How (not) to ban prohibition on assignment clauses: Lessons for the Netherlands gleaned from English efforts to adopt legislative change.
Author: Jennifer Collins-de Lange Supervisor: A.F. Salomons
Date of submission: 28 July 2016
Abstract:
Both English and Dutch law currently take the approach that if a creditor is prohibited by a contractual clause from assigning its rights to receive a payment, then the effect of that prohibition on assignment clause (referred to herein as a ‘PAC’) is largely a matter of contractual interpretation. This is however in contrast to the position in many jurisdictions, where legislation has been adopted in order to override such clauses. Indeed, the UK is also set to adopt a statutory instrument pursuant to which PACs will, in certain circumstances, be rendered ineffective. As will be shown, the road to legislative reform in the UK has been long and not particularly smooth and the final destination is less that satisfactory.
This latest development in the long running saga of the PAC does though give cause to consider whether the Dutch legislature ought to adopt specific rules on the effect of PACs and, if so, what lessons it can learn from the English reform process and the resulting legislative proposal. In particular, it will be suggested that calls for legislative intervention in the Netherlands are unlikely to be fruitful unless there is (i) persuasive evidence of the economic benefit of a change in law, (ii) proper identification of the deficiencies of existing law and a pressing need for those deficiencies to be addressed by legislative intervention and (iii) adequate consideration in the consultative stage of the proper scope of any change of law.
How (not) to ban prohibition on assignment clauses: Lessons for the Netherlands gleaned from English efforts to adopt legislative change.
1. Introduction and aims 2. Conflicting interests
2.1. Freedom of Contract v Alienability of property 2.2. The competing rights of interested parties
2.2.1. Interests of the creditor 2.2.2. Interests of the debtor 2.2.3. Interests of the assignee
2.2.4. Interests of the creditors’ creditors
3. Practical impetus for change
3.1. Inefficiencies in the supply chain and unutilised assets
3.2. How can factoring and supply chain finance alleviate the problem? 3.3. Why are PACs problematic to those industries?
4. The Dutch law approach to the PAC
4.1 The Legislative position
4.2 PACs before the Dutch courts
5. The English law approach to the PAC
5.1. The Legislative position
5.2. PACs before the English courts
5.3. Arguments in favour of legislative change to English law
6. Time to legislate?
6.1. International examples
6.2. Towards a legislative solution in the UK 6.2.1. The Proposal
6.2.2. The impetus for (and resistance to) change
6.2.3. Lessons learned from the path towards English legislative intervention 6.3. Towards a legislative solution in the Netherlands
6.3.1. The political desire for legislative intervention
6.3.2. Deficiencies in current Dutch law approach to PACs warranting legislative intervention
6.3.3. Scope and exceptions
1. Introduction and aims
Both English and Dutch law currently take the approach that if a creditor is prohibited by a contractual clause from assigning its rights to receive a payment, then the effect of that prohibition on assignment clause (referred to herein as a ‘PAC’) is a matter of contractual interpretation. This is however in contrast to the position in many jurisdictions, where legislation has been adopted in order to override such clauses. Indeed, the UK is now set to adopt a statutory instrument pursuant to which PACs will in certain circumstances be rendered ineffective. As will be shown, the road to legislative reform in the UK has been long and not particularly smooth and the final destination is less that satisfactory.
This latest development in the long running saga of the PAC does though give cause to consider whether the Dutch legislature ought to adopt specific rules on the effect of PACs and, if so, what lessons it can learn from the English reform process and the resulting legislative proposal. This question will be analysed as follows:
(i) I will begin by outlining the conflicting issues at stake with respect to PACs in order to illustrate why the issue has traditionally been so contentious and why only particularly persuasive arguments in favour of change are likely to sway the legislature to act (part 2);
(ii) I will then examine whether such motivations exist and why lobbying groups claim that PACs must be rendered ineffective in order for companies (in particular small to medium sized enterprises or ‘SMEs’) to access finance through the factoring and supply chain finance industries (part 3);
(iii) I will then analyse the current approach to PACs taken by English and Dutch law in order to identify whether there are deficiencies that warrant legislative intervention (parts 4 and 5); and
(iv) finally, I will consider whether it is time to legislate in the UK and the Netherlands by outlining examples of legislative approaches found at international level (UNIDROIT, UNCITRAL) and national level (Germany, the US and Canada) before outlining the proposed UK legislation and I will suggest that, in introducing its proposal to nullify the effect of PACs, the UK government appears to have been motivated largely by economic policy rather than by a desire to address specific deficiencies in English law.
In conclusion, I will draw out three lessons that the Netherlands can learn from the English law path to legislative change. In particular, I will argue that the chances of securing a successful legislative intervention will be improved if there is (i) persuasive evidence of the economic benefit of a change in law, (ii) proper identification of the deficiencies of existing law and a pressing need for those deficiencies to be addressed by legislative intervention and (iii) adequate consideration in the consultative stage of the proper scope of any change of law.
2. Conflicting Interests
Finding an acceptable solution to the problems presented by the inclusion of a PAC in a contract has long been an elusive quest. Below, I outline the conflicts and competing interests that have led to this issue proving so problematic1.
2.1 Freedom of Contract v Alienability of property
Essentially, the issue of PACs is controversial because at the heart of the debate is the question whether the law ought to afford preference to the interests of (i) freedom of contract or (ii) freedom of property.
Proponents of the first view argue that parties to the contract under which a receivable is created ought to be able to agree the terms governing the assignability (or non-assignability) of that receivable and that those agreements should be binding. Pacta sunt servanda is, after all, a fundamental principle of both English and Dutch law2. Proponents of the latter view however object to PACs on the basis that they constitute an unwarranted restriction on ownership rights. They argue that since a contractual claim for payment is a property right and an asset of the creditor, it is unacceptable that the owner of that claim should be restricted in his ability to use that asset in order to raise finance either (i) by selling it to a third party (who in turn will collect the
1 See Should clauses Prohibiting Assignment be overridden by Statute? 4 Penn St. J.L. & Int’l Aff. 47 (Dec, 2015). Louise Gullifer, for a more in depth explanation of these issues.
2 See Ban the ban: prohibiting restrictions on the assignment of receivables, Butterworths Journal of International Banking and Finance Law, March 2015. p. 136-137 by R. Calnan for a persuasive defence of the principle of contractual freedom and a critical appraisal of the forthcoming UK statutory instrument on PACs.
receivable from the debtor when due) or (ii) by assigning it to to a third party (such as a lender) as security for a debt. 3
2.2 The competing rights of interested parties
Next to the conflict between fundamental principles of property and contract law, there are also practical conflicts between the interests of the parties involved in the assignment of a claim. These conflicts can be difficult to reconcile and often involve policy choices as to which interest is more worthy of legislative protection. The relevant interests are summarised below.
