Towards a uniform rule on the law applicable to the third party effects of assignments of claims
In a further step towards a more uniform European capital markets framework, earlier this year the European Commission published a proposal for a regulation on the law applicable to the third party effects of assignments of claims.
Assignments of claims are used in many ways by market participants to obtain liquidity and to access credit on the financial markets, e.g. in the context of factoring, asset-based lending against receivables and securitising pools of receivables.
Different conflicts of law rules
Whilst Article 14 of the existing Rome I Regulation harmonises certain private international law rules with respect to the assignments of claims, it does not provide for a uniform conflict rule as to which law should govern the enforceability of the assignment of a claim against third party creditors of the assignor. Since these rules vary across jurisdictions and different private international rules refer to each other, structuring cross-border receivables financing transactions remains unduly complex and requires detailed prior analysis of the potentially applicable legal regimes.
To reduce this complexity, the Commission is proposing that, as the principal default rule, the law of the habitual residence of the assignor would be the law applicable to the third party effects of assignments of claims. This is in line with current Belgian private international law and with earlier Commission proposals.
The scope of the proposal is broad. The new default rule would cover all rights to claim debt of whatever nature and would extend to ‘traditional’ assignments of claims as well as to assignments for security purposes and pledges of claims. Assignments of cash credited to an account held with a credit institution and claims arising from a financial instrument would follow a different regime, however. The third party effects of these assignments would be governed by the law applicable to the assigned claim. In addition, the proposal provides that, with view to a securitisation, parties can deviate from the default rule and opt instead for the law applicable to the assigned claim.
Whilst the proposal is generally welcomed by market participants on the basis that increased uniformity of conflict rules would lead to more legal certainty, in its current form, the proposal gives rise to uncertainty. Important concepts (such as the term 'securitisation') are not defined and some provisions contradict each other. Another general observation is that the relationship of the proposal to the Rome I Regulation remains ambiguous, as the recitals of the proposal are not always consistent with the corresponding proposed operative provisions. There are also notable differences between the various language versions of the proposal.
Except for these comments on the legislative quality and coherence of the text, concerns have also been expressed that the newly proposed rule deviates from long-standing market practices and that it fails to provide for a uniform private international law framework for the transfer of contracts . Several parties and industry associations such as the Loan Market Association, the European Central Bank and the International Swaps and Derivatives Association, have argued that its exceptions should be broadened and/or that further clarifications should be provided as to the proposal’s exact scope.
The proposal has been sent to the European Parliament for first reading, where the Committee on Legal Affairs has published a first report. This contains certain amendments which – albeit only partially – respond to some of the concerns raised by industry and market practitioners. Unexpectedly, the Committee has also proposed the deletion of the exception for securitisations. The proposal and report will be discussed in plenary session scheduled for February 2019.
For any questions in relation to these matters, please contact a member of our Banking & Finance team.