STUDY ON THE QUESTION OF EFFECTIVENESS OF AN ASSIGNMENT OR SUBROGATION OF A CLAIM AGAINST THIRD PARTIES AND THE PRIORITY OF THE ASSIGNED OR SUBROGATED CLAIM OVER A RIGHT OF ANOTHER PERSON FINAL REPORT
Project Coordinators - Dr. Eva Lein, BIICL, - Prof. Andrew Dickinson, Professor, University of Sydney; Solicitor; Consultant Clifford Chance LLP, London; Visiting Fellow BIICL. Project Research Fellow - Hayk Kupelyants, BIICL Project National Rapporteurs: - Belgium, Hélène Volkova/ Lounia Czupper, Clifford Chance LLP, Brussels, - Czech Republic, Robert Pavlu, Allen & Overy, Prague, - Finland, Jari Tukiainen, Hannes Snellmann, Helsinki, - France, Alban Caillemer du Ferrage/Clément Saudo, Gide Loyrette Nouel, Paris, - Germany, Ilka Breuer/ Peter Scherer, Clifford Chance LLP, Frankfurt, - Italy, Dr. Anna Gardella, Università Cattolica, Milan, - Luxemburg, Marc Mehlen/Stefanie Ferring, Clifford Chance LLP Luxemburg, - The Netherlands, Prof. Hendrick Verhagen/Sanne van Dongen, Radboud University Nijmegen, - Poland, Tomek Jedwabny/ Andrzej Stosio, Clifford Chance LLP, Warsaw, - Spain, Prof. Francisco Garcímartin Alférez, Universidad Autonoma, Madrid, - Sweden, Anne-Marie Pouteaux, Wistrand Advokatbyrå, Gothenburg, - United Kingdom, Pamela Kiesselbach/ Dorothy Livingston/ Adam Johnson, Herbert Smith LLP, London. Participating Trade Bodies and Financial Institutions - Asset Based Finance Association (ABFA), - Association for Financial Markets in Europe (AFME), Securitisation Division, - International Swaps and Derivatives Association (ISDA), - Financial Markets Law Committee (FMLC). Expert Group - Prof. Trevor Hartley, Emeritus, LSE, London, United Kingdom, - Prof. Hendrick Verhagen, Radboud University Nijmegen, The Netherlands, - Prof. Francisco Garcímartin Alférez, Universidad Rey Juan Carlos, Madrid, Spain, - Prof. Axel Flessner, Emeritus, Humboldt University Berlin, Germany, - Prof. Michael Hellner, University of Uppsala, Sweden, - Prof. Horatia Muir Watt, Sciences Po, Paris, France, - Dorothy Livingston, Herbert Smith LLP; City of London Law Society, United Kingdom, - Joanna Perkins, Barrister, South Square; Director Financial Markets Law Commitee, London, United Kingdom, - Peter Werner, Senior Director, ISDA, London, United Kingdom, - Richard Hopkin, Consultant, AFME, London, United Kingdom, - Kate Sharp, Edward Wilde, AFBA, London, United Kingdom.
TABLE OF CONTENTS EXECUTIVE SUMMARY... 10 1. BACKGROUND OF THE STUDY...10 2. STRUCTURE OF THE STUDY...10 3. CURRENT DIVERGENCE OF SOLUTIONS IN THE MEMBER STATES...12 4. PROBLEMS IDENTIFIED...14 5. SOLUTIONS PROPOSED...17 PART 1: SYNTHESIS REPORT... 23 1. INTRODUCTION...23 2. SUMMARY OF THE STATISTICAL, EMPIRICAL AND LEGAL ANALYSIS...24 2.1. STATISTICAL ANALYSIS...24 2.1.1. Evaluation of Stakeholder Responses...24 2.1.2. Transaction Volumes of Market Sectors...25 2.1.3. Case Law...26 2.1.4. National Conflict of Laws Solutions for the Third-Party Effects of Assignment...26 2.2. EMPIRICAL ANALYSIS...26 2.2.1. Distribution of the Questionnaire...26 2.2.2. Participation of Stakeholders...27 2.2.3. Presentation of Results...29 2.3. LEGAL ANALYSIS - NATIONAL REPORTS...30 2.3.1. Conflict of Laws Issues...30 2.3.2. Related Substantive Law Issues...36 2.4. LEGAL ANALYSIS - DEVELOPING THE RULES ON ASSIGNMENT IN THE ROME I REGULATION...40 3. SUMMARY OF RECOMMENDATIONS...46 PART 2: STATISTICAL ANALYSIS... 48 1. INTRODUCTION...48 2. TABLES (SECTOR-SPECIFIC)...49 2.1. SUMMARIES OF RESPONSES FROM STAKEHOLDERS...49 2.1.1. Business Sectors...49 2.1.2. Business Types...49 2.1.3. Problems Encountered in Securing the Effectiveness of an Assignment Against Third Parties...50 2.1.4. Average Legal Costs for Cross-Border Transactions per Business Sector...57 2.1.5. The Need for New Legislation...58 2.1.6. Suggested Solutions to the Law Applicable to the Third-Party Effects of Assignment...62 2.1.7. Impact of a Uniform EU Solution on Businesses...71 2.2. TRANSACTION VOLUMES PER SECTOR...74 3
2.2.1. Transaction Volumes of the International Factoring and Invoice Discounting Sector...74 2.2.2. Transaction Volumes of the Securitisation Sector...80 2.3. CASE LAW PROVIDED BY NATIONAL RAPPORTEURS (12 MEMBER STATES)...85 2.4. NATIONAL CONFLICT OF LAWS SOLUTIONS FOR THE THIRD-PARTY EFFECTS OF ASSIGNMENT...96 PART 3: EMPIRICAL ANALYSIS... 99 1. INTRODUCTION...99 2. QUESTIONNAIRE...100 3. ANSWERS OF STAKEHOLDERS SUMMARY...112 3.1. INTRODUCTION...112 3.2. ANSWERS OF STAKEHOLDERS (SECTOR-SPECIFIC)...113 PART 4: LEGAL ANALYSIS... 