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24 September 2010
If a buyer of chattels wishes to receive protection against the seller's creditors, Swedish law demands, in the majority of cases, that a tradition of the property is executed. In order to be effective, the tradition must involve a change in possession of the right to dispose of the property. This makes Swedish law unique in this area, as in most other European countries a purchaser of chattels is protected against the seller's creditors through the conclusion of the transfer of ownership agreement.
In a 10-page addendum to a Supreme Court judgment delivered in 2008, Justice Håstad argued that the principle of tradition should be repealed and replaced by the principle of immediate transfer of ownership. These types of addendum hold no precedential value in Swedish law, but rather are seen as an opportunity for the individual judge to explain or elaborate on his or her stance. In the present case, which concerned the question of whether tradition had taken place in a transaction where the seller and the final purchaser were associated companies, Håstad concurred with the majority ruling. His addendum was not merely an explanatory statement directed to the parties, but rather an open and direct request for change addressed to the legislator.
Håstad began by summarising the origin and application of the principle of tradition. The principle was originally codified in Swedish law in 1835 and has had an impact on insolvency law ever since, despite its influence having weakened in recent years due to changes in the Consumer Sales Act.
Håstad then went on to argue why the principle should be repealed. He stressed two main points: (i) that the aim of the principle of tradition is unclear, that it appears to serve several purposes and that its efficiency in this aspect can be questioned; and (ii) that the case law entailing an application of the principle of tradition is incoherent.
As for the first point, the principle of tradition has, for example, been said to serve the purpose of publicity thereby preventing creditors from being mislead regarding the state of the debtor's economy. Håstad rejected this so-called 'false wealth' argument by stating that business practices such as hire-purchase, leasing and commission already pose a risk that chattels in the possession of the debtor are not available to his or her creditors in case of insolvency. The principle of tradition has also been said to exist in order to prevent the seller from defrauding his or her creditors. Håstad accepted that the principle of tradition countervails pre-dated contracts and other false statements regarding the goods the debtor has in his or her possession, but argued that this aim is reached at the expense of those who have made a legitimate purchase but for some reason have left the chattel in question with the seller. He therefore requested empirical data showing to what extent debtors usually defraud their creditors and to what extent legitimate buyers sustain losses due to the fact that the tradition of their property has yet to be executed.
As for the second point, Håstad noticed that in the context of chattel mortgages, the right of disposition tends to be more emphasised nowadays, while the publicity argument has played a more prominent role in the past. In the context of transactions between associated companies, developments in recent years suggest that even when the seller has the object at his or her own disposal, the buyer enjoys protection against the seller's creditors as long as the seller has a strong enough interest not to dispose over the object in question. This implies that in cases where tradition takes place between associated companies the protection against the seller's creditors is achieved by conclusion of the transfer of ownership agreement.
Håstad supported his thesis that it is time to retire the principle of tradition with a general comparative argument, citing the fact that most other European countries afford protection against a seller's creditors merely through the conclusion of the transfer of ownership contract. It is clear that he wished to approximate Swedish law to that of its neighbours. He did not, however, give any account of how protection through the conclusion of the transfer of ownership agreement is perceived amongst the legal scholars in those jurisdictions. Håstad concluded his addendum by citing previous case law of the Supreme Court which clearly states that since the principle of tradition is codified by law it is not to be repealed by a Supreme Court judgment but should rather be revoked by the legislator. What role this addendum will play in the future is hard to say, but it is obvious that further discussion is to be expected.
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