Assignment of Claims and Proprietary Effects: Overview of Doctrinal Debate and the EU Commission’s Proposal

3.2.1 The Options

Historically, and in the run-up to the Commission submitting its current proposal,¹² four approaches to determining the most appropriate connecting factor had been competing: (i) the law of the domicile or the habitual residence of the debtor; (ii) the law governing the assigned claim; (iii) the law governing the contract between assignor and assignee; and (iv) the law of the assignor’s habitual residence.

French courts and writers had traditionally favoured a solution according to which the debtor’s domicile was identified as the situs of the claim and the law of the debtor’s domicile governed the proprietary aspects of the assignment.¹³ Article 1690 Code Civil – the provision stating the requirements and formalities for third-party effects of an assignment – was framed, in a unilateralist manner, as belonging to French public policy (d’ordre public), ie mandatory at least in all cases in which the debtor’s domicile was in France. In other words, the rationale (debtor protection) was projected onto the trans-border scenario.¹⁴

German and Austrian law had adopted the rule according to which third-party effects of an assignment were governed by the law applicable to the assigned claim.¹⁵ The courts’ as well as the majority among commentators’ principal reason was their preference for a unitary connecting factor so as to ensure that all relevant aspects (in particular assignability and debtor protection) would be governed by the same substantive law.

Dutch law had opted for the extension of the law governing the contract between assignor and assignee so as to apply also to the property-law related aspects, in particular third-party effects of an assignment.¹⁶ Critics of this approach point to the problematic (as they see it) opening to party autonomy, ie the parties’ freedom to choose the applicable law.¹⁷ Interestingly, also the proponents of this solution focus on party autonomy, arguing that legal certainty is enhanced if the parties to the transaction can choose the governing law on the basis of their evaluation of risks flowing from Member States’ laws that lend themselves to being selected in light of the particular circumstances. Moreover, the constitutional freedoms guaranteed under the EU Treaty are cited in support of this rule.

Belgian and – already with an eye on the discussion that lead to the Draft Regulation – Norwegian law¹⁸ may be cited when looking for support of the Commission’s proposal, as it is now examined by the Parliament and the member States, ie to have third-party effects governed by the law of the assignor’s habitual residence.

Apart from these generalising approaches, Professor Garcimartín Alférez’ opinion deserves to be mentioned according to which differentiating the connecting factor in function of the specific type and purpose of an assignment will be beneficial.¹⁹

3.2.2 The Assignor’s Habitual Residence

The Commission’s proposal – for which it has made a strong case shared by this writer – is a ‘mixed approach combining the law of the assignor’s habitual residence and the law of the assigned claim’.²⁰ It combines the application of the law of the assignor’s habitual residence as a general rule (Article 4(1)) and the application of the law of the assigned claim to certain exceptions (Article 4(2), (3)). Apart from its own research as well as the study conducted by the British Institute of International and Comparative Law (BIICL) and presented in September 2016, the Commission was able to rely on writings by eminent scholars²¹ who had identified the following features as supporting the primary connecting factor of the assignor’s habitual residence or place of business:²²

that it is the ‘natural environment’ of claims and the place where the assignor’s patrimonial situation (in particular, the appearance of solvency) is on display;

 

it is the only law that is predictable and easily ascertained by any third party;

 

it is the only practical solution in cases of bulk assignments and the only possible one for the assignment of future claims (both of crucial importance for the factoring industry);

 

it is consistent with the Union acquis on insolvency, ie the Insolvency Regulation,²³ as regards the connecting factor which designates the law applicable to insolvency proceedings, according to which the main insolvency proceeding must be opened in the member State where the debtor (here: the assignor) has its centre of main interests (COMI)²⁴ whose courts will, in principle, apply their own law;

 

it is – as also highlighted by Recital 22 of the Draft Regulation – consistent with the international solution enshrined in the 2001 UN Convention on the Assignment of Receivables in International Trade;

 

even where, currently, the parties choose to apply the law of the assigned claim to the third-party effects of their assignment, they usually also look to the law of the assignor’s place of business to make sure that the acquisition of title on the part of the assignee is not prevented by overriding mandatory provisions of that law requiring some form of publicity, eg by registration, so as to ensure that third parties may have knowledge of the assignment.

While legal systems – both those based on codifications and those based on judge-made rules – traditionally designed rules on the assignment of claims to a large extent with an emphasis on debtor protection, in recent decades the assignment of claims has become a tool for enhancing the easy flow of credit. This cannot be without consequences for the conflict of laws and, in particular, the choice of the most appropriate connecting factor(s).²⁵ Since there are two main industries involved in providing credit based on large-scale assignment of claims – on the one hand the factoring industry and, on the other hand, the securitisation industry – both with their own distinct practices and needs,²⁶ it was clear that the Commission had to formulate (at least) two choice-of-law rules. The principal rule (law of the assignor’s habitual residence) meets the needs and practices of factors who buy future claims (where the governing law is still unknown), who are the assignees of bulk assignments (where many claims may be governed by many different laws) and who, importantly, are not geared up to examine the underlying contracts and to determine the law governing each claim, which would entail substantial additional burden.

3.2.3 Exceptions: Law of the Assigned Claim

Conversely, securitisers driven by rating agencies requiring detailed information which is necessary to assess the rating of the bonds or notes to be issued, are routinely examining the underlying contracts, the applicable law and other relevant factors in the course of their due diligence. Accordingly, Article 4(3) provides for the possibility that the assignor and the assignee choose the law applicable to the third-party effects of an assignment of claims in view of a securitisation. That choice of law is to be made expressly.