148 1. INTRODUCTION...148 2. THE PROPRIETARY ASPECTS OF ASSIGNMENT: FROM THE ROME CONVENTION TO THE ROME I REGULATION...149 2.1. THE ROME CONVENTION ON THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS (1980)...149 2.1.1. Legislative History...149 2.1.2. Assignment under the Rome Convention...149 2.2. THE ROME I REGULATION ON THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS...150 2.2.1. Legislative History...150 2.2.2. Assignment under the Rome I Regulation...153 3. INTERACTION WITH INTERNATIONAL AND EU INSTRUMENTS...157 3.1. UN RECEIVABLES CONVENTION...157 3.2. FACTORING...159 3.3. FINANCIAL INSTRUMENTS...159 3.3.1. EU Settlement and Financial Collateral Directives...159 3.3.2. Insolvency Regulation...160 3.3.3. Rome II Regulation on the Law Applicable to Non-Contractual Obligations...162 3.3.4. Proposed Securities Law Directive...163 3.3.5. Hague Securities Convention (2002)...165 3.3.6. Geneva Securities Convention (2009)...167 4. NATIONAL REPORTS...168 A. NATIONAL REPORT BELGIUM...169 1. INTRODUCTION...171 1.1. Evolution and General Principles...171 1.2. Distinction of Assignment from Other Mechanisms...173 1.3. Scope of the Report...173 2. SUBSTANTIVE LAW ISSUES...174 2.1. Art. 1690 of the Belgian Civil Code...174 4
2.2. Effectiveness as Against the Claims Debtor...174 2.3. Priority Issues...175 2.4. No Registration Requirements...176 2.5. Defences of the Debtor, Including Set-Off...176 2.6. The Assignment of Future Claims...177 2.7. Specific Rules and Regulations for Certain Claims...178 2.8. Retention of Title Provisions...179 2.9. The Effect of Contractual Prohibitions of Assignment...179 3. CONFLICT OF LAWS ANALYSIS...179 3.1. The Law Applicable to the Proprietary Effects of an Assignment...179 4. A NEW CONFLICT OF LAWS PROVISION ON THE PROPRIETARY EFFECTS OF ASSIGNMENT IN THE ROME I REGULATION?...187 B. NATIONAL REPORT THE CZECH REPUBLIC...188 1. CHARACTERISATION AND SUBSTANTIVE LAW ISSUES...192 1.1. General...192 1.2. Notification...192 1.3. Good Faith...193 1.4. Consent of the Debtor...193 1.5. Set-off...193 1.6. Specific Transactions...194 2. CONFLICT OF LAWS ANALYSIS...194 2.1. National Conflict Rules...194 2.2. New Conflict of Laws Rule in Rome I...195 C. NATIONAL REPORT FINLAND...197 1. SUBSTANTIVE LAW ISSUES...200 1.1. Formal Requirements...200 1.2. Effectiveness of an Assignment...200 1.3. Right to Assign, Set-off, Etc....201 2. CONFLICT OF LAWS ANALYSIS...202 D. NATIONAL REPORT FRANCE...204 1. CHARACTERISATION AND SUBSTANTIVE LAW ISSUES...208 2. CONFLICT OF LAWS ANALYSIS...209 2.1. Types of Assignments under French Law and Rules Applicable to the Proprietary Effects...209 2.2. Laws Applicable to the Proprietary Effects of Assignments Presenting a Cross-Border Element...210 E. NATIONAL REPORT GERMANY...215 1. SUBSTANTIVE LAW ISSUES...217 1.1. Legal Requirements for Assignments under German Substantive Law...217 1.2. Proprietary Effects of Assignments...220 1.3. Position of Third Parties (Other than Debtor or Assignee)...223 1.4. Assignments in the Context of Securitisation Transactions...224 2. CONFLICT OF LAWS ANALYSIS...226 2.1. Law of the Habitual Residence of the Assignor...227 2.2. Law of the Original Claim...228 2.3. Application of Art. 14 (1) Rome I...229 2.4. Conclusion and Outlook...230 F. NATIONAL REPORT ITALY...232 1. SUBSTANTIVE LAW ISSUES...235 5
1.1. Assignment of Claims under Italian Law: the General Framework...236 1.2. Pledge of Claims...238 1.3. Factoring...239 1.4. Bulk Assignment of Claims and Securitisation...240 1.5. Subrogation...240 2. CONFLICT OF LAWS ANALYSIS...241 2.1. Effectiveness of Assignment Against Third Parties within the Rome Convention...241 2.2. The Law of the Assignor's Residence Pursuant to Article 13(3) of the Rome I Proposal...242 2.3. Article 14 Rome I Regulation...243 2.4. The Law Applicable to Transfer of Shares and Book-Entry Securities...244 2.5. Effectiveness of Assignment Against Third Parties and Mandatory Rules...245 2.6. Assignment of Claims and Insolvency...245 G. NATIONAL REPORT LUXEMBURG...247 1. CHARACTERISATION AND SUBSTANTIVE LAW ISSUES...251 1.1. General Rules...251 1.2. Specific Rules...253 1.3. Pledge over Claims...253 1.4. Securitisation...255 2. CONFLICT OF LAWS ANALYSIS...256 2.1. General Rules...256 2.2. Effects of an Assignment Against the Debtor...257 2.3. Effects of the Assignment Against Third Parties...257 2.4. Particular Rules of Applicable Law for Certain Kinds of Transactions: Securitisation...258 3. A NEW CONFLICT OF LAWS PROVISION ON PROPRIETARY QUESTIONS IN THE ROME I REGULATION (NEED FOR AN ART. 14(3))...259 3.1. The Case for an Article 14 (3)...259 3.2. The Applicable Rule...259 H. NATIONAL REPORT THE NETHERLANDS...262 1. INTRODUCTION...269 2. ASSIGNMENT UNDER DUTCH SUBSTANTIVE LAW...269 2.1. Hybrid Legal Institution: Obligational and Proprietary Effects...269 2.2. Requirements for Assignment...270 2.3. Ranking of Multiple (Competing) Assignments...272 3. ASSIGNMENT UNDER DUTCH PRIVATE INTERNATIONAL LAW...274 3.1. The Hansa -Case...274 3.2. The Conflicts Property Act...277 4. PARTICULAR ISSUES...279 4.1. Multiple (Competing) Assignments...279 4.2. Prohibition of Security Assignments...281 4.3. Transfer of Security Interests and Other Ancillary Rights...282 4.4. The Assignability of a Claim...282 4.5. Future Receivables...283 4.6. The Position of the Debtor...284 5. THE ASSIGNMENT S OTHER THIRD-PARTY EFFECTS...285 6. ASSIGNMENT AND INSOLVENCY SITUATIONS...286 6.1. European Insolvency Regulation...286 6.2. Dutch Insolvency Law...287 7. CONCLUSION...288 I. NATIONAL REPORT POLAND...290 6
