Efficient priority rules under default: the case of traditio versus contract principle
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Efficient priority rules under default: the case of traditio versus contract principle Jens Andreasson1 · Wolfgang Faber2 · Shubhashis Gangopadhyay1,3,4,5 · Claes Martinson1 · Stefan Sjögren1
© The Author(s) 2020
Abstract We investigate the economic consequences of the traditio and the contract principle—differing in how they determine the priority rights for an item sold but not delivered. Our results suggest that the two principles are equivalent in terms of the net utilities enjoyed by involved actors. For example, a lower price paid for a forward transaction under a traditio principle can be compensated by better credit terms, implying there is no competitive advantage for either the seller or buyer under any principle. We demonstrate how market prices, incorrectly used, may misleadingly favour a contract principle, and discuss how fraudulent behaviour better supports a traditio regime. We also contribute to the legal discussion on priority regimes of undelivered items basing our discussion on bankruptcy priority laws instead of distribution of ownership. Keywords Priority rules · Bankruptcy · Traditio principle · Delivery model · Transfer of ownership JEL Classification G33 · K20 · K00 · L50
* Stefan Sjögren [email protected] 1
School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden
2
University of Salzburg, Salzburg, Austria
3
India Development Foundation, Gurugram, India
4
University of Groningen, Groningen, The Netherlands
5
Indian School of Public Policy, New Delhi, India
13
Vol.:(0123456789)
European Journal of Law and Economics
1 Introduction This study investigates the economic consequences of two opposing legal principles that may be applied by legislators to determine the priority rights of various parties when a business becomes insolvent. Our focus is on a case involving advance purchases, where an item has been paid for but due to the seller’s bankruptcy is not delivered. In such cases, the firm’s (or, seller’s) bankruptcy proceedings begin before they make the delivery, thus hindering the delivery despite the customer having already paid the agreed-upon price while the seller was still solvent. In this situation, the legislators must determine the party that takes priority over the undelivered item—the seller’s creditor(s) or the customer. The legal variant of this problem has been debated among lawyers within different jurisdictions. Under the contract principle (also called the consensus principle), the buyer is given priority over the seller’s other creditors.1 Since there is a valid contract, and provided the item is specified, the bankruptcy estate must give the buyer priority for the item. In this case, the item is not considered part of the bankruptcy estate. Conversely, under the ‘traditio’ principle (also called the delivery principle) the buyer is protected only if the delivery has already happened.2 If the delivery has not been made, the estate will most likely fulfil the contract since the estate usually prefers to get the
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