New Concept of the Legal Nature of Finance Leasing Relations

Publication date
Wednesday, 31.01.2001

Authors
S. Shatalov

Series
Yurist 2001, №1. pp.16 – 26

Annotation
The paper presents analysis of the contractual relations structure of the “tripartite” finance lease. Various points of view on the subject are considered and their shortcomings are shown. A qualitatively new approach is proposed. The “tripartite” finance lease is a combination of a sales contract between the seller and the EC and a lease contract between the LC and the user, where: EC (emptor compositus) is the buyer made up of the finance lessor and the user who, in a certain way, distribute the rights and duties of the buyer between themselves; and LC (locator compositus) is the lessor made up of the finance lessor and the seller who, in a certain way, distribute the rights and duties of the lessor between themselves.

Doctrinal writings repeatedly discuss the importance of proper understanding of the legal nature of finance leasing. The complexity of defining it is often pointed out. By way of illustration we quote the utterances of certain writers.

M. Giovanoli, the author of the first substantial study containing a profound analysis of finance leasing in legislation, judicial practice and doctrine of the States of continental Europe (Belgium, Italy, Federal Republic of Germany, Switzerland), wrote: “Despite the headlong development of the credit-bail (leasing) in continental Europe, this means of financing creates delicate problems affecting not only taxation and accounting, like in the United States and Great Britain, but, and chiefly, private law”. [1]

>He continues: “Finance leasing has achieved favourable recognition in continental Europe and virtually throughout the entire world. Nonetheless, the classification of finance leasing in private law remains controversial and various views are expressed with regard to this question. A precise definition of the legal nature of financial leasing is important not only for theory, but to facilitate the integration of this new means of financing of Anglo-American origin in the system of obligations and rights to a thing of continental Europe. It also has great practical significance with regard to the mutual rights and duties of the parties and especially for the status of the parties with respect to the third persons, since autonomy of will is the rule in the contractual sphere, the classification of the operation is a necessary condition in order to fill possible gaps in the agreement so as to interpret the will of the parties in the event of doubt, to resolve conflicts of laws, to apply the rules of public policy (particularly directed toward defence of the weakest party). It is no less important to determine the accounting and taxation regime of the transaction. But especially it is important in the sphere of rights to a thing, where in the legislation of continental Europe the principle of numerus clausus dominates and the parties are not free to create new types of rights-to-a-thing means of securing the performance of an obligation”. [2]

'>E.V.Kabatova, author of the first Russian work containing a civil-law analysis of financial leasing, said: “The mutual relations of the manufacturer and the user constitute one of the principal distinctive features of finance leasing, its peculiarity and complexity. The problem of relations of the manufacturer and user is so unusual that various theories exist to legally substantiate the existing position. These relations can not be classified as representation, nor as relations with third persons, nor as tripartite transaction with the participation of the manufacturer, the person providing the equipment for use, and the user. Each of these institutes may be applied only with a certain measure of conventionality… And all the same doctrine endeavors to use the enumerated institutes in order to explain the character of mutual relations between the manufacturer and the user”. [3]

Vitrianskii, author of one of the most recent Russian works concerning the legal nature of finance leasing, wrote: the legal nature of finance leasing and its place in the system of civil-law obligations remains among the most controversial issues in legal literature devoted to the study of finance leasing legal relations. According to the views of some authors, the contract of finance leasing is an individual type of the contract of lease which possesses certain qualifying indicia enabling it to be distinguished fr om other types of contract of lease and to single out an individual type of contract of lease. Other authors suggest that unlike the contract of lease, the contract of finance leasing is not bilateral, but a trilateral or multilateral transaction. One meets also the view that the contract of finance leasing is an autonomous type of contractual obligations distinct from other types of civil-law contracts, including from the contract of lease”. [4]

A multitude of theories of the legal nature of finance leasing have been created by jurists of various countries during recent decades. Works repeatedly are encountered whose authors refute a number of existing opinions (approaches, orientations), attempt to substantiate their own position, and simultaneously point to the possibility of the emergence of new theories. Kabatova, for example, writes in this connection: “The further development of finance leasing, especially in the international sphere, may lead to the emergence of new theories and conceptions since the conversation concerning the legal nature of finance leasing is far from completed”. [5]

In the present article we set out the pure civilist view of finance leasing relations, abstracting ourselves not only from economic aspects but also from the practice which has formed in the effectuation of finance leasing operations and that undoubtedly has influenced the modern legislative approach and complicates a clear vision of the legal nature of finance leasing.

The possible practical significance of the new conception proposed we see most clearly with regard to the international legal regulation of finance leasing.

The numerous conceptions (or approaches, orientations) affecting the legal nature of finance leasing which have emerged during recent decades have, in our view, certain weak moments. At present on the international level the conception on which the 1988 Ottawa Convention on International Financial Leasing is based has received recognition. Under its influence were formulated, in particular, the norms of the Civil Code of the Russian Federation (hereinafter: Civil Code), directly relating to the regulation of finance leasing relations. From the standpoint of the Ottawa Convention, financial leasing is a combination of interconnected contracts of finance leasing [6] and purchase-sale, [7] where the contract of finance leasing is the contract between the finance lessor and the finance lessee, [8] complicated by the presence of a third figure – the seller, [9] who while not a direct participant of the agreement between the finance lessor and the finance lessee, nonetheless must be aware that the finance lessor acquires from him equipment in connection with the contract of finance leasing and bear duties under the contract of purchase-sale also with respect to the finance lessee as though the last were a party to this contract and the equipment were sold directly to him.

