Assignations in international private law – which law should govern the proprietary aspects?
The international private law relating to tangible moveable property was described by Cheshire in 1952 as “the most intractable topic in English private international law.” 50 years later Dr Janeen Carruthers, now one of the editors of Cheshire’s majestic textbook on international private law, states in her The Transfer of Property in the Conflict of Laws (para 6.05), “The complexity of the rules concerning chattels , however, is surpassed by that concerning the rules relating to intangible moveable property”.
Wherever the law of property and the law of obligations interact there are complexities, when there is an international dimension these complexities are compounded – the difficulty in this context involving identifying an appropriate connecting factor for the proprietary aspects of an international assignation. And for lawyers practising in scotland this is a particular problem because the domestic law of assignation contains restrictions and formalities (with a formal requirement for intimation to the debtor to divest the assignor and vest the claim in the assignee, causing problems for the transfer of future rights, and block transfers such as would be used in debt factoring or securitisation arrangements).
For assignations the complexity lies in the fact that there is an obligation owed by the original debtor to the original creditor – potentially governed by one applicable law; an agreement to assign between that creditor as assignor and the assignee – potentially governed by another applicable law; and a conveyance (the assignation itself) from creditor/assignor to assignee. However, there is then the question of the passing of the right – and the question who holds the right to payment. This is a proprietary question. Which law should govern the proprietary question?
The topic is complex. Under the old Rome Convention, enshrined in the UK in the Contracts (Applicable Law) Act 1980, the question was left open. Assignation was governed by Article 12 which provided,
" 1. The mutual obligations of assignor and assignee under a voluntary assignment of a right against another person ('the debter`) shall be governed by the law which under this Convention applies to the contract between the assignor and assignee.
"2. The law governing the right to which the assignment relates 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 any question whether the debtor's obligations have been discharged."
Article 12 (1) dealt with the rights and obligations arising within the assignation itself – and was governed by the law the parties chose to govern it (so covered the obligation to pay, the consequences of non-payment, any guarantees such as the warrandice debitum subesse). Article 12 (2) dealt with whether or not the obligation was assignable (so, for example, if there was a prohibition on assignation within a contract under French law the contract would be assignable, but a prohibition on assignation within a contract under Scots law the assignation would arguably – based on the recent cases – not be assignable). And Article 12 (2) also deals with questions between the debtor and the assignee providing that they are governed by the law of the original obligation. This makes sense because the essence of assignation is that the assignee steps into the shoes of the original creditor/assignor. And the original debtor should not be prejudiced in any way by this change of creditor.
However, what Article 12 did not do was to determine what law governed the transfer itself. This is important because there are two principal approaches within the systems: those where notification is a constitutive part of the process of transfer; and those where notification is not a constitutive part of the process of transfer.
For example, if a claim to payment under a contract governed by Scots law between Alf (who is in the Republic of Ireland) and Bert (who is in France) is assigned by Alf to Carol (who is in Germany) with an assignment under English law which law determines WHEN Carol becomes the creditor in the obligation. Is it Scots law or Irish law or French law or German law or English?
As can be seen the proprietary question was left silent in the Rome Convention, and this was a conscious decision – as the Giuliano-Lagarde report indicated that proprietary issues were not considered by the Convention.
A variety of possible connecting factors suggest themselves. For example the law of the obligation to be assigned; or the law of the assignation; or a connecting factor based on the residence of one or other of the parties; or based on the fiction of the situs of the debt (which would enable the proprietary rule for incorporeals to coincide with the general approach to property transfers in IPL).
Given that property law ordinarily sets out the framework within which obligations operates, and property law is governed to a large extent by concerns relating to third parties – be they creditors or prospective transferees – a property lawyer’s reaction is that there is a risk in giving too much autonomy to the parties in that they may adversely affect the interests of third parties.
However, party autonomy is an important principle in IPL and led the Dutch Hoge Raad in Brandsma qq v hansa Chemie AG HR 16 May 1997, NJ 1998, 585, to favour an approach to the proprietary consequences of assignations based on Article 12 (1).
