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Expansion of Applicable Sphere: A way to Uniformity
——Compare and Contrast between UNIDROIT and UNCITRAL Conventions
By Dongsheng Lu, Chen Yan
I. Introduction
Financing is paramount for the promotion of commerce. It has been noted that “in developed countries the bulk of corporate wealth is locked up in receivables”. As the economy develops, this wealth increasing is “unlocked by transferring receivables across national borders”. With the prompt and great increases in international trade, receivables financing now plays a more and more important role. Yet under the law of many countries, certain forms of receivables financing are still not recognized. Even transactions are involved in countries where the form of receivables financing is permitted, determining which law governs will be difficult. The disparity among laws of different jurisdiction increases uncertainty in transactions, thus constitutes obstacles to the development of assignments of receivables. To remove such obstacles arising from the uncertainty existing in various legal systems and promote the development of receivables financing cross-boarder, a set of uniform rules in this field is required. The international community has made great efforts in adopting uniform laws. Among those efforts, the United Nations Commission on International Trade Law (UNCITRAL) drafted, on 12 December, 2001, “United Nations Convention on the Assignment of Receivables in International Trade” (hereinafter referred to as the “UNCITRAL Convention”), with its aim to “establish principles and to adopt rules relating to the assignment of receivables that would create certainty and transparency and promote the modernization of the law relating to assignments of receivables”. UNCITRAL is not the first international organization attempting to resolve the problems associated with receivables. As early as in May 1988, the International Institute for the Unification of Private Law (UNIDROIT) has already adopted a convention known as the “UNIDROIT Convention on International Factoring” (hereinafter referred to as the “UNIDROIT Convention”).
When compare and contrast between the UNIDROIT Convention and the UNCITRAL Convention, one might see a lot of inconsistency in detailed regulations, e.g. sphere of application, relations between parties, priorities, and choice of law, etc. Given the limited space available in this article, the author may only focus on the difference in “sphere of application” of these two conventions, as sphere of application is perhaps the most fundamental issue of a convention.
The purpose of an international convention is to create uniformity in its covered matter, thus the broader a convention’s sphere of application is, the higher could uniformity reach. This article will try to make compare and contrast the sphere of application between the UNIDROIT Convention and the UNCITRAL Convention, illustrate the differences exist between these two conventions, and demonstrate the expansion of sphere of application in the UNCITRAL Convention and its progress on the way to uniformity.
II. Sphere of Application: Subject Matter
As its title indicates, the subject matter of the UNIDROIT Convention is of course international factoring. Article 1(1) says, “this Convention governs factoring contracts and assignments of receivables as described in this Chapter.”
For “factoring contract”, the UNIDROIT Convention provides the following 4 characteristics:
(1) purpose of the contract is to assign receivables;
(2) receivables to be assigned arises from contracts of sale of goods made between the supplier and its customers (debtors), other than those of sale of goods bought primarily for personal, family or household use;
(3) the factor is to perform at least two of the four functions: (i) finance for the supplier; (ii) maintenance of accounts (ledgering) relating to the receivables; (iii) collection of receivables; and (iv) protection against default in payment by debtors;
(4) notice of the assignment of the receivables is to be given to debtors.
As about “assignments of receivables as described in this Chapter”, article 2 (1) describes assignments of receivables as assignment of receivables pursuant to a factoring contract.
Factoring is just a subset of the receivables financing, and perhaps the oldest and most basic one. Besides factoring, receivables financing still entail the following forms,
(1) Forfeiting, similar to factoring, involves the purchase or discounting of documentary receivables (promissory notes, for example) without recourse to the party from whom the receivables are purchased;
(2) Refinancing, also known as secondary financing, involves the subsequent assignment of receivables. In its basic form, one bank or financier will assign to another bank its interest, with the potential for further assignment;
(3) Securitization, in which both marketable (for example, trade receivables) and non-marketable (consumer credit card receivables) asset cash flows are repackaged by a lender and transferred to a lender-controlled company, which will issue securities, sell and then use the proceeds to purchase the receivables;
(4) Project Finance, in which repayment of loans made by banks or financiers to project contractors for the financing of projects are secured through the future revenues of the project.
The first draft of the UNCITRAL Convention has stated to cover factoring, forfeiting, refinancing, securitization and project finance. Somehow, the working group decides that rather than emphasize the form in which the receivables appear, it would instead concentrate on the way in which the receivables might be transferred (contractual or non-contractual) and the purpose of the transaction (for financing or non-financing purposes). It decides the contractual receivables and assignment made to secure financing and other related services would be covered. The non-contractual receivables such as insurance and tort receivables, deposit bank accounts, or claims arising by operation of law seems are not within the ambits of the UNCITRAL convention.
