As will be seen in the remarks made in prior panels, the concepts of harmonization, regionalism and universality have different meanings for some speakers and different implications in the various areas of international private law ("IPL") that are on the agenda of this Congress. My comments are intended to give an overview of secured transactions law as it has figured into harmonization work over the last decade, and what that may mean for the future.
Secured finance law in recent years has been a hotbed of IPL activity. Looking backward, it can be seen as reflecting major trends due in part to globalization and in part to mere work overall in the IPL field, not only at Unidroit but at other international and regional bodies engaged in this activity. One needs less than a decade to illustrate this. In the mid-l990's, the accepted wisdom in the field had placed several areas in the "impossible" list, consigned to a dust bin because of deep differences in legal traditions, the uses of commercial law, and legislative and cultural difficulties in changing longstanding law. Secured finance was near the top of that list.
In modern vernacular, one can fast-forward less than ten years, and between 2001
and September 2002, the time of our Congress, two important multilateral treaties (conventions) on secured finance were concluded, a progressive regional instrument concluded, a third draft convention is due to be finalized later this year. and at least two more new secured finance law projects are under way. These include the groundbreaking 2001 Cape Town Convention on mobile equipment finance, shepherded by Unidroit over the years, and its Protocol on aircraft finance done jointly with the International Civil Aviation Organization (ICAO); the closely related 2001 Uncitral Convention on accounts receivable finance, and the 2002 Organization of American States (OAS) sponsored Inter-American Model Law on Secured Finance. Before the ink was dry, new projects in this area of law were underway at Unidroit and Uncitral. In December of this year, the Hague Conference will meet to finalize its draft convention on securities intermediaries (which is driven by the exponential growth in the use of secured interests in stocks, bonds, etc. to support cross-border collateral). All this amounts to a major shift in this IPL field in a short period of time.
Certainly this was in part driven by what is often called "globalization", a term that variously covers cross-border markets, distribution, financing and corporate activities. The advent of the computer age made access to markets possible for remote participants; this also made the status of their laws on secured finance a front-line issue for credit risk analysis. Trade agreements, liberalization of markets, and open borders have all created the possibility of enhanced trade. The interaction of regional markets also has been a factor, and during this period substantial change has come through the European Union, Nafta, Mercosur and others. Law harmonization has now taken some root in subsaharan Africa through Ohada and several other bodies.
The other side of this coin is that a significant amount of cross-border commerce doesn't materialize because even with liberalized trade, disparities in certain areas of private law, such as secured finance, effectively block or make transactions inefficient, or fail to provide equivalent access to commercial finance. Secured finance reform has become one of the most effective tools by which countries can enhance their credit capacity for transacting parties in their territories, build their infrastructure, and engage in modern trade and commerce. That said, the path forward is still uncertain.
Secured finance is as old as pre-Roman commerce, and a fair amount of knowledge is available as to how polities in different ages sought to reduce the risk of distant parties both in transfer of goods and in the transfer of value. Some, though by no means all, of early credit enhancement systems were offshoots of fixed property law concepts, which worked adequately for many centuries. More recently, harmonization in the last century (Unidroit dates from 1926; some bodies such as the Pan American Union and the Hague Conference date from the late years of the 19th Century) emphasized the balancing of provisions of different major legal systems. This has worked well in our era for more settled areas of law like sales of goods, which was the process used for the elaboration of the UN Convention on Contracts for the International Sale of Goods ("CISG'), and its predecessor conventions and projects at Unidroit.
By the mid-1990's however the more traditional laws on secured financing no longer were necessarily the most economically productive, and this factor often increases for less developed legal systems and economies, This in turn led some to look beyond the established concepts of "harmonization", i.e. a type of middle ground between existing law standards, and to focus instead on economic results-based tests for appropriate commercial law standards. We can now see that traditional harmonization of existing secured finance laws, for example, clearly does not work effectively if the test is the best credit enhancement.
Cross-border commercial finance in a more global economy requires some measure of harmonization, of course, but also a higher level of ex-ante predictability and at the same time
lower risks, in order to bring more credit into a number of markets and to lower the costs. Commercial finance laws, unlike many other areas of private law, can be tested as to credit effect through neutral capital markets, which assess risks common to raising capital across borders. This is less necessary for internal market transactions of some more developed countries, because credit law and practice, even if restrictive, can adjust within closed systems and may not need changes to attract outside capital. The converse is, however, often true for cross-border finance, and especially so for lesser credit economies. International "credit maps" reflect the status of laws in place, and their effect is substantial. Without significant changes in existing secured finance laws, modern capital markets for many countries may remain out of reach. (1 would note, in passing, that this raises issues at another level as to the purpose of commercial law, and how that fits into overall societal and political objectives, but that's a topic for another day).
Different secured finance models have been tested in international credit markets, and some produce greater credit enhancement. Unidroit's Cape Town Convention, Uncitral's accounts receivables convention, and the OAS model secured finance law have all adopted a common path: secured credit based on priority rights through publicly accessible and transparent notice filing systems. These are low cost systems, requiring little information for filing, but economically effective. While proven to be best able amongst competing systems to lower risk by resting on transparency and publicity, as I will note later it is not yet clear that such systems will become commonly used.
