1

Fourth lecture

Comparison among the Commercial Pawn Contract, the Holding

Pawn, and the Formal Pawn:

To study the Commercial Pawn Contract, we must differentiate upon this

kind of pawn and the other two types, which were; the formal pawn and
the holding pawn. So, we will start with other two kinds of pawns, in order
to show the characteristics of the commercial pawn.

a) The formal pawn:

The formal pawn is related to the real property. We can call the formal
pawn as the realty pawn. This pawn must be registered in the real estate
agency as it belongs to the immoveable property as a rule, and some
specific transported properties as an exceptional to the rule. The Egyptian
Law gives a definition to the formal pawn contract as; “The contract
which gives the creditor the concrete and superior right to receive the
value of his loan from the pledged property before the ordinary creditor
and from any hand that controls the pledged property”. So, the formal
pawn is a tangible right, as it is a peculiar right, which belongs to a
concrete thing that is evaluated by money, so it is a distinguished
insurance to the loan of any creditor, as example; the bank, as it can take
the value of its loan from the pledged property. So, we may use the bank
as an example for the creditor in our study in this lecture.

This pawn is an ancillary right, as it follows the guaranteed loan. So, there
is a strong relation between the loan contract and the formal pawn
contract. If the first one is legal and true, the second one also will be the
same. But in the same time, the client may pledge a real property to the
bank as a deposit for a future credit or loan. This way suits many kinds of
investments like pledging the land to the bank before a project of
constructing of homes. The formal pledge or pawn is an undivided right,
as if the pledged property is transferred from the debtor to many persons
whether through selling or by inheritance or by any other way. So, the
 2

bank’s loan is guaranteed by all parts of the pledged property, in spite of

settling a part of this loan to the bank. But the bank can make a contract
with its client that allows the division of this guarantee.

Most of the time, banks prefer the formal pawn as a practical guarantee
for its loans. There are many reasons for this preference; First: banks can
give a loan according to the value of the pledged property, so that they
can reduce the risks of this credit and may assure the settling of this loan.
Second: banks can settle their loans from the formal pledged real property
as a priority right, before any creditor, who hasn’t the same right, or could
have it after the bank.
Third: The bank that has a formal pawn right can follow its guarantee in
any ownership that dominates or has the pledged property. This is the right
to trace the guarantee of the formal pawn.
Fourth: The debtor, who pledge his real property to the bank is committed
not to hinder his guarantee by any personal action, and committed not to
block his guarantee also by any legal action from the others.
Fifth: The debtor is committed also in this case to guarantee not to
destruct his property by his action or any unexpected strange action.

Also, there is an important privilege for the debtor who pawns his
real property in a formal pledge, as he has the right to exploit his property
and use it in any way or investment he wants to. That is why many debtors
prefer this guarantee to secure their loans for the banks.

Yet, there are two main defects in using the formal pawn as a guarantee
for the bank’s loans:

1) There are many obstacles for the creditor banks in using their
pawned property, as the debtors have the right to hold and utilize
it as they are still having their possession on it. So, the banks can’t
exploit or use the pawned property in any investment.
 3

2) It is true that there are privileges in performing the formal pawn

contract officially, as it protects the public and private interests of
the people, but in the same time, the formalities have negative
effects on the bank’s credits. This may lead to many complicated
obstacles, which may retard the banking work, especially in the
credit field.
b) The holding pawn:
The holding pawn is distinguished by the concept of moving the control
of the transported pawn from the debtor to the bank or the creditor in the
any kind of credits.
So, some debtors don’t prefer the holding pawn as a guarantee for their
banking loans, as they can’t exploit or utilize what they owned, because
they lose their control on the transferred own, as they submit it to the
creditor (bank) to secure their loans.
In most cases, there is preference on the part of debtors to use the formal
pawn rather than the holding pawn, as they don’t use their control on
pledged property in the case of holding pawn in contrast of the formal
pawn, but there is still an importance for using the holding pawn along
with the formal pawn. The holding pawn is distinguished of avoiding the
complicated procedures of executing the formal pawn, so that many banks
(creditors) may prefer to recourse to the holding pawn as a practical
guarantee for their credits to their clients.

