Business Law in English II

Financial Law II: Trade Financing

Emeric PREVOST, LLB, LLM
 Overview

I. General considerations
II. Letters of credit
III. Bills of lading
IV. Factoring
 I) General considerations
• Trade financing vs. Credit facilities
• Facilitates international trade (export-import) by reducing payment risk and
the supply risk through the intermediation of a third-party
• Main Tools:
o Letters of credit
o Factoring
o Invoice discounting
o Export credit
o Insurance
II. Letters of credit
 II) Letters of credit

1. Definition of letters of credit (l/c):

o = a letter by which an issuer undertakes to honour a documentary presentation by
payment to a beneficiary at the request or for the account of an applicant
2. Parties to a l/c:
o applicant = buyer
o beneficiary = seller
o issuer = bank of buyer
o advising, confirming or paying bank = bank of seller or correspondent bank
3. Purpose of l/c:
o essential in cross-border commerce where parties often do not know and trust each
other
o provides applicant with credit and beneficiary with a guarantee of payment
o involves banks as intermediaries
o l/c is a negotiable instrument
 II) Letters of credit

• Types of letters of credit

o revocable or irrevocable l/c
o confirmed or unconfirmed l/c
o standby l/c (or SBLC)
= a credit which is payable in the event of a default of the other party's
obligations
Letters of credit
 II) Letters of credit
• Applicable law
o Exception for negotiable instruments (e.g. Art. 1(2)(d) Rome I)
o Parties’ autonomy: choice of law (Art. 3 Rome I; Art. 7 Japanese Act PIL)
o If no choice:
ØEU Law solution:
olaw of the place of the habitual residence (central administration, Art. 19
Rome I) of the party effecting the characteristic performance, Art. 4(2)
Rome I.
ØJapanese Law:
§law of the place with which the act was most closely connected at the
time the act was made (Art. 8(1) of the Japanese Act of PIL);
§law of the place of habitual residence (or place of the (principal)
establishment) of the party undertaking the characteristic performance
is presumed to be the law of the place with which the juristic act is most
closely connected (Art. 8(2) of the Japanese Act of PIL).
 II) Letters of credit

o What is the characteristic performance?

ØPayment obligation under the l/c = obligation incumbent to the
advising, paying or confirming bank
§ Applicable law = law of the place of central administration of bank
the paying or confirming
ØNote: debate as to whether the characteristic performance is
simply the issuance of the l/c?
§ In such case: Applicable law = law of the place of central
administration of bank issuing the l/c
 II) Letters of credit
1. Uniform Customs and Practice for Documentary Credits - UCP 600
o issued by the International Chamber of Commerce (ICC)
o first version adopted in Vienna 1933
o not a set of stringent legal rules
o incorporation into agreement of the parties
o followed by bankers and traders around the world
o can be considered as a custom under national law
o For electronic l/c: eUCP 500 (2002) and now eUCP 600 (2007)
2. International Standby Practices (ISP 98)
o issued by the International Chamber of Commerce (ICC)
o for users of standby l/c
3. Uniform Rules for Bank-to-Bank Reimbursement (URR 725)
o issued by the International Chamber of Commerce (ICC)
o URR 725 effective as from 1 October 2008
III. Bills of Lading
 III) Bills of Lading
• Bills of lading (B/L) (French: connaissement, German: Konnossement)
• B/L has the following functions:
o determines the rights and obligations of the parties (contractual function)
o provides prima facie evidence of the cargo received (probatory function)
o allows the transfer and hypothecation of the goods (commercial function)
• Use of the blockchain for B/L? Several benefits
o Secures uniqueness, exclusive access, fast and immutable transfer from title holder
o eliminates human errors
o less vulnerable to attacks
o reduces concerns about government censorship
 III) Bills of Lading
• Types of B/L:
o non-negotiable B/L (“waybill”)
§ cannot be transferred to third person
§ duty of the carrier is to deliver to the consignee named in the bill
only
o transferrable B/L
§ goods can be transferred to third persons by transfer of the bill
§ transfer is made by “endorsement” (=signing on the back) either to
a specific person or in blank
 III) Bills of Lading
1. The “Hague-Visby Rules”
a. International Convention for the Unification of Certain Rules of Law relating
to Bills of Lading (Hague Rules), 25 August 1924
b. Amended by the First and Second Protocol (Visby Rules), 23 June 1968 and
21 December 1979
Ømost widely ratified convention on maritime transport
2. United Nations Convention on Contracts for the International Carriage of Goods
Wholly or Partly by Sea (New York, 2008) (the "Rotterdam Rules")
3. UNCITRAL Model Law on Electronic Transferable Records (2017)
o Adopted by Bahrain, Belize, Kiribati, Papua New Guinea, Paraguay, Singapore,
United Arab Emirates (UAE)
o inter alia designed for B/L
o dematerialisation of B/L
IV. Factoring
 IV) International Factoring:
General Considerations
1. Definition factoring:
= the purchase of debts by a financial institution (= factor)