1. INTRODUCTION...298 1.1. Contractual vs. Proprietary Effect of Assignment...298 1.2. Assignability and Registration...298 1.3. Scope of Assignment...299 1.4. Commercial Use of Assignment of Claims...299 1.5. Notice to the Debtor...299 1.6. Debtor's Defences...300 2. CHARACTERISATION AND SUBSTANTIVE LAW ISSUES...300 2.1. Proprietary Effect of Assignment...300 2.2. Protection of Debtor...301 2.3. Legal Means Available to the First Assignee...302 2.4. Assignment in Bankruptcy...303 3. CONFLICT OF LAWS ANALYSIS...303 3.1. Law Governing Proprietary Effects under PIL and NPIL...304 3.2. Law Governing Proprietary Effects under Rome I...306 3.3. Mandatory Rules/Public Policy...306 3.4. Particular Rules of Applicable Law for Certain Kinds of Transactions...307 4. CONCLUSIONS...307 J. NATIONAL REPORT SPAIN...310 1. SUBSTANTIVE LAW ISSUES...312 2. CONFLICT OF LAWS ANALYSIS...313 2.1. Introduction...313 2.2. Situation Before April 2011...313 2.3. Current Law...316 2.4. Conclusion and Personal View...317 K. NATIONAL REPORT SWEDEN...318 1. INTRODUCTION...319 2. ASSIGNMENTS...320 3. SECURITY ARRANGEMENTS...320 3.1. Security Interest Transfer of Title...320 3.2. Security Interest...321 3.3. Title Transfers...322 4. VALIDITY OF SECURITY INTERESTS...322 4.1. Choice of Law...322 4.2. Perfection Measures...326 4.3. Enforcement of Security Outside Insolvency Proceedings...328 4.4. Enforcements of Security after the Commencement of an Insolvency Proceeding...329 4.5. Priority Rights to Security...330 4.6. Recovery (Claw-back) of Collateral...330 5. TRANSFER OF TITLE ARRANGEMENTS...331 5.1. Characterisation...331 5.2. Recovery...331 5.3. Prohibition Against Collateral Forfeiture...332 5.4. Valuation Percentage...332 5.5. Substitution...332 5.6. Relationship Between the Parties...332 6. SUBROGATION...332 7. SECURITISATION...333 8. COVERED BONDS...334 8.1. General...334 7
8.2. Bankruptcy of the Issuing Institution...335 8.3. Priority Rights...335 8.4. Transfer of the Cover Pool in Case of Insolvency...335 L. NATIONAL REPORT ENGLAND...337 1. SUBSTANTIVE LAW ISSUES...343 2. CONFLICT OF LAWS ANALYSIS...346 2.1. The Proprietary Aspects of an Assignment...347 2.2. "General" English Choice of Law Rules Relating to the Proprietary Aspects of an Assignment...352 2.3. The Application of the Choice of Law Rules to More Complex Transactions...359 2.4. English Mandatory Rules and/or Public Policy...362 2.5. Renvoi...363 2.6. Suggestions for a Common Conflict of Law Rule Dealing with Proprietary Issues (Article 14(3))...363 M. THIRD STATES SOLUTIONS (AUSTRALIA, CANADA, JAPAN, RUSSIAN FEDERATION, SWITZERLAND, USA)...365 1. AUSTRALIA...365 2. CANADA...366 3. JAPAN...367 4. RUSSIAN FEDERATION...367 5. SWITZERLAND...368 6. UNITED STATES...369 PART 5: DEVELOPING THE RULES ON ASSIGNMENT IN THE ROME I REGULATION... 373 1. NEED FOR A NEW RULE IN ART. 14 Rome I Regulation...373 2. SCOPE, UNCERTAINTIES AND INTERACTION OF THE EXISTING RULES IN ART. 14 AND A POTENTIAL NEW RULE...375 2.1. GENERAL LIMITATIONS OF THE REGULATION S SCOPE IMPACTING ON ART. 14 ROME I REGULATION...375 2.2. COVERAGE OF ART. 14 (1) AND 14 (2) ROME I REGULATION...376 2.2.1. Limitation of Art. 14 Rome I Regulation to Voluntary Assignments...376 2.2.2. Issues Subject to Art 14 (1) Rome I Regulation (Law that Applies to the Contract Between Assignor and Assignee)...376 2.2.3. Issues Subject to Art. 14 (2) Rome I Regulation (Law Governing the Assigned Claim)...377 2.2.4. Borderline Issues (Uncertain Whether Covered by Art. 14(1) or Art. 14(2) Rome I Regulation or Outside Current Scope)...378 2.3. INTERACTION WITH THE INSOLVENCY REGULATION...381 2.4. INTERACTION WITH THE ROME II REGULATION...382 2.5. SCOPE OF A NEW RULE CONCERNING THIRD-PARTY ASPECTS...382 2.5.1. Art. 27(2) Rome I Regulation...382 2.5.2. Additional Questions Raised by the Study...383 3. POSSIBLE SOLUTIONS...384 3.1. NON-VIABLE OPTIONS...384 3.2. SOLUTION 1: LAW APPLICABLE TO THE CONTRACT BETWEEN ASSIGNOR AND ASSIGNEE...385 3.2.1. Advantages...385 3.2.2. Disadvantages...386 8
3.2.3. Debated Arguments...387 3.3. SOLUTION 2: LAW APPLICABLE TO THE ASSIGNED CLAIM...390 3.3.1. Advantages...390 3.3.2. Disadvantages...391 3.3.3. Debated Arguments...392 3.4. SOLUTION 3: LAW OF THE ASSIGNOR'S LOCATION (HABITUAL RESIDENCE)...394 3.4.1. Advantages...394 3.4.2. Disadvantages...396 3.5. A COMBINATION OF SOLUTIONS...398 3.5.1. Limited Party Autonomy...398 3.5.2. Sector-Specific Solutions...399 3.6. EU SUBSTANTIVE RULES GOVERNING THE THIRD-PARTY EFFECTS OF ASSIGNMENTS.401 5. DRAFTING PROPOSALS...404 5.1. CURRENT TEXT OF THE ROME I REGULATION (FOR COMPARISON)...405 5.2. PROPOSAL A RESTRICTED APPLICATION OF THE LAW APPLICABLE TO THE CONTRACT BETWEEN ASSIGNOR AND ASSIGNEE...406 5.3. PROPOSAL B LAW GOVERNING ASSIGNED CLAIM [WITH OPTIONAL FACTORING EXCEPTION]...411 5.4. PROPOSAL C - LAW OF THE ASSIGNOR'S LOCATION [WITH OPTIONAL EXCEPTION FOR ASSIGNMENTS OF CLAIMS UNDER FINANCIAL CONTRACTS]...414 9
