United Nations Convention - Essay Example

Running Head: UN CONVENTION ON ASSIGNMENT OF RECEIVABLES United Nations Convention on the Assignment of Receivables of the [Name of the Institution] United Nations Convention on the Assignment of Receivables Introduction The United Nations Convention on the Assignment of Receivables has become an unexpected success story. It was concluded after more than 30 years preparation in 1980 by a United Nations (UN) conference in Vienna, at which 62 member-states participated. The number of states that have enacted the UN law for receivables now stands at 65, among them all important trading nations except the United Kingdom and Japan. There are now more than 2000 decisions of state courts and arbitration tribunals reported - and probably many more that are not recorded in one of the many databases - in national law journals or court reporters. The basic structures of the UN law for receivables have influenced domestic law reforms, regional projects of harmonisation of law such as Directives of the European Community, and international projects of unification such as the Principles for International Commercial Contracts of 1994/2004, promulgated by the Institute for the Unification of Private Law in Rome. It, most likely, is the uniform law convention with the greatest influence on the law of worldwide trans-border commerce, and in some countries lawyers and courts are today as familiar with the Convention as they are with their domestic law - it is the lingua franca of sales. Part of the success is or might be due to the simple requirements of application of the Convention, encoded in articles 1 to 6, which have become a model followed in other international conventions or draft conventions. They are simple in their basic structure, although not without some tricky details which require explanation. These application requirements will be the topic of this short introduction to the Convention.1 UN Law and UK Law: A Legal Perspective Article 1(1) (a) UN law for receivables requires only that the parties have their places of business in different contracting states that is states which have enacted the Convention. With 65 contracting states, now many sales contracts of U.K traders with foreign parties (for example in Australia, Asia, the United States or Europe) are governed by the Convention. Neither the nationality of the parties nor their qualification as merchants influences the application of the Convention, although consumer purchases are almost always excluded from the Convention. The parties' places of business in different states are, in other words, decisive, so that a U.K firm, having its relevant place of business in Australia, when concluding a contract with a firm in Wellington, might find its contract governed by the UN law for receivables. Also, the contract must be a "sale of goods", which normally does not pose problems, but there are borderline cases, with which I shall deal later, and an important extension to mixed contracts under article 3(2) of the UN law for receivables. Parties in Different States The predecessors of the UN law for receivables, the so-called Hague Sales Laws of 1964 - which were ratified by only nine states - used as the main requirement for application only that the parties were residing in different states, thus making it possible that parties from different states, which had not enacted the Uniform Sales Law, might have found their contract governed by this uniform law alien to both of them and to their countries. Therefore, this imperialistic claim of the old uniform sales laws was rejected in the preparation of the UN sales law, but not entirely.2 Article 1(1)(b) states that the UN law for receivables [page 782] is applicable, if the parties are situated in different states - which need not be contracting states, if the conflict of law rules of the forum lead to the application of the law of a contracting state. Thus, if there is a contract between a Japanese and an English trader subject - on account of a clause in the contract - to arbitration in Wellington under U.K law, the UN law for receivables would govern as the applicable law of U.K. This is not a very likely situation. More likely is a contract between a U.K trader and a Japanese or United Kingdom trader being litigated in a U.K court on account of a jurisdiction clause, or U.K law being applicable on account of a choice of law clause, or because of the conflict of law rules of the U.K forum, on account of objective factors determining U.K law to be applicable. Comparable cases had to be decided in Germany very often in the years before Germany had ratified the UN law for receivables but other European states such as Italy or France had already ratified the Convention. If their law was applicable, German courts had to apply and did apply the UN law for receivables as part of the applicable Italian or French law, deciding that neither the Italian nor French domestic law was applicable, but the law for international sales, that is the UN law for receivables. In my example of a contract between a U.K and a Japanese trader, even a Japanese court would have to apply the UN law for receivables, if its conflict of law rules pointed to the application of U.K law.3 The consequence of article 1(1) (b), which meant that parties in non-contracting states could be subject to the application of the UN law for receivables, (a law that their country had not ratified), met with serious objections in Vienna, and it was accepted only on account of a compromise allowing a reservation, that is a ratifying state could declare that it would not be bound by article 1(1)(b). It would, in other words, apply