A second exception is provided for in Article 4(2) of the Draft Regulation. According to this provision, the law applicable to the assigned claim also governs the third-party effects of the assignment of (a) cash credited to an account in a credit institution and (b) claims arising from a financial instrument. The former is appropriate if one assumes that the contract between account holder (eg a consumer or a small or medium-sized company) and its bank is governed either because chosen in the account contract pursuant to Article 3 Rome I Regulation or by the law of the country where the bank is located pursuant to Article 4(1)(b) Rome I Regulation. Both hypotheses make the applicable law readily ascertainable.

As regards the third-party effects of assignments of claims arising from financial instruments (as defined in Article 2(j) of the Draft Regulation), for example derivative contracts, the Explanatory Memorandum emphasises that subjecting them to the law of the assigned claim rather than the law of the assignor’s habitual residence ‘is essential to preserve the stability and smooth functioning of financial markets as well as the expectations of market participants’.²⁷ This is conceptually correct, and the law applicable is either the law chosen by the parties to the contract or the law determined in accordance with non-discretionary rules applicable to the relevant financial market.

3.3.1 Express Solutions

Article 4(1) subparagraph 2 of the Draft Convention provides a solution for the following variation of our example, as described supra section 3.1: Where the Italian creditor/assignor on 1 March assigns its claim against the German debtor to the Luxembourg Assignee I, thereafter moves its habitual residence to Switzerland and, on 1 April, assigns the claim to Assignee II, the priority conflict between A I and A II will be decided by the law (Italian or Swiss) at the time of the assignment (1 March or 1 April) which became first effective against third parties under the law designated as applicable pursuant to Article 4(1) subparagraph 1.

Article 4(4) of the Draft Regulation provides a solution for cases where the categories of claim differ and lead to a different connecting factor. Assume the Italian creditor’s claim for the purchase price against the German debtor, governed by Swiss law, on 1 March is assigned to Assignee I, a Luxembourg factor. On 1 April, the assignor assigns the same claim to Assignee II, an English securitiser, under a contract providing for the applicability of Swiss law pursuant to Article 4(4).

In both cases the Draft Regulation favours the assignee who, under the law applicable to that assignment, first secures the effectiveness of the assignment to it. In this writer’s submission, it is the Commission’s intention to state that a claim is either effective against all third parties or it is not yet effective against any third party. However, Professor Dickinson’s view that the language based on this assumption is ambiguous and that it would be beneficial for the ‘super conflict rules’ to refer specifically to ‘existing or future assignees of the same claim’ rather than merely to ‘third parties’ clearly has merit, and this ought to be clarified.²⁸ Likewise, a clarification to the effect that this ‘super conflict rule’ also applies to the priority conflicts envisaged in Article 5(c)-(e) should be considered.

3.3.2 Implied Solutions to Obvious Questions?

Reading the text of the Commission’s proposal as well as the Explanatory Memorandum one may wonder how to interpret the absence of any specific reference to, let alone guidance for, the solution of potential priority conflicts in cases like the following.

The Italian creditor/assignor assigns the claim against the German debtor to Assignee I, its Luxembourg bank or factor. Subsequently, A I assigns it to Assignee II in the Netherlands. A more complex scenario, introduced to the discussion by Professor Trevor Hartley²⁹ and projected onto our standard example supra section 3.1 raises another issue: The creditor/assignor in Italy assigns the claim against the German debtor for the purchase price, arisen under a contract governed by Swiss law, to Assignee I, its Luxembourg bank or factor. Subsequently, the Italian creditor assigns it a second time to another bank in the Netherlands, Assignee II, who, in turn, assigns it to a financial institution in England, Assignee III. Who has priority, Assignee I or Assignee III? Professor Hartley points out the advantages of applying the (Swiss) law of the obligation because it is readily ascertainable by any third party to whom the claim might be assigned by the creditor or the creditor’s assignee or subsequent assignees. Conversely, if the habitual residence of the assignor were to be chosen as the relevant connecting factor, should one look to Italy, the creditor’s (and original assignor’s) habitual residence or to that of Assignee II, the Netherlands? Based on this premise, it is obvious that both (potentially) governing laws would pose problems of practicality and fairness: Assignee III has no reason to be concerned with Italian law. In the same vein, Assignee I’s rights should not depend on the law of Assignee II’s habitual residence, ie Dutch law. In response, Professor Goode suggested (and Professor Hartley reportedly agreed) that the better approach was to start with the ‘last event’ rule by which it is the law of the last dealing or event which determines whether (a purchaser or) an assignee has acquired an overriding title.³⁰ This would, obviously, not be the case if the nemo dat rule applied.³¹ A court seised of the matter of a priority conflict would first examine the position according to the law applicable to the assignment by Assignee II to Assignee III. Only if this does not give Assignee III an overriding title would it be necessary for the court to resort to the law applicable previously, ie Italian law, to determine the title of Assignee I. This analysis, while not addressing the issue as to whether applying the law of the assigned claim is preferable, is correct. Moreover, it would appear to be premised on the assumption that all legal systems have adopted the ‘nemo dat rule’ and that no legal system acknowledges the good-faith acquisition of a title to a claim by way of assignment from a ‘non-owner’. The Draft Regulation too seems to be premised on this assumption when defining, in Article 2(a), an assignor – and that must mean anyone purporting to transfer title in a claim – as a person who transfers ‘his right’ to a claim to another person. In our example, only the Italian creditor and original assignor assigned ‘his right’. All further transactions failed because the right now vested in Assignee I.

The present writer fully subscribes to the view according to which any conceivable conflict of connecting factors in situations involving a chain of assignments should, and could, be dispelled by another round of careful examination of examples such as the ones discussed above.³² This could include – if felt necessary – a thorough comparative analysis of the substantive law regarding the assignment of claims.