United Nations Convention on the Assignment of

Receivables in International Trade

 

Contents

 

Page

I.          Purpose ....................................................................................................

II.         Background ..............................................................................................

III.       Summary of Key Provisions of the Convention and Protocol ................

IV.       Implementing Legislation .......................................................................

V.        Recommendation and Comments ........................................

VI.       Proposed Text for Resolution of Ratification ...........................................................

 

I. Purpose

 

 

            The Convention applies to assignments^[1] of receivables ^[2]/ in international trade.  The objective of the Convention is to provide uniform legal rules for those transactions that will have the effect of increasing the availability of credit and reducing the costs of credit. The application of the rules is expected to foster the development of new financing practices. The Convention accomplishes this while at the same time preserving existing financing practices and protecting the interests of debtors.^[3]/  The Convention is substantially consistent with Article 9 of the Uniform Commercial Code, which is the law in every state of the United States and the District of Columbia. ^[4]/  As augmented by the proposed declarations and understandings of the United States, the Convention differs from Article 9 in only a limited way, primarily with respect to conflict-of-laws rules applicable to a small number of transactions in very limited contexts.

 

II. Background

 

            On December 12, 2001, the United Nations General Assembly approved the Convention.  The Convention was the product of six years of work by the United Nations Commission on International Trade Law.  Delegations from the Commission countries, including a delegation from the United States, participated.  The delegation of the United States was very active in the process.

 

III. Summary of Key Provisions of the Convention

A detailed article-by-article discussion of the Convention may be found in [the Letter of Submittal from the Secretary of State to the President, which is reprinted in full in Treaty Document ___–__].  A summary of the key provisions of the Convention is set forth below.  As explained in the article-by-article discussion, the rules of the Convention differ in only a limited way from those of Article 9 of the Uniform Commercial Code, which has been enacted in every state of the United States and the District of Columbia.

 

Scope.

 

Receivables and Assignments Covered.  The Convention addresses the assignment of certain contractual rights to payment, which the Convention calls receivables.  The Convention covers two types of assignments of receivables – assignments to secure an obligation as well as outright assignments.

The Convention excludes from its scope (i) transactions in securities, derivatives, and other financial assets, (ii) assignments of deposit accounts, and (iii) assignments of claims under letters of credit and independent guaranties.  The Convention does not affect the priority rights of those who are holders of negotiable instruments or assignees of certain real estate receivables.  The Convention does not cover the assignment of contractual rights that are not rights to payment.  For example, the Convention does not cover an assignment of the typical rights of a licensee of intellectual property or the rights of a licensor that are not a contractual right to payment.

These exclusions and limitations mean that the Convention relates primarily to assignments of trade, loan, and similar commercial and consumer receivables arising in asset-based lending, factoring, securitization, and project finance transactions.

Internationality.  The Convention will apply to an assignment of a receivable only if either the assignment or the receivable is international.  An assignment is international if the assignor and assignee are located in different States. A receivable is international if the assignor and the debtor on the receivable^[5] are located in different States.  Further, the Convention applies only to an assignment of a receivable by an assignor located in a Contracting State.  Even when these tests are satisfied, the Convention’s rules affect the rights and obligations of the debtor only if the debtor is located in a Contracting State or the original contract entered into by the debtor is governed by the law of a Contracting State.

The Convention provides specific rules to determine where a party is located for purposes of application of its provisions.  Under these rules, an assignor or assignee that is a legal entity is located in the State in which it has its central administration.  The meaning of the term “central administration” is the subject of a proposed understanding of the United States stated in Part VI below.  A debtor is located in the State that has the closest relationship to the contract that gave rise to the receivable.

Once the Convention applies to the assignment of a receivable, the Convention continues to apply to all subsequent assignments of the receivable.

Substantive Rules.

Rules Among Assignor, Assignee, and Debtor.  The Convention provides specific rules that set forth when and by whom a debtor may be notified of an assignment and whom 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.  These rules are consistent with Article 9 of the Uniform Commercial Code.

Future Receivables and Bulk and Partial Assignments of Receivables. The Convention overrides commercial laws of a State to the extent those laws 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 does not have to describe the receivables specifically.  The receivables may be described generally so long as they may be identified to the contract of assignment.  Once there is a present assignment of a future receivable, a new contract of assignment does not have to be executed when the future receivable thereafter arises or is created and can be identified to the contract of assignment.  These rules are consistent with Article 9 of the Uniform Commercial Code.

Anti-Assignment Clauses.  The Convention generally overrides contractual clauses (but not statutes or other rules of law) that would 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.  To the extent that the Convention overrides such contractual limitations on assignment, it is consistent with Article 9 of the Uniform Commercial Code.

Proceeds.  The Convention gives an assignee the right to proceeds of an assigned receivable that are paid to the assignee directly and the right to reasonably identifiable proceeds of an assigned receivable that are held by the assignor.  An assignee’s right in the proceeds has the same priority as the assignee’s right in the receivable to which the proceeds relate.  These rules parallel those of Article 9 of the Uniform Commercial Code.  The Convention does not address a priority conflict between, on the one hand, an assignee claiming an interest in property as proceeds of an assigned receivable and, on the other, a depositary bank, securities intermediary, or other person claiming an interest in the property other than as proceeds of the receivable, e.g., through a right of setoff or a consensual transfer of an interest in the property.

Consumer Protection.  Although the Convention covers the assignment of consumer receivables, the provisions of the Convention do not alter rights of consumers under state and federal consumer protection laws.  This deferral to consumer-protection laws is similar to the rules of Article 9 of the Uniform Commercial Code that likewise defer to consumer-protection laws.

Choice of Law for Priority.

