 4e éd., 2013, § 537 et seq.

132


An assignment of rights and claims even by way of security results in an outright transfer of such rights and claims. The original creditor can only assign them once, with the general rule that the prior assignment generally supersedes the later.

Article 1690 Civil code sets out certain formalities to be respected in order to assure the effectiveness of the right of the assignee (“The right of the assignee is effective against third parties only upon notification of the assignment to the debtor. However, the assignee may also be put in possession through the acceptance of the assignment given by the debtor in an authentic act”).

Therefore, if the assignment was not rightfully notified to the Lessee, in accordance with French Law, the assignee will not be able to exercise its rights against the debtor, as the latter had no knowledge of the assignment.

In the case that the assignment was notified properly to the debtor, and considering that a clause in the supply and support contract provides that the Lessor is deemed to have automatically assigned payments under the lease contract to the Supplier, the Supplier would hold a superior right over the leasing contract.

133

Part 8. French Law, Second Response



Contract formation:

o Under French law, a contract is formed, and thus is binding and enforceable between the parties thereto, when a firm definite offer made by the offeror receives an unqualified acceptance by the offeree.

Form of the contract:

o As far as validity is concerned, unless provided otherwise by law, a contract generally does not require any specific form in order to be valid and enforceable. Moreover, under French commercial law, no specific form of contract is required in order for a supply and support contract or a leasing contract to be valid between the parties thereto. In particular, no legalization or notarisation is required nor do signatures have to be witnessed in order for a contract to be valid. However, a financial lease contract (crédit-bail) must be registered with the Commercial Registry in order to be enforceable against third parties.

o As far as proof is concerned, in civil law, a contract which provides for consideration or value superior to €1, 500 can generally only be proven if evidenced in writing and signed by the parties. An exception to this rule is provided by French commercial law, whereby commercial acts (such as a contract) can be proven and enforced against a trader by any method of proof, unless otherwise provided by law.


Creation of a binding contract: Cass. Com., 6 mars 1990; art. 1113 of the draft Revised Civil Code.

Memorandum of understanding (examples): Cass.civ. 3e, 16 apr. 1991, Bull.civ IV. N°148; Cass.civ. 3e, 22 apr. 1980, Bull.civ., III n°82

Form of the contract:

o As far as validity is concerned: art. 1108 of the Civil Code (art. 1127 of the draft Revised Civil Code); art. L313-7 s. of the Commercial Code (leasing contract).

o As far as proof is concerned: art. 1345 of the Civil Code (article 1360 of the draft Revised Civil Code); art. L110-3 of the Commercial Code.

134

c) Bibliographical references.

BENABENT, “Droit civil, Les obligations”, Montchrestien, n°54, n°65 and n°101 s.

d) Application of legal principles to the question above.

Definitive documents setting out the terms of the transactions were signed on 15 February 2015.

The signatures of the parties on both the supply and support contract and the leasing contract indicate the presence of a valid offer and acceptance of the terms therein, and therefore both contracts are binding and enforceable between the parties from the moment they were signed on 15 February 2015. A Support and Supply contract and a Leasing do not Contract need to be notarized nor witnessed in order to be binding or admitted as evidence.

It is possible that the Supplier’s decision not to communicate the government’s letter to the Lessor may have vitiated the consent of the Lessor to the Support and Supply contract. If this omission is proved to be a vitiating factor, the Lessor will legally be able to request that the court rescind the contract (for a further analysis, see question 2). On the other hand, if this letter had been communicated, it is also possible that it might not have dissuaded the Lessor from entering into the contract, but rather provided it with leverage for negotiation in order to reduce the purchase price or secure more favourable terms.

The fact that the signed originals were lost, and thereafter duplicated with forged signatures, does not call in to question the validity of the contracts, since the contract was validly made the moment it was originally signed. Furthermore, all parties assumed the forged signatures were authentic and relied on them as proof of agreement to the contracts when performing their obligations under the contracts. Since no specific form is required in order for the contracts to be valid and legally binding or to be admitted in evidence, the loss and replacement of the signatures will not affect its validity and binding nature.

The copies of the contracts can however be used as proof of the validity of the contract and the terms of agreement between the parties. Furthermore, since the supply and support and leasing contracts are commercial contracts, they may be proven by any method of proof, including by performance. As such, the continuing performance of these contracts by the parties from 2010 to 2014 would provide a strong argument in proving the validity and enforceability of these contracts as between the parties to those contracts.


135


Good faith: there is a general principal that pre-contractual negotiations and the performance of contracts must be conducted in good faith.

Vitiating factor: Willful misrepresentation by omission Conditions of willful misrepresentation by omission:

o Omission of information: the information withheld must be impossible or at least difficult for the other party to obtain independently.

o Intentional misrepresentation: when one party is in possession of certain information and is also aware of the importance of such information to the other party in respect of its decision to contract. The decision not to communicate such information must be made with the intent that the other party’s consent be obtained and in the knowledge that such consent would probably not be obtained had the other party had knowledge of the information withheld.

Consequences: willful misrepresentation which induces an innocent party to enter into a contract may give rise to the remedies of rescission and damages for such innocent party.

Civil (extra-contractual) liability: Any human act that results in damage to another person requires the party at fault in respect of such act to compensate the damaged party for such damage.


Art. 1134 of French Civil code (good faith) Art. 1116 of French Civil code (willful misrepresentation) Art. 1382 of French Civil code (civil (extra-contractual) liability) Cass.com, 12 Feb. 2013 n°11-22641; Cass.com, 3 apr. 2013 n° 12-13314

(Case law concerning the nature of information for the purposes of Art. 1116)

Art. 1147 of French civil code (contractual liability)


FLOUR J., AUBERT J.-L., SAVAUX E., « LES OBLIGATIONS - L’acte juridique », Sirey, 16th édition


Assuming that the contract was validly entered into on February 15th, 2010, the non-disclosure of the letter could constitute willful misrepresentation by omission if the specific conditions listed above are found.

The Supplier concealed the receipt and contents of the letter from the Lessor and the Lessee. Even if the Lessor is a professional, we assume that it was difficult, if not impossible, for it to gain knowledge of the receipt of the letter independently if the contents of the letter were not published or freely obtainable. However, given that the regulatory risk had been raised in preliminary discussions, it is arguable that the Lessor and the Lessee/Investco should have conducted their own independent enquiries about the status of the government inquiry both with the Supplier and otherwise.

We assume that the Supplier intentionally concealed the letter from the Lessor on the basis that it was aware that the unrestricted use of progressive scanner 7 was

136

a material factor in the Lessee’s/Investco’s decision, and probably therefore also in the Lessor’s decision, to enter into their respective contracts. The requirement to discontinue the use of the progressive scanner 7 pending the finalization of the assessment would at least significantly alter the terms of the deal and perhaps cause it to collapse.

We can also consider that the non-disclosure by the Supplier was of decisive importance in terms of the consent by Lessor and Lessee for the transaction.

On balance, the conditions of willful misrepresentation are likely to be fulfilled and there was willful misrepresentation by the Supplier. Therefore, the Lessor could ask the Court for rescission of the contract.

The Lessor could also request the Court for damages for breach of contract by proving a lack of good faith in the performance of the contract by the Supplier. As a general rule, each party must protect its own legal and commercial interests but, as a result of the legal obligation to conduct pre-contractual negotiations and to perform the contract in good faith, each party is also obliged to respect the rights, assets and interests of the other party.