III. Sphere of Application: Special Requirements
Both of the conventions contain a series of requirements. Only when those requirements are satisfied, could the convention be applied. The higher and stricter the requirements are, the smaller the chance to apply the convention is.
a) Internationality requirement
Both the two conventions indicate their sphere of application is of internationality requirement, but the same word in these two conventions has different legal meaning. The internationality requirement of UNIDROIT Convention is exclusively based upon the parties to the underlying contract, i.e. the contract of sale of goods (the supplier and the debtor) having their place of business in different countries. In other words, where the receivables arise from a contract of sale of goods between a supplier and a debtor whose places of business are in the same State, the UNIDROIT Convention could not apply, no matter the following assignment of receivables is to assignee in the same or different State. Thus leaving the international assignment of domestic receivables untouched. The problem, at its simplest, is twofold: first, inconsistency. For instance, in the case where a bulk assignment is made and where part of the receivables are domestic (supplier and debtor are in the same State) and part are international (supplier and debtor are in different State), if the supplier assigns the receivables to a party which is located in another State, the bulk assignment between the same supplier and the same assignee will be governed by two sets of laws and regulations: the portion of international receivables may be governed by the UNIDROIT Convention while the domestic one will be left to the jurisdiction of certain domestic law.
Secondly, leaving the international assignment of domestic receivables to the jurisdiction of various law systems of different States can make “commercial practice uncertain, time-consuming and expensive”. The assignee of receivables from a foreign State may not know which State’s law governs the transaction, and, if the law of the assignor’s State applies, the assignee’s rights would be subject to the vagaries of that foreign law. This no doubt would greatly impede the development of such transaction.
Cross-boarder receivables assignments call for a uniform law. From this point, the UNIDROIT convention does not satisfy this requirement once and for all, for which it has been highly criticized.
Based on former experience, UNCITRAL Convention’s sphere of application is enlarged. In the first article, it states this convention applies to assignments of international receivables and to international assignments of receivables. And defines in article 3 that a receivable is international if, at the time of conclusion of the original contract, the assignor and the debtor are located in different States and an assignment is international if, at the time of conclusion of the contract of assignment, the assignor and the assignee are located in different States. Thus the internationality requirement of UNCITRAL Convention actually contains two internationality criteria, and the result is that this convention could be applied to all assignments of receivables with international elements, including: 1) international assignment of international receivables, where the assignor, assignee, and debtor are in three different countries; 2) domestic assignments of international receivables, where the assignor and assignee are in the same country, and the debtor is in another country; and 3) international assignment of domestic receivables where the assignor and debtor are in one country and the assignee in another country. In other words, the scope of UNCITRAL Convention covers all the assignment of receivables except pure domestic assignment of domestic receivables (i.e. where the assignor, the assignee and the debtor are in the same country) and it may be applied on a wide range of receivables financing in international trade.
b) Link to Contracting Party Requirement
Although internationality is required by both the two conventions, in order for the two conventions to apply, it is not sufficient that the internationality requirement is met. Both the conventions require there shall be a link with contracting party.
As in the UNIDROIT Convention, article 2(1) stipulates this convention would apply when any of the two requirements of link with contracting party are satisfied,
(a) those States and the State in which the factor has its place of business are Contracting States; or
(b) both the contract of sale of goods and the factoring contract are governed by the law of a Contracting State.
Thus, in the UNDIROIT Convention, the link to contracting party requirement is twofold: a territorial one and a legal one. The convention would apply whenever either of the two requirements is satisfied.
As for the UNCITRAL Convention, it also contains a territorial link requirement for its application in article 1(1), but different from the UNIDROIT Convention, it does not contain a legal link as article 2(1)(b) of the UNIDROIT Convention. No provisions could lead to the application of this convention when the territorial requirement is not met.