So, there are many advantages of using the holding pawn as a guarantee
for the banks to give their loans to their clients and they are:

1) The debtors are committed to hand over the transferred pawn to the
creditor’s hands (banks), as this submission protects the banks right
in dominating their guarantee on their possession, and in the same
time, it protects the others, who will know about the holding pawn,
before making any deal with the debtors.
 4

2) The debtors are committed to guarantee the safety of their

transferred pawned matter. So, they must secure their real or legal
destruction to their creditors (banks).
3) The banks have the right for holding the pledged assets, in order to
secure the settling of their loans.
4) If the dead line of discharging the loan comes to an end, and the
debtors didn’t settle their loans, the bank will have the right to sell
the pawned asset, in order to get back its money.
5) The debtors have the right to sell the pledged assets, as they still own
them, but this must be done without wasting the right of the
creditor’s bank.

Yet, there are some defects in using the holding pawn as a guarantee for
the banking credits:
1) Banks are committed to preserve and guard the pawned assets, as
they are holding them, so that they may spend a lot of money to
protect these assets.
2) Banks also are committed to manage the pawned assets by spending
time and money to achieve the profit from these assets and keep
them doing their roles.
3) Banks are committed to send back the pawned assets at the end of
the pledged contract, so they have to spend lots of money and exert
many efforts in carrying out this task.

c) The commercial pawn:

Rarely, the trader gives real property as a commercial pawn. Mostly,

he pledges transferred bonds or drafts or assets, because pledging
real property must be registered in the real estate agency. So, it is
spread out in the market, and has bad impact on the trader’s
reputation. But the commercial pawn becomes more advanced
nowadays after the enlargement of the market. So, many traders turn
to use the commercial pawn, in order to obtain bank loans to develop
and improve their business.
 5

On the grounds that the traders have to hold their goods and other things,
which they use in their business, so the legislators in many countries, like
France for example, started from many decades to worry about setting
rules for the commercial pawn, which enable the traders to control their
business, and protect the pawn rights to the banks (creditors).

There are two main advantages in using the commercial pawn as a

guarantee for the creditors (banking) credits:
1) The trader is committed to submit the pawned bond, draft,
asset…etc., to the bank in order to demonstrate the commercial
pawn to the others, so no one can’t make a deal on the pawned
property.

2) The Egyptian legislator facilitates the procedures of selling the

pawned property in case the trader didn’t settle his loan to the bank
or any creditor in general. This is due of course to the main two
fundamental characteristics of the trade, which we mentioned
many times, that are; speed and credit.

The defects of using the commercial pawn as a guarantee for obtaining

the (creditor) bank’s credit:
1) As the bank (creditor) holds the pawned property, it must protect
and guard it from any risk.
2) As in some times, the debtor doesn’t submit the pawned property
to the bank (creditor), the preceding and the tracking rights of the
bank are dependent on possessing the pawned property.

The Egyptian law stipulates articles for organizing the pledging of the
trader’s stores or firms, so as not to deprive him from possessing his
business firm or shop.
 6

- The Contract Agency:

The nature of the contract agency must be concluded as it is a type of

commercial agency.
The contract agent is nothing more than an ordinary agent, except that he
practices his work and has a great deal of freedom in relation to other
commercial agents. He is authorized by the principal customs, contracts
and laws, who is usually a commercial or industrial establishment, to
conclude contracts in his name and for his account, or his mission is
limited to receiving offers and sending them to the commercial
establishment, likewise; the contract may be concluded between him and
the client directly.

Despite the importance of the role of contract agents in internal and

external trade, there was no special regulation in the ancient Egyptian
commercial legislation for this type of agency, and it was subject to the
general rules of agency included in the civil law, commercial custom, and
established commercial customs. The law is regulating commercial
agency work and some commercial mediation work issued by Law No.
120 of 1982 used the term commercial agency and not “contract agency.”
It seems that the legislator meant by it both contract agency and
commission agency, as in the first article he defined a commercial agent
as every agent, whether he is contract agency or any commercial agency.
According to this law, a legal entity that normally - without being linked
to a contract of employment or a contract for leasing services or others -
submits bids or concludes purchase, sale, rental or provision of services
in the name and for the account of producers, merchants, or distributors,
or in his name and for the interest of one of them. It is clear that this
clarification includes the case of the agent contracts, who works in the
name and for the account of the principal, and that is the case of “contract
agency.” It also includes the case of the agent contracting in his name
and for the account of his client, which is in the case of “commission
agent.” However, the Trade Law promulgated by Law No. 17 of 1999
stipulated special provisions for the contract agency contract in its
 7

articles (177 to 191), and Article (177) defined it as a contract under

which a person commits to undertake, on a continuous basis and in a
specific area of activity, promotion and negotiation. So, he concludes
transactions in the name of the client and for his account in exchange for
a fee, and his mission may include implementing them in the name of the
client and for his account.