In practical terms, this results in an obligation to disclose all material information to the other party which is not in the public domain or of which the other party could not readily have knowledge. As such, a lack of good faith could be found on the basis of the Supplier selling CAP to the Lessor without disclosing the discontinuation of interim use of the CAP pending finalization of assessment. It is arguable that such lack of disclosure has the effect of vitiating the Lessor’s consent and agreement to the contract as the Lessor is contracting on terms which the Supplier knows not to be accurate. However, these are matters of fact which would have to be proved.

In addition to contractual claims, the Supplier could also be exposed to liability in tort to the Lessor and the Lessee, if they could prove fault on the part of the Supplier, damage to the Lessee and a causal link between the Supplier’s fault and the damage to the Lessee. In this case, the fault would be the Supplier’s misrepresentation by omission; the damage is the economic loss resulting from the penalty and the restriction of use of the product. The causal link between the fault and the damage is direct. In the event that the corporate veil between Lessee and its parent company, Investco, is pierced by the Court, the Supplier might additionally be liable in tort to Investco, although as discussed in Question 7 below it is unlikely that the corporate veil would be lifted in this case.

In the event that the Supply and Support contract is rescinded by the Court on the basis of the misrepresentation by the Supplier (which would have the effect of vitiating the consent given by the Lessor), the sale of the CAP would be deemed to never have taken place. Therefore, such the Lessor would not be able to full its obligations under the Leasing Agreement to lease the CAP to the Lessee, as well as would be in breach of certain representations and warranties regarding the title to the CAP. In this case, if the Lessee brought an action for breach of contract against the Lessor, the Lessor could also claim that the amount of damages payable under such claim would also constitute a loss which resulted directly from the Supplier’s misrepresentation. As such, the Supplier would be liable to the Lessor for this amount too.

137



Principle of freedom of contract. Under a financial leasing contract (crédit-bail), ownership of the property

remains with the lessor as security for payment obligations. French law does not recognize any distinction between legal and “beneficial” ownership. A financial lease does not give rise to any “démembrement” of ownership as recognized in French property law. Only a contractual right of use is usually conferred on the lessee. However, economic risk attaching to the equipment is usually transferred to the lessee according to the terms of the agreement.

Pacta sunt servanda – the parties must comply with the terms of the agreement. Therefore, risks associated with ownership can be contractually assigned to the lessee.


Art. 1709 and 1713 of French civil code (lease) Art. 1134 of French civil code (pacta sunt servanda) Art. L.313-7 and following of the Code monétaire et financier Cass.com, 10 May 1982 (lease/leasing)


BENABENT A., « Droit civil, Les contrats spéciaux civils et commerciaux », Montchrestien, 9ème ed.


Under French Law, the Lessor is and remains the only “owner” of the progressive scanner 7, unless and until the Lessee exercises its option to acquire ownership at the end of the lease period.

As the penalty must be paid by the “owner” of any system that uses progressive scanner 7, in this case it is the Lessor who is legally responsible for payment of the penalty to the government.

However, clause 3(e) of the Leasing Agreement provides that the Lessee will indemnify the Lessor in respect of any claims made against the Lessor or any damages costs and expenses suffered or incurred by the Lessor as the result of a claim made by a third party arising out of the state, condition or use of the Equipment or in any way arising out of its leasing hereunder”. Therefore, although the Lessee is not directly liable for the payment of the penalty, it has agreed to indemnify the Lessor and therefore is contractually liable to indemnify the Lessor for such payment.

138



Contracts validly formed can only be modified by mutual agreement of all the parties thereto. Parties may agree to include a “hardship clause” which imposes an obligation to re-negotiate in good faith in the event that hardship is experienced by a party.

Hardship: hardship (“imprévision”) is a change in circumstances that renders the contract more onerous for at least one party. Traditionally, French civil law does not permit a party to obtain a modification of the contract on the sole basis of hardship in the absence of a specific contractual agreement to that effect. However, the proposed revisions to the Civil Code concerning the law of obligations (contract and tort) would take hardship into consideration as follows: in the event of hardship experienced by at one least party to a contract, the parties would be under a legal obligation to re-negotiate the contract, and in case of refusal or failure to do so, the parties could jointly ask the court to adapt the contract, or a party could unilaterally ask the court to terminate the contract.


Art. 1134 of the Civil Code (article 1194 of the draft Revised Civil Code). Judicial refusal of any legal consequences given to hardship: Cass. Civ., 6

mars 1876 (“Canal de Craponne”). Statutory admission of legal consequences given to hardship: art. 1196 of

the draft Revised Civil Code (provisions concerning obligations).


Droit civil - Les contrats spéciaux contrats civils et commerciaux, Benabent A., Montchrestien, 9ème ed.


In the case in hand, by reason of the substantial monthly penalty and the replacement of the progressive scanner 7 with progressive scanner 8 (resulting from the placing of the progressive scanner 7 on the restricted product list by the government), the Lessee requested the Lessor that the leasing contract be renegotiated to include a substantial reduction of rentals to reflect to inferior quality of progressive scanner 8, with effect from 1 March 2016 (the date from which the continued use of progressive scanner 7 will be prohibited). In absence of the Lessor’s agreement to this point, the Lessee intends to request judicial modification of the leasing contract by reason of hardship.From 1 January 2014 to 1 March 2016, the potential increase by 500% of the cost to Lessee of using the CAP resulting from the enforcement of the contractual indemnity by Lessor equivalent to the amount of the substantial monthly penalty could be considered as hardship for the Lessee. This increase only potentially renders the performance of the contract more onerous for the Lessee, but does not render such performance impossible. There is no hardship clause in the Lease Agreement that could impose renegotiation of the contract on the Lessor. Furthermore, current French civil law does not permit

139

the Lessee to seek judicial modification of the leasing contract on the sole basis of hardship. However, the draft Revised Civil Code concerning the law of obligations seeks to encourage the parties, in the case of hardship for a party, to renegotiate the contract by mutual agreement, and even gives the right to the court to eventually modify or terminate the contract if it deems necessary.In our view, the imposition of a penalty for the use of the progressive scanner 7, and even the prohibition of use, does not render performance of the leasing agreement impossible or illegal. The leasing agreement is legally distinct from the supply and support agreement and lessor had fulfilled its obligations to make the progressive scanner 7 available to the lessee by means of a financial lease. There is no legal prohibition on owning or renting such a scanner. Therefore, the principle of force majeure/cas fortuit could not properly be invoked by the Lessee against the Lessor.



Currently, under French law, a communication by a party to another contracting party indicating that it is unable or unwilling to perform some or all of its obligations under the contract does not give rise to any specific rights to the non-defaulting party.

Moreover, an intention to breach a contractual obligation before performance of such obligation is due does not constitute a breach in itself; in other words, advance notice of repudiation does not give the non-defaulting party a right to terminate the contract or to suspend its obligations thereunder. Any remedies or mechanisms will only become available upon the actual occurrence of a breach.

However, Art.1220 of the draft Revised Civil Code proposes to introduce a mechanism which would be available when (i) the defaulting party indicates that it will not perform a future obligation, (ii) that such intention is sufficiently clear and (iii) that the consequences of such non-performance are sufficiently serious for the non-defaulting party. In such event, the non-defaulting party may immediately suspend its obligations until the other party either indicates it no longer intends to not perform its obligations or until it resumes the performance of its obligations. The non-defaulting party must notify the defaulting party as soon as possible (dans le meilleur délai) that it has suspended its obligations.


Art. 1184 of the Civil code: Termination of a contract. Art. 1612 of the Civil Code (defense of non-performance) Art. 1719-1 of the Civil Code (defense of non-performance) Art. 1134 of the Civil Code (unilateral termination) Art. 1220 of the draft Revised Civil Code (provisions concerning

obligations).

140


Droit des obligations, Philippe Malinvaud, LexisNexis, August 2014

d) Application of legal principal to the question above.