The conceptual foundation of the Ottawa Convention can not be deemed correct for the following reasons. Under the contract of purchase-sale, the seller must bear responsibility for improper performance only to its contracting party, the purchaser. The Ottawa Convention requires that the seller bear the said responsibility to the finance lessee, a person who is not a party to the contract of purchase-sale, and endows the last with the right to submit respective claims to the seller. The notice by the purchaser to the seller about its plans for disposition of the good being acquired should not have for the seller such far-reaching legally significant consequences as the imposition on it of the said responsibility to a third person. In the so-called contract of purchase-sale the Ottawa Convention proposes to fractionate the status of the purchaser and carry over part of its rights and duties to a third person – the finance lessee, which is not a party to the contract of purchase-sale, and the so-called contract of finance leasing is concluded between the finance lessor and the finance lessee, but in so doing, according to the Ottawa Convention, certain duties are imposed also on the third person – the seller only for the reason that it is informed by the finance lessor that the last is acquiring the good in connection with the contract of finance leasing.

On the basis of the foregoing, it seems that the legislator, just as a number of theoreticians, in endeavouring to justify the contradictions contained in the conception to generally-recognized principles of private law, has chosen the path of least resistance, having called finance leasing in the preamble “distinctive triangular relationship”.

One of the principal mistakes of both legislation and doctrinal studies is the special attention devoted to relations between the finance lessor and the finance lessee, [10] although finance leasing may be imagined successfully, for example, as a combination of a contract between the finance lessor and the seller, complicated by the existence of the finance lessee, and a contract of lease between the finance lessor and the finance lessee. Kabatova’s assertion that in finance leasing “relations with regard to the temporary use of equipment play the primary role” and “relations with regard to purchase-sale remain an auxiliary link” [11] seems to be not correct. In finance leasing there is no common purpose whose achievement the finance lessor and the finance lessee, and the seller, endeavour to achieve. In the contract of purchase-sale it is of no significance to the seller how the purchaser disposes of the good purchased and the contract of purchase-sale can not be classified depending upon that as “primary” or “auxiliary (secondary)”. In the contract of lease it is of no significance for the lessee how the leased property has come to the ownership of the lessor, and the contract of lease can not be classified depending upon that as “primary” or “auxiliary (secondary)”. [12]

In the chapter of the Civil Code on lease there is a section on the finance lease (finance leasing) in accordance with which under a contract of finance lease the lessor (that is, the finance lessor) is obliged to acquire in ownership property specified by the lessee from a seller determined by it and to grant this property in temporary possession and use (Article 665). However, it would be no less correct to place in the chapter of the Civil Code on purchase-sale a section on finance purchase-sale (finance leasing), according to which under a contract of purchase-sale the purchaser (that is, the finance lessor) is obliged to acquire in ownership the property specified by the lessee from the seller determined by the lessee and to grant this property to the lessee for payment in temporary possession and use. The remaining articles of this section would contain essentially the same provisions as the section on the finance lease in the chapter of the Civil Code on lease, the only difference being that finance leasing would not be called the finance lease, but rather finance purchase-sale, and the finance lessor, not the lessor but the purchaser.

So far we have mentioned the most obvious possible approaches connected with apportioning relations between two participants of finance leasing as its dominant element (contract of finance leasing); [13] however, one can imagine other constructions analogous to a certain extent which might at first glance seem more artificial.

Unlike the approaches considered above, one may specially single out the relations of the seller and the finance lessee, seeing finance leasing as the combination of a contract between them complicated by the presence of a third figure – the finance lessor (contract of finance leasing), and the contract of the finance lessor with the seller or finance lessee. This approach offers two additional possible constructions.

If in this instance the contract of finance leasing is considered to be a contract of purchase-sale, the finance lessee here acts as the purchaser, part of whose status is carried over to a third person – the finance lessor, who is not in direct contractual relations with the seller. Under this approach, finance leasing is a combination of the contract of finance leasing (purchase-sale) between the seller and the finance lessee, complicated by the presence of the finance lessor, and the contract of lease between the finance lessee and the finance lessor.

If the contract of finance leasing is considered to be a contract of lease, the finance lessee here acts as the lessee, and the seller, as the lessor, part of whose status is carried over to a third person, the finance lessor, who is not in direct contractual relations with the finance lessee. Under this approach, finance leasing is a combination of the contract of finance leasing (lease) between the seller and the finance lessee, complicated by the presence of the finance lessor, and the contract of purchase-sale between the seller and the finance lessor.

We suggest that neither of the four constructions enumerated can be considered to be correct, as well as the very idea of specially apportioning relations between any two participants of finance leasing, that gives occasion for the aforesaid deductions.

In our view, the legal nature of finance leasing may be explained only by recognizing the “equality of rights”, that is, the identical degree of significance of the contracts of purchase-sale and lease, which comprise finance leasing, and the inadmissibility of specially singling out one of them; the impossibility of the existence of contracts comprising finance leasing, in which part of the rights and/or duties of one contracting party is carried over to a third person.