This approach can be contrasted with that in England where Article 12 (2) was said to apply. Raifeissen Zentralbank Osterreich AG v Five Star General Trading  QB 825 (Court of Appeal) with the leading judgment of Mance, LJ on the question of who was entitled to the proceeds of an insurance claim that had been assigned by the insured to a bank. He analysed assignment as being contractual and argued that as Article 12 (2) dealt with the question of payment between debtor and assignee the obligation assigned therefore governed the proprietary aspects of the transfer.
Other countries held that Article 12 had no role in the proprietary effect of the transaction and in France, for example, they seemed to apply an approach based on the residence of the debtor (ie the situs of the debt).
With this aspect of the international private law uncertain there was further consideration in Article 14 of the Rome I regulation (in force from 17th December 2009) which provides
"1. The relationship between assignor and assignee under a voluntary assignment or contractual subrogation of a claim against another person (the debtor) shall be governed by the law that applies to the contract between the assignor and assignee under this Regulation.
2. The law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor's obligations have been discharged.
3. The concept of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges or other security rights over claims."
While this is a step forward from the previous position, in clarifying that – for example – assignations in security are covered. It does not deal with the proprietary issue. The problem remains and mirrors the problem in the previous provision in the Rome Convention. However, Article 27 of the Regulation provides that within 6 months this area to be reviewed. A discussion paper from the Ministry of Justice and Scottish and Northern irish governments “Rome I: European Commission Review of Article 14: Assignment”, raises questions on which views are invited by 22 February 2010.
The UK government has argued that the law of the obligation to be assigned should govern the proprietary consequences, as this will remain constant for the life of the obligation giving increased certainty (and endorsing the approach of the Court of Appeal). The alternative approach suggested during the initial negotiations on Rome I is that the law of the habitual residence of the assignor should govern the proprietary consequences.
But while the law is unclear it is apparent that there has been an impact in practice. Some years ago Professor Jenny Hamilton and myself carried out research for the Scottish Executive Central Research Unit on business finance for small and medium sized businesses in Scotland. This research involved various strands including interviews with legal and other advisers to the SMEs. What became apparent was that conscious of limitations within Scots law many businesses were being advised to prepare their contracts under English law. The assumption seemed to be that the approach subsequently adopted in Raiffeisen is correct, the consequence being that to best serve their clients to facilitate the raising of money from sale or security over book debts Scottish firms. And the advantage to the Scottish business of doing this is that under English law no notification is needed for the transfer as an equitable assignment is effective to divest the assignor and invest the assignee.
Now, while the governments within the Uk are consulting on the question there is an acknowledgement that there might be one problem created by the UK’s preferred approach (of having the law of the underlying assignation governing the proprietary consequences of the transfer). For factoring (and potentially for other bulk assignations) it was proposed by some Member States that the applicable law should be that of the assignor’s habitual residence, an argument based on the nature of factoring. In factoring there is a purchaser who buys receivables in bulk, and it would be costly and time consuming if he or she required to determine the law governing each individual debt. As the habitual residence of the assignor is common to all the debts, this would simplify the process appreciably. However, bulk assignments are also common in structured-finance transactions (where claims may change hands 2 or more times) and the Uk government believe it “would be undesirable to adopt choice-of-law rules that could produce uncertainty (as might be the case if the law of the assignor’s habitual residence were applied…)”.
There is also a concern – expressed forcefully by some experienced practitioners when I delivered a paper at the recent conference on assignations arranged by Dr Ross Anderson at the University of Glasgow – that the habitual residence of the assignor may change, or a business may be resident in more than one place. One possible approach, suggested by professor Gerry Maher QC, is to use the connecting factor which applies in the jurisdictional rules on cross border insolvency. In this context the "centre of main interests" is used. And if – to facilitate bulk transfers – the centre of main interests of the assignor was used it would clearly point to one system and plug into the jurisprudence of the European court of Justice.
If the law is changed to provide for a rule based on the residence or business centre of the assignor to determine proprietary questions the flexibility Scottish businesses have enjoyed through the use of English law – and the consequent ability to transfer without formal notice to the debtor – will be lost.
The use of international private law to avoid the formalities of Scots law may have eased some of the pressure to consider and reform potential deficiencies within the system. It would be ironic if a move from Europe in international private law designed to ease business for small and medium sized enterprises served to prejudice Scottish businesses, and drove the domestic reform of the area.
PS The above was written before the recent blog post from Professor Clive.