Conditional Sales

From the high and late classical period, texts have been passed down to us in which—possibly following Hellenistic transactional practices^{[1267] [1268]—a sale-based arrangement enabled the creditor to possess pledged property as owner in case of default.}

Pap. FV 9 and Marci. D. 20.1.16.9

We have two fragments from late classical jurists which uphold the validity of a conditional sale of the pledged object by the debtor to the creditor, triggered by a default under the secured debt (loan).

FV 9. Papinianus. Creditor a debitore pignus recte emit, siue in exordio con­tractus ita conuenit siue postea; nec incerti pretii uenditio uidebitur, ut pecunia fenoris non soluta creditor iure empti dominium retineat, cum sor­tis et usurarum quantitas ad diem soluendae pecuniae praestitutam certa sit. A creditor lawfully purchases the object of pledge, irrespective of whether this has been agreed at the commencement of the contract or later; it will not be regarded as a sale for an uncertain price if it has been agreed that, on non-payment of the interest charged amount, the creditor may retain the ownership pursuant to his right of purchase, since the amount of principal and interest to be paid at the date of payment is certain.

D. 20.1.16.9. Marcianus libro singulari ad formulam hypothecariam. Potest ita fieri pignoris datio hypothecaeve, ut, si intra certum tempus non sit soluta pecunia, iure emptoris possideat rem iusto pretio tunc aestimandam: hoc enim casu videtur quodammodo condicionalis esse venditio. et ita divus Severus et Antoninus rescripserunt.

It can be a term of a pignus or hypotheca that if the money is not paid by a certain date, the creditor can possess the property as buyer at a fair price then to be assessed. In this case, there is, as it were, a conditional sale, as Severus and Antoninus held in a rescript.

The conditional sales discussed in these texts are in substance forfeiture mechanisms. The debtor and creditor have agreed on ‘day 1' of the credit transaction that only in case of a default under the secured debt shall the creditor acquire ownership of the pledged object by way of sale. The effects of Papinian FV 9, in particular, are almost identical to those of an express for­feiture clause. The fact that the purchase price can be set on the principal amount of the loan plus interest means that, where the value of the object of pledge is higher than the amount of the secured debt, the surplus will be for the benefit of the creditor. Marci. D. 20.1.16.9, by way of contrast, expressly states that the purchase price must reflect the iustum pretium of the pledged object. The text refers to a rescript by Septimius Severus and Caracalla which considers this constructive forfeiture arrangement as a valid conditional sale of the pledged property. The ruling that the purchase price must reflect the iustum pretium of the property means that the secured debt owed to the creditor must be set off against the purchase price owed to the debtor. If the market value exceeds the amount of the secured debt, the balance (which is the surplus value) must be paid by the creditor to the debtor. It is difficult to interpret this text otherwise than that it shows concern for the debtor's position.

Is it possible that Marci. D. 20.1.16.9 really reflects classical notions of fairness,^[1269] or is the text interpolated? ^[1270] According to Levy, the reference to the ‘fair price then to be assessed' (‘iusto pretio tunc aestimandam') is indeed an interpolation, made by the Compilatores of the Digest in order to harmonize D. 20.1.16.9 and C. 8.34.3 (Constantine's prohibition of forfeiture clauses).^[1271] One would think, however, that if at the end of the classical period it was settled that the creditor was obliged by operation of law to refund the surplus to the debtor, the creditor's obligation to pay the fair market value in Marci. D. 20.1.16.9 would be perfectly reconcilable with this. In another opinion, Marcian discusses the practice of the debtor selling the pledged property himself, in order to facilitate him to pay off the secured debt with the pro­ceeds of that sale.^{[1272] [1273] [1274] [1275] Marcian recommends that before the sale actually takes place the creditor shall obtain an undertaking (cautio) from the prospective purchaser that the latter shall pay the purchase price up to the amount of the secured debt to the creditor. Again, this reflects that the creditor's entitlement to the value of the pledged property is confined to the amount of the secured debt.61 It is, therefore, not at all impossible that Marci. D. 20.1.16.9 does reflect classical notions of fairness. The rescript of D. 20.1.16.9 is, moreover, not necessarily at odds with the opinion expressed by Papinian in FV 9. The ques­tion in dispute in FV 9 only concerned the certainty of the purchase price, which was an essential requirement for a valid contract of sale/2 The (un)fairness of allowing the creditor to keep the surplus was not at issue. In another fragment of the Digest, reference is made to a rescript, which was rendered by the emperor (who must have been Septimius Severus) at a time ‘when Papinian headed the Office of Petitions'.}

