United Nations Commission On International Trade Law ......3 THE THIRTY-THIRD SESSION (2000) A....

United NationsCommission onInternationalTrade Law

YEARBOOKVolume XXXI: 2000

UNITED NATIONSNew York, 2001

NOTE

Symbols of United Nations documents are composed of capital letters combined with figures.Mention of such a symbol indicates a reference to a United Nations document.

The footnote numbering follows that used in the original documents on which this Yearbookis based. Any footnotes added subsequently are indicated by lower-case letters.

Changes of and additions to wording that appeared in earlier drafts of conventions, model lawsand other legal texts are in italics, except in the case of headings to articles, which are in italicsas a matter of style.

A/CN.9/SER.A/2000

UNITED NATIONS PUBLICATIONSales No. E.02.V.3

ISBN 92-1-133646-5ISSN 0251-4265

iii

CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Part One. Report of the Commission on its annual session;comments and action thereon

THE THIRTY-THIRD SESSION (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. Report of the United Nations Commission on International Trade Law on the workof its thirty-third session (New York, 12 June-7 July 2000) (A/55/17) . . . . . . . . . . . . 3

B. United Nations Conference on Trade and Development (UNCTAD): extract fromthe report of the Trade and Development Board (forty-seventh session) (TD/B/47/11(Vol. I ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

C. General Assembly: report of the United Nations Commission on International TradeLaw on the work of its thirty-third session: report of the Sixth Committee(A/55/608) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

D. General Assembly resolution 55/151 of 12 December 2000 . . . . . . . . . . . . . . . . . . . . . 67

Part Two. Studies and reports on specific subjects

I. PRIVATELY FINANCED INFRASTRUCTURE PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . 71

Draft chapters of a Legislative Guide on Privately Financed Infrastructure Projects:Report of the Secretary-General (A/CN.9/471 and Add.1-9) . . . . . . . . . . . . . . . . . . . . . 71

II. ASSIGNMENT IN RECEIVABLES FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

A. Report of the Working Group on International Contract Practices on the workof its thirty-first session (Vienna, 11-22 October 1999)(A/CN.9/466) . . . . . . . . . . . . . 193

B. Working paper submitted to the Working Group on International Contract Practicesat its thirty-first session: draft Convention on Assignment in Receivables Financing:text with remarks and suggestions: note by the secretariat (A/CN.9/WG.II/WP.104) . 230

C. Working paper submitted to the Working Group on International Contract Practicesat its thirty-first session: Commentary to the draft Convention on Assignmentin Receivables Financing (Part I) note by the secretariat (A/CN.9/WG.II/WP.105) . . 253

D. Working paper submitted to the Working Group on International Contract Practicesat its thirty-first session: Commentary to the draft Convention on Assignmentin Receivables Financing (Part II): note by the secretariat (A/CN.9/WG.II/WP.106) . 269

E. Analytical Commentary to the Convention on Assignment [in Receivables Financing][of Receivables in International Trade]: note by the secretariat (A/CN.9/470) . . . . . . 290

F. Draft Convention on Assignment [in Receivables Financing][of Receivables in International Trade]: compilation of comments by Governments(A/CN.9/472 and Add.1-4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

III. ELECTRONIC COMMERCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

A. Report of the Working Group on Electronic Commerce on the workof its thirty-fifth session (Vienna, 6-17 September 1999) (A/CN.9/465) . . . . . . . . . . . 383

B. Working paper submitted to the Working Group on Electronic Commerceat its thirty-fifth session: draft Uniform Rules on Electronic Signatures:note by the secretariat (A/CN.9/WG.IV/WP.82) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404

iv

Page

C. Report of the Working Group on Electronic Commerce on the workof its thirty-sixth session: (New York, 14-25 February 2000) (A/CN.9/467) . . . . . . . . 428

D. Working paper submitted to the Working Group on Electronic Commerceat its thirty-sixth session: draft Uniform Rules on Electronic Signatures:note by the secretariat (A/CN.9/WG.IV/WP.84) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448

IV. INTERNATIONAL COMMERCIAL ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

A. Report of the Working Group on Arbitration on the work of its thirty-secondsession (Vienna, 20-31 March 2000) (A/CN.9/468) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

B. Working paper submitted to the Working Group on Arbitration at its thirty-secondsession: Settlement of Commercial Disputes: Possible uniform rules on certain issuesconcerning settlement of commercial disputes: conciliation, interim measures ofprotection, written form for arbitration agreement (A/CN.9/WG.II/WP.108 and Add.1) 493

V. POSSIBLE FUTURE WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517

A. Report of the Working Group on Insolvency Law on the work of itstwenty-second session (Vienna, 6-17 December 1999) (A/CN.9/469) . . . . . . . . . . . 517

B. Working paper submitted to the Working Group on Insolvency Law on the workof its twenty-second session: Possible future work on insolvency law:note by the secretariat (A/CN.9/WG.V/WP.50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535

C. Security Interests: current activities and possible future work:Report of the Secretary-General (A/CN.9/475) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 557

D. Transport Law: possible future work: Report of the Secretary-General (A/CN.475) . 570

VI. COORDINATION AND COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579

A. International Standby Practices (ISP98): Report of the Secretary-General(A/CN.9/477) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579

B. Uniform Rules for Contract Bonds (URCB): Report of the Secretary-General(A/CN.9/478) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 594

C. ICC INCOTERMS 2000: Report of the Secretary-General (A/CN.9/479) . . . . . . . . 599

VII. CASE LAW ON UNCITRAL TEXTS (CLOUT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631

VIII. STATUS OF UNCITRAL TEXTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633

Status of Conventions and Model Law: note by the secretariat (A/CN.9/474) . . . 633

IX. TRAINING AND ASSISTANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635

Training and technical assistance: note by the secretariat (A/CN.9/473) . . . . . . . . . . 635

Part Three. Annexes

I. UNCITRAL LEGISLATIVE GUIDE ON PRIVATELY FINANCEDINFRASTRUCTURE PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643

II. SUMMARY RECORDS OF THE UNITED NATIONS COMMISSION ONINTERNATIONAL TRADE LAW FOR MEETINGS DEVOTED TO THE PREPARATIONOF THE DRAFT CONVENTION ON ASSIGNMENT OF RECEIVABLES . . . . . . . . . . . . . . 645

III. BIBLIOGRAPHY OF RECENT WRITINGS RELATED TO THE WORKOF UNCITRAL: NOTE BY THE SECRETRIAT (A/CN.9/502 AND CORR.1) . . . . . . . . . . 771

IV. CHECK-LIST OF UNCITRAL DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781

V. LIST OF UNCITRAL DOCUMENTS REPRODUCED IN THE PREVIOUS VOLUMESOF THE YEARBOOK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785

v

INTRODUCTION

This is the thirtieth volume in the series of Yearbooks of the United NationsCommission on International Trade Law (UNCITRAL).1

The present volume consists of three parts. Part one contains the Commission’sreport on the work of its thirty-first session, which was held in New York from 12 Juneto 7 July 2000, and the action thereon by the United Nations Conference on Trade andDevelopment (UNCTAD) and by the General Assembly.

In part two most of the documents considered at the thirtieth session of the Com-mission are reproduced. These documents include reports of the Commission’s WorkingGroups as well as studies, reports and notes by the Secretary-General and the Secretariat.Also included in this part are selected working papers that were prepared for the WorkingGroups.

Part three contains the UNCITRAL Legislative Guide on Privately Financed Infra-structure Projects, the Summary Records of the United Nations Commission on Inter-national Trade Law for meetings devoted to the preparation of the draft Convention onAssignment of Receivables, the bibliography of recent writings related to the Commis-sion’s work, a list of documents before the thirty-third session and a list of documentsrelating to the work of the Commission reproduced in the previous volumes of theYearbook.

UNCITRAL secretariatVienna International Centre

P.O.Box 500, A-1400 Vienna, AustriaTelephone: 43-1-26060-4060 Telex: 135612 Telefax: 43-1-26060-5813

E-Mail: [email protected] Internet: http://www.un.or.at/uncitral

1To date the following volumes of the Yearbook of the United Nations Commission on InternationalTrade Law (abbreviated herein as Yearbook [year]) have been published:

United Nations publicationVolume Years covered Sales No.

I 1968-1970 E.71.V.1II 1971 E.72.V.4III 1972 E.73.V.6III Suppl. 1972 E.73.V.9IV 1973 E.74.V.3V 1974 E.75.V.2VI 1975 E.76.V.5VII 1976 E.77.V.1VIII 1977 E.78.V.7IX 1978 E.80.V.8X 1979 E.81.V.2XI 1980 E.81.V.8XII 1981 E.82.V.6XIII 1982 E.84.V.5XIV 1983 E.85.V.3XV 1984 E.86.V.2XVI 1985 E.87.V.4XVII 1986 E.88.V.4XVIII 1987 E.89.V.4XIX 1988 E.89.V.8XX 1989 E.90.V.9XXI 1990 E.91.V.6XXII 1991 E.93.V.2XXIII 1992 E.94.V.7XXIV 1993 E.94.V.16XXV 1994 E.95.V.20XXVI 1995 E.96.V.8XXVII 1996 E.98.V.7XXVIII 1997 E.99.V.6XXIX 1998 E.99.V.12XXX 1999 E.00.V.9

Part One

REPORT OF THE COMMISSIONON ITS ANNUAL SESSION;

COMMENTS AND ACTION THEREON

3

THE THIRTY-THIRD SESSION (2000)

A. Report of the United Nations Commission on International TradeLaw on the work of its thirty-third session

(New York, 12 June-7 July 2000) (A/55/17) [Original: English]

CONTENTS

Paragraphs Page

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2 4

II. ORGANIZATION OF THE SESSION . . . . . . . . . . . . . . . . . . . . . . . . . . 3-11 4

A. Opening of the session . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4

B. Membership and attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-8 4

C. Election of officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5

D. Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5

E. Adoption of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5

III. DRAFT CONVENTION ON ASSIGNMENTOF RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-192 5

A. Title and preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5

B. Consideration of draft articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-178 5

C. Report of the drafting group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179-185 31

D. Future work on the draft convention . . . . . . . . . . . . . . . . . . . . . . . . 186-192 32

IV. PRIVATELY FINANCED INFRASTRUCTURE PROJECTS . . . . . . . . 193-379 34

A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193-194 34

B. Consideration of draft legislative recommendations . . . . . . . . . . . . 195-368 34

C. Finalization of the legislative guide . . . . . . . . . . . . . . . . . . . . . . . . . 369-371 48

D. Adoption of the legislative guide . . . . . . . . . . . . . . . . . . . . . . . . . . . 372-374 48

E. Possible future work in the area of privately financedinfrastructure projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375-379 49

V. ELECTRONIC COMMERCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380-388 49

A. Draft uniform rules on electronic signatures . . . . . . . . . . . . . . . . . . 380-383 49

B. Future work in the field of electronic commerce . . . . . . . . . . . . . . 384-388 50

VI. SETTLEMENT OF COMMERCIAL DISPUTES . . . . . . . . . . . . . . . . . . 389-399 51

VII. INSOLVENCY LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400-409 52

VIII. MONITORING THE IMPLEMENTATION OF THE 1958NEW YORK CONVENTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410-412 54

IX. CASE LAW ON UNCITRAL TEXTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 413-415 54

X. TRANSPORT LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416-427 54

XI. ENDORSEMENT OF TEXTS OF OTHER ORGANIZATIONS:INCOTERMS 2000, ISP98 AND URCB . . . . . . . . . . . . . . . . . . . . . . . . . 428-434 56

XII. TRAINING AND TECHNICAL ASSISTANCE . . . . . . . . . . . . . . . . . . . 435-442 57

XIII. STATUS AND PROMOTION OF UNCITRAL TEXTS . . . . . . . . . . . . 443-446 58

XIV. GENERAL ASSEMBLY RESOLUTION ON THE WORKOF THE COMMISSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447-454 59

XV. COORDINATION AND COOPERATION:SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455-463 60

4 Yearbook of the United Nations Commission on International Trade Law, 2000, vol. XXXI

Paragraphs Page

XVI. OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464-470 61

A. Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464-465 61

B. Willem C. Vis International Commercial Arbitration Moot . . . . . . 466-467 61

C. Date and place of the thirty-fourth sessionof the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 61

D. Sessions of working groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 61

E. Retirement of the Secretary of the Commission . . . . . . . . . . . . . . . 470 62

ANNEXES

I. Draft Convention on Assignment of Receivables in International Trade . . . . . . . . . 62

II. List of Documents before the Commission at its thirty-third session . . . . . . . . . . . 65

I. INTRODUCTION

1. The present report of the United Nations Commissionon International Trade Law covers the Commission’sthirty-third session, held in New York from 12 June to7 July 2000.

2. Pursuant to General Assembly resolution 2205 (XXI)of 17 December 1966, this report is submitted to the As-sembly and is also submitted for comments to the UnitedNations Conference on Trade and Development.

II. ORGANIZATION OF THE SESSION

A. Opening of the session

3. The United Nations Commission on InternationalTrade Law (UNCITRAL) commenced its thirty-third ses-sion on 12 June 2000. The Under-Secretary-General forLegal Affairs, the Legal Counsel, opened the session.

B. Membership and attendance

4. The General Assembly, by its resolution 2205 (XXI),established the Commission with a membership of 29States, elected by the Assembly. By its resolution 3108(XXVIII) of 12 December 1973, the Assembly increasedthe membership of the Commission from 29 to 36 States.The current members of the Commission, elected on 28November 1994 and on 24 November 1997, are the follow-ing States, whose term of office expires on the last dayprior to the beginning of the annual session of the Commis-sion in the year indicated:1

Algeria (2001), Argentina (2004—alternating annu-ally with Uruguay, starting 1998), Australia (2001),Austria (2004), Botswana (2001), Brazil (2001), Bul-garia (2001), Burkina Faso (2004), Cameroon (2001),China (2001), Colombia (2004), Egypt (2001), Fiji(2004), Finland (2001), France (2001), Germany(2001), Honduras (2004), Hungary (2004), India(2004), Iran (Islamic Republic of) (2004), Italy(2004), Japan (2001), Kenya (2004), Lithuania (2004),Mexico (2001), Nigeria (2001), Paraguay (2004),Romania (2004), Russian Federation (2001), Singa-pore (2001), Spain (2004), Sudan (2004), Thailand(2004), Uganda (2004), United Kingdom of GreatBritain and Northern Ireland (2001) and United Statesof America (2004).

5. With the exception of Kenya and Uganda, all themembers of the Commission were represented at the ses-sion.

6. The session was attended by observers from the fol-lowing States: Angola, Bangladesh, Belarus, Bolivia,Canada, Costa Rica, Côte d’Ivoire, Croatia, Cuba, CzechRepublic, Holy See, Indonesia, Ireland, Israel, Kuwait, Mo-rocco, Myanmar, Peru, Philippines, Poland, Portugal, Re-public of Korea, Saudi Arabia, Sweden, Switzerland andVenezuela.

7. The session was also attended by observers from thefollowing international organizations:

(a) United Nations system: Economic Commission forEurope; World Bank; International Monetary Fund.

(b) Intergovernmental organizations: Asian ClearingUnion; Asian Development Bank; East African Coopera-tion Secretariat; European Union; Hague Conference onPrivate International Law; Inter-American DevelopmentBank; International Institute for the Unification of PrivateLaw.

(c) International non-governmental organizations in-vited by the Commission: Arab Association for Interna-tional Arbitration; Arab Society of Certified Accountants;Association of the Bar of the City of New York; CairoRegional Centre for International Commercial Arbitration;

1Pursuant to General Assembly resolution 2205 (XXI), the members ofthe Commission are elected for a term of six years. Of the current member-ship, 17 were elected by the General Assembly at its forty-ninth session, on28 November 1994 (decision 49/315), and 19 at its fifty-second session, on24 November 1997 (decision 52/314). Pursuant to resolution 31/99 of15 December 1976, the term of those members elected by the Assembly atits forty-ninth session will expire on the last day prior to the opening of thethirty-fourth session of the Commission, in 2001, while the term of thosemembers elected at the fifty-second session will expire on the last day priorto the opening of the thirty-seventh session of the Commission, in 2004.

Part One. Report of the Commission on its annual session; comments and action thereon 5

Chartered Institute of Arbitrators; Commercial Finance As-sociation; Council of Legal Education; Europafactoring;European Banking Federation; European Lawyers’ Union;Factors Chain International; Financial Markets LawyersGroup; Group of Thirty; International Association of Law-yers; International Association of Ports and Harbours; In-ternational Bar Association; International Chamber ofCommerce; International Council for Commercial Arbitra-tion; International Federation of Commercial ArbitrationInstitutions; International Federation of Insolvency Profes-sionals (INSOL International); International MaritimeCommittee; International Swaps and Derivatives Associa-tion; International Women’s Insolvency and RestructuringConfederation; Latin American Group of Lawyers for In-ternational Trade Law; University of the West Indies;World Association of Former United Nations Interns andFellows.

8. The Commission was appreciative of the fact that in-ternational non-governmental organizations that had exper-tise regarding the major items on the agenda of the currentsession had accepted the invitation to take part in the meet-ings. Being aware that it was crucial for the quality of textsformulated by the Commission that relevant non-govern-mental organizations should participate in the sessions ofthe Commission and its working groups, the Commissionrequested the secretariat to continue to invite such organi-zations to its sessions based on their particular qualifica-tions.

C. Election of officers2

9. The Commission elected the following officers:

Chairman: Mr. Jeffrey CHAN WAH TECK(Singapore)

Vice-Chairmen: Mr. Aly GAMLEDIN Awad (Egypt)Mr. Jorge ROBERTO MARADIAGA(Honduras)Ms. Victoria GAVRILESCU(Romania)

Rapporteur: Mr. David MORÁN BOVIO (Spain)

D. Agenda

10. The agenda of the session, as adopted by the Commis-sion at its 676th meeting, on 12 June 2000, was as follows:

1. Opening of the session.2. Election of officers.

3. Adoption of the agenda.4. Draft convention on assignment of receivables.5. Draft legislative guide on privately financed in-

frastructure projects.6. Electronic commerce.7. Insolvency.8. Settlement of commercial disputes.9. Monitoring implementation of the 1958 New

York Convention.10. Case law on UNCITRAL texts (CLOUT).11. Transport law: progress report on the gathering

of information.12. Endorsement of texts of other organizations:

Incoterms 2000, ISP98, URCB.13. Training and technical assistance.14. Status and promotion of UNCITRAL legal texts.15. General Assembly resolutions on the work of the

Commission.16. Coordination and cooperation.17. Other business.18. Date and place of future meetings.19.Adoption of the report of the Commission.

E. Adoption of the report

11. At its 710th meeting, on 7 July 2000, the Commissionadopted the present report by consensus.

III. DRAFT CONVENTION ON ASSIGNMENTOF RECEIVABLES

A. Title and preamble

12. The Commission decided to postpone discussion ofthe title and the preamble until it had had a chance to con-sider the scope of the draft convention (see paras. 181-183).

B. Consideration of draft articles

CHAPTER I. SCOPE OF APPLICATION

Article 1. Scope of application

13. The text of draft article 1 as considered by the Com-mission was as follows:

“1. This Convention applies to:

“(a) Assignments of international receivables and tointernational assignments of receivables as defined inthis chapter, if, at the time of the conclusion of the con-tract of assignment, the assignor is located in a Contract-ing State;

“(b) Subsequent assignments provided that any priorassignment is governed by this Convention; and

2The election of the Chairman took place at the 676th meeting, on 12 June2000, the election of the Vice-Chairmen at the 694th and 697th meetings,on 23 and 26 June 2000, respectively, and the election of the Rapporteur atthe 687th meeting, on 19 June 2000. In accordance with a decision taken bythe Commission at its first session, the Commission has three Vice-Chair-men, so that, together with the Chairman and the Rapporteur, each of thefive groups of States listed in General Assembly resolution 2205 (XXI),sect. II, para. 1, will be represented on the bureau of the Commission (seethe report of the United Nations Commission on International Trade Law onthe work of its first session, Official Records of the General Assembly,Twenty-third Session, Supplement No. 16 (A/72/16), para. 14 (Yearbook ofthe United Nations Commission on International Trade Law, vol. I: 1968-1970 (United Nations publication, Sales No. E.71.V.1), part two, chap. I,sect. A)).


“(c) Subsequent assignments that are governed bythis Convention under subparagraph (a) of this para-graph, notwithstanding that any prior assignment is notgoverned by this Convention.

“2. This Convention does not affect the rights andobligations of the debtor unless the debtor is located ina Contracting State or the law governing the receivableis the law of a Contracting State.

“[3. The provisions of chapter V apply to assignmentsof international receivables and to international assign-ments of receivables as defined in this chapter independ-ently of paragraphs 1 and 2 of this article. However,those provisions do not apply if a State makes a decla-ration under article 37.]

“4. The annex to this Convention applies in aContracting State which has made a declaration underarticle 40.”

Paragraph 1

14. The suggestion was made that subparagraph (b)should be revised to require for a subsequent assignment,as subparagraph (a) did for an initial assignment, that theassignor be located in a contracting State. It was stated that,unless the assignor in a subsequent assignment was locatedin a contracting State, the rules of the convention could notapply to a dispute with a third party arising in theassignor’s location; and the convention could inadvertentlyapply to an assignment even if the assignor, the assigneeand the debtor were located in a non-contracting State. Thesuggestion was objected to. It was observed that such anapproach would be inconsistent with the principle ofcontinuatio juris, which was reflected in subparagraph (a)and under which, if the initial assignment was covered bythe convention, any subsequent assignment would also becovered.

15. While some concern was expressed that subpara-graph (c) might be inconsistent with the principle ofcontinuatio juris reflected in subparagraph (b), it waswidely felt that it appropriately provided that the conven-tion applied to a subsequent assignment, which met theconditions of subparagraph (a). In that connection, theview was expressed that the assignment addressed insubparagraph (c) was not really a third type of assignment,as suggested by the present wording, but rather a negationof a possible limitation that might otherwise apply withrespect to assignments meeting the requirements ofsubparagraph (a). It was, therefore, suggested thatsubparagraph (c) should be recast as a new paragraph 2 toread: “This Convention applies to a subsequent assignmentthat is described in paragraph 1 (a) of this article notwith-standing that this Convention did not apply to any priorassignment of the same receivable”. Subject to that change,the Commission approved the substance of paragraph 1 andreferred it to the drafting group.

Paragraph 2

16. It was noted that, in order to enhance certainty withrespect to the application of the convention, paragraph 2should specify the time when the debtor needed to be lo-

cated in a contracting State or a receivable needed to begoverned by the law of a contracting State for the debtor-related provisions of the convention to apply. It was alsonoted that reference to the time of the conclusion of theoriginal contract would be preferable from a debtor protec-tion point of view, since the debtor could determine at thetime it undertook the original obligation whether the con-vention would affect its legal position. It was also noted,however, that such an approach would inadvertently resultin the assignor, the assignee and other third parties beingunable to determine at the time of the assignment of afuture receivable whether the convention would apply tothe rights and obligations of the debtor. Despite that diffi-culty, which also arose in article 3 with respect to the de-termination of the internationality of a future receivable,the Commission decided that paragraph 2 should be revisedto provide that the debtor should be located in a contractingState or the receivable should be governed by the law of acontracting State at the time of the conclusion of the origi-nal contract. The Commission approved the substance ofparagraph 2 and referred the matter to the drafting group.

Paragraphs 3 and 4

17. The Commission decided to defer discussion of para-graph 3, which dealt with the scope of the private interna-tional law provisions contained in chapter V, until it hadhad a chance to consider chapter V. The Commission alsodecided that paragraph 4, which dealt with the applicationof the annex, should be considered at a later stage in thecontext of the discussion of article 40 and the annex.

Article 2. Assignment of receivables


“For the purposes of this Convention:

“(a) ‘Assignment’ means the transfer by agreementfrom one person (‘assignor’) to another person (‘as-signee’) of the assignor’s contractual right to payment ofa monetary sum (‘receivable’) from a third person (‘thedebtor’). The creation of rights in receivables as securityfor indebtedness or other obligation is deemed to be atransfer;

“(b) In the case of an assignment by the initial orany other assignee (‘subsequent assignment’), the personwho makes that assignment is the assignor and the per-son to whom that assignment is made is the assignee.”

Non-contractual receivables

19. Concern was expressed that, by referring to contrac-tual receivables, subparagraph (a) was unnecessarily re-strictive. It was pointed out that the assignment of non-contractual receivables, such as payment rights under taxreimbursement claims, was part of important financingpractices that the draft convention should cover. Further-more, it was said that a broader definition of receivablesmight avoid the difficulties that resulted from the varyinginterpretation given in different legal systems to the term


“contractual rights”. In order to address that concern, thesuggestion was made that subparagraph (a) should be re-vised to refer to non-contractual receivables or that, at least,States should be given an option to apply the convention toassignments of non-contractual receivables. The suggestionwas objected to. It was pointed out that the draft conven-tion had been prepared with contractual receivables in mindand that some of its provisions (e.g. provisions as to thedefences and rights of set-off and as to the location of thedebtor) might be ill-suited for non-contractual receivables.An effort to cover the assignment of non-contractual re-ceivables would, therefore, require a careful review andadjustment of a number of provisions of the draft conven-tion, which was considered non-productive at that latestage of the deliberations. After discussion, the Commis-sion confirmed the decision of the Working Group on In-ternational Contract Practices to limit the scope of applica-tion of the convention to contractual receivables.