2. Method
Øby assignment of claim (e.g. Art. 466 et seq. Japanese Civil Code); or
Øby subrogation (e.g. Art. 423 et seq. Japanese Civil Code)
3. Advantages:
Ø providing immediate financing to the creditor
Ø relieving the creditor from the burden of collecting the debt
Classic factoring method
 Assignment of claims:
General Considerations

• assignment = transfer of a claim

• to be distinguished from a transfer of contract
• assignment is important for
• secured transactions (= collateralised transactions)
• factoring
• debt collection
 Assignment of claims
A B
Assignor Creditor Debtor Assigned
Payment Obligation

Assignment of claims Initial claim

Payment

Assignee
 Assignment of claims
A B
Assignor Creditor Debtor Assigned
Payment Obligation
Ex Art 466(2) JCC:
Not enforceable
Assignment of claims Initial claim
Defence (§2):
Ex Art 466(2) JCC:
No knowledge in

Payment
Not valid good faith
Valid?
New Art. 466(2) JCC:
Yes, valid New Art. 466(2) JCC:
C Yes, enforceable

Counter defence(§4): Defence (§3):

Debtor does not pay Knowledge or gross
to the assignor within negligence
a reasonable delay
Assignee
 Assignment of claims under Japanese Law
Before the Reform of the JCC
Art. 466 JCC:
“(1) A claim may be assigned; provided, however,
that, this shall not apply to the cases where its
nature does not permit the assignment.
(2) The provisions of the preceding paragraph
shall not apply in cases where the parties have
manifested their intention to the contrary;
provided, however, that such manifestation of
intention may not be asserted against a third
party without knowledge.”
Art. 467 JCC: Assigned claim may be asserted
against the debtor or third party if there has been
a notice to the debtor or acknowledgment by the
debtor (i.e. perfection requirement)
Reform of the JCC of May 2017 effective
on 1 April 2020
Art. 466 JCC:
“(1) A claim may be assigned; provided, however, that this does not apply if
its nature does not permit the assignment.
(2) Even if a party to a claim manifests the intention to prohibit or
restrict the assignment of the claim (hereinafter referred to as the
"manifestation of intention to restrict assignment"), the validity of the
assignment of the claim is not impaired.
(3) In the case prescribed in the preceding paragraph, the obligor may refuse
to perform the obligation to a third party such as the assignee that knew or did
not know due to gross negligence that the manifestation of intention to restrict
assignment was made, and may duly assert against such third party any event
that results in extinguishment of the obligation such as payment to the
assignor.
(4) The provisions of the preceding paragraph do not apply if the obligor does
not perform the obligation, and the third party prescribed in that paragraph
makes a demand to the obligor for the performance to the assignor by
specifying a reasonable period of time, but the obligor does not perform the
obligation within that period.”
Art. 466-6 JCC: possibility to assign claims yet to arise.
Art. 467 JCC: Assigned claim may be asserted against the debtor or third
party if there has been a notice to the debtor or consent by the debtor
(i.e. perfection requirement).
 Assignment of claims
French and German Law Comparison
French Civil Code
Art. 1321: “The assignment of a claim is a
contract by which the assigning creditor
transfers, whether against payment or free
of charge, all or part of his claim against the
assigned debtor to a third party called the
assignee.
It may relate to one or more present or
future, determined or determinable claims.
It extends to the accessories of the claim.
The consent of the debtor is not required,
unless the claim has been stipulated to be
non-assignable.”
Art. 1324: “The assignment is enforceable
to the debtor, if he has not already
consented to it, only if it has been notified
to him or if he has taken note of it” (i.e.
perfection requirement).
German Law (BGB and HGB)
Section 398 (Assignment) BGB
“A claim may be transferred by the obligee to another person by contract
with that person (assignment). When the contract is entered into, the new
obligee steps into the shoes of the previous obligee.”
Section 399 (Exclusion of assignment in case of change of contents or
by agreement) BGB
“A claim may not be assigned if the performance cannot be made to a
person other than the original obligee without a change of its contents or
if the assignment is excluded by agreement with the obligor.”
Section 354a (Validity of the assignment of a monetary claim) HGB
“(1) If the assignment of a monetary claim is excluded by agreement with
the debtor pursuant to section 399 of the Civil Code and the legal
transaction underlying such claim is a commercial transaction for both
parties, or if the obligor is a legal person under public law or a special fund
under public law, then the assignment nonetheless will be effective. The
debtor may, however, render performance to the previous creditor with
discharging effect. Agreements in derogation herefrom are void.
(2) Subsection (1) does not apply to a claim under a loan agreement
where the creditor is a credit institution within the meaning of the
Banking Act.”
 Subrogation
A B
Subrogor Creditor Debtor
Payment Obligation