The Convention provides that the law of the State in which the assignor is located determines the priority of an assignee’s interest in a receivable as against the interests of other claimants to the receivable.  A proposed declaration would result in the application of the location rules of Article 9 of the Uniform Commercial Code for persons who are located in the United States under the location rules of the Convention. The law of the State in which the assignor is located also determines, for purposes of priority, whether the assignment is an outright assignment or an assignment to secure an obligation.  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 assignor is subject to an insolvency proceeding in an insolvency tribunal located in a State other than the State in which the assignor is located, the insolvency tribunal may use the proceeds of the receivables to pay certain preferential claims required under the forum State’s insolvency laws, such as certain wage and tax claims.

 

IV. Implementing Legislation

 

No implementing legislation is required for the Convention.

 

 

V. Recommendation And Comments

 

The proposed Convention is in the interest of the United States.  It should be ratified, subject to the declarations and understandings recommended for inclusion in the proposed text for the resolution of advice and consent to ratification.  Each proposed declaration is made under an article of the Convention that expressly provides that a State may make a declaration concerning that article. 

Support for the Convention has been expressed by banking and financial-services entities involved in receivables financing, and [import-export interests].  The American Bar Association formally endorsed the ratification of the Convention by the United States in a resolution by the House of Delegates of the American Bar Association.  It should be further noted that the National Conference of Commissioners on Uniform State Laws, with the participation of knowledgeable members of the American Law Institute, has devoted time and expertise to developing an approach to implementation of the Convention in a manner that will keep it substantially consistent with Article 9 of the Uniform Commercial Code.

The proposed declarations to the Convention are designed to (i) preserve current law of the states and other territorial units within the United States with respect to choice-of-law rules that operate within the United States, (ii) identify certain of the persons whose claims may be given priority over the rights of an assignee in an insolvency proceeding in which the assignor is a “debtor” under and as defined in the United States Bankruptcy Code, (iii) exclude the application of the additional conflict-of-laws rules contained in Chapter V of the Convention, and (iv) indicate that the states of the United States, in their adoption of Article 9 of the Uniform Commercial Code, have already substantially implemented the principles of the optional priority rules and registration system set forth in annexes to the Convention.

The understandings interpret provisions of the Convention concerning (i) the application of the Convention to assignments of receivables consisting of securities and to assignments of receivables consisting of other financial assets or instruments held by a bank, broker, clearing corporation, or other intermediary, (ii) the determination of the location of an assignor or assignee that has a place of business in more than one State, and (iii) the preservation under applicable non-Convention law of any rights of an assignee to proceeds that are broader than those provided in the Convention.

 

VI. Proposed Text for Resolution Of Ratification

 

It is recommended that the Senate, if it grants advice and consent, state that:

The Senate advises and consents to the ratification of the United Nations Convention on the Assignment of Receivables in International Trade (hereafter in this resolution referred to as the ‘‘Convention’’), adopted by the General Assembly of the United Nations on December 12, 2001 (T. Doc. ___– __), subject to the declarations and the understandings recommended below.

 

It is recommended that the Senate, if it grants advice and consent, state that:

The advice and consent of the Senate should be made subject to the following declarations relative to the Convention:

(1) Pursuant to article 23 of the Convention, rights that arise by operation of law under Title 11, United States Code (the “Bankruptcy Code”), Sections 364(d) and 506(c), (as these provisions may be amended or renumbered from time to time) may be given priority over the rights of an assignee in an insolvency proceeding in which the assignor is a “debtor” under and as defined in the Bankruptcy Code.  This declaration is not a complete list of all rights that arise by operation of law that might be given priority over the rights of an assignee in an insolvency proceeding.

(2)  Pursuant to articles 36 and 37 of the Convention, any reference in the Convention to the law of the United States means the law in force in the territorial unit determined in accordance with article 36, subject to the following.  To the extent that, under the conflict-of-laws rules in force in that territorial unit, a particular matter would be governed by the law in force in a different territorial unit of the United States, the reference with respect to that matter is to the law in force in the different territorial unit.  The conflict-of-laws rules referred to in the preceding sentence include related rules that determine where a person is located.

(3) Pursuant to article 39 of the Convention, the United States will not be bound by chapter V.

(4) Pursuant to article 42 of the Convention, for assignments of receivables within the scope of Article 9 of the Uniform Commercial Code in force in a territorial unit of the United States, the territorial unit through its adoption of Article 9 of the Uniform Commercial Code has substantially implemented the principles of the priority rules set forth in section I of the annex and the registration system set forth in section II of the annex.  Article 9 of the Uniform Commercial Code differs in only a limited way from the priority (as defined in article 5) rules set forth in section I of the annex and the registration system set forth in section II of the annex in that, among other things, Article 9 of the Uniform Commercial Code sets forth different priority (as defined in article 5) rules for assignments of "chattel paper", "instruments", "payment intangibles" (as these terms are defined in Article 9 of the Uniform Commercial Code) and other particular types of receivables.

 

It is recommended that the Senate, if it grants advice and consent, state that:

The advice and consent of the Senate should be made subject to the following understandings relative to the Convention:

(1) With respect to article 4 of the Convention, paragraph (2)(e) of article 4 excludes from the scope of the Convention the assignment of (i) a receivable that is a security, regardless of whether the security is held with an intermediary, and (ii) a receivable that is not a security but is a financial asset or instrument, if the financial asset or instrument is held with an intermediary.

(2) With respect to article 5 of the Convention, the phrase “that place where the central administration of the assignor or the assignee is exercised” as used in paragraph (h) of article 5 has a meaning equivalent to the phrase “that place where the chief executive office of the assignor or assignee is located”.

(3) With respect to article 24 of the Convention, that article provides rights and benefits to an assignee with respect to proceeds and does not derogate from any additional rights or benefits that an assignee may have with respect to proceeds under law other than the Convention.