Certain authors consider finance leasing to be an autonomous type of contract, the term “contract of finance leasing” under this approach designating a tripartite transaction uniting the finance lessor, the finance lessee, and the seller as the parties.

In its fullest and most concentrated form the system of views on the contract of finance leasing as an autonomous type of civil-law contract has been set out by I. A. Reshetnik, [14] in whose opinion “the contract of finance leasing integrates elements various in their nature, among which one may single out features of relations of the lease type, purchase-sale, and contracts concerning the rendering of legal and actual services. At the same time, the combining in the contract of finance leasing of elements of contractual constructions known to legislation has formed special qualities and indicia which … characterize the specific legal essence of this contract. Today’s approach of the legislator, consisting of singling out the dominant element of this system – relations connected with the provision of property for temporary use, is … not successful because it does not ensure the achievement of the principal aim – the creation of the optimal legal construction capable of most effectively regulating civil-law relations of a special type (finance leasing relations). The attempts to configure a more complex economic formation within the framework of a simpler structure are, besides being practically unproductive, accompanied by artificially dividing the elements of the legal construction of finance leasing, ignoring their organic interlinkage”. [15]

Reshetnik repeatedly calls attention to the uniqueness of relations of the participants of finance leasing which occurs in accordance with the legislative approach which she criticizes, for example: “The uniqueness of the system being investigated is manifested, undoubtedly, in the unique role of each participant of the finance leasing transaction and the peculiarities of the mutual relations of the parties. Thus, for example, the specific nature of the status of the finance lessor is obvious, acting simultaneously as the purchaser of the finance leasing property. It is interesting that the finance lessee, without taking part in the conclusion of the contract of purchase-sale, acts nonetheless as an active participant of these relations, specifying the necessary property and determining the seller thereof. But most illustrative is the unusual nature of mutual relations between the finance lessee and the seller, consisting in the presence between them of legal links based on the expression of will of those parties”. [16]

In acknowledging that the approach of the legislator, consisting in singling out the dominant element in the system of finance leasing relations, is unsatisfactory, one can not at the same time concur that this relations are relations of special type and that finance leasing is a tripartite transaction. In a tripartite transaction each party is in contractual relations with each of the remaining two parties. Reshetnik, instead of imagining such a “full-fledged” tripartite transaction, explains the mutual relations of the finance lessee and the seller by the presence “of legal links between them based on the expression of will of these parties”. It seems that when recognizing the presence of contractual relations between the finance lessor and the seller and between the finance lessor and the finance lessee, the expression of will Reshetnik speaks of, in any event the expression of will of the seller when concluding the contract with the finance lessor, rather reminds one of the expression of will occurring under a contract of accession (Article 428(1), Civil Code) – which can not in and of itself lead to the establishment of contractual relations between the acceding party and any person who is not a party directly to the particular contract of accession. As Vitrianskii justly notes, “the view of a contract of finance leasing or so-called finance leasing transaction (that is, the aggregates of contracts incorporating the contract of purchase-sale of the finance leasing property and the contract of lease thereof) as a tripartite transaction is not laid down in the concept of a civil-law transaction existing in civil law (either in legislation or in doctrine). Two autonomous bilateral transaction: purchase-sale and lease – even in the event of their very close interlinkage cannot form a third transaction whose parties are the subjects of the two autonomous contracts”. [17]

We propose our own concept of the legal nature of finance leasing, taking into account the aforementioned considerations and without leaving a place for the “unusualness” of finance leasing relations, pointed at by other authors.

In our view, finance leasing is a combination of purchase-sale (emptio-venditio) and lease (locatio-conductio rerum), classical contracts necessary and sufficient to explain its legal nature. In so doing the need to view finance leasing as a tripartite transaction disappears.

In accordance with our conception finance leasing is manifested in a special fractionalization of the status of purchaser between the finance lessor and the finance lessee and simultaneously a special fractionalization of the status of lessor between the finance lessor and the seller.

The finance lessee and finance lessor form a community which we shall call emptor compositus, acting as one party (the purchaser) in the contract of purchase-sale which is concluded with the seller and in the determined way distribute the rights and duties of the purchaser. In particular, the finance lessor becomes the owner of the good, and the finance lessee receives the right to present demands to the seller with respect to the quality of the good.

The finance lessor and the seller form a community which we shall call locator compositus, acting as one party (the lessor) in the contract of lease which is concluded with the finance lessee (here acting as the lessee) and in the determined way distribute the rights and duties of the lessor. In particular, the finance lessor is the owner of the property being transferred on lease and the recipient of the lease payments, and the seller bears responsibility to the lessee for the quality of the property.

This distribution of the roles of purchaser and lessor enables the contracts of purchase-sale and lease which form finance leasing to be singled out. [18]

We examine in greater detail the rights and duties of the participants of both contracts.

Under the contract of purchase-sale the seller is obliged to transfer a good (the object of finance leasing) to the other party – the emptor compositus, which is obliged to accept and to pay for the good. For finance leasing the following distribution of rights and duties within the emptor compositus has significance of principle:

  • the finance lessor receives the right of ownership to the good;
  • the finance lessor pays for the good;
  • the finance lessee receives the right to present demands to the seller with respect to the quality of the good;
  • the contract may be dissolved at the initiative of the emptor compositus only with the consent of both the finance lessor and the finance lessee.

