Definitions and rules of interpretation

147. The text of draft article 5 as considered by the Commission was as follows:

“For the purposes of this Convention: “(a) ‘Original contract’ means the contract between the assignor and the debtor from which the assigned receivable arises;

“(b) ‘Existing receivable’ means a receiv- able that arises upon or before the conclusion of the contract of assignment and ‘future receivable’ means a receivable that arises after the conclusion of the contract of assignment;

“(c) ‘Writing’ means any form of informa- tion that is accessible so as to be usable for subsequent reference. Where this Convention requires a writing to be signed, that requirement is met if, by generally accepted means or a proce- dure agreed to by the person whose signature is required, the writing identifies that person and indicates that person’s approval of the informa- tion contained in the writing;

“(d) ‘Notification of the assignment’ means a communication in writing that reasonably identifies the assigned receivables and the assignee;

“(e) ‘Insolvency administrator’ means a person or body, including one appointed on an interim basis, authorized in an insolvency pro- ceeding to administer the reorganization or liqui- dation of the assignor’s assets or affairs;

“(f) ‘Insolvency proceeding’ means a collective judicial or administrative proceeding, including an interim proceeding, in which the assets and affairs of the assignor are subject to control or supervision by a court or other compe-

tent authority for the purpose of reorganization or liquidation;

“(g) ‘Priority’ means the right of a party in preference to another party;

“(h) A person is located in the State in which it has its place of business. If the assignor or the assignee has a place of business in more than one State, the place of business is that place where the central administration of the assignor or the assignee is exercised. If the debtor has a place of business in more than one State, the place of business is that which has the closest relationship to the original contract. If a person does not have a place of business, reference is to be made to the habitual residence of that person;

“(i) ‘Law’ means the law in force in a

State other than its rules of private international law;

“(j) ‘Proceeds’ means whatever is received in respect of an assigned receivable, whether in total or partial payment or other satisfaction of the receivable. The term includes whatever is received in respect of proceeds. The term does not include returned goods;

“(k) ‘Financial contract’ means any spot, forward, future, option or swap transaction involving interest rates, commodities, currencies, equities, bonds, indices or any other financial instrument, any repurchase or securities lending transaction and any other transaction similar to any transaction referred to above entered into in financial markets and any combination of the transactions mentioned above;

“(l) ‘Netting agreement’ means an agree- ment that provides for one or more of the following:

“(i) The net settlement of payments due in the same currency on the same date whether by novation or otherwise;

“(ii) Upon the insolvency or other default by a party, the termination of all outstanding transactions at their replacement or fair market values, conversion of such sums into a single currency and netting into a single payment by one party to the other; or

“(iii) The set-off of amounts calculated as set forth in subparagraph (l) (ii) of this article under two or more netting agreements;

“(m) ‘Competing claimant’ means:

“(i) Another assignee of the same receiv- able from the same assignor, including a person who, by operation of law, claims a right in the assigned receivable as a result of its right in other property of the assignor, even if that receivable is not an interna- tional receivable and the assignment to that assignee is not an international assignment; “(ii) A creditor of the assignor; or

“(iii) The insolvency administrator.”

Subparagraph (g) (“Priority”)

148. Recalling its earlier discussion of the definition of “priority” (see para. 37), the Commission considered a new version of subparagraph (g) that read as follows:

“(g) ‘Priority’ means the right of a person in preference to the right of a competing claimant and, to the extent relevant for such purpose, includes the determination whether the right is a property right or not and whether it is a security right for indebtedness or other obligation or not.” 149. It was noted that a new paragraph had been added to draft article 26 to ensure that the draft Convention did not affect the priority of rights of persons other than those included in the definition of “competing claimant”. It was, therefore, suggested that, for that provision to operate, reference should be made in subparagraph (g) to “a competing claimant or other

person” (for a change to draft art. 5, subpara. (h),

decided later, see para. 162).

Subparagraph (h) (“Location”)

150. It was agreed that the definition of “location” in subparagraph (h) would operate well in the vast majority of cases. The view was expressed, however, that it might not be appropriate for banks and other financial institutions, at least to the extent that it would refer priority issues with respect to the dealings of a branch of a foreign bank in one State to the law of the central administration of the bank in another State. It was stated in particular that that result was problematic

in the case of financing transactions in which central banks provided financing to branches of foreign banks taking receivables of those branches as security, as well as in transactions in which commercial banks bought loans from branches of foreign banks. In order to address that problem, it was suggested that branch offices of banks and possibly of other financial institutions should be treated as independent legal entities. While the concern was raised that such a rule would reduce the certainty achieved by sub- paragraph (h) and might negatively affect practices beyond those that it was intended to address, the Commission expressed its willingness to attempt to develop a rule to address the specific problem iden- tified above. Language along the following lines was proposed for addition at the end of subparagraph (h): “If the assignor or the assignee is engaged in the business of banking by making loans and accepting deposits, a branch of that assignee or assignor is a separate person.”