The assertion in the Lessee’s letter - “pending resolution of [the responsibility to pay the penalty and the renegotiation of rent], the Lessee would hold back 50% of its monthly rental payments,” - would not constitute a breach of contract under current French law.

On the facts, the Lessee is stating its intention to withhold rental payments which are due on a specific date every month. The Lessor will be unable to treat the Lessee’s intention to suspend or cease the performance as an actual repudiation of contract. It may only claim non-performance on the part of the Lessee when the Lessee actually fails to perform its obligations when they become due, i.e. the date on which the Lessee is contractually obliged to make a payment and fails to do so. French law does not prevent the Lessor from requesting future assurances of performance from the Lessee. However, the Lessor will be unable to justify such request on any legal grounds, but is likely to instead invoke a commercial or relationship justification.

However, if the proposal discussed above becomes law, the Lessor would be justified in requesting assurances of future performance which would serve to confirm whether or not the Lessee intends or not to cease performance of its obligations. In the event that the Lessee does not provide assurances, the Lessor could interpret such act as a clear intention to not perform and therefore would be legally justified in immediately suspending its obligations under the contract.



French law provides three options to a non-defaulting party in the event that the defaulting party has committed a sufficiently serious breach of contract: (i) unilateral termination (resiliation); (ii) rescission subsequent to non-performance (“résolution conventionnelle”); and iii) specific performance (execution forcee).

In order to unilaterally terminate a contract, the non-defaulting party must provide prior notice to the defaulting party that it wishes to terminate the contract. If the requisite length of notice is not governed by a contractual provision, it should be determined with regard to the length of the relationship between the parties. This option is subject to a greater degree of uncertainty compared to rescission as the Court will rule on the validity of the termination after it has taken place. If it finds that the termination by the non-defaulting party was not justified, such party will be liable to pay the defaulting party damages. Furthermore, the length of notice is evidently subjective and therefore also open to challenge at Court.

141

In the event that a party fails to perform an obligation under a contract, the non-defaulting party may apply to the Court for (i) rescission (resolution) of the contract if such breach is determined to be material or (ii) specific performance (execution forcée) of that obligation (see question 8 for more detail this concept).

Rescission (resolution) is available to a non-defaulting party in the event that the party fails to perform its obligations or is in breach of contract. There is no requirement that the failure to perform such contractual obligation results in any damage for the non-defaulting party. It is also not necessary that the breach was caused by an action or omission by the defaulting party, meaning, for example, that acts of force majeure would prima facie justify rescission. The non-defaulting party is not obliged to comply with any obligatory notice prior to commencing proceedings.

It is however required that the non-defaulting party is able to demonstrate that the breach is of a sufficiently material nature to “jeopardize the economy of the agreement”. Full or partial non-performance by the defaulting party may fulfil this requirement. When assessing this limb, the Court will assess the circumstances existing up until the date of its decision including whether or not the parties acted in good faith. In the event that the Court considers that the above condition is fulfilled, it will rescind the contract. The purpose of this action is to put the parties in the position had they never entered into the contract. In addition, damages may be available to the non-defaulting party.

A further option provided by French law to the parties of a bilateral contract is a mechanism called plea for non-performance (exception d’inéxecution), which allows a non-defaulting party to refrain from performing its obligations fully or partially under the contract until the defaulting party performs its obligations. In effect, it operates to suspend the obligations whilst not affecting the validity of the underlying contract. For such mechanism to be available, a link between both parties’ obligations is required, that is, that they be reciprocal, interdependent and simultaneous. The mechanism is available without the permission of the Court or the fulfillment of any notice requirements.

In addition to those options offered by statute, the parties may agree on termination provisions (“resolution conventionnelle”) in their contract which details the circumstances in which automatic termination of the contract would validly take place, without the intervention of the court.


Article 1184 of the Civil code. Article 1147 of the Civil code Article 1134 of the Civil code Cass Civ. 1ère, 13 oct 1998 Bull. Civ I 300 and Cass Civ 28 oCt 2003 Bull

Civ I no 211.



142


The parties to the Leasing Agreement dated 15 February 2010 inserted a termination clause in clause 7.A. (xii) which provides that in the event of the occurrence of any event of default under the Agreement, “the Lessee shall be deemed to have repudiated the Agreement and the Lessor may thereupon at any time after becoming aware of the same, accept that repudiation […]”.

Thus, in the event that the Lessee defaults in respect to any rental payments, the Lessor would be, in accordance with abovementioned clause, entitled to terminate the contract. However, considering the Lessee only threatened to cease its monthly rental payments, this would not constitute an event of default and therefore would not form a valid basis upon which Lessor could enforce the termination clause. Note that the Lessee’s insolvency would not, under French law, entitle the Lessee to terminate the contract, notwithstanding the terms of the Leasing Agreement, which is an executory contract (“contrat en cours”).

Considering that the Leasing Agreement is a finance lease (“credit bail”), the Lessor will remain the legal owner of the CAP unless the option to purchase the product at full term is exercised by the Lessee and all of its obligations under this contract have been fully performed (clause 6 of the Leasing Agreement). However, considering the events surrounding termination, the Lessor is entitled to claim that the Lessee return the CAP as well as damages resulting from breach of contract.



Corporate veil: once a company is incorporated, it is considered as a separate legal entity from its members until its dissolution. A group of companies is not considered as being a single legal entity under French law.

According to the doctrine of privity of contract (“principe de l’effet relative des conventions”), a contract is only enforceable against the parties thereto, subject to exceptions and qualifications. In certain situations, contracts may be invoked by and against third parties.

Agency (“mandat is an express or implied agreement by which a person, the principal, gives authority to another, the agent, to act in his name and on his behalf on a specific matter. An act entered into by the agent without authority can be ratified by the principal.

Bankruptcy law provides some tools to pierce the corporate veil:

o In the event of a commingling of assets (“confusion de patrimoine”) between the debtor and another entity or a fictitious entity, the court may pierce the corporate veil in order to extend the insolvency proceedings to this other entity. According to French case law, a commingling of assets is found when the unusual

143

financial flows between the two companies are such that one can no longer distinguish between the property of each entity. A fictitious entity is an entity which has never existed, which is a mere façade.

o In case of judicial liquidation of the debtor in which there are insufficient assets to satisfy the creditors, the court may pierce the corporate veil by ordering the de jure or de facto directors to pay creditors if the lack of sufficient assets is due to mismanagement (“action en responsabilité pour insuffisance d’actif”).

Theory of interference (“theorie de l’immixtion”) – piercing the corporate veil: in a group of companies, it is possible that a parent company interferes in contractual relations of its subsidiary with third parties. In order to pierce the veil between the parent and the subsidiary, the third party which seeks to extend the liability to the parent company must demonstrate that, in relation to its contract with the subsidiary, it had grounds to believe that the parent company was in fact making the commitment. Without sufficient proof that this condition is satisfied, the principle that each company is a separate legal entity will apply.


Creation of a separate legal entity by incorporating a company: art. 1847 of the Civil Code, art. L210-6 of the Commercial Code; a group of companies is not a legal entity: Cass. Com., 2 avril 1996 (n°94-16380).

Doctrine of privity of contract: art. 1165 of the Civil Code (art. 1200 of the draft Revised Civil Code).

Agency: art. 1984 s. of the Civil Code. Piercing the corporate veil in bankruptcy law:

o Commingling of assets or fictitious legal entity: article L. 621-2 of the Commercial Code; Cass. Com., 3 avril 1998; Cass. Com., 1 oct. 1997).

o Contribution by the directors to the debts of the company in case of mismanagement: art. L651-2 of the Commercial Code.