the Convention only if both parties had their places of business in different contracting states. This reservation was, unfortunately, made by a number of very important states such as China and the United States. It has attracted much scholarly attention and, consequently, some confusion. What does this reservation mean for contracts between U.K as a member state which has not made reservation under article 95 of the UN law for receivables and foreign parties, having their place of business in reservation states, for example in China or the United States Despite the reservation declared, these states are contracting states within the meaning of article 1(1)(a), so that the Convention applies on account of this basic provision; article 1(1)(b) and the reservations declared in regard to this provision can be disregarded. This applies whether the case is litigated in U.K or in the reservation state. Matters are different if parties in a (contracting) reservation state and in a non-contracting state are involved. If a contract between a Chinese trader - a party having its place of business in a contracting, but reservation state - and a Japanese trader, a party in a non-contracting (a non-Convention) state is at stake, a distinction has to be made. If litigated in a Japanese court under Japanese law, the UN law for receivables would not be applicable. If litigated in China under Chinese law, the UN law for receivables, although having been ratified by China, would be inapplicable because of the reservation declared by China under article 95 of the UN law for receivables. Now, if the case were tried in a U.K court and the court's conflict of law rules determined Chinese law as applicable, would that be the UN law for receivables I think that this would not be the case, for the U.K court has to apply Chinese law as a Chinese court would do, which would mean the U.K court would have to respect China's reservation under article 95 of the UN law for receivables by not applying the UN law for receivables.4 UN law for receivables and Conflict of Laws Rules Although it was thought by those drafting and promulgating a uniform sales law that it would make conflict of laws rules obsolete, this is not the case. Even if the UN law for receivables is applicable on account of article 1(1)(a) - which in itself could be regarded as a one-sided conflict rule there are many questions not covered by the Convention which have to be solved under domestic law determined by conflict rules of the forum. And in the case of an article 1(1)(b) situation, conflict rules are indispensable, since they are a prerequisite to the application of the Convention. Therefore, even in the case of a sale clearly governed by the Convention, it is advisable to have a choice of law clause. Main Differences between UN law for receivables and UK Case Law Opting Out When reading the prerequisites of application and realising that the contract of the client might be governed by the Convention, every lawyer must have in the back of his or her mind: can I get out of the Convention, and how Article 6 provides an answer, but only a partial one. a) The parties can opt out of the Convention on the conflict of laws level by choosing the law of a non-contracting state. The U.K and the German party to a sales contract can opt out of the UN law for receivables by choosing English law to govern their contract. Since England has not enacted the Convention, the UN law for receivables is not applicable. Although this is clearly stated in article 6 of the UN law for receivables, ultimately it is the conflict of laws rules of the forum that decide such matters as whether such a choice of law clause is valid, how it has to be agreed upon, and whether some form requirement applies. If, for example the choice of law clause is to be found only in a letter of confirmation, the forum state's conflict rules decide whether this choice of law clause is valid. b) The parties can also opt out on the level of substantive law. This is the core meaning of article 6 of the UN law for receivables. If in a contract between an Australian and U.K trader, the UN law for receivables would be applicable on account of article 1(1)(a), the parties can derogate from the uniform sales law and opt, for example, for the U.K Sale of Goods Act 1908. But there is a catch that has led to a great number of court decisions. If the clause only reads something like, "the parties stipulate that the law of U.K applies to this contract", then, since the UN law for receivables is part of the law of U.K, the UN law for receivables would still govern, at least on the plain meaning of this clause. The parties, therefore, have to make it clear if they want to derogate from the UN law for receivables, by stating that the UN law for receivables should not apply. Although this could also be derived from the interpretation of a clause not expressly excluding the UN law for receivables, the parties are well advised to be clear on this point. Opting in Opting in can happen on two levels, too. Parties in non-contracting states, for example a trader in England and the counterpart in Japan, can agree that U.K law is applicable to their contract. This would mean that under article 1(1)(b) the UN law for receivables as the applicable U.K law would govern the contract.5 These cases may arise in particular in arbitration, when parties from non-contracting states have opted for a "neutral law", for example arbitration in Switzerland under Swiss law. Parties in contracting states can also agree that their contract should be governed by UN law for receivables rules despite the fact that it is not a sales contract falling under the