The nature of the contract agency helps in distinguishing between

commission agency, contract agency, and commercial representative:

A contract agent is a person who obtains agencies for a period of time

from producers and industry owners to conclude contracts related to the
sale of their products in exchange for a fee that is usually a certain
percentage of the price in the contract concluded by him (20% of the price,
for example). The agent works in this field in the name and for the benefit
of his client, so a legal relationship is established between his client and
the third party. He is a person who continuously, during a specific or
indefinite period of time, in a specific area, instigates the conclusion of
contracts for the benefit of another person, usually a factory, company, or
financial house, and therefore spares an effort in order to sell the goods)1(.

The difference between the commission agent and the contracts agent
is that the former works in his own name and becomes the debtor or
creditor in the contract he concludes with a third party, and no direct
relationship arises between this third party and the client, while the
contracts agent works in the name of his client and is not considered a
party to the contract concluded by him. Rather, his mission is merely to
represent the client and act on his behalf in concluding the contract. In
addition, the contract agent represents the company, the financial house,
or the factory in the same way.

)1(
Refer to the Commercial Law, by Dr. Tharwat Abdel Rahim, 1982 edition, 1178 onwards, and
The Mediator in the Egyptian Commercial Law, by Dr. Mohsen Shafiq, Part Two, Third Edition,
1957, pp. 73 and onwards.
 8

The nature of the agency contract is to Continue and conclude contracts

without receiving a special order regarding each deal he concludes, in
contrast of the case of a commission agent. From a practical standpoint, a
distinction is often drawn between a contract agent and a commercial
representative, and it is likely that the characteristic of independence from
the principal is more apparent in contract agency, meaning that the
contract agent is the head or director of a self-contained commercial
project (Enterprise Agent). He carries out the work of the agency and
manages his commercial activity regarding it in an independent manner,
and he alone bears the expenses necessary to manage his activity, in
contrast to the commercial representative who does not enjoy this degree
of independence in his work with the commercial establishment or
company he represents. Jurisprudence in France have long been
established that contracts agencies are concluded for the common interest
of themselves and the principal. As for Egypt, the Trade Law promulgated
by Law No. 17 of 1999 stipulated this for the first time in Article (188) of
it, which stipulated that: “1- Contract agency is concluded for the mutual
benefit of both parties…”.

There are conditions that must be met even if the special nature of the
contract agency is present, which are summarized as follows:

First: An agency: Article (177) of the Trade Law promulgated by Law

No. 17 of 1999 stipulates the standard of full representation for the
contract agent, as he concludes deals in the name and for the client's
account in exchange for a fee.
Second: The condition of dominating: This condition means that the agent
is the sole representative of the principal to promote his products or
services or conclude deals regarding them in a specific geographical area.
The contract agency often includes this condition in his contract, but it is
not one of the conditions whose failure to stipulate it in the contract leads
to its invalidation, as Article (179) of the aforementioned Trade Law
allows the two parties to agree on something other than that. The common
interest in contract agency lies in the existence of common clients between
 9

the agent and the principal who were formed by the joint work and
cooperation between them, so that each of them has an interest in
increasing and developing these clients in order to benefit from them in
increasing the number of trade deals. Some legislation regulates contract
agency with special provisions. Examples of such legislation include
German law and Italian law.

-Jurisprudential approach:

The jurisprudential approach holds that the common interest in this

concept is achieved only in the case of the presence of one agent who
carries out the task of representing one client. In this assumption alone,
the agent will be keen to retain the clients he has formed through his
efforts, develop them, and increase their number, because he will not be
shared in benefiting from them by other agents, as it is difficult in the case
of the presence of more than one agent to determine who has the credit
for attracting and forming clients, even if we accept that they all
participated in that. It is difficult to determine the share of effort of each
of them in this formation, due to the absence of the right of any one of the
agents to monopolize the customers or trade deals. The same logic applies
to the principal in the event that the agent represents more than one client
in the same area of activity and in the same branch of activity, and this is
what the French Court of Cassation stated in its ruling; that the existence
of an agency with a common interest is arranged by stipulating in the
contract a condition of interest for each party.