Piercing the corporate veil – interference: Cass.Ass.Plen, 9 octobre 2006, n°06-11.056 (general principle) ; Cass.com., 15 june 1993, n°91-14.404 and Cass.civ. 3ème, 25 feb. 2004 (lease).

c) Bibliographical references

Sociétés commerciales, Ph. Merle, Dalloz, 2015, n°95 s. Fasc. 10: Mandat. – Définition et caractères distinctifs, M. Mekki,

JurisClasseur Civil Code, 2012, n°60 s. Lamy Droit du contrat, Partie 3, Etude 305-49 et 305-37


The Lessor brought legal action against Investco (which has 100% control of InvestX - the Lessee), on the grounds that: “Lessee was effectively an agent of Investco.” Article 12b of the Lease Agreement provides that “the Lessee may enter into this Agreement as agent for a third party,” thus the existence of an agency relationship between the Lessee and a third party could be inferred to have been in the contemplation of the parties when contracting.

However, the creation of a subsidiary entirely dedicated to the management of CAP progressive scanner 7 could also show the intention of Investco to clearly

144

separate this activity from its assets, and thus not to be bound by acts committed by the Lessee. The facts of the case, in particular, the undertaking among the Supplier and Investco to separate out the progressive scanner activity, would favour the argument that the Lessee was contracting exclusively on its own behalf.

The Lessor would face a high burden of proof in showing that the corporate veil should be pierced and the separate legal personality of the Lessee disregarded - “Or alternatively, that the corporate veil between Investo and the Lessee is not substantive”. The contracts entered into by the Lessee and the numerous exchanges directly between the Lessee and the Lessor would tend to show that the Lessee is not a purely fictitious entity.

Regarding the theory of interference, the facts do not provide any basis upon which to conclude that the Lessor truly believed that it entered into contractual relations with Investco. On the contrary, by virtue of establishing a specific new entity in order to perform the obligations of the leasing agreement, it can be inferred that Investco sought to prevent exposure of its own assets to the risk of this venture. It did so by creating a new subsidiary and thereby ensuring that a corporate veil existed between it and the Lessee. There do not appear to be grounds upon which the theory of interference would apply in this case and therefore the corporate veil between Investco and Lessee will remain unpierced and Investco will not be liable to Lessor.


a) Basic principles

Specific performance is available to a non-defaulting party as a remedy for breach of contact. However, it should be noted that equitable remedies do not exist under French law and thus specific performance is not an equitable remedy but rather a contractual remedy under French law.

In bilateral contracts, a condition subsequent is implied to deal with the possibility that one party might not perform its obligations. In such event, the non-defaulting party has the right to request the Court either to compel the other party to perform its obligations in accordance with the terms of the contract or to rescind the contract. Contrary to the rescission of a contract for non-performance, which requires that the non-performance constitutes a ‘material’ breach, the availability of specific performance is not subject to any similar thresholds. Furthermore, it is not necessary to prove that the non-performance has resulted in any loss for specific performance to be available.

French law distinguishes between the obligation to act and the obligation to give. The availability of specific performance will depend on how the Court classifies the relevant non-performed obligation.

Specific performance might not be available when there is an obligation to act or to refrain from acting which has not been performed. In such case, article 1142 of the Civil code provides that the creditor has recourse to damages for breach of contract. Such unavailability depends on the Court identifying a material, moral or judicial obstacle which makes it impossible

145

to order the specific performance of the obligation, especially where the contract has an intuitu personae character.

For instance, if a contract contains an obligation where its performance by a specific individual is an essential term, such as the performance by a specific musician in a concert, the creditor will not be granted specific performance by the Court as to do so would violate the privacy and the individual liberty of the musician.

In the event of non-performance of an obligation which does not have an intuitu personae character, the Court may make an order that a third party fulfills the obligation at the expense of the debtor.

The Court may also sanction the debtor through the payment of a one-off penalty or periodic penalties until it performs its obligations. As specific performance is a remedy in personam, meaning it is attached to the defendant rather than to its property, such sanctions will be personally payable by the debtor to prevent it from making any other person, moral or legal, liable for the sums due.

b) Citations of main source

Art. 1184 of the French civil code (exécution forcée) Art. 1142 of the French civil code and Cass.civ.1ère 16 janvier 2007

(exécution forcée) Art. 1144 of the French civil code (exécution force) Art. 1134 of the French civil code (pacta sunt servanda) Art. 1147 of the French civil code (contractual liability) Cass. com., 6 nov. 1979, no 78-12.212 (moral damage)

c) Bibliographical references (secondary sources)

FABRE-MAGNAN M., "Droit des obligations - Contrats et engagement unilatéral", PUF, 3ème éd.


In this case, the Lessor is seeking specific performance of a clause in the leasing contract which required the Lessee to publish a notice in Cyber Security Weekly announcing the successful closing of the original transaction and the Lessor’s first rate provision of services. Our analysis is on the basis that the Lessee’s non-performance of this obligation would constitute a breach of contract.

The obligation to publish a notice is an obligation to act. The Court would consider whether such obligation has an intuitu personae character by considering whether it is an essential term of the contract that the Lessee publishes the notice.

Assuming that the Court infers that the parties’ intentions with respect to the inclusion of the notice clause was to promote, and potentially protect, the Lessor’s business, it is likely that the Court would find the important factor to be that the notice is published, regardless of by whom it is published. As such, it would not be essential that the Lessee publishes the notice. The Court has the option of ordering that (i) the Lessee publish the notice and is sanctioned with penalties until it does so or (ii) the Lessor or a third party publish the notice and that the Lessee be liable for all associated costs.

In the event that the Court does find that the notice has an intuitu personae character, it may sanction the Lessee with penalties until it publishes the notice.

146



Suretyship (cautionnement): benefit of discussion (bénéfice de discussion) Required diligence on the part of the creditor: information regarding the

guarantor; information regarding the failure of the debtor, formal notice to the debtor, obtaining an enforcement order.

A surety is discharged when the subrogation to the rights of the creditor can no longer take place in favour of the surety owing to an act of the creditor.

Effect of fraud on a group of contracts (fraud in the underlying transaction)


Article 2298 of the Civil code provides that the surety is bound to pay the creditor only upon occurrence of the debtor's default, and payment must have been previously required from the debtor.

Article 1139 of the Civil code: formal notice. Article 2313 of the Civil code states that “A surety may exercise against

the creditor all the defences that belong to the principal debtor, and that are inherent to the debt; But he cannot exercise defences that are purely personal to the debtor” (exception inherent au contrat).

Civ. 3ème, 11 May 2005: “ the guarantor can ask to be relieved of its commitment because the principal contract is void due to the creditor’s fraud. It can exercise against the creditor all the defences that belong to the principal debtor, and that are inherent to the debt”.

Unless the surety has waived its right to do so, it can require that the creditor seek to enforce its rights against the assets of the principal obligor (“benefice de discussion”).




The term "guarantee" under French law is generic and includes a first demand guarantee or a suretyship (“cautionnement”). In this scenario, it does not appear that the guarantee is a first demand guarantee (such concept is more akin to an indemnity), which requires the guarantor to pay on first demand of the creditor when the debtor fails to perform its obligations. Instead, given that the relationship here is one of suretyship, the Lessor should claim from the Lessee in the first instance, and only if it does not receive full payment from the Lessee, it may claim from the Guarantor.

