Real Securities

As stated, a real security involves the creditor getting a real right in some item of property belonging to the debtor.^[1615] The creditor thus has two rights: a personal right against the debtor, entitling the creditor to be paid; and a real right in some item of the debtor's property.

One early arrangement fulfilling a security function in Roman law was called nexum, in which the debtor in effect used his own person as security. Failure to pay the debt resulted in enslavement. Nexum was greatly restricted by a lex Poetelia in the fourth century BC, and does not appear in accounts of classical law.^[1616] It will not be considered further here. Classical Roman law recognised three forms of real security: fiducia, pledge (pignus) and hypothec (hypotheca'). Before going into these, a preliminary point must be made. In the Roman texts, the terms pignus and hypotheca are often used interchangeably,^[1617] or almost so, and there does seem to be a historical relationship between them. As a result, it is sometimes difficult to determine which is being talked about and whether the point being made applies to one or both of them. The usage here is the one generally used in modern texts, and is the usage of modern Scots law. According to that usage, the distinction is as follows: a pledge requires possession of the property to be given to the creditor; in a hypothec, the debtor is allowed to retain possession.

(1) Fiducia

The earliest form of security involved an outright transfer of ownership by the debtor to the creditor,^[1618] coupled with an undertaking by the creditor to transfer the property back when the debt was repaid.^[1619] This agreement was known as a fiducia.^[1620] If the creditor failed to reconvey the property to the debtor when the debt was repaid, the debtor was given an action, the actio fiduciae, for recovery of the property.

(2) Pledge

(a) Nature

Pledge as a right in security was created by the giving of possession to the creditor of property belonging to the debtor. The advantage of this to the debtor was that it allowed the debtor to borrow money on security of the property without giving up ownership.^[1622] On the other hand, it had the disadvantage of requiring the debtor to give up possession. It therefore restricted, for example, the ability of those in busi­ness to raise finance on security of their stock or the tools of their trade.^[1623]

A security of this type exists in Scots law under the name of pledge, and there has been clear Roman influence on its development.^[1624] However, although the core idea of creation of security by delivery of possession is accepted, the Scots law on pledge has departed from the Roman law in a number of respects. Perhaps the most obvious is that, in Scots law, a pledge can only be created over moveable property. In Roman law, pledges were not subject to that restriction, and could be created over land.^[1625]

(b) Parties’ Rights, Duties and Liabilities In a pledge, the creditor’s primary right was to retain possession of the property until the debt was paid.^[1626] The creditor was not entitled to use the property, and indeed a pledge creditor who used the property was liable for theft.^[1627] Scots law by contrast does not impose liability for theft in this way However, on this point Scots law of pledge does otherwise follow Roman law, the Roman rule having been adopted in place of an earlier, more liberal rule on use of the property by the credi­tor.^[1628] The creditor was also entitled to be reimbursed for any necessary expenses.^[1629]

The debtor’s primary duty was to pay the debt owed.

What if the property was lost or damaged while in the creditor’s possession? Because the pledge was partly in the interests of the creditor, he or she was held to the ‘highest standard of care’ (exacta diligentia).^[1633] This was not, however, a guar­antee of the property’s safety. If the property was damaged accidentally and without fault, or through the fault of a third party, the normal rule applied that property perished at the risk of the owner.^[1634] The debtor was owner of the prop­erty, and so bore the risk of damage through accident or the fault of a third party.^[1635] The loss or destruction of the property would destroy the real right in security, although the debt itself would continue in existence.

(c) Enforcement and the Power of Sale

If the debtor fails to pay the debt, it is likely that the creditor will want to recover the money owed by selling the property. Originally, however, there was no power of sale in a pledge unless expressly agreed by the parties. Such express agree­ment became standard. This development has been linked to the adoption of coined money in the third century BC facilitating the liquidation of assets into money.^[1636] An express power of sale was often coupled with a clause known as the pactum legis commissoriae, which gave the creditor ownership of the property on the debtor's default.^[1637]

So much did it become standard to agree an express power of sale that, dur­ing the classical period, it came to be implied even where not mentioned.^[1638] Rules developed, however, to moderate the potential unfairness of an unrestricted power of sale.

The emperor Constantine abolished the pactum legis commissoriaeS^[1642] As an alter­native to this, however, it was possible to apply to the emperor for an award of the property if a purchaser could not be found.^[1643] This involved an official valu­ation of the property, followed by notice to the debtor. After a year's delay, the creditor was awarded bonitary ownership,^{[1644] [1645] and could acquire full ownership by usucapio?6 The debtor could redeem the pledge at any time before usucapio was complete. The creditor was taken to have acquired the property at the official valuation, and had to be content with that if it was less than the debt. If it was more, the excess had to be paid to the debtor.[1646] This procedure for awarding ownership to the creditor in place of payment is known as foreclosure.}

Justinian laid down a new set of rules for sale and foreclosure.^[1647] According to these rules, if the parties had made express provision for sale, that would be followed. Otherwise, the creditor had to initiate the process of sale by giving notice to the debtor or obtaining a judgment from the court. Two years from this, the creditor had to give a further notice to the debtor, if the debtor could be found. A judge would then consider the circumstances and set a time limit for the debtor to appear and redeem the debt. If the debtor did not do so, the creditor could seek a further order of the court awarding him or her the prop­erty, at the valuation set by the court. Thereafter, the debtor still had two years to redeem the pledge before the property became irrecoverable.