Parts of and undivided interests in receivables

20. The Commission noted that, while article 9 expresslyvalidated partial assignments, partial assignments were notexplicitly referred to in subparagraph (a) and that, as aresult, uncertainty might arise as to whether the conventionas a whole applied to partial assignments. In particular, itwas noted that uncertainty might arise with regard to thelegal position of the debtor in the case of a partial assign-ment (e.g. whether the debtor would be obliged to pay theassignee or the assignor). In view of the fact that partialassignments were involved in significant financing prac-tices, the Commission decided that the matter should beexplicitly addressed in subparagraph (a) and referred thematter to the drafting group. In the discussion, it was sug-gested that another possible approach to the problem mightbe to confine article 11 to assignments of whole receiva-bles. The Commission postponed discussion of the legalposition of the debtor in the case of a partial assignmentuntil it had a chance to consider the debtor-related provi-sions of the draft convention (see paras. 173, 180 and 185).

21. The Commission noted that article 9 validated notonly partial assignments of receivables, but also assign-ments of undivided interests in receivables. It was generallyagreed that appropriate reference to assignments of undi-vided interests in receivables should also be made in article2 so as to make it clear that the convention as a whole wasalso applicable to such assignments.

Non-monetary performance rights

22. The Commission decided that the assignment of non-monetary performance rights arising out of the originalcontract (such as the right to performance, the right todeclare the contract avoided) should not be covered by theconvention. It was agreed that assignments of such non-monetary performance rights were not frequent in practiceand that, therefore, their inclusion in the scope of the con-vention was not necessary. It was also pointed out that thedraft convention had been prepared essentially with assign-ment of monetary rights in mind and that the inclusion ofother performance rights might require adjustments in vari-ous provisions. Furthermore, it was felt that, while the

transfer of security or supporting rights related to the re-ceivable was appropriately addressed in the draft conven-tion (see article 12), other rights, such as the right to termi-nate a contract, might be regarded as eminently personalrights that should not be automatically transferred to theassignee with the receivable.

Statutory assignability

23. The Commission noted that assignments of receiva-bles that were not assignable by law (other than those ad-dressed in article 9) were not intended to be covered by thedraft convention and considered the question whether thatunderstanding should be explicitly expressed in article 2.Noting that the matter related to the effectiveness of theassignment, rather than to the scope of the convention, theCommission decided that it should be considered in con-nection with article 9 (see para. 131).

Unilateral assignments

24. The Commission decided that unilateral assignments(i.e. assignments made but not yet accepted by the as-signee) should not be addressed in the draft convention. Itwas widely felt that such assignments were rare in practiceand that, therefore, there was no need to address them inthe draft convention.

Article 3. Internationality


“A receivable is international if, at the time of theconclusion of the original contract, the assignor and thedebtor are located in different States. An assignment isinternational if, at the time of the conclusion of the con-tract of assignment, the assignor and the assignee arelocated in different States.”

26. The Commission approved the substance of article 3and referred it to the drafting group.

Article 4. Exclusions


“1. This Convention does not apply to assignments:“(a) Made to an individual for his or her personal,

family or household purposes;“(b) To the extent made by the delivery of a nego-

tiable instrument, with any necessary endorsement;“(c) Made as part of the sale, or change in the own-

ership or the legal status, of the business out of which theassigned receivables arose.

“[2. This Convention does not apply to assignmentslisted in a declaration made under article 39 by the Statein which the assignor is located, or with respect to theprovisions of this Convention which deal with the rightsand obligations of the debtor, by the State in which thedebtor is located.]”


Paragraph 1 (a)

28. It was noted that the convention was intendgd tocover assignments of commercial or consumer receivablesfor commercial purposes, but not assignments for consumerpurposes (irrespective of whether the receivables werecommercial or non-commercial). With that understanding,the Commission approved the substance of subparagraph(a) and referred it to the drafting group.

Paragraph 1 (b)

29. It was noted that subparagraph (b) was intended toexclude from the scope of the convention transfers ofnegotiable instruments, whether made by mere delivery orby delivery and endorsement. It was also noted that, whena receivable served as a basis for issuing a negotiableinstrument and then both the negotiable instrument and theclaim were transferred, the transfer of the negotiable instru-ment was not covered by the draft convention while thetransfer of the receivable by way of an assignment was tobe covered. In that connection, a suggestion was madeto delete in subparagraph (b) the expression “with anynecessary endorsement” as it might lead to a misunder-standing that a transfer of a negotiable instrument by meredelivery was not excluded. The Commission approved thesubstance of subparagraph (b) and referred it to the draftinggroup.

30. The question was raised whether subparagraph (b)should exclude from the scope of application of the con-vention also transfers of dematerialized (i.e. electronic)securities held by an intermediary. The Commission tooknote of the question and decided to discuss it subsequentlyin the context of the broader discussion of the types oftransaction to be included in or excluded from the scope ofthe convention (see para. 72). In addition, it was noted thatdematerialized securities might call for special treatment asregards the law applicable to competing rights (article 24).It was also noted that the matter might be considered by theHague Conference on Private International Law and, there-fore, coordination and cooperation with the HagueConference might become necessary (see paras. 177, 178and 460).

Paragraph 1 (c)

31. The Commission approved the substance ofsubparagraph (c) and referred it to the drafting group.

Paragraph 2

32. It was noted that paragraph 2, allowing States to ex-clude further practices, appeared within square bracketspending final determination of the scope of the convention.The Commission postponed consideration of paragraph 2until it had reached a final decision on the scope of theconvention (see paras. 109 and 152).

Article 5. Limitations on [assignments of]receivables other than trade receivables


“[Variant A

“1. Articles 17, 18, 19, 20 and 22 do not affect therights and obligations of the debtor in respect of a receiv-able other than a trade receivable except to the extent thedebtor consents.

“2. Notwithstanding articles 11, paragraph 2, and 12,paragraph 3, an assignor who assigns a receivable otherthan a trade receivable is not liable to the debtor forbreach of a limitation on assignment described in articles11, paragraph 1, and 12, paragraph 2, and the breachshall have no effect.

“Variant B

“Articles 11 and 12 and section II of chapter IV applyonly to assignments of trade receivables. With respect toassignments of receivables other than trade receivables,the matters addressed by these articles are to be settled inconformity with the law applicable by virtue of the rulesof private international law.]”

34. While some support was expressed in favour of vari-ant A, it was widely felt that an approach along the lines ofvariant B would be preferable since it would result in pro-tecting the debtor more fully than variant A. It was statedthat, if the assignment were to be effective as between theassignor and the assignee, as provided under variant A, thelegal position of the debtor could, in certain legal systems,be negatively affected. The discussion focused on a revisedversion of variant B, as follows (see A/CN.9/472/Add.1,page 11):

“Unless the debtor consents, articles 11 and 12 applyonly to assignments of trade receivables. With respect toassignments of receivables other than trade receivables,the matters addressed by these articles are to be settled inconformity with the law applicable by virtue of the rulesof private international law.”

35. This revised version of variant B was supplementedby the following definitions (see A/CN.9/472/Add.1,page 12):

“‘Trade receivable’ means a receivable arising underan original contract for the sale or lease of goods or theprovision of services other than receivables arising underpayments or securities settlement systems and receiva-bles arising under financial contracts governed by net-ting agreements or used as collateral.

“‘Payment or securities settlement system’ means anycontractual arrangement between three or more partici-pants with common rules for the settlement of paymentor security transfer orders, and of any related collateral,between the participants, whether or not supported by acentral counter-party, settlement agent or clearing house.

“‘Financial contract’ means any spot, forward, future,option or swap transaction involving interest rates, com-modities, currencies, equities, bonds, indices or anyother financial instrument, any repurchase or securities


lending transaction, any deposit transaction and anyother transaction similar to any transaction referred toabove entered into in financial markets and any combi-nation of the transactions mentioned above, and anycollateral or credit support related to any transaction re-ferred to above.

“‘Netting agreement’ means an agreement which pro-vides for one or more of the following:

“(a) The net settlement of payments due in the samecurrency on the same date whether by novationor otherwise;

“(b) Upon the insolvency or other default by a party,the termination of all outstanding transactions attheir replacement or fair market values, conver-sion of such sums into a single currency andnetting into a single payment by one party to theother; and

“(c) The set-off of amounts calculated as contem-plated by the preceding phrase (b) under two ormore netting agreements.”

36. Comparing the original and the revised version ofvariant B, general preference was expressed for the revisedversion. It was observed that the original version of variantB was unnecessarily broad in that it would inadvertentlyresult in excluding from the scope of the convention theassignment of all receivables other than trade receivables.Unlike the original version of variant B, the revised versioncalled for a more limited exclusion, since it referred only toarticles 11 and 12, only for receivables from payment sys-tems or financial netting agreements and only if the debtordid not consent to the assignment.

37. With regard to the particular formulation of the re-vised version of variant B, a number of views were ex-pressed. One view was that the reference to consent by thedebtor was meaningless, since anti-assignment clauseswere routinely included in netting arrangements. Anotherview was that the reference to private international lawmight create uncertainty and should be deleted. In re-sponse, it was pointed out that, even if that reference wereto be deleted, the result would be the same. As regards thedefinition of “trade receivable”, it was observed that re-ceivables from construction works should also be treated astrade receivables. It was also stated that it might be betterto avoid defining “trade receivable” since the term was notuniversally understood in the same way (for remarks on theother definitions, see paras. 49-51).

38. While it was agreed that the revised version of variantB was more appropriate than variant A and the originalversion of variant B, the view was expressed that even therevised version of variant B did not go far enough in pro-tecting the rights of debtors, for example, in financial net-ting agreements, since it relied on the existence of an anti-assignment clause and on the effect given to that clause bythe law applicable outside the draft convention. It wasstated that, if the applicable law recognized the validity ofan assignment made in violation of an anti-assignmentclause, the assignment would be effective and could fallwithin the ambit of the convention. As a result, for exam-

ple, netting arrangements might be disrupted (e.g. becausenetting could be exercised by means other than set-off and,therefore, article 19 might not be sufficient in preservingnetting rights). To the extent that the debtor would have aright of set-off and would be considered to be also a credi-tor, in the case of a conflict of priority, article 24 couldapply and refer priority issues to the law of the assignor’slocation rather than, for example, to the more appropriatelaw of the location of the investment securities account. Itwas stated that consultation with the industry had led to theresult that certain financial practices should be excludedfrom the scope of application of the convention altogether.In the place of article 5, language along the following lineswas proposed for inclusion in articles 6 and 4:

“Article 6 “Definitions and rules of interpretation

“(x) (i) Except as provided in subparagraph (ii), areceivable is a contractual right to payment of a mon-etary sum, owed by a person (debtor) to an assignor, as:

“(a) Payment for goods sold or leased or for the pro-vision of services [other than financial services];

“(b) Payment for industrial or other intellectual prop-erty sold or licensed;

“(c) Payment for a credit card transaction;

“(d) Repayment of a loan of money, regardless of thecurrency in which denominated; or

“(e) Reimbursement for the payment, pursuant to aguaranty, suretyship obligation [or other secondary obli-gation] of the debtor’s obligation to a third party.

“(x) (ii) The following are not ‘receivables’:

“(a) Rights to payment arising from transactions on aregulated futures exchange;

“(b) Rights to payment arising from the sale, lease orloan of gold or other precious metals;

“(c) Rights to payment under a financial nettingagreement;

“(d) Rights to payment under bank deposit relation-ships, including those arising under inter-bank paymentsystems;

“(e) Rights to payment from an insurer under an in-surance contract, or from a reinsurer under a reinsurancecontract;

“(f) Rights to payment for goods sold or leased to theextent that under the law of the State where the goodsare located the goods are considered to be part of the realestate on which the goods are situated;

“(g) Drawing rights or rights to payment under a letterof credit or independent bank guarantee;

“(h) Rights to payment arising from foreign exchangecontracts; or

“(i) Rights to payment arising from the sale or lend-ing of investment securities, including repurchase agree-ments and rights to payment arising under investmentsecurities settlement systems.”


“Article 4 “Exclusions and limitations on applica-tion of certain provisions

“3. In the case of receivables described insubparagraphs (d) and (e) of article 6 (x) (i), articles 11and 12 do not affect the rights and obligations of thedebtor [or any guarantor, surety or other secondary ob-ligor for the debtor] unless the debtor [or such guarantor,surety, or secondary obligor] otherwise consents.”

39. The purpose of the proposal, it was explained, wasessentially to refine the scope of application of the conven-tion with a view to ensuring that it did not inadvertentlydisrupt certain financial practices for which not all provi-sions of the convention were well suited. It was observedthat the proposal was based on a distinction between threecategories of receivables, those to which all of the provi-sions of the convention would apply, those to which onlysome provisions would apply and those which would beexcluded from the scope of application of the conventionaltogether. Moreover, it was explained that the list of exclu-sions was necessary since, even with an enumeration ofpractices covered, the convention could inadvertently applyto practices that were well regulated and that could even bedisrupted if the convention were to apply.

40. There was general agreement in the Commission thatcertain practices needed to be treated differently. Differingviews were expressed, however, as to whether those prac-tices should be excluded from the scope of the conventionas a whole or from the scope of articles 11 and 12 only.One view was that, if articles 11 and 12 did not apply, theeffectiveness of assignments made despite anti-assignmentclauses would be left to law applicable outside the conven-tion. As a result, in most cases, the assignment would beineffective and the convention would not apply. It was alsostated that, while an approach based on lists would have thesame result, it could not be preferred because it raised anumber of problems. One problem was that an approachbased on lists, rather than on a general rule, would run therisk of being incomplete or inconsistent and thus raisequestions of interpretation. Another problem was that a listcould soon become outdated, since international practiceevolved rapidly and new types of receivables might de-velop that might not fit well into any of the categories listedin the proposal. In that event, questions would arise as towhether those new types of receivables would fall within oroutside the scope of the convention. Yet another problemwas that any list might inadvertently exclude new practiceswith regard to trade receivables, thus hampering their fur-ther development. Still another problem was that the late-ness of the proposal did not allow delegates time for con-sultations with representatives of the relevant sectors of theindustry, which became necessary as a result of the radicalnature of the proposal.

41. Another view was that a qualified approach, such asthe one mentioned above (see paras. 38 and 39), should befollowed. Such an approach would enhance certainty in theapplication of the convention and increase the level of itsacceptability to States and the relevant industry. It wasstated that, for the reasons mentioned above (see para. 38),excluding certain practices from the scope of articles 11and 12 only would not be sufficient to avoid undue inter-

ference with well-regulated and efficiently functioningpractices. That result was said to be contrary to the maingoal of the convention, which was to increase the availabil-ity of lower-cost credit. In addition, it was stated that theproposal did not raise a new issue, since the exact scope ofthe convention had been left open by the Working Group.

42. After discussion, the Commission postponed reachinga decision as to the proposed approach until it had com-pleted its consideration of the practices listed in the pro-posal (see paras. 97-100). In order to accommodate someof the concerns expressed, the Commission agreed that thedefinition of “receivable” by way of a list of practicescould, for the time being, be left aside. The Commissionwent on to consider in more detail the practices suggestedto be excluded.

Subparagraph (a) (Payment rights from regulatedfutures exchanges)

43. It was stated that the reference to rights to paymentarising from transactions on a regulated futures exchangewas essentially intended to cover exchange trading of de-rivatives and commodities, which was well regulated andfunctioning under national law. In addition, it was observedthat application of the convention to such practices couldfrustrate the legitimate expectations of parties and seriouslydisrupt existing markets. The suggestion was made that, forthe same reasons, all exchange trading should be excluded.It was stated that such an approach would render any spe-cific reference to exchange trading in precious metals andto foreign currency exchange trading unnecessary. In orderto address the points made in the discussion, the proposalwas reformulated as follows: “[rights to payment] [receiva-bles] arising from transactions on a regulated exchange”. Itwas observed that the bracketed language was being usedpending determination by the Commission whether such anexclusionary approach would be followed and, if so,whether the list of exclusions would be made part of article2 or article 4. In response to a question, it was stated thatthe reference to “exchange” was intended to encompasstransactions made under the auspices of a regulated ex-change (e.g. stock exchange, securities and commoditiesexchange) and not every regulated market.

Subparagraph (b) (Rights to payment from the sale,lease or loan of gold or other precious metalsand from foreign currency exchange transactions)

44. It was explained that the proposed exclusions werebased on considerations similar to those underlying theproposed exclusion of rights to payment arising from trans-actions on a regulated futures exchange. They were neededbecause the rules of the convention (e.g. articles 11 and 12)might not be entirely compatible or might even interferewith the functioning of regulated markets. It was also ex-plained that, while precious metals and foreign currencywere traded in exchanges, trading between individuals wasalso a practice that should be excluded, in particular inview of the need to control the transfer of such assets tooff-shore parties.


45. Various objections were raised to the proposed exclu-sion, which it was felt would lead to an unnecessary andunjustified limitation of the scope of application of theconvention. It was considered that the essential criterion forthe exclusion should be the technique used for settlementand not the nature of the assets being traded. It was addedthat, as currently formulated, the proposed exclusion wouldencompass transactions involving the factoring of proceedsof the sale of gold and other metals that took place outsideany regulated exchange, such as the sale of jewellery. Afterdeliberation, it was tentatively agreed that the proposedexclusions should be reformulated and possibly combinedwith trading in a regulated exchange. As a result,subparagraph (b) of the proposed text (see para. 38) couldbe deleted and subparagraph (h) would relate only to for-eign exchange contracts negotiated off a regulated ex-change (see paras. 66-68).

Subparagraph (c) (Rights to payment under financialnetting agreements)

46. The Commission generally agreed that the assignmentof rights to payment under financial netting agreementsshould be excluded from the scope of application of theconvention or of articles 11 and 12. It was widely felt thatsuch practices functioned well under standard masteragreements prevailing in practice (e.g. master nettingagreements prepared by the International Swaps and De-rivatives Association) and currently applicable law. In ad-dition, it was stated that bringing the assignment of finan-cial netting receivables into the scope of the conventionwould inadvertently result in disrupting such financial net-ting practices, since certain provisions of the draft conven-tion would not work well for those practices (e.g. articles11, 12, 19 and 24-26). Such a result was said to be contraryto the overall goal of the convention, which was to increasethe availability of lower-cost credit with a view to facilitat-ing the movement of goods and services across nationalborders. Moreover, it was observed that the exclusion ofthe application of articles 11 and 12 only would not besufficient to protect parties to financial netting agreements,since it was based on the assumption that there would al-ways be an anti-assignment clause and that that clausewould be validated under law applicable outside the con-vention. In that connection, it was observed that, if an as-signment was effective despite the fact that it was made inviolation of an anti-assignment clause, the assignmentcould fall under the convention. As a result, the debtor’sright to netting might be affected (article 19 referring toset-off might not cover all types of netting) and prioritywould be referred to the law of the assignor’s location (in-stead of the more appropriate law of the location of thesecurities account).

47. With regard to the particular formulation of the exclu-sion of netting in financial agreements, a number of ques-tions were raised. One question was whether paymentrights arising both before and after close-out (i.e. termina-tion) of the netting agreement were meant to be covered bythe exclusion. In response, it was stated that all such rightsto payment were intended to be covered. Another questionwas whether netting in non-financial agreements (e.g. inthe airline or farming business) should also be excluded.While there was some support for the exclusion of such

netting agreements, the prevailing view was that theyshould not be excluded, since such an approach might in-advertently result in excluding the assignment of certaintrade receivables. It was suggested, however, that the appli-cation of articles 11 and 12, dealing with anti-assignmentclauses, might be excluded with respect to such non-finan-cial netting agreements. There was no sufficient support forthat suggestion (for the continuation of the discussion, seepara. 149).

48. The view was expressed that rights arising under in-ter-bank payment systems (referred to in subparagraph (d))and rights arising from the sale or lending of investmentsecurities or under investment securities settlement systems(referred to in subparagraph (i)) were closely related tonetting agreements and should be listed together. In orderto address the concerns expressed, subparagraph (c) of theproposed text (see para. 38) was reformulated as follows:“[Rights to payment] [Receivables] arising under financialcontracts governed by netting agreements, except a [receiv-able] [right to payment] owed on the termination of alloutstanding transactions”. It was explained that only finan-cial netting arrangements would be covered, while nettingbetween industry participants would not be excluded (butmight need to be treated differently in the context of article20 so as to ensure that rights of set-off arising from trans-actions governed by netting arrangements would be pre-served; see, however, para. 149). It was also stated that theassignment of receivables payable upon termination of anetting arrangement was not intended to be excluded, sincein such a case there was no risk that the mutuality of net-ting arrangements would be disturbed.

Definitions

49. Support was expressed in favour of the definition of“netting agreement” (see para. 35). At the same time, anumber of concerns were expressed. One concern was thatthe definition was too broad and might inadvertently resultin excluding bilateral agreements between traders poolingcredits and debits and settling mutual obligations by way ofnet payments, a result that was considered inappropriate. Inresponse, it was observed that financial netting arrange-ments, whether multilateral or bilateral, should be excludedfrom the scope of the draft Convention. Another concernwas that the reference to “set-off” might be inappropriate,since there was no universal understanding of that notion.Yet another concern was that the situation described insubparagraph (b) of the definition of “netting agreement”did not involve a genuine netting arrangement and shouldbe deleted.

50. Support was also expressed in favour of the definitionof “financial contract” (see para. 35). It was suggested,however, that the reference to payment rights from depositaccounts should be deleted, since specific reference wasmade in the proposed list of exclusions to payment rightsfrom deposit accounts (see para. 38 and para. (x) (ii) (d) ofthe proposed text). It was also suggested that the referenceto collateral or credit support arrangements should be de-leted, since such arrangements did not constitute a neces-sary element for the definition of “financial contract”. Itwas stated, however, that collateral and credit support ar-rangements were an important part of financial contracts,


which affected the overall cost of the financing made avail-able and should, therefore, be explicitly mentioned either inthe definition of “financial contract” or in the definition of“netting agreement”. In response, it was observed that,while the importance of collateral and credit support ar-rangements could not be denied, they did not form part ofthe definition of either “netting agreement” or “financialcontract”. It was also stated that referring to collateral ar-rangements in the definitions of “financial contract” or“netting agreement” could inadvertently result in the exclu-sion of an assignment of receivables made by a business tosecure a bank loan. It was tentatively agreed that the refer-ence to collateral and credit support arrangements in thedefinition of “financial contract” should be deleted (seealso para. 74).

51. The Commission also considered the definition of“payment or securities settlement system” (see para. 35). Itwas stated that it was important to clarify that three or moreparticipants were required for an inter-bank payment orsecurities settlement arrangement to qualify as a “system”and be excluded from the scope of the convention. Theview was expressed that that matter could be clarified in acommentary to the convention. It was observed, however,that in some countries such payment systems could be es-tablished by two correspondent banks. After discussion, theCommission tentatively decided that a definition of pay-ment and securities settlement systems was not necessary(for the continuation of the discussion, see para. 71).

Subparagraph (d) (Rights to payment under bankdeposit relationships, including those arising underinter-bank payment systems)

52. It was stated that, with respect to the assignment ofreceivables arising from deposit accounts and inter-bankpayment systems, the convention would not always lead todesirable results and that, in any case, those receivableswere regulated by law and by contract in the light of thespecific needs of the relevant practices. Some support wasexpressed in favour of leaving assignments of such receiva-bles within the ambit of the convention (as had been theview in the Working Group), since they were frequent andit was desirable that they should benefit from the harmo-nized regime of the draft convention. It was observed that,if any special treatment of those receivables was needed(e.g. as regards priority and location), that should be ad-dressed in the context of the relevant draft articles. How-ever, the prevailing view was that those receivables shouldbe excluded, since it was preferable to leave the issue oftheir assignability and the effects of assignment to the regu-lation outside the convention. It was stated that interferenceby the convention in non-assignment clauses in bank de-posits might cause misgivings in that industry and mighthave a negative effect on the acceptability of the conven-tion.

53. There was support in the Commission for excludingthe assignment of receivables arising from inter-bank pay-ment systems (whether from the draft convention as awhole or only from articles 11 and 12 remained an openquestion; see paras. 97-100). However, since those relation-ships, whether multilateral or bilateral, contained elementsof netting, it was suggested that that exclusion should be

incorporated into and consolidated with the exclusion ofrights to payment under a financial netting agreement (seeparas. 46-48). In order to meet some of the concerns ex-pressed, the second part of subparagraph (d) of the pro-posed exclusion (see para. 38 and para. (x) (ii) (d) of theproposed text) was reformulated thus: “[Rights to payment][Receivables] arising under inter-bank payment systems orsecurities settlement systems”. In response to the query asto a possible inconsistency with the reformulated version ofthe exclusion of financial netting arrangements (see para.48), it was observed that inter-bank payment or securitiessettlement systems operated within or outside netting ar-rangements. It was also stated that, in the case of inter-bankpayment and securities settlement systems, the assignmentof the payment obligation outstanding on the termination ofa netting arrangement should be excluded, since there wasno market in financing such close-out payment rights.

54. In the discussion, the question was raised as towhether the facilitation by the convention of assignmentsof financial deposits might run counter to the provisions oflaw designed to prevent money-laundering. It was noted inresponse that that was not the case, because any assign-ments of receivables under the convention would remainsubject to any mandatory provisions concerning money-laundering.