The distribution of other rights and duties within the emptor compositus has no significance of principle for the essence of finance leasing.

Under the contract of lease the locator compositus is obliged to provide to the finance lessee (or lessee) property (the object of finance leasing) for payment in temporary possession and use. For finance leasing the following distribution of rights and duties within the locator compositus has significance of principle:

  • the finance lessor receives the right of ownership to the property;
  • the finance lessor receives the lease payments;
  • the finance lessor receives the right to present demands to the finance lessee, arising from the contract of lease in the event of improper performance of the contract by the finance lessee;
  • the seller bears responsibility to the finance lessee for the quality of the property.

The distribution of other rights and duties within the locator compositus has no significance of principle for the essence of finance leasing.

The contract of purchase-sale and the contract of lease are closely interlinked. The emptor compositus and the locator compositus are manifested only in the existence of both contracts, the finance lessor being simultaneously both in the emptor compositus and the locator compositus.

Under this approach to the definition of the legal nature of finance leasing all specific features allegedly peculiar to it and pointed at by those who regard the relations between the finance lessee and the seller to be unusual because they are not in contractual relations, disappear. In the contract of purchase-sale, besides the seller, only one party, the emptor compositus, represented by different persons, participates. In the contract of lease, besides the lessee (finance lessee), only one party, the locator compositus, represented by different persons, participates.

Reshetnik adduces the following arguments against explaining finance leasing by means of contracts of purchase-sale and lease: “In analyzing the content of the present contract, we discover therein both the link of individual elements of standard contractual forms and the link of elements which characterize the mixed contract. The position of Vitrianskii seems not sufficiently accurate, who considers that ‘the uniqueness of the contract of finance leasing is basically to be explained by the fact that the obligations which arose therefrom are a combination, on one hand, of the rights and duties of the lessor and lessee typical for lease relations and, on the other, certain rights and duties of the seller and purchaser inherent in the contract of purchase-sale’. That position leaves without attention the material features of the contract of finance leasing which are not typical for the property relations regulated by the legislation mentioned by Vitrianskii. In particular, there can not be explained, in our view, by means of lease and purchase-sale the duty of the finance lessor with regard to the acquisition in ownership of the property specified by the finance lessee from the seller determined by the last. In addition, a consideration of the rights and duties of the finance lessor and the finance lessee inclines one to the view that the distribution of duties of the parties in the contract of finance leasing does not coincide with the resolution of this question under the contract of lease; that is, the norms concerning the contract of lease do not reflect in full the actual content of the contract of finance leasing. The legal link arising between the finance lessee and the seller of the object of finance leasing, which excludes the view of a purely mechanical joining of the elements incorporated in finance leasing and testifying to the formation as a result of such combination of a qualitatively new and more complex formation than any of the constituent parts thereof can not be ignored”. [19]

To these objections the idea advanced by us enables the following to be said in answer. The duty of the finance lessor with regard to the acquisition in ownership of the property specified by the finance lessee from the seller determined by the last is explained by means of the contract of purchase-sale, wh ere the purchaser is the emptor compositus. As regards the distribution of duties of the parties in the contract of finance leasing, it in fact “does not coincide with the resolution of this question under the contract of lease; that is, the norms concerning the contract of lease do not reflect in full the actual content of the contract of finance leasing”, recognition of the very existence of which is profoundly erroneous, but the contract between the finance lessee and the locator compositus is a contract of lease. “The legal link arising between the finance lessee and the seller of the object of finance leasing, which excludes the view of a purely mechanical joining of the elements incorporated in finance leasing” is to be explained once again by means of the contracts of purchase-sale and lease, but does not at all “testify to the formation … of a qualitatively new and more complex formation than any of the constituent parts thereof”.

We note that many conceptions (or normative legal acts), despite their shortcomings, contain individual elements whose presence enables one to assert that an understanding of the legal nature of finance leasing by the authors (or draftsmen) of these conceptions (or normative legal acts) is approximate to ours.

Thus, Article 670 (1) of the Civil Code distributes the rights and duties of the lessee and lessor with respect to the seller just as we see the distribution of rights and duties between the participants of the emptor compositus, the contracting party of the seller: “The lessee shall have the right to present directly to the seller of the property which is the object of the contract of finance lease demands which arise from the contract of purchase-sale concluded between the seller and the lessor, in particular, with respect to the quality and completeness of the property, the periods of the delivery thereof, and in other instances of improper performance of the contract by the seller. In so doing the lessee shall have the rights and bear duties provided for by the present Code for a purchaser except the duty to pay for the property acquired as if it were a party to the contract of purchase-sale of the said property”. [20]

The remaining provisions of this point also represent the lessee (or finance lessee) and lessor (or finance lessor) in accordance with our conception as a single purchaser: the lessee may not dissolve the contract of purchase-sale with the seller without the consent of the lessor; in relations with the seller the lessee and lessor act as joint and several creditors (Article 362, Civil Code).