151. Support was expressed for that proposal. It was recalled that article 1, paragraph 3, of the UNCITRAL Model Law on International Credit Transfers contained a similar rule. It was stated that, if branches were treated as separate legal entities, priority issues with respect to their dealings would be subject to the law with the closest connection to the assignment transaction. It was also pointed out that such a rule would be appropriate since it would result in referring priority issues to the State in which the branch of a bank was deemed to be located for regulatory and taxation purposes.

152. In order to improve the rule proposed, a number of proposals were made. One proposal was that the proposed rule should be expanded to apply to other financial institutions or even to other commercial entities operating through a branch-based structure. That proposal was objected to on the ground that it could inappropriately expand the scope of the proposed rule and undermine the certainty achieved by subparagraph (h). Another proposal was that the new rule should apply solely to cases where the banking activity had been authorized. That proposal too was objected to on the ground that merely referring to the authorization to trigger the effect of the proposed rule would inadvertently result in its application to situations where no actual banking activity took place. It was also pointed out that it was not clear whether the authorization would refer to the head office or to the

branch (a matter that was said not to be clear even with respect to the actual banking activity). Yet another proposal was to avoid any reference to “making loans and accepting deposits”, because some banks might not be authorized to engage in both activities. While there was support for that proposal, the concern was expressed that it might result in the rule applying to entities that were not banks. Yet another proposal was to limit the application of that rule to priority issues. There was no support for that proposal. Yet another proposal was that the reference to the “assignee” should be deleted, since the assignee’s location was relevant neither for the applicability of the draft Convention nor for the purposes of priority. That proposal too was objected to on the ground that the location of the assignee was relevant for the internationality of a transaction and thus for the application of the draft Convention.

153. Beyond the concerns expressed with regard to the formulation of the proposed rule, a number of fundamental objections were raised. It was stated that the central administration rule contained in subparagraph (h) was appropriate in the vast majority of cases and should not be compromised by exceptions. In addition, it was pointed out that priority issues should be referred not to the law of the State where the branch of a bank was regulated or taxed but to that of the State in which the bank would be wound up, namely, the place of its central administration. Furthermore, it was observed that treating branches of banks as separate entities would create an artificial distinction that could cause confusion in practice. In particular in jurisdictions where registration was required in the place of central administration, such a rule could cause uncertainty as to how to obtain priority or even create a double registration require- ment. It was also stated that such a rule could inadvertently apply to entities beyond those envisaged since there was no uniform understanding as to what a “bank” was. In that connection, it was observed that the definition of “bank” in the UNCITRAL Model Law on International Credit Transfers could not be used since it was structured around the subject of the Model Law, namely, payment orders.

Subparagraph (k) (“Financial contract”)

154. The suggestion was made that collateral and credit support arrangements were part of financial contracts and should thus also be excluded. It was

stated that such arrangements were documented under the same industry standard master agreements governing financial contracts. It was also observed that exclusion of collateral and credit support arrangements from the draft Convention would lead to further certainty and predictability with respect to set-off and netting provisions of the standard market arrangements pursuant to which those important risk-management arrangements operated. It was noted, however, that, at its thirty-third session, the Commission had agreed that collateral and credit support arrangements should be deleted from the definition of “financial contracts” that was before it. The reasons given by the Commission were that such arrangements did not fit into a definition of “financial contract” and, more importantly, that such an approach could inadvertently result in excluding an assignment of receivables to secure a bank loan.5 _The Commission confirmed that decision. It was widely felt that such exclusion could expand the scope of the excluded practices excessively. It was stated that it would be particularly inappropriate to exclude the assignment of receivables that secured rights arising under both financial and non-financial contracts.

Subparagraph (l) (“Netting”)

155. The suggestion was made that it should be made clear that the definition of netting covered both bilateral and multilateral netting. Language along the following lines was proposed for insertion after the word “agreement”: “between two or more parties”. There was broad support in the Commission for that suggestion.

156. Subject to the changes referred to above (see paras. 149 and 154), the Commission approved the substance of draft article 5 and referred it to the drafting group.