Subparagraph (e) (Rights to payment from an insurerunder an insurance contract, or from a reinsurerunder a reinsurance contract)

55. It was pointed out that the insurance market was regu-lated in great detail (by contract and statute) and that thedraft convention introduced provisions that might not pro-duce the desired results or might even interfere with thecontractual and statutory provisions governing those con-tracts. In addition, there existed many forms of insurancethat were subject to different policy considerations andexpectations of the parties and it was difficult to make surethat provisions of the draft convention would not present anundesirable interference with them.

56. The proposal to exclude insurance practices was ob-jected to on the ground that it was desirable to place re-ceivables from insurance contracts on a certain and interna-tionally harmonized legal footing. Such receivables (fromdifferent types of insurance contract such as casualty,health, pension, credit or liability insurance) were fre-quently assigned and were also frequently part of cross-border financing operations, such as factoring. Those op-erations were developing and it was desirable to facilitatethem and reduce their costs and risks by means of theconvention. After discussion, the proposal to exclude theassignment of insurance receivables did not obtain suffi-cient support and the Commission decided not to single outinsurance or reinsurance receivables as receivables to beexcluded from the scope of the convention as a whole.

Subparagraph (f) (Rights to payment for goods soldor leased that become part of real estate)

57. It was widely felt that the assignment of receivablesarising from the sale or lease of goods should not be ex-cluded, even if the goods had temporarily become part of


real estate. It was stated that the exclusion of the assign-ment of such trade receivables from the scope of the con-vention would significantly reduce its usefulness and un-dermine its chances for wide adoption. It was also observedthat such an exclusion would create uncertainty with regardto the application of the draft convention in view of thedivergent approaches taken in various legal systems as tothe conditions required for movable goods to become partof real estate.

58. The discussion focused on a reformulated version ofsubparagraph (f), which was aimed at excluding the assign-ment of: “[Rights to payment] [Receivables] arising fromthe sale or lease of real estate”. Support was expressed forthe reformulated version of subparagraph (f), which wouldresult in avoiding the exclusion of the assignment of tradereceivables, without creating undue interference with na-tional law on real estate rights.

59. It was pointed out, however, that the assignment ofreceivables arising from the lease of real estate should notbe excluded. In response, it was observed that it would becounter-productive to attempt to draw a distinction betweensales and leases, since leases often had attributes of a sale(e.g. long-term leases with an option to buy) and, in manylegal systems, were treated in the same way as sales.

60. On the other hand, it was observed that, while theassignment of receivables arising from leases of real estatecould be included in the scope of the convention, it wasmost important to exclude receivables secured by a mort-gage in real estate so as to avoid interfering with nationallaw on the transfer of mortgages in general and onsecuritization of mortgages in particular. In that connec-tion, a note of caution was struck that the usefulness of theconvention would be severely reduced if the assignment oftrade receivables (arising from the supply of goods, con-struction or services) were to be excluded on the soleground that they happened to be secured by real estate. Itwas pointed out that commercial and, in particular, con-struction companies regularly relied on the assignment ofreceivables secured by a mortgage in real estate or con-struction sites for obtaining financing. It was also statedthat it would be a strange result for the convention not tocover a global assignment of receivables by a commercialentity merely because that entity (assignor) or the debtor ora third party gave a mortgage as an additional security. Itwas pointed out that excluding such a global assignmentwould create uncertainty as to the application of the con-vention and might lead to inconsistent results (e.g. a con-flict arising before a mortgage was given would be coveredbut not a conflict arising after the mortgage was given).

61. In addition, it was stated that the concern expressedwith regard to the effect an assignment of receivables couldhave on security rights in real estate could be addressed bymeans of a private international law rule that would referconflicts of priority between an assignee under the conven-tion and a holder of an interest in real estate with a right inthe assigned receivable to the law of the location of the realestate. The following wording was proposed:

“If the assigned receivable arises from the sale or leaseof an interest in land or is secured by such an interest,the rights of the assignee are subject to any competing

rights of a person who holds an interest in the land underthe law of the State in which the land is situated”.

Support was expressed for that proposal. It was stated thatthe legal analysis underlying the proposal was sound andaddressed all relevant issues. In particular, it was pointedout that, if no conflict arose with a holder of a right in realestate under national law and there was no statutory limi-tation on the assignment of real estate receivables (a matterthat might be explicitly addressed in article 9; see para.131), national real estate markets would not be affected bythe convention. In addition, it was observed that the draftconvention dealt with the assignment of receivables and didnot include any rules that could undermine national realestate markets. It was pointed out, in particular, that article12 was sufficient in referring to national law issues, such asthe distinction between an accessory and an independentright, rights of the debtor as against the assignor and theform of transfer of a security right, whether in real estate orin movable property.

62. However, the view was expressed that the proposedtext might not be sufficient to ensure that national real estatemarkets would not be disrupted. Under such an approach,matters other than priority (and form, which was left tonational law by virtue of article 12, para. 5) might fall withinthe ambit of the convention. It was, therefore, suggested thata broader private international law rule would be necessary.The following language was proposed for inclusion in article25: “Where the assignment would transfer or create an inter-est in land or a receivable arising from such an interest, thelaw of the State in which the land is located will govern thematters specified in article 24”. After deliberation, the pro-posal was modified to read as follows:

“Where a receivable arises from an interest in land, orwhere the assignment of a receivable, or any associatedtransaction, would create or transfer an interest in land,all matters pertaining to that interest in land will be gov-erned by the law of the State in which that land is locatedfor the purposes of this Convention”.

Support was expressed for the proposed text. It was statedthat an approach based on a special regime to be incorpo-rated in draft article 25 would better address all the con-cerns expressed. It was observed, however, that there wasno real difference between that proposal and the proposalmentioned above (see para. 61), since, under the latter pro-posal, the law of the assignor’s location applied only if itsapplication would not result in any interference with thelaw of the State in which the real estate was located.

63. As an alternative to the above-mentioned proposals todeal with the matter by way of a limited exclusion in article24 or in article 25, it was proposed that, in order to avoidinterfering with national mortgage markets, an outrightexclusion in article 4, paragraph 1, could relate only to“receivables arising from the sale or lease of real estate thatare secured by a mortgage in such real estate”. In addition,it was stated that, if the Commission were not able to reachagreement on such an exclusion, an approach based onarticle 4, paragraph 2, could be considered. Concern wasexpressed, however, that article 4, paragraph 2, allowingStates to exclude an unlimited number of practices, wouldnot be conducive to the uniformity sought to be achievedthrough the convention.


64. After deliberation, the Commission suspended consid-eration of the matter to allow time for consultations (for thecontinuation of the discussion, see paras. 75-87).

Subparagraph (g) (Drawing rights or rights topayment under a letter of credit or independent bankguarantee)

65. The Commission agreed that the assignment of re-ceivables arising from letters of credit or independent guar-antees (either as rights to claim payment or rights to receivepayment after a valid claim had been made) should not begoverned by the convention. It was widely felt that theassignment of such receivables gave rise to special consid-erations that were dealt with by special non-legislative andlegislative texts, including the Uniform Customs and Prac-tices (UCP500), the International Standby Practices(ISP98) and the United Nations Convention on Independ-ent Guarantees and Stand-by Letters of Credit (GeneralAssembly resolution 50/48, annex, “the Guarantees andStand-by Convention”).

Subparagraph (h) (Rights to payment arising fromforeign exchange contracts)

66. The Commission recalled that foreign exchange con-tracts would be excluded by the convention insofar as theytook place under the auspices of a regulated exchange (seesubpara. (a) and para. 43) or involved netting arrangements(see subpara. (c) and paras. 46-48). The discussion focusedon foreign exchange contracts that would not fall undersubparagraph (a) or subparagraph (c) of the proposed listof exclusions.

67. The view was expressed that the exclusions undersubparagraphs (a) and (c) were not sufficient since therewere significant practices relating to foreign exchange con-tracts that took place outside a regulated exchange andwere not subject to master netting agreements. It was alsostated that, in such situations, financing institutions wouldrely on statutory rights of set-off, the preservation of whichwas crucial for controlling the credit risk and thus the costof a transaction. It was also stated that it was equally essen-tial for financial institutions to be able to rely on non-as-signment clauses against possible assignees of the proceedsof foreign exchange transactions. The application of arti-cles 11 and 12 could thus inadvertently result in an in-creased exposure of the financial institutions to the risk ofdefault by their clients, which would lead to an increase inthe financial cost of those transactions. Another argumentput forward in support of the proposed exclusion was thatforeign exchange transactions were in many countries sub-ject to special regulation by domestic monetary authoritiesand that the exercise of those regulatory functions shouldnot be hindered by the convention. Monetary regulationssometimes included restrictions on the assignability of theproceeds of foreign exchange transactions for the purposeof controlling cross-border currency flows.

68. The Commission took note of those concerns. Never-theless, it considered that there was no compelling reasonto exclude those residual foreign exchange transactionsfrom the scope of application of the convention. Financialinstitutions that wished to avoid the application of the con-

vention to their foreign exchange transactions remainedfree to use netting agreements for those transactions,thereby qualifying for exclusion under the appropriate pro-vision. In addition, it was widely felt that, to the extent thatstatutory regulations restricted the assignability of receiva-bles arising under foreign exchange contracts, they wouldremain unaffected by the convention as a whole and arti-cles 11 and 12 in particular. Moreover, it was generally feltthat article 20 was sufficient to preserve the debtor’s rightsof set-off. After discussion, the Commission decided thatsubparagraph (h) should be deleted.

Subparagraph (i) (Rights to payment arising from thesale or lending of investment securities, includingrepurchase agreements and rights to payment arisingunder investment securities settlement systems)

69. It was recalled that rights to payment arising underinvestment securities settlement systems would be coveredunder subparagraph (d) as revised (see para. 53), while thesale or lending of investment securities would not be cov-ered by the exclusions with respect to netting arrangementsand transactions on a regulated exchange. Support was ex-pressed for the exclusion. It was stated that investmentsecurities were sold, lent or traded pursuant to repurchaseagreements in well-established and regulated markets andthat the convention (e.g. the rules on representations, set-off and priority) might have a disruptive effect on thosemarkets. In response, it was argued that the fact that thosetransactions were subject to regulation by national law wasnot sufficient to justify their exclusion from the scope ofthe convention, since the convention would not affect anystatutory limitations on assignment. It was therefore sug-gested that, if necessary, States could make use of the rightrecognized in article 4, paragraph 2, to exclude certainpractices by making a declaration under article 39. It wassaid in reply that, to the extent any practices should beexcluded from the convention, it would be preferable toexclude them explicitly in article 4, paragraph 1, and not bya unilateral declaration by a State pursuant to articles 4,paragraph 2, and 39, since such an approach would notadvance uniformity and might create uncertainty as to theapplication of the convention. After discussion, pendingfinal determination of the question whether exclusionsshould relate to the convention as a whole or to articles 11and 12 only, the Commission tentatively decided that salesand loans of investment securities should be excluded (seealso para. 72).

Revised consolidated list of exclusions

70. Subsequently, the Commission reviewed the results ofits consideration of the types of receivables that should beexcluded from the convention. The Commission did so onthe basis of a draft prepared by an informal ad hoc group forinclusion in article 4, paragraph 1, which read as follows:

“[The Convention does not apply to]:

“(a) Receivables arising from transactions on a regu-lated exchange;

“(b) Receivables arising under financial contractsgoverned by netting arrangements, except a receivableowed on the termination of all outstanding transac-tions;


“(c) Receivables arising from bank deposits;

“(d) Receivables arising under inter-bank paymentsystems or investment securities settlement systems;

“(e) Receivables under a letter of credit or independ-ent bank guarantee;

“(f) Receivables arising from the sale or loan of in-vestment securities.”

71. Recalling its earlier discussion on the definition of“payment and securities settlement systems” (see para. 51),the Commission decided that, in subparagraph (d), refer-ence should also be made to inter-bank payment agree-ments. It was widely felt that, in addition to payment andsecurities settlement systems, payment arrangements be-tween two correspondent banks should be excluded fromthe scope of the convention.

72. With respect to subparagraph (f), the suggestion wasmade that it should be revised to refer also to the holdingof investment securities. In response to a question, it wasstated that the direct or indirect holding of investment se-curities, whether they were in paper or in electronic form(“dematerialized securities”), could generate receivables,such as the balance in a securities account, dividends fromsecurities or the price from the sale of securities. It wasgenerally agreed that the assignment of such receivablesshould be excluded from the draft convention, for the samereasons that the assignment of receivables arising from thesale or loan of investment securities was to be excluded(see para. 69).

73. The Commission also considered the definitions of“financial contract” and “netting agreement” that were re-ferred to in subparagraph (b) of the above-mentioned list ofexclusions (see para. 70) and should be included in article6. The draft definitions (modelled closely on the text sug-gested by the European Banking Federation in documentA/CN.9/472/Add.1) were as follows:

“(n) ‘Financial contract’ means any spot, forward, fu-ture, option or swap transaction involving interest rates,commodities, currencies, equities, bonds, indices or anyother financial instrument, any repurchase or securitieslending transaction, any deposit transaction and anyother transaction similar to any transaction referred toabove entered into in financial markets and any combi-nation of the transactions mentioned above;

“(o) ‘Netting agreement’ means an agreement whichprovides for one or more of the following:

(i) The net settlement of payments due in the samecurrency on the same date whether by novationor otherwise;

(ii) Upon the insolvency or other default by a party,the termination of all outstanding transactions attheir replacement or fair market values, conver-sion of such sums into a single currency andnetting into a single payment by one party to theother; and

(iii)The set-off of amounts calculated as contemplatedby the preceding subparagraph (ii) under two ormore netting agreements.”

74. It was noted that, in view of the Commission’s earlierdiscussion of those definitions (see paras. 49-51), the refer-ence to deposit accounts and to collateral and credit supportsystems in the definition of “financial contract” had beendeleted. Wide support was expressed for those definitionsas revised. It was agreed that deposit accounts were ex-cluded by virtue of subparagraph (c) of the revised list ofexclusions (see para. 70). A suggestion was made to re-move receivables arising from deposit accounts from thelisv of excluded practices, but that suggestion did not re-ceive sufficient support. The Commission also agreed thatcollateral and credit support systems did not fit into a defi-nition of “financial contract”. After discussion, the Com-mission adopted the above-mentioned list of exclusions anddefinitions and referred them to the drafting group.

Real estate receivables

75. The Commission resumed its deliberations on realestate receivables (see paras. 57-64). The discussion fo-cused on a proposal that read as follows:

“Where a receivable is connected with an interest inland, the law of the State in which the land is situatedgoverns all matters pertaining to that interest and thepriority of the right of the assignee with respect to thecompeting right of a person who holds an interest in theland.”

76. It was stated that the proposed text was intended toapply in all cases, irrespective of the connection of thereceivable to land (e.g. whether the receivable arose fromthe sale or lease of land, or was simply secured by aninterest in land), and to preserve the application of the lawof the land on all matters relating to an interest in land. Itwas also observed that the second part of the proposed textwas intended to address a more limited issue, namely, theissue of the law applicable to a conflict of priority betweenan assignee under the convention and the holder of an in-terest in land under the law of the land. Strong support wasexpressed for that proposal. It was stated that the proposedtext would address the concerns expressed with regard tostatutory limitations on assignments that could have animpact on interests in land, as well as any other publicpolicy concerns in that regard. As a matter of drafting, itwas suggested that the first and the second part of the pro-posed text should be connected with the word “including”.That suggestion was objected to, since the second part ofthe proposed text contained a limited rule dealing with thelaw applicable to priority with respect to the receivable,while the first part dealt with the law applicable to allmatters relating to an interest in land.

77. At the same time, a number of concerns were ex-pressed. One was that the proposed text was overly broadand could inadvertently result in excluding from the scopeof the convention transactions that were intended to becovered (e.g. an assignment of a receivable embodied in apromissory note and secured by a mortgage or the assign-ment of the income flow from an amusement park or a golfcourse). In particular, the words “connected” and “all mat-ters pertaining” were considered to open up the scope ofthe proposed text too broadly and to be introducing anunacceptable degree of uncertainty. It was observed that


commercial loans were often secured by personal propertyand real property. In such situations, it was pointed out,priority with respect to the land-related receivable could bereferred to the law of the land only if, under the law of theland, priority were to be subject to registration in a publicregistry and if a conflict with a holder of an interest in landwere to arise. In that connection, it was stated that, if theassignee had not registered its interest in the land and theassignor were to become insolvent, the assignee’s prioritywith respect to the insolvency administrator should be sub-ject to the law of the assignor’s location. It was also statedthat, even if the assignor had assigned the same receivableto another assignee who had not registered either, priorityshould again be determined under the law of the assignor’slocation. Furthermore, it was observed that the only situa-tion in which the law of the land could apply and the as-signee could be defeated would be where a subsequentassignee had registered its interest under the law of theland. The second part of the proposed text was intended tocover that limited conflict situation.

78. Another concern was that the mere fact that a receiv-able had some connection to real estate, irrespective of thevalue of the real estate compared to the value of the receiv-able, was not sufficient to justify a change in the law gov-erning priority. It was stated that, if the convention were toinclude a rule on the law governing conflicts of prioritywith respect to real estate receivables, that rule should beappropriately cast so as to avoid any undue interferencewith financing practices involving such receivables. Doubtwas expressed as to whether the rule contained in the pro-posed text would be suitable for real estate financing andfor financing on the basis of receivables secured by amortgage. In any case, it was stated that a rule that wouldmake it necessary for any receivables financier to investi-gate whether the relevant receivables were secured by amortgage so as to establish whether the convention appliedwould be unacceptable. In order to address the concernsexpressed, it was suggested that the convention should dealonly with a conflict between an assignee who acquired,under article 12, an interest in the land securing payment ofthe assigned receivable and a holder of an interest in land,which by virtue of the law of the land extended to thereceivable. Such a rule should preserve the application ofthe law of the land either by excluding that type of conflictfrom the scope of the priority rules of the convention or bygiving priority to the holder of an interest in land, if thatperson would have priority under the law of the land.

79. The following language was proposed:

“If a receivable is associated with the land such thatunder the law of the State in which the land is situateda person with an interest in the land has rights in thatreceivable, then the rights of the assignee with respect tothe receivable are subordinate to the rights of any personto whom under the law of the State in which the land issituated the assignee’s rights would be subordinate.”

It was explained that the proposed rule was designed tohave a narrow scope of application, since it required that areceivable be associated with land and that, under the lawof the land, a person with an interest in land acquired aninterest in the land-related receivable. It was explained thatthe proposed rule did not address conflicts with respect to

interests in land, since article 12 was thought to be suffi-cient to ensure that any conflict with respect to interests inland would be resolved by the law of the land. It was alsounderstood that the proposed rule would have no applica-tion if, as a result of debtor default, the assignee of a re-ceivable secured by a mortgage were to foreclose and sellthe land, as long as the assignee had met all the require-ments existing under the law of the land for the acquisitionof interests in land.

80. Some support was expressed for the proposal men-tioned above. In order to ensure that the proposed textwould cover not only rental payments but also receivablessecured by real estate, the suggestion was made that itshould be amended as follows: “Where a receivable is se-cured by land or arises from a lease of land …”. At thesame time, a number of concerns were expressed. One wasthat the proposed text failed to address all situations inwhich the convention might affect rights in land under thelaw of the land. In response to a question as to whetherarticle 9 (in particular, as reformulated; see para. 131)would not cover any concern relating to statutory limita-tions relating to land-related receivables, it was observedthat article 9 would address most but not all public policyconcerns. In response to a further question as to whetherarticle 25 would address those remaining public policyconcerns, it was stated that the article might not be suffi-cient in that regard.

81. In order to bridge the gap between the two divergingproposals (see paras. 75 and 79), the following languagewas proposed: “No provision in this Convention shall af-fect the application of the law of the real estate when theassignment of a receivable is linked to that real estate”.While the proposal was met with interest, it was stated thatit might inadvertently result in creating uncertainty as to theapplication of the convention. The mere fact that, for exam-ple, a mortgage in real estate of a minor value was givencould result in removing the assignment of receivables ofconsiderable value from the scope of the convention. It wasalso pointed out that the only issue that needed to be cov-ered was the conflict between an assignee under the con-vention and the holder of an interest in land linked to thereceivable assigned. Statutory limitations with respect tothe assignment of land-related receivables would be suffi-ciently covered by revised article 9 (see para. 131), whilearticle 12 would be sufficient to ensure that any conflictswith respect to competing interests in land would be subjectto the law governing interests in land by virtue of the rulesof private international law outside the convention.

82. However, the concern was expressed that addressingonly issues of priority would not be sufficient to preserve theapplication of the law of the land on all matters pertaining toan interest in land. For that reason, support was expressed forthe proposal mentioned above (see para. 80) or for allowingStates to exclude the assignment of land-related receivablesfrom the scope of the draft convention (see articles 4, para-graph 2, and 39). It was widely felt that every effort shouldbe made to define clearly the scope of the convention so thatno further exclusions would need to be made by States, sincesuch an approach would reduce certainty with respect to theapplication of the convention and result in its having adifferent scope from State to State.


83. In an effort to reach consensus, the following lan-guage was proposed:

“In the case of a receivable secured by or arising fromthe sale or lease of an interest in real estate, nothing inthis Convention:

“(a) Affects the rights of a person entitled to priorityin the receivable pursuant to the real estate law of theState in which the real estate is located; or

“(b) Authorizes an interest in the real estate that isnot permitted under that law.”

84. It was explained that the proposed text was intendedto ensure that the convention would not affect the priorityof a holder of an interest under the real estate law of theland and would not create an interest in land not permittedby the law of the land. While the proposal attracted sup-port, with regard to subparagraph (a), concern was ex-pressed that the reference to the real estate law of the landwas insufficiently clear and overly restrictive, since priori-ties were normally governed by other law, including insol-vency law. In response, it was stated that referring to thelaw of the land in general would remove from the scope ofthe convention any conflicts of priority with respect to re-ceivables linked to land, no matter how remote or artificialthat link might be. Such a result would undermine the cer-tainty sought through articles 24-27 and was said to beunacceptable, since it would fail to cover significant con-flicts of priority with respect to receivables. The examplewas given of a conflict between two assignees in country Aof a receivable secured by a mortgage in country B.

85. It was stated, however, that, as long as the conventionmade it clear that it was not intended to prejudice rightsunder real estate law, there would not be a need to addressthe specific issue of priority dealt with in subparagraph (a)of the proposed text. In response it was observed that, inthe absence of subparagraph (a), the law of the assignor’slocation would inadvertently apply by virtue of article 24 toa conflict between an assignee under the convention and aholder of a right in land that, under national law, was ex-tended to the receivable.

86. As to subparagraph (b), the suggestion was made thatit should refer to “interference” with the law of the land.That suggestion was objected to, since the term “interfer-ence” might be excessively broad and was in any caseunclear. As a matter of drafting, the suggestion was madethat subparagraph (b) should refer to authorization withrespect to the acquisition of a right in land, a suggestionthat received wide support.

87. Subject to preserving the priority of interests in landarising from law governing interests in land, the Commis-sion approved the text reflected in paragraph 83 and re-ferred it to the drafting group. The Commission continuedits discussion with respect to receivables arising from realestate transactions on the basis of a text to be added inarticle 4, which read as follows:

“[3.] This Convention does not:

“(a) Affect the question whether a property right inreal estate is a right in a receivable related to that realestate;

“(b) Affect the priority of the right in real estate withrespect to the right of an assignee of the receivable; or

“(c) Make lawful the acquisition of property rightsin real estate not permitted under the law of the Statewhere the real estate is situated.”

The concern was expressed that subparagraph (a) departedfrom the policy approved by the Commission (seeparas. 83-87) and was incomprehensible, since an interestin real estate could not be an interest in a related receivable.In response, it was stated that subparagraph (a) was a logi-cal prerequisite for a conflict of priority as described insubparagraph (b) to arise. As to whether the holder of aninterest in land could have an interest in land-related re-ceivables and thus find itself in a conflict of priority withan assignee of those receivables, by way of an example, itwas stated that in many jurisdictions the buyer of a buildingacquired an interest in rents from the lease of the building.As a matter of drafting, it was suggested that the word“confers”, “contains” or “includes” should be substitutedfor the word “is” in subparagraph (a). After discussion, theCommission approved the proposed text and referred it tothe drafting group.

Further practices to be excluded (assignmentsof receivables from sales or leases of aircraft, spaceequipment and railway rolling stock)

88. The suggestion was made that, for the same reasonsmentioned above (i.e. highly regulated, special markets thatdid not need to be covered by the convention), the assign-ment of receivables arising from leases of or secured bycertain types of high-value mobile equipment should beexcluded from the convention. In favour of that proposal,it was stated that an outright exclusion of such practiceswould avoid introducing rules that might not be appropriate(e.g. articles 11, 12 or 24). It was also observed that suchan approach would result in avoiding creating conflictswith a draft convention currently being prepared by theInternational Institute for the Unification of Private Law(Unidroit) (“the draft Unidroit convention”) and otherorganizations. In that connection, it was explained that fur-ther to the decision of the relevant bodies preparing thosetexts to limit the scope of their work to aircraft, spaceequipment and railway rolling stock (instead of to any“uniquely identifiable object”), an outright exclusion wouldbe a limited one and would not risk excessively limiting thescope of the draft convention being prepared byUNCITRAL. Furthermore, it was explained that the draftUnidroit convention and the protocols thereto dealt in anindustry-specific way with remedies upon default of thedebtor and introduced a priority regime based on interna-tional, equipment-specific registries.