EXECUTIVE SUMMARY 1. BACKGROUND OF THE STUDY The British Institute of International and Comparative Law (BIICL) has been engaged by the European Commission to draft a Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person. This study shall serve as a basis for the report that the Commission has to present according to Art. 27 (2) Rome I Regulation and for a potential future proposal to amend Art. 14 Rome I Regulation to provide for a new European conflict of laws solution for the third-party aspects of assignment. In preparing this study, BIICL has collaborated with national rapporteurs from twelve EU jurisdictions representing a range of legal traditions (Belgium, Czech Republic, Finland, France, Germany, Italy, Luxemburg, The Netherlands, Poland, Spain, Sweden, the United Kingdom), with trade bodies representing the factoring, securitisation and derivatives sectors (ABFA, AFME, ISDA), with the Financial Markets Law Committee of the Bank of England (FMLC) and with a group of eleven experts in the areas of private international law and assignment (Prof. Trevor Hartley, Emeritus, LSE, London, United Kingdom; Prof. Hendrick Verhagen, Radboud University Nijmegen, The Netherlands; Prof. Francisco Garcímartin Alférez, Universidad Rey Juan Carlos, Madrid, Spain; Prof. Axel Flessner, Emeritus, Humboldt University Berlin, Germany; Prof. Michael Hellner, University of Uppsala, Sweden; Prof. Horatia Muir Watt, Sciences Po, Paris, France; Dorothy Livingston, Herbert Smith LLP; City of London Law Society, United Kingdom; Joanna Perkins, Barrister, South Square Chambers, Director, Financial Markets Law Commitee, London, United Kingdom; Peter Werner, Senior Director, ISDA, London, United Kingdom; Richard Hopkin, Consultant, AFME, London, United Kingdom; Kate Sharp, Edward Wilde, AFBA, London, United Kingdom). 2. STRUCTURE OF THE STUDY The core of the study consists of five parts: 1. A synthesis (Part 1 Synthesis Report ), outlining the main findings of the study. 1 1 See pp. 24-47. 10
2. A collection of statistical data (Part 2 Statistical Analyis ), which provides information in a table format on the importance of economic activities involving assignments (especially on the numbers of transactions per market sector) and on the problems and needs of different market sectors. 2 3. An EU-wide empirical analysis (Part 3 Empirical Analysis ) studying the practical problems encountered in different market sectors in cross-border assignment and subrogation cases. 3 To assist in the preparation of this analysis, BIICL drafted a questionnaire, which was distributed to approximately 2000-3000 stakeholders. These stakeholders represented businesses, trade bodies and associations, financial market institutions, law societies, law firms and other legal practitioners, academics and other interested parties. The questionnaires provided an opportunity for the various sectors to inform the Commission about their needs in this area. Thirtysix responses to that survey were received within an extended deadline. Stakeholders were asked to provide information on data as to turnover and the relative significance of cross-border transactions; the average legal costs for cross-border transactions; the necessity and extent of legal due diligence within these kinds of transactions; the incidence of problems encountered in securing the effectiveness of assignments against third parties; the categories of third parties with whom stakeholders are concerned; the existing uncertainty regarding the law applicable to third-party aspects of assignment; the need to amend Art. 14 Rome I Regulation; the solutions favoured by stakeholders; and the impact that a uniform EU solution in this area might have on their businesses. This information has been included in a table format, listing the responses to the different questions per stakeholder. This information has also been further evaluated and integrated in the statistical part of the study. 4. A legal study (Part 4 Legal Analysis ), based on national reports, presenting the current conflict of laws rules applying to the third-party aspects of assignment in twelve Member States (Belgium, Czech Republic, Finland, France, Germany, Italy, Luxemburg, The Netherlands, Poland, Spain, Sweden, the United Kingdom). The legal study primarily focuses on third-party aspects of assignment in the conflict of laws but includes, as far as is relevant, information about substantive law rules. It also comprises, as a comparison, the solutions of six economically important non-member States representing a range of different solutions (Australia, Canada, Japan, Russia, Switzerland, USA). 4 2 See pp. 48-98. 3 See pp. 99-147. 4 See pp. 148-372. 11