2.2.1 Interests of the creditor
A creditor of a receivable may seek to argue that it should not be bound by a PAC to which it agreed and will advance a number of arguments in support of this claim:
Right to alienate property unimpeded
A PAC prevents the free alienation of property and means that the rights of a creditor as an owner of the receivable are fettered in a way that prevents that party from utilising its assets and arranging its affairs to the fullest extent. For example, a PAC can prevent a creditor from selling a claim in order to realise value prior to the scheduled due date of an invoice and from using the asset to pledge as security for a loan.
Right not to be detrimentally affected by the inequality of bargaining power It is not always true that giving effect to a PAC supports the principles of party autonomy and freedom of contract (i.e. the freedom to agree the terms that will apply to ones contract) because the application of the principle of pacta sunt servanda can lead to the enforcement of clauses that were never the result of free agreement. Indeed it may be that the PAC was ‘hidden’ in general terms or was the result of unfair bargaining power so that the clause was forced upon a creditor rather than freely chosen through a negotiation between the parties.
3 This ability to use receivables as security for debt can be beneficial to a creditor of the receivable because the ability to provide security for one’s debt will generally mean that a loan can be obtained and/or that the interest rate on that loan will be lower.
2.2.2 Interests of the debtor
The debtor will commonly be the party seeking to have a PAC apply to its fullest extent. Their principal concerns will be fourfold:
Right not to be faced with an alternative debtor.
A debtor has an interest in ensuring that it will always deal with one creditor. Firstly, it is more likely that a creditor with which the debtor has an existing relationship will be willing to waive certain terms and agree to extending the date for payment of a receivable than an unrelated third party. Secondly, a debtor will wish to avoid the potential to pay to the wrong creditor – for example because it had failed to process a notification of assignment prior to the due date of the debt. Indeed, payment to the original creditor after an assignment can, in a number of jurisdictions, mean that the debtor will have failed to discharge its debt4.
Right to maintain set-offs
A debtor will be keen to ensure that it can set-off amounts that it owes to its creditors against amounts owed by its creditor to it. Transfer of a claim from may prevent those set-offs from being possible and, more importantly, may prevent the set-off of future claims of the debtor against the original creditor5. In England, for example, a receivable will be transferred ‘subject to equities’ including subject to accrued set-off rights6. However, to the extent that set-off rights have not, at the time of transfer accrued, the amount of the claim payable by the debtor cannot be further reduced by later arising claims of the debtor against the original creditor.
Right to rely on pacta sunt servanda
A debtor who has agreed a contractual clause will seek to rely on the principle of pacta sunt servanda. Indeed, it has been suggested by Smits and Henkman7 that
4 See further Deformalisation of Assignment Law and the position of the debtor in European Property Law, European Review of Private Law 5-2007 [639-657]
5 Such future claims may arise for example as a result of credit notes being issued by a trade supplier (the creditor) to its Buyer (the debtor) if delivered products are incomplete or defective.
6 Note that as a matter of English law however, set-off will only apply between two parties to the extent that they have contractually agreed this. Unlike Dutch law (6:127 DCC), English law does not (outside of insolvency) provide for a set-off right in the absence of a contractual agreement.
7 Coface/Intergamma in de praktijk: schipperen tussen rechtszekerheid en financierbaarheid, FIP 2016/119 W.J.G. Smits en T. Hekman.
the logical assumption would be that a debtor would intend a PAC not only be of contractual effect but to have proprietary working (i.e. to ensure that a claim was not capable of transfer) since the debtors’ main interests, as explained above, will be to ensure that it faces its original creditor and that set-offs continue to apply between it and that creditor.
Right to rely on confidentiality protections.
A debtor may also have valid objections to the transfer of receivables and so have reasonable justifications for having negotiated a PAC, such as the fact that the terms of the receivable contain sensitive trade and pricing information that it does not wish to be openly available to any third party buying the claim.
2.2.3 Interests of the assignee
The assignee, as a third party to the original contract, will also assert that it has legitimate interests worthy of protection where a PAC was applicable to the original contract under which the receivable arose.
Right not to be detrimentally affected by an agreement to which it was not a party An assignee will argue that it is unreasonable for a contractual clause such as a PAC to be granted erga omnes effect since it is a term not freely known to third parties.
There are of course protections against the assignee purporting to purchase a claim that is ultimately not transferable. Prior to purchase, the assignee can perform due diligence on the assets and obtain waivers from the debtor and creditor. Following an unsuccessful purchase, the assignee can potentially pursue a contractual claim against the assignor for breach of the purchase contract between the assignor and assignee and, as a matter of English law, may be able to argue that a constructive trust has arisen over any future receipts received by the assignor in respect of the relevant debt.
However, the objection arises that these ‘workarounds’ are economically inefficient. It is argued that the underlying risk that the assignee may find that a
receivable was not successfully transferred to it because of the existence of a PAC (and possibly that it has later purported to transfer that asset and is itself therefore liable for breach of contract to its ‘purchaser’) impedes finance and depresses the price that a creditor can demand for its receivables8. Ultimately, this would mean that a creditor achieves sub-optimal use of/value for its assets.
2.2.4 Interests of the creditors’ creditors
Other than the parties to the original contract under which the receivable arose and the parties to the assignment contract, the rights of another set of interested parties must not be overlooked. The creditors of a party entitled to the payment of a debt may assert the following interest:
The interest in its own creditor receiving (full) payment of a debt
The creditors of a party holding a debt claim may argue that they are entitled to rely on the presence of a PAC in the original document and therefore are entitled to expect the full repayment of the debt by the debtor to the original creditor and that they would be disadvantaged if their own debtor (i.e. the creditor of the debt) were able to sell that debt at a reduced price in breach of a PAC.
The extent of the rights of such third parties is complicated by the fact that there is little consensus as to which law will even determine the effectiveness and enforceability of the assignment of receivables against third parties (including, for example, against creditors of the assignor such as a receiver in the original creditor’s insolvency). See further part 3.3 in this regard.
In an area of law where competing interests so clearly conflict, it would seem unwarranted to enact legislation without a compelling reason for doing so. I now therefore turn to examine whether there exists a practical impetus for change.
3. Practical impetus for change
In an area of law where competing interests so clearly conflict, it would seem unwarranted to enact legislation without a compelling reason for doing so. The
8 See for example Ban on assignment clauses: views from the coalface. Hugh Beale, Louise Gullifer and Sarah Paterson. B.J.I.B. & F.L. 2015, 30(8), 463-466, where this view is advanced.