Article 669 of the Civil Code establishes the general rule, in accordance with which the risk of accidental perishing or accidental spoilage of leased property passes to the lessee, although under the contract of purchase-sale this risk, according to the general rule, passes to the purchaser. From the point of view of our concept the rule established by this Article seems more correct inasmuch as under the contract of purchase-sale the contracting party of the seller, the emptor compositus, includes the finance lessee.

In the view of Kabatova, “the clearest distinction between the contracts of lease and finance leasing is manifested in the resolution of the question of responsibility and transfer of the risk. In the contract of lease, the lessor bears responsibility to the lessee for the untimely provision of the property in possession of the lessee, for defects discovered, and others. In the contract of finance leasing, responsibility for a violation of the conditions relegated to the subject of the contract (quality, nonconformity to purposes of the user) is usually borne by the manufacturer of the equipment. As a result, it is not the owner of the equipment who is liable to the user, but the manufacturer of the equipment, who is not a party to the contract of finance leasing. The risk of accidental perishing or spoilage of equipment, as a rule, is born by the user, and in the contract of lease, as is provided by the legislation of various countries, the owner bears all risks, that is, the lessor”. [21]

As regards responsibility of the seller to the finance lessee, our conception removes this nonconformity since under the contract of lease the sole lessor, the locator compositus, bears the said responsibility to the finance lessee. With respect to the risk of accidental perishing or spoilage of property transferred on lease, we note that placing this risk on a particular party has no significance of principle for the essence of lease relations. The contract of lease remains a contract of lease even if the parties agree to place the risk of accidental perishing or spoilage of the property transferred on lease on the lessee. Moreover, under finance leasing the risk of accidental perishing or spoilage of property transferred in use is not obligatorily born by the finance lessee.

The view that the legal nature of finance leasing may be explained by means of a contract to the benefit of a third person is widespread.

Thus, in the view of Ivanov, “the lessor under a contract of finance leasing places the performance of part of his duties on the seller under the contract of purchase-sale (Article 313(1), Civil Code), there occurring a special instance of a re-commission of performance under which only the performer (seller) becomes responsible to the creditor (lessee) by virtue of an express instruction of the law. In turn, the contract of purchase-sale becomes a contract to the benefit of a third person – the lessee (Article 430, Civil Code)”. [22]

Vitrianskii believes that the “specific feature of finance leasing relations (the close interlinkage of the contracts of purchase-sale and lease) lies in the fact that the contract of purchase-sale of finance-leased property, thanks to the special rules on the contract of finance lease (finance leasing) contained in the Civil Code (Chapter 34, §6), from the outset was designed along the model of a contract to the benefit of a third person. In accordance with Article 430 of the Civil Code a contract to the benefit of a third person is deemed to be a contract in which the parties have established that the debtor is obliged to make performance not to the creditor, but to a third person specified or not specified in the contract, who has the right to demand performance of the obligation to his benefit from the debtor. It is this which the special rules of finance lease (finance leasing) provided for by the Civil Code have in view when they place on the seller the duty to transfer finance-leased property directly to the finance lessee, and the last, who is not a party to the contract of purchase-sale, is endowed with the rights of the purchaser under the said contract (Article 668(1), Article 670(1), Civil Code)”. [23]

If the contract of purchase-sale were concluded to the benefit of the finance lessee, the right of ownership in the good (object of finance leasing) would have passed to the finance lessee. Under the contract to the benefit of a third person, this person is endowed with the rights of a creditor and, consequently, may dissolve the contract, and the finance lessee does not have the right to dissolve the contract without the consent of the finance lessor (Article 670(1), Civil Code).

As wee see, as a result of the conclusion of a contract to the benefit of a third person the fractionalisation of the status of the purchaser, which could be incorporated into the complex of finance leasing relations, can not occur. The distribution of the role of purchaser between the finance lessor and the finance lessee, which characterizes finance leasing, is the direct consequence of the contract between the seller and his sole contracting party – the emptor compositus.

Reshetnik, in attempting to substantiate the existence of contractual relations not only between the finance lessor and the seller and between the finance lessor and the finance lessee, but also between the finance lessee and the seller, writes as follows: “The actual existing contractual link between the finance lessee and the seller is founded on the special expression of will of these subjects. The special character of their expression of will is manifest in the fact that the will of the finance lessee and the seller is expressed indirectly. The will of the finance lessee to the arising of respective relations is reflected in the contract of finance leasing deciding the questions not only of the finance-leased property, but also the seller which usually is specified by the finance lessee, which testifies to the importance of this condition for the finance lessee in similar instances. Finance leasing agreements contain, as a rule, provisions clarifying certain peculiarities of the mutual relations of the finance lessee and the seller, in particular, affecting the transfer by the last directly to the finance lessee of the property, installation of equipment, and so forth. Such questions requiring clarification and being agreed in the contract of finance leasing clearly testify to the fact that in concluding a contract with the finance lessor, the finance lessee simultaneously expresses the will for contractual relations to arise with the seller of the property. The positive expression of will of the seller is presumed by the very fact of the entry into contractual relations with the finance lessor since the last, in fulfilling the duty placed on him by the law (Article 667, Civil Code), warns the seller that the property is acquired specially for the transfer thereof on conditions of a contract of finance leasing to a specific person. Absolutely right is O. S. Ioffe in suggesting that if the ‘contracting parties have agreed to conclude a particular contract, it is thereby recognized that they expressed consent to subordinate themselves to the conditions which under the law extend to contractual relations of the respective type …’. Thus, with regard to finance leasing this means that in concluding a contract with the finance lessor, the seller considers the scheme of a finance leasing transaction to be acceptable to him in which his direct contracting party in the majority of instances will de facto be the finance lessee. The presumption of the expression of will is confirmed thereafter by means of performance by both the seller and the finance lessee of a number of actions giving grounds to state the existence of their agreed will (transfer by the seller and respectively acceptance by the finance lessee of the object of finance leasing, actions connected with the presentation by the last of demands directly to the seller, and others)”. [24]

