49. Memorandum prepared by the Office of Private International Law providing an overview of the UN Convention on the Assignment of Receivables in International Trade
TO: The Secretary
FROM: L - William H. Taft, IV
SUBJECT: Circular 175: Request for Authority to Sign the United Nations Convention on the Assignment of Receivables in International Trade
Issue for Decision:
Whether to sign the attached Full Power (Tab 1) authorizing the signature of the United Nations Convention on the Assignment of Receivables in International Trade approved by the UN General Assembly and opened for signature and ratification December 12, 2001.
The Convention will allow ratifying states to significantly expand their ability to finance commercial activity and engage in trade by adopting modern concepts of finance law already in place in the United States. The United States supported the negotiation of the Convention, which largely parallels uniform state law in the United States as the guiding economic and legal standard. The United States standard allows rights to commercial payments, such as accounts receivables, to be used as collateral for commercial transactions. This in turn promotes the development of secondary markets where payment rights can be traded, thereby providing new sources of capital for commercial activities and reducing the costs of obtaining credit. Such a system can boost the economic potential of countries, especially with respect to the growth of medium and smaller enterprises in developing countries. Absent this type of modern law, most countrieseffectively restrict available collateral, and as a result restrict access to credit for many sectors of the economy. The modern financing concepts contained in this Convention, in addition to boosting developing and emerging states' capacity, would work well with the United States financial and trade sectors, which already apply these mechanisms.
Over 60 countries developed the text at the United Nations Commission on International Trade Law (UNCITRAL) over a four-year period, and the Convention was approved by UN General Assembly Resolution 56/81, December 12, 2001. The Convention is open for signature until December 31, 2003. A number of states have advised the UN Secretariat that they would consider becoming a party only if the United States goes forward, since it is well recognized that the United States took the lead in proposing this treaty and the economic changes it could bring about. Signature by the United States, therefore, within this time frame will promote acceptance of the treaty and thereby serve United States interests both in the Government and the private sector.
The Convention was negotiated in close coordination with state law bodies and trade associations in the United States. Support for the negotiation by the United States was based on a request to undertake that effort by the leadership of the National Conference of Commissioners on Uniform State Laws (NCCUSL). The Convention has been endorsed by leading finance associations in the United States, including the New York-based Commercial Finance Association, which represents a substantial percentage of major commercial lenders in many countries and which sponsored an international colloquium on the Convention at Vienna following its adoption by the UNGA. The American Bar Association formally endorsed the Convention in 2002 for United States signature and ratification upon the recommendation of both its International Law and Business Law Sections.
No amendments to any state or federal law are expected, nor is any other action by state authorities necessary to implement this Convention. The Convention was carefully negotiated to harmonize with existing state law under the UCC.The Convention does not obligate the Department or any agency of the United States to undertake financial obligations for implementation, nor create new assessed contributions for the United States.
That you sign the attached Full Power (Tab 1) authorizing Ambassador John D. Negroponte, United States Representative to the United Nations, or, in his absence, Ambassador James B. Cunningham, Deputy United States Representative to the United Nations, to sign the above-referenced Convention at the Headquarters of the United Nations in New York.
Approve ________________ Disapprove__________________
Tab 1 - Full Power
Tab 2 - Overview of the Convention
Tab 3 - Memorandum of Law
Tab 4 - Text of the Convention and Annex
I invest Ambassador John D. Negroponte, Permanent Representative of the United States of America to the United Nations, or, in his absence, Ambassador James B. Cunningham, Deputy Permanent Representative of the United States of America to the United Nations, with full power and authority for and in the name of the Government of the United States of America to sign the United Nations Convention on the Assignment of Receivables in International Trade, open for signature at the Headquarters of the United Nations in New York, together with any related documents, the said Convention to be transmitted to the President of the United States of America for his ratification by and with the advice and consent of the Senate of the United States of America.
IN TESTIMONY WHEREOF, I have hereunto set my hand and caused the seal of the Department of State to be affixed at the city of Washington, in the District of Columbia, this
Overview of the Convention
On December 12, 2001, the United Nations General Assembly approved an international convention providing uniform rules on the assignments of receivables, which is now open to States for signature and ratification. The Convention was prepared by the United Nations Commission on International Trade Law (UNCITRAL) over a five-year period involving more than 60 States, together with a number of international organizations and trade and finance associations. The United States supported the negotiation as an effort to promote commerce to and from the United States and to enhance the credit and economic capacity of developing and emerging States. The model for many of the Convention's provisions was the modern capital markets approach to commercial law, such as that now adopted in the United States through uniform state laws.
