The 1998 UNIDROIT Convention Free Essay Example

Introduction

Receivables financing is a means by which a debt is placed on the market and sole to improve liquidity. Essentially this mechanism is an assignment of debt and is a significant part of capitalists’ management systems. In fact in a vast majority of developed nations a substantial amount of company assets are primarily comprised of receivables. Receivables financing function to permit the release of funds without having to wait for the maturity of the debts with the result that the liquidity improves and the market is free to finance additional commercial concerns.

In many ways the international trade market focuses on receivables. This can be problematic since the law of assignment varies from one jurisdiction to another with the result that a debt assigned in one country may not be enforceable in another. The International Institute for the Unification of Private Law (UNIDROIT) seeks to harmonize domestic legislation for the purpose of facilitating international receivables. The 1998 UNIDROIT Convention on International Factoring specifically addresses the problem of comity of nations.

1998 UNIDROIT Convention on International Factoring

This paper examines those solutions and exposes both its weaknesses and strengths. The 1998 UNIDROIT Convention on International Factoring was concluded in Ottawa, Canada in May of 1988. International factoring transactions are applicable. A transaction is international if the contracting parties are domiciled in different Conventions states. Franco Ferrari explains the international element of factoring yunder Article 2(1) of the Convention as follows:

“…a factoring contract is international when the receivables assigned arise from an ‘international’ contract of sale of goods, i.

e. , a contract of sale between the supplier and a debtor whose places of business are in different states (or if they arise from an ‘international’ contract for the supply of services, i. e. , a contract for the supply of services the parties to which have their places of business in different states). Consequently, the convention’s applicability depends not so much upon the “internationality” of the factoring contract as upon the ‘internationality’ of the receivables. ”

Article 8(1), 12 of the UDIDROIT Convention of 1988

Factoring occurs when a contract calls for the assignment of receivables resulting out of a sale and the factor is used for finance, collecting receivables, debt protection and ledgering. The parties are at liberty to either adapt or reject the Convention. Under Article 8(1) of the UDIDROIT Convention of 1988 the debtor is under a duty to discharge the factor in respect of specified receivables coming out of completed contract sales in circumstances where there is no evidence of the existence of a superior right. This payment is required to be made contemporaneously with written notice of the assignment of the debt.

This particular Article gives rise to some practical problems under English contract law since there is some uncertainty as to whether a debtor can claim funds paid over to the factor prior in the event the contract between vendor and purchaser has not yet been performed. Article 10 of the UNIDROIT Convention 1988 addresses this constraint in English law by expunging liability on such factors in default under a contract for sale only if the funds have not yet been paid by the factor to the supplier or there is evidence that the funds were paid notwithstanding knowledge of the default.

In order to avoid further complications Article 12 provides that rules that apply to and regulate the initial assignment will follow on to all subsequent assignments. Another constraint imposed by conflicts of laws under domestic laws is that some jurisdictions provide some measure of prohibition on the assignment of debts with the result that factoring agreements may be voided. Some jurisdictions may or may not have a measure for overcoming this difficulty.

Article 6(1) of the UNIDROIT Convention

Under English law however, the law of equity can be invoked to the extent that any constraints against assignment may be overcome by the imposition of a trust is the parties intentions can be construed to create a trust. Sealy and Hooley explain that the prohibition in this instance only relates to the assignment of the benefit rather than the declaration of trust. Article 6(1) of the UNIDROIT Convention responds to this constraint at follows:

“The assignment of a receivable by the supplier to the factor shall be effective notwithstanding any agreement between the supplier and the debtor prohibiting such assignment. ” In other words, under the Convention a receivable can be assigned from a supplier to a debtor notwithstanding any prior agreement between the parties stating otherwise. However, Article 6(2) provides that parties domiciled in one of the contracting states under the Convention may make a declaration under Article 18 which effectively exempts the application of Article 6(1).

Article 6(2) and Article 18 declarations

Article 18 provides that: “A Contracting State may at any time make a declaration in accordance with Article 6(2) that an assignment under Article 6(1) shall not be effective against the debtor when, at the time of conclusion of the contract of sale of goods, it has its place of business in that State. ” Salinger is particularly critical of Article 6 and its compromise. He maintains that this compromise on the impact of assignment prohibitions may function to deter factors rather than encourage them particularly in cases where the exporters are insignificant in size.

Perhaps the UNIDROIT Convention 1988 was remiss in providing the out and should have left Article 6(1) alone without the insertion of the Article 6(2) proviso. At the very least as a stand alone, Article 6(1) would have provided for predictability, a serious difficulty which is often associated with conflicts of laws. As it is, international relations have more than enough uncertainty. The only saving grace is that out of the 19 signatories to the UNIDROIT Convention of 1988 on International Factoring only Germany and Latvia have made Article 6(2) and Article 18 declarations.

Sassoon explains that the UNIDROIT Convention 1988 does little more than acknowledge the necessity for facilitating factoring on an international level. However, it has left a lot of unresolved issues that can potentially give rise to problems in the likely event there is a conflict of laws were left unaddressed. Issues such as priorities of factor claim and third party rights in the event of the debtor’s insolvency are sorely lacking in the text of the UNIDROIT Convention 1988.

The criticism of the UNIDROIT Convention 1988

Making matters worse there is no provision for the application of a standard conflict of law rule to address any of these issues which will undoubtedly give rise to conflict of laws. Salinger takes a more direct approach to his criticism of the UNIDROIT Convention 1988 and maintains that it leaves out of its ambit any incidents of domestic factoring as well as issues that might arise between a factor and his or her client. Mara E. Trager writes that:

“Its application is limited in that it does not cover domestic factoring arrangements, regulate priorities, or adopt choice-of-law rules. ” The most obvious aim of any international convention including the UNIDROIT Convention on International Factoring is the removal of legal boundaries. As a result the greatest difficulties for conventions is the issue of coordinating disparaging rules of law. These conventions work better when they are adapted by states and if a convention identifies too closely to one state over another it risks having many states decline adaptation.

This explains the shortfalls within the 1988 UNIDROIT Convention on International Factoring. As Ferrari explains: “No single convention comprehensively covers all the issues which may arise in relation to the specific contract it deals with, which is one reason why we will never be able to do without domestic law. ” Another significant barrier to coordination is the existence and applicability of the various international conventions that can attach to a single contract with international elements.

Recognizing the possible difficulties the UNIDROIT Convention on International Factoring seeks to overcome this problem by the insertion of Article 15 which specifically provides that: “this convention does not prevail over any international agreement which has already been or may be entered into. ” By virtue of Article 15 of the UNIDROIT Convention on International Factoring, any existing Convention will prevail over UNIDROIT. Ferrari maintains that there is a significant link between the Vienna Sales Convention and the UNIDROIT Convention on International Factoring.

Vienna Sales Convention

In fact the Vienna Sales Convention “served as a model for the latter. ” Ferrari explains that the close connection between the two conventions can be discerned by the “internationality” element. While the Factoring Convention applies only to contracts of international factoring, internationality itself is not “defined in relation to the factoring contract itself. ” Notably the Vienna Sales Convention defines internationality based on the states in which the parties to the contract are domiciled.

Under factoring contracts both the supplier and the factor may be domiciled in the same country and by virtue of the receivables per Article 2(1) (as previously noted). At the end of the day this means that in order for the UNIDROIT Convention on International Factoring requires an international sale of goods or services contract for it to be applicable. In other words: “…whenever the assigned receivables arise from a contract governed by the

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