89. In order to implement that proposal, language alongthe following lines was suggested for inclusion in the list ofexcluded practices in draft article 4, paragraph 1: “Theassignment of rights [to payment] arising from transactionsin which mobile equipment is leased or is the primary realsecurity for obligations incurred”. That language would besupplemented by the following definition: “‘Mobile equip-ment’ means airframes, aircraft engines, helicopters, rail-way rolling stock and space property.” In response to a


question, it was stated that, while there was not yet a defi-nition of the term “space property”, that term was used toreflect not only equipment in outer space (e.g. satellites),but also any associated rights (e.g. any telemetry, trackingand command facility; satellite command and control soft-ware, as well as access codes; and governmental authoriza-tions for use of the assigned orbital location and associatedradio frequencies). It was observed that, as a practicalmatter, the right of a secured creditor to take possession ofa satellite could not be assured without the associatedrights. As a result, exclusion of associated rights from asecurity interest in the relevant satellite itself would erodethe commercial value of the satellite as collateral and thusundermine the ability of satellite manufacturers, launchservice providers and satellite operators to obtain financingoffering non-possessory security interests in their satellites.It was also stated that it was important for the draft conven-tion to avoid any interference with the draft space protocolbeing prepared, since that draft protocol would be the firstinternational text dealing in a comprehensive way with se-curity interests in space equipment (although other interna-tional texts, such as the Unidroit Convention on Interna-tional Leasing (1988), could be considered applicable tothe lease of space equipment).

90. Strong support was expressed initially for the pro-posed exclusion. It was stated that those categories ofmobile equipment were of a kind traditionally regarded asenjoying special status, which was recognized in the pro-posed new international regime provided in the draftUnidroit convention and protocols. In addition, it waspointed out that the highly specialized nature of financingtechniques of such mobile equipment required that assign-ments of receivables taken as security be dealt with inequipment-specific instruments. Moreover, it was said thatthe proposed exclusion was needed in order to preserve theconcept of indivisibility of the asset and the associatedrights, a concept enshrined in articles 8, paragraph 1, and10 of the draft Unidroit convention. That concept could beundermined if the debtor could assign receivables derivedfrom such high-value mobile equipment under a systemdifferent from that applicable to that mobile equipment. Inorder to avoid such a result, the assignment of receivablesarising from the following transactions, in particular,should be excluded from the scope of the convention: thefinancing of sales by sellers retaining title until full pay-ment of the price; the financing of sales by third-party fin-anciers obtaining a security right in the relevant mobileequipment; the financing of leases in which rental pay-ments were fused with the mobile equipment; and the fi-nancing of companies owning mobile equipment by finan-ciers obtaining a security right through loans primarilysecured by the mobile equipment.

91. The view was expressed that a conflict between twotexts that had not yet been finalized could not be addressedby means of an outright exclusion of certain practices. Suchan approach would result in a legal vacuum until the morespecialized text had been finalized and had entered intoforce. It was therefore suggested that the matter should beleft to article 36 and to the draft Unidroit convention andprotocols that could supersede the draft convention beingprepared by UNICITRAL. In response, it was pointed outthat the main issue was not one of conflicts between two

international texts, but the need to avoid interference witha well-functioning and highly specialized practice. The is-sue of conflicts between international texts was a secondaryone and related not only to a future international text butalso to currently existing international conventions. In anycase, an approach based on article 36 or on general treatylaw would fail to provide the certainty necessary for creditto be made available at affordable rates. In that connection,it was explained that, in order to determine which textapplied, parties would need to establish the location of therelevant parties in a State having made a declaration, aswell as the effect of such a declaration.

92. The view was also expressed that an outright exclu-sion would be inappropriate, since the draft conventionappropriately dealt with financing on the basis of receiva-bles in a broad way and had a different objective from thedraft Unidroit convention and protocols on internationalinterests in mobile equipment. In addition, it was observedthat the proposed language might be excessively broad inthat it would inadvertently result in excluding an assign-ment of a receivable from the scope of the convention,even if the owner of the mobile equipment had paid theprice secured by the security in the mobile equipment. Itwas considered that such a result would be inappropriate. Itwas, therefore, suggested that it would be better to leavethe matter to parties to choose by opting into the draftconvention being prepared by UNCITRAL or the draftUnidroit convention and protocols on international interestsin mobile equipment. In response, it was stated that rightsassociated with security interests in high-value mobileequipment were, in some important practices, inextricablylinked with that equipment and those transactions could notbe subject to a different law on assignment of receivables.It was also stated that leaving the matter to parties wouldcreate uncertainty as to the application of both conventions.

93. The concern was expressed that the proposed lan-guage left open the question whether the assignment ofreceivables in transactions in which the types of equipmentto be excluded were not the primary security would becovered by the draft UNCITRAL convention or by thedraft Unidroit convention and protocols on internationalinterests in mobile equipment. It was stated that, in suchsituations, a conflict could arise between the relevant textsand the problem should be addressed in the draftUNCITRAL convention. In response, it was stated that insituations in which the security in the types of mobileequipment proposed to be excluded would be only a sec-ondary security the assignment of receivables would not beexcluded from the scope of the convention.

94. The concern was also expressed that, unless the scopeof the exclusion was carefully delimited, a general finan-cier might be able to change the regime applicable to as-signments by including in a receivables financing transac-tion an aircraft receivable. In addition, it was stated that anexclusion of assignments of receivables from railway roll-ing stock and space equipment was not possible at thecurrent stage, especially as the scope of the relevant draftprotocols was still unclear and in any case they had yet tobe considered and approved in an intergovernmental con-text. It was also observed that chapter IX of the draftUnidroit convention (dealing with assignments of interna-


tional interests and “associated rights”, including receiva-bles) had not been finally adopted and that alternative pro-visions had been annexed to that chapter on the understand-ing that that matter would be re-examined by a small expertgroup before the diplomatic conference planned so as toconclude the draft convention. Furthermore, it was pointedout that an approach based on an exclusion would inadvert-ently result in an exclusion of a wide range of practicesfrom the scope of the convention, whether or not a countrywas a party to the draft Unidroit convention or had legis-lation dealing with such matters. Moreover, even an ap-proach based on article 36 would need to be deferred untilthe draft UNIDROIT convention and protocols had beenfinalized. Furthermore, including the assignment of aircraftand similar receivables within the ambit of the UNCITRALconvention would not risk disrupting any markets. In thatconnection, the attention of the Commission was drawn tothe fact that recent studies had shown that the exclusionssought would create special regimes where none currentlyexisted and might unduly affect significant practices, suchas those involving the securitization of aircraft receivables.

95. In response, it was pointed out that, while the Com-mission might benefit from further consultations on thematter, it was clearly essential to resolve it in a reasonableway and to the satisfaction of the relevant industry so as toavoid raising opposition to the draft convention. It was alsostated that an approach based on a limited exclusion ofreceivables that were inextricably linked with a high-valuetype of equipment and a priority rule referring to the Stateof registration might work well, at least for aircraft financ-ing practices. In addition, a solution based on article 36,dealing with conflicts with other international texts, couldnot fully address the problems under discussion. In oppo-sition to that view, it was observed that article 36 would besufficient to settle the matter. In addition, the fact that re-ceivables were inextricably linked with the equipment didnot justify an exclusionary approach. The key issue wasthat under the draft Unidroit convention and protocols anequipment financier would always have priority over a re-ceivables financier.

96. Noting the strong views expressed both in favour ofand against an exclusion of assignments of receivables aris-ing from transactions relating to high-value, highly mobileassets, the Commission decided to defer a decision on thematter until the draft Unidroit convention was closer tocompletion, which would allow Governments to undertakethe necessary consultations with the relevant industries.

Placement of the list of receivables to be excluded

97. The Commission considered the question whether thereceivables in the list were to be excluded from the draftconvention in toto or whether the identified receivablesshould receive special treatment only in certain provisions.Some support was expressed for a selective approach, ac-cording to which each receivable would be excluded (ordealt with in a special way) only to the extent necessary toavoid problems in a particular area, while preserving theapplicability of other provisions of the draft convention.That approach was said to be in line with the desire toobtain as broad as possible a scope of application of the

convention and to facilitate, to the extent possible, assign-ment-related financing operations. Nevertheless, the widelyprevailing view was that it was preferable to exclude theidentified receivables completely from the sphere of appli-cation of the convention. That view was a result of theassessment according to which tailor-made exclusionswould cause difficulties of interpretation and would com-plicate the application of the convention. It was stated, inparticular, that variant B of article 5 would have to beexpanded and tailored so as to adapt the convention to theneeds of particular types of practices. Such adjustments, itwas observed, might be necessary as regards, for example,priority issues, rights of set-off, representations and themeaning of the term “location”. Furthermore, total exclu-sions would reduce the need for (or make superfluous)articles 4, paragraph 2, and 39, which by allowing States toexclude further practices might create complications in theapplication of the Convention.

98. After having suspended consideration of the matter toallow some time for consultation among delegates, theCommission continued its discussion, focusing on the ques-tion whether the list of practices to be excluded from thescope of the convention should be placed in article 5 andincorporated into variant B or articles 11 and 12. Somesupport was expressed in favour of placing the list in article5, variant B. It was stated that excluding the practicesmentioned in that list only from the scope of articles 11 and12 would be in line with the overall policy, approved bythe Commission, that the scope of the convention should beas broad as possible. It was also observed that such anapproach would enhance predictability with regard to theapplication of the convention. At the same time, it wasrecognized that the definition of “trade receivable” in vari-ant B of article 5 introduced an unacceptable degree ofuncertainty and should therefore be deleted, while directreference to specific practices should be made. The follow-ing language was proposed for inclusion in draft article 5:

“Articles 11 and 12 [and section II of chapter V] donot apply to assignments of receivables [list of practicesto be excluded]. With respect to the assignment of suchreceivables, the matters addressed by these articles are tobe settled in conformity with the law applicable by virtueof the rules of private international law.”

99. The prevailing view, however, was that the list of prac-tices to be excluded should be placed in article 4. It wasstated that, if those practices were to be excluded only fromthe scope of articles 11 and 12, the convention might stillapply, depending on whether the law applicable outside theconvention would give effect to anti-assignment clauses. Insuch a case, it was stated, the Commission would need toadjust a number of provisions of the draft convention (e.g.the rules on “location”, representations, debtor’s rights ofset-off and priority issues) to the particular needs of thepractices proposed to be excluded. In the discussion, thesuggestion was made that in subparagraph (d) of the pro-posed list of exclusions (see para. 70), language might needto be added to ensure that inter-bank payment systems andsecurities settlement systems were excluded “whether or notthey are governed by netting agreements”. It was also sug-gested that subparagraph (f) should indicate clearly that itincluded repurchase agreements.


100. After discussion, the Commission decided that thelist of practices to be excluded should be appropriately in-corporated into article 4 and referred the matter to the draft-ing group (as to whether articles 5 and 6, paragraph 1,should be retained, see paras. 104-108 and 151).

Specific list of receivables to be included

101. The Commission subsequently turned to a discus-sion of the advisability of including in the draft conventiona list of receivables, the assignment of which would becovered by the convention. In support of such a list, it wasstated that it would provide immediate and express assur-ance and clarification to the interested industries benefitingmost from the convention that those practices were coveredby it. Those practices included, in particular, the supply ofgoods, works and services, the sale or licence of intellectualproperty, credit card transactions, as well as the lending ofmoney and payments on guarantees or surety obligations.Such an approach was said to be a practical one that wouldfoster the acceptability of the convention and facilitate itsinterpretation. However, there was considerable oppositionto including such a list of practices. The opinion was ex-pressed that such a list would unnecessarily limit the scopeof application of the convention and thus run counter to thegenerally approved policy for the convention to have asbroad a field of application as possible. In addition, a jux-taposition of a list of exclusions and a list of inclusionsmight cause difficulties of interpretation with respect topractices for which it was not entirely clear where theybelonged or practices that might develop in the future.Moreover, it was observed that the list would be superflu-ous, since it would be merely restating, by using the mosttypical examples, the transactions that were covered by theconvention by virtue of article 2. Furthermore, it was statedthat if the list of practices to be excluded were to be addedin article 4, paragraph 1, article 5 would not be necessaryand, as a result, a distinction between financial and tradereceivables would be superfluous and could inadvertentlyresult in excluding trade receivables.

102. The Commission adopted the view that the conven-tion should not set out a list of transactions to be includedin the scope of the convention, but that a clarification tothat effect should be made in a commentary or in the pre-amble to the convention.

103. After having suspended consideration of the matterto allow time for consultation among delegates, the Com-mission resumed its deliberations on the list of practicesproposed to be included in the scope of the convention.While the view was expressed that such a list might use-fully further clarify the scope of application of the conven-tion, it was widely felt that such a list was not necessary.It was stated that article 2, which defined “assignment” and“receivable” in sufficiently broad terms, was sufficient tocover all the practices included in the list. It was also ob-served that a list of practices to be included might inadvert-ently limit the scope of application of the convention evenfurther than intended. In the discussion, it was suggestedthat the list of practices to be included might be usefullymentioned in a commentary or in the preamble to the con-

vention. After discussion, the Commission decided that noreference should be made to such a specific list of practicesfor the purposes of defining the scope of application of theconvention.

Practices to be excluded from the scopeof articles 11 and 12

104. The Commission next considered the related ques-tion whether certain practices should be excluded from thescope of articles 11 and 12 (see para. 38). It was proposedthat variant B of article 5 be retained and supplemented bya definition of “trade receivable”, which would read as fol-lows:

“‘Trade receivable’ means a receivable:

“(i) Arising under an original contract for the saleor lease of goods or the provision of servicesother than financial services;

“(ii) Arising under an original contract from thesale, lease or licence of industrial or other in-tellectual property or other information;

“(iii) Representing the payment obligation for acredit card transaction.”

105. In support of that proposal, it was stated that therewere other practices beyond those to be excluded in article4 for which articles 11 and 12 would not be suitable. Theexample was given of loan syndication, as well as factoringand invoice discounting agreements, in which anti-assign-ment clauses were normally given effect. It was observedthat, if those practices were excluded from the scope ofarticles 11 and 12, by virtue of the second part of article 8,paragraph 2, the effectiveness and the legal consequencesof anti-assignment clauses would be left to law applicableoutside the convention. As a result, if the applicable lawwere to give effect to an anti-assignment clause, an assign-ment would not be effective and the convention would notcome into play. If, on the other hand, the applicable lawgave no effect to the anti-assignment clause, the assignmentwould be effective and the convention would apply. Forthat reason, the preservation of the application of the debtorprotection provisions, contained in section II of chapter IV(through a deletion of their exclusion in article 5, variantB), was considered most important. In response to a ques-tion, it was clarified that those provisions of the conventioncould apply to practices to be excluded from the scope ofarticles 11 and 12 without risking disrupting those prac-tices.

106. At the same time, the proposal raised a number ofconcerns. One concern was that the distinction betweentrade and financial receivables would create uncertainty. Itwas stated that the reference to financial services in theabove-mentioned definition (see para. 104) left openwhether it included only services by banks or also by otherfinance service providers. A suggestion to refer only tobanks was objected to on the ground that such an approachwould fail to address practices involving, for example, in-surance companies. Another concern was that the proposedexclusion might inadvertently result in excluding the as-signment of a trade receivable merely because, subsequent


to the original assignment by a trader to a bank, it wasassigned by that bank to another bank. In response, it wasstated that, once a receivable was a trade receivable, itwould always be a trade receivable (and, as a result, itssubsequent assignment by a bank would not be excluded bythe proposed text). Yet another concern was that the dis-tinction could lead to inconsistent results (e.g. an assign-ment of trade receivables backed by a letter of credit wouldnot be covered, while an assignment of receivables withoutany credit guarantee would fall within the ambit of theconvention).

107. In order to address those concerns, the suggestionwas made that the scope of articles 11 and 12 could belimited by way of a specific list of exclusions without anyreference to a definition of “trade receivable”. The above-mentioned proposal (see para. 104) was amended to read:“Draft articles 11 and 12 apply only to assignments of re-ceivables [list (i)-(iii) from para. 6].” A query was raised asto the meaning of the term “financial services” and in par-ticular as to whether the term would include services of-fered by an institution other than a financial institution. TheCommission decided to postpone consideration of the pro-posal until it became available in versions in all six officiallanguages of the United Nations (for the continuation of thediscussion, see paras. 145-151).

108. During the discussion, it was suggested that receiva-bles arising from bank deposits should be excluded fromthe scope of articles 11 and 12, but not from the scope ofthe convention as a whole. While some support was ex-pressed for that suggestion, it was widely felt that it couldnot be adopted, since, in particular, the definition of theterm “location” would not be appropriate for banks. It wasstated that, if the anti-assignment clause were not giveneffect by the law applicable, the assignment could be effec-tive, the convention could apply and, as a result, priorityissues with respect to a conflict with a branch of a bankwould be referred to the law of the State in which the headoffice of that bank was located, a result that was said to beinappropriate. For that reason, the Commission decided toretain the assignment of receivables arising under depositaccounts in the list of practices to be excluded from thescope of the convention as a whole (see para. 70).

Further exclusions by States through declarations(articles, 4, paragraph 2, and 39)

109. It was noted that articles 4, paragraph 2, and 39 wereintended to enhance the acceptability of the draft conven-tion to States by allowing them to exclude further practicesfrom the scope of the convention as a whole. It was widelyfelt, however, that those provisions should be deleted. Itwas stated that an approach along the lines of articles 4,paragraph 2, and 39 would result in uncertainty, since thescope of the convention might become difficult to deter-mine and, in any case, might end up being different fromState to State. Pending final determination of the scope ofarticles 11 and 12, the Commission decided to defer a finaldecision on articles 4, paragraph 2, and 39 to a later stage(for the continuation of the discussion, see para. 152; seealso para. 32).

CHAPTER II. GENERAL PROVISIONS

Article 6. Definitions and rules of interpretation



“(a) ‘Original contract’ means the contract betweenthe assignor and the debtor from which the assigned re-ceivable arises;

“(b) ‘Existing receivable’ means a receivable thatarises upon or before the conclusion of the contract ofassignment; ‘future receivable’ means a receivable thatarises after the conclusion of the contract of assignment;

“[(c) ‘Receivables financing’ means any transactionin which value, credit or related services are provided forvalue in the form of receivables. Receivables financingincludes factoring, forfeiting, securitization, project fi-nancing and refinancing;]

“(d) ‘Writing’ means any form of information that isaccessible 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 meansor a procedure agreed to by the person whose signatureis required, the writing identifies that person and indi-cates that person’s approval of the information containedin the writing;

“(e) ‘Notification of the assignment’ means a com-munication in writing which reasonably identifies the as-signed receivables and the assignee;

“(f) ‘Insolvency administrator’ means a person orbody, including one appointed on an interim basis, au-thorized in an insolvency proceeding to administer thereorganization or liquidation of the assignor’s assets oraffairs;

“(g) ‘Insolvency proceeding’ means a collective ju-dicial or administrative proceeding, including an interimproceeding, in which the assets and affairs of theassignor are subject to control or supervision by a courtor other competent authority for the purpose of reorgani-zation or liquidation;

“(h) ‘Priority’ means the right of a party in prefer-ence to another party;

“(i) A person is located in the State in which it hasits place of business. If the assignor or the assignee hasmore than one place of business, the place of business isthat place where its central administration is exercised. Ifthe debtor has more than one place of business, the placeof business is that which has the closest relationship tothe original contract. If a person does not have a place ofbusiness, reference is to be made to the habitual resi-dence of that person;

“(j) ‘Law’ means the law in force in a State otherthan its rules of private international law;

“(k) ‘Proceeds’ means whatever is received in re-spect of an assigned receivable, whether in total or par-tial payment or other satisfaction of the receivable. Theterm includes whatever is received in respect of pro-ceeds. The term does not include returned goods;


“[(l) ‘Trade receivable’ means a receivable arisingunder an original contract for the sale or lease of goodsor the provision of services other than financial serv-ices.]”

111. The Commission decided to postpone the discussionof subparagraphs (c), (h) and (j) until it had had a chanceto consider the title and the preamble, the priority rules andthe federal state issues in the final provisions (for the dis-cussion of subparagraph l, see paras. 104-107 and 145-151;with regard to subparagraph (c), see para. 184).

112. Discussion focused on subparagraph (i) (definitionof “location”). It was generally agreed that thesubparagraph was one of the most important provisions ofthe convention, since it was relevant for the determinationof the scope of application and the priority rules of theconvention. Differing views were expressed.

113. One view was that subparagraph (i) was in principlean appropriate rule that would work well in the majority ofcases. According to that view, the subparagraph would notwork as well for those industries which operated with branchoffices (in particular, the banking and insurance industry). Insupport of that view, it was observed that it would not beappropriate to refer priority issues with respect to transac-tions of a company made through a branch office in onecountry to the law of another country where that companyhappened to have its central administration. In addition, itwas stated that failing to address that matter might result inreducing the acceptability of the convention. In order toaddress those special cases in which a place-of-central-ad-ministration rule might not work, a number of suggestionswere made. One suggestion was to refer to the location of thebranch in whose books the receivables appeared immedi-ately before the assignment (see A/CN.9/466, paras. 98and 99). That suggestion was objected to on the grounds thatsuch an approach would not enhance certainty and transpar-ency, since third parties would not know in whose books thereceivables appeared and, in any case, books (in a paper orelectronic form) could be kept in a jurisdiction that wasirrelevant to the assignment contract. Another suggestionwas that the exception could be formulated along the lines ofarticle 1, paragraph 3, of the UNCITRAL Model Law onInternational Credit Transfers (“branches and separate of-fices of a bank in different States are separate banks”). Thatsuggestion was objected to on the grounds that such anapproach would not resolve the problems arising in the caseof a conflict between an assignment of the same receivablesby two different branch offices of the same bank, while itwould be very difficult to reach agreement on a uniformdefinition of the term “bank”. Those objections were citedagainst another suggestion made to refer to the branch of abanking or insurance company with which the assignmenthad the closest relationship.

114. Another view was that the location of branch officesneeded to be addressed in a consistent manner for all indus-tries that operated throughout the world through branchoffices rather than through independent subsidiaries. Ac-cordingly, instead of introducing a narrow exception forbanks and insurance companies, a different location ruleshould be introduced that would deal with the location ofthe assignor, the assignee and the debtor on the basis of the

place of business with the closest relationship with the rel-evant contract. Various suggestions were made, including asuggestion that subparagraph (i) should read:

“If the assignor or the debtor has more than one placeof business, the relevant place of business is the onewhich has the closest relationship to the original con-tract. If the application of this rule designates more thanone place of business of the assignor or the assignee [,located in different States], the relevant place of businessis that where its central administration is exercised.”

Support was expressed for that suggestion, in particular inview of the fact that it would solve the problem of deter-mining the location of the assignor in the case of multipleassignments by branch offices of the same entity.

115. However, the suggestion was objected to on thegrounds that reference to a closest-connection test wouldsignificantly reduce the certainty aimed to be achievedthrough the convention and would have a negative impacton the cost and the availability of credit. It was pointed outthat, in the case of future receivables, the place with theclosest connection to the original contract could not bedetermined at the time of assignment and, in the case ofbulk assignments, there might be various places with clos-est connection to the original contracts as there were sev-eral original contracts. It was also observed that, in manypractices, the considerations applicable to the determinationof the location of the assignor (borrower) and the assigneewould normally differ from the relevant considerations inthe determination of the location of the debtor. It was alsostated that the suggestion failed to take into account theneed to link the location of the assignor with the assign-ment contract, which in that context was more importantthan the original contract. In view of the wide divergenceof views, the suggestion was made that a place-of-businessapproach should be followed to define the location for theapplication of the convention and a central-administrationrule should be adopted for the purposes of the priority pro-visions of the convention. That suggestion was objected toas it would fail to enhance certainty with regard to theapplication of the convention and would lead to inconsist-ent results, without resolving the problems arising withregard to branch offices.

116. During the discussion, a number of additional sug-gestions were made with regard to other issues. One sug-gestion was that, in cases where the location of the debtorcould not be determined, reference should be made to theplace of the central administration or the place from whichpayment emanated. There was insufficient support in theCommission for that suggestion. Another suggestion wasthat subparagraph (i) should be revised to deal with multi-ple places of business only if they were located in differentcountries. While it was noted that that matter was alreadyimplicit in subparagraph (i), it was agreed that it couldusefully be clarified further. Another suggestion was that,for the sake of clarity, reference should be made to the“ordinary” rather than to the “habitual” residence of thedebtor. There was no support for that suggestion.

117. Subject to the reference to more than one place ofbusiness in different countries, the Commission approvedthe substance of subparagraph (i) and referred it to thedrafting group.


118. With regard to subparagraph (k), concern was ex-pressed that, by excluding from the definition of “pro-ceeds” goods returned by the buyer to the seller (e.g. be-cause they were defective, because the sales contract wascancelled or because the buyer did not wish to retain themafter the expiry of a trial period), it could inadvertentlyundermine certain practices. It was explained that in suchpractices the assignee, having paid the assignor/seller, ac-quired a property right in any goods returned by the buyerto the assignor/seller. The suggestion was made that the lastsentence of subparagraph (k) should be deleted, since inany event, under subparagraph (k), “proceeds” would notencompass “returned goods”. The Commission noted thatthe issue of “returned goods” arose in the context of articles16 and 24 and deferred consideration of the matter until ithad discussed those articles (see para. 167).

Article 7. Party autonomy


“The assignor, the assignee and the debtor may dero-gate from or vary by agreement provisions of this Con-vention relating to their respective rights and obligations.Such an agreement does not affect the rights of anyperson who is not a party to the agreement.”