On the facts, the Lessor sought payment from the Guarantor without first seeking payment from the Lessee. The Guarantor refused to pay on the grounds that Lessor has not fulfilled its obligations under the contract. Clause 2.1 in the Deed of Guarantee provides that before being able to claim under a warranty, the Lessor must pursue the Lessee, and only after exhausting all the remedies against

147

Lessee, may it pursue Guarantor (this principle corresponds to a cautionnement simple under French law). French law provides that the legal remedies have been exhausted once the Lessee has been given notice to pay and following receipt of such notice, sums remain owing to the creditor. The notice may be made by an extra-judicial act (sending a simple letter) or by formal notice as per the notice provisions of a contract. The statutory notice requirements are specific; a notice must include the date of the letter, provide details of the reasons for payment and the amount claimed, ask for payment, set a deadline for resolving the problem, provide the sender’s contact information and signature and include in the text the phrase "formal notice". (mise en demeure). If the notice remains unanswered for at least 8 days, it can be considered that it is not successful and the creditor may initiate legal proceedings.

On the facts, the requirement of the Lessor to send a formal notice to the Lessee had not been respected, and as such the Guarantor can refuse to pay.

In addition, in this case, the guarantor has not specifically waived this “bénéfice de discussion”, so even if a claim were properly made against it, the guarantor could still require that the lessor attempt to enforce against the assets of the principal debtor.

A possible additional defence for the Guarantor to resist payment might be that the principal obligation, ie, the lessee’s obligations under the lease Agreement, is void on the basis that the Supplier fraudulently withheld information from the Lessor which had vitiated the Lessor’s consent to the Supply contract. However, apart from the fact that such fraud is not apparent on the facts, the lease transaction is legally separate from the Supply and Support contract and is not void or unenforceable simply because of an issue involving the Lessor’s consent to a different contract.



Good faith: the contracts must be performed in good faith. Fault in contractual negotiations: contractual negotiations are governed by

the principle of contractual freedom. The parties engaging in negotiations are not required to reach a final agreement which means that each party may unilaterally terminate the negotiations. However this principle is tempered by a requirement of good faith. While the parties are free to break off negotiations, they must act honestly and in good faith.

Privity of contract: only persons who are party to a contract may benefit from the contract.

Civil liability (tort): a person suffering loss as a direct consequence of the fault of another can obtain compensation for such loss from the person at fault.


Article 1165 of the Civil code: relative effect of contracts (privity of contract).

148

Article 1382 of the Civil code: Any act that results in loss to another person, obliges the party at fault to compensate such loss.

Cass.ass.plèn, 6 October 2006 n° 05-13.225: a third party can claim damages under tort law for a breach of a contract to which it is not a party.




In this case, the Lessee is claiming that it suffered or will suffer economic loss as a result of the Supplier’s actions with regard to the Supply and Support contract between the Supplier and Lessor.

However, there is no contractual relationship between the Supplier and the Lessee.

As Lessee is not a party to a contract with supplier, and therefore does not benefit from privity of contract, it would be unable to bring a claim against supplier for fault in contractual negotiations or for breach of the obligation by the Supplier to act in good faith in the context of a contractual relationship.

Lessee could, however, claim from Supplier in tort (civil liability) if it can show a direct causal link between Supplier’s failure to disclose the letter of February 2010 and loss suffered by the lessee. That loss could be the difference between the profit the Lessee could have made using the progressive scanner 7 over its useful lifetime without restriction as compared to the profit or loss which will result from the penalties and the prohibition of use of progressive scanner 7 and the reduced profits which would result from having to us progressive scanner 8 as a replacement. The Lessee would have to prove both the amount of the loss and the direct causal link between the amount of that loss and the fault of the Supplier.



The occurrence of an event of default allows the Bank to demand immediate repayment of the loan.

The insolvent state is the situation in which a person or a company no longer has sufficient cash to meet its due and payable debts (cessation des paiements).


Article 2348 of the Civil Code: it may be agreed in the contract that in case of a failure to perform the secured obligation, the creditor will come owner of the thing given in pledge.

149

Article L. 631-1 of the Commercial Code: the cessation of payments (“cessation des paiements”) is when the debtor is unable to pay its accrued liabilities with its quick assets.c) Bibliographical references.

N/a

c) Application of legal principal to the question above.

The occurrence of any of the events of default listed in the Global Credit Agreement (clause 20) allows the Bank to demand early repayment of the loan and provides it with the possibility of enforcing the security. However, on the facts, the event of default has not occurred yet, as the borrower has paid all monies currently owing (clause 20.1 “no-payment”), is not in a bankruptcy situation (clause 20.5 “insolvency”), and no insolvency proceedings have been commenced (clause 20.6 “insolvency proceedings”) as at the date the bank declared an event of default.

Further, as far as we are aware, it is not in breach of its financial covenants (clause 20.2“financial covenant”). As such, the occurrence of an event of default is at this stage only hypothetical. As per the language of the contract, the occurrence of the event of default must have actually occurred in order for the Bank to be able to exercise its rights under the same clause. Accordingly, the Bank was not legally justified to declare an event of default under the Global Credit Agreement and as such its actions are in breach of contract.

Could the bank take extra-judicial action based on the contract?

It is not necessary for the Bank to request the permission of the court in order to accelerate payment following an event of default because it would allow the debtor to request the opening of insolvency proceedings by the time the judgment is rendered. It may directly demand repayment of the loan from Lessor. There is also no need to provide a 30 day grace period following an event of default.

In relation to the enforcement of security, the situation is different, and the Bank must request the court for leave to enforce it; because no clause in the contract allows the realization of the collateral out of courts (“pacte commissoire”); it cannot do this extra-judicially. But it depends on the collateral, because for some of them as the cash deposit (“gage espèce”), the creditor becomes the ownership of the cash without any Court’s judgement. But there is no need to provide a grace period.


Note that under French law, when insolvency proceedings are initiated in respect of a debtor (“procédure collective”), a statutory moratorium prevents creditors (i) from bringing any actions to enforce security and (ii) from being paid by the

150

debtor for debts accrued before the date of the judgement which commenced the insolvency proceeding.

- 12 (i) Attacked Bank’s claim to the security collateral as being invalid since the credit and security facility was entered into by Bank as trustee not in its own name and individual capacity.


The concept of security trustee, which generally allows security to be granted to a single bank or financial institution and to be held on trust for a fluctuating pool of beneficiaries, is not recognised by French law. To date, France has not ratified the 1985 Hague Convention on the Law applicable to Trusts and their Recognition although French law created a trust-like mechanism “fiducie” in 2007.

In 2011, the French Supreme Court in the Belvédère case, recognised the effects of foreign law trusts and the consequent rights of a security trustee within the context of documents governed by New York law. Moreover, the concept of parallel debt, in this case governed by New York law, was recognised to give rise to certain rights of the security agent as a parallel debt creditor for the purposes of insolvency proceedings in France. Belvédère provided authority that French courts will look to the law of the relevant document to determine the capacity of a trustee. It does not however provide any authority regarding the enforcement of security by a security trustee

Instead, French law recognizes the concept of security agent as set out in Article 2328-1 of the Civil Code. The article was designed to provide for the appointment of an entity which was not an agent (mandataire) but which, on the basis of specific legislation, could take, administer and enforce security on behalf of several beneficiaries which would not have to be individually identified in the security documentation. Legal practitioners have been reluctant to see Article 2328-1 as a sui generis mechanism for the creation of a security agent and so practice is to name all beneficiaries individually.


Article 2328-1 of the Civil code states that “Every real surety may be constituted, registered, managed, and realized for the account of the creditors of the obligation guaranteed by a person whom they name for that purpose in the act that establishes this obligation. »


N/a


The security agent alone signed the security documents. In the absence of any court decision interpreting Article 2328-1 of the Civil Code, it is an open question whether the agent had properly acted on behalf of the beneficiaries so as to give them the benefit of the security granted. What does appear to be clear is that even giving Article 2328-1 its intended application, the security agent would require a power of attorney from the beneficiaries in order to take legal proceedings on their behalf to enforce the security.