We suggest that this fragment also may serve as an example of coming closer to our understanding of finance leasing, although the thesis that the “actual existing contractual link between the finance lessee and the seller is founded on the special expression of will of these subjects”, obviously, in turn is founded primarily on the approach devoting special attention to relations of the finance lessor and the finance lessee. In reality, under the contract of purchase-sale the seller has the rights and bears the duties with respect to the emptor compositus represented not only by the finance lessor but also by the finance lessee, and under the contract of lease the finance lessee has the rights and bears the duties with respect to the locator compositus represented not only by the finance lessor but also by the seller.

The opinion of Ioffe that if the “contracting parties have agreed to conclude a particular contract, it is thereby recognized that they expressed consent to subordinate themselves to the conditions which under the law extend to contractual relations of the respective type”, it is thought, appertains exclusively to contracts whose legal regulation is built on rules based, expressing the words of Vitrianskii, “on general approaches worked out as a whole with regard to the entire system of legal regulation of property turnover”, [25] no objections arise with regard to our conception: if the seller and the emptor compositus have agreed to conclude a contract of purchase-sale, it is thereby recognized that they have expressed consent to subordinate themselves to the conditions which according to the law extend to relations of purchase-sale; the situation is analogous with the consent of the locator compositus and the finance lessee to conclude the contract of lease. As regards those contracts of which finance leasing consists in the view of the legislator (contract of finance leasing between the finance lessor and the finance lessee and the contract of purchase-sale between the seller and the finance lessor), here Ioffe’s opinion may serve as an argument just exactly against recognizing the existence of a contractual link between the finance lessee and the seller.

The conception proposed by us enables us, in particular, to show with greater clarity the unfoundedness of the attempts encountered in doctrinal writings to substantiate the special significance of relations between the finance lessor and the finance lessee.

Thus, Giovanoli proceeds from the fact that despite the diversity encountered in practice of the modifications of finance leasing, the very substance of the transaction remains in all instances an investment credit guaranteed by the right of ownership, in connection with which the essence of finance leasing is manifested in principle identically both in the classical finance leasing operation and in the lease-back. Farther on the attention is drawn to the fact that the “supplier of the property being financed is merely little-noticed at the initial phase of the contract, in a tripartite finance leasing operation of the classical type and that he is completely absent in the lease-back” and it is proposed to “limit oneself initially to the study of bilateral ‘internal’ relations between the finance lessor and the finance lessee, and later to embark upon the study of their ‘external’ relations with third persons …”. [26]

With respect to lease-back we note the following. First, lease-back differs in principle from “classical” finance leasing in that it consists in essence of consecutive contracts of purchase-sale and lease concluded by the same pair of persons. Second, in lease-back the seller is not absent, but simply the same person in one contract acts as the seller, and in the other, as the lessee.

Here we consider it advisable to quote the following view of Vitrianskii, who appeals for the legal purity of analysis:

“Before we embark upon an analysis of the various views concerning the legal nature of finance leasing, it is necessary to stipulate that the subject of the study is merely the legal aspects of this problem “purified” (whenever possible) from an economic approach to relations connected with finance-leased property since for a correct definition of the legal nature of the contract of finance leasing it is necessary above all to avoid regarding finance leasing as an economic-legal category, which is frequently encountered in the works of individual authors … . Such an approach to finance leasing (as an economic-legal category) prevailed during the preparation of the Federal Law on Finance Leasing, which told negatively on its standard and content and made it one of the most contradictory legislative acts in the sphere of property turnover.

Of course, the economic essence of property relations which are the subject of legal regulation must be taken into account and, moreover, pre-determine the content of respective legal norms, but legal regulation itself must be structured according to its own rules based on general approaches worked out as a whole with regard to the entire system of the legal regulation of property turnover. This circumstance has special significance for States with a codified legal system, among which is Russia. For such legal systems, any attempts to structure the legal regulation of property relations by proceeding from the aspiration of complete regulation of the respective individual economic-legal categories without taking into account the entire system of legal regulation of property turnover are simply ruinous”. [27]

Simultaneously, this extract may serve as a routine illustration of the internal contradictoriness peculiar to civil legislation and many finance leasing theories. The author of the extract quoted justly points to the need to take account of general approaches “worked out as a whole with regard to the entire system of the legal regulation of property turnover”, but in so doing himself accepts without evidence the existence of the contract of finance leasing, which is contrary to these general approaches, noting further merely that “when the matter concerns judgments concerning the legal nature of the contract of finance leasing, which presupposes the determination of the place of this contract in the system of civil-law obligations, one may speak only of one contract, namely: the contract to be concluded between the finance lessor and the finance lessee under which finance-leased property is transferred to the last in temporary, fixed-term, and compensated use”. [28] It is not surprising that as a result of such displacement of the “centre of gravity”, present in the majority of finance-leasing theories the relations between the seller and the finance lessee may seem to be unusual to the authors of those theories.