Third: The agent and client (principal) share the project’s profits and
losses: One of the criteria for the availability of a common interest is the
sharing of profits and losses arising from the exploitation of the common
element on which the activity of the agent and the principal focuses, which
is the success of the project. As long as the agent and principal are affected
negatively and positively by the prosperity and decline of this element,
the criterion for both of them is to bear the project’s losses and sharing its
profits also. The agency and the principles are aiming to realize common
 10

interest, which is concluded to attract customers in regional clusters, with

the aim of opening new markets for the project or the business. So, both
the agent and the principal share in the risks and profits of the operations
that represent its subject.

Fourth: The goal of the agency is to form customers to open new markets
for the client or the principal: By concluding agency contracts, the
principals aim to open outlets and create new markets to distribute their
products and services in the areas where the agents practice their activity.
Distribution outlets will not be established and new markets will not be
opened unless there are customers accessibility. They are confident in the
product or service provided by the project and proceed to acquire it and
continue to deal with it. In fact, these customers are the important target
behind concluding agency contracts)1(.

One of the results of this special nature of the contract agency was that
the provisions for its termination and non-renewal at the end of its term
were distinguished by some special provisions, whether in Egyptian law
or comparative laws, which made financial settlements upon the
expiration of this contract, so the Egyptian Trade Law issued by Law No.
17 of 1999 stipulates some special provisions in Article (188).

Rights resulting from completion Contracts agency:

There are subrogated rights for an agent whose agency contract has ended
for a reasonable cause, unless he is an employee or is legally treated as
employees. But if the contract is terminated without cause reasonably,
rights may expand in this case. It is usual for agents to have rights in the
event of the termination of (agency contracts) to include some financial
settlements. The settlement may represent a percentage of the total profits

)1(.
Dr. Reda Al-Sayyid Abdel Hamid, previous reference, p. 34 et seq. (1) 11.11.1960.V. Cass.
Com 13 Oct. 1959.J.C.P., see Dr. Reda Abdel-Sayed, op. cit., p. 35. (2) 113. Reda Al-Sayyid Abdel
Hamid, op. cit., p. 40.
 11

he achieved during the validity of the contract, or be double the amount

he earned during the validity of the contract or during some years of the
contract. The settlement takes into account whether the vouchers were of
indefinite duration. The material settlement also takes into account the
value of the goods in the agent’s possession, the moral value achieved by
the agent for the business, the advertising expenses he paid, or any other
expenses or investments made during the validity of the contract. It is
explicitly stated in this article that the contract agency is concluded for the
common interest of both parties, as we mentioned before. The legislator’s
determination in this contract is concluded for the common interest, so, it
characterized by special provisions, which are important to the financial
settlements, but the legislator does not stipulate that in many of them,
depending on the agreement. It is based on the general rules that decide
this, but the explicit report from the legislator in the Egyptian Trade Law
states that a contract agency is concluded for the common interest of its
two parties, in addition to some of the characteristics of this contract.

Rights upon Termination:

Terminated agents/distributors have various rights under the laws of
different nations. If the agent/distributor is terminated without just cause,
unless the agent/distributor is an employee, or otherwise treated as such,
there are likely to be limited rights, if any, but where the termination is
without just cause, the rights may be extensive.
Usually, rights upon termination involve some form of a monetary
settlement. The amount may be a percentage of the principal’s gross
profits during the time the agreement was in effect, or it may be a multiple
of what the agent/distributor has earned during the life of the agreement
or during a certain number of years. The calculation may also consider
any unexpired term of the contract. The agent/distributor cay have to be
paid for any goods in his possession, for any goodwill established by the
 12

agent/distributor, for any promotional expenses assumed, and for any

other expenses or investments made during the time of the agreement)1(.

- Overview of International Sales Transactions and Contracts:

- The Sales Contract:

(1) General Considerations: In analyzing an international sales

transaction, it is important to begin as with any other
transaction with the question whether the parties have
concluded an enforceable contract. Although there are
variations among legal systems in respect of contract
formation, they are generally not of great importance. The
precise scope of a party’s rights and obligations, particularly
rights in the event of breach by the other party, are more likely
to vary under different legal systems. These problems may be
minimized if the parties choose a governing law known to an
acceptable to both of them, since most courts accept the
parties’ right to choose the law applicable to their agreement.
The parties’ choice of law may not be enough to protect their
expectations, however, if the chosen law has to be interpreted
in a court that is unfamiliar with it. Thus, consideration must
also be given to specifying the forum (whether a court or
arbitral panel) that the parties want to interpret the contract.
More and more, courts seem willing to accept the choice of
forum made by the parties. Of course, even a “favorable”
choice of law and choice of forum provision may be negated
if it is not possible to enforce ay judgement obtained in that
forum, without relitigating the issues in dispute in the court
that is called upon for enforcement purposes.

)1(Review International Business Transactions _ a problem oriented coursebook _ fifth Edition, By

Ralph H. Folsom, Michael wllace Gordon, John A. Spanogle, Jr., pages, 237, 238, 239.
 13

in choosing applicable law, it is important to bear in mind

that in some countries special rules apply to international sales
transactions. In late 1986, The Unites States ratified the
Vienna (sometimes called the United Nations Convention on
Contracts for the International Sale of Goods, which entered
into force on January 1, 1988. As of November 2000, 57
countries had ratified the Convention including Argentina,
Australia, Canada, Chile, China, Egypt, Mexico, New
Zealand, Russia, Singapore, Uruguay, Venezuela and most
European countries.
The Convention is an important development in
international sales law for US companies. It applies
automatically to all contracts for the sale of goods between two
countries that are parties to the Convention, unless the parties
to the contract expressly opt out of having it apply or choose
another applicable law. Among the important differences
between the Convention and the UCC are (i) a contract is
formed at the time the acceptance is received by the offeror,
not when it is transmitted by the offeree; (ii) if the price is not
specified, no contract is formed; (iii) an acceptance must
mirror the terms of the offer for a contract to be formed,
otherwise the acceptance will be viewed as a counteroffer; (iv)
the extent and conditions under which an offer may be treated
as irrevocable differ; (v) certain provisions regarding risk of
loss when goods are changing hands differ; and (vi) certain
aspects of the seller’s right to cure differ. Article 6 of the
Convention permits the parties to a contract subject to the
Convention’s rules to agree to vary any particular provision of
the Convention.
(2) The CIF: The International Sale of Goods Convention is
an effort to standardize the basic rules of contract law for
international transactions, thereby to increase the
predictability of dispute outcomes and to reduce the costs to
parties of negotiating and drafting international contracts.
 14

Similar efforts have been undertaken to standardize the terms

of international contracts, so that parties can without great ado
invoke a sensible allocation of risks and responsibilities
between them simply by referring to a standardized
terminology. The International Chamber of Commerce (ICC)
has been at the forefront of this effort, publishing detailed
definitions of some of the principal terms used in these
transactions, most recently as Incoterms 2000. They may be
adopted expressly by the parties, and are often accepted in any
event by courts in diverse countries as representing the
common meaning of a particular term. Perhaps the best
known, if not the most common, type of sales contract is the
CIF contract. A CIF contract is a shipment contract, not a
destination contract. As the Incoterms definition makes clear,
the seller’s obligation under a CIF contract is to arrange for
insurance and freight and to deliver the goods to the carrier.
The seller takes the risk that shipping or insurance costs will
be higher than anticipated, but the seller is not responsible for
seeing that the goods actually reach their intended destination.
If they are lost, the risk of loss falls on the buyer (and is
hopefully covered by the insurance arranged by seller). A CIF
contract is often framed as a contract for the delivery of
documents rather than one for the delivery of goods. When the
seller presents to the buyer or the buyer’s agent evidence of
insurance and a document of title from the carrier covering the
goods, the buyer is normally obligated to pay for the goods
even though they have not arrived and the buyer has had no
opportunity to inspect them. If non-conforming goods are
shipped, the buyer will be out-of-pocket until a settlement is
reached. Buyers sometimes try to reduce the risk by requiring,
as a condition to payment, a certificate from an independent
inspection agency that the goods conform to the contract. In
light of the many events-wars, embargoes, etc.- that may
prevent delivery of goods after shipment in an international
 15

transaction, the risk -of- loss allocation to the buyer may be

significant. These risks occur not infrequently. Indeed, many
of the classic cases in contract law on impossibility or
frustration involve international sales contracts)1(.
- The Uniform Commercial Code (UCC) in Britain and the
Warranty of Commercial Sales Contracts:

It is difficult to know how much or how little one should say about
warranty liability under the Code. Others have written books and articles
on the topic, and the personal-injury cases in particular tend to present a
seamless web running from express warranty through the implied
warranty of merchantability to strict tort liability or negligence.
We know that a plaintiff will sometimes be able to state a cause of action
on the basis of the same facts under either theory, but a plaintiff is not
always free to choose. Sometimes a buyer of defective or damaged goods
sues in negligence strict liability in tort rather than for breach of warranty
or breach of contract, in order to secure grater recovery, or to avoid
defenses such as lack of privity, failure to give notice, disclaimers, or
remedy limitations, etc.
On the other hand, “economic loss” usually cannot be recovered in tort. If
the buyer is to recover at all, this can be on a warranty or a breach of
contract theory. Not all courts can define economic loss in the same way.
A frequently cited definition is that of the Illinois Supreme Court in
Moorman Manufacturing Co. v. National Tank co.)1(
“Economic loss” has been defined as damages for inadequate value, costs
of repair and replacement of the defective product, or consequent loss of
profits-without any claim of personal injury or damage to other property,
as well as the diminution in value of the product, because it is inferior in

)1(
Legal Problems of International Economic Relations, Cases, Materials and Text, Fourth
Edition, John H. Jackson, Willian J. Davey, Alan O. Sykes, Jr., American Casebook Series, West
Group, page 48 and next.
)1(
A frequently cited definition is that of the Illinois Supreme Court in Moorman Manufacturing
Co. v. National Tank co( .91 111. 2d 69, 435 N.E. 2d 443, 61 111. Dec. 746, 33. UCC 510 (1982).
 16

quality and does not work for the general purposes for which it was
manufactured and sold”.

At the outset, one should understand how a warranty lawsuit looks to a

plaintiff’s lawyer and how it differs from a suit against an “insurer” on the
one hand and an allegedly negligent defendant on the other. If an
insurance company insures against the loss of an arm, all claimant need
do is show the bloody stump. If the same claimant wishes to recover in
warranty from the seller of the offending chainsaw, he has a much tougher
case to prove. Proof of injury-the loss of his arm- is just the beginning.
First, he must prove that the defendant made a warranty, express or
implied, under 2-313, 2-314, or 2-315. Second, he must prove that the
goods did not comply with the warranty, that is, that they were defective
at the time of the sale. Third, he must prove that his injury was caused,
proximately and in fact, by the defective nature of the goods (and not, for
example, by his carless use of the saw). Fourth, he must prove his
damages. Finally, the warranty plaintiff must fight off all sorts of
affirmative defenses such as disclaimers, statute of limitations, privity,
lack of notice, and assumption of the risk.
Although the warranty plaintiff need not prove negligence, warranty
liability has much more in common with negligence liability than it does
with a life, collision, or health insurer’s liability
By its own terms, Article (2) applies only to “transactions in goods”. Code
Warranty provisions do not govern contracts which are purely for
services. Unfortunately, not every transaction can be neatly classified as
involving either goods or services. Many dealings, such as the purchase
and installation of a water heater, are made up of both goods and services.
Judges and litigants frequently face difficulty and uncertainty in
determining whether the code applies to such hybrid transactions. Areas
of continuous dispute include construction contracts, repairs and
installations (particularly on real estate), and medical treatments.
Some Courts have insisted on separating the goods and services
components of a contract and have applied the Uniform Commercial Code
(UCC) only to the goods portion of the transaction. Most courts, however,
 17

use the “predominant factor” test in deciding whether the code applies to
a particular contract. This test simply asks which aspect of a goods-
services contract is the most important to the overall transaction. UCC
will apply to the entire transaction, including the services portion. If the
contract primarily furnishes services, the Code will not govern any portion
of the transaction.