Volume 42 | Number 3 Summer 2007
The Disappearing Divide Between Property and Obligation: The Impact of Aligning Legal Analysis and Commercial Expectation
Page 3 of 5
« First
<
1
2
3
4
5
>
Last »
I. Expanding the Notion of Property: Turning Obligation into Property
The goal in this section is simply to show that, over time, certain types of once purely personal obligations have come to be treated as property. The transition has been largely the result of equity’s incursions, although common law and statutory developments have supported and reinforced the change. The assertion is not controversial, and the detail needs only to be summarised here.8 Of course, the assertion depends on the definition of property. This issue is revisited in the next section, where some of the most commonly accepted divisions between property and obligation are examined. For the moment, it is enough to adopt the widely accepted notion that property is “usable wealth.” From amongst a long list of rights of enjoyment typically associated with ownership or other proprietary interests,9 the choice is made that the truly essential features of property rights are that right-holders can transfer their rights, and can exclude third parties from interfering with their rights. These twin attributes of “transferability” and “excludability” characterise property rights.10 Put another way, those with property rights can control allocation and access.
The early common law approach was to accord proprietary status to real property (land) and to tangible personal property (goods), but not to intangible property. Intangible property was not assignable; it was not usable wealth. This boundary between property and obligation accords with the (now crude) view of property as a “thing.” Tangible “things” were accorded proprietary advantages and proprietary protection; intangible “things” were characterised as personal rights against specific parties, and were not regarded as proprietary.
Equity completely overturned this state of affairs. It dramatically expanded the category of “property,” or proprietary rights, by acting on two fronts. The story is well known.11 First, it permitted the assignment of “personal obligations” that were unassignable at common law. Debts, shares, and other contractual claims thus became usable wealth. The possibility was further extended to include rights to future benefits: claims to future dividends, interest payments, royalties and such could all be sold immediately for value, in advance of entitlement to the underlying payment.12 In this way, future benefits could be capitalised immediately and put to their most efficient use by those agreeing to the exchange.
Sceptics might suggest that this expansion is too limited to contribute to the agenda suggested here. It permits the assignment of the benefits of personal contracts; the burdens remain with the original obligor. To take the simplest of examples, a creditor can assign the benefit of the debt owed to her, but the debtor cannot assign his obligation to pay his creditor unless, of course, his creditor consents to substitute performance from the transferee.13 However, this rather limited form of assignment of benefits, not burdens, accords with the predominant commercial pressure to convert these contractual rights into “usable wealth.” It is the benefits, not the burdens, that the parties are keen to assign, so as to capitalise their value. Indeed, precisely analogous rules apply to transfers of tangible property, where it is exceedingly difficult (although not impossible) to ensure that positive burdens run with the property.14 Buyer One may agree with his Seller that the fire breaks will be cleared annually on his newly acquired farm, or that an artistic object will be displayed only in certain ways. If the farm or the artwork is transferred to a new buyer, Seller can rarely insist that Buyer Two comply with the same restrictions, unless the two have contracted directly with each other to that effect. In some circumstances, this inability to ensure that positive burdens run with tangible and intangible assets can reduce the economic value of the assets in question. The next section makes it clear that all three branches of the law—equity, common law, and statute—have made advances to improve matters on this front, while balancing the need to protect Buyer Two from unexpected burdens. But the difficulties across the board only serve to reinforce the similarities in treating tangible and intangible assets as “property.”
As well as expanding the class of rights that were assignable, equity’s second strategy was simply to create completely new forms of property. It did this by permitting novel divisions of certain “bundles of rights” (property rights) that the common law had previously regarded as indivisible, and then, over time, reclassifying these novel bundles as “property” rather than “obligation.”
To understand this second strategy, it is necessary to go back a step. Dividing property between different parties is commercially attractive. At common law, such divisions are possible. Tangible things (land and goods) can be co-owned, with several owners sharing the sum total of the relevant property rights. In the simplest case, a division of rights between co-owners can give them interests that are qualitatively the same, even if quantitatively different. Co-ownership of a horse, for example, might divide ownership rights 1/2: 1/4: 1/4. More sophisticated strategies allow different parties to have different types of interests in the same asset, not merely different shares of the interest. With tangible personal property, the common law allowed the parties to split ownership and possession between different parties. With land, the common law went even further and allowed different parties to have sequential ownership interests along a time-line, via the doctrine of estates. In this way, the practical and commercial benefits of divided property ownership were recognised and accommodated by the common law. Although these common law options for divided ownership appear limited (especially for tangible personal property), their innovative potential should not be underestimated. For example, the simple division of ownership and possession of goods permits different forms of leases (with all manner of associated covenants), hire-purchase agreements, pledges, contractual liens, retention of title sales, bailments, and more.
Equity dramatically expanded upon these rather meagre common law possibilities for divided interests. It did this through the creation of trusts and charges. These two structures are often assumed to be equity’s greatest legacy to the law. Their enormous commercial significance goes without saying. These devices began as contractual arrangements (“personal obligations”), and slowly evolved until they were unequivocally recognised as delivering new (divided) property interests in the underlying tangible or intangible assets.15 The terms “trust” and “charge” disguise the enormous flexibility permitted within these categories. Taking each in turn, “trusts” permit the division of interests according to the common law model (that is, shared and sequential ownership) regardless of the nature of the underlying asset. But this is just the start. Trusts enable endless innovation and division, limited only by the imagination of interested commercial parties. Assets can be subdivided at will, and different types of rights can be parcelled out to different parties.16 Using the trust, for example, rights associated with company shares can be divided to give certain parties the voting rights, others the dividend rights, and still others the rights to bonus issues. Even this does not exhaust the divided rights that are possible because of the trust. Consider the many formal and informal arrangements that are now considered to deliver trust structures of divided ownership. The best known include Quistclose trusts,17 building retention trusts,18 and constructive trusts arising in response to contracts of sale19 or, occasionally, family agreements.20
“Equitable charges” are a more recent legal innovation. They evolved in a similar fashion to trusts, however, and now provide enormous flexibility in enabling contracting parties to structure security arrangements that accommodate their individual needs and circumstances. The rapid evolution and growing commercial significance of equitable charges can be seen clearly in the evolving debates surrounding the granting of security over after-acquired assets,21 the recognition of floating charges22 and automatic crystallisation clauses,23 and, most recently, the possibility that a lending bank could take a charge (a “charge back”) over the debtor’s account with the same bank.24 The ability of well-advised creditors to protect themselves against their debtor’s insolvency using such devices quickly led to parliament providing statutory protection for certain classes of unsecured third parties, especially against floating charge holders.25 This, in turn, led to a fresh round of debates (still on-going) about the accurate characterisation of parties’ arrangements as creating these vulnerable floating charges rather than some other form of proprietary protection such as a fixed charge,26 a contractual lien in the context of construction contracts,27 or legal ownership or a trust in the context of retention of title agreements.28 For our purposes, the outcomes of these debates are not important in themselves. What is important is that they serve to reinforce, rather dramatically, the notion that “obligations” between parties often count as “property” of one sort or another.
To summarise, this section suggests that, over time, equity made two very significant moves. It treated common law obligations as property, simply by permitting their assignment and providing some protection for the assignees. It also treated obligations to divide property rights as being in themselves new forms of property. Put bluntly, equity converted obligations into property.29
The previous assertion tests “property’” by the twin attributes of assignability and excludability, but even measured in this simple way, there has been a radical change in what is assigned to the “obligations” box and what to the “property” box. In itself, of course, this is not sufficient to establish that the divide between obligation and property has disappeared. The divide may simply have moved to a different place. The next section seeks to advance the case for disappearance.