If we compare the territorial requirement in the two conventions, we would find the regulation is not identical. The UNIDROIT Convention requires the factor’s place of business is in contracting States while the UNCITRAL Convention requires not the factor (assignee), but the assignor has its place of business in contracting States. When probing the reason for this, one has to take into account that the UNDROIT Convention was drafted by a small group of experts who basically represent the interests of the factor (banks and financing institutions). The regulation maker is to protect the preferential and leading position of banks, and it’s no surprising that the UNDROIT Convention chooses factor’s place as connecting point. Actually in the two kinds of legal relationship in a receivables financing: the underlying trade relationship between the supplier and the debtor, and the receivables assignment between assignor (supplier) and the assignee, the key role connecting these two kinds of relationship is just the assignor, who would participate in both the two transactions and play the most important role. The UNCITRAL Convention recognizes the key status of the assignor and put its place of business as connecting point.
For the condition where the parties involved have multiple places of business, the two conventions also make different provisions on it. The UNIDROIT Convention solves the problem of identifying the place of business by referring to “the place of business which has the closest relationship to the relevant contract and its performance.” However, the UNCITRAL Convention refers to the “place where its central administration is exercised”. Using the place of “central administration” to substitute for the place “has the closest relationship to the relevant contract and its performance”, the UNCITRAL Convention chooses a more fixed and stable connecting point, which could increase the predictability a lot.
c) Requirement on the Receivables Assigned
The UNIDROIT Convention defines receivables as “arising from a contract of sale of goods between a supplier and a debtor” and supplements that "goods" and "sale of goods" in this convention shall include services and the supply of services. Obviously, the UNIDROIT Convention would apply when the receivables assigned are arising from contracts of sale of goods and supply of services.
Meanwhile, article 2(a) of the UNCITRAL Convention, when defining “assignment”, also defines “receivables” as “an undivided interest in the assignor’s contractual right to payment of a monetary sum”. The scope of any “contractual right” is a rather broad scope, which is followed by a detail list of exclusions and limitations under which the convention does not apply. According to article 4 of the UNCITRAL Convention,
(1) The convention does not apply to assignment to an individual for his or her personal, family or household purposes;
We could find the very word in article 1(2) of UNIDROIT Convention, where when limits receivables to the field as “arising from contracts of sale of goods made between the supplier and its customers”, it excludes “those for the sale of goods bought primarily for their personal, family or household use”. But on closer examination we would find the exclusion contained in the two conventions is not the same: the UNIDROIT Convention excludes the assignment of consumer receivables from its sphere of application while the UNCITRAL Convention excludes assignment made for consumer purposes. The four kinds of possible relations are illustrated in the following chart:
Receivables Assignment Which convention may govern
Consumer Receivables For consumer purpose Neither
Consumer Receivables For Commercial purpose UNCITRAL Convention
Commercial Receivables For consumer purpose UNIDROIT Convention
Commercial Receivables For Commercial purpose Both
The first situation is not difficult to understand where the consumer receivables are assigned for consumer purpose. It’s a general practice that international convention does not regulate on pure personal matters, let alone the UNCITRAL is an organization under the United States concentrating on international trade matters; Under the second situation, where consumer receivables are assigned for commercial purpose, it cannot be governed by the UNIDROIT Convention, but still could be subject to the UNCITRAL Convention; Under the third situation, where commercial receivables are assigned for consumer purpose, logically the UNDROIT Convention shall govern, but considering the UNDROIT Convention is a convention on international factoring, where factors are all banks and other financial institutions, the receivables are not possible to be assigned for consumer purpose, so this situation does not exist; Under the last situation where commercial receivables are assigned for commercial purpose, both of the conventions may be applied.
UNIDROIT’s attitude is understandable that banks don’t want consumer receivables, for pressing for payment from individuals is, in anyway troublesome and low profit. Thus exclusion of these consumer receivables is a natural choice. UNCITRAL Convention substitute the exclusion of consumer receivables to exclusion of receivables assigned for consumer purpose, regardless of the receivables is consumer or commercial one, thus expand the sphere of application of the convention. This expansion is justified for receivables, once coming into being, shall be separated from the underlying contract for the sale of goods. No matter the goods are bought for personal purpose or for commercial purpose, debt has come into being. The convention put the emphasis on the character of receivables assignment, not the character of underlying contract.
(2) The convention does not apply to assignment as part of the sale or change in the ownership or legal status of the business out of which the assigned receivables arose
Considering the complexity in the field of business transfer and the great inconsistency among various jurisdictions, the convention thus leave this part untouched. If UNCITRAL Convention insists to regulate on this sector, it would face great difficulty when being ratified by States. For this reason, the convention chooses a careful attitude and excludes this part out of its sphere of application.