Demand in favour of changes to Dutch and English law on PACs are heard most strongly from the factoring and supply chain financing (or ‘SCF’) communities. In this section, I will therefore explain how factoring and SCF work, the benefits that these financial constructions claim to offer and how PACs can impede the availability of these methods of financing.
3.1 Inefficiencies in the supply chain and unutilised assets
When two parties enter into a contract for the supply of goods and services, two (main) obligations arise – one party has an obligation to deliver or perform (this party will be referred to as the Supplier) and the other party has the obligation to pay (this party will be referred to as the Buyer). This obligation to pay is often set out in the related invoice raised by the Supplier. Once the Supplier completes its delivery or performance obligation, it will therefore hold a monetary claim against the Buyer which, depending on the terms of the supply contract, may be payable simultaneously with delivery or may be payable some time after the Supplier has performed its obligations. Often, invoices will be payable after performance and the agreed delay will commonly vary between 30-180 days depending on factors such as the relative strength in bargaining power of the Buyer and Supplier and market practice in the relevant industry. This delay between delivery and payment in what is referred to as the ‘supply chain’ can cause funding shortages for the Supplier (who has delivered goods and requires payment in order to produce new goods for sale) and for the Buyer (who has taken delivery and needs time to create new goods from the raw ingredients, sell and receive payment on the same in order to pay the Supplier). The problem for the Buyer and Supplier is essentially one of how to access short term funding to support their respective commercial enterprises.
In an economic climate where the extension of credit by traditional means of lending by banks is under pressure, it can be difficult for an SME to access the capital necessary to fund its business while awaiting payment for goods and services rendered (on the side of the Supplier) or to immediately pay for goods and services received (on the side of the Buyer)9.
9
See further the Impact Assessment prepared in October 2014 (the Impact Assessment) in relation to the UK nullification of PACs consultation, point 2 quoting a decline in lending to businesses from GBP720 billion in 2008 to GBP 450 billion in 2014. See also the Explanatory Notes to the Small
3.2 How can factoring and supply chain finance alleviate the problem?
Factoring and SCF are alternative methods of financing that have been developed in order to address the discrepancy between delivery and payment dates and are offered by intermediaries such as banks and other vehicles specifically established to offer such services. Both methods essentially entail the purchase by a third party of a claim from a Supplier prior to its due date10.
The constructions work as follows. The claim of the Supplier to payment from the Buyer will have a value, which will be dependent on a number of factors including the creditworthiness of the Buyer and the length of time remaining until its due date. If the Supplier can sell (assign) the claim to a third party (the assignee) prior to its due date then the Supplier (i) will receive early payment (which will provide cash flow to assist the Supplier in funding its own business activities without necessitating a loan) and (ii) ceases to run a non-payment risk (i.e. ‘credit risk’) on the Buyer. The assignee on the other hand is assuming the credit risk on the Buyer and will need to be able to fund the purchase price of the debt from the date on which it purchases the debt until the date on which the Buyer pays that debt.
Due to the benefits reaped by the Supplier and the risk taken by the assignee, the assignee will not buy the claim from the Supplier at its full ‘face value’ but will pay a lesser amount, commonly referred to as the discounted purchase price. The exact discount will depend on the creditworthiness of the Buyer and the length of time between the purchase by the assignee of the claim and its due date. On the due date of the claim, the Buyer will be obliged to pay the full face value of the claim to the assignee. In this way, the assignee receives payment for its services in an amount equal to the difference between (i) the (discounted) amount at which it purchased the Business, Employment and Enterprise Act 2015 (the Act), paragraph 14: “The largest four banks
account for over 80% of UK smaller business’ main banking relationships. Many small businesses approach only these largest banks when seeking finance. Although a large number of these applications are rejected - in the case of first time small and medium sized business borrowers the rejection rate is around 50% - a proportion of these are viable and are rejected simply because they do not meet the risk profiles of the largest banks. There are often challenger banks and alternative finance providers with different business models that may be willing to lend to these small and medium sized businesses”. http://www.legislation.gov.uk/ukpga/2015/26/pdfs/ukpgaen_20150026_en.pdf, 10 Due to a lack of consistent terminology in the factoring industry, that third party may be referred to as an intermediary, factor, assignee, purchaser or financier but is essentially the party that buys the claim. In this paper, I will refer to such party as the assignee.
debt and (i) the (full) amount of the debt paid by the Buyer on the due date. This is in some ways comparable to the way a lender is paid for its services by means of an interest rate.
There are many variations on this basic financing concept11. Non-recourse factoring refers to the fact that the assignee has no recourse against the Supplier if the Buyer fails to pay. ‘Recourse factoring’ is a method of factoring whereby the assignee does have recourse to the Supplier if the Buyer fails to pay or has recourse against an insurance policy taken out by the Supplier to cover non-payments by Buyers. In such cases, the assignees’ exposure to non-payment will be reduced and, accordingly, the discount factor will decrease accordingly12.
SCF (sometimes referred to as ‘reverse factoring’)13 is an alternative method of structuring the bulk purchase of claims. In such structures, the primary client of the assignee will be the Buyer rather than the Supplier. Commonly, there will be an agreement between the Buyer and the assignee whereby the Buyer agrees that when it receives invoices from a Supplier, it will confirm to the assignee that the relevant amount is payable by the Buyer to the Supplier. The Supplier in turn will be notified of this confirmation and will have the opportunity to offer the invoice for sale to the assignee at a pre-agreed discount rate. The debt will be purchased by the assignee on a non-recourse basis. Most supply chain finance programmes provide some form of credit enhancement with respect to the claim. For example, it may be that the parent of the Buyer guarantees payment of the invoice, declares itself jointly and severally liable for the payment of that invoice or that the Buyer (and/or its parent) issues a second payment obligation in an equal amount to the invoice which obligation is payable regardless of any later invalidity of the original invoice14. The purpose of the credit enhancement is to increase the likelihood of the assignee receiving satisfaction
11 For a more complete overview of the variations, see further Annex A of the Impact Assessment published by the UK government.
12 Such structures are commonly set up on a programme basis whereby the intermediary purchases from a Supplier invoices owed to a variety of Buyers in bulk over a period of time.
13 See for example footnote 10 of the Factoring Model Law, prepared by the Legal Committee of International Factors Group
14 This third method is used to create a payment obligation which exists in parallel to the original invoice and when paid extinguishes the original invoice to the extent that such invoice remains outstanding. This creation of a new obligation is, in fact, a manner of ‘working around’ the issue that the original invoice may contain a PAC.
of the claim on its due date and allow the assignee to establish ultimate credit risk towards the highest rated entity in the Buyers’ corporate group.
