Turkey: Legal Diversity and The Cape Town Convention

The Cape Town Convention on International Interests in Mobile Equipment (2001) ("Convention") purports to harmonize the law of secured interests in international transactions dealing with high value mobile equipment.^[1] The importance of the Convention does not only stem from the fact that it deals with high value mobile equipment^[2]; it also creates universal substantive laws to govern transactions relating to them.

The Convention defines an international interest as one that is: granted by the chargor under a security agreement; vested in a person who is the conditional seller under a title reservation agreement; or vested in a person who is the lessor under a leasing agreement. According to paragraph (d) of the Article 2 of the Convention, it is the applicable law which determines whether an interest falls under one of the international interest definitions. Consequently, it is possible to state that available remedies vary according to the definition and interpretation of the relevant domestic applicable law.^[3] Existence of an interest, as defined under the scope of the Convention, may depend on the applicable national law because different families of law have different definitions for the concept of "property".^[4] Therefore, the concept of security varies from jurisdiction to jurisdiction, again depending on the definitions of concepts of ownership and possession.

This article will initially explore how the property and security interest concepts differ in common and civil law systems; more relevant distinction between functionalist and formalist approaches to security interests; and the effects of legal diversity on the interpretation and formation of the Convention.

Common Law v. Civil Law:

The Concept of Property
In common law systems, possession means either physical possession or control through a physical possession, which can even be physical access to an asset such as a key. In view of that, intangibles cannot be pledged since it requires the delivery of possession.

The Nature of Security Interests
In common law jurisdictions, the nature of security interest remains uncertain: In England and Wales, Hong Kong, Malaysia and Singapore security interests are regulated by their legal form. The principal issue to identify is whether the interest in question falls under one of the four classes of security interest types as recognized by the common law, which are regulated as charge, mortgage, pledge or lien.^[5]

In other common law systems, based on the United States Uniform Commercial Code ("UCC") (functional approach), namely, Canada^[6] and recently New Zealand and Australia; countries adopt a functional and economic approach by classifying title retention agreements and certain leasing agreements as forms of security and the title of the conditional seller or lessor as limited to a security interest.^[7] For example, a lessee is viewed as having a special property interest in movable property in his or her possession in the countries which adopt a similar system to the U.S.A.'s UCC. However, a lessee is viewed as having only a possessory interest under most civil law systems and in the other common law countries. As a consequence, the default remedies of a conditional seller and of a lessor whose lease is treated as a security agreement will be governed under the provisions of the Convention dealing with security agreements, not by Article 10 dealing with conditional sales and leases.^[8]

This explanation underlines the fact that the differing nature of security interests among countries stems from their approach rather than their legal family. Therefore, the relevant comparison is between the functional and formalist approaches.^[9]

Functional Approach v. Formal Approach

A leasing transaction would be characterized as a lease in a jurisdiction that applies a formal approach. However, it could be classified as a security agreement under a jurisdiction that applies a functional approach.^[10] This is a result of the fact that most legal systems outside of North America (and Australia, New Zealand) make a clear distinction between security agreements and title-retention and leasing agreements. They treat a conditional seller or lessor as the full owner.^[11] On the other hand, the United States, Canada, New Zealand and more recently Australia,^[12] adopt a functional and economic approach, treating title reservation agreements and certain leasing agreements as forms of security and the title of the conditional seller or lessor as limited to a security interest.^[13]

The Usinor Industeel v. Leeco Steel Products, Inc^[14] case clarifies the distinction between the two approaches. In this case, the seller, a French company with its place of business in France, sold steel plates to the buyer, an Illinois corporation with places of business in the United States. The parties' contract provided that the seller retained title to the steel until the buyer paid the purchase price. The buyer took delivery of the steel but did not make full payment. Before the seller sued the buyer to recover possession of the steel that had not been sold by the buyer to third parties, the buyer had granted a security interest in the steel to a bank that took due steps to publicize its interest.^[15] Had French law been applied, the seller might have recovered possession of the steel, because the ownership was retained in the goods under the title reservation clause contained in the contract.^[16] On the other hand, the applicable law was U.S law and according to UCC 2-401(a) it is provided that: "Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the Article on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties."^[17]

Conclusion

While the Convention reflects some similarities to national laws, generally, it has nothing to do with traditional formalism. Instead, the Convention employs a simple, functional approach to the identification of secured financing devices. The main focus of the Convention is on the everyday needs of the parties and persons affected by secured financing transactions, and not the theoretical and the conceptual organization of any particular national system. Because according to the Convention, title reservation agreements and leasing agreements create registrable rights same as security interests. Same procedure applies to US and the countries that adopt functional approach. However, in civil law systems and the common law systems which adopt formal approach such as England the strict categorization of security interests and exclusion of quasi securities cause difficulties. That being said, it would not be unfair to say that the Convention clearly parallels the functionalist systems in the U.S. and Canada (excluding Quebec).^[18] Therefore, the purpose of the Convention is an overall simplification of quasi and real security interests even though the remedies for security interests and quasi security interest may differ depending on the national law. There will still be a secured party irrespective of the individual countries' approaches towards defining the interests. Therefore, there is a great level of approximation in secured finance law regarding high value mobile equipment under the Convention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.