5. A comprehensive analysis (Part 5 Developing the Rules on Assignment in the Rome I Regulation ) of the question of whether it would be desirable to amend Art. 14 Rome I Regulation to include the third-party aspects of assignment and if so, the possible forms which that amendment could take. Part 5 contains an in-depth discussion of all the arguments that can be advocated in favour of and against a new conflict of laws solution, taking into account the comments of all stakeholders, national rapporteurs and the expert group. 5 3. CURRENT DIVERGENCE OF SOLUTIONS IN THE MEMBER STATES The Member States currently adopt different approaches to the law applicable to the third-party aspects of assignment. 3.1. Approach 1. Law of the contract between assignor and assignee A party autonomy based solution is favoured in the Netherlands. 6 According to Dutch law, the law applicable to the contract between assignor and assignee is applicable to the effectiveness of an assignment against third parties, i.e. to all its property aspects. In cases of the abuse of party autonomy, recourse can be made to the public policy exception, fraus legis, actio pauliana, etc. As to the question of priority in the case of multiple (competing) assignments, the law governing the second assignment should decide upon the protection of bona fide second acquirers. This approach is also gaining increasing support in other Member States, e.g. in Germany. 7 By way of comparison, a very liberal party autonomy-based solution has been adopted in Switzerland..8 3.2. Approach 2: Law of the underlying debt assigned (as a general rule or in combination with sectoral rules) Despite the absence of clear case-law, Luxemburg favours the application of the law of the assigned claim to the issue of the effectiveness of an assignment against third parties, although in the specific sector of securitisation, the law applicable to the third-party aspects of the assignment shall be the law of the country in which the assignor is established. 9 In England, there is a strong view which suggests applying the law of the underlying debt to the question which 5 See pp. 373-415. 6 See Part 4: Legal Analysis, 4.H.3., pp. 274 et seq. 7 See Part 4: Legal Analysis, 4.E.2.3., p. 229. 8 See Part 4: Legal Analysis, 4.M.5., pp. 368-369. 9 See Part 4: Legal Analysis, 4.G.2.3., pp. 257-258. 12
assignment takes priority in cases of competing assignments, as this law is the common factor between the assignees. 10 Also in Germany the majority of authors still suggest applying the law of the debt assigned; judicial decisions, including from the Federal Supreme court, support this position. 11 Spanish law has also adopted this conflict rule. 12 Under Polish law, the law of the underlying debt assigned will govern proprietary effects, including its effectiveness against third parties. 13 In the absence of any case-law on the matter, Italian scholars generally favour the law of the debt assigned. However, some support the introduction of the law of the assignor s habitual residence for bulk assignments and assignments of future claims. 14 By way of comparison, the application of the law underlying the debt assigned is also supported in Australia, Canada, Japan and in the Russian Federation. 15 3.3. Approach 3: Law of the assignor s habitual residence Belgian law opts for the law of the assignor s habitual residence at the time of the assignment to govern the third-party aspects of the assignment. 16 By way of comparison, under U.S. law, perfection of most assignments is governed by the law of the assignor s location. 17 3.4. Approach 4: Lex rei sitae The law of the situs of the debt is in theory applicable in Czech law, despite the absence of legislation or any clear case-law on the subject. 18 Swedish courts apply the lex rei sitae to the question of whether a security has been validly perfected. As to dematerialized securities, the issue will be governed by the law of the jurisdiction where the register recording the holder s/beneficiary s interest in the securities is located (e.g. bank). 19 3.5. Approach 5: Law of the habitual residence of the debtor French case-law supports the law of the habitual residence of the debtor as applicable to third-party aspects of the assignment. 20 10 See Part 4: Legal Analysis, 4.L.2.2., pp. 337 et seq. 11 See Part 4: Legal Analysis, 4.E.2.2., pp. 228-229. 12 See Part 4: Legal Analysis, 4.J.2.3., pp. 316-317. 13 See Part 4: Legal Analysis, 4.I.3.1., p. 304. 14 See Part 4: Legal Analysis, 4.F.2.1., p. 242. 15 See Part 4: Legal Analysis, 4.M., pp. 365-367. 16 See Part 4: Legal Analysis, 4.A.3., p. 180. 17 See Part 4: Legal Analysis, 4.M.6., pp. 369-372. 18 See Part 4: Legal Analysis, 4.B.2.1., p. 195. 19 See Part 4: Legal Analysis, 4.K., pp. 318 et seq. 20 See Part 4: Legal Analysis, 4.D.2.2., p. 211. 13
