Guidance for exercising foreign rights IN REM
Foreign activities are becoming more and more “routine business” for Estonian entrepreneurs. Hopefully such trend will intensify even more. This also means, however, that the contacts with foreign law become more frequent. The contract law is generally dispositive in the sense that it allows “customising” the relationships with your contractual partners, i.e. you can agree such terms as precisely fitting for all parties. In cross-border business relationships there is a choice to agree on applying either the foreign law or the Estonian law to a contract. It must be remembered, however, that the parties cannot negotiate similar choice of law for property law matters. The reason for this is that the law and the legal practice of different countries can be so different that the parties cannot effectively implement their agreement, however hard they try. This is an especially important matter when dealing with security rights and collaterals under the property law. Moreover, the parties may even both be in the same country for the foreign property law to become applicable – it is enough that only the objects of their contract are abroad.
Applying foreign property law in Estonia?
Article 18 (1) of the Private International Law Act (PILA) establishes a rule that the creation and extinguishment of a right in rem shall be determined pursuant to the law of the country in which the object was situated at the time of creation or expiry of the right in rem. This seems pretty natural for immovable property (because even the definition of immovable property depends primarily on the law of the location of the property). But in case of movable property, which may be easily transported elsewhere, things become complex. Questions such as whether an act of disposal of movable property is legally valid or not and what is the substance of such disposal depends on the object’s location at the time of the disposal. So it can happen that a pledge agreed in Estonia or resulting from Estonian law (a statutory pledge) is not actually established because the object of the pledge was currently in a country where pledging of property is subject to additional formal requirements. Another possibility is that the pledge is established, but remains subject to the pledge law of location state of the pledge object (regardless of having agreed to apply the Estonian law to the contract), even if the pledged object has been subsequently transported to Estonia (e.g. a carrier’s pledge on the cargo under a carriage contract). This, in turn, creates a situation where a foreign pledge right has to be exercised in Estonia. Both the pledgor and the pledgee may end up in a situation where the substance of the relevant foreign property law is unexpectedly different from the relevant Estonian law (e.g. different claims are secured) and the balance of rights and obligations may turn to material disadvantage for the one or the other party. In order to avoid such a situation, Article18(2) of the PILA prescribes an exception by stating that a right in rem shall not be exercised in conflict with the essential principles of the law of the country of location of the object. Any conflicts with the “essential principles of the law” are a matter to be assessed by a court.
There is still very little judicial practice in Estonia regarding such matters and any assessments to the possibilities of exercising rights in rem regarding contracts with a “foreign element” must remain in the theoretical realm. Still, as a general principle, we can consider the opinion stated in a recent judgement of the Civil Chamber of the Supreme Court dated 19.12.2012 in court case No. 3-2-1-165-12 (see clause 20):
- Estonian courts have to assess whether and to what extent the recognition of a right in rem established under a foreign law would be in conflict with the principles of the Estonian law. Most of all, it must be assessed whether it is possible to protect the creditors and the commerce by refusing to recognise a right in rem established abroad, if such type of right in rem is not known in Estonia and if recognition of such right would conflict with the general principles of the Estonian property law;
- A right in rem established abroad and generally recognised in Estonia is not required to be recognised in a wider extent than a similar right established under the Estonian law. In the Civil Chamber’s opinion, a collateral right under the property law established abroad cannot generally be “better” for the creditor in exercising it than a similar collateral right prescribed by the Estonian law.