Cross-border market liberalization through trade agreements or otherwise often cannot reach an appropriate level of transactions in the absence of lower cost commercial finance, or where there is a disparity between such credit facilities between two trading country partners. Adoption of this type of law through the Convention can significantly enhance a country's credit capacity by converting payment rights into collateral, thus freeing up a substantial source of collateral for commercial undertakings, which in turn can support cross-border commerce.
The following is a brief description of the highlights of the Convention.
As the preamble to the Convention indicates, the objective of the Convention is to provide, for assignments of receivables, uniform rules that will have the effect of increasing the availability of credit and reducing the costs of credit, fostering the development of new financing practices and protecting the interests of debtors.
The Convention consists of 47 Articles divided into six Chapters, and an Annex providing three optional sets of rules for ratifying states to select from, which establishthe priority rules for transactions covered by the Convention. Chapter I covers scope of application, rules to determine the "internationality" of a transaction, and exclusions from the Convention's scope. Chapter II, "General Provisions" (Articles 5-7) include definitions and the party autonomy rule, i.e. the right of parties to vary the Convention's provisions as to their respective rights and obligations. Chapters III and IV contain the core financing provisions. Chapter III, "Effects of Assignment" (Articles 8-10) covers effectiveness, contractual limitations on assignment, and transfer of security rights. Chapter IV (Articles 11-25) is divided into three Sections dealing with rights and obligations of the assignor and the assignee; debtor's rights and protections, including discharge and defenses; and rules on third parties, including the law applicable to competing rights and special rules on proceeds. Those two Chapters contain the core provisions that introduce modern financing concepts, such as the ability to assign future rights and bulk receivables. Chapter V, "Autonomous Conflict-of-Laws Rules" (Articles 26-32) is an optional Chapter containing rules to determine the law applicable to the form of contract, the various parties, and priority. Chapter VI (Articles 33-47) contains provisions on entry into force, detailed provisions on declarations, rules on territorial application, optional limitations on government entities, and special exclusions.
The Annex contains three optional sets of rules on priority that states can adopt. The first, priority rules based on registration, reflects the modern system adopted by the United States through uniform state laws and by some other countries, including Canada. In the United States view, this approach offers the only realistic way to expand modern finance opportunities in developing and emerging countries. By adopting transparency through openly accessible and low-cost registries to determine priority, with limited exceptions, the credit capacity of these countries could be significantly increased. This would also enable them to access capital markets much more effectively, which is now often out of reach for many enterprises in developing countries. The Annex also provides optional rules for priority based on time of assignment or time of notification of the assignment, bothof which are traditional in some legal systems but cannot meet modern capital market standards and are for countries with less developed economies or where credit system risk is high.
The Convention's key features are:
Scope of Receivables and Assignments Covered. The Convention addresses the assignment of receivables, which are contractual rights to payment. Covered assignments include both the creation of security interests in receivables and true sales of receivables. The Convention rules relate primarily to assignments of trade, loan and similar commercial and consumer receivables arising in asset-based lending, factoring, securitization and project finance transactions. The Convention excludes transactions in existing organized markets such as securities, derivatives and other financial assets, deposit accounts, and assignments of claims under letters of credit and independent guaranties, and otherwise protects those who are holders of negotiable instruments or assignees of certain real estate lease receivables
Internationality. For the Convention to apply to an assignment of a receivable, either the assignment or the receivable must be international, i.e., the assignor and assignee must be located in different States or the assignor and the debtor must be located in different States. Also, for the Convention to apply, the assignor must be located in a Contracting State and, for the rights or obligations of the debtor to be affected by the Convention, either the debtor must be located in a Contracting State or the law of a Contracting State must govern the original contract. The Convention provides specific rules to determine where an assignor, assignee or debtor is located. Under these rules, an assignor or assignee that is a legal entity is located in the State in which it has its central administration, i.e., its chief executive office.
Rules Among Assignor, Assignee and Debtor. The Convention provides specific rules that set forth when and by whom the debtor may be notified of an assignment andwhom the debtor must pay, following the assignment, in order to obtain a discharge on the receivable. The debtor's setoff and recoupment rights are generally preserved. Furthermore, agreements of a debtor not to assert claims and defenses against an assignee are generally validated.