Initial claim
Subrogated

Payment
claim

Subrogee New creditor/

Obligee
 Applicable Law:
UNIDROIT Factoring Convention
• International Material Rule Approach
ØUNIDROIT Convention on International Factoring
Øconcluded on 28 May 1988 in Ottawa
Ø9 contracting states
◦ Belgium ◦ Latvia
◦ France ◦ Nigeria
◦ Germany ◦ Russia
◦ Hungary ◦ Ukraine
◦ Italy
 UNIDROIT Factoring Convention
A. Scope of application
1) Material scope
• factoring contract (Art. 1):
a. not for assignment of receivables arising from contracts of sale
of goods for personal, family or household use
b. Art. 1(3): goods = services ; sale of goods = supply of services
c. factor must perform at least two of these functions:
• finance supplier
• maintain accounts
• collect receivables
• protect against debtor’s default
d. notice of assignment given to debtor
 UNIDROIT Factoring Convention

2) Geographical scope (Art. 2):

a. supplier and debtor must have their place of business in different
states, and
b. alternative condition:
i. those states and the state where the factor has its place of
business are contracting states, or
ii. both contract of sale and factoring contract are governed by law of
a contracting state
 UNIDROIT Factoring Convention
3. Possibility to exclude convention (Art. 3)
a. in factoring contract, or
b. between parties to a sale contract, but only for receivables that arise
at or after the time when the factor has been given notice in writing of
the exclusion
c. Scope of exclusion: only exclusion of the convention as a whole (no
dépeçage)
 Practice Case
1. Facts:
• An Italian Co in Milan sells food products to a Japanese Co seated in Tokyo
• The sale contract contains a clause providing that claims arising out of the contract
may be assigned or otherwise transferred only upon prior consent of the counterparty
• No choice of applicable law has been made in the sale contract
• The Italian Co assigns its claims to a French Bank as per their factoring contract which
is expressly governed by French law
• After notification and request to pay, the Japanese Co refuses to pay to the French
Bank as it has not consented to the assignment of the claims
2. Procedure:
• Acting upon the persistent refusal of the Japanese Co, the French Bank starts a legal
action in Tokyo to recover the money due, and additionally claims damages
 Practice Case