3.3 Why are PACs problematic to those industries?
Despite the apparent benefits of factoring and SCF, there remain obstacles to constructing a manner of buying and selling receivables which is truly reliable for the assignee. Many of these obstacles arise as a result of the fact that an assignment of a claim will involve the interests of multiple parties - including the Buyer (debtor), the Supplier (creditor and assignor), the assignee and third parties (such as the creditors of the Supplier who, particularly upon insolvency of the Supplier, may seek to challenge the sale of a claim at a discount). Furthermore, such parties may be located in a number of different jurisdictions and there will be multiple contracts involved including the original supply contract and the contract of assignment, each which may have a different governing law.
Due to this multiplicity of parties, contracts, jurisdictions and governing laws, the transfer of receivables can entail complex conflict of law questions. As a matter of EU law, pursuant to the article 14(1) of Regulation (EC) No. 593/2004 on the law applicable to contractual obligations (Rome I), the relationship between an assignor (Supplier) and assignee is governed by the law that applies to the contract of assignment entered into between those parties. In other words, the parties are free to choose their governing law when assigning a receivable. However, pursuant to article 14(2) of Rome I, the law of the contract under which the receivable itself was created will determine, inter alia, the assignability of the receivable, the relationship between the assignee and the assigned debtor, the conditions under which the assignee can invoke the assignment against the debtor and whether the debtor’s obligations have been discharged.
There can be (and often are) therefore different laws governing (i) whether the receivable can be assigned and (ii) whether it has been assigned. Further complicating the picture, neither Article 14 nor any other provision of Rome I indicate which law will govern the effectiveness and enforceability of the assignment of receivables against third parties (including creditors of the assignor such as a receiver in the seller’s insolvency). This question must be resolved by national
conflict of law rules and options include (i) the law governing the receivable (which has the advantage that it remains stable) (ii) the law of the jurisdiction of incorporation of the Supplier (which has the advantage that local creditors will be able to determine their positions with greater certainty) and (iii) the law chosen by the assignee and assignor (which upholds the principle of freedom of contract)15.
As a result of the current conflicts rules, we could find that with respect to an Italian law governed receivable owed by a Swedish debtor, assigned by a Spanish Supplier to a English assignee under a German assignment agreement, enforceability by the assignee against (i) the assignor is governed by German law, (ii) the debtor is governed by Italian law and (iii) an unsecured third party creditor (or insolvency official) of the assignor is governed by Italian, Spanish or Swedish law. The assignee clearly runs a degree of legal uncertainty as a result.
Further analysis of the private international law aspects of PACs is beyond the scope of this paper. However, it should be clear from the foregoing that the assignability of a receivable is a matter of the law governing the receivable and that this cannot be contracted out of.16 As such, notwithstanding other unresolved conflict of law issues, where the law governing a receivable permits parties to agree and enforce clauses which prohibit the assignment of a claim, the use of factoring and supply chain financing will certainly be impeded. It is this aspect of the law governing the assignment of receivables with which this paper is concerned and I now turn to examine how the Dutch and English legal systems approach the problem of the PAC.
4. The Dutch law approach to the PAC
Below, I will set out the Dutch law position on PACs, both as a matter of the DCC and its interpretation by the Dutch courts, before examining the strength of the argument in favour of legislative intervention.
4.1 The Legislative position
15 See further the ‘Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person: Final report’, published by the British Institute of International and Comparative Law (2012).
http://ec.europa.eu/justice/civil/files/report_assignment_en.pdf, in particular from p. 62
16 For example, by the assignee and the assignor electing that the receivable is governed by a law of their choosing.
The Dutch Civil Code (DCC) provides that as a matter of principle, receivables (just like ownership and limited property rights) are transferable unless the law or the nature of the right provide otherwise. Legal restrictions on transferability of monetary claims include, for example, the prohibitions found in the DCC against transferring the right to receive wages under an employment contract17 or compensation for non-pecuniary damages18. Claims available to a curator under 2:248 DCC against parties that have liability in the insolvency of a company provide an example of claims that by their nature cannot be transferred to another party. The DCC however provides a further ground for the restriction of the transferability of a receivable – namely, article 3:83(2) expressly provides that the transferability of a receivable can be excluded by agreement between the debtor and creditor. This has been described by van Boom as a choice by the Dutch legislature in favour of a freedom to restrict assignment over a freedom to deal freely over one’s own goods19. Unfortunately, the DCC does not state whether such an agreement has proprietary or contractual effect and the matter has therefore been the subject of both judicial intervention and fierce academic debate.
Finally, as a matter of Dutch law, it should be noted that a receivable that is capable of transfer can be transferred in one of two ways20. Firstly, the receivable can be assigned under a written agreement (een daartoe bestemde akte) between the assignee and assignor with few formalities, provided that it is notified to the debtor21. In this case, the debtor must pay to the assignee in order to discharge the debt. Secondly, the assignor and assignee can agree the transfer in an official document drawn up by a notary (een daartoe bestemde authetieke akte) or a written agreement registered with the tax authorities (een geregistreerde onderhandse akte) in which case the assignment takes effect without notification to the debtor22. In this case, the debtor (even if such debtor becomes aware of the assignment) can only pay to the assignor in
17 7:633(1) DCC 186:106(2) DCC
19 Uitleg cessieverbod - Prof.mr. W.H. van Boom - HR 21 maart 2014, ECLI:NL:HR:2014:682 (Coface Finanz/Intergamma), Ars Aequi dec 2014 p.929, “Onze wetgever kiest in artikel 3:83 BW voor beperkingsvrijheid over beschikkingsbevoegdheid”.
20 See Deformalisation of Assignment Law and the position of the debtor in European Property Law, European Review of Private Law 5-2007 [639-657], for a much more in depth explanation and analysis of the requirements for valid assignment and the effect of notification on the debtor position – both as a matter of Dutch law and in other legal systems (including English law).