As regards the determination of the place of finance leasing relations in the system of civil-law obligations, then insofar as finance leasing consists only of contracts of purchase-sale and lease, this question is resolved more simply than was done by the legislator and than believe (or suggest) many theoreticians attempting to resolve the said question with regard to the contract of finance leasing, who consider it to be a bilateral or tripartite transaction, a variety of lease, or a civil-law institute distinct from it.

The logical legislative resolution is seen in placing in the chapter of the Civil Code on purchase-sale a section on leasing (or financial) purchase-sale (that is, a contract between the seller and emptor compositus), the distinctive feature of which is the distribution of the role of purchaser between the finance lessor and finance lessee and the interlinkage with the contract of leasing lease, and the respective placement in the chapter of the Civil Code on lease of a section on the leasing (or financial) lease (that is, a contract between the locator compositus and the finance lessee), the distinctive feature of which is the distribution of the role of lessor between the finance lessor and the seller and the interlinkage with the contract of leasing purchase-sale.

We see possible practical significance of our conception most clearly with regard to international private law, in which an understanding of the legal nature of finance leasing relations has enormous significance.

Under a view of finance leasing as a tripartite transaction the international legal regulation thereof is rather difficult in the absence of unified international norms directed towards the regulation of finance leasing directly. The act containing such norms today is the 1988 Ottawa Convention on International Financial Leasing, whose authors “have determined that the successful legal regulation of international finance leasing may be effectuated only in the event of (a) recognition of finance leasing as an autonomous legal institute, and not a variety of already existing, and (b) consideration of two contracts – purchase-sale and finance leasing directly – as a single tripartite transaction. The wish to “adjust” finance leasing to fit under one of the well-known legal institutes led to unresolvable contradictions; each time such an institute proved to be a “procrustean bed” for finance leasing. An interpretation of finance leasing as a tripartite transaction enables the realization of the rights of all participants of the transaction and proper performance by them of there duties to be ensured”. [29] In order to determine whether a finance leasing transaction is international “it was decided to take as the benchmark the location of the places of business of the finance lessor and the user. A finance leasing transaction is deemed to be international if the places of business of the finance lessor and the user are located in different countries. The location of the supplier in this instance is considered to be secondary since the basis of finance leasing comprises the contract between the finance lessor and the user”. [30]

In reality the norms regulating international contracts of purchase-sale and lease are applicable to the legal regulation of international finance leasing. The question of whether a contract is international should be decided separately with respect to purchase-sale and with respect to lease. In so doing we consider it natural in both instances to be guided by the criterion of the location of the places of business of the parties (as defined, for example, in Article 1 of the United Nation Convention on the Sale of Goods). [31] The question of which of the places of business of a party has the closest link with the contract may acquire additional significance in connection with the fact that the emptor compositus and locator compositus have at the minimum two places of business.

Possibly the failure to understand the legal nature of finance leasing by the legislator, judicial practice, doctrine, and the participants themselves will have less serious negative consequences as a larger number of States accede to the 1988 Ottawa Convention on International Financial Leasing. However, the existing position is more complicated by the fact that even the more or less generally-recognized finance leasing construction has more or less serious and practically significant differences (contradictions) in legislation, judicial practice, and doctrine of various States and legal systems, [32] which for many States is an obstacle to accession to the Convention; in such instances the higher quality of the unified norms of the respective international-legal act is, the more difficult such an obstacle is to overcome. “The unification of developed legal institutes”, wrights Mednikov in this connection, “always collides with concealed or clear counteraction of various groups. The legal regulation of a particular question in a specific country works, and works as a rule satisfactorily. The possible and undoubted advantages from the unification of legal regulation engage heavy and expensive work with regard to the revision of a considerable number of normative acts of national law. If the work is conscientious, the change of civil-law norms must entail a change of tax, customs, procedural, and other branches of law.” [33]

Therefore, it is not surprising that notwithstanding the, it would seem, progressive role of the 1988 Ottawa Convention in the sphere of the regulation of international financial leasing, the participants thereof are only Belarus, Hungary, Italy, Latvia, Nigeria, Panama, France, and Russia. Moreover, the Ottawa Convention does not have the aim of unifying all aspects of finance leasing. The preamble contains a reference to the “desirability of formulating certain uniform rules relating primarily to the civil and commercial law aspects of international financial leasing”.

“The existence of unified norms of law”, Mednikov writes, “always facilitates the development of economic relations between subjects falling under their regulation. The existence of such norms reduces the cost of preparing a draft and the insurance of risks, and also gives to the parties to the contract an assurance that they understand the content of their rights and duties identically. Regrettably, the sphere of operation of the Convention is still small. This does not allow one to use the possibilities thereof in full”. [34]

In summing up the aforesaid, we draw attention to the fact that our understanding of the legal nature of finance leasing relations has the following significant advantages for the international legal regulation thereof.

In the absence of applicable unified international norms and agreements of the parties, it is much easier to determine the applicable law for contracts of purchase-sale and lease than for finance leasing in its “triangular” understanding.

