4. Importance in insolvency

The difference between having a real or rather a personal right is important especially in the case of insolvency of the recipient. Let us take the example of the sale of a movable. The seller has entered into the contract under the influence of a defect of will, for example duress. As the transaction does not correspond to his true will, the seller has the power to avoid the contract of sale. Where the thing has already been delivered avoidance will oblige the buyer to return the thing to the seller.

In a purely abstract transfer system the seller merely has a personal right to the retransfer of the thing. As a result, the seller does not have any priority in the buyer’s insolvency: he is an ordinary unsecured creditor. In a causal system, on the other hand, the seller will in principle be able to claim back the thing relying on his right of ownership, which will normally revert to him as a result of the avoidance. When ownership reverts to the seller the thing does not form part of the buyer’s goods available for realization and satisfaction of the buyer’s debts. It should be returned to its owner by the administrator in insolvency. For that reason it is often said that a causal system gives a better protection to the transferor against insolvency of the other (i.e. the receiving) party.

We should bear in mind, however, that the protection against insolvency of the receiving party is rather imperfect. Firstly, the seller’s protection against the buyer’s insolvency is limited by a few important exceptions: as the protection depends on the transferor’s ownership the protection is no longer available when for some reason the right of ownership transferred by the seller has lapsed. To give an example, when the transferee (B), who bought the car from (A) has sold the car to a bona fide third party (C) who is protected against the fact that he acquired from a non-owner, A will no longer be able to revindicate the car. Ownership does not revert to him. The reverting of ownership to the transferor may also be barred as a result of original acquisition, for example when the thing has been mixed with identical assets in the hands of the transferee (confusio and commixtio), or if the thing has been used to make a new thing (specificatio) or if it has been attached to another thing (accessio).

5. The German transfer system⁸

5.1. Abstract transfer system

The German abstract system distinguishes between the contract obliging to make the transfer (Verpflichtungsgeschäft) and the transfer itself (Übereignung, Veräußerung). In principle the transfer is valid even if the preceding contract is void or has been avoided with retroactive effect. If ownership has been transferred under a voidable contract avoidance will not automatically revest ownership in the transferor.

The abstract system in its purest form was developed by the German scholar Friedrich Carl von Savigny and his pupils in the nineteenth century. As it is the archetype of an abstract system, it is used in comparative law as the standard example of the abstract model. It seems that in Savigny’s view a defect of will, such as fraud, mistake or undue influence, never gave its victim a proprietary remedy to claim back the thing transferred. The seller had the option to avoid the contract of sale, but he did not have the possibility to avoid the transfer itself. As a result, property always passed on the basis of a void contract, while avoidance of a voidable contract did not automatically re-vest title in the seller. Instead the seller had an unsecured claim that property should be retransferred to him on the basis of unjustified enrichment.

As German law in the nineteenth century did not recognise any general principle of third party protection, the abstract transfer system had a practical function.⁹ An abstract system protects third parties, at least to some extent, because it prevents a defect in a sales contract from influencing a subsequent transfer by the buyer to a sub-buyer. To illustrate this with the standard ABC example: if voidness or avoidance of the initial contract between A and B does not prevent B from becoming and remaining owner of the thing, B is able to give a good title to C. No special provision protecting a bona fide buyer is needed to achieve this result. This justification for the abstract transfer theory was not used by Savigny and appeared only much later, in the second half of the nineteenth century. In the preliminary draft of the German Bürgerliches Gesetzbuch a general protection for third parties was consciously omitted,¹⁰ and protection was left instead to the principle of abstraction.¹¹ Later, however, it was decided to provide for a general third party protection after all.¹² Yet the draftsmen did not draw the conclusion that the principle of abstraction had ceased to be needed to protect third parties. Yet this protection is clearly superfluous because, even if Germany had opted for a causal system, the subsequent acquirer would have been sufficiently protected.¹³ In the case of an invalid or non-existing legal ground for the transfer, a causal system would prevent title from passing to the acquirer. Under § 932 BGB¹⁴ a second acquirer would then be protected against the first acquirer's lack of title, provided he is in good faith. When this provision applies, the second acquirer becomes owner of the asset.

Although the abstract principle continues to apply in modern German law, it has been eroded in practice by the notion of “identity of defect” (Fehleridentität) between contract and transfer. It is accepted that the transfer, the transfer, is independent and that defects in the underlying contract do not automatically spill over to the transfer. At the same time, however, Wiegand stresses that no artificial segregation should be made between the two legal acts.¹⁵ In every case it should be ascertained whether the transfer is affected by the same defect as the contract. If, as often, both legal acts suffer from the same defect, this should be openly acknowledged, despite the obvious effect of eroding the abstract transfer system. Under German law, serious defects of will, such as fraud, undue influence and duress, will normally affect both the contract and the transfer. As a result, the victim may annul the transfer as well as the contract. It is also accepted that usury renders a transfer void when the transfer gives effect to the usury. Transfers for the purposes of security can also be void for reasons of usury. Similarly, legislation on unfair standard form contracts may render void not only the contract but also the transfer itself. Identity of defect is, however, hardly ever accepted in respect of error, the most common defect of will, except in cases where the wrong thing has been transferred or a transfer has been made to the wrong person. Where a statutory provision entails voidness it is vital to check whether or not the voidness is aimed only against the contract or also against the transfer itself. Moreover, in German law parties to the contract and transfer may opt out of the abstract transfer system by treating them as a unitary transaction (Geschäftseinheit) in the sense of § 139 BGB, or by making the transfer under a resolutive condition that the underlying contract is and remains valid.¹⁶

One effect of these developments is to erode the main policy reason for including the abstract transfer system in the German Civil Code, namely third party protection. The abstract system prevents that defects in a transaction spill over into the subsequent transaction. Now this third party protection is being eroded. This is not problematic because third party protection is available in the form of § 932 BGB. The need for the abstract system is reduced accordingly.¹⁷