151

- 12(ii)

Did not specifically identify the security collateral, which was acquired by Lessor following the closing of original credit and security agreement, but rather was swept in through an ‘after-acquired property clause’


Under French law, security may be created over future rights and assets on the condition that the security complies with the concept of specificity, i.e. that such future rights and assets are clearly identifiable. In the event that condition is met, the security is created when the relevant asset comes into existence.


Article 2355 suivants of the Civil code.: Receivables pledge (applicable to all pledges below)

Article 1866 of the Civil code: Legal mortgage on group shares Article 132-10 of the insurance code: Insurance policy pledge Article 2360 of the Civil code: Account pledge Article L. 142-1 suivants C. civ. article L142-1 of the Civil code: General

business charge


Sûretés et Garanties du Crédit, D. Legeais, LGDJ, 2008, Edition 6

d) Application of legal principal to the question above

In order to consider whether the ‘after-acquired property clause’ would be valid under French law, each type of security interest should be analysed separately. For the purposes of this exercise, we have selected three types of security interest commonly used in French finance transactions. It is generally preferable to ensure that specificity requirements are met as far as possible to reduce the risk of creating new security for future assets and thus losing hardening periods.

General business charge (Nantissement de fonds de commerce)

The Security Agreement Clause 3 “Creation of Security” dated 15 February 2010 provides for a floating charge over the assets of the Lessor. The concept of a floating charge does not exist under French law. However, the closest concept is a general business charge which has the potential to capture some (but not all) assets of a business, i.e. intellectual property, professional equipment and machinery, the clientele, commercial property, trade name and logo, goodwill, lease rights. There are certain business assets which fall in to the scope of this charge automatically (the brand and trade name, leasehold rights, clients and goodwill) and others which need to be specifically mentioned in the security document (for example intellectual property).

The nature of this type of security creates a charge over the business as a going concern, and as such business assets replacing those in the scope (assiette) of the charge and new business assets, to the extent they were capable of being included in the scope initially, are expected to fall in to the scope from time to time. Lenders tend to protect themselves from any loss in assets and thus in the

152

value of their charge by requiring the borrower to covenant that it will not to sell, transfer or dispose of any charged assets. It is common that the scope of the charge will be specified to include the assets existing at the date of the security document as well as any other assets created or acquired, i.e. future assets, to the extent they are sufficiently determinable.

A general business charge must be registered with the commercial registry (greffe du tribunal de commerce) in the district in which the business is operating within 15 days of the date of security document in order to create the charge. If this registration is not carried out within the requisite timeframe, the charge will be void.

As such the after-acquired property clause’ would be valid, if properly registered within the requisite timeframe, in respect of a general business charge.

Charge over securities account (Nantissement de compte de titres)

Security is commonly taken over shares of companies whose shares are transferable by registration in a share account by way of a charge over a securities account (nantissement de compte de titres) in respect of joint stock companies such as societe anonyme, societe par actions simplifiee or a societe europeenne. Shares of other types of companies whose shares cannot be transferred by simple registration in a share account, such as a societe a responsabilite limitee, societe en nom collectif or societe civile are pledged by way of a share charge which shall not be discussed here.

Shares of French companies whose shares are transferable by registration are dematerialised and thus credited to an account which is kept either by the respective company or by a financial intermediary. Article L.211-20 requires a statement of pledge to be made by the pledgor (declaration de nantissement) in order for the charge to be valid and to take effect. A cash account (compte fruits et produits) is also secured as part of this charge, in which any dividends, interests or other proceeds or income arising from the secured securities are automatically credited.

As the security is over the account which holds the securities and not over the securities themselves, the scope of the charge covers any replacing or additional securities which are credited to the secured account. There is no requirement for any further statements of pledge to be made to secure these additional securities.

As such, on the condition that the statement of pledge is properly made, the after-acquired property clause’ would be valid in respect of the charge over the securities account.

Assignment of receivables by way of security (Dailly)

Such charge is subject to strict rules and may only be granted by a borrower in favour of a French licensed credit in situation (etablissement de credit) or a foreign credit institution which is licensed to carry out financial activities in France by virtue of a European “passport”.

Under French law, multiple receivables may be assigned simultaneously by means of one security document (borderaeu). The security document must set out details which permit each receivable to be identified.

With respect to future receivables, these need to be identifiable but not necessarily identified in the security document. It would suffice that the future

153

receivable is identifiable by reference to a framework contract or an intra-group agreement, for example, ‘all present and future receivables held or to be held by the pledger and owed by company A.’ However, the scope of the assignment would not cover, for example, ‘any receivable owed or owing to the pledger’ without providing further points of reference in order to make the receivable identifiable.

There are no registrations or formalities required in order that an assignment of receivables by way of security is valid and enforceable against third parties, including the receivable debtors. However, Article L. 313.23 of the Financial and Monetary Code sets out certain elements which must be listed in the security document in order for the assignment to be valid.

Given the nature of the drafting of the ‘after-acquired property clause,’ any future receivables would not fall into the scope of the assignment.

- 12 (iv) did not specify a maximum amount secured, and purported to secure performance of any future obligation of Lessor or a third party to Bank,


Under French law, it is not necessary that a security interest specifies a maximum amount to be secured. It is however necessary that the obligations which the security interest is securing are sufficiently defined, in order that the security be validly created.

It is also possible to secure the obligations of a third party or group company subject to compliance with the strict rules of corporate benefit and financial assistance.

Under the corporate benefit rules, the guarantor or security provider must receive distinct and not insignificant benefit as a result of providing the surety. If such benefit is not identifiable, there is a risk that the guaranty or security would be declared unenforceable and the directors of the surety providing company may be subject to criminal sanctions for misuse of the company’s assets. These rules also apply to security granted in favour of the obligations of another group member. It is generally accepted that downstream guarantees or security provide a corporate benefit as a shareholding company tends to have an interest in securing the obligations of its subsidiary. However the granting of upstream or cross-stream guarantees or security must be approached with care to ensure that the financing structure provides for a proportional amount of benefit to the guarantor or security provider and that the amount being guaranteed or secured does not exceed the financial capabilities of the guarantor or security provider.

Under the financial assistance rules, a French joint stock company is prevented from providing financial assistance in the form of guarantee, security or loan for the acquisition of its own shares. These rules are not applicable in this context and shall not be further discussed.


Article 2356 of the Civil code.Article L.255-216 of the Commercial Code

154


Sûretés et Garanties du Crédit, D. Legeais, LGDJ, 2008, Edition 6


In the Global Security Agreement, the secured obligations are defined as “all present and future obligations at any time due, owing or incurred by each Obligor to any Secured Party under the Finance Documents.”

As discussed above, under French law separate pledges must be taken over different security interests and each such interest is subject to its own specific perfection rules. We assume this has been done in this case and that the definition of Secured Obligations appears in each such pledge.

There is strong argument that the definition of Secured Obligations would be sufficiently certain for French law purposes, as it refers to the obligations arising between specific parties pursuant to specific contracts, i.e. pursuant the Facility Agreement and the Security Agreement. Such definition provides both flexibility and certainty for the lending parties that any sums which are or become due to them by the Borrower, or Obligor, will fall into the scope of the secured obligations.

Under the current terms of the Facility Agreement, Lessor is the only Obligor and it is prevented from assigning any rights or transferring any right and obligations under the Finance Documents. Moreover there are no provisions which provide for the accession of additional Obligors. However, in the event that Lessor did secure the obligations of an additional Obligor, the corporate benefit rules must be complied with. Current market practice provides that in order to demonstrate corporate benefit in respect of upstream or cross stream security, intra-group loans from the Obligor to the security provider are granted out of the loan proceeds, whereby the amount secured is limited to the amount lent under the intra-group loan.