Convention. Thus, sales of ships, excluded from the applicability of the Convention under its article 2(e), could be submitted to the UN law for receivables. In mixed contracts, where it might be unclear whether the UN law for receivables applies, the parties can avoid problems by clearly denominating the rules of the UN law for receivables as applicable to the entire contract. There is, however, a limit to this opting in: since opting in on the level of substantive law is a use of party autonomy governed by the applicable domestic law, the limits on party autonomy of this law apply, too. If, for example the parties attempt to escape some consumer protection provision of the applicable law, such as the right to rescind a contract within a certain period of time, by referring to the UN law for receivables as applicable law, this would not derogate from mandatory provisions to protect consumers under the applicable domestic law. SALE OF GOODS Goods The UN law for receivables applies only to a sale of goods. Goods are mainly tangible objects. Rights, in particular industrial or intellectual property rights are, in themselves, not goods in the meaning of the Convention. Real estate is not "goods". Certain assets that could be regarded, and which are treated in some jurisdictions, as goods are excluded for different reasons, for example ships, stocks, shares and negotiable instruments, and electricity. In addition, goods bought for personal, family or household use, that is consumer goods, are almost always excluded. Software is controversial, and there are many distinctions and differentiations advocated, for example whether it is standard or custom-made software, whether software is tangibly embodied in discs or hard drives, or whether it is to be delivered, that is, transmitted electronically for downloading by the recipient, whether the acquired software could be used forever or only temporarily (with a right of renewal). If, however, software can be used only for a certain period of time, and the use can be revoked for example by an administrator in insolvency, the contract is a licence contract not governed by the sales law.6 Goods to be manufactured are also governed by the Convention. However, there is an uncertain borderline between sales and services (contracts for work) in cases of objects to be produced or altered, in particular, when the client (that is the presumptive buyer) supplies all or a great part of the materials: is it a manufacture of goods to be delivered like pre-existing goods sold, or is it simply a processing of the client's materials Article 3(1) attempts to draw the line according to who supplied the more substantial part of the materials used for the manufacture: if the party who orders the goods supplies a substantial part of the material for the manufacture or production of the goods, it is no longer a sale falling under the Convention. Thus, in an Austrian case,[21] an Austrian [page 786] firm had brooms produced by a firm in former Yugoslavia from materials mostly supplied by the Austrian party - the economic background being, of course, that labour was much cheaper in Yugoslavia. This was not a sales contract under the Convention, but a service contract to process the material supplied. But there are many problems in interpreting this provision, for example what constitutes substantial (value, or essential function as in case of computer chips supplied by the client), what about the labour costs of manufacturing - are they part of the equation, are designs, patents, and the like provided by one or the other part materials Sales The right of an assignee in an assigned receivable has priority over the right of an insolvency administrator and creditors who obtain a right in the assigned receivable by attachment, judicial act or similar act of a competent authority that gives rise to such right, if the receivable was assigned and notification was received by the debtor before the commencement of such insolvency proceeding, attachment, judicial act or similar act.7 Sales mean an exchange of goods for money. Barter contracts are not sales. Certain sales are excluded, for example auctions, because at the time of the drafting of the Convention auctions were held only locally and rarely across borders. This has changed, however, and it stands to be argued whether article 2(b) should not be limited to local auctions, thus allowing electronic transborder auctions to be governed by the UN law for receivables. However, the Convention goes beyond mere sales: Article 3(2) mandates its application to mixed contracts, where one party has undertaken not only to deliver goods, but also to provide services, for example where the seller of an assembly line has contracted to install the assembly line at the purchaser's factory, where the equipment for a window-production plant is sold and the seller, in addition, has to erect the plant, or where a special machine is sold and the seller has promised to install the electronic guidance control system of the machine. If these different obligations are part of one contract, such as where there is a lump sum price for the whole transaction, the mixed contract has to be qualified entirely either as a sale or a service contract, or it has to be split. The UN law for receivables has opted for treating it as a unitary contract, being governed by the UN law for receivables only if the preponderant part of the transaction is the delivery of goods. Again, this provision, inserted without much thought for its consequences, raises numerous problems. First of all, preponderant (as is substantial in article 3(2) paragraph 2) is open to different understandings. Second, and