3.6. Approach 6: No clear preference Finnish law seems particularly uncertain as to the law governing the effects of assignment to third parties. 21 4. PROBLEMS IDENTIFIED 4.1. Statistical/Empirical Study The statistical data shows that the volume of domestic and international factoring and invoice discounting business per Member State of the European Union increases constantly. The total of international factoring and invoice discounting business within the EU (in terms of claims assigned) has been estimated at over 140 billion EUR during 2010. The volume of European securitisation issuance has increased between 1992 and 2010 from 302.11 million USD to 513,717.03 million USD in each country of the EU, peaking in 2008 at over 1 trillion USD. 22 These two important market sectors as well as others have, however, reported various problems with the current incomplete conflict of laws solution in Art. 14 Rome I Regulation and have expressed their preferences for a potential solution. 23 The main results were the following: 4.1.1. Practical Problems 47 % of the stakeholders encounter problems in practice in securing the effectiveness of an assignment against third parties. 24 4.1.2. Average Legal Costs The average legal costs for cross-border transactions involving assignments are in many cases considerably high and can, depending on the type of transaction, amount to several hundreds of thousands of Pounds/Euros. 25 4.1.3. Need for New Legislation 80 % of the responding stakeholders have expressed a need for a new legislation on the law applicable to third-party effects of an assignment. 26 21 See Part 4: Legal Analysis, 4.C.2., pp. 202-203 22 See Part 2: Statistical Part, 2.2., pp. 74 et seq. 23 See Part 3: Empirical Analysis, 3.2., pp. 113-119. 24 For further information see Part 2: Statistical Part, 2.1.3., pp. 49 56. 25 See Part 2: Statistical Part, 2.1.4., pp. 57-58. 14
4.1.4. Suggested Solutions Overall As a solution, 44 % of the stakeholders favour the law of the assignor s habitual residence; 30 % favour the law of the underlying claim assigned; 11 % opt for the law chosen by assignor and assignee. 27 Sectoral Perspective From the perspective of the different business sectors, there is a strong preference for the law of the assignor s habitual residence in the factoring sector (75%). 28 Per Business Type From the perspective of business types, the majority of financial institutions have a preference for the law of the habitual residence of the assignor (47%), while 26% opt for the law of the assigned claim and 20% for the law chosen by assignor and assignee. The law of the habitual residence of the assignor is also favoured by 3 responding association stakeholders representing financial institutions, associations and networks. In contrast, 43 % of the legal practitioners prefer the law of the underlying claim assigned. This solution is also favoured by 2 participating association stakeholders representing 14,000 UK lawyers and 68,000 German lawyers. As to the academic participants, 75% favour the law of the assignor s habitual residence. 29 4.1.5. Impact of Uniform EU Solution The vast majority of stakeholders who addressed this particular issue indicated that a uniform EU solution would be of positive impact to their business. They highlight the reduction of legal costs and due diligence, increased legal certainty and higher transaction volumes as the potential effects of the introduction of a uniform rule on the property aspects of an assignment. 30 26 For further information see Part 2: Statistical Part, 2.1.5., pp. 58-61. 27 For further information see Part 2: Statistical Part, 2.1.6., pp. 62 et seq. 28 See Part 2: Statistical Part, 2.1.6., pp. 67-68. 29 See Part 2: Statistical Part, 2.1.6., pp. 69-70. 30 See Part 2: Statistical Part, 2.1.7., pp. 71-73. 15
4.2. Legal Study Apart from the current heterogeneous legal landscape and the lack of consensus regarding a uniform conflict of laws solution on third-party effects of assignment, the current Art. 14 Rome I Regulation gives rise to further doubts. It is uncertain if the question of whether the assignee is entitled to bring a direct claim against the debtor or whether he must join the assignor in bringing such a claim is governed by Art. 14(1) or (2) Rome I Regulation; which law applies to claims brought to recover the proceeds or value of the assigned claim; whether and which restrictions on assignment fall under Art. 14(1) or (2); whether Art. 14(2) Rome I Regulation applies to claims under contracts not yet in existence; which rule applies to the effectiveness of an assignment against successors in title and other representatives of the assignor (14(1) Rome I Regulation or a new rule) and which rule governs the ability of the debtor to take an assignment, charge or pledge of his own debt. 31 It is also uncertain how a new assignment provision in the Rome I Regulation would interact with the Insolvency Regulation and the Rome II Regulation. As to the interaction with the EC Insolvency Regulation, it is especially unclear whether the insolvency representative of an insolvent assignor (or assignee) should be treated as assignor (or assignee) or as a third party (application of Art. 14(1) Rome I Regulation or of a new rule); it is of further controversy how Art. 4(2)(b) and Art. 5 Insolvency Regulation would interact with a new rule in Art. 14 Rome I Regulation. Turning to the interaction of the Rome I Regulation with the Rome II Regulation, it needs to be clarified which Regulation applies to the claim to recover proceeds or the value of the assigned claim (Art. 10 Rome II Regulation or Art. 14 Rome I Regulation). 