Economic rationale of the ‘pactum Marcianum

The plague which broke out during Marcus Aurelius's reign in 165 ad and ended in 180 ad was the beginning of one of the most dramatic periods of the whole history of the empire, surpassed in its severity only by the fall of the Western empire in 471 ad.^[1276] The economy of this period suffered from failing markets and high inflation. In an economy characterized by high inflation it is favourable for creditors of medium- and long-term loans to insist on a for­feiture arrangement. The value of the pledged property will rise in relation to the sum loaned, so that the substitution of the borrowed sum with the charged property will put the creditor in a better position. Let us suppose that a loan of 100,000 sesterces with a term of three years is secured by a pledge of real estate, which at the time of the granting of the pledge has a market value of 120,000 sesterces. In times of hyperinflation (which did occur in the late empire) it may very well be that when, after three years, the loan must be repaid the market value of the property has risen to 500,000 sesterces. If the borrower would fail to repay the loan, forfeiture of the pledged real estate would be favourable for the lender: a claim with a nominal value of 100,000 sesterces would be substituted with real estate with a market value of 500,000 sesterces. The surplus value of 400,000 sesterces could be pocketed by the lender so that the original balance between the amount of the secured debt and the value of the collateral is more or less maintained.

This economic advantage of conditional sales for lenders in times of heavy inflation disappears where they must pay the fair market value (determined at the time of the debtor's failure to pay) of the pledged property to borrowers. Pursuant to the rescript by Septimius Severus and Caracalla, on which Marci. D. 20.1.16.9 is based, the lender must pay to the borrower the balance of the secured debt (100,000 sesterces) and the purchase price (500,000), which is the surplus value of 400,000 sesterces. Would the imperial rescript referred to by Marcian have put an end to the practice of conditional sales? This is by no means certain. Conditional sales of this type can still be an efficient means of taking recourse against charged assets, even when they do not provide protec­tion against inflation. They dispense with the need to auction the property soon after the debtor has defaulted. In a depressed market, the creditor can purchase the pledged property for a low price, has the option to wait for bet­ter times for selling the property, or has the opportunity to sell the property outside the framework of an execution sale (which may render a lower price than an ordinary sale). In modern Italian law, the transactional practice discussed in Marci. D. 20.1.16.9 has never disappeared and is still referred to as ‘patto Marciano’.^{[1277] [1278] [1279]}

Sale to the creditor after the secured debt is due and payable: Marcell. D. 13.7.34

Marci. D. 46.3.44 discusses the case where the debtor sells the pledged prop­erty to the creditor in order to discharge the secured debt. The text does not express any reservations (like iustum pretium as in Marci. D. 20.1.16.9). However, the crucial difference is that in this text the sale is not conditional upon a future event of default in respect of the secured loan but takes place after the secured debt has become due and payable/⁸ From an earlier period, the Corpus iuris civilis contains a—problematic—text by Marcellus, which from the ‘renaissance' of Roman law in the twelfth century until this day has received different interpretations/⁹

D.

Titius lent money to Sempronius and took a pledge against the loan. When sale of the pledge was imminent because the money had not been paid, the debtor asked the lender to buy the estate at a given price. Having succeeded in his request, he sent a letter reciting that he had sold the estate to the lender. Question: Can the debtor set this sale aside on tender of the principal and interest which are due? Marcellus’s reply was that on the story as set out no revocation was possible.