more importantly, it is very uncertain what the consequences are in a case of a breach of the service obligations under the contract. Are the remedies of the Convention to be applied with appropriate modifications What are these modifications Which Law is Better If interpretation fails to adjust the Convention, gap-filling under article 7(2) has to be considered. There are two steps to fill a gap.8 First and foremost, a uniform rule based on general principles, on which the Convention is based, should be searched for and formulated. Second, but only if gap-filling by a uniform rule fails, recourse is to be had to domestic law denominated by the conflict of law rules of the forum. The problem of the first step is obvious. What and where are the general principles of the Convention It does not state them explicitly. Therefore, they have to be derived from an analysis of concrete provision so to unearth the general principles underlying them. Thus, from a number of provisions one can derive the general principle of estoppel; or a number of provisions allow withholding one's own performance until the other party has performed or has provided adequate assurance of its performance. This makes it possible to formulate a general right to retain one's own performance until the other party has fulfilled its part of the contract. On the other hand, where no principle can be found, gap-filling by uniform rules is impossible, and one has to revert to domestic law. For example, rules on set-off or assignment of receivables differ widely in domestic systems, and no uniform principle can be found in the UN law for receivables as to prerequisites and operation of set-off or assignments. Therefore, recourse to domestic law is unavoidable in most cases. Part III, the core of the Convention, regulates the rights and remedies of the parties, and it is easy to understand, basically because it first states the obligations of the seller and the remedies of the buyer in case of breach, and then, vice versa, the obligations of the buyer and the respective remedies of the seller. Some parties state general provisions applicable to both parties, notably the provisions on damages. The backbone of the legal relation between the parties is the remedies, notably the claim for damages and the right to avoid - that is terminate - the contract. Although a claim for specific performance is part of this backbone, too, common law courts do not have to grant specific performance, unless they would do so under their own domestic law. A Roman Law inheritance much disliked by many common law jurists, is the price reduction by the buyer in case of non-conforming goods. Also, common law jurists complain that a perfect tender rule is missing, so that, seemingly, a buyer has to take over non-conforming goods and claim damages or price reduction, unless the non-conformity is so serious as to amount to a fundamental breach, allowing avoidance and, consequently, rejection of the goods. This problem can be taken care of, however, by a general right to withhold performance, which I have mentioned before.9 The most important remedy is, of course, the obligee's claim for damages in case of breach. The respective rules should be familiar to common law jurists. But there is one notable exception and, as a consequence, an argument among legal writers about its extent. Article 5 excludes from the Convention actions and claims for personal injuries and death caused by the goods. This was due to the general products liability issue emerging in the 1960s and producing new rules of strict liability, with which the drafters of the Convention did not want to interfere. But there are problems, which were overlooked. First, since mixed contracts might be governed by the UN law for receivables too, on account of article 3(2), it can be debated whether personal injury or death not caused by the goods, but by mal-performance of services, is governed by the Convention. To my mind, they should not be governed by the Convention, and article 5 should be interpreted accordingly. More difficult is the problem of consequential - or "special" damages - in the form of injury to property caused by defective goods, for example a fire caused by a short-circuit in a machine sold, which destroys the purchaser's plant. Certainly, the buyer must have a damage claim under the Convention, if such damages were in the contemplation of the parties, since article 5 does not extend to property damages. But does the Convention exclusively govern, or can the purchaser invoke tort liability under domestic law, that is file a concurrent action The importance of this point is obvious in cases where the buyer has lost his or her claim under the Convention for having neglected to give notice of the known or discoverable defects within a reasonable period of time, or if the fire has occurred more than two years after delivery, so that rights and remedies of the buyer are barred by the two-year limit of article 39(2). I advocate the opinion that concurrent actions are not excluded by the Convention, but there are a number of legal writers who hold the opposite view. References Directive 1999/44/EC of the European Parliament and the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/12. Frank Diedrich "Maintaining Uniformity in International Uniform Law via Autonomous Interpretation: Software Contracts and the CISG" (1996) 8 Pace Int'l L Rev 303. United Nations Convention on the Assignment of Receivables: Accessed from: www.uncitral.org/pdf/english/texts/payments/receivables/ctc-assignment-convention-e.pdf, on April 23, 2008. http://www.fifoost.org/allgemein/divers/international_receivables/node4.php Read More