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Diplomacy in Action

88. Memorandum to USAID re commercial law initiatives and development policies (December 1, 2006)



TO: USAID – EGAT Nick Klissas

USAID - EGAT Charles Schwartz

FROM: L/PIL – Harold Burman

Overview of 2006 Commercial law initiatives

In connection with planning for the forthcoming meeting on development policies and the private commercial law, the following as requested is a brief overview. We have not covered here related areas of PIL activity such as commercial arbitration, the Hague Choice of Court convention or progress on revisions to the Hague apostille convention, which would be separate topics.

As a general matter, our international commercial law projects of significance for developing and emerging states have been focused this year on three areas of commercial law, secured finance, electronic commerce, and cross-border business bankruptcy law. While considerable activity has also taken place with respect to investment securities and related market structure issues, those, while very important for a medium or long-term point of view for enhancing the economies of such states, are of somewhat less immediate significance, since implementing them would need to be accompanied by other developments in their market structures.

One change has become apparent during 2006. As a result of the considerable advances in international private commercial law (IPCL), these fields of law and the economic goals they seek to achieve are beginning to intersect more often, and increasingly present difficult policy choices about overlapping and sometimes inconsistent means to achieve economic enhancement in the developing world. Agencies such as USAID, Commerce and US EXIM Bank may need to assess these issues and provide additional guidance. Similar conflicts will be assessed at global institutions such as the World Bank, IFC, UNCITRAL and others.

A case in point is the very considerable advances made on promoting modern secured finance law reform in the third world. Adopting modern commercial finance concepts, in many cases already market-tested in countries such as the US, is a leading path by which economic development and capacity-building in the third world can be accomplished. A close second is the necessarily related area of business bankruptcy law reform, increasingly seen by international capital markets as a front-line test of economic law progress in developing countries.

Modern secured finance law can significantly expand the range of assets available as collateral for domestic and trade credit, expand the range of persons and entities that have access to that credit, especially small and medium size entities, and lower the cost of credit overall. This is most often accomplished by requiring transparency for other financing parties through filing systems and keying priorities of lenders to that, with only very limited exceptions. The UNCITRAL Convention on assignments, the draft UNCITRAL legislator’s guide on secured finance, the UNIDROIT Cape Town Convention, and the OAS Model Inter-American law on secured finance all adopt that approach.

Securing other and sometimes short-term advances however can result in conflicting paths which need to be rationalized. UNIDROIT for example, supported by the IFC as well as a number of equipment leasing associations, including those in the US, is moving toward a model national law primarily on financial leasing. That draft is aimed at and can facilitate imports of needed infrastructure equipment by less developed countries, an important goal. It would do so however by overcoming the credit deficits of such countries by granting special non-disclosed creditor’s priority rights for exporters of such goods into those countries. This would conflict sharply with the overall reform on secured finance sought at UNCITRAL, which consistent with the views of a large majority of participating countries seeks to curtail such non-disclosed liens in a priority contest between creditors.

Added to that are the important advances made in the area of cross-border business bankruptcy law, which in order to make possible US-style reorganization and refinancing of failing businesses, a critical factor for developing states, calls for a stay of any actions by secured creditors at least at the outset of any collective proceeding. The work at UNCITRAL on secured finance as well as bankruptcy law reform is being largely conformed to this objective. The World Bank and the IMF have supported the goals of law reform in business bankruptcy set out by UNCITRAL, which are being incorporated in new joint standards of the Bank and IMF for assessing recipient country progress.

The UNIDROIT draft model law on leasing would be inconsistent with this. Similarly, recent proposals for principles of secured finance reform for the Inter-American system would avoid the bankruptcy reform referred to above so as to encourage an inflow of short-term secured finance. These inconsistencies have been justified by the goal of achieving the earliest possible introduction of needed equipment or finance into LDC’s (least developed countries) and others.

We will also have to now assess the impact on these differences on the growing number of developing countries that are becoming parties to the Cape Town Convention and its Protocol on aircraft finance, as well as the soon to be completed second Protocol on

railway finance. That treaty system is also dependent on transparent and publicly-accessible financing information through registries as a means of establishing priorities.

These conflicting approaches result from the very success that has been achieved in the PIL field, but which now need to be more closely assessed as to the legal means employed and the conflicting short and longer term goals involved. It might be tempting to adjust these issues as has been recommended by some on a country-by-country basis, but this would not be feasible vis-à-vis establishing US negotiating positions in multilateral bodies where these issues are and will be assessed.

We look forward to assistance by USAID is assessing these issues, which are of considerable importance both for US positions at these international fora and for the development potential of the countries involved.

Attachment: summary of 2006 developments

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