The assignment of a claim is an important legal instrument for the financial market. It enables both simple transfers of claims from one person to another and complex financial operations used to finance the business activity of firms, such as financial collateral arrangements, factoring and securitization. Furthermore, it enables the availability of capital and credit across borders and allows small and medium enterprises (SMEs) to obtain credit at affordable rates. In a globalizing context, such cross-border transactions are a daily routine.
Substantively, there exists no harmonization in the field of the assignment of a claim on EU-level. The question which law is applicable to the assignment of a claim, therefore, can have a huge impact on the outcome of a dispute, when national jurisdictions apply different rules to make an assignment effective against third parties. The Rome-I Regulation contains a provision on the applicable law to the assignment of a claim. However, art. 14 of the Rome-I Regulation does not provide an answer to the most important question, i.e. which law governs the effectiveness of an assignment against third parties. This question is widely discussed and the topic of choice-of-law rules for the assignment of claims in financial services and markets is considered to be one of the most complicated, challenging and arcane.
On 29th September 2016, five years after the study carried out by the BIICL[1], the European Commission finally released its long-awaited report[2] on the matter. In its report the EC recognizes the necessity of a uniform connecting factor to determine the applicable law to the effectiveness of a cross-border assignment of a claim. Not only does the lack of a uniform connecting factor cause legal uncertainty, it also causes practical problems and high (legal) costs.
Comparative research[3] shows that four connecting factors are used among the Member States: (1) the law of the debtor’s habitual residence, (2) the law of the assignor’s habitual residence, (3) the law of the contract between assignor and assignee and (4) the law applicable to the assigned claim.
In order to present a possible solution, one has to review the four possible connecting factors with regard to:
(1) legal certainty: it should be easy for the parties involved and third parties to determine the applicable law. By doing so, the transaction costs will decrease and third parties such as creditors are better protected.
(2) multiple assignment: the connecting factor should provide a solution to the problem of multiple assignment. If X assigns a claim to Y and subsequently assigns the same claim to Z, how do we determine the applicable law without ending up in a deadlock situation?
(3) bulk assignments: the connecting factor should enable parties to assign a portfolio of claims without being faced with many different laws which would cause an increase of the transaction costs. To illustrate the problem the following example: a French company wants to assign its claims to a Dutch company. The contract is governed by French law. Now, if the law of the debtor’s habitual residence would determine the applicable law and one has a claim with a debtor in the UK, a claim with a debtor in Belgium and a claim with a debtor in Germany. One would be faced with four different laws if one would like to assign those three claims in one transactions: French law for the contractual aspects, UK, Belgium and German law for the effectiveness of the assignment.
(4) coinciding with the insolvency proceedings (i.e. the lex concursus): the law applicable to the effectiveness of the assignment should coincide with the lex concursus. The opening of an insolvency proceeding can impair the propriety interest of creditors. Therefore, creditors want to secure their position in case of the opening of an insolvency proceeding. If the applicable law to the effectiveness of the assignment of claim would be different from the lex concursus, a discrepancy arises which might affect the interests of those creditors.
(5) the connecting factor must avoid an increase of transaction costs.
Despite the fact that some scholars favour one of the above mentioned connecting factors, research shows that neither of the connecting factors is perfect as they all fall short of meeting the above mentioned conditions.[4] Furthermore, combinations and/or sector-specific rules need to be avoided as they carry the risk of inherent complexity and characterization problems. Therefore, it is not possible to formulate a uniform connecting factor from a purely theoretical perspective. In its report, the EC already rules out the law of the debtor’s habitual residence as a possible connecting factor and presents the three other connecting factors as a possible solution. At the same time the EC recognizes the fact that those three connecting factors are imperfect. Furthermore, The EC added that they will conduct a study on the law applicable to securities as well as claims traded on financial markets will be completed by mid-2017.[5]
Further empirical data on the actual impact of the legal objections is necessary in order to present a solution. However, there is a general consensus on the fact that a uniform connecting factor in the first place should meet the requirement of legal certainty, even though it might present some other theoretical issues.[6] It seems that the result of the negotiations between the Member States and the Commission will be one of weighing legal, economic and political interests against each other.
This post is based on a master thesis defended at the KU Leuven in June 2017.
[1] BIICL, Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of ethe assigned or subrogated claim over a right of another person, 2011, http://ec.europa.eu/justice/civil/files/report_assignment_en.pdf
[2] Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the question of the effectivness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person, Brussels, 29/09/2016, COM (2016) 626 Final, 12 p. (http://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/COM-2016-626-F1-EN-MAIN-PART-1.PDF)
[3] BIICL, Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of ethe assigned or subrogated claim over a right of another person, 2011, http://ec.europa.eu/justice/civil/files/report_assignment_en.pdf
[4] See for example: V. Sagaert, “De zakenrechtelijke werking van de cessie: De nieuwe IPR-regeling na de wet van 2 augustus 2002”, TPR 2003, 561-606 (in favour of the law of the assignor’s habitual residence); Verhagen, H.L.E. en van Dongen, S., “Cross-Border Assignments under Rome I”, Journal of Private International Law 2010, 6:1, 1-21 (in favour of the law of the contract between assignor and assignee); J. Perkins, “A Question of priorities: choice of law and proprietary aspects of the assignment of debts”, Law and Financial Market Review 2008, 238-243 (in favour of the law applicable to the assigned claim).
[5] Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the question of the effectivness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person, Brussels, 29/09/2016, COM (2016) 626 Final, 12. (http://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/COM-2016-626-F1-EN-MAIN-PART-1.PDF)
[6] F.J. Garcimartin, “Assignment of Claims in the Rome I Regulation: Article 14”, in F. Ferrari en S. Leible (eds.), The Law Applicable to Contractual Obligations in Europe, Munich, Sellier, 2009, 234 en 248; L. Steffens, “The New Rule on the Assignment of Rights in Rome I – The Solution to All our Proprietary Problems? – Determination of the Conflict of Laws Rule in Respect of the Proprietary Aspects of Assignment”, European Law Review 2006, 544; R. Fentiman, “Assignment and Rome I: towards a principled solution”, Law and Financial Markets Review 2010, 406;
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