21 3:94(1) DCC 22 3:94(3) DCC
order to discharge the debt until such time as the debtor is notified of the assignment.23
4.2 PACs before the Dutch courts
In Oryx/Van Eesteren24, the Supreme Court of the Netherlands considered the effect of a clause prohibiting the transfer of and the creation of security over a receivable without consent and ruled that an act in contravention of that clause led not only to contractual breach (wanprestatie) but also the invalidity of the purported security taken over the receivable. In other words, the PAC was recognised to have proprietary effect, which prevented the relevant receivable from being assigned or used to provide security by the original creditor.25
In Coface/Intergamma26 however, a clause found in the general terms of a contract which prohibited the transfer (in part or in whole) of rights and obligations stemming from that contract without prior written consent was found to have only contractual effect. In reaching this judgement, the Supreme Court resolved the apparent conflict between the judgements in Oryx/van Eesteren and Coface/Intergamma by reasoning that the court in the former case had reached the conclusion that parties can agree a PAC that has proprietary working (rather than that all PACs have proprietary effect per se)27. The court further explained that it would be in excess of its remit to re-evaluate the conclusion of the court in Oryx before explaining that Oryx did not provide a rule of contractual construction to the effect that proprietary effect should be assumed unless the contrary is proved (as had been accepted by the court of second instance in Coface). Rather, the court explained, the correct rule of construction is that a PAC has contractual effect unless the formulation of the clause, as a matter of
23 However see further Verhagen q.q./INB HR 19 September 1997, NJ 1998, 689 regarding the entitlement of a debtor to withhold performance where there is doubt as to the party to whom the debtor must pay in order to discharge the debt.
24Oryx/Van Eesteren, HR 17 januari 2003, NJ 2004, 281 (ECLI:NL:HR:2003: AF0168).
25 The particular clause in this case expressly prohibited both assignment and the creation of security. (Het schuldeiser werd verboden haar uit die overeenkomst voortvloeiende vorderingen zonder toestemming van de debiteur “aan een derde te cederen, verpanden of onder welke titel dan ook in
eigendom over te dragen").
26Coface Finanz/ Intergamma, HR 21 maart 2014, ECLI:NL:HR:2014:682, JOR 2014/151
27 For a critical analysis of the court’s reasoning and its refusal to acknowledge that its conclusion on Coface was a departure from its earlier reasoning in Oryx, see De Hoge Raad op drift?, WPNR 2015, R.M. Wibier
contractual interpretation, leads to the conclusion that proprietary effect was intended by the parties to the contract. The case of DSM/Fox28 was cited as establishing the principle that a clause with the potential to affect the legal position of third parties (i.e. creditors of the Supplier and potential assignees) in a uniform manner and where those third parties are unaware of the intention of the original parties should be construed by reference to objective criteria (the so-called ‘CAO-norm’), but taking into account the Haviltex criteria.
The Haviltex criteria have become fundamental principles to the construction of contracts as a matter of Dutch law and stem from the Supreme Court case of the same name29. In short, a court must take a number of criteria into account when assessing a contract, looking not only to the literal interpretation of the words in a contract but also considering the meaning that the parties could reasonably have attached to the words used and what they could reasonably have expected from each other, in each case in the relevant circumstances. The application of the Haviltex criteria to the construction of a commercial contract between professional parties was confirmed in Lundiform/Mexx30.
To summarise then, the Supreme Court in Coface/Intergamma laid down a rule that as a matter of Dutch law, the effect of a PAC is a matter of contractual construction involving an assumption that PACs have contractual effect unless it is apparent from the formulation of the relevant clause that proprietary working was intended by the parties, assessed by reference to what the original parties could reasonably have expected to have been the result of their chosen words.
4.3 Arguments in favour of legislative change to Dutch law
A number of arguments can be discerned from Dutch literature to the effect that a change to Dutch law is warranted.
28 Pensioenfonds DSM-Chemie/Fox, HR 20 februari 2004, LJN: AO1427 29 Haviltex, HR 13 maart 1981, nr.11647, NJ 1981, 635
Smits and Hekman have recently taken aim at the rule of interpretation adopted in Coface/Intergamma, arguing that it would be more compatible with economic reality if the assumption were that a clause has proprietary effect unless the alternative intention is demonstrated. They suggest that proprietary effect is the more logical intention of a debtor in agreeing a PAC31. Indeed, considering that a debtors’ main reasons for including such a clause might be to avoid facing a new creditor and to ensure that his set-off rights against his original creditor are not limited, it would be logical to assume that the principal intention would be to prevent a transfer (as opposed to creating for himself a contractual claim for breach of contract).
Further, there has been criticism as to how reliably the rule in Coface can be applied. Biemans has suggested that if a PAC is not clear a judge retains a rather wide discretion to decide what effect that clause has given the prevailing contractual interpretation approach.32 Beekhoven van den Boezem and Bergvoet have also sketched a rather complex picture of how the current rules of interpretation may lead to a PAC being interpreted differently dependent on whether the clause was concluded between personally related parties, between professional parties (either in negotiated loan documentation or in general conditions), or between a consumer and a professional party (with the clause being included in general terms of the latter)33.
However concerns over the unpredictability of the contractual interpretation solution do not appear to have materialised. Smits and Hekman conclude that it is clear from Coface/Intergamme, coupled with the resulting jurisprudence and academic commentary how a PAC will be interpreted. They point to a number of rules of thumb that can be extracted from recent case law and which make it possible to ensure that a PAC has the effect intended by the parties34. Van Boom also put forward
31
Coface/Intergamma in de praktijk: schipperen tussen rechtszekerheid en financierbaarheid, FIP 2016/119, W.J.G. Smits en T. Hekman.
32 Onoverdraagbare vorderingen in faillissement: twee kwesties van uitleg tussen de curator en de pandhouder. J.W.A. Biemans. MvV 2013, p.114-121, para 4.4 “Uit het voorgaande volgt in ieder geval
dat als een beding niet duidelijk is geformuleerd, een rechter daar alle kanten mee uit kan”.
33 Uitleg van cessie- en verpandingsverboden, TvI 2012/13, Beekhoven van den Boezem en G.J.L.
Bergervoet.