32 Furthermore, and most importantly, the scope of Art. 14(1) in combination with Recital 38 remains unclear. The very generic term of relationship in Art. 14(1) Rome I Regulation is imprecise in meaning. The separation between effects of an assignment inter partes and against third parties seems artificial, complicated and incompatible with the erga omnes effect of property law. 33 31 For further information see Part 5, 2.2.4., pp. 378-380. 32 See Part 5, 2.3., pp. 380-382. 33 See Part 5, 2.2.3., p. 377. 16
5. SOLUTIONS PROPOSED 5.1. General Recommendations In light of the identified current problems and uncertainties surrounding Art. 14 Rome I Regulation, several recommendations are made: 34 5.1.1. One rule for all proprietary aspects of assignment It is suggested that the inclusion of third-party aspects of assignment into the Rome I Regulation should lead to a solution pursuant to which all proprietary aspects of assignment are governed by one rule (subject to the limitations for the protection for the debtor in Art 14 (2) Rome I Regulation) and that the current structure of Art. 14 (and Recital 38) should be revisited. 5.1.2. Distinction between contractual aspects of assignment and its legal effects It should be clarified that contractual aspects between the assignor and assignee are covered by Art. 3 ff Rome I Regulation directly while Art. 14 only addresses the legal effects of an assignment. 5.1.3. Reduction of potentially applicable laws It is also suggested to aim at a solution that reduces the number of applicable laws under Art. 14 Rome I Regulation. 5.1.4. No or moderate use of sector-specific rules It is advised, as far as possible, not to consider sector-specific rules, or if considered, to use them with moderation, as they add complexity and encourage characterisation problems. 5.1.5. Balancing of interests Account needs to be taken of the interests of all parties involved in an assignment: assignor, assignee, debtor and third parties. They need to be outbalanced in a new rule. Also, it needs to be ensured that the new rule does not hinder but supports trade in the EU. 5.1.6. Clarification of current uncertainties in Recitals It is also suggested that some unclear issues be clarified in Recitals. 35 Thus, it should be clarified that party autonomy as it stands at the moment and as 34 See Part 5, 4., pp. 402-403. 35 For further details see Part 5, 5.2., pp. 406-407. 17
amended prospectively, should not infringe upon the protection of weaker parties under Art. 6 and 8 Rome I Regulation. Furthermore, it needs to be clarified that the law applicable under Article 14(2) applies to all aspects which directly affect the debtor, including the question of whether the assignee has standing to bring legal proceedings against the debtor and whether the assignor must be joined as a party to such legal proceedings. In addition, the interaction between the Rome I and Rome II Regulations should be clarified. It should be stated that Article 14 shall also apply to any action to recover the proceeds of a claim, or their value, on the basis of unjust enrichment or otherwise. To this extent, Regulation (EC) No. 1864/2007 on the law applicable to non-contractual obligations (Rome II) shall not apply. Lastly, a Recital clarification is needed as to the assignment of future claims under existing contracts. 5.1.7 Scope of the Rome I Regulation It is also suggested to exclude the issue and transfer of shares from the scope of coverage of the Rome I Regulation. By the same token, assignments by operation of law, except insofar as Article 14 determines the priority between a voluntary assignment or contractual subrogation and a competing right arising by operation of law, and assignments or other transfers of judgment debts or intellectual property rights should also be excluded from the ambit of the Rome I Regulation. 36 5.1.8. Definition of habitual residence Finally, habitual residence should be defined differently from Art. 19 Rome I Regulation. For the purposes of establishing a connecting factor for the thirdparty aspects of the assignment, the place of the operation of a branch, agency or any other establishment (Art. 19 (2) and (3) Rome I Regulation) shall not be relevant. 37 5.2. Drafting Suggestions The British Institute has formulated alternative drafting proposals which present the conflict of laws solutions that have been favoured by a significant number of stakeholders and/or experts and can reasonably be considered as an option for legislation. They are based on the premise that a solution should cover all of the proprietary effects of assignment. 36 See Part 5, 5.2., pp. 407-408. 37 See Part 5, 5.2., p. 408. 18