Scots law has not followed Roman law in this respect. In Scotland, at common law, the pledge creditor has no power of sale without express agreement^[1648] or the authority of the court.^[1649] In modern practice, most pledges are regulated by the Consumer Credit Act 1974.^[1650] This does contain a power of sale,^[1651] but it is not derived from Roman law.

(3) Hypothec

A hypothec was a form of real right in security which, unlike a pledge, did not require the creditor to have possession of the property. The origin of hypothec lay in agricultural tenancies.^[1652] It developed initially to deal with the problem that a tenant could often not afford to pay the rent until the crop had been harvested and sold, so the landlord then ran the risk of the tenant running into financial difficulties and being unable to pay. The crop might fail, for example. Equally, the tenant's main assets were livestock, slave labourers and farming equipment. These could not be given in pledge without giving up control, which would make farming impossible. Accordingly, the landlord and tenant might enter into an agreement whereby, on failure of the tenant to pay the rent, the landlord could take possession of the crops and the tenant's moveable goods. By the classical period, it could be said to be customary to agree to this,^[1653] to the extent that a hypothec over the crop came to be implied as security for the rent.^[1654] A hypothec in favour of the landlord was also implied in the case of leases of urban property, over goods present on the property.^[1655] The goods to which this hypothec applied were known as the invecta et illata, a term also used in modern Scots law, which means not simply any goods brought onto the property but those intended to remain there.^[1656] This differed from rural leases.

A general hypothec over present and future assets does not cover things that some­one is unlikely to give specially as security For example, there must be left to the debtor household articles, clothes and those of his slaves which are used in such a way that he would certainly not want to give them in pledge, for example one employed in services that were essential to him or who held his affection.^[1658]

A number of other implied hypothecs also developed. One example of this was a preference given to the state for payment of taxes.^[1659]

As the quote from Ulpian indicates, even outside the context of leases, it was possible to create a hypothec by agreement. This could extend to the debtor's property generally, and even be agreed to extend to property acquired by the debtor in the future.^[1660] An express hypothec was created simply by the agreement of the parties, without any necessary formalities.^[1661]

Hypothec had the major advantage for the debtor that, because the debtor kept possession of the property, he or she could continue to make use of it. Fur­ther, the fact that it was not necessary for the debtor to give up ownership or possession of the property meant that the same property could be used to secure debts owed to more than one creditor. Where multiple hypothecs were created over the same property, the rule was that an earlier hypothec took precedence over a later one.^[1662] We would say that the earlier security ‘ranked' before the later. This meant that the holder of the earlier hypothec had a prior claim on the prop­erty, and was entitled to be paid first from the proceeds of its sale.

The praetor provided an interdict, the interdictum Salvianum, allowing the credi­tor to take possession of the property subject to the hypothec.^[1663] This, though, is consistent with the hypothec being simply a matter of personal agreement between the parties. The hypothec became a real right when an action enforce­able against third parties, the actio Serviana, was introduced.^[1664] Given the lack of formality and publicity in the creation of a hypothec, this would often have harsh consequences for third parties acquiring in good faith.

In Scots law, a hypothec, in the broad sense of a non-possessory security, may be constituted voluntarily, although the term ‘hypothec’ is not normally used in this case. However, this requires registration in the Land Register, which is a pub­lic register, thus giving notice of the security’s existence to third party acquirers.^[1665] This security, called the ‘standard security’, is not derived from Roman law. As far as moveables are concerned, other than ships and aircraft, for which special provi­sion is made, and floating charges, which can extend to a debtor’s whole property but which are only available to limited classes of debtor, it is not possible to create a hypothec over moveables in Scots law by agreement. The only recognised implied hypothec over moveables in Scots law is the landlord’s hypothec. This is similar to the landlord’s hypothec in Roman law, by which it has been influenced,^[1666] but it is now restricted to leases of commercial property.^[1667] Protection is given to good faith acquirers of property subject to the landlord’s hypothec.^[1668]

(4) Retention

A final point to mention is retention, the ius retentionis. This is a right that arises in certain circumstances, where one person has custody of property belonging to another, and the law refuses to allow the owner to recover the property. In certain circumstances, the person with custody of the property could defend an action for recovery of the property with the exceptio doli (the defence of deceit).^[1669] We have seen one example of this, the right of a good faith improver of property to retain posses­sion until compensated for the improvements.^{[1670] [1671] Another example was the right of the borrower of property (under a contract of commodatumf1 to retain the property until compensated for necessary expenditure.[1672] It is unclear whether the person retaining the property was given a real right, though certain texts make an analogy with pledge, which was certainly a real right.[1673] The Roman law of retention forms the basis of the Scots law of lien,[1674] which is indeed a real right.[1675]}

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