34 In particular, Smits and Hekman reviewed 3 cases from the appeals court and 8 cases from the lower
courts as follows:
Gerechtshof ’s-Hertogenbosch 29 juli 2014, ECLI:NLGHSHE:2014:2535. Gerechtshof Amsterdam 7 april 2015, «JOR» 2015/345
certain formulations that parties could to use to ensure the desired effect of their clause35 and Beekhoven van den Boezem and Bergvoet have suggested that proprietary effect can best be achieved by ensuring that the prohibition is described as a characteristic of the debt rather than as an instruction addressed to the creditor36. As a result, it appears that if a clause is carefully constructed, parties enjoy a relatively high degree of certainty as to the effect of a PAC. At first sight this appears to be a triumph for party autonomy. However it is questionable whether a cleverly constructed clause in a set of general conditions actually gives effect to parties intentions at all.37
A further call for a change to Dutch law has been centred on the argument that even if the effect of a PAC can be predicted with a fair degree of certainty, the effect of a PAC with proprietary working will be to restrict the ability of a creditor to pledge its receivable and that this is detrimental to trade and the availability of finance. However, others have argued that this is not the effect (or at least should not be the effect) of a PAC with proprietary effect. This discussion is primarily focused around article 3:81(1) DCC, pursuant to which the holder of a transferable interest can create limited rights there over which would include, for example, a right of pledge. On one side of the debate scholars such Orval38 and Beekhoven van den Boezem 39 argue that, pursuant to the DCC, a receivable that cannot be transferred can also not be pledged as security. Other authors such as Vriesendorp40 have put forward a more nuanced Rechtbank Noord-Nederland 19 november 2014, ECLI:NL:RBNNE:2014:5752
Rechtbank Amsterdam 4 maart 2015, «JOR» 2016, 38
Rechtbank Midden-Nederland 8 april 2015, ECLI:NL:RBMNE:2015:2742 Rechtbank Gelderland 30 juni 2014, ECLI:RBGEL:2014:4013
Rechtbank Amsterdam 3 december 2014, ECLI:RBAMS:2014:8254 Rechtbank Oost-Brabant 15 april 2015, NJF 2015, 259
Rechtbank Amsterdam 3 juni 2015, ECLI:NL:RBAMS:2015:3658 Rechtbank Oost-Brabant 3 juni 2015, ECLI:NL:RBOBR:2015:333.
35 Uitleg cessieverbod - Prof.mr. W.H. van Boom - HR 21 maart 2014, ECLI:NL:HR:2014:682 (Coface
Finanz/Intergamma), Ars Aequi dec 2014,p. 932
36 Uitleg van cessie- en verpandingsverboden, TvI 2012/13, Beekhoven van den Boezem en G.J.L.
Bergervoet.
37 Indeed the argument that general conditions show no such expression of party autonomy was
instrumental in the case built by the UK government in favour of introducing a ban on PACs (which are commonly included on general terms), for example it was noted in the Impact Assessment
published by the UK government in 2014 that “A ban on assignment clauses in a debtors’ terms of sale
tend to be in place because of historic and unrevised contractual arrangements.”
38 Het cessieverbod nader bezien, WPNR December 2009 p.992-997, M. Orval.
39F.E.J. Beekhoven van den Boezem, Onoverdraagbaarheid van vorderingen krachtens partijbeding
(diss. Groningen), Kluwer, 2003, p. 103-108
view that proprietary working should not be afforded to contractually agreed clauses in so far as that would prevent the creation of a pledge. He argued as early as 1996 that proprietary effect of a PAC should be restrictively interpreted. He pointed primarily to three arguments in support of his position. Firstly, although 3:81(1) DCC states that rights such as a pledge can only be created over interests which are transferable41, this article can be read to refer only to interests that are by their nature assignable (the inference being that a debt claim is by its nature transferable so that although it is possible to agree a clause that it will not be transferred, such agreement will not prevent the creation of a pledge there over). Secondly, it is not necessary (or common practice) for the holder of a security right to actually sell the claim over which he holds security so that assignability of that claim is a moot point. Finally, he argued that it was not necessary that creating a pledge under article 3:228 DCC demanded or led to an assignment of ones rights in respect the underlying receivable42 and effectively dismissed contrary views as following an overly theoretical line of reasoning43. As a result, in Vriesendorp’s view, it is a question of interpretation whether a PAC prevents assignment and the creation of security – the former does not automatically imply the latter.44
In summary then, we can evaluate the strength of the arguments in favour of an amendment to the DCC as follows:
41 Article 3:81(1): “Hij aan wie een zelfstandig en overdraagbaar recht toekomt, kan binnen de grenzen
van dat recht de in de wet genoemde beperkte rechten vestigen.”
42 Indeed, 3:228 DCC, actually states that a pledge can be created over interests capable of transfer
(“Op alle goederen die voor overdracht vatbaar zijn…”). However, it should be noted that other authors such as Wibier dismiss this reasoning and argue that the question whether a receivable can be pledged as security should be answered not by reference to article 3:81(1) in combination with 3:228 DCC but simply by reference to article article 3:81(1) in combination with 3:98 DCC, since the latter clause relates to the creation of limited rights (such as a pledge) and dictates that 3:81(1) is equally applicable to the creation of such rights (i.e. so that assignability is a pre-requisite to the vesting of a limited right such as a pledge). See further: Cessie- en verpandingsverboden: nieuw arrest, nieuwe problemen’, TBR 2014, part 3. R.M. Wibier
43 See also with regard to this argument H.L.E. Verhagen & M.H.E. Rongen, Cessie. De overdracht van
vorderingen op naam (preadvies uitgebracht voor de Vereniging voor Burgerlijk recht), Deventer: Kluwer 2000, p. 105
44 See further Coface/Intergamma en onoverdraagbaarheidsbedingen: HR 21 maart 2014,
ECLI:NL:HR:2014:682 Mr. M.S. Breeman en Mr. S. Houdijk para 5.2 en para 7 where the conclusion is reached that a PAC with proprietary working also leads to inability to create security over that receivable unless as a matter of contractual interpretation, the clause should be construed to mean that the parties intended the creation of security to be possible.
- the argument that reliance on contractual interpretation is uncertain currently appears unfounded - Smit and Hekman show that the interpretation of carefully constructed PACs has been rather predictable;
- the argument that security cannot be created over non-assignable receivables is not uncontested and, even if correct, if the essential problem with a PAC is reduced to the creation of security, one could imagine a solution whereby the DCC was amended to explicitly make the creation of security possible over non-assignable claims without nullifying the PAC itself; and
- if the remaining argument to ban PACs is that the that the current rule of construction rests on an illogical conclusion that a debtor would prima facie intend a PAC to have contractual effect, it is to be questioned whether such an objection is really strong enough to take precedence over freedom of contract and lead to the situation where PACs are rendered ineffective (as is now proposed in the UK).
5. The English law approach to the PAC
By way of comparison, I will now set out the English law position on PACs both as a matter of law and as a matter of judicial application of that law to the issue of PACs in order to examine whether there are deficiencies in the English legal position that may have driven attempts to adopt legislative change.
5.1 The Legislative Position
English law has no equivalent legislative rule to article 3:83(2) DCC. However, it does offer a range of options for the transfer of receivables and it is important to understand these options in order to evaluate the case law regarding PACs.
As a matter of English law, there are three methods of assigning a receivable, each requiring different formalities be complied with in order to be effective:
(a) the holder of a legal title to a claim can transfer that title in a manner that complies with each of the requirements of s.136 of the Law of Property Act (“LPA”), meaning that (i) the assignment must be concluded “by writing under hand”, (ii) express notice in writing of the assignment must have been given to the debtor and (iii) the assignment must be absolute and not conditional and as a result will transfer legal (and equitable) title;
(b) the holder of a legal title can also transfer the equitable title while retaining the legal title and this manner of transfer has no particular formalities; and
(c) the holder of an equitable title may only make an equitable assignment of its rights and must do so in a manner that complies with the requirements of s. 53 LPA which include that the assignment must be “in writing signed by the person disposing of the same”.