120. The Commission noted that the draft article wasmodelled on article 6 of the United Nations Convention onContracts for the International Sale of Goods (Vienna,1980; “the United Nations Sales Convention”). It was alsonoted, however, that, unlike article 6 of the United NationsSales Convention, article 7 of the draft UNCITRAL con-vention did not allow parties to vary or derogate from pro-visions that affected the legal position of third parties or toexclude the Convention as a whole. The reason for thatdifferent approach was said to be that, while the UnitedNations Sales Convention dealt with the mutual rights andobligations of the seller and the buyer, the draftUNCITRAL convention dealt mainly with the proprietaryeffects of assignment and could, therefore, have an impacton the legal position of the debtor and other third parties.The Commission proceeded to consider article 7 on theunderstanding that agreements between the assignee andthe debtor would not be covered by the convention (see A/CN.9/470, para. 150). A suggestion to revise article 7 so asto allow the parties to exclude the application of the con-vention altogether did not receive support. In the discus-sion, some doubt was expressed as to whether a choice bythe parties of the law of a non-contracting State wouldalways result in excluding the application of the conven-tion.

121. The Commission decided that language should beadded to the article to clarify that it did not empower theparties to derogate from the provisions of article 21, whichlimited the scope of waivers of defences that might beagreed by the debtor and the assignor. It was stated that asimilar reference might need to be made to other provisionsof the draft convention so as to ensure that consumer-pro-tection legislation would not be interfered with (as regardsconsumer protection, see paras. 170-172). Deferring a final

decision on the matter to a later stage and subject to inclu-sion of a reference to article 21 in article 7, the Commis-sion approved the substance of article 7 and referred it tothe drafting group.

Article 8. Principles of interpretation


“1. In the interpretation of this Convention, regard is tobe had to its international character and to the need topromote uniformity in its application and the observanceof good faith in international trade.

“2. Questions concerning matters governed by thisConvention which are not expressly settled in it are to besettled in conformity with the general principles onwhich it is based or, in the absence of such principles, inconformity with the law applicable by virtue of the rulesof private international law.”

123. It was proposed that paragraph 1 expressly mentionthe preamble to the convention among the elements thatshould be taken into account in the interpretation of theconvention. The formulation “[regard is to be had] to itsobject and purpose as set forth in the preamble” was pro-posed (see article 4, paragraph 1, of the Unidroit Conven-tion on International Factoring, Ottawa, 1988; “the OttawaConvention”). Subject to that change, the Commission ap-proved the substance of paragraph 1 and referred it to thedrafting group.

124. With regard to paragraph 2, the suggestion wasmade that it might need to be revised to ensure that the lawapplicable by virtue of the private international law rules ofthe convention was to be applied first and then, only asnecessary, the law applicable by virtue of the rules of pri-vate international law of the forum. It was also generallyconsidered that the possibility of applying general princi-ples or the law applicable by virtue of the rules of privateinternational law extended only to the substantive law partof the convention and not to chapter V. Noting that theinterplay between article 7 and chapter V would depend onthe scope and purpose of chapter V, a matter that wouldneed to be considered by the Commission, the Commissionpostponed a decision on the matter until it had finalizedchapter V.

CHAPTER III. EFFECTS OF ASSIGNMENT

Form of assignment

125. The Commission noted that the draft convention didnot settle the issue of the form of assignment. It was notedthat failure to address the matter could create difficulties oruncertainty as to the validity of an assignment. An assigneeunder the convention would need to establish the formalvalidity of an assignment under law outside the convention(without having a clear indication as to which law mightapply), the material validity of an assignment partly under


the convention and partly under other law outside the con-vention and priority under the law of the assignor’s loca-tion. Such a result could have a negative impact on the costof credit. It was also noted that failing to address the issueof form in the convention would raise uncertainty as towhether the convention intended the matter to be referredto law applicable outside the convention or to be settled infavour of the principle that no form was required (favorcessionis), a result that was said to be inconsistent with thepolicy underlying the decision of the Working Group not toaddress the issue of form. Furthermore, it was noted thatidentifying the law applicable to the form of assignmentmight be difficult. In that connection, the example wasgiven of article 9 of the Convention on the Law Applicableto Contractual Obligations (Rome, 1980), where it was notclear whether it provided a solution also for the form ofassignment as a transfer (at least for those jurisdictionswhere a clear distinction was drawn between the contract toassign and the assignment itself).

126. Some support was expressed for the position that noprovision on form requirement should be included in thedraft convention. It was stated that a number of issues re-garding the contract of assignment had been left out of thedraft convention and that, in view of the difficulties in find-ing an agreed solution on form requirements, it was pref-erable not to deal with the issue at all. It was also observedthat, to the extent that it was not clear that the form ofassignment was outside the scope of the convention, thematter should be clarified in a commentary.

127. The prevailing view, however, was that, in order toavoid difficulties (noted above in para. 125), it was advis-able to resolve the issue of form (of the contract of theassignment and the assignment itself). It was consideredthat it would not be possible to reach consensus on a uni-form form requirement or on a uniform private interna-tional law rule that would determine the law governingform requirements. However, there was broad support forproviding a “safe-harbour” type of rule that would give theparties the certainty that, if they complied with the formrequirement of the law of the assignor’s location, the as-signment would not be invalidated for failing to meet theform requirements of the law that would otherwise apply.Such a safe-harbour rule would refer form to a single andeasily identifiable jurisdiction without necessarily restrict-ing the parties to the form requirements of one law, butwould leave them the choice of following the form require-ments of either the law that (according to the rules of pri-vate international law) governed form or of the law speci-fied in the convention.

128. A suggestion was made to define what was meant by“form”. According to one view, the concept should be un-derstood broadly and should cover not only the narrowissue of whether the assignment should be recorded in awritten or electronic form, but also issues such as whetherthe assignment should be registered and whether and howthe debtor should be notified of the assignment. The pre-vailing view, however, was that the draft convention shouldnot attempt to define the requirements that fell within thenotion of form and that, in any case, for a safe-harbour ruleit was not necessary to define in a uniform manner thenotion of form.

129. The Commission considered several proposals forthe formulation of a safe-harbour rule. One proposal readas follows: “An assignment shall be considered formallyvalid if it meets, at least, the formal requirements of the lawof the State in which the assignor is located” (see A/CN.9/470, para. 82). That proposal did not attract sufficient sup-port, since it could be misunderstood as providing a uni-form rule on the form requirement. Another proposal read:“Without prejudice to the formal validity of the assignmenton the grounds of any other applicable law, an assignmentis [effective] [formally valid] if it meets the form require-ment of the law of the State in which the assignor is lo-cated.” There was no support for that proposal either, sincethe requirements referred to might be applicable “subjectto” (i.e. cumulatively with) the form requirements of thelaw applicable by virtue of the rules of private internationallaw. Having reiterated its intention to provide a safe-har-bour rule (which should pursue the principle in favoremnegotii to the extent possible), the Commission decidedthat a safe-harbour rule should be included in the draftconvention, referring form either to the law applicable byvirtue of the rules of private international law or to the lawof the assignor’s location. The precise formulation of thatrule was referred to the drafting group.

Article 9. Effectiveness of bulk assignments,assignments of future receivables

and partial assignments


“1. An assignment of existing or future, one or more,receivables and parts of, or undivided interests in, re-ceivables is effective, whether the receivables are de-scribed:

“(a) Individually as receivables to which the assign-ment relates; or“(b) In any other manner, provided that they can, atthe time of the assignment, or, in the case of futurereceivables, at the time of the conclusion of the origi-nal contract, be identified as receivables to which theassignment relates.

“2. Unless otherwise agreed, an assignment of one ormore future receivables is effective at the time of theconclusion of the original contract without a new act oftransfer being required to assign each receivable.”

Paragraph 1

131. It was noted that article 9 was not intended to over-ride statutory limitations other than those referred to inparagraph 1. The Commission agreed that that understand-ing needed to be reflected explicitly in article 9. The fol-lowing language was proposed: “This Convention does notaffect any statutory limitations on assignment other thanthose referred to in article 9” (see A/CN.9/470, para. 85).It was stated that the proposed language should be ex-panded to cover statutory limitations giving effect to con-tractual limitations on assignment of receivables and ofrights securing receivables. The following text was pro-posed:


“This article is subject to any applicable statute, otherthan a statute of the type described in paragraph 4 [of thetext proposed in A/CN.9/472/Add.3, p. 12], that prohibitsor limits the assignment of a receivable for a reasonother than the existence of a contractual prohibition orlimitation of such assignment.”

132. It was also noted that article 9 dealt with the effec-tiveness of an assignment as between the assignor and theassignee and as against the debtor, while the effectivenessas against third parties other than the debtor (i.e. priority)was governed by the law applicable under article 24. It wasagreed that article 9 should be appropriately amended toreflect that distinction between effectiveness and priority,in particular for the sake of clarity in the application of theconvention in those jurisdictions in which such a distinc-tion was not known. It was also agreed that article 9 shouldmake it clear that it was not intended to supplant the rulesof priority of the law applicable or to allow prohibitions onbulk assignments or on assignments of future receivables tocome through the back door through the use of a priorityrule applicable under articles 24-27. In order to reflect thatagreement, it was proposed that the wording of paragraph1 make it clear that it applied to effectiveness as betweenthe assignor and the assignee and as against the debtor.Similarly, the proposal was made that a new paragraph beinserted in article 9 to read: “A transfer of a receivable iseffective, as between the assignor and the assignee, at thetime of transfer” (see A/CN.9/472/Add.3, p. 12). It wasagreed that the wording should make it clear that the as-signment was effective as against the debtor as well.

133. In addition, it was proposed (see A/CN.9/470,para. 88) that a new paragraph be added to article 9 to read:

“The effectiveness of an assignment of receivablesreferred to in paragraphs 1 and 2 of this article as againstthird parties other than the debtor is governed by the lawapplicable under article 24. However, such an assign-ment is not ineffective as against such third parties onthe sole ground that the law of the assignor’s locationdoes not recognize its effectiveness.”

While there was general agreement on the principle embod-ied in the proposed text, it was stated that the first sentencemight not be necessary since it repeated the rule reflectedin article 24, while the second sentence might go too far inthat it might affect rules of insolvency law as to the effec-tiveness of an assignment of receivables arising after thecommencement of an insolvency proceeding with respectto the assets and the affairs of the assignor. In order toaddress that matter as well, the following text was pro-posed:

“A transfer of a receivable is not ineffective against,and may not be subordinated to, a person described insubparagraph (a) of article 24, solely because law otherthan this Convention does not generally recognize anassignment described in paragraph 1 or 2.”

It was also proposed (see A/CN.9/472/Add.3, p. 12) thatone more additional paragraph be added to article 9 to read:“Except as otherwise provided in this article, whether atransfer of a receivable affects the rights of a person de-scribed in subparagraph (a) of article 24 is determined inaccordance with section III of chapter IV.”

134. Subject to the changes mentioned in the precedingparagraphs, the exact formulation of which was referred tothe drafting group, the Commission approved the substanceof paragraph 1.

Paragraph 2

135. It was noted that, as a result of the substitution of thewords “at the time of the conclusion of the original con-tract” for the word “arises”, made by the Working Groupat its thirty-first session, paragraph 2 appeared to addressthe issue of the time of assignment in a way that was incon-sistent with article 10. It was noted that paragraph 2 wasnot intended to deal with that matter but only with thevalidity of master agreements covering a multiplicity ofpresent and future receivables. It was therefore agreed thatthe words “at the time of the conclusion of the originalcontract” should be deleted. Subject to that change, theCommission approved the substance of paragraph 2 andreferred it to the drafting group.

Article 10. Time of assignment

136. The text of draft article 10 as considered by theCommission was as follows:

“An existing receivable is transferred, and a futurereceivable is deemed to be transferred, at the time of theconclusion of the contract of assignment, unless theassignor and the assignee have specified a later time.”

137. The concern was expressed that articles 9 and 10could be read as overriding the domestic insolvency law ofthe assignor’s jurisdiction regarding priorities with respectto receivables arising after the commencement of the insol-vency proceeding or earned after the commencement of theinsolvency proceeding by the use of unencumbered assetsof the insolvency estate. Such an interpretation could arisefrom the fact that article 24 explicitly stated that it did notcover “matters which are settled elsewhere in this Conven-tion” and article 10 contained no explicit wording as towhether it was intended to affect the rights of third parties.

138. There was general agreement that the question of theextent to which an assigned receivable arising or beingearned after the commencement of the insolvency proceed-ing should be subject to the applicable insolvency law (onthis matter, see also para. 133). Subject to that change, theexact formulation of which was referred to the draftinggroup, the Commission approved the substance ofarticle 10.

Article 11. Contractual limitations on assignment

139. The text of draft article 11 as discussed by the Com-mission was as follows:

“1. An assignment of a receivable is effective notwith-standing any agreement between the initial or any subse-quent assignor and the debtor or any subsequent assigneelimiting in any way the assignor’s right to assign its re-ceivables.


“2. Nothing in this article affects any obligation or li-ability of the assignor for breach of such an agreement.A person who is not party to such an agreement is notliable on the sole ground that it had knowledge of theagreement.”

General policy

140. The view was expressed that article 11 ran counterto the principle of party autonomy and should therefore bedeleted or made subject to a reservation by States. Therewas not sufficient support for that view in the Commission.It was widely felt that the underlying policy of article 11should be approved. Article 11 was an essential provisionagreed upon by the Working Group after a long debate. Inaddition, it was observed that it was more beneficial foreveryone to facilitate the assignment of receivables and toreduce transaction costs rather than to ensure that thedebtor would not have to pay a person other than the origi-nal creditor. It was also stated that the goal of the draftconvention, which was to increase the availability of creditat more affordable rates, could not be achieved withoutsome adjustments in national legislation that would beaimed at accommodating modern commercial practices.After discussion, the Commission approved the overallpolicy underlying article 11 and decided that it should beretained (subject to the changes described in paras. 144 and151).

Avoidance of contract on the sole ground of breach ofanti-assignment agreement

141. Differing views were expressed as to whether thedebtor should be able to declare the original contractavoided on the sole ground of breach of the agreementlimiting the assignment of receivables in any way (“anti-assignment agreement”), if the debtor had such a rightunder law applicable outside the convention. One view wasthat the convention should not interfere with the debtor’sright to avoid the original contract for breach of any anti-assignment agreement. It was stated that such an approachwas not necessary since avoidance of the original contractcould not affect any rights acquired under that contract. Inaddition, it was observed that such an approach would in-advertently result in overprotecting, without any reason,not only the assignee but also the assignor, despite the factthat the assignor would have committed a breach of con-tract.

142. The prevailing view, however, was that, unless thedebtor was precluded from declaring the original contractavoided on the sole ground that the assignor had violatedan anti-assignment agreement, articles 11 and 20, para-graph 3, would be deprived of any meaning (those provi-sions validated an assignment made in breach of an anti-assignment agreement and precluded the debtor fromraising against the assignee any right the debtor might haveas against the assignor as a result of the breach of the anti-assignment agreement). In addition it was stated that ifafter notification the debtor could not do the minimum,namely modify the original contract without the actual orconstructive consent of the assignee, the debtor should not

be entitled to do the maximum, namely to avoid the origi-nal contract. Moreover, it was pointed out that, if the origi-nal contract were to be avoided, the assignee could finditself in a position of having advanced financing to theassignor while being unable to rely on payment by thedebtor.

143. For that reason, the suggestions to exclude the debt-or’s avoidance rights with respect to all contracts exceptlong-term contracts and future receivables or to leave para-graph 2 unchanged and to include an explanation of thematter in a commentary were not supported. Another sug-gestion to include in the text of article 11 or in a commen-tary to the convention the clarification that the avoidance ofthe original contract did not affect the debtor’s acquiredrights did not attract sufficient support either. It was widelyfelt that if the debtor avoided the original contract, the as-signee’s rights were bound to be affected. Another sugges-tion to limit the debtor’s right to avoid the original contractfor breach of an anti-assignment agreement to cases inwhich a material breach was involved also did not attractsufficient support. It was widely felt that such an approachwould introduce uncertainty, since it might not always beclear what types of conduct constituted a material breach ofcontract. In any case, such an approach would not be suf-ficient to protect the assignee, since any type of breachcould be defined in the original contract as being a materialbreach. It was generally agreed that any uncertainty withregard to that matter could inadvertently result in failing tocover the risk of contract avoidance and thus in defeatinga transaction or in raising the cost of credit for the assignorand the debtor. Yet another suggestion to preclude thedebtor from avoiding the original contract, unless the as-signment “materially impaired the debtor’s ability to obtainperformance”, was met with interest. It was proposed thatlanguage be included in paragraph 2 to implement that sug-gestion and to preclude the parties from defining the breachof an anti-assignment clause as a material impairment ofthe debtor’s ability to obtain performance. An objectionwas raised with regard to the inclusion of the proposed textin article 11 on the ground that it might inadvertently beinterpreted as implying that the convention affected non-monetary performance rights. It was agreed, however, thata commentary to the convention could clarify that an as-signment under the convention could not affect any non-monetary performance rights of the debtor.

144. After discussion, the Commission agreed that para-graph 2 should be revised to preclude the debtor fromavoiding the original contract on the sole ground that theassignor had made an assignment in violation of an anti-assignment agreement. It was also agreed that the same ruleshould apply with respect to anti-assignment agreements inassignments or subsequent assignments. Furthermore, itwas agreed that the debtor’s right to compensation shouldnot be limited in any way. Subject to that change, theCommission approved the substance of paragraph 2 andreferred it to the drafting group.

Scope of articles 11 and 12

145. Recalling its earlier discussion on the scope of arti-cles 11 and 12 (see paras. 104-107), the Commission con-


sidered a suggestion to limit the scope of application ofarticle 11 to those practices for which articles 11 and 12,paragraphs 2 and 3, would be suitable. Language along thefollowing lines was proposed for inclusion in a new para-graph 3 of article 11 and after paragraph 3 of article 12:

“This article applies only to receivables:

“(a) Arising under an original contract for the sale orlease of goods or the provision of services other thanfinancial services;

“(b) Arising under an original contract for the sale,lease or licence of industrial or other intellectual prop-erty or other information; or

“(c) Representing the payment obligation for a creditcard transaction.”

146. It was stated that under the proposed approach theeffect of an anti-assignment agreement with respect topractices not mentioned in the proposed list would be leftto law outside the convention. If that law gave effect toanti-assignment agreements, the assignment would be inef-fective and thus the convention would not apply. It wasobserved that such an approach would make a restrictivedefinition of “receivable” in article 2 unnecessary and itwould also make article 5 superfluous.

147. While broad support was voiced in the Commissionfor the proposed limitation of the scope of articles 11 and12, paragraphs 2 and 3 (and thus of the convention), con-cern was expressed that the proposed approach wouldoverly limit the scope of the convention.

148. A question was also raised as to whether “goods”would include immovable property. In response, it wasobserved that “goods” was meant to denote only movabletangible property and would therefore not include land orbuildings or goods permanently fixed into land or build-ings. The suggestion was therefore made that insubparagraph (a) of the proposed text reference should alsobe made to receivables arising from the sale or lease of realestate. In support, it was stated that there was no reason toexclude from the scope of application of articles 11 and 12,paragraphs 2 and 3, assignments of receivables arisingfrom real estate transactions. Such an exclusion was notnecessary, in particular, after the addition of a provision inarticle 4 aimed at protecting interests held under the law ofthe country in which the real estate was located. A note ofcaution was struck, however, that such an approach mighthave a negative effect on the acceptability of the conven-tion. In response, it was pointed out that the inclusion ofthe proposed addition would highlight the matter and facili-tate consultation with the relevant industry. After discus-sion, the Commission approved the proposed addition.

149. Recalling its earlier decision to exclude financialnetting agreements from the scope of the draft conventionas a whole (see paras. 46-48), the Commission resumed itsdiscussion on whether industrial netting agreements shouldbe excluded from the scope of articles 11 and 12. Thesuggestion was made that the assignment of receivablesarising from non-financial contracts governed by nettingagreements should be excluded from the scope of the twoarticles. Objections were raised with regard to that sugges-

tion on the ground that such an approach could inadvert-ently result in excluding the assignment of a wide range ofreceivables merely because the assignor and the debtor hadincluded in their original contract a clause about paymentby way of set-off. It was considered that the conventionshould not sanction such set-off agreements, which wereroutinely made and were aimed at defrauding assignees. Itwas stated that such an approach was not necessary, sincereceivables from industrial netting arrangements betweenchambers of commerce were normally not assigned. Thesuggestion was made that the matter could be addressed inarticle 20, dealing with rights of set-off. However, it wasstated that industrial netting arrangements could be pre-served, without excluding from the convention importanttrade practices, if the application of articles 11 and 12 wereto be limited to the net debt owed after the settlement ofmutual debts governed by a netting agreement contained inan original contract. It was also observed that the net bal-ance owed after the settlement of mutual obligations to theparties to a netting agreement was a new receivable arisingby novation. It was pointed out that a netting agreement,under the definition adopted by the Commission, should beunderstood as an arrangement among, at least, three ormore parties (see paras. 73 and 74). Some doubt was ex-pressed as to whether the definition of “netting agreement”made it sufficiently clear that at least three parties wererequired. However, it was widely felt that the definitionwas sufficiently clear and should not be changed, in par-ticular, since in some jurisdictions netting arrangementscould involve only two parties. The following text wasproposed for addition either in articles 11 and 12 or inarticle 4:

“In the case of receivables arising under contractsgoverned by netting agreements, articles 11 and 12,paragraphs 2 and 3, apply only to the assignment of areceivable owed to the assignor upon net settlement ofpayments due pursuant to the netting agreement.”

There was broad support for that suggestion.

150. The suggestion was also made that articles 11 and12, paragraphs 2 and 3, should apply “to other similar prac-tices”. That suggestion encountered an objection on theground that it might create uncertainty as to the scope ofapplication of the convention. Another suggestion was thatin subparagraph (a) of the proposed text reference shouldbe made also to construction, since in some jurisdictionsthe term “services” was not sufficient to include construc-tion. Broad support was expressed in the Commission forthat suggestion. Yet another suggestion was that a com-mentary to the convention should explain that “financialservices” included factoring and invoice discounting, evenif those practices involved services that were not financialin a strict sense, such as insurance, book-keeping or debt-collection services. That suggestion also attracted sufficientsupport.

151. After discussion, the Commission approved the sub-stance of the proposed addition to articles 11 and 12, asrevised to refer to real estate receivables, industrial nettingand construction (see paras. 148-150) and referred it to thedrafting group. In line with that decision, the Commissiondecided that articles 5 and 6, subparagraph (l), should bedeleted.


Further practices to be excluded

152. After completing its discussion on the scope of arti-cles 11 and 12, the Commission reverted to the questionwhether States should be allowed to exclude further prac-tices from the scope of the convention (see articles 4, para.2, and 39, as well as paras. 32 and 109). There was strongsupport for the deletion of articles 4, paragraph 2, and 39.It was widely felt that, once the scope of the conventionhad been defined in a detailed and restrictive way, allscope-related concerns would have been addressed andtherefore there was no need to allow further exclusions. Itwas also widely felt that allowing further exclusions on aState-by-State basis would run counter to the goal of theconvention to achieve uniformity and certainty. However,the concern was expressed that deletion of articles 4, para-graph 2, and 39 might reduce the acceptability of the con-vention. It was also stated that it would be premature todelete article 4, paragraph 2, before the Commission hadmade a final decision with respect to all scope-related is-sues and the final provisions in their entirety. For that rea-son, the Commission deferred final decision on draft arti-cles 4, paragraph 2, and 39 until it had finalized the draftconvention as a whole.

Article 12. Transfer of security rights


“1. A personal or property right securing payment of theassigned receivable is transferred to the assignee withouta new act of transfer, unless, under the law governing theright, it is transferable only with a new act of transfer. Ifsuch a right, under the law governing it, is transferableonly with a new act of transfer, the assignor is obliged totransfer this right and any proceeds to the assignee.

“2. A right securing payment of the assigned receivableis transferred under paragraph 1 of this article notwith-standing an agreement between the assignor and thedebtor or other person granting the right, limiting in anyway the assignor’s right to assign the receivable or theright securing payment of the assigned receivable.

“3. Nothing in this article affects any obligation or li-ability of the assignor for breach of an agreement underparagraph 2 of this article. A person who is not a partyto such an agreement is not liable on the sole ground thatit had knowledge of the agreement.

“4. The transfer of a possessory property right underparagraph 1 of this article does not affect any obligationsof the assignor to the debtor or the person granting theproperty right with respect to the property transferredexisting under the law governing that property right.

“5. Paragraph 1 of this article does not affect any re-quirement under rules of law other than this Conventionrelating to the form or registration of the transfer of anyrights securing payment of the assigned receivable.”

Paragraph 1

154. The Commission noted that the second part of thefirst sentence of paragraph 1 repeated in effect the second

sentence of paragraph 1 and should therefore be deleted.Subject to that change, the Commission approved the sub-stance of paragraph 1 and referred it to the drafting group.

Paragraphs 2 and 3

155. Recalling its decision that the debtor should not beable to declare the original contract avoided on the soleground that the assignor violated an anti-assignment clause(see para. 144), the Commission decided that the same ruleshould apply with respect to a breach of an agreement toassign a right securing payment of a receivable. Subject tothat change in paragraph 2, the Commission approved thesubstance of paragraphs 2 and 3 and referred them to thedrafting group.

156. The Commission also recalled its decision with re-spect to the scope of article 11 (see para. 151) and decidedthat paragraphs 2 and 3, which followed the language ofarticle 11, should have the same scope as article 11. It wastherefore decided that a new paragraph dealing with thescope of paragraphs 2 and 3 along the lines of the scopeprovision in article 11 should be inserted as paragraph 4 ofarticle 12.

Paragraphs 4 and 5

157. The Commission approved the substance of para-graphs 4 and 5 unchanged. It was noted that paragraph 5was consistent, and did not need to be aligned, with thenew safe-haven rule on the form of assignment. As a resultof a combined application of the new rule and article 12,paragraph 5, the form of assignment would be subject tothe law of the assignor’s location (or any other applicablelaw), while the form of the transfer of a right securingpayment of the assigned receivable would be subject to thelaw governing that right.

CHAPTER IV. RIGHTS, OBLIGATIONSAND DEFENCES

Section I. Assignor and assignee

Article 13. Rights and obligations of the assignorand the assignee


“1. The rights and obligations of the assignor and theassignee as between them arising from their agreementare determined by the terms and conditions set forth inthat agreement, including any rules or general conditionsreferred to therein.

“2. The assignor and the assignee are bound by anyusage to which they have agreed and, unless otherwiseagreed, by any practices which they have establishedbetween themselves.

“3. In an international assignment, the assignor and theassignee are considered, unless otherwise agreed, to have


impliedly made applicable to the assignment a usagewhich in international trade is widely known to, andregularly observed by, parties to the particular [receiva-bles financing] practice.”

159. It was noted that, in view of the fact that party au-tonomy was broadly recognized in paragraph 1, partieswould always have the right to agree otherwise as to thebinding nature of practices established between themselves.As a result, it was noted, the words “unless otherwiseagreed” in paragraph 2 were not necessary. It was alsonoted that those words might raise questions of interpreta-tion, since the equivalent provision in article 9, paragraph1, of the United Nations Sales Convention did not containsuch wording. The Commission agreed, however, that thematter was sufficiently clear and decided to retain thewords “unless otherwise agreed”, since the reference topractices might otherwise create uncertainty.

160. It was noted that, after the limitation of article 13 tothe mutual rights and obligations of the parties, the reasonfor departing in paragraph 5 from the wording of theequivalent provision of the United Nations Sales Conven-tion (article 9, paragraph 2) had ceased to exist and there-fore reference to what the parties knew or ought to haveknown would not create any problems for third parties.However, the Commission agreed that paragraph 5 wassatisfactory in its current formulation.

161. After discussion, the Commission approved the sub-stance of article 13 unchanged and referred it to the draft-ing group. Pending final determination of the title, the pre-amble and article 6 (c), the Commission deferred a decisionwith regard to the words “receivables financing” in para-graph 3 (see para. 184).

Article 14. Representations of the assignor


“1. Unless otherwise agreed between the assignor andthe assignee, the assignor represents at the time of theconclusion of the contract of assignment that:

“(a) The assignor has the right to assign the receiv-able;“(b) The assignor has not previously assigned thereceivable to another assignee; and“(c) The debtor does not and will not have any de-fences or rights of set-off.

“2. Unless otherwise agreed between the assignor andthe assignee, the assignor does not represent that thedebtor has, or will have, the financial ability to pay.”

163. The Commission approved the substance of article14 unchanged and referred it to the drafting group. It waswidely felt that paragraph 1 (a) was sufficient to cover allrepresentations relating to the existence of the receivable,since, if the receivable did not exist or was subject to astatutory limitation, the assignor would not have the rightto assign it. It was also generally agreed that it was notnecessary to add representations as to the non-modification

of the original contract after notification, without the actualor constructive consent of the assignee, or to the transfer ofany independent security or other supporting rights by theassignor to the assignee, since those matters were suffi-ciently covered by party autonomy and draft articles 12,paragraph 1, and 22, paragraph 2.

Article 15. Right to notify the debtor


“1. Unless otherwise agreed between the assignor andthe assignee, the assignor or the assignee or both maysend the debtor a notification of the assignment and apayment instruction, but after notification is sent onlythe assignee may send a payment instruction.

“2. A notification of the assignment or payment in-struction sent in breach of any agreement referred to inparagraph 1 of this article is not ineffective for the pur-poses of article 19 by reason of such breach. However,nothing in this article affects any obligation or liability ofthe party in breach of such an agreement for any dam-ages arising as a result of the breach.”

165. The Commission approved the substance of article15 unchanged and referred it to the drafting group.

Article 16. Right to payment


“1. As between the assignor and the assignee, unlessotherwise agreed, and whether or not a notification of theassignment has been sent:

“(a) If payment in respect of the assigned receivableis made to the assignee, the assignee is entitled toretain the proceeds and goods returned in respect ofthe assigned receivable;“(b) If payment in respect of the assigned receivableis made to the assignor, the assignee is entitled topayment of the proceeds and is also entitled to goodsreturned to the assignor in respect of the assigned re-ceivable; and“(c) If payment in respect of the assigned receivableis made to another person over whom the assignee haspriority, the assignee is entitled to payment of the pro-ceeds and is also entitled to goods returned to suchperson in respect of the assigned receivable.

“2. The assignee may not retain more than the value ofits right in the receivable.”

167. The Commission approved the substance of article16 unchanged. It was agreed that the draft article properlycovered proceeds, including returned goods, and that thedefinition of proceeds should be reviewed in the context ofarticles 24 and 26.


Section II. Debtor

Article 17. Principle of debtor protection


“1. Except as otherwise provided in this Convention,an assignment does not, without the consent of thedebtor, affect the rights and obligations of the debtor,including the payment terms contained in the originalcontract.

“2. A payment instruction may change the person, ad-dress or account to which the debtor is required to makepayment, but may not:

“(a) Change the currency of payment specified inthe original contract; or“(b) Change the State specified in the original con-tract, in which payment is to be made, to a State otherthan that in which the debtor is located.”

Change of country of payment

169. The Commission considered whether any change ofthe country of payment, even to the country in which thedebtor was located, should be subject to the debtor’s con-sent. It was stated that paragraph 2 (b) was sufficient tocover the vast majority of cases, in which payment in thedebtor’s country, instead of in the country of a foreignassignor, would be agreeable to the debtor. It was alsoobserved that such an approach appropriately reflected agood practice, in particular, in international factoring con-tracts, and the convention should avoid casting any doubton that practice. In addition, it was observed that the con-vention did not need to address the very special cases inwhich a debtor might prefer to pay in a foreign country. Onthe other hand, it was stated that any change to the countryof payment should be subject to the debtor’s consent, sincethe debtor might have good reasons for agreeing in theoriginal contract to pay in a foreign country. In addition, itwas stated that, if the assignee and the debtor were to beable to change by agreement the country of payment, theyshould also be able to change the currency of payment. Onthe understanding that agreements between assignees anddebtors fell outside the scope of the convention, theCommission decided that no change was necessary in para-graph 2.

Consumer protection

170. It was noted that a principle flowing from article 17was that the convention was not intended to affect ad-versely the legal position of consumer debtors. It was alsonoted that that general principle was also reflected in arti-cles 1, paragraph 2 (which provided that the conventionwould not affect the debtor’s legal position unless thedebtor was located in a contracting State or the law govern-ing the receivable was the law of a contracting State), 9 asrevised (which made clear that the convention was not in-tended to affect limitations on assignment imposed by law,

other than those referred to in article 9), 19 (which allowedthe debtor to discharge its obligation under law outside theconvention), 20 (which preserved the debtor’s defences andrights of set-off, with the exception of rights of set-off aris-ing from unrelated contracts and not available at the timeof notification), 21 and 23 (which made explicit referenceto consumer protection law) and 22 (which allowed amodification of the original contract, even after notifica-tion, with the constructive consent of the assignee).

171. The view was expressed that, in order to avoid anydoubt, the above-mentioned understanding should be ex-plicitly mentioned in article 17. It was stated that consumerprotection legislation reflected public policy, at both thenational level and the supranational level, with which theconvention could not and should not interfere. It was statedthat such legislation was aimed at protecting consumerdebtors, in view of the fact that they normally did not havethe bargaining power to protect their interests, and it couldnot be derogated from by agreement of the parties since itwas of a mandatory nature. In addition, clauses involvingimplicit consent by the consumer could be interpreted asabusive clauses prohibited by rules of law enacted underinternational agreements on regional integration. The fol-lowing language was proposed for addition to article 17(see A/CN.9/472, p. 10). “This Convention does not preju-dice the laws of the State in which the debtor is locatedgoverning the protection of the debtor in transactions madefor personal, family or household purposes.”

172. Objections were raised with regard to the above-mentioned suggestion. It was stated that the proposedwording was unnecessary, since the draft convention al-ready contained appropriate provisions protecting the inter-ests of consumer debtors. It was also observed that theproposed wording might raise questions of interpretation oreven invite courts to invalidate assignments on obscure orartificial grounds, a result that could undermine the avail-ability or the cost of consumer credit. On the other hand, itwas pointed out that the difference between the positionsreflected above might not be so significant. In that vein, itwas suggested that the wording of article 17 should makeit clear that the draft convention would not permit a con-sumer debtor to vary or derogate from the original contractif the derogation or variation was not permitted by con-sumer-protection legislation in the State in which thedebtor was located. While some support was expressed forthat suggestion, the Commission approved the substance ofarticle 17 unchanged and referred it to the drafting group,on the understanding that it might have to reconsider thematter.

Legal position of the debtor in the caseof a partial assignment

173. It was recalled that the Commission had decided topostpone discussion of the legal position of the debtor inthe case of one or more notifications with respect to apartial assignment until it had a chance to consider thedebtor-related provisions (see para. 20). The view was ex-pressed that the matter should be dealt with in article 17.However, the Commission did not have sufficient time toconsider the matter (see paras. 180 and 185).


CHAPTER V. CONFLICT OF LAWS

174. The Commission heard a statement on behalf of thePermanent Bureau of the Hague Conference on Private In-ternational Law, which was aimed at ensuring close coop-eration with UNCITRAL. It was recalled that a joint groupof UNCITRAL and Hague Conference experts had met inThe Hague from 18 to 20 May 1998 and that subsequentlythe Permanent Bureau of the Hague Conference had sub-mitted a report dated 10 July 1998 containing severalrecommendations to the relevant UNCITRAL WorkingGroup (A/CN.9/WG.II/WP.99). It was observed that, whilearticles 24-27 did not fully implement the recommenda-tions contained in the report by the Permanent Bureau, theywere in principle entirely satisfactory.

175. With regard to chapter V, it was pointed out that, ifadopted with a broader scope than that of the convention(i.e. as a “mini-convention”), it might be in conflict withregional texts, such as the European Union Convention onthe Law Applicable to Contractual Obligations (Rome,1980; “the Rome Convention”). In that connection, it waspointed out that draft article 28 departed from article 12 ofthe Rome Convention in two respects: it required an ex-plicit choice of law and created a rebuttable presumption infavour of the law of the assignor’s location as the law mostclosely connected to the contract of assignment. It was alsoobserved that, in principle, it would not be appropriate tosubject the application of chapter V to the notion of inter-nationality of the substantive law part of the draft conven-tion. However, if that approach were to be confirmed bythe Commission, draft article 28, paragraph 3 (precludingthe application of a foreign law chosen by the parties to adomestic assignment of domestic receivables), might not benecessary, since, if an assignment were not internationalunder draft article 3, chapter V would not apply. With re-gard to draft articles 30-32, some doubt was expressed asto whether they were necessary. It was also observed thatdraft article 30, paragraph 2, appeared to repeat the rulecontained in draft article 32. In addition, it was stated thatthe issue of the scope of chapter V and the hierarchy be-tween chapter V and the rest of the draft convention wouldneed to be resolved in a separate article, as suggested bythe UNCITRAL secretariat (see A/CN.9/470, para. 22).Moreover, the issue of renvoi would need to be resolved byway of a provision in chapter V, since, if chapter V wereto have a broader scope of application than the rest of thedraft convention, draft article 6 (j) (which was intended toaddress the issue of renvoi) would not apply.

176. In response, it was stated that chapter V might not bea “mini-convention” and, if it were to become one, articles28 and 29 might need to be redrafted and a provision onrenvoi might need to be included in chapter V. It was alsoobserved that, if chapter V applied to assignments with aninternational element as defined in article 3, article 28,paragraph 3, would not be necessary.

177. The Commission was also informed of a proposalpresented to the Special Commission on general affairs andpolicy of the Conference at its meeting held in The Haguefrom 8 to 12 May 2000, for the Hague Conference to pre-pare a draft convention on the law applicable to securityinterests in investment securities. It was stated that close

cooperation with UNCITRAL would be particularly wel-come, in view of the Commission’s work on assignment ofreceivables and the possibility of UNCITRAL undertakingfurther work in the future in the field of secured credit law.

178. The Commission expressed its appreciation to theobserver for the Permanent Bureau of the Hague Confer-ence and deferred discussion on chapter V until it had fi-nalized the substantive law part of the draft convention.Discussion on possible future work in the field of securedcredit law was postponed until the Commission had consid-ered agenda item 16, “Coordination and cooperation” (seeparas. 455–463).

C. Report of the drafting group

179. The Commission requested a drafting group estab-lished by the secretariat to review articles 1-17 of the draftconvention, with a view to ensuring consistency betweenthe various language versions.

180. At the close of its deliberations on the draft conven-tion, the Commission considered the report of the draftinggroup and adopted articles 1-17 of the draft convention, asrevised by the drafting group, with the exception of thebracketed language in those provisions and of article 1,paragraph 5, which was left to be considered in the contextof a discussion on draft article 40 and the annex to the draftconvention. Article 7, paragraph 2 (article 8 in the text ofthe draft convention considered by the Commission), wasadopted subject to consideration of the question of its rela-tionship with chapter V. Article 17 was adopted subject toconsideration of whether the issue of the legal position ofthe debtor in the case of a partial assignment should beexplicitly addressed in article 17, a question which theCommission did not have sufficient time to consider (seeparas. 20, 173 and 185).

181. In the context of the discussion of the report of thedrafting group, the Commission decided that the title of theconvention should read: “Convention on Assignment ofReceivables in International Trade”. It was widely felt thatany reference to “receivables financing” would be incon-sistent with the scope of the convention, which went be-yond purely financing transactions. In the discussion, thesuggestion was made that the words “in InternationalTrade” should be deleted, since they were not necessaryand might be misleading to the extent that they suggestedthat only the assignment of trade receivables was covered.It was agreed that those words could be retained, while acommentary to the convention could explain that the term“international trade” was used in the widest possible senseand that in any case it was intended to include trade, finan-cial and consumer transactions.

182. Following up on its decision to delete the referenceto “receivables financing” in the title of the convention, theCommission decided to delete any reference to financing inthe preamble. With regard to the second preambular para-graph, it was decided that reference should be made touncertainties constituting an obstacle to international trade.As to the third preambular paragraph, while some supportwas expressed for the retention of the indicative list of


practices, it was decided that the list should be deleted,since it was bound to be incomplete and could soon be-come outdated. It was also agreed that the main practices tobe covered by the convention should be highlighted at thebeginning of a commentary to the convention. With regardto the fourth preambular paragraph, the suggestion wasmade that it should include a reference to the preservationof national law, in particular with regard to preferentialrights and rights in real estate. It was agreed that the refer-ence to the preservation of the debtor’s rights was suffi-cient in that respect and that a commentary could furtherexplain the types of debtor’s rights and the kind of lawsintended to be preserved. It was noted that such an ap-proach would be consistent with the approach taken in thepreamble to the UNCITRAL Model Law on Cross-BorderInsolvency. As to the fifth preambular paragraph, it wasagreed that the reference to “capital and credit” should beretained so as to clarify that the convention was intended tocover both outright assignments (in which capital wasmade available) and assignments by way of security (inwhich credit was made available). It was also agreed thatreference should be made first to the availability of capitaland credit and then to international trade.

183. After discussion, the Commission decided that thepreamble should read as follows:

“The Contracting States,

“Reaffirming their conviction that international tradeon the basis of equality and mutual benefit is an impor-tant element in the promotion of friendly relationsamong States,

“Considering that problems created by the uncertain-ties as to the content and the choice of legal regimeapplicable to assignments of receivables constitute anobstacle to international trade,

“Desiring to establish principles and adopt rules relat-ing to the assignment of receivables that would createcertainty and transparency and promote modernizationof law relating to assignments of receivables, while pro-tecting existing assignment practices and facilitating thedevelopment of new practices,

“Desiring also to ensure the adequate protection of theinterests of the debtor in the case of an assignment ofreceivables,

“Being of the opinion that the adoption of uniformrules governing assignments of receivables would pro-mote the availability of capital and credit at more afford-able rates and thus facilitate the development of interna-tional trade,

“Have agreed as follows:”

184. In line with its decision to delete any references to“receivables financing” in the title and the preamble to theconvention, the Commission decided that article 6,subparagraph (c), and the reference to “receivables financ-ing” in article 13, paragraph 3, should also be deleted.

185. In view of the fact that, under article 2, the scope ofthe convention would be limited to contractual receivables,it was stated that the question whether States should be givena right to apply the convention to additional practices (e.g.to assignments of non-contractual receivables) should be

reconsidered in the context of the final provisions. Withrespect to draft article 4, paragraph 1 (b), it was agreed thatthe words “to the extent” should be deleted. As to draftarticle 4, paragraph 3 (a) and (b), it was agreed that thesubparagraphs should be merged, reference should be madeto competing rights and the word “or” after subparagraph (b)should be deleted. As to draft article 4, paragraph 2 (f), it wassuggested that the French version should refer to “valeursmobiliers”. With respect to draft articles 11, paragraph 3 (a),and 12, paragraph 4 (a), it was agreed that the word “goods”should be placed in square brackets, pending a decision as towhether the word “goods” included intangible movableproperty. With respect to article 17, it was agreed that thequestion of the legal position of the debtor in the case ofnotifications relating to partial assignments remained to beaddressed in the future (see also paras. 20, 173 and 180).

D. Future work on the draft convention

186. Having adopted the report of the drafting group, theCommission considered the steps to be taken for the com-pletion of its work on the draft convention. A proposal wasmade and supported by several delegations that a resumedsession of the Commission should be convened for thatpurpose before the end of the year or early in 2001. Thiswould have the advantage of allowing the Commission tocomplete its work in a timely fashion while avoiding send-ing the draft convention back to a working group and risk-ing the reopening of matters already settled by the Com-mission. The prevailing view, however, was that the draftconvention should be referred back to a working group. Itwas widely felt that such an approach would ensure theoptimal use of the resources available to the Commissionand allow it to complete its work on the draft conventionin 2001 without having to change radically its schedule ofmeetings or general programme of work. It was stated thatthe changes made in articles 1-17 created a new situation,which would need to be reviewed by the Working Groupon International Contract Practices. It was also observedthat, in view of the Working Group’s familiarity with thetext, its expertise and efficiency, the draft convention couldbe advanced to a point where it could be swiftly adopted bythe Commission at its 2001 session. In that connection, theCommission reaffirmed its confidence in the WorkingGroup and expressed its appreciation for the remarkablework it had accomplished during the eight sessions devotedto the draft convention from November 1995 to October1999.

187. As to the terms of reference of the Working Group,the Commission considered a proposal that read as follows:

“1. Beginning with draft article 18, the Working Groupshould review those parts of the draft convention thatthe Commission has not had the opportunity to examineand text that remained within square brackets in draftarticles 1-17.

“2. In the light of modifications to draft articles 1-17,the Working Group should ensure that the coherence andconsistency of the text are maintained.

“3. If, as a result of its consideration of draft articles 18of the draft convention to draft article 7 of the annex, theWorking Group identifies issues in draft articles 1-17, it


should bring those issues to the attention of the Commis-sion with an appropriate explanation and recommenda-tion, if possible.

“4. As to its working methods, the Working Groupshould adopt the same approach as the Commission, thatis, it should make only those changes that meet withsubstantial support.”

188. Strong support was expressed for the proposal. Itwas widely felt that the proposed terms of reference wouldensure that the mandate of the Working Group was bothfirm, ensuring that the Working Group would not changepolicy decisions made by the Commission, and flexible,allowing the Working Group to consider all issues not set-tled by the Commission and effect purely drafting changesin draft articles 1-17. In order to clarify the point that theWorking Group should not reopen discussion on policyissues settled by the Commission, it was suggested thatparagraphs 2 and 4 of the above-mentioned terms of refer-ence should be prefaced by the words “In reviewing draftarticles 18 of the draft convention to draft article 7 of theannex”. However, it was agreed that that change was notnecessary, since the current wording made it sufficientlyclear that the Working Group did not have the mandate toeffect any change in the policy decisions made by theCommission. If the Working Group identified any newpolicy issues relating to articles 1-17, it could only bringthem to the attention of the Commission, making recom-mendations for their resolution by the Commission. On thatbasis, the Commission approved the terms of referencementioned above and referred the draft convention to aworking group to be convened before the end of the year,with the request that the working group proceed with itswork expeditiously so as to finalize the draft conventionand submit it for adoption by the Commission at its nextsession, in 2001.

189. The Commission next considered the procedure forfinal adoption of the draft convention and opening for sig-nature by States. The view was expressed that it would bepremature for the Commission to consider the matter at thecurrent session. The prevailing view, however, was that theCommission should inform the General Assembly of thepossibility of the final adoption of the draft convention bythe Assembly at its fifty-sixth session, in 2001, or by adiplomatic conference to be convened as soon as possibleafter the adoption of the draft convention by the Commis-sion at its thirty-fourth session. Such a recommendationwould allow the Sixth Committee of the General Assemblyto consider the matter and take any necessary action. Itwould also allow the Fifth Committee to consider whethera diplomatic conference could be held within existing re-sources and thus keep open for the Commission the optionof deciding at its thirty-fourth session to refer the draftconvention to a diplomatic conference. It was understoodthat authorization of a diplomatic conference by the Gen-eral Assembly would be subject, in addition to approval bythe Fifth and Sixth Committees, to an offer by a Govern-ment to host the conference, accepting to bear the costs ofchanging the venue of the conference from Vienna, the seatof the secretariat of UNCITRAL, to a city in the host coun-try. The Commission deferred a decision on the matter untilit had considered a draft recommendation to the GeneralAssembly (see para. 192).

190. The Commission next turned to the question whethera commentary should be prepared on the convention. It wasnoted that a commentary could be official, in which case itwould need to be reviewed in detail and approved by theCommission, or unofficial, in which case it could be pre-pared by the secretariat on the basis of general instructionsgiven by the Commission. It was also noted that, regardlessof whether the commentary were to be official or unoffi-cial, the Commission would need to consider whether thepurpose of the commentary would be to assist legislators intheir consideration of the draft convention for adoption orusers of the convention in the application and interpretationof it, or whether the commentary should be cast as both alegislative guide and a tool for interpretation. It was gener-ally agreed that a commentary should be prepared by thesecretariat in order to assist legislators in considering thedraft convention for adoption and users of the conventionin interpreting and applying it. It was stated that the analyti-cal commentary contained in the note by the secretariat of23 May 2000 (A/CN.9/470) could serve as an excellentbasis for such a commentary, which, however, should bemore concise and succinct. In response to a question, it wasnoted that it would be more efficient if the revised versionof the commentary were to be prepared after the WorkingGroup had completed its consideration of the draft conven-tion, since otherwise the first part of the commentary, onarticles 1-17, would probably need to be revised again afterthe Working Group had completed its work. In any case, itwas widely felt that the Working Group would not havetime to consider the commentary. It was agreed, however,that, if necessary, the secretariat could prepare a note bring-ing to the attention of the Working Group any issues to beaddressed by the Group.

191. After discussion, the Commission requested the sec-retariat to prepare and distribute a revised version of thecommentary on the convention after the Working Grouphad completed its work on the draft convention (for thedates of the next session of the Working Group on Interna-tional Contract Practices, see para. 469). It was agreed thatthe commentary should be concise and serve as an unoffi-cial legislative guide and a tool for the interpretation of theconvention. The Commission also requested the secretariatto distribute for comments the text of the draft conventionafter the completion of the work of the Working Group toall States and interested international organizations, includ-ing non-governmental organizations that were normally in-vited to attend meetings of the Commission and its workinggroups as observers, and to prepare an analytical compila-tion of those comments.

192. At the close of its deliberations on the draft conven-tion, the Commission adopted the following recommenda-tion to the General Assembly:

“The United Nations Commission on InternationalTrade Law,

“Noting that it is expected to adopt the draft Conven-tion on Assignment of Receivables in InternationalTrade at its thirty-fourth session, in 2001,

“Bearing in mind that, at that session, it will have tosubmit a recommendation to the General Assembly as tothe procedure for the conclusion of the draft Convention,


“Recognizing the importance of concluding the workon the draft Convention in a timely manner,

“1. Recommends that the General Assembly includean item entitled ‘Conclusion of the draft Convention onAssignment of Receivables in International Trade’ in theagenda of its fifty-sixth session, in 2001, with a view toconcluding the draft Convention itself or referring it to aconference of plenipotentiaries to be convened in 2002;

“2. Also recommends that, if the Commission decidesto recommend the holding of a Conference, the GeneralAssembly request the Secretary-General to distribute thedraft Convention, as early as possible after its finaliza-tion by the Commission at its thirty-fourth session, in2001, for comments by States and international organiza-tions, including non-governmental organizations nor-mally invited to attend meetings of the Commission asobservers.”

IV. PRIVATELY FINANCED INFRASTRUCTUREPROJECTS

A. General remarks

193. At the outset of its consideration of the draft chap-ters of a legislative guide on privately financed infrastruc-ture projects, the Commission noted that earlier drafts of allchapters of the legislative guide had been considered by theCommission at its thirty-second session, in 1999 (A/CN.9/458/Add.1-9). Some of the chapters had also been consid-ered at the Commission’s thirtieth session, in 1997 (A/CN.9/438/ Add.1-3), and at its thirty-first session, in 1998(A/CN.9/444/Add.1-5).

194. Given the advanced stage of preparation of the draftchapters and the extensive deliberations that had takenplace at the earlier sessions, it was decided that at the cur-rent session the Commission should focus its attention onthe legislative recommendations (as contained in the con-solidated list of legislative recommendations in A/CN.9/471/Add.9). The Commission was invited to turn to thenotes on the legislative recommendations only when thatwould be necessary to establish whether the notes accu-rately reflected the deliberations in the Commission at itsthirty-second session (and reflected in the relevant part ofits report on the session)3 or when a modification to thenotes would be necessary as a result of decisions regardingthe draft legislative recommendations. (For the subsequentdiscussions regarding the finalization of the guide and pos-sible future work in the area of privately financed infra-structure projects, see paras. 375-379 below.)

B. Consideration of draft legislativerecommendations

Suggestion for addition of a general legislativerecommendation

195. A suggestion was made to introduce, at the begin-ning of the list of legislative recommendations or at another

appropriate place, a note of caution to legislators not torestrict overly the freedom of the parties to shape theproject agreement since that would make it more difficultto negotiate or implement privately financed infrastructureprojects. While it was agreed that the suggestion was basedon valid reasoning, the general opinion was that such a noteof caution or recommendation should not be added. Onereason given was that the legislative recommendations intheir totality had to reflect the appropriate balance betweenfreedom of the parties and restrictions needed to protect thepublic interest. Another reason was that such general ad-vice was by nature not precise and therefore of limitedutility, and might even cause difficulty or confusion if itwere to be used in interpreting legislative recommendationsin the guide.

196. The Commission adopted the chapeau to the legisla-tive recommendations, which appeared before recommen-dation 1, and read as follows:

“For host countries wishing to promote privately fi-nanced infrastructure projects it is recommended that thefollowing principles be implemented by the law:”

CHAPTER I. GENERAL LEGISLATIVE ANDINSTITUTIONAL FRAMEWORK

Constitutional and legislative framework

197. The Commission postponed its decision on a sugges-tion to incorporate chapter VII. “Other relevant areas oflaw”, into chapter I, “General legislative and institutionalframework” (see para. 369).

Recommendation 1

198. The text of the draft recommendation was as fol-lows:

“The legislative and institutional framework for theimplementation of privately financed infrastructureprojects should ensure transparency, fairness and thelong-term sustainability of projects. Undesirable restric-tions on private sector participation in infrastructure de-velopment and operation should be eliminated.”

199. In order to reflect the breadth of the recommenda-tion and to align the title with the content of the recommen-dation, it was decided to expand the title to read “Consti-tutional, legislative and institutional framework” and theopening words of the recommendation to read “The consti-tutional, legislative and institutional framework”. Subjectto those changes, the Commission adopted recommenda-tion 1.

Scope of authority to award concessions

Recommendation 2


“The law should identify the public authorities of thehost country (including, as appropriate, national, provin-

3Official Records of the General Assembly, Fifty-fourth Session, Supple-ment No. 17 (A/54/17), paras. 12-307.


cial and local authorities) that are empowered to enterinto agreements for the implementation of privately fi-nanced infrastructure projects.”

201. The Commission adopted recommendation 2 to in-sert the words “to award the concession and” between thewords “that are empowered” and the words “to enter intoagreements”.

Recommendation 3


“Privately financed infrastructure projects may in-clude concessions for the construction and operation ofnew infrastructure facilities and systems or the mainte-nance, modernization, expansion and operation of exist-ing infrastructure facilities and systems.”

203. Proposals were made to expand the recommendationby adding references to “ownership” of the infrastructurefacility and “financing”. The proposals did not receive suf-ficient support on the ground that adding those detailsmight require the addition of other details. Furthermore,whether and to what extent a concession involved owner-ship of the infrastructure concerned was a matter related tothe various policy options available to the host country,which were discussed in the notes. The Commissionadopted recommendation 3.

Recommendation 4


“The law should identify the sectors or types of infra-structure in respect of which concessions may begranted.”

205. The opinion was expressed that the recommendationenvisioned an exhaustive list of sectors or types of infra-structure where concessions might be granted. In that light,a proposal was made to reformulate the recommendation toexpress the idea that the legislator should set out only apriority list of such sectors or types of infrastructure. Insupport of the proposal, it was stated that governmentalpriorities as to the sectors in which concessions might begranted might change over time and that, by having anexhaustive list of sectors in the law, the Government wouldunnecessarily limit itself in fostering the development ofinfrastructure.

206. The Commission did not adopt the proposal andnoted that it was indicated in paragraph 18 of the accom-panying notes that there was more than one possible way ofindicating sectors or types of infrastructure in respect ofwhich concessions might be granted. The Commissionadopted recommendation 4.

Recommendation 5


“The law should specify the extent to which a conces-sion might extend to the entire region under the jurisdic-tion of the respective contracting authority, to a geo-graphical subdivision thereof or to a discrete project, andwhether it might be awarded with or without exclusivity,as appropriate, in accordance with rules and principles oflaw, statutory provisions, regulations and policies apply-ing to the sector concerned. Contracting authoritiesmight be jointly empowered to award concessions be-yond a single jurisdiction.”

208. The Commission adopted recommendation 5.

Recommendation 6


“Institutional mechanisms should be established to co-ordinate the activities of the public authorities responsi-ble for issuing approvals, licences, permits or authoriza-tions required for the implementation of privatelyfinanced infrastructure projects in accordance with statu-tory or regulatory provisions on the construction andoperation of infrastructure facilities of the type con-cerned.”


Recommendation 7


“The authority to regulate infrastructure servicesshould not be entrusted to entities that directly or indi-rectly provide infrastructure services.”


Recommendation 8


“Regulatory competence should be entrusted to func-tionally independent bodies with a level of autonomysufficient to ensure that their decisions are taken withoutpolitical interference or inappropriate pressures from in-frastructure operators and public service providers.”


Recommendation 9


“The rules governing regulatory procedures should bemade public. Regulatory decisions should state the rea-sons on which they are based and should be accessible tointerested parties through publication or other means.”



Recommendation 10


“The law should establish transparent procedureswhereby the concessionaire may request a review ofregulatory decisions by an independent and impartialbody and should set forth the grounds on which a requestfor review may be based and the availability of courtreview.”

218. The Commission adopted recommendation 10 sub-ject to editorial review of its wording.

Recommendation 11


“Where appropriate, special procedures should be es-tablished for handling disputes among public serviceproviders concerning alleged violations of laws andregulations governing the relevant sector.”


CHAPTER II. PROJECT RISKSAND GOVERNMENT SUPPORT

Recommendation 12


“No unnecessary statutory or regulatory limitationsshould be placed upon the contracting authority’s abilityto agree on an allocation of risks that is suited to theneeds of the project.”


Recommendation 13


“The law should clearly state which public authoritiesof the host country may provide financial or economicsupport to the implementation of privately financed in-frastructure projects and which types of support they areauthorized to provide.”

224. The suggestion was made to add after the words“types of support” the words “including public loans andguarantees, equity participation, subsidies and sovereignguarantees and assurances” to reflect better and more com-pletely the legislative advice that was discussed in thenotes. Furthermore, it was stated that it should be madeclearer that various authorities in a State might grant publicsupport to a given privately financed infrastructure project.The Commission adopted recommendation 13 without thesuggested additions since it was generally felt that bothpoints were sufficiently covered in the notes (A/CN.9/471/Add.3, paras. 30-60).

CHAPTER III. SELECTIONOF THE CONCESSIONAIRE

General considerations

Recommendation 14


“The law should provide for the selection of the con-cessionaire through transparent and efficient competitiveprocedures adapted to the particular needs of privatelyfinanced infrastructure projects.”

226. By way of a general comment, it was pointed outthat chapter III contained an extensive set of legislativerecommendations and detailed notes thereon. In that con-nection, the question was raised as to whether it was rec-ommended that the host country should adopt specific leg-islation dealing with the procedures for selecting theconcessionaire.

227. In response, it was noted that the purpose of thelegislative recommendations was to assist the host countryin developing rules specially suited for the selection of theconcessionaire. The recommendations were concerned withthe particular needs of privately financed infrastructureprojects and differed in many respects from general ruleson government procurement, such as those contained in theUNCITRAL Model Law on Procurement of Goods, Con-struction and Services. However, the recommendationswere not intended to replace or reproduce such generalrules on government procurement and it was for each hostcountry to decide in which manner they could best be im-plemented. For example, a State might wish to enact spe-cial regulations dealing only with the selection of the con-cessionaire or might incorporate some of them into generallegislation on privately financed infrastructure projects,with cross-references, as appropriate, to other legislationdealing with matters not covered in the recommendations(such as administrative and practical arrangements for con-ducting the selection proceedings).

228. Besides terminological suggestions accepted by theCommission to ensure consistency among the languageversions (i.e. using the term “procédure de mise encompétition” instead of “procédure ouverte” in the Frenchtext), no further comments were made and the Commissionadopted recommendation 14.

Pre-selection of bidders

Recommendation 15


“The bidders should demonstrate that they meet thepre-selection criteria the contracting authority considersappropriate for the particular project, including:

“(a) Adequate professional and technical qualifica-tions, human resources, equipment and other physicalfacilities as necessary to carry out all the phases of the


project, namely, engineering, construction, operationand maintenance;“(b) Sufficient ability to manage the financial as-pects of the project and capability to sustain the fi-nancing requirements for the engineering, construc-tion and operational phases of the project;“(c) Appropriate managerial and organizational ca-pability, reliability and experience, including previousexperience in operating public infrastructure.”


Recommendation 16


“The bidders should be allowed to form consortia tosubmit proposals, provided that each member of a pre-selected consortium may participate, either directly orthrough subsidiary companies, in only one bidding con-sortium.”

232. It was suggested that recommendation 16 shouldstate that the bidders should be authorized to form consor-tia both for the purpose of submitting proposals and forexecution of the project. However, noting that the provi-sion dealt only with issues related to the selection process,the Commission adopted recommendation 16 without theproposed amendment.

Recommendation 17


“The contracting authority should draw up a shortlistof the pre-selected bidders which will subsequently beinvited to submit proposals upon completion of the pre-selection phase.”


Procedure for requesting proposals

Recommendation 18


“Upon completion of the pre-selection proceedings,the contracting authority should invite the pre-selectedbidders to submit final proposals.”

236. Subject to substituting the word “request” forthe word “invite”, the Commission adopted recommenda-tion 18.

Recommendation 19


“Notwithstanding the above, the contracting authoritymay use a two-stage procedure to request proposals frompre-selected bidders when it is not feasible for the con-tracting authority to formulate project specifications orperformance indicators and contractual terms in a man-ner sufficiently detailed and precise to permit final pro-posals to be formulated. Where a two-stage procedure isused, the following provisions apply:

“(a) The contracting authority should first call uponthe pre-selected bidders to submit proposals relating tooutput specifications and other characteristics of theproject as well as to the proposed contractual terms;

“(b) The contracting authority may convene a meet-ing of bidders to clarify questions concerning the ini-tial request for proposals;

“(c) Following examination of the proposals re-ceived, the contracting authority may review and, asappropriate, revise the initial project specifications andcontractual terms prior to issuing a final request forproposals.”

238. The suggestion was made that the recommendationshould refer to the contracting authority’s obligation tokeep minutes of meetings with bidders. The Commissionfelt, however, that the matter would best be left to the noteson the legislative recommendation and adopted recommen-dation 19 unchanged.

Recommendation 20


“The final request for proposals should include at leastthe following:

“(a) General information as may be required by thebidders in order to prepare and submit their proposals;

“(b) Project specifications and performance indica-tors, as appropriate, including the contracting authori-ty’s requirements regarding safety and security stand-ards and environmental protection;

“(c) The contractual terms proposed by the contract-ing authority;

“(d) The criteria for evaluating the proposals, therelative weight to be accorded to each such criterionand the manner in which criteria are to be applied inthe evaluation of proposals.”


Recommendation 21


“The contracting authority may, whether on its owninitiative or as a result of a request for clarification by abidder, modify the final request for proposals by issuingaddenda at a reasonable time prior to the deadline forsubmission of proposals.”



Recommendation 22


“The criteria for the evaluation and comparison of thetechnical proposals should concern the effectiveness ofthe proposal submitted by the bidder in meeting theneeds of the contracting authority, including the follow-ing:

“(a) Technical soundness;“(b) Operational feasibility;“(c) Quality of services and measures to ensure theircontinuity;“(d) Social and economic development potential of-fered by the proposals.”

244. After having considered various proposals made inconnection with recommendation 23 (see paras. 248-250),the Commission adopted recommendation 22.

Recommendation .23


“The criteria for the evaluation and comparison of thefinancial and commercial proposals may include, as ap-propriate:

“(a) The present value of the proposed tolls, feesand other charges over the concession period;

“(b) The present value of the proposed direct pay-ments by the contracting authority, if any;

“(c) The costs for design and construction activities,annual operation and maintenance costs, present valueof capital costs and operating and maintenance costs;

“(d) The extent of financial support, if any, expectedfrom the Government;

“(e) Soundness of the proposed financial arrange-ments;

“(f) The extent of acceptance of the proposed con-tractual terms.”

246. The Commission agreed to insert the words “, unitprices” before the words “and other charges” insubparagraph (a).

247. In response to a query as to the difference betweensubparagraphs (b) and (d), it was explained thatsubparagraph (b) was concerned with direct payments ex-pected from the contracting authority for goods or servicesactually provided or made available by the concessionaire.Subparagraph (d), in turn, was concerned with financialsupport, such as loans, subsidies or guarantees provided bythe Government, and not necessarily the contracting au-thority.

248. The Commission considered proposals for rearrang-ing items listed in the recommendations. It was pointed outthat assessing the soundness of the proposed financial ar-rangements was the very purpose of the evaluation of thefinancial proposals, rather than an evaluation criterion, and

that therefore the substance of subparagraph (e) should beincorporated into the chapeau of the recommendation. Itwas further suggested that a distinction should be madebetween criteria used to evaluate the soundness of the fi-nancing proposed for each phase of the project (i.e. con-struction and operation). Lastly, it was proposed thatsubparagraph (f) should be deleted because it would not beappropriate to evaluate proposals in terms of their respon-siveness to the contractual terms proposed by the contract-ing authority. It would be preferable to incorporate thenotion of responsiveness in the chapeau of recommenda-tion 23, and possibly in the chapeau of recommendation 22as well, by inserting words such as “[I]n conformity withthe proposed contractual terms”.

249. The Commission heard expressions of strong sup-port for those proposals, in particular to the deletion ofsubparagraph (f), since in some legal systems the accept-ance of the contractual terms circulated with the request forproposals was a mandatory requirement. The prevailingview, however, was that the current text of the recommen-dation should be retained. It was sufficiently clear that theitems listed in subparagraphs (a)-(e) were intended to ap-ply, as appropriate, in the evaluation of the soundness offinancial proposals in respect of the various phases of theproject. As regards subparagraph (f), it was generally feltthat the provision was useful and should not be deleted.The complexity of privately financed infrastructure projectsmade it unlikely that the contracting authority and the se-lected bidder could agree on the terms of a draft projectagreement without negotiations and adjustments to adaptthose terms to the particular needs of the project. It wastherefore appropriate to include an assessment of the re-sponsiveness of bidders to the proposed contractual termsamong the criteria for the evaluation of the financial andcommercial proposals.

250. After deliberation, the Commission adopted recom-mendation 23.

Recommendation 24


“The contracting authority may establish thresholdswith respect to quality, technical and commercial aspectsto be reflected in the proposals in accordance with thecriteria set out in the request for proposals. Proposalsthat fail to achieve the thresholds should be regarded asnon-responsive.”

252. Subject to inserting the word “financial” before thewords “and commercial” in the first sentence, the Commis-sion adopted recommendation 24.

Recommendation 25


“Whether or not it has followed a pre-selection proc-ess, the contracting authority may retain the right to re-quire the bidders to demonstrate their qualificationsagain in accordance with criteria and procedures set forth


in the request for proposals or the pre-selection docu-ments, as appropriate. Where a pre-selection process hasbeen followed, the criteria shall be the same as thoseused in the pre-selection process.”


Recommendation 26


“The contracting authority should rank all responsiveproposals on the basis of the evaluation criteria set forthin the request for proposals and invite for final negotia-tion of the project agreement the bidder that has attainedthe best rating. Final negotiations may not concern thoseterms of the contract which were stated as non-negoti-able in the final request for proposals.”

256. The question was raised as to how the contractingauthority should proceed if, after evaluation of the propos-als, two or more proposals obtained the highest rating or ifthere was only an insignificant difference in the rating oftwo or more proposals. In response, it was stated that undersuch circumstances it would be appropriate for the con-tracting authority to invite for negotiations all the biddersthat had obtained essentially the same rating. It was gener-ally felt, however, that an appropriate comment to that ef-fect should be included in the relevant notes, rather than inthe recommendation.

257. The suggestion was made that the recommendationshould include advice as to how contracting authoritiesshould handle requests by prospective lenders for changesin the proposed contractual arrangements. In response, itwas stated that the issue, although of great concern in prac-tice, was not necessarily a matter for legislative action andhad already been adequately dealt with in paragraphs 56,70 and 82 of the notes to chapter III (A/CN.9/471/Add.4).

258. After deliberation, the Commission adopted recom-mendation 26.

Recommendation 27


“If it becomes apparent to the contracting authoritythat the negotiations with the bidder invited will not re-sult in a project agreement, the contracting authorityshould inform that bidder that it is terminating the nego-tiations and then invite for negotiations the other bidderson the basis of their ranking until it arrives at a projectagreement or rejects all remaining proposals.”


Direct negotiations

Recommendation 28


“The law should set forth the exceptional circum-stances under which the contracting authority may beauthorized by a higher authority to select the concession-aire through direct negotiations, such as:

“(a) When there is an urgent need for ensuring con-tinuity in the provision of the service and engaging ina competitive selection procedure would therefore beimpractical;

“(b) In case of projects of short duration and with ananticipated initial investment value not exceeding aspecified low amount;

“(c) Reasons of national defence or national security;

“(d) Cases where there is only one source capable ofproviding the required service (for example, because itrequires the use of patented technology or uniqueknow-how);

“(e) When an invitation to the pre-selection proceed-ings or a request for proposals has been issued but noapplications or proposals were submitted or all pro-posals failed to meet the evaluation criteria set forth inthe request for proposals and if, in the judgement ofthe contracting authority, issuing a new request forproposals would be unlikely to result in a projectaward;

“(f) Other cases where the higher authority author-izes such an exception for compelling reasons of pub-lic interest.”

262. By way of a general comment, it was stated that theexpression “direct negotiations”, which appeared in recom-mendations 28 and 29, as well as in the correspondingnotes, although adopted by the Commission at its thirty-second session,4 did not adequately reflect the nature of theprocedures described in those recommendations. It waspointed out that recommendations 28 and 29 contemplatedthe use, under exceptional circumstances, of a proceduredifferent from those described in recommendations 14-27.That difference consisted essentially of the absence of astructured competition among bidders, as was otherwisecalled for under recommendations 14-27. Negotiations withbidders, however, were not exclusive to recommendations28 and 29, since a certain degree of negotiation was alreadyprovided at various stages of the selection procedure underrecommendations 14-27, in particular under recommenda-tions 26 and 27.

263. After deliberation, the Commission decided that thephrase “concession award without competitive procedures”should be used instead of the words “direct negotiations” inthe title of section D of chapter III (see A/CN.9/471/Add.4)and that the chapeau of recommendation 28 should beamended to read:

“The law should set forth the exceptional circum-stances under which the contracting authority may beauthorized to award a concession without using competi-tive procedures, such as:”

264. The Commission noted that, as a result of the adop-tion of the new wording, a series of consequential amend-

4Ibid., paras. 127 and 128.


ments might be required in the relevant notes in chapter III(see A/CN.9/471/Add.4) and possibly in other legislativerecommendations and parts of the draft legislative guide.The Commission requested the secretariat to ensure that thenecessary changes were made.

265. The Commission agreed that recommendation 28should also refer to unsolicited proposals, which undercertain circumstances might justify the award of a con-cession without competitive procedures (see paras. 277and 279).

Recommendation 29


“The law may require that the following procedures beobserved in direct negotiations:

“(a) The contracting authority should publish a no-tice of the negotiation proceedings and engage in ne-gotiations with as many companies judged capable ofcarrying out the project as circumstances permit;

“(b) The contracting authority should establish andmake known to bidders the qualification criteria andthe criteria for evaluating the proposals and shoulddetermine the relative weight to be accorded to eachsuch criterion and the manner in which criteria are tobe applied in the evaluation of the proposals;

“(c) The contracting authority should treat proposalsin a manner that avoids the disclosure of their contentsto competing bidders;

“(d) Any such negotiations between the contractingauthority and bidders should be confidential and oneparty to the negotiations should not reveal to any otherperson any technical, price or other commercial infor-mation relating to the negotiations without the consentof the other party;

“(e) Following completion of negotiations, the con-tracting authority should request all bidders remainingin the proceedings to submit, by a specified date, abest and final offer with respect to all aspects of theirproposals;

“(f) Proposals should be evaluated and ranked ac-cording to the criteria for the evaluation of proposalsestablished by the contracting authority.”

267. The view was expressed that recommendation 29was unnecessarily detailed on procedural matters of limitedpractical relevance, since a contracting authority faced withthe exceptional circumstances referred to in recommenda-tion 28 might often have no choice but to negotiate withonly one company. For the conceivably rare cases wherethe contracting authority had more choices, it would besufficient if the notes referred to measures to introducecompetitiveness into such negotiations, such as those re-ferred to in subparagraphs (b), (c) and (e), which, however,in their current form, were not needed. More importantthan those provisions was the disclosure of the reasons forawarding a concession without competitive procedures, arequirement that should be expressly made in recommenda-

tion 29. As for subparagraph (d), which was said to berelevant for the final negotiations under recommendations26 and 27 as well, it was proposed that it should becomea separate recommendation and be placed before recom-mendation 36.

268. Strong support was expressed for those proposals,which were generally felt to enhance transparency in theaward of concessions without the use of competitive proce-dures. It was pointed out, however, that the requirement ofpublicity concerning the reasons for awarding a concessionwithout competitive procedures should be weighted againstother reasons of public interest, in particular the need forconfidentiality of decisions on matters of national defenceor security.

269. After deliberation, the Commission agreed thatrecommendation 29 should be redrafted along the follow-ing lines:

“The law may require that the following procedures beobserved for the award of a concession without competi-tive procedures:

“(a) The contracting authority should publish a no-tice of its intention to award a concession for the im-plementation of the proposed project and should en-gage in negotiations with as many companies judgedcapable of carrying out the project as circumstancespermit;

“(b) Offers should be evaluated and ranked accord-ing to the criteria for the evaluation of proposals es-tablished by the contracting authority;

“(c) Except for the situation referred to in recom-mendation 28 (c), the contracting authority shouldcause a public notice of the concession award to bepublished, disclosing the specific circumstances andreasons for the award of the concession without com-petitive procedures.”

270. The Commission noted that, as a result of the adop-tion of the new text for recommendation 29, a series ofconsequential amendments might be required in the rel-evant notes in chapter III (A/CN.9/471/Add.4) and possiblyin other legislative recommendations and parts of the draftlegislative guide. The Commission requested the secretariatto ensure that the necessary changes were made.

Unsolicited proposals

Recommendation 30


“By way of exception to the selection procedures de-scribed in legislative recommendations 14-27, the con-tracting authority may be authorized to handle unsolic-ited proposals pursuant to specific proceduresestablished by the law for handling unsolicited propos-als, provided that such proposals do not relate to aproject for which selection procedures have been initi-ated or announced by the contracting authority.”



Recommendation 31


“Following receipt and preliminary examination of anunsolicited proposal, the contracting authority should in-form the proponent, within a reasonably short period,whether or not there is a potential public interest in theproject. If the project is found to be in the public interest,the contracting authority should invite the proponent tosubmit a formal proposal in sufficient detail to allow thecontracting authority to make a proper evaluation of theconcept or technology and determine whether the pro-posal meets the conditions set forth in the law and islikely to be successfully implemented on the scale of theproposed project.”


Recommendation 32


“The proponent should retain title to all documentssubmitted throughout the procedure and those docu-ments should be returned to it in the event the proposalis rejected.”


Recommendation 33


“The contracting authority should initiate competitiveselection procedures under recommendations 14-27above if it is found that the envisaged output of theproject can be achieved without the use of a process,design, methodology or engineering concept for whichthe author of the unsolicited proposal possesses exclu-sive rights or if the proposed concept or technology isnot truly unique or new. The author of the unsolicitedproposal should be invited to participate in such pro-ceedings and might be given a premium for submittingthe proposal.”


Recommendation 34


“If it appears that the envisaged output of the projectcannot be achieved without using a process, design,methodology or engineering concept for which the au-thor of the unsolicited proposal possesses exclusiverights, the contracting authority should seek to obtainelements of comparison for the unsolicited proposal. Forthat purpose, the contracting authority should publish adescription of the essential output elements of the pro-posal with an invitation for other interested parties to

submit alternative or comparable proposals within a cer-tain reasonable period.”


Recommendation 35


“The contracting authority may engage in negotiationswith the author of the unsolicited proposal if no alterna-tive proposals are received, subject to approval by ahigher authority. If alternative proposals are submitted,the contracting authority should invite all the proponentsto negotiations in accordance with the provisions of leg-islative recommendation 29 (b)-(f).”

282. The Commission adopted recommendation 35 (butsee paras. 269 and 270).

Review procedures

Recommendation 36


“Bidders who claim to have suffered, or who maysuffer, loss or injury owing to a breach of a duty im-posed on the contracting authority by the law may seekreview of the contracting authority’s acts in accordancewith the laws of the host country.”

284. The Commission agreed that recommendation 36should be the final recommendation on the selection of theconcessionaire and that its accompanying notes should bemoved to the end of chapter III (A/CN.9/471/Add.4). Sub-ject to those changes, the Commission adopted recommen-dation 36.

Notice of project award

Recommendation 37


“The contracting authority should cause a notice of theaward of the project to be published. The notice shouldidentify the concessionaire and include a summary of theessential terms of the project agreement.”


Record of selection and award proceedings

Recommendation 38


“The contracting authority should keep an appropriaterecord of key information pertaining to the selection andaward proceedings. The law should set forth the require-ments for public access.”


288. Subject to restoring the second sentence of the rec-ommendation in the French version, where it did not ap-pear, the Commission adopted recommendation 38.

CHAPTER IV. CONSTRUCTION AND OPERATIONOF INFRASTRUCTURE

289. The Commission requested the secretariat to revisethe title of the chapter so as to reflect more clearly theissues discussed therein, which were largely concernedwith the contents of the project agreement and its relationto the construction and operation of infrastructure. Subse-quently the secretariat proposed the following title, whichwas approved by the Commission: “Construction and op-eration: legislative framework and project agreement”.

General provisions on the project agreement

Recommendation 39


“The law might identify the core terms to be providedin the project agreement, which may include those termsreferred to in recommendations 39-65 below.”

291. Subject to changing the cross-reference to legislativerecommendations 40-67, the Commission adopted recom-mendation 39.

Recommendation 40


“Unless otherwise provided, the project agreement isgoverned by the law of the host country.”

293. In response to a question as to the meaning of theopening phrase of the recommendation, it was pointed outthat the issue of the law governing the project agreementhad been the subject of extensive debate at the thirty-sec-ond session of the Commission. The flexible wording even-tually agreed upon by the Commission was intended to takeinto account the fact that, under some legal systems, provi-sions allowing for the application of a law other than thelaw of the host country could only be of a statutory nature,whereas in other legal systems the contracting authoritymight have the power to agree on the applicable law. TheCommission adopted recommendation 40.

Organization of the concessionaire

Recommendation 41


“The contracting authority should have the option torequire that the selected bidders establish an independentlegal entity with a seat in the country.”


Recommendation 42


“The project agreement should specify the minimumcapital of the project company and the procedures forobtaining the approval of the contracting authority to itsstatutes and by-laws of the project company and funda-mental changes therein.”


The project site and easements

Recommendation 43


“The project agreement should specify, as appropriate,which assets will be public property and which assetswill be the private property of the concessionaire. Theproject agreement should identify which assets the con-cessionaire is required to transfer to the contracting au-thority or to a new concessionaire upon expiry or termi-nation of the project agreement; which assets thecontracting authority, at its option, may purchase fromthe concessionaire; and which assets the concessionairemay freely remove or dispose of upon expiry or termi-nation of the project agreement.”

299. The Commission adopted recommendation 43, sub-ject to amending the heading to read “project site, assetsand easements”.

Recommendation 44


“The contracting authority should assist the conces-sionaire in the acquisition of easements needed for theoperation, construction and maintenance of the facility.The law might empower the concessionaire to enterupon, transit through, do work or fix installations uponproperty of third parties, as required for the constructionand operation of the facility.”

301. The view was expressed that the reference in thefirst sentence of the recommendation to assistance by thecontracting authority in connection with the acquisition ofeasements was unclear and possibly in conflict with thesecond sentence of the recommendation. It was proposedthat the first sentence of the recommendation be expandedto reflect the idea that the contracting authority should as-sist in securing the land and other property required by theconcessionaire to carry out the project. The Commissionheard expressions of strong support for that proposal. Itwas pointed out that, in practice, considerable problems inthe implementation of infrastructure projects might becaused by delay in acquiring the land for the project site.That problem, it was pointed out, had been identified inparagraphs 20-22 of chapter IV, “Construction and opera-


tion of infrastructure” (see A/CN.9/471/Add.5), but no leg-islative recommendation reflected the discussion in thosenotes. The legislative guide, it was stated, had an importantrole to play in reminding contracting authorities, by a leg-islative recommendation, of their responsibility for provid-ing the concessionaire with the assistance required to se-cure an appropriate site for the project.

302. The countervailing view, which also met with strongsupport, was that issues related to acquisition and ownershipof land were foreign to recommendation 44, which was onlyconcerned with easements that might be needed by the con-cessionaire in connection with the construction, operation ormaintenance of the infrastructure facility. The perceivedlack of clarity of the sentence was attributable to the use ofthe phrase “acquisition of easements”, which was said tocreate difficulties of interpretation in some legal systems. Ifthe Commission felt that the first sentence of the recommen-dation was unclear, it would be preferable to delete thesentence rather than to expand it as had been proposed.

303. The Commission considered various proposals madeto address the concerns that had been expressed. It waspointed out that, in paragraphs 30-32 of chapter IV, “Con-struction and operation of infrastructure” (see A/CN.9/471/Add.5), two alternative ways were identified for the conces-sionaire to obtain the easements it required: either by appro-priate arrangements between the concessionaire and theowners of the property concerned or by legislation thatempowered the concessionaire to enter, pass through or dowork or fix installations upon the property of third parties. Itwas thus proposed that the connection between the twosentences of the recommendation be clarified by addingwords such as “[A]nother solution might be for the law toempower” at the beginning of the second sentence. In re-sponse, it was stated that the proposal might indeed be usefulto clarify the way in which the legislative recommendationreflected the discussion of legal problems related toeasements in the notes. However, by dealing only witheasements, the proposal did not provide an adequate answerto questions related to the project site itself, which had beenidentified in the notes to the legislative recommendations.

304. After consideration of the different views and pro-posals heard by the Commission, the prevailing view wasthat the first sentence of the legislative recommendationshould be redrafted to read: “The contracting authorityshould assist the concessionaire in obtaining such rightsrelated to the project site as necessary for the operation,construction and maintenance of the facility.” Subject tothat amendment and to the addition of the word “mainte-nance” in the second sentence, the Commission adoptedrecommendation 44. The Commission requested the secre-tariat to make the necessary adjustments to the notes inorder to align them with the new text of the recommenda-tion. It was generally understood that the recommendationdid not affect the property regime in the host country.

Financial arrangements

Recommendation 45


“The law should enable the concessionaire to collecttariffs or user fees for the use of the facility or the serv-ices it provides. The project agreement should providefor methods and formulas for the adjustment of thosetariffs or user fees.”


Recommendation 46


“Where the tariffs or fees charged by the concession-aire are subject to external control by a regulatory body,the law should set forth the mechanisms for periodic andextraordinary revisions of the tariff adjustment formulas.”


Recommendation 47


“The contracting authority should have the power,where appropriate, to agree to make direct payments tothe concessionaire as a substitute for, or in addition to,service charges to be paid by the users or to enter intocommitments for the purchase of fixed quantities ofgoods or services.”


Security interests

Recommendation 48


“The concessionaire should be responsible for raisingthe funds required to construct and operate the infra-structure facility and, for that purpose, should have theright to secure any financing required for the projectwith a security interest in any of its property, with apledge of shares of the project company, with a pledgeof the proceeds and receivables arising out of the conces-sion or with other suitable security, without prejudice toany rule of law that might prohibit the creation of secu-rity interests in public property in the possession of theconcessionaire.”

312. Subject to the deletion of the words “in the posses-sion of the concessionaire”, the Commission adopted rec-ommendation 48.

Assignment of the concession

Recommendation 49


“The project agreement should set forth the conditionsunder which the contracting authority might give its con-


sent to an assignment of the concession, including theacceptance by the new concessionaire of all obligationsunder the project agreement and evidence of the newconcessionaire’s technical and financial capability asnecessary for providing the service. The concessionshould not be assigned to third parties without the con-sent of the contracting authority.”

314. The view was expressed that the second sentence ofthe recommendation was overly restrictive and mighthinder the contracting authority’s ability to enter into adirect agreement with lenders for the substitution of theconcessionaire by another entity selected in agreement withthe lenders in case of default by the concessionaire. In re-sponse, it was pointed out that infrastructure concessions,as generally understood by the Commission, were awardedin the light of the concessionaire’s technical and financialcapabilities and, as such, were not freely transferable, aprinciple that was reflected in the second sentence. Thepossibility given to lenders to appoint a substitute conces-sionaire, in agreement with the contracting authority (asituation covered by the first sentence of the recommenda-tion), constituted an exception accepted by the Commissionto the general rule stated in the second sentence.

315. Subject to reversing the order of the two sentences,in order to clarify the way they related to one another, theCommission adopted recommendation 49.

Transfer of controlling interest in the project company

Recommendation 50


“The transfer of a controlling interest in the capital ofa concessionaire company may require the consent of thecontracting authority.”

317. The view was expressed that the recommendationwas overly restrictive, since there were circumstanceswhere restrictions on the transfer of a controlling interest ina concessionaire company might not be reasonable. In re-sponse, it was noted that recommendation 50 shared thesame rationale as recommendation 49. Nevertheless, with aview to making it clear that there might be exceptions tosuch a rule, it was agreed that words such as “unless oth-erwise provided” should be added at the end of the recom-mendation.

318. Subject to that amendment and the deletion of thewords “the capital of”, which were deemed unnecessary,the Commission adopted recommendation 50.

Construction works

Recommendation 51


“The project agreement should set forth the proce-dures for the review and approval of construction plans

and specifications by the contracting authority, the con-tracting authority’s right to monitor the construction of,or improvements to, the infrastructure facility, the condi-tions under which the contracting authority may ordervariations in respect of construction specifications andthe procedures for testing and final inspection, approvaland acceptance of the facility, its equipment and appur-tenances.”


Operation of infrastructure

Recommendation 52


“The project agreement should set forth, as appropri-ate, the extent of the concessionaire’s obligations to en-sure:

“(a) The adaptation of the service so as to meet theactual demand for the service;“(b) The continuity of the service;“(c) The availability of the service under essentiallythe same conditions to all users;“(d) The non-discriminatory access, as appropriate,of other service providers to any public infrastructurenetwork operated by the concessionaire.”

322. It was suggested that the words “evolution of de-mand” should be substituted for the words “actual demand”in subparagraph (a), so as to express more clearly the ideathat the concessionaire was under an obligation to ensurethe adaptation of the service to both quantitative and quali-tative changes of demand. It was also suggested thatsubparagraph (c) should refer to the concessionaire’s obli-gation to “ensure equal access” of users to the service.Lastly, it was suggested that subparagraph (d) should referto the need to ensure interconnection between infrastruc-ture networks under objective, transparent and non-dis-criminatory conditions.

323. Noting that the issues discussed in the recommenda-tion had been extensively debated at its previous sessions,the Commission adopted recommendation 52 without theproposed amendments.5

Recommendation 53


“The project agreement should set forth:“(a) The extent of the concessionaire’s obligation toprovide the contracting authority or a regulatory body,as appropriate, with reports and other information onits operations;

5Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), paras. 96-114,and ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17),paras. 185-187.


“(b) The procedures for monitoring the concession-aire’s performance and for taking such reasonable ac-tions as the contracting authority or a regulatory bodymay find appropriate, to ensure that the infrastructurefacility is properly operated and the services are pro-vided in accordance with the applicable legal and con-tractual requirements.”


Recommendation 54


“The concessionaire should have the right to issue andenforce rules governing the use of this facility, subject tothe approval of the contracting authority or a regulatorybody.”


General contractual arrangements

Recommendation 55


“The contracting authority may reserve the right toreview and approve major contracts to be entered into bythe concessionaire, in particular contracts with the con-cessionaire’s own shareholders or related persons. Thecontracting authority’s approval should not normally bewithheld except where the contracts contain provisionsinconsistent with the project agreement or manifestlycontrary to the public interest or to mandatory rules of apublic law nature.”


Recommendation 56


“The concessionaire and its lenders, insurers and othercontracting partners should be free to choose the lawapplicable to govern their contractual relations, exceptwhere such a choice would violate the host country’spublic policy.”


Recommendation 57


“The project agreement should set forth:“(a) The forms, duration and amounts of the guaran-tees of performance that the concessionaire may berequired to provide in connection with the construc-tion and the operation of the facility;

“(b) The insurance policies that the concessionairemay be required to maintain;“(c) The compensation to which the concessionairemay be entitled following the occurrence of legislativechanges or other changes in the economic or financialconditions that render the performance of the obliga-tion substantially more onerous than originally fore-seen. The project agreement should further providemechanisms for revising the terms of the project agree-ment following the occurrence of any such changes;“(d) The extent to which either party may be exemptfrom liability for failure or delay in complying withany obligation under the project agreement owing tocircumstances beyond their reasonable control;“(e) Remedies available to the contracting authorityand the concessionaire in the event of default by theother party.”


Recommendation 58


“The project agreement should set forth the circum-stances under which the contracting authority may tem-porarily take over the operation of the facility for thepurpose of ensuring the effective and uninterrupted de-livery of the service in the event of serious failure by theconcessionaire to perform its obligations.”


Recommendation 59


“The contracting authority should be authorized to en-ter into agreements with the lenders providing for theappointment, with the consent of the contracting author-ity, of a new concessionaire to perform under the exist-ing project agreement if the concessionaire seriouslyfails to deliver the service required or if other specifiedevents occur that could justify the termination of theproject agreement.”


CHAPTER V. DURATION, EXTENSION ANDTERMINATION OF THE PROJECT AGREEMENT

Duration and extension of the project agreement

Recommendation 60


“The duration of the concession should be specified inthe project agreement.”



Recommendation 61


“The term of the concession should not be extended,except under those circumstances specified in the law,such as:

“(a) Completion delay or interruption of operationdue to the occurrence of circumstances beyond eitherparty’s reasonable control;“(b) Project suspension brought about by acts of thecontracting authority or other public authorities;“(c) To allow the concessionaire to recover addi-tional costs arising from requirements of the contract-ing authority not originally foreseen in the projectagreement that the concessionaire would not be able torecover during the normal term of the project agree-ment.”

341. A suggestion was made to replace in subparagraph(a) the concept of “circumstances beyond either party’sreasonable control” by the expression “force majeure” (andto use the equivalent expression in the other language ver-sions). This was suggested because the proposed term waswidely known and understood in the context of variousnational laws. The Commission preferred to retain the cur-rent text, however, because it used an expression that con-veyed the intended meaning but was less likely to be sub-ject to possible different interpretations and meanings innational legal systems than the term “force majeure”. It wasnoted that the current wording had been modelled on article79 of the United Nations Sales Convention, which had alsobeen used as a model in other international texts such as theUNCITRAL Legal Guide on Drawing Up InternationalContracts for the Construction of Industrial Works (chap.XXI, “Exemption clauses”, para. 6). In order not to departfrom those models, the Commission also did not accept thesuggestion to delete the word “reasonable” fromsubparagraph (a).


Termination of the project agreement

Recommendation 62


“The contracting authority should have the right toterminate the project agreement:

“(a) In the event that it can no longer be reasonablyexpected that the concessionaire will be able or will-ing to perform its obligations, owing to insolvency,serious breach or otherwise;“(b) For reasons of public interest, subject to pay-ment of compensation to the concessionaire.”

344. A proposal was made to replace in subparagraph (a)the words “it can no longer be reasonably expected that theconcessionaire will be able” with the words “the conces-sionaire is unable”. The proposal was not adopted because

the suggested words would have implied that terminationwould be available only after it was established that theconcessionaire was unable to perform its obligations. Thepolicy underlying the subparagraph, in turn, was to allowtermination already when it was reasonably certain that theconcessionaire would be unable to perform its obligations.It was important to maintain the current wording in orderto allow the contracting authority to terminate the conces-sion soon enough to be able to find an alternative way ofproviding the public service.


Recommendation 63


“The concessionaire should have the right to terminatethe project agreement under exceptional circumstancesspecified in the law, such as:

“(a) In the event of serious breach by the contractingauthority or other public authority as regards the ful-filment of their obligations under the project agree-ment;“(b) In the event that the concessionaire’s perform-ance is rendered substantially more onerous as a resultof variation orders or other acts of the contracting au-thority, unforeseen changes in conditions or acts ofother public authorities and that the parties have failedto agree on an appropriate revision of the projectagreement.”

347. It was suggested that the recommendation should bereformulated so as to reflect the idea that, at least in somelegal systems, the concessionaire’s right to terminate theproject agreement was based on grounds that were differentfrom and were more restricted than the contracting authori-ty’s right to terminate the concession. The Commission didnot accept the suggestion because it considered that theextent of the right of the concessionaire to terminate theproject agreement (as compared to such a right of the con-tracting authority) was appropriately explained in the noteson the legislative recommendation (A/CN.9/471/Add.6,para. 28).


Recommendation 64


“Either party should have the right to terminate theproject agreement in the event that the performance of itsobligations is rendered impossible by the occurrence ofcircumstances beyond either party’s reasonable control.The parties should also have the right to terminate theproject agreement by mutual consent.”



Consequences of expiry or terminationof the project agreement

Recommendation 65


“The project agreement should lay down the criteriafor establishing, as appropriate, the compensation towhich the concessionaire may be entitled in respect ofassets transferred to the contracting authority or to a newconcessionaire or purchased by the contracting authorityupon expiry or termination of the project agreement.”


Recommendation 66


“The project agreement should stipulate how compen-sation due to either party in the event of termination ofthe project agreement is to be calculated, providing,where appropriate, for compensation for the fair value ofworks performed under the project agreement and forlosses, including lost profits.”


Recommendation 67


“The project agreement should set out, as appropriate,the rights and obligations of the parties with respect to:

“(a) The transfer of technology required for the op-eration of the facility;“(b) The training of the contracting authority’s per-sonnel or of a successor concessionaire in the opera-tion and maintenance of the facility;“(c) The provision, by the concessionaire, of opera-tion and maintenance services and the supply of spareparts, if required, for a reasonable period after thetransfer of the facility to the contracting authority or toa successor concessionaire.”


CHAPTER VI. SETTLEMENT OF DISPUTES

Disputes between the contracting authority and theconcessionaire

Recommendation 68


“The contracting authority should be free to agree todispute settlement mechanisms regarded by the parties assuited to the needs of the project, including arbitration.”

358. The suggestion was made to delete the words “in-cluding arbitration”, as arbitration was one of the methodsof settling disputes and it should not be singled out in therecommendation to the exclusion of others. Considerablesupport was expressed for that suggestion and reasoning.However, there was also wide support for retaining thewords in the recommendation, since arbitration, which wascrucial for the settlement of international disputes, was theonly binding non-judicial method that was typically re-quired by investors in international privately financed in-frastructure projects. The recommendation was alsodeemed necessary in view of the fact that a number ofcountries were modifying their laws to allow contractingauthorities to use arbitration in privately financed infra-structure projects. A further suggestion was to clarify thatthe freedom to agree to arbitrate included the freedom toagree to arbitration in a country other than the host country.

359. After weighing the various arguments and wishingto present a balanced text reflecting the differing views andalso taking into consideration the explanations given in thenotes (A/CN.9/471/Add.7, paras. 30-38), the Commissiondecided to delete the words “including arbitration”. How-ever, in order to reflect the importance of arbitration ininternational privately financed infrastructure projects, itdecided to reformulate the third sentence of paragraph 30of the notes to the effect that “[A]rbitration, often in acountry other than the host country, was preferred and inmany cases required by private investors and lenders”. TheCommission also reformulated the expression in the recom-mendation “regarded by the parties as suited” to read “re-garded by the parties as best suited”.

360. The Commission decided to add in paragraph 27 ofthe notes (A/CN.9/471/Add.7) the words “or arbitrate” af-ter the words “to accept the recommendations voluntarilyrather than litigate” and to add the words “or arbitration”after the words “[A]part from avoiding potentially pro-tracted litigation”.

361. Subject to those modifications, the Commissionadopted recommendation 68.

Recommendation 68bis


“[The law should indicate whether and, if so, to whatextent the contracting authority may raise a plea of sov-ereign immunity, both as a bar to the commencement ofarbitral or judicial proceedings and as a defence againstenforcement of the award or judgement.]”

363. Wide support was expressed for the deletion of therecommendation. It was noted that the recommendationraised controversial issues that had not yet been settled ininternational law; that the recommendation did not andcould not deal with the issue of whether sovereign immu-nity was a matter requiring general treatment in legislation


or was to be left to the discretion of the executive branchof the Government; and that sovereign immunity was cur-rently expected to be considered by the Sixth Committee ofthe General Assembly and the outcome of that considera-tion was not yet known. Objections were also raised withregard to the proposal on the ground that the recommenda-tion and the accompanying notes did not call for a unifiedor harmonized legislative approach to the matter and didnot suggest any particular solution to be adopted. The rec-ommendation was merely calling upon States to clarifywhether and, if so, to what extent the contracting authoritymight raise a plea of sovereign immunity. Nevertheless, theprevailing view was that recommendation 68bis should bedeleted.

364. The Commission turned its attention to the notesaccompanying the recommendation and accepted the sug-gestion to replace in paragraph 36 the words “may notplead sovereign immunity” with the words “may or maynot plead sovereign immunity” and to transpose theamended paragraph 36 to precede paragraph 33. The Com-mission did not accept a suggestion to delete the last sen-tence of paragraph 33.

Disputes between the concessionaire and its lenders,contractors and suppliers

Recommendation 69


“The concessionaire should be free to choose the ap-propriate mechanisms for settling commercial disputesamong the project promoters, or disputes between theconcessionaire and its lenders, contractors, suppliers andother business partners.”

366. The Commission adopted recommendation 69 sub-ject to the addition of the words “and the project promot-ers” before the words “should be free”.

Disputes between the concessionaire and its customers

Recommendation 70


“The concessionaire may be required to make avail-able simplified and efficient mechanisms for handlingclaims submitted by its customers or users of the infra-structure facility.”

368. The Commission adopted recommendation 70.As regards the accompanying notes (A/CN.9/471/Add.7,para. 43, in particular the second and third sentences), itwas observed that, while lenders frequently preferred thatarbitration be used for solving disputes arising out of theproject agreement and increasingly also for disputes be-tween different lenders, judicial proceedings were often thepreferred method for disputes arising out of loan agree-ments between the lenders and the concessionaire. TheCommission requested the secretariat to reformulate theparagraph to reflect that circumstance.

C. Finalization of the legislative guide

369. The Commission heard expressions of strong sup-port for proposals for rearranging the chapters of the legis-lative guide, in particular a proposal to combine chapterVII, “Other relevant areas of law” (A/CN.9/471/Add.8),with chapter I, “General legislative and institutional frame-work” (A/CN.9/471/Add.2). Nevertheless, the Commissiondecided to retain the current structure of the guide.

370. The Commission decided that all legislative recom-mendations should appear together before the notes thereto,rather than at the beginning of the chapters to which eachblock of recommendations pertained.

371. The Commission requested the secretariat to reviewand revise, as appropriate, the text of the notes to the leg-islative recommendations in order to ensure consistencywith the recommendations, as adopted by the Commission,as well as terminological accuracy and consistency in thevarious language versions. The Commission invited itsmembers and observers participating at the current sessionto submit their linguistic observations or suggestions di-rectly to the secretariat.

D. Adoption of the legislative guide

372. At its 703rd meeting, on 29 June 2000, the Commis-sion adopted the Legislative Guide, consisting of the legis-lative recommendations (A/CN.9/471/Add.9), with theamendments adopted by the Commission at the current ses-sion (see paras. 195-368 above) and the notes to the legis-lative recommendations (A/CN.9/471/Add.1-8), which thesecretariat was authorized to finalize in the light of thedeliberations of the Commission. The Commission man-dated the publication of the Guide under the title“UNCITRAL Legislative Guide on Privately Financed In-frastructure Projects” and requested the secretariat to trans-mit the text of the Guide to Governments and other inter-ested bodies. The Commission also recommended that allStates give favourable consideration to the LegislativeGuide when revising or adopting legislation relevant toprivately financed infrastructure projects. It furthermorerequested the secretariat to ensure the widest possible dis-semination of the Guide.

373. Upon the adoption of the Legislative Guide, theCommission heard a statement by the representative of theEconomic Commission for Europe (ECE), who congratu-lated the Commission on the completion of the Guide,which was expected to become a useful instrument fordomestic legislators and policy makers. While domesticpolicies for infrastructure in the early 1990s had given pref-erence to ad hoc contractual solutions, there was growingawareness of the importance of an adequate legislative andregulatory framework for privately financed infrastructureprojects. ECE had developed considerable expertise in vari-ous areas related to those projects, in particular economic,financial and contractual aspects, and was preparing guide-lines to assist domestic public authorities in negotiatingproject agreements. ECE stood ready to assist the secre-tariