Notion of Debtor Default

The parties to a security arrangement on a means of transport enjoy broad freedom to agree on the circumstances that entitle the secured creditor to exercise remedies. The starting point for the notion of default in the “system of two promissory notes” is, of course, the debtor not discharging their obligations under the promissory note (or credit agreement) that expresses the actual debt owed to the creditor (“wrap promissory note”). By contrast, a bearer bond with mortgage entry (“charge promissory note”), which is a promissory note only in a formal sense, is irrelevant for this purpose.

For example, if the parties agree that even one late periodical payment can make the entire debt fall due and immediately payable, then that delay entitles the secured creditor to seek satisfaction out of the value of the means of transport. Without such an agreement, a single late payment may not have the same effect if the sum of this payment is but a negligible part of the entire debt or the value of the means of transport. Common in financing practice are agreements that entitle a secured creditor to claim additional security or payments in advance, alternatively to make the entire debt fall due, if the security for the credit extended somehow deteriorates.[1] It should be noted, however, that the mortgage acts already provide solutions to some such situations.[2]

  • [1] Havansi 1992, 383. He also notes that limits to the parties’ freedom of agreement may resultfrom Section 36 of the Contracts Act (228/1929). Subsection (1) provides as follows: “If a contractterm is unfair or its application would lead to an unfair result, the term may be adjusted or set aside.In determining what is unfair, regard shall be had to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and toother factors.”
  • [2] Vessel Mortgage Act, Sections 38 and 39; Vehicle Mortgage Act, Section 11.
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