5.2.1. Proposal A - Solution based on the law of the contract between assignor and assignee This solution offers a flexible party autonomy-based approach which can suit different market sectors as it allows a certain level of adaptability to their particular needs. Particular sector-specific rules could thus be avoided. 38 To prevent the inherent risk of a party autonomy-based solution prejudicing third parties, the BIICL proposal is based on a restricted application of the law applicable to the contract between assignor and assignee: if the parties have chosen the law governing the assigned or subrogated claim or the law of the country in which the assignor had his habitual residence to govern their contract, this choice will extend to the legal effects of the assignment. In the case where the assignor and assignee do not choose the law applicable to their contract, the law governing the assigned or subrogated claim shall apply. Only in the case of an assignment of a claim arising under a contract not in existence at the date of the assignment (as opposed to future claims under existing contracts where the applicable law is at least determinable at the date of the assignment), the law of the country in which the assignor had his habitual residence at the date of the assignment shall be applicable. The priority issues between competing assignees can be resolved by analysing the effects of each transaction in sequence, according to its own applicable law. The analysis would follow the property law principle of prior tempore, potior iure, of first in time, first in right and rank, which is qualified only by rules on good faith acquisition of the following transactions. Each transaction is assessed with the preceding transaction preparing the ground for the following, and the following, by its governing law, may override the effects of the preceding transaction. Arguments 39 This solution, or a variant of it, is favoured by three out of 11 experts, some commentators and by 11% of the responding stakeholders. This connecting factor is adopted by one of the examined EU Member States (The Netherlands). The solution is also suggested by the Dutch, German and Belgian rapporteurs. One out of six surveyed Third States (Switzerland) has adopted this solution. Amongst the advantages of this solution are: Flexibility for the different sectors, no evidence of abuse in practice, 38 For further information see Part 5, 5.2., pp. 408-410. 39 See Part 5, 3.2., pp. 385-389. 19
avoidance or reduction of the need for sector-specific rules, reduction of the number of laws applicable to assignment, suitability for the assignment of future claims. The disadvantages of the solution are: possible prejudice to third parties, however reduced by the suggested limited party autonomy approach, risk of the avoidance of publicity requirements. The debated (controversial) arguments put forward are: the relevance of the principle of party autonomy throughout the Rome I Regulation; certainty of the applicable law; priority issues in cases of multiple contracts of assignment; and unsuitability for financial claims. 5.2.2. Proposal B - Solution based on the law applicable to the assigned claim If the law applicable to the assigned claim is used as a basis to govern proprietary aspects of the assignment, Art. 14 can be based on the application of a single law. 40 Exceptionally, in the case of an assignment of a claim arising under a contract not in existence at the date of the assignment or, in view of taking the specific needs of the factoring industry into account, an assignment by way of factoring, the third-party aspects of an assignment shall be governed by the law of the country in which the assignor has his habitual residence at the relevant date. If the issue is one of priority between two or more competing assignments or other rights to the same claim, the relevant date is the date of the last assignment or other event giving rise to a competing right. If the issue is whether the debtor s obligations have been discharged, the relevant date is the date of performance of the debtor s obligation in question. For all other issues, the relevant date is the date of the assignment in question. Arguments 41 A solution based on the law of the underlying claim as a general rule is favoured by some experts and commentators and by 30% of the respondents to the BIICL questionnaire. It has to be noted that the participating association stakeholders representing the legal profession (from England and Germany representing 14,000 and 68,000 lawyers respectively) favour this solution. The connecting 40 For further details see Part 5, 5.3., pp. 411-413. 41 See Part 5, 3.3., pp. 390-393. 20