The Surplus/Deficit Clause

From the first and second century ad we have epigraphic evidence of express authorizations in security documents allowing the creditor to sell the charged object in case of a payment default.

In practice, such licence to sell was always accompanied by a contractual provision to the effect that in case of such a sale, the creditor would be liable to return the surplus to the debtor and the debtor would be liable for any deficit (‘surplus/deficit clause’).™² The whole arrangement of a licence to sell coupled with a surplus/deficit clause was at the creditor’s discretion. In other words, the creditor was not obliged to sell and only if he chose to do so would he be liable for any surplus. This raises an important question. Why would the creditor in respect of a forfeiture pledge demand that he may sell? After all, if the pledged property would be forfeited, the creditor could—as owner—do anything he liked with the property, including selling it.^[613] ^{^[614] ^[615] In a pledge as lien the licence to sell would have added value as it gives him a power that he otherwise would not have. There is therefore potentially a good argument against the hypothesis of a forfeiture pledge—an argument which eventually does not prove to be decisive either. The surplus/deficit clause provides the key for unlocking the meaning of the practice of granting a licence to sell to a creditor who would become the owner of the pledged property upon forfeiture. Ersatzpfand (substitution pledge)
Not only in TPSulp 79, but also in other documents (Mancipatio Pompeiana and Formula Baetica) from the first century AD the licence to sell is coupled with a surplus/deficit clause.™⁴ This is an indication that in the first century ad no binding rule of law existed from which it already arose that the creditor would be liable for the surplus and the debtor for the deficit.
This is consistent with what we know about the time of origin of the duty to pay the surplus or deficit arising by operation of law.™⁵ The appearance of the surplus/deficit- clause in the epigraphic sources shows that in the first century AD the pledge was effectively still an ‘Ersatzpfand’, pursuant to which the secured debt would be substituted with the charged property. The licence to sell coupled with a surplus/deficit clause was intended to evade the adverse consequence of this. In the law of Athens and the law of Greco-Roman Egypt, forfeiture pledges were accompanied by clauses providing that the debtor remained liable for the reliquum. The maritime loan (ca. 340 bc) quoted in the Demosthenic speech Against Lacritus provides with respect to the pledged amphoras that if payment is not made within the agreed time, the creditors will have the right to sell the amphoras at the going rate. To this it is added that if the sale proceeds are less than the amount of the secured debt, the debtor shall remain liable for the deficit with all his remaining assets.™⁶ Five centuries later, in the Muziris papyrus (mid-second century ad), we find another example of this. The parties have agreed that upon the debtor's failure to pay, ownership of the pledged property shall pass to the creditor and that thereupon the creditor shall be authorized (inter alia) to sell it at the then prevailing market price. At the end of the pledge agreement, the debtor declares that he shall be liable for any shortfall.¹⁰⁷ In republican and early classical Roman law it will have been the same. Kunkel claims to have identified an early ancestor of the non- possessory pledge, which he calls the ‘substitution pledge' (Ersatzpfand) or ‘estimation pledge' (Astimationspfand).¹⁰* This arrangement entailed that the parties agreed that if the debtor failed to pay the secured debt, the creditor shall have the right to take a specified object as an alternative to the payment.
The value of this object has (at the time the transaction was concluded) been estimated by the parties to be more or less equal to the secured debt, hence the term ‘estimation pledge'. The pledged object completely substituted the creditor's claim for payment. The creditor did not have to account for any surplus value, nor was the debtor liable for an undervalue of the pledged object.10⁹ There is too little evidence for Kunkel's substitute pledge in order to assume that it actually existed. There are, however, certain elements which are plausible. In particular, the substitution of the secured debt with the pledged object may explain the early classical transactional practice of combining a contractual licence to sell for the creditor with a clause providing that the debtor shall be liable for any shortfall of the proceeds of the sale (while the creditor shall pay the surplus to the debtor). The purpose of such surplus/ deficit clauses would be to shift the economic risk of the pledged object from the creditor back to the debtor. We can still see traces of the original idea of substitution in the second and third centuries ad. From Pomponius there is an opinion saying that ‘the clause commonly included in pledging that, to the extent that the object of pledge yields too little return at sale, the debtor must pay the remainder, is superfluous as it is also the situation by operation of law without this addition.110 Pomponius's opinion still echoes the transactional practice of the surplus/deficit clause (which may have continued to be used in the practice of his time), but clearly shows liability for the remainder now arises by operation of law.m At the end of the third century ad the imperial chancery still considered it necessary to rule that the creditor had an actio in personam against
107 Schuster 2005: 107-8, 113-20. Text and translation of the forfeiture clause, licence to sell, and deficit clause in P. Vindob. G 40822, De Romanis 2020: 14-7.