Future Receivables and Bulk and Partial Assignments of Receivables. The Convention overrides domestic commercial laws that would otherwise not permit an assignment of receivables in bulk, a present assignment of future receivables, or an assignment of partial or undivided interests in receivables. The Convention provides that the contract of assignment between the assignor and the assignee need not describe the receivables specifically; rather, the receivables may be described generally so long as they can be identified by the contract of assignment. A new contract of assignment need not be executed when there is a present assignment of a future receivable and the future receivable thereafter arises or is created and can be identified by the contract of assignment.
Anti-Assignment Clauses. The Convention generally overrides contractual clauses that restrict assignments of receivables arising from the sale or lease of goods, credit card receivables or receivables arising out of the licensing of intellectual property. It does not, however, override domestic statutes or rules of law restricting such assignments.
Choice of Law for Priority. The Convention provides that the priority of an assignee's interest in a receivable as against other claimants is determined by the law of the State in which the assignor is located. That law also determines whether the assignment is a true sale or a secured transaction. If a challenge to the priority of an assignment is made in a court located in a State other than the State in which the assignor is located, the court may not refuse to apply the priority rules of the State of the
assignor's location unless those rules are "manifestly contrary to the public policy of the forum State." However, if an insolvency proceeding is commenced by or against an assignor in an insolvency tribunal located in a State other than the State in which the assignor is located, the insolvency tribunal may charge the receivables with wage, tax or other preferential claims if otherwise required under the forum State's insolvency laws.
Consumer Protection. The provisions of the Convention do not alter rights and obligations of parties to consumer transactions under domestic consumer protection laws.
Optional Provisions. The Convention sets forth optional choice of law rules to be applied in cross-border receivable assignment transactions even if the Convention would not otherwise apply. The Convention also sets forth in an optional annex a menu of substantive priority rules that a State may choose to apply, including a priority rule based upon the first to file in a notice filing system (the modern UCC system). In addition, the annex contains provisions for the establishment of an international filing system and general rules for its operation.
The accompanying memorandum to the Secretary of State requests authority to sign the United Nations Convention on the Assignment of Receivables in International Trade, concluded at the United Nations in New York on December 12, 2001. The Convention was formulated by the United Nations Commission on International Trade Law (UNCITRAL), of which the United States is a member, and reviewed and recommended to the General Assembly for adoption by the General Assembly's Sixth Committee on legal affairs.
The subject matter of the Convention -- commercial finance law rules for the establishment, priority, and enforcement of interests in rights to payment involving international transactions and transactions involving international accounts receivables -- is within the Federal Government's authority to regulate. The Federal Government can regulate commerce with foreign nations and as between the States of the United States under Article 1, Section 8 of the Constitution, and of the President to make treaties, subject to the advice and consent of the Senate under Article II, Section 2 of the Constitution. The Convention would be brought into force for the United States by deposit of an instrument of ratification, upon advice and consent of the Senate.
The UNCITRAL Convention on receivables finance is consistent with legal rules on accounts receivable financing and related secured interest financing rights already in place in every state of the United States through the Uniform Commercial Code, and would extend such rules to international transactions and transactions involving international receivables.The negotiation of this Convention has been consistent with trade and commerce promotion programs of the Federal Government.
The Convention was negotiated at the request of state law authorities in the United States in order to extend modern finance laws internationally and to obtain predictability between domestic transactions in the United States and international transactions involving the United States. Representatives of the National Conference of Commissioners on Uniform State Laws and the Business Law Section of the American Bar Association were involved at all stages. The American Bar Association formally adopted in February 2002 a policy of support for United States signature and ratification of this Convention. The Secretary of State's Advisory Committee on Private International Law, on which a number of state and national law associations are represented, endorsed the Convention for signature and ratification in November 2002. These consultations were done consistent with Executive Order 13132.
No amendments to any state or federal law are expected, nor is any other action by state authorities necessary to implement this Convention. The Convention was carefully negotiated to harmonize with existing state law under the UCC.
No environmental impact assessment is required for this purpose under the National Environmental Policy Act or Executive Order 12114.
The Convention does not obligate the Department or any agency of the United States to undertake financial obligations for implementation, nor create new assessed contributions for the United States.
Based on the foregoing, there is no legal objection to signature by the United States of the Convention nor to the granting of a full power for that purpose.
Assistant Legal Adviser for
Private International Law