A new EU conflict of laws rule for third-party effects of cross-border assignments of claims

On 12 March 2018, the European Commission published a proposal for a new EU regulation on the law applicable to the third-party effects of assignments of claims (COM(2018) 96 final). This proposal follows on from the Commission’s 2015 Action Plan on Building a Capital Markets Union (CMU) and the 2017 CMU Mid-Term Review. What is the impact of the proposed Regulation on cross-border assignments of claims and is its conflict of laws regime to be welcomed?

Rome I Regulation (2008)

Article 14 of the Rome I Regulation, that entered into force on 17 December 2009, contains a conflict of laws rule on cross-border assignments and the creation of security rights over claims. The provision covers several aspects. According to section 1, the relationship between the assignor and the assignee shall be governed by the law that applies to the contract between the assignor and the assignee; while under section 2, the law governing the assigned claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged

Recital 38 of the Rome I Regulation clarifies that ‘Article 14(1) also applies to the property aspects of an assignment, as between assignor and assignee, in legal orders where such aspects are treated separately from the aspects under the law of obligations.’ Dutch law can serve as an example. Under the conflict of laws regime of Article 135, Book 10 Dutch Civil Code (DCC), the proprietary aspects of a cross-border assignment must be strictly separated from the obligatory aspects. As the review clause of Article 27(2) Rome I indicates, Article 14 Rome I does not cover the effectiveness of an assignment against third parties and the priority of the assigned claim over a right of another person. Due to a lack of consensus these property law elements were redirected to the national laws of each individual EU Member State. At this particular point uniformity is lacking.

CMU Mid-Term Review (2017)

As the CMU Mid-Term Review correctly argues, differences in the national treatment of third-party effects (priority issues included) of cross-border assignments complicate the use of these instruments as cross-border collateral and make it difficult for investors to price the risk of debt investments. After all, the assignment of claims is a crucial mechanism in, for instance, factoring and securitisation arrangements. The new proposed Regulation tries to fill this gap, not by amending Article 14 Rome I, but by means of a separate regulation.

Draft Regulation (2018)

The new general rule is to be found in Article 4(1) of the draft Regulation and reads as follows: ‘Unless otherwise provided for in this Article, the third-party effects of an assignment of claims shall be governed by the law of the country in which the assignor has its habitual residence at the material time.’ Article 2(f) draft Regulation defines the term ‘habitual residence’ in line with Article 19(1) Rome I, while Article 2(c) aligns the definition of ‘assignment’ with that contained in Article 14(3) Rome I. The term ‘assignment’ not only covers outright transfers of claims, but also transfers of claims as security and pledges or other security rights over claims. As has been indicated by Article 2(d) draft Regulation, the term ‘claim’ is a broad concept referring to a debt of any nature, whether monetary or non-monetary, and whether arising from a contractual or a non-contractual obligation. Pursuant to Article 5, the law applicable to the third-party effects of cross-border assignments governs, in particular, the requirements to ensure the effectiveness of the assignment against third parties other than the debtor (e.g. registration or publication formalities), the priority of the assignee over the rights of another assignee of the same claim, as well as the priority over the rights of the assignor’s creditors (e.g. in insolvency cases).

National approaches

The approaches in determining the applicable law to third-party effects of cross-border assignments in the national laws of the EU Member States differ to a great extent. Some Member States, such as the Netherlands, apply the law of the contract between assignor and assignee to all proprietary aspects of assignment (cf. Article 10:135 DCC), while others, such as Germany, favour the law of the underlying claim assigned. The law of the assignor’s habitual residence as proposed by Article 4(1) draft Regulation is compatible with Belgian law (Article 87(3) PIL Code) and Article 22 UN Convention on the Assignment of Receivables in International Trade (2001). Besides, it was chosen by the European Commission in its 2005 Rome I Regulation proposal (Article 13(3)).

The law of the assignor’s habitual residence: advantages

According to the Explanatory Memorandum to the draft Regulation, a uniform application of the law of the assignor’s habitual residence brings legal certainty and ensures that the same conflict of laws rule will apply in each individual EU Member State. Moreover, the assignor’s habitual residence as a connecting factor will enhance the predictability and traceability of the applicable law on cross-border assignments and enables the determination of the law applicable to third-party effects of the assignment of future and multiple claims. Additionally, in case of the assignor’s insolvency, the applicable law will often correspond to the law of the assignor’s habitual residence, although this will not always be the case, since the ‘habitual residence’ of Article 2(f) draft Regulation and the ‘centre of main interests’ (COMI) of Article 3(1) EU Insolvency Regulation (recast) are two different legal concepts.

The law of the assignor’s habitual residence: disadvantages

The application of the law of the assignor’s habitual residence has some distinct disadvantages. A major issue is the fact that the Commission’s proposal includes increased transaction costs and complexity, since it would lead to three (instead of two) laws being applied to cross-border assignments: the applicable laws under Article 14 Rome I, sections 1 and 2 and the law of the assignor’s habitual residence (Article 4(1) draft Regulation). Besides, there is also the potential risk of a conflict of connecting factors in cases of joint assignors located in different States (e.g. syndicated loans) and the occurrence in which the assignor changes its habitual residence between two assignments of the same claim (see Article 4(1) draft Regulation). Moreover, under the draft Regulation the actual scope of the proposed main rule is rather unclear: does it cover all proprietary effects of cross-border assignments as confusingly indicated by recital 15 draft Regulation, or does it only relate to third-party effects and priority issues as clearly stated by Article 5 draft Regulation? The latter interpretation would lead to an – undesirable – split of the property law regime of cross-border assignments, where Article 14(1) Rome I applies to the property aspects as between assignor and assignee (inter partes), while Article 4(1) draft Regulation would cover the third-party effects.

Challenging the European Commission’s magic wand

In its search for a – non-existent – ‘situs’ for (intangible) claims, the Commission’s proposal regrettably disregards the fundamental elements of flexibility, transparency and uniformity that are essential for the contracting parties in complex cross-border assignments. Because of this imperfection, several exceptions to the main rule have been formulated in Article 4(2) and (3) draft Regulation, in case of cash credited to an account in a credit institution, claims arising from a financial instrument (e.g. derivatives) that are not administered in an account, and securitisations. These three exceptions reveal the weakness of the basic rule. In my view, legal practice would benefit most from the practical and proven application of the law of the contract between assignor and assignee as regulated in Article 10:135 DCC and applied by the Dutch Supreme Court in its landmark decision of 16 May 1997 (Bechem/Hansa). Moreover, this conflict of laws rule safeguards a uniform and tailor made regime for all property law aspects of cross-border assignments, which serves legal certainty and prevents cross-border assignments from becoming too costly and complicated. The European Commission unfortunately decided differently.

Epilogue:

On 8 August 2018 the German Oberlandesgericht Saarbrücken submitted four questions to the European Court of Justice for a preliminary ruling concerning Article 14 Rome I and its applicability to the third-party effects of a multiple assignment. The outcome of this preliminary ruling might put the draft Regulation of 12 March 2018 into a different perspective. See also Peter Mankowski’s recent blog post on conflictoflaws.net.