108 See section 6.4, discussing Lab. D. 20.1.35. 109 Kunkel 1973: 164.
110 Paul. (Pomp.) D. 20.5.9.1 (quod in pignoribus dandis adici solet, ut, quo minus pignus venisset, reliquum debitor redderet, supervacuum est, quia ipso iure ita se res habet etiam non adiecto eo^>').
111 Manigk 1941: 1259. See also Gai. D. 12.1.28; Scaev. D. 46.1.63. the debtor for the remainder after the proceeds of sale had been applied to the secured debt.^{^[616]} ^{^[617] ^[618] ^[619] ^[620] ^[621] ^[622]} This would not have been necessary if in the past the law had not been otherwise.“³
Risks for creditors and debtors
In republican and early classical law the creditor was entitled to any surplus value present in the charged property. This may have been a relic of the archaic idea of forfeiture as a penalty for the failure to repay the secured debt.“⁴ For a long time the Roman law of secured credit reflected the economically dominant position of lenders.“⁵ Only where, as a corollary to a licence to sell, a surplus/deficit clause had been agreed and the creditor did actually exercise his right of sale, would the creditor be obliged to pay the surplus value to the debtor. Without such a clause, the charged object completely replaced the claim as such, irrespective of whether it was worth more or less. This could turn out very well for the creditor. In a letter to Atticus from 45 bc Cicero sets out how his brother Quintus had granted security to banker Castricius over a number of slaves.“⁶ The aggregate value of these slaves undoubtedly being much higher than the amount of the secured debt, Castricius had indicated that he preferred taking possession of the slaves over payment of the secured debt. Castricius, who may have been what we now call a merchant banker, seemingly not only had his (security) interest as creditor in mind but may here even more have been motivated by the commercial value of the slaves.“⁷ This appeared inequitable to Cicero: ‘non mihi videtur esse aequum’.^lls Certainly where Quintus had not defaulted under the loan, a definitive appropriation by Castricius of the charged slaves would even be in violation of his fiduciary duty to reconvey the slaves after repayment of the loan. From a later letter it appears that the matter was probably settled through the mediation of L.
Egnatius Rufus.“⁹ What this affair does show is that in case of a large surplus value, forfeiture and substitution would be attractive for a secured creditor. This could, however, also work against the creditor. Cassius Dio reports how in the credit crisis which ravaged the Roman real estate market in 49-48 bc, creditors would not be satisfied with debtors giving up their charged real estate but rather insisted on receiving payment in bare silver. In early classical law forfeiture of the charged object was probably constructed as the result of a conditional traditio pignoris causa taking place by way of payment (pro soluto).^[623] ^{^[624] ^[625] The debt was repaid by delivering another performance than initially agreed on, also when its value was lower than the original debt. If there was an undervalue, it would therefore have benefited the creditor to negotiate that in case of default he could sell the collateral, recover his claim from the proceeds, and take recourse against the other goods of the debtor for any remaining deficit. In all likelihood this was the main motivation for the creditor to insist on the vendere licere clause: to avoid the consequences of substituting the secured debt with an object worth lessThi The surplus/deficit clause coupled with the licence to sell would allow lenders to take recourse for the shortfall against the debtor's other assets. Particularly for solvent debtors, this would be a strong incentive for avoiding deliberately defaulting under a secured loan in a depressed market.}
Coupling of licence to sell and surplus/deficit clause
The fact that in practice a surplus/deficit clause was always coupled with a licence to sell can be explained by the fact that a deficit or surplus only manifests itself in a sale of the charged assets. The assumption, however, that the surplus/deficit clause has emerged simultaneously with the licence to sell has been opposed in modern literature: the argument is contested that the creditor sought to protect himself from a deficit through this clause.