(3) This Convention does not apply to assignments of receivables arising under or from: transactions on a regulated exchange, financial contracts governed by netting agreements, except a receivable owed on the termination of all outstanding transactions foreign exchange transactions, inter-bank payment systems, inter-bank payment agreements or clearance and settlement systems relating to securities or other financial assets or instruments, transfer of security rights in, sale, loan or holding of or agreement to repurchase securities or other financial assets or instruments held with an intermediary, bank deposits, letter of credit or independent guarantee,
In this article, the convention made a detail and exhaustive list on some receivables excluded. After reading this list carefully, one might find these exclusions are mostly in the financial fields. Since financial sector is of vital importance to the national economy and its fluctuation influences the society a lot, nearly all the States put this sector under its own jurisdiction, and different States’ regulations varies a lot. For the same reason above, the convention leave this part untouched.
IV. Sphere of Application: Party Autonomy and Exclusion
Both of the conventions set forth that parties to receivables assignment may choose to exclude the application of the said conventions.
According to article 3 of the UNIDROIT Convention, The application of this Convention may be excluded:
(a) by the parties to the factoring contract; or
(b) by the parties to the contract of sale of goods, as regards receivables arising at or after the time when the factor has been given notice in writing of such exclusion.
Similarly, article 6 of the UNCITRAL Convention provides, the assignor, the assignee and the debtor may derogate from or vary by agreement provisions of this Convention relating to their respective rights and obligations. But unlike UNIDROIT Convention, which stipulates that such exclusion may be made only as regards the Convention as a whole, the UNCITRAL Convention stipulates that agreement to derogate from this convention does not affect the rights of any person who is not a party to the agreement.
V. Conclusion
If the international uniform law’s sphere of application is not broader enough, i.e. some issues will still be subject to various domestic law system, the uncertainty exists cannot be thoroughly removed, which is contravening the very purpose of uniform law conventions. Compared with UNIDROIT Convention, the UNCITRAL has expanded a lot in its sphere of application and progressed forward on the way to uniformity. It has been argued given the convention’s potential impact on international trade, it may become the most important work that UNCITRAL has done so far.
In the meantime, the broader the convention’s sphere of application is, the difficult it is to be ratified by certain country. Up until the end of 2002, the UNCITRAL Convention has only been signed by Luxembourg. Considering when drafting this convention, the working group is composed of all States members of the Commission, including the United States, United Kingdom, Japan, China, France and other. For the process of formulation of this convention is participated and supported by lots of States and non-government organizations, it is believed that this convention will be widely recognized and accepted by most of the States.
1 See Steven L. Schwarcz, The Universal Language of Cross- Boarder Finance, 235, 236-37, Duke J. Company and International Law,8 (1998).
2 See Preamble of the UNCITRAL Convention.
3 Article 1(2) of the UNDROIT Convention.
4 See Steven L Schwarcz, Towards A Centralized Perfection System for Cross-Border Receivables Financing (1999).
5 See Assignment in Receivables Financing, Discussion and preliminary Draft of Uniform Rules, Report of the Secretary-General, UNCITRAL., 28th Session, para.25, U.N. Doc. A/CN.9/412/1995.
6 See id. paras. 26.
7 See id. paras. 27-28.
8 See id. paras. 29.
9 See id. paras. 22-29.
10 See Report of the Working Group on International Contract practices on the Work of its Twenty-fourth Session, UNCITRAL, 29th Session, para 16, U.N. Doc. A/CN.9/420 (1995).
11 Article 2(1) of the UNIDROIT Convention.
12 Steven L.Schwarcz, A fundamental Inquiry into the Statute Rulemaking Process of Private Legislatures, 29 GA.L.Rev. 909, 940 (1995) .
13 See LS Sealy& RJA Hooley, Commercial Law: Text, Cases and Materials (Second Edition), 937 (1999).
14 See Franco Ferrari, The UNCITRAL Draft Convention on Assignment in Receivables Financing: Applicability, General Provisions And The Conflict Of Conventions, 11, Melbourne Journal of International Law, 1 (2001).
15 Article 2(2) of the UNIDROIT Convention.
16 Article 5 of the UNCITRAL Convention.
17 Article 2(1) of the UNIDROIT Convention.
18 Article 1(3) of the UNIDROIT Convention.
19 Article 3(2) of the UNIDROIT Convention.
20 Article 6 of the UNCITRAL Convention.
21 See Gerald T. McLaughlin & Neil B. Cohen, International Accounts Receivables Financing, 216 N.Y.L.J. 3 (1996).
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