1. Questions:
a. Which law should the Japanese judge apply?
– Does the UNIDROIT Factoring Convention apply?
b. Is the Japanese company obliged to pay to the French Bank?
 Practice Case
1. Facts:
• An Italian Co in Milan sells food products to a Japanese Co seated in Tokyo
• The sale contract contains a clause providing that claims arising out of the contract
may be assigned or otherwise transferred only upon prior consent of the counterparty
• No choice of applicable law has been made in the sale contract
• The Italian Co assigns its claims to a French Bank as per their factoring contract which
is expressly governed by French law
• After notification and request to pay, the Japanese Co refuses to pay to the French
Bank as it has not consented to the assignment of the claims
2. Procedure:
• Acting upon the persistent refusal of the Japanese Co, the French Bank starts a legal
action in Tokyo to recover the money due, and additionally claims damages
 Practice Case
1. Reasoning
• Japanese Courts of the place of domicile of the Defendant are competent (Art. 3-2(3) Japanese
Code of Civil Procedure)
àJapanese conflict-of-laws provisions apply
• In the case of assignment of claims/receivables as per the factoring contract
àArt. 23 of the Act no. 76 on the General Rules of Application of Laws (“Japan PIL”)
“The effect of an assignment of a receivable in relation to a debtor and other third parties shall be
governed by the law applicable to the receivable which is to be assigned.”
• Which claim is assigned? à The claims of the Italian Co under the sale contract
• What is the law applicable to the sale contract?
àNo choice of law: therefore, Art. 7 Japan PIL does not apply
à In the absence of choice of law:
§ closest connection test (Art. 8(1) Japan PIL)
§ Presumption that the closest law to the contract is the law of habitual residence/place of
business of the debtor of the characteristic performance (Art. 8(2) Japan PIL)
àIn a sale contract, the characteristic performance (i.e. the delivery) is done by the seller
àIn our case: The contract of sale is governed by Italian law, which is the law of the place of
business of the seller, i.e. the Italian Co seated in Milan
 Practice Case

• Pursuant to Art. 23 Japan PIL: Italian law governs the assignment of claims arising under the sale
contract
• But Italy is a State party to the UNIDROIT Factoring Convention
• Is the UNIDROIT Factoring Convention applicable?
a. Material scope of application
àYes. We are in a factoring situation as prescribed by Art. 1 of the Convention.
b. Geographical scope of application: Article 2 of the Convention
àSupplier and debtor have their place of business in different States (Italy and Japan)
à Supplier and factor have their place of business in Contracting States (Italy and
France), but the debtor has its place of business in a non-Contracting State (Japan)
--> therefore, the Convention is not directly applicable (Art. 2(1)(a) of the Convention)
 Practice Case

à However:
§ The law applicable to the factoring contract is French law, i.e. the law of a Contracting
State, and it is a valid choice as per Art. 7 Japan PIL
§ The law applicable to the sale contract is Italian law, pursuant to Art. 8 Japan PIL; it is
the law of a Contracting State
§ Therefore: pursuant to its Art. 2(1)(b) (indirect applicability), the UNIDROIT Factoring
Convention is applicable and its rules are part of Italian law
 UNIDROIT Factoring Convention

1. Rights and duties

• assignment is effective notwithstanding any agreement to the contrary between
supplier and debtor (Art. 6)
• possibility to transfer all rights from sales contract (Art. 7)
• duty of debtor to pay on notice by the factor or the supplier (Art. 8)
• debtor may assert against the factor all defences available at the time the
assignment was notified (Art. 9)
• remedies for non-performance of the supplier primarily against supplier (Art. 10)
2. Practice case:
– Is the Japanese company obliged to pay to the French Bank?
– Answer:Yes, but may assert available defences (e.g. set-offs)
Classic factoring
Reverse factoring
 Assumption/assignment of debt
Article 472 (Requirements for and Effect of
Assumption of Obligation Releasing Old
Obligor) Japanese Civil Code
(1) A new obligor resulting from the assumption of
obligation releasing an old obligor assumes an
obligation of the same content as the obligation of
the initial obligor to the obligee, and the initial
obligor is released from their own obligation.
(2) The assumption of obligation releasing an old
obligor may be effected by a contract between the
obligee and the person that becomes the replacing
obligor. In such a case, the assumption of obligation
releasing an old obligor becomes effective when the
obligee notifies the initial obligor of the conclusion
of that contract.
(3) The assumption of obligation releasing an old
obligor may also be effected if the initial obligor and
the person that becomes the replacing obligor
conclude a contract and the obligee gives consent to
the person that becomes the replacing obligor.
Assignment of debt under the French Civil
Code
Art. 1327:
A debtor may, with the agreement of the creditor,
assign his debt.
The assignment must be recorded in writing,
otherwise it shall be null and void.
Art. 1327-1:
The creditor, if he has given his consent to the
assignment in advance and has not intervened in it,
such assignment may not be enforced against him or
relied upon until the day on which it has been
notified to him or as soon as he has taken note of it.
Art. 1327-2:
If the creditor expressly consents, the original debtor
is released for the future. Failing this, and unless
otherwise agreed, he is jointly and severally liable for
payment of the debt.
Thank you!