At first glance the case seems to be a simple one.^[1280] Creditor Titius informs his debtor Sempronius that he intends to sell the pledged fundus to a third party by way of execution. Sempronius then offers Titius the possibility that the fundus will remain with Titius by way of purchase. After Titius has accepted the offer, Sempronius gives him a written confirmation. If Sempronius later seeks to redeem the pledged fundus, this is no longer possible since it has already been validly sold and delivered to Titius. In this interpretation, a con­structive forfeiture arrangement exists: the debtor sells the charged object to the creditor due to default. '1 his, however, involves a forfeiture arrangement that is made only after the default has occurred, which in later times was con­sidered less onerous than a forfeiture arrangement concluded at the time of granting the pledge.7^[1281] In my view, it therefore is certainly possible that Marcellus’s text does concern the purchase of a charged object by the creditor himself.

The problem with this interpretation is that not Sempronius but Titius appears to be the subject of ‘petit a creditore’.^{[1282] [1283] [1284] [1285] Titius may therefore not be regarded as the creditor to whom the request is made to buy the charged object. According to the greater part of modern literature, there must thus have been a third party in the case of D. 13.7.34.73 According to Peters and Kaser, Sempronius has granted a right of pledge to Titius as additional secur­ity for fulfilling the repayment obligation under a loan provided by Titius with the funds of a third party/4 When Sempronius later defaulted in repay­ing the loan, Titius sold the pledged object to this third party and notified Sempronius of this in writing. In this interpretation, there is no purchase by the creditor to whom the purchased property had been pledged/5 However, might it not be the case that the text was passed down to us in a somewhat corrupted state? In the older Romanist literature, several conjectures have been suggested—for example, that ‘Sempronius' should simply be inserted after ‘petit a creditore’.[1286] [1287] [1288] [1289] [1290] [1291] This approach has, in any case, become dominant in the ius commune. Starting with Jacques de Revigny, D. 13.7.34 will be used as the main authority for the validity of a forfeiture arrangement that was agreed after the secured debt had fallen due.77}

Evaluation

Can Marci. D. 20.1.16.9 still be reconciled with the late classical constitutions, which provide that the creditor should sell the pledged object to a third party and only allow him to acquire its ownership with the express permission of the emperor (impetratio dominii)? According to some modern authors, it cannot: these constitutions should be interpreted as invalidating forfeiture arrange­ments (including conditional sales)/⁸ This would mean that the rescript by Septimius Severus and Caracalla of Marci. D. 20.1.16.9, which allowed forfeit­ure arrangements based on the collateral's market value, was rendered obso­lete by the constitutions of Alexander Severus soon after and again in the next century, by Constantine's unequivocal prohibition of forfeiture clauses. Another interpretation is more plausible/⁹ It is clear that at the end of the classical period the creditor was obliged to pay the surplus to the debtor. It would be inconsistent with this that forfeiture arrangements allowing the creditor to purchase the pledged property for the amount of the loan would be valid. If, on the other hand, the parties had agreed that the purchase price would reflect the market value, then the surplus would go to the debtor and there would be no need to invalidate the conditional sale. It is not unlikely that the Compilatores endorsed the same interpretation/⁰ It may not be a coincidence that, despite Alex. C. 8.34.1 and Const. C. 8.34.3, Marci. D. 20.1.16.9 has been included in the Corpus iuris civilis, while Papinian FV 9 has been left out/¹ In this interpretation, only conditional sales of the type described by Papinian FV 9 would be invalid. As to the impetratio dominii, this could well only have been necessary where the parties had failed to reach agreement on a sale or datio in solutum to the creditor. In other words, the existence of the impetratio dominii does not necessarily exclude the validity of forfeiture arrangements in the form of conditional sales or dationes in solutum.

The underlying principle which can be distilled from the legal sources is that an invalid forfeiture clause has two elements: if one of these elements is absent, then a valid clause has been established. First, it is aimed at a default which might possibly occur in the future. If the acquisition of the charged object is the result of an agreement which has been concluded only after the occurrence of the default, then the first characteristic is missing and a valid acquisition exists.^[1292] Secondly, the surplus value contained in the charged object accrues to the creditor. If the second characteristic is lacking, because the arrangement by the parties is based on the market value of the charged object and payment of the surplus value to the debtor, then a legally valid clause has been established/^[1293] This synthesis is not expressed in the Corpus iuris civilis itself, not even in Constantine's prohibition. For this, we need to turn to the jurists of the ius commune.^{[1294] [1295]}

11.5