With respect to purchase-sale and lease many more international agreements have been concluded whose participants are many more States than those parties to the 1988 Ottawa Convention.

The international unification of norms on purchase-sale and lease is effectuated much more simply than the unification of norms on finance leasing in the existing understanding thereof.

The working out of international agreements regulating leasing purchase-sale and leasing lease in the form in which these contracts have been describes by us above seems more simple. And the unification of public-law aspects will be simpler in so doing.



[1] M.Giovanoli, Le cr'edit-bail (leasing) en Europe: d'eveloppement et nature juridique (Paris, 1980), p. 3.

[2] Ibid., p. 4.

[3] E.V.Kabatova, Новые формы передачи машин и оборудования во временное пользование (лизинг) в гражданском праве буржуазных государств (М., 1981), pp. 135-136 (Dissertation for kandidat of legal sciences).

[4] V.V.Vitrianskii, Договор аренды и его виды: прокат, фрахтование на время, аренда зданий, сооружений и предприятий, лизинг (M., 1999), pp. 284-285.

[5] E.V.Kabatova, Лизинг: правовое регулирование, практика (M., 1997), p. 54.

[6] In the terminology of the Convention, the leasing agreement.

[7] In the terminology of the Convention, the supply agreement.

[8] In the terminology of the Convention and the Civil Code – respectively lessor and lessee.

[9] In the terminology of the Convention, the

[10] See, for example, Kabatova, note 5 above, pp. 32, 38. Giovanoli, note 1 above, pp. 353-354; I.A.Reshetnik, Гражданско-правовое регулирование лизинга в Российской Федерации (Perm, 1998), p.36 (Dissertation for the degree of kandidat of legal sciences); O. M. Kozyr’, in  Kozyr’, A. L. Makovskii, and S. A. Khokhlov (eds.), Гражданский кодекс Российской Федерации. Часть вторая. Текст, комментарии, алфавитно-предметный указатель (1996), p. 344.

[11] Kabatova, note 5 above, p. 20.

[12] We suggest that the existing legislative approach is condition by the fact that under this approach the economic function of the contract is the principal criterion for the legal treatment thereof. However, the absolutization of one element may lead also to a distorted treatment of finance leasing as purchase-sale complicated by the presence of the finance lessee and give occasion to regard the principal function of finance leasing as ensuring the sale of the product.

[13] This approaches may seem the most obvious thanks to the practice of effectuating finance leasing operations, which have influenced the legislative regulation of finance leasing.

[14] See V. V. Vitrianskii, note 4 above, p. 294.

[15] Reshetnik, note 10 above, pp. 122-123.

[16] Ibid., p. 13.

[17] Vitrianskii, note 4 above, p. 347. A. A. Ivanov adduces the following objections to treating finance leasing as a multilateral transaction (tripartite contract): “Relations between the lessor and lessee, on one side, and the lessor and seller of the leased property, on the other, have been regulated as in classical bilateral contracts. The participants of these contracts have no single right or duty which would belong simultaneously to each of them, as characterized a multilateral transaction”. Ivanov, in A. P. Sergeev and Tolstoi (eds.), Гражданское право. Учебник (1998), p. 194.

[18] The principal distinction between our concept and the other conceptions of the legal nature of finance leasing conditions certain distinctions in the terminology used by us. The contract between the seller and the emptor compositus as a special instance of the contract of purchase-sale we consider it possible to name the contract of leasing (or financial) purchase-sale, and the contract between the locator compositus and the finance lessee as a special instance of the contract of lease – contract of leasing (or financial) lease. The leasing purchase-sale and the leasing lease may be called leasing contracts. By finance leasing is understood only the entire complex of finance leasing relations. The term “finance leasing contract” designates the relations specially singled out by many theories between any two participants of finance leasing and, although in such instances they always speak of relations between the finance lessor and the finance lessee, we have endeavoured to show that by analogy the existence of the “contract of finance leasing” can equally be imagined both between the seller and the finance lessor and between the seller and the finance lessee.

[19] Reshetnik, note 10 above, pp. 121-122 (footnotes omitted).

[20] Translated in W. E. Butler, Russian Civil Legislation (1999), p. 323 [Emphasis added – S.Sh.].

[21] Kabatova, note 5 above, pp. 34.

[22] Note 17 above, p. 194.

[23] Vitrianskii, note 4 above, p. 292.

[24] Reshetnik, note 10 above, pp. 132-133 (footnotes omitted).

[25] Vitrianskii, note 4 above, p. 286.

[26] Giovanoli, note 1 above, pp. 366-368.

[27] Vitrianskii, note 4 above, pp. 285-286.

[28] Ibid., p. 287.

[29] Kabatova, note 5 above, pp. 78-79.

[30] Ibid., p. 77.

[31] On the meaning of the term “place of business” see Венская конвенция о договорах международной купли-продажи товаров. Комментарий (1994), pp. 9-10.

[32] See in detail, Giovanoli, note 1 above; Kabatova, note 5 above.

[33] V. Mednikov, «Лизинг в международном праве», Закон, no. 8 (1999), p. 39.

[34] Ibid., p. 42.

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Stanislav Shatalov, Legal adviser of the Institute for the Economy in Transition

Translated by William E. Butler

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