article / 01 Dec 2015

Security rights in railway wagons engaged in international traffic

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Under Swedish law, unlike ships and aircraft, railway wagons are not subject to any registration rights. Such vehicles are considered movable goods for the purpose of Swedish law on creditors’ rights. When such vehicles are utilized in international traffic, the question arises under what jurisdiction the rights of creditors should be determined.
  I will use an example to illustrate the issue. Swedish company A owns sets of railway wagons and would like to finance them through a sale and lease-back. UK company B agrees to purchase the wagon sets and to lease them to A. The wagons are engaged in regular traffic between Sweden and Germany. A and B have agreed on UK law to be applicable to their contract.

 

Creditors’ rights in relation to third parties

Swedish law discriminates between (a) the obligations between the parties to a contract that are largely governed by the agreement and (b) the impact of any agreement between two or more parties in relation to the creditors of the parties or other third parties which calls for certain specific criteria to be fulfilled in order to perfect the agreement. Thus, the transfer of title to goods may freely be agreed between a seller and a purchaser, but in order for the transfer of title to have effect in relation to the seller’s creditors, the purchaser is normally required to take exclusive physical possession of the goods or to comply with the specific procedure of purchase of movables that remain in the possession of the seller. It is important to understand this specific feature under Swedish law where the requirement under (a) is subject to contract only whereas the requirement under (b) is not (since it is intended to protect the interests of third parties).

Swedish private international law will respect, with limited exceptions and in accordance with the Rome-I Regulation on the applicable law to contractual obligations, the parties´ choice of law in the contract (even in relation to non-EU countries) as far as the requirement under (a) is concerned. Regarding the requirement under (b), however, Swedish law will apply to goods situated in Sweden.

Under Swedish International private law, legal perfection of title to and third party rights in rem in relation to movable property will have to be established according to the lex rei sitae principle, which means that the relevant jurisdiction would be the one where the property is situated.

 

Wagons in international traffic

When wagons are engaged in international traffic, they will typically commute between countries. As for the railway wagons, they will have a “home state” in accordance with the Convention concerning International Carriage by Rail of 9 May 1980 in the version of the Protocol of Modification of 3 June 1999 (COTIF). Sweden is a party to COTIF, but the convention as such does not deal with creditors rights other than claims based on the convention (which basically comprises only claims resulting from freight contracts regarding passengers or goods, agreements on charter of railway equipment, or on usage of railway infrastructure).  However, it may be noted that railway wagons under  COTIF (app. D, article 2, (d)) always have a home station for the purpose of the convention.

 

Goods moving from one country to another

Swedish doctrine generally holds that rights in goods initially situated abroad and later moved to Sweden will be subject to a double test. First, it will be tested if the right is valid in the foreign jurisdiction where it was established. When the goods are moved to Sweden, it will have to be tested to what extent the right could be upheld as continuing by Swedish law. It may be noted that this view is based on the assumption that the goods were originally situated abroad and subsequently transferred permanently to Sweden.

In the case NJA 1984 p. 693, the Swedish Supreme Court  has seemingly adhered to the idea of a closest connection. In this case, a car (MB 280 SE) registered in former West Germany was attached in Sweden in order to settle the tax debts of a natural person domiciled in Sweden. The natural person also conducted business in West Germany where the car was used. In West Germany, the natural person had used the car as surety for a loan under West German law using a security transfer (Sicherungsübereignung). It should be noted that the surety arrangement would not have been validly perfected under Swedish law. The court noted that the car was not permanently situated in Sweden and concluded, based on the fair expectations of creditors, the need for stability in the credit market and reciprocity of acknowledgement of foreign sureties, that a surety in movable goods validly established in another jurisdiction should be recognised in Sweden when the goods had a considerable connection to the foreign jurisdiction. Thus, the Swedish attachment was not upheld.

The case is based on the fact that the car was permanently situated in Germany and that it was situated in Sweden only temporarily. It is quite clear from the facts of the case that the car had a considerable connection to Germany since the car was presumably used most of the time in Germany. This does not necessarily mean that the same would apply to railway wagons used regularly in several jurisdictions.

 

Goods commuting

It may be observed that the case referred to above does not necessarily clarify the standpoint of Swedish international private law when goods commuting between two or more countries are to be considered situated. It may be argued that this has to be assessed taking into account only the actual physical position of the goods at a given time. A better view would be to take into account the closest connection of the goods to one country where such a connection can be assessed.

In the example described in the introduction:

  • the company using the wagons is incorporated in Sweden;
  • the wagons are probably – for the purpose of COTIF – marked as pertaining to the Swedish company;
  • the business activity in which the wagons are engaged is operated from Sweden

The facts pinpointed suggest a connection to Swedish jurisdiction. However it is uncertain if those facts are prerequisite to rule out application of any rights established under a foreign jurisdiction. In the example, UK law is the law of the sale and lease-back contract, but there is no other connection to the UK other than the lessor being incorporated there. Thus we may add that the absence of any direct connection between the UK and the railway wagons would speak in favour of Swedish law on rights in rem to prevail in the law of the contract.

Finally, it remains to be tested whether the wagons are to be considered to have a close connection to Germany since they are in fact operating regularly both in Sweden and in Germany. In my view, it would be reasonable to consider the wagon units situated permanently in Sweden and intermittently, but temporarily, situated in Germany, since they are actually operated from Sweden by a Swedish company. This view is also supported by the premise – for purposes other than establishing a general connection to a jurisdiction – of a “home station” under COTIF.
Since that question has not yet been tried in Swedish case law, it would be advisable to uphold a “double test” even in this situation. The ownership of the lessor should therefore be respected both in Germany and Sweden.

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