Furthermore, English law recognises the concept of the trust whereby a trustee can hold the legal title to assets on trust for a beneficiary, who enjoys the equitable ownership of those assets. A trust puts the assets over which it has been declared (or construed to exist) beyond the insolvency of the trustee.
In terms of enforcement, the holder of an equitable title will need to join the holder of legal title in any proceedings. The rationale here is that, where ownership of the legal and equitable title has been split, the debtor should be protected from having to defend itself in two different proceedings. The beneficiary of a trust by contrast can avail itself of the Vandepitte procedure pursuant to which he is able to sue the obligor simply by adding the trustee as a defendant in the event that a trustee refuses to sue in its own name on behalf of a beneficiary45.
In respect of the ability of the debtor to discharge its debt with certainty following an assignment, English law answers this question as follows. Where legal title to a debt is transferred, notification to the debtor is a pre-requisite46 and the debtor must from that moment onward pay only to the assignee in order to discharge its debt. Likewise, where the equitable title has been transferred and the debtor is notified, payment must be made to the assignee. However, where equitable title is transferred without notification the debtor may pay to the assignor and, if the debtor becomes aware (other than through notification) that the debt has been transferred then he may pay to either the assignee or assignor47. Finally, in the situation where a trust is deemed to exist, it is difficult to conceive of a situation that may lead to the debtor being asked to pay twice – if the debt is paid to the trustee, it should be held for the benefit of the beneficiary of the trust (ie the ‘failed’ assignee) and if it is paid to the beneficiary
45 Vandepitte v Preferred Accident Insurance Corp. Of New York PC ([1933] AC 70) 46 See s.136 LPA
47 See further Deformalisation of Assignment Law and the position of the debtor in European Property
directly, the trustee would have little ground to make a claim to be paid (for the benefit of that beneficiary). Pursuant to English law then, the debtor enjoys a higher level of protection against the possibility that it will fail to discharge its debt following an assignment than under Dutch law.48
Below, I will examine how the courts have applied this theoretical framework to the thorny issue of PACs.
5.2 PACs before the English courts
Armed with the multitude of possible transfer methods described above, the English courts have reached a variety of conclusions when they have been asked to consider the effect of a PAC, which conclusions can be difficult to reconcile and have been criticised as leading to ‘a state of confusion’49
.
In Linden Gardens50, the House of Lords was asked to consider the effect of a clause that purported to prohibit the assignment of contractual rights to a third party. Lord Browne-Wilkinson concluded, in a unanimous judgement, that “an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights”. It must be noted that in reaching this conclusion, Lord Browne-Wilkinson’s judgement appears to have been influenced by the fact that the assignor was not a party to the proceedings and that since contracts of the nature under consideration (a building contract) were typically ‘pregnant with disputes’, the obligors intention when concluding a contract with a PAC must have been to ensure that he would deal only with his original contracting party. Gullifer has cited Linden Gardens as evidence for the conclusion that a PAC prohibits legal assignment (i.e. an assignment made pursuant to s.136 LPA), although acknowledging that the effect of any contractual clause will depend on its wording.51
48 See further part 4.1 above in respect of the Dutch law approach to this issue.
49 Trust of a Non-Assignable Contractual Benefit: Barbados Trust Company v Bank of Zambia,
Alexander Trukhtanov, The Modern Law Review, Vol. 70, No. 5 (Sep., 2007), pp. 848-856
50 Linden Gardens Ltd v Lenesta Ltd [1994] 1 A.C. 85
51 Should clauses Prohibiting Assignment be overridden by Statute? 4 Penn St. J.L. & Int’l Aff. 47
(Dec, 2015). Louise Gullifer, part II and footnote 13. This view is also repeated in Ban on assignment clauses: views from the coalface. Hugh Beale, Louise Gullifer and Sarah Paterson. B.J.I.B. & F.L. 2015, 30(8), 463-466.
The importance of contractual interpretation in determining the effect of a PAC was further highlighted by Lightman J in Don King Productions52, where it was acknowledged that while the presence of a PAC in the underlying contract did not prevent a trust from being declared over receivables, an appropriately drafted PAC might also in fact prohibit a trust. Interestingly though, while opening the door to the recognition of a constructive trust in the face of an assignment that failed due to the presence of a PAC, the court in Don King held that the courts “will be astute to disallow the procedural shortcut sanctioned in Vandepitte’s case in a commercial context where it has no place”. The intention appears to have been that the courts should avoid bringing an assignee and a debtor into direct contact, given the commercial intention of a PAC will often be precisely to prevent such relations, as indeed the court in Linden Gardens highlighted. The court in Don King therefore tried to protect the legitimate interests of the debtor (and therefore give effect to the intention of the underlying contract) while also recognising the interests of the assignee (and giving effect to the assignment contract through the recognition of a trust).
However, in Barbados Trust Co v Bank of Zambia53 two of the three presiding judges in the Court of Appeal, stated (obiter) that the Vandepitte procedure would be available to a beneficiary of a trust construed to exist as a result of a failed assignment54. In effect, the courts have declined to give effect to assignments in breach of a PAC (on the basis of the debtor’s interest in ensuring it would face only the creditor with whom it had decided to contract) while recognising the possibility that a constructive trust may result from a failed assignment (as a result of which the assignee may proceed against the debtor under the Vandepitte procedure). This reasoning is somewhat contradictory. Indeed, Bridge has commented that despite judicial assertions that equitable assignment and a declaration of trust are not the same thing “they are like Siamese twins who are readily separated”55
.
52 Don King (Productions) Inc v Warren, [1998] 2 All ER 608, [2000] Ch 291, Ch D. 53 Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; [2007] 1 Lloyd’s Rep 495.
54 In this case, it was held that since the PAC in question required consent to a assignment and such
consent had not been provided prior to the purported assignment, that assignment failed but that a trust could be found since the PAC did not exclude the creation of a trust.
In conclusion, English law has shown a willingness to adapt existing legal constructs such as the trust to find a balance between the interests of debtors, assignors and assignees but as the lines between different methods of transfer become increasingly blurred, the value of construing a trust in place of permitting an equitable assignment has become questionable. In both instances, it currently appears that if the intention of the debtor was to avoid direct relations with the assignee, that intention will be thwarted equally by an equitable assignment as by the recognition of a constructive trust.56
Finally, it is also clear that the effect of a PAC and the ability of the courts to give effect to an assignment at law, in equity or via a constructive trust will largely depend on the proper construction of the clause in question. It is therefore appropriate to consider briefly the rules of construction commonly employed by the English courts.