-- 12 (v): was only properly perfectly by registration under national law on 15 April 2014, and was therefore considered voidable as preference or fraudulent transfer under national insolvency/bankruptcy law


Under French law, different security interests are governed by different statutory regimes. As such, an asset by asset approach must be taken to consider whether registration is necessary in order to perfect the security.

o General business charge (nantissement du fonds de commerce) – must be registered within 15 days of execution of the security document with the relevant commercial registry (“greffe du tribunal de commerce”) otherwise will be void. If the charge includes intellectual property rights, the security over these must be registered with the French National Institute of Intellectual Property (INPI).

o Pledge over receivables (nantissement de créances) – no registration requirements apply in order to perfect the pledge. However the pledge is not enforceable against the third party debtor unless it has been properly notified of the pledge.

o Pledge over bank accounts (nantissement sur des comptes bancaires) - no registration requirements apply in order to perfect

155

the pledge. However the pledge is not enforceable against the third party debtor unless it has been properly notified of the pledge.

o Pledge over securities account (nantissement sur compte-titres) – no registration requirements apply. The pledge is valid as long as the pledgor delivers a statement of pledge which must meet certain statutory requirements.

o Pledge over intellectual property (nantissement de propriete intellectuelle) - the pledge, along with details of each secured intellectual property right, must be registered with the National Institute of Intellectual Property (INPI). There is no time limit within which registration must be made.

Under French law, a company is considered to be insolvent when it is unable to pay its debts as they fall due out of its available assets. Certain actions or agreements are void or voidable if carried out or entered into by the debtor with its creditors during the hardening period (période suspecte).

The Court determines the date on which the hardening period commences by reference to the date on which the debtor is in a cash-flow default (cessation des paiements). The hardening period ends on the date of the judgement which commences insolvency proceedings. The hardening period can be no longer than 18 months prior to the date of such judgement.

Certain actions or agreements are considered void if entered into during the hardening period, as they are deemed to provide preference to certain creditors over others or to be fraudulent in an attempt to remove the assets of the company from the reach of certain creditors. A security interest is void if granted during the hardening period in respect of a debt previously incurred. Case law provides that the relevant date to assess whether the security is granted during the suspect period is the date of creation of the security and not the date of its registration, if applicable.

Other actions or agreements entered into or carried out during the hardening period may be voidable. A security interest is voidable if granted during the hardening period in order to secure a debt incurred simultaneously if it can be proven that the creditor was aware of the debtor’s cash-flow default at the time at which the relevant contracts were entered into.


Registration of security interests under French law:

o General business charge (“fonds de commerce”): art. L. 142-3 of the Commercial Code.

o Pledge over receivables: art. 2361 of the Civil Code ; art. 2360 of the Civil Code (pledge of bank account).

o Pledge over securities account: art. L 211-20 of the Monetary and Financial Code.

o Pledge over intellectual property: art. L 613-9 al. 1 of the Intellectual Property Code.

Void and voidable actions under insolvency law: Articles L. 631-8, L632-1 et L632-2 of the Commercial Code.

Cass. Com., 25 October 1994, n°91-14539.

156


Droit et pratique des procedures collectives, P.-M. Le Corre, Dalloz, 2015-2016, n°823.52


The relevant security interests were granted on 15 February 2010 but only registered over four years later on 15 April 2014. The bankruptcy case was filed on 15 May 2014. Considering the circumstances at the time of registration, including ongoing disputes and potential defaults under the facility agreement, it is likely that the registration date will fall into the hardening period, but ultimately this would a decision for the court to make.

From our list of security interests above, only the general business charge and pledge over intellectual property require registration. The general business charge will be void in this case as it was not registered within 15 days of being granted. The pledge over intellectual property will not be void if it was granted simultaneously with the Facility Agreement, even if registration occurs subsequently during the hardening period.

The other security interests do not require registration and would not be void because they were granted simultaneously with the facility agreement and we can presume from the facts that the loan was not made during the hardening period.

- 12 (vi) secured obligations to pay high rates of interest and penalties, which violates public policy.


Commercial contracts (i.e. those not involving a consumer) are no longer subject to usury laws (“taux d’usure”) which set a maximum interest rate as a matter of public policy.

A penalty clause is defined as being a clause by which a party promises to do or give something in the event that it fails to perform its contractual obligations. Parties are free to agree on the scope of a penalty clause to be applied in the event of breach of contract, subject to the possibility of such penalty being increased or reduced by the court if it is found to be manifestly excessive or derisory. There is no need for the non-defaulting party to prove any loss arising from the non-performance.


Rate of usury: article L313-3 of the Consumer Code. Penalty clause: articles 1152 and 1226 of the Civil Code (art. 1231-5 of the

draft Revised Civil Code).


Droit civil, Les obligations, Benabent, Montchrestien, 2007, n°427 s.


The Facility Agreement sets the interest rate at LIBOR plus 6% per annum. Considering the agreement is a commercial contract, the laws regarding

157

usury rate will not apply. As such, the interest rate cannot be challenged on this basis.

In the event that the Borrower fails to meet its payment obligations, the Facility Agreement provides for the payment of default interest at a rate which is 2% higher than that which otherwise would be payable. The default interest provisions are to be construed as a penalty clause, as they apply to compensate the lenders in the event that the Borrower fails to perform its contractual obligations.

According to market practice, the rate of default interest is generally set between 1 and 3% depending on the commercial circumstances and negotiating power of the parties. As such, there is a relatively low likelihood that the 2% default interest rate would be determined by a court to be manifestly excessive.


Q1: Set off against the insolvency/bankruptcy estate (the Lessor)


Payment before a bankruptcy case has been filed: debts can be set off by operation of law if these debts are reciprocal, certain, liquid and due for payment.

Payment after a bankruptcy case has been filed:

o Principle: when a debtor is subject to insolvency proceedings (“procédure collective”), there is a stay period during which no creditors can be paid by the debtor for debts accrued before the date of the judgement which commenced the insolvency proceedings.

o Exception: once the insolvency proceedings are filed, payment during the stay period may be however possible by set-off in respect of “related debts” (“dettes connexes”). According to case law, debts are said to be “related” when, for example, they are certain, reciprocal and arise from the performance of the same contract.


Payment by set off: art. 1289, 1290 and 1291 of the Civil Code (art. 1325-1 of the Revised Civil Code Project) ; Cass. Com., 24 juin 2003 (n°98-11406).

Payment of the creditors under insolvency proceedings (principle and exception): art. L622-7 of the Commercial Code.

The definition of “related debts”: see for example, Cass. Com., 14 févr. 2006 (n°04-11887).

158


Droit des entreprises en difficulté, Jacquemont, LexisNexis, 2013, n°371 s. Droit et pratique des procédures collectives, P.-M. Le Corre, Dalloz, 2015-

2016, n°632.41 s. Procédures collectives, Lienhard, Delmas, 2015-2016, n°75.18 s.


Lessee sought to set off amounts it owed to Lessor under the leasing contract by amounts it claimed as damages from Lessor. In order to be set off, debts must meet certain requirements.

The debts are reciprocal between the Lessee and the Lessor (the Lessee owes rent to the Lessor, and the Lessor is alleged to owe money as damages to the Lessee). Both obligations arise from the same contract, ie, the leasing contract and relate to the period before the bankruptcy case was filed. However, at the point of set off, the debt for damages is neither due nor payable because it is still a mere allegation from the Lessee and no judgement has been yet delivered concerning this issue. As such, neither (i) set-off by operation of law before the insolvency proceedings have been filed, nor (ii) set-off of related debts during the stay period would be permitted.