It would suggest that objects with an undervalue were used as collateral on a regular basis. This is considered to be unlikely: a sensible creditor would never accept that.122 The appearance of a surplus/deficit clause in the epigraphic sources indicates, however, that in the first century ad parties did take into account the possibility of an undervalue. For this liability to pay the reliquum, third parties were made surety^³ This shows that deficit clauses were not meaningless boilerplate, but that undervalue was a real concern. In Pomp. D. 13.7.6 pr. a case was submitted to (possibly) Sabinus and Atilicinus in which the value of real estate (pledged or transferred by fiduciary agreement) was at risk of falling sharply in the near future.^[626] ^{^[627] Like in present day secured lending, it must also have occurred in classical Rome that objects were found to have an undervalue at the time of execution. There may have been a variety of reasons for this: a decline in market price (e.g., Pomp. D. 13.7.6 pr.), an incorrect assessment by the creditor, damage or destruction of the pledged object (e.g., Pap. D. 46.1.52: collapsed building), or a compulsory sale that generates less than an ordinary one. Consequently, this undervalue does not need to exist, or does not need to be apparent, at the time of taking out the loan, but may have manifested itself later. In a text from the second century ad (Scaev. D. 46.1.63), it was expressly agreed that if the proceeds of the pledged assets would be less than the amount of the secured debt, the debtor would pay the difference to the creditor. There can be no doubt that creditors in classical Rome were aware of this risk and sought to safeguard themselves against it by means of a surplus/deficit clause. It is obviously also possible that a surplus/deficit clause was included with the mutual intention of effectuating a balanced distribution of the enforcement proceeds which, without a clause agreed by the parties, would not occur by operation of law. In other words, the clause was intended to protect the creditor in case of an undervalue and the debtor in case of a surplus value. The parties wanted to create an exact match between the amount of the secured debt and the execution proceeds to which the creditor was entitled. In modern literature this is used as an argument against forfeiture. Certainly where surplus value was likely, creditors would never have agreed to a licence to sell as long as the alternative of a forfeiture pledge was available to themTh⁵ This representation is too simple. There will undoubtedly have been cases where a creditor with a great deal of bargaining power insisted on a forfeiture pledge, without the obligation to pay the superfluum. But there will also certainly have been cases where there was a more balanced distribution of bargaining power between the parties, resulting in a licence to sell linked to a surplus/deficit clause. Admittedly, the licence to sell did not imply an obligation to sell, so that the creditor still had the liberty not to sell. But if the creditor chose to sell, he was under a contractual obligation to restore the superfluum to the debtor. If by the first century ad a public auction had become the normal method of exercising recourse in pignus and fiducia,^[628] ^{^[629] ^[630] ^[631]} the debtor would in most cases have been protected by a surplus/deficit clause.
Conclusion
The archive of the Sulpicii provides a fascinating portrait of the reality of Roman law. Nonetheless, this historical reality is, in regard to the execution of real security in the first century ad, not easily retrievable. Based on the sources available to us, one can only find ways to approach this reality. It can therefore not entirely be excluded that in the first century ad the creditor, in the event that the parties had agreed neither on a licence to sell nor on a forfeiture clause, was merely authorized to retain possession of the pledged goods. It is unlikely, however, that in the first century ad creditors such as those of the Tabulae Pompeianae Sulpiciorum would be satisfied with merely a right of retention. The most plausible interpretation of the pledge agreements in the archive of the Sulpicii is that the Roman pledge in the first century ad was still a forfeiture pledge. The creditor's ownership of the forfeited property would have enabled him to sell and transfer it to the highest bidder at auction. The hypothesis that in the first century ad, pignus was a forfeiture pledge is not refuted by the presence of contractual licences to sell in the epigraphic sources in the first century ad. The surplus/deficit clause provides the key for unlocking the meaning of this practice. Creditors would not be prepared to grant secured credit which would leave them exposed to the risk of an undervalue of the collateral. By auctioning the property such shortfall would manifest itself and the creditor could then hold the debtor liable for the deficit.12⁷ The debtor's contractual right to the surplus was a side effect of this. This whole arrangement was entirely optional for the creditor.^ In the first century ad a public auction was the normal method of realising real security (pignus as well as fiducia). Therefore, particularly where a liquid market existed for the objects concerned (e.g., slaves, real estate, cloth, and wheat), in the majority of cases borrowers would receive any surplus proceeds.^⁹ In fact, one would then in actual practice already have a pledge similar to the one functioning in contemporary codifications: the secured creditor takes recourse against the collateral by means of a public auction, subject to the obligation to pay the debtor the surplus resulting from the execution sale. In transactional practices of the first century ad an equilibrium was reached between the interests of secured creditors and debtors that over centuries (and even millennia) proved to be extremely stable.^[632]
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Source: Verhagen Hendrik L.. Security and Credit in Roman Law: The Historical Evolution of Pignus and Hypotheca. Oxford University Press,2022. — 448 p.. 2022

The Surplus/Deficit Clause

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