Generally, English courts have employed an objective standard in contractual interpretation, applying a purposive approach that looks in the first instance to the plain meaning of the words used. In Investors Compensation Scheme v. West Bromwich Building Society57, Lord Hoffman for example set out five principles applicable to the construction of a contract as follows:
1 A contract has the meaning that a reasonable person would afford to it, having the background knowledge which would reasonably have been available to the parties at the time of the contract,
2 provided that for such purposes, the background includes “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”,
3 subject to the exception that the background does not include “previous negotiations of the parties and their declarations of subjective intent”,
4 where the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean; and
56 See further in respect of English case law; Prohibitions on assignment: a choice to be made. C.L.J.
2014, 73(2), 405-434, G.J. Tolhurst and J.W. Carter; and Prohibitions on assignment: contract or property? BJIBFL, December 2014, 692-697.
57 Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 28; [1998] 1 All
5 where words should be given their "natural and ordinary meaning" on a common sense basis and provided that the law does not demand that a meaning that plainly could not have been intended be attributed to a document (for example, where linguistic mistakes had been made).
In conclusion then, the English position on PACs can be summarised as follows: (i) a PAC can prevent a purported assignment from having effect between the
debtor and the original creditor;
(ii) a failed assignment may give rise to a constructive trust, provided that such possibility is not excluded by contract;
(iii) the beneficiary of such a trust may be able to proceed directly against the debtor by invoking the Vandepitte procedure; and
(iv) points (i) and (ii) are matters of contractual interpretation.
5.3 Arguments in favour of legislative change to English law
As a result of the above overview of the state of English case law on the issue of PACs, one can conclude that there is at least an argument that legislative intervention would be desirable in order to clarify the rules as to when and how an assignee can proceed against a debtor. The rationale in this area is currently somewhat unclear - the holder of an equitable title must ‘join’ the legal title holder in order to enforce a claim, the beneficiary of a trust must use the Vandepitte procedure (if available) or obtain a power of attorney58 (if possible) to enforce a claim directly against the debtor and the beneficiary of a constructive trust recognised as a result of a failed assignment is yet to be categorically determined.
If uncertainty detrimentally affects the ability of a creditor to sell or otherwise deal with his receivables, it is suggested that rules specifying when and how a financier can expect to enforce its claim directly against a debtor would assist the availability of financing.
58 This possibility is described in further detail by Bridge in his article ‘Unassignable Rights’, who
concludes that “for this approach to be successful in all cases, the assignee would have to acquire a limited property interest”.
However, it will be explained at part 6.2 below how the English legislature when framing its proposals on legislative change largely neglected to analyse these deficiencies in current English law and instead pursued a policy to deprive PACs of effect, driven by economic motivations.
6. Time to legislate?
Above, I have sketched the current legal framework in the UK and in the Netherlands concerning PACs and have shown that each system has its own deficiencies that would perhaps benefit from legislative intervention. In this part 6, I will set out briefly a number of alternative legislative solutions to addressing PACs before turning to evaluate the current English proposals and finally, examining how the further development of a Dutch solution could be informed by the lessons we can glean from the English experience of developing a legislative solution.
6.1 International examples
Both the UK and the Netherlands are currently out of step with the prevailing trend towards a legislative solution to the issue of the PAC.
On an international level, the UNIDROIT Convention on International Factoring provides a general rule at article 6(1) that a PAC has only inter partes effect between the debtor and the original creditor59 but allows Contracting States to afford PACs certain erga omnes effect - namely effect against assignees - by allowing a debtor that had its place of business in the relevant Contracting State at the time the sale contract was concluded to discharge its payment obligations by paying the original creditor60. Of the nine States in which the Convention is in force, three (France, Belgium and Latvia) have made such an election to extend the effect of a PAC61. However, it should be noted that the scope of the Convention is limited – its provisions are applicable only to the extent that the debtor and the original creditor have their places of business in different Contracting States and either (i) the assignee is located in a Contracting State or (ii) both the sale and assignment contracts are governed by the
59 Article 6(1): “The assignment of a receivable by the supplier to the factor shall be effective
notwithstanding any agreement between the supplier and the debtor prohibiting such assignment.”
60 Article 6(2); Article 18.
laws of a Contracting State. Further, the Convention applies only in respect of disclosed factoring which involves the factor performing two or more services62 and it is non-mandatory63. The Netherlands is not a party to this Convention, although the UK is.
The UNCITRAL Convention on the Assignment of Receivables in International Trade (2001) is also applicable to the international assignment of receivables64, on condition that the original creditor is located in a Contracting State at the time of conclusion of the assignment contract. Article 9 provides that “An assignment of a receivable is effective notwithstanding any agreement between the initial or any subsequent assignor and the debtor or any subsequent assignee limiting in any way the assignor’s right to assign its receivables” but preserves any liability of the assignor for breach of such a PAC. The Convention enjoys only a handful of signatories and has yet to enter into force65.
It should be noted that both of these international conventions are restricted to commercial activities, with the UNIDROIT Convention applying to receivables arising from contracts concerning the sale of goods and the supply of services other than contracts primarily concluded for ‘personal, family or household use’66 and the UNCITRAL Convention being limited by reference to the purpose of the assignment and excluding assignments made for ‘personal, family or household purposes’67
. Nevertheless, they evidence an increasing trend toward legislative solutions.
At a domestic level, Germany, the US and Canada each have notable statutory rules on PACs. In Germany, as a general principle, parties are permitted to agree a PAC68. However, such a clause will have no proprietary working if agreed between certain
62 The services are listed in Article 1(2)(b) as finance for the supplier, including loans and advance
payments; maintenance of accounts (ledgering) relating to the receivables; collection of receivables and protection against default in payment by debtors
63 Article 3
64 UNCITRAL Convention on the Assignment of Receivables in International Trade (2001),
Explanatory Notes Section II.D: “An assignment is international if the assignor and the assignee are
located in different States. A receivable is international if the assignor and the debtor are located in different States. The international character of an assignment or a receivable is determined by the location of the assignor and the assignee, or the debtor, at the time of the conclusion of the assignment contract (a subsequent change does not affect the application of the Convention).”
65 Status table ‘Overview of the status of UNCITRAL Conventions and Model Laws’ v. 04 July 2016, available at https://www.uncitral.org
66
Article 2(1)(a) 67 Article 4(1)(a) 68 399 BGB
