Documents as carriers of rights – the concept of abstractionof abstraction

Particular attention has to be paid to documents which evidence rights and obligations in a manner that is is tied to a tangible document and cases in which the possession and delivery or surrender (traditio) of the document constitute legal effects. Paper as a physical material facilitates its physical possession and the transfer of rights recorded on it. There is only one paper called ´original´ (or a preset number of ´originals´) representing the rights and the equivalent information recorded on it. The conceptual function behind an original is the uniqueness or singularity of a set of data. One has to verify that a set of data content is used only once for a given purpose. As it is not possible to deliver data physically, a transfer of rights embodied in the agreed data content must follow other patterns such as the assignment (denuntio) of rights.⁵⁸

Documents represent rights in various senses. Negotiable instruments such as promissory notes, cheques or bills of exchange relate to the payment of money. The debtor can pay the person by producing the instrument and can be sure that he does not have to pay a second time. The creditor, as long as he or she possesses the instrument, does not have be afraid that the payment wil be made to somebody else.⁵⁹ Such documents concern the payment of a sum of money, which is a generic obligation.

Documents of title such as bills of lading are, under many domestic laws, also negotiable instruments⁶⁰, but more accurately they represent rights to goods, which is usually a specific, but sometimes a generic obligation.⁶¹ Although bills of lading are regulated by international conventions, which deal with their

functions in contracts of transport, national law also has a role to play in governing the nature and some aspects of the commercial operation of the instrument and its role in transferring rights to the goods in a proprietary sense.⁶² When the right is specific, it establishes a right to the goods themselves, which is generally valid against the world at large being a right in rem or a security right.⁶³ In transport law, transport documents which are not documents of title but a right to control the goods during transport are tied to the possession of a duplicate.

58 Grönfors 1991, p. 69, referring also to Reinskou, Bill of Lading and ADP, Description of Computerized System of Carriage of Goods by Sea, Journal of Media Law and Practice 1981, as well as to Henriksen, The Legal Aspects of Paperless International Trade and Transport, 1982.

59 Schnauder, p. 1642.

60 English lawyers usually refer only to ´document of title´ since one cannot, under English law, transfer a better title as one can do with negotiable instruments proper, such as bills of exchange, see Chapter VI, post.

61 Cf. Grönfors 1991, p. 78.

62 Latin jurisdictions such as France seem to classify bills of lading as credit instruments, see Chapter VI, post.

63 Such a right exists as to the representative document itself and as to the goods

represented by them, see Chapter V, post. A transfer of a negotiable instrument could be considered either as an assignment of debt evidenced by it or as a right in rem to the document itself, See Kaisto 2001, pp. 496 ff. The solution to this problem could have implications relating to private international law, since the law of the place where the document is (lex carta sitae) may come into play.

Securities such as shares, bonds and warrants are traditionally documents which are tradable and represent ownership in a company or a claim of money.

These may traditionally be transferred in ways similar to negotiable instruments.

The similarities between securities and commercial negotiable instruments used in the sale and transportation of goods may be established to analyse how immaterialised securities systems work and how experiences with these could be transferred to the use of commercial documents.

I use mainly my own (Finnish) legal system to illustrate how negotiable instruments and securities operate. Generally, the same ideas seem to be valid in other jurisdictions referred to in this study. Negotiable instruments are documents which are issued to bearer, to a named person or order or to order.⁶⁴ Bills of lading are also negotiable in the same ways.⁶⁵ The law safeguards the exchange functions of these documents by protecting a party who has acquired the document in good faith⁶⁶ against debtor´s arguments relating to the credit relationship. Good faith does not protect the recipient if the document is forged or if there is a fundamental flaw in consent such as coercion or the incapacity of the issuer. Neither is a holder in good faith entitled to a claim on a document which is invalidated.⁶⁷ Once the transferor has transferred the possession of the document together with an indorsement, where necessary, the transfer is also valid against the creditors of the transferor.⁶⁸ The debtor is not liable to pay, unless the negotiable instrument is presented and surrendered to him.

Securities are generally understood to be instruments which tie the exercise of certain rights to the possesion of a document. The Finnish Companies Act, chapter 3 § 9, makes the transfer of shares subject to the provisions of the law of negotiable instruments. This equation between shares and negotiable instruments defines the former as merchantable. The merchantability and the public nature of the markets are the essential features of securities under 1 § 1 of the Finnish Securities Markets Act.⁶⁹ Bonds are securities within the meaning of the act, and so are certain other documents. Finnish law like other Nordic laws has created dematerialised securities markets, see infra.