One of the trends one might draw from the examples above, is that each has moved to some extent away from legal concepts embedded in traditional property law. The Cape Town Convention embraces modern "asset-based" financing and the Uncitral Receivables Convention embraces modern finance based on intangible rights to payment, both of which are grounded as it were in highly moveable collateral, which requires a shift in the concept of secured rights.
The latter, for example, allows present "rights" to vest in future goods not yet in existence, and future payment obligations as well. It also allows "bulk" financing, that is the bundling of payment rights which become almost fungible and without individual identification, such as might be required in ordinary property law. The mobile equipment convention in turn provides for the creation of treaty-based secured rights, not drawn from property law, which prevail over otherwise valid national rights if properly filed in a new international registry. These filings are neither examined as to adequacy or validated, and thus the registry operates not as a property type system, but simply places all financing parties on notice of possible superior priorities.
The Hague Conference may seek to go one step further: in order to determine the law applicable to intermediaries, which has become very important both for financing and systemic risk concerns, it is likely that conflict of laws rules drawn from property-based concepts of corporate record owners' rights cannot be maintained. If applicable law continues to be tied to
That said, we should now also look at the constraints and possible limits on this modern trend. First, the "jury is still out" as we say, as to whether a significant number of countries will shift to the more modern asset-based and receivables financing, or the newer concepts of secured rights in securities, already in place in some jurisdictions. Economic performance alone may not be sufficient to support change in civil or commercial law in some countries. While one could seek this type of economic boost by modernizing secured finance laws domestically, without embracing globalization more widely (though it may be difficult to do one very deeply without the other), the debates on the values of globalization may nevertheless also affect decisions on adoption of modern finance laws.
The Cape Town Convention is likely to be widely successful, and that may in turn facilitate ratifications of the Receivables Convention, as well as adoption of the OAS model law and comparable laws in other regions. However, a follow-on project at Uncitral, which started this year to formulate general concepts of secured finance law, has shown that some basic issues are back on the table, despite many of the same countries having agreed to the Receivables Finance Convention only a year ago. This may have been predictable in that, while adopting a significant body of modern commercial law on assignments in the Convention, the critical priority provisions were all left optional in an annex. The optional priority systems mirror the spread in existing major legal systems today. By the end of next year, the direction in which Uncitral's work may go should become clear.
Another test will be the new Unidroit project on harmonizing secured interests in stocks, bonds, futures, etc. That project will need to see how far countries are willing to go to make secured rights work for highly moveable securities, including computer transfers of data representing "rights". A new concept of rights now exists, for example, in the U.S. through the Uniform Commercial Code Article 8 (which is uniform state law and not national law in the U.S.), which intentionally departs from older property law concepts in order to provide rights which can work predictably in an atmosphere of rapid transfers and increased fluidity of a number of markets. While some anticipate that the computer age will necessarily at some point move many countries away from older laws that inhibit market fluidity, that has not yet happened widely and cannot safely be predicted.
Missing perhaps from this litany of constraining factors are the non-legal impacts. The structure of secured finance has through history often had a significant effect on the types of parties that most readily can grant credit, the types of businesses that it favors, the types of property interests
Constraints from other legal disciplines may also be more evidenced in the future. For example, running side-by-side in some international bodies with secured finance law projects, is current work on business insolvency laws (also, by the way, on the "impossibility" list in the mid-1990's). Seen now by the World Bank, the IMF, the ADB and others as a keystone for enhancing investment but at the same time lessening systemic risk, new proposals for insolvency law reform have included optional legal regimes for refinancing and saving business entities where feasible. That, however, requires constraints on enforcement of pre-commencement secured rights, through stays of action and other mechanisms. The vision for many of a new international superhighway for secured rights financing may have new traffic signals in the middle of the road.
Finally, one of the last frontiers for secured finance laws may yet turn out to be the most difficult step to achieve at this point in our new millennium. The recent extension of modern secured finance laws to airspace, compatibly with the Chicago Convention of 1944 and its progeny which established the framework for international air transportation, works in the Cape Town Convention. Unidroit, however, is now seeking to go a few meters higher, and extend these concepts to outer space.
Outer Space law, largely initiated by the UN's Outer Space Treaty system in 1967, effectively precludes application of national law in space. Time will tell whether the many legal minds Unidroit expects to gather next year, plus participants from the UN's Committee on the Peaceful Uses of Outer Space (UNCOPUOS), as well as the International Telecommunications Union (ITU) and others, can create a new treaty system establishing secured interest rights that can adhere to assets in or services from space, and which can be enforced down below in national territories, in a manner which a sufficient number of countries are willing to accept and ratify. To be economically effective, however, of equal importance to ratifications is whether the standards negotiated are competitive with other risk investments in neutral capital markets. As noted earlier in these remarks, commercial finance law is thus testable.