Q2: Set-off against the assignee of the leasing contract (the Bank)


Debts can be set off by operation of law if these debts are reciprocal, certain, liquid and due for payment.

If the right to receive payment under a contract has been assigned to a third party:

o If the assignment has been accepted by the assigned debtor, the assigned debtor will not be able to refuse payment to the assignee by alleging set-off between it and the assignor.

o If the assignment has not been accepted by the assigned debtor but has been notified to him, the assigned debtor will only be able to refuse payment to the assignee by alleging set-off between it and the assignor for debts accrued before the assignment.

o If the assignment has neither been accepted by the assigned debtor nor notified to it as required by law, the assigned debtor will be able to refuse payment to the assignee by alleging a set-off between the assigned debtor and the assignor.


Set-off by operation of law: articles 1289, 1290 and 1291 of the Civil Code (article 1325-1 of the draft Revised Civil Code).

Set-off by operation of law in case of assignment of rights to a third party: article 1295 of the Civil Code (article 1325-6 of the draft Revised Civil Code).


Droit civil, Les obligations, Benabent, Montchrestien, 2007, n°728

159


The Lessee sought to set off against the Bank (to the extent it had a proper assignment of the leasing contract) amounts that it owed under the leasing contract against amounts it claimed as damages from the Lessor. However, in this situation, the Lessee’s claim against the Lessor does not meet the requirements for set-off by application of law since it is only a claim for damages and is not certain “liquid” or directly enforceable (“exigible”). Even if Lessee were to subsequently obtain an award if damages against Lessor, it could still not set off such damages against the Bank since the assignment to the Bank had been notified to Lessee prior to the award of damages.

The only legal justification that the Lessee may rely on in this case to refuse to pay the Bank is to claim that a right to set-off exists between the Lessee and the Lessor if the assignment has neither been accepted by the Lessee nor served on it. However, even in this case, in order to exercise the right to set-off by operation of law, debts must meet certain requirements: to be reciprocal, certain, liquid and due for payment. As stated above, the debt of damages from the Lessor is not certain as it is still a mere allegation from the Lessee. Therefore, the requirements for set-off are not met and the Lessee cannot refuse to pay the Bank by alleging a set off by operation of law between him and the Lessor.


The “assignment of the leasing contract” in favour of the Bank would be considered in French Law to be an assignment of receivables arising from the leasing contract.


• An assignment of receivables as security for performance of an obligation is, in the absence of specific legal rules to the contrary, considered to be a pledge of receivables.

• A pledge of a receivable in accordance with the rules of the Civil Code is valid and enforceable against third parties upon signatures of the deed of pledge but is only enforceable against the assigned debtor upon notification to the assigned debtor (or if the assigned debtor has intervened in the deed of pledge).

• Banks benefit from a special security interest over receivables in respect of credit which they provide to a business. The assignment of “professional” receivables, when made by a debtor to a bank in accordance with the special rules for such assignments, transfers title to such receivables absolutely to the bank, even where such an assignment is made in guarantee”.

b) Citations to main sources of Law

160

Cass. Com. 19 déc. 2006, N° 65 16.395 (assignment of receivable by way of security is a pledge)

Civil Code, articles 2361 and 2362 (enforceability of pledges of receivables)

Monetary and Financial Code articles L.313-23 to L.313-29 (assignment and pledges of “professional” receivables to banks – “loi Dailly”)

c) Bibliographical References


Based only on the case documentation as written, neither the bank not the Supplier would be in a strong position to claim any special rights over lessor’s receivables from lessee in the insolvency proceeding of lessor.

We will assume that instead of relying on the Security Agreement, the Bank took security in the special form required by the “loi Dailly” and available only to banks. For this purpose, the lessor would have signed a special assignment form and the Bank, as beneficiary of the assignment, would have dated that form immediately.

In such case, the Bank would be considered to have taken an absolute assignment of the receivables listed in the special form as of the date inserted by the Bank and such assignment would be enforceable against all persons, including the receivable debtor, without any requirement of notification or registration. The effect of such an assignment is that the assigned receivables are no longer assets of the assignor, including for purposes of any insolvency proceedings of the assignor. This remains the case even when the assignment is made by way of security.

Therefore, in the event of the lessor’s insolvency, and assuming the special form assignment of receivables to the bank was carried out and dated in 2010 when the credit agreement was signed, the bank’s rights to the receivables would not be affected.

Since the Supplier is not a bank, it could not benefit from the special form of assignment. The provision of the supply agreement cited to support the supplier’s claim would at most be considered to be a pledge of receivables governed by the Civil Code. Unlike the special form of assignment available to banks, the pledge of receivables in favour or the supplier would have to be notified to the receivable debtor in order to be enforceable against it. In addition, once such notification takes place, the receivable debtor is obliged to pay the assignee directly instead of the assignor. Once notified to the receivable debtor a Civil Code assignment in guarantee has some effects which are broadly similar to the special form of assignment available to the banks in that the receivable debtor must pay the receivables directly to the assignee and such receivables are therefore not affected by the insolvency of the assignor. However, following the insolvency of the lessor it would be up to the insolvency administrator to determine whether the leasing contract and/or the support contract should continue to be performed by lessor. That decision would influence whether any receivables subject to the assignment to the Supplier, (or indeed to the Bank) would continue to be generated.

161

However, there is no evidence that the Supplier notified the lessee, as receivable debtor, of the assignment. Such failure would seriously, indeed probably, fatally weaken the supplier’s position in the insolvency of the lessor.

162

University of Washington School of LawLaw B599: Comparative Commercial Law: Transactional Perspective, Summer 2015Instructor: Prof. Jeffrey Wool

Annex V This tutorial was conducted with four students, two US JD students, and two foreign LLM students, both from a civil law-based, developing jurisdiction. The JD students had not taken advanced courses in commercial law. The LLM students had taken such courses. Prof. Jon Eddy of UW law school sat in on, and actively contributed to, the tutorial. The following are select observations following the tutorial: - 1. Materials A) Structure The ideal structure of materials may be: -

a. generic schematicsb. short black letter summaries of law for each jurisdiction [more than the ‘basic principles’ in the current materials, and tied-in tighter to the ‘sources of law’]c. the current materials [hypothetical and comparative application]

The current materials, alone, would not be effective for an ‘assigned reading’ supplement to TCL; they could be effective in a stand-alone CCL course, with much teaching support. The black letter summaries might best revolve around a set of foundational legal questions. Consideration is needed in determining contributors to these black letter summaries. B) Jurisdictional replies While generally high (more so given the relatively short time in

163

which they were prepared), the quality of the materials is uneven. Additional review and work is needed for at least two of the jurisdictions. It would be desirable to have Saudi Arabia added, to compare and contrast with UAE. c) Problem There are select ambiguities in the problem, with corresponding issues in the transaction documents, which need to be corrected / clarified. 2. Overarching elements to consider A) Applied comparative law Of interested was the fact that there were often different outcomes in doctrinally similar systems. These raises the broad question of ‘applied comparative law’, that is, differences between concepts and application. To our knowledge, the work on that is thin, especially in the commercial law context (at least beyond contracts). This feature should be explored in greater detail. B) Impact of economic historical development The economic historical development of legal systems appears to contribute greatly to understanding the black letter law and application of it to the facts. For example, the concentrated structure, and the resulting high degree of professional information, may help explain German systems of non-registration of security. These historical features should also be explored in greater detail.

164

Faculty of Law | University of Oxford - 1 January – … · Web view(b)with effect from 1 March...

Documents

Transcript of Faculty of Law | University of Oxford - 1 January – … · Web view(b)with effect from 1 March...