Finnish law defines the nature of the document as a negotiable instrument or as a security dependent on functional characteristics, which means generally that the title of the document does not count. It is also possible that any document representing the goods could be made negotiable or transferable, although the law does not directly deal with these documents.⁷⁰ Once the

64 VKL (Promissory Notes Act) § 11.

65 The general law on negotiable instruments contained in VKL is, however, applicable only to monetary obligations (Aurejärvi, p. 13). The provisions of the Maritime Code apply to bills of lading.

66 VKL § 14 states that unless the recipient of the document knew or ought to have known that the transferor was not able to dispose of it this cannot affect the right of the recipient in respect of it.

67 VKL § 17.

68 VKL § 22.

69 Karjalainen-Parkkonen, p. 15.

70 See however L asiakirjain kuolettamisesta (act on amortisation of documents) 14.8.1901, where a number of documents such as bills of lading and warrants are listed.

document is transferred, the creditors of the transferor cannot validly claim the goods represented by the document. National law can also be more restrictive as to what documents can represent rights in respect to goods. Under English common law, especially, a well-established practice is required to make a particular paper qualify for a document of title.⁷¹

Legal literature sometimes uses the concept of abstraction.⁷² Abstract rights are separable from their original causa, which in a very pure sense of abstract rights does not necessarily exist, and can often be transferred independent of the situation in the original legal relationship. Negotiable instruments relating to the payment of money are rather abstract in that no underlying transactions may be invoked, and the good faith required from the party surrendering it relates to the rightfulness of the possesion of the document. Bills of lading represent an abstract undertaking by the carrier to deliver the goods in their recorded shape to a consignee surrendering an original bill of lading in good faith. Good faith may protect a party in commercial transactions without it being tied to the possession of negotiable instruments. Under Finnish law, good faith protects a purchaser of goods which do not belong to the seller in respect of which the seller is the borrower or deposit-holder.⁷³ Furthermore, according to the brand new edition of the UNIDROIT Principles of International Commercial Contracts, an assignee of a right acting in good faith is protected.⁷⁴

Good faith has a more general meaning in the laws of many jurisdictions and international trade (see II.7., infra). In legal transactions, whether or not it is accompanied by negotiable instruments, good faith has a specific meaning and standards and measures are established under national law.⁷⁵ Under international maritime conventions⁷⁶, the good faith of the consignee surrendering a bill of lading creates ´estoppel´ for the carrier to refer to circumstances in the underlying contract of transport and the carrier´s obligation becomes abstract vis-à-vis such consignee. International conventions do not, however, define what is the good faith standard that they require.⁷⁷

Abstract undertakings are frequently seen as a contradiction to accessory undertakings, and they are often described as ´independent´. For instance,

71 See Chapter VI, post.

72 There is no uniformity as to how this concept is used in the Finnish doctrine, see Kaisto 2001, p. 490.

73 Kauppakaari (Handelsbalken) from 1734 § 11(4) and 12(4).

74 See Chapter V.9., post.

75 For the substantive aspects of good faith under Finnish kauppakaari §§ 11(4) and 12(4) as well as VKL 14 § and in other Scandinavian countries, see Kaisto 1997, pp. 268 ff. See also Aage Thor Falkanger, God tro, En studie om kravet till god tro som vilkår for å erverve eller opprettholde privatrettslige rettigheter, Oslo 1999. The measure can be objective such as that of bonus pater familias or it can be more related to circumstances.

76 See Chapter VI, post.

77 UNCITRAL draft instrument on the carriage of goods by sea (draft as contained in doc A/

CN.9/WG.III/WP.32, 26 August 2003) Article 38 attempts to define the carrier´s good faith when taking information to transport documents when goods are delivered to the carrier.

However, good faith remains undefined in the tripartite relationship shipper-carrier-indorsee.

guarantee obligations can be absolute and need not be based on a default in the underlying transaction. This is the case with demand guarantees. The guarantor undertakes to guarantee the default in the transaction simply ´on first demand´.

Although some documents will have to be furnished, the independence is not mitigated by the need to furnish documents. The only exception to the

guarantor´s undertaking to pay is generally fraud. If the beneficiary´s fraud under the relationship can be established, the guarantor is not liable to pay.

Generally speaking, one of the major challenges of e-commerce legislation is to define how to deal with abstraction in an electronic environment. It requires a policy decision that delineates to what extent abstract undertakings should be allowed to exist. Will the enhanced dissemination of information in IT society change the picture so as to require more carefulness for good faith to effectively exist? Technically, it is possible to obtain and record information on the condition and ownership of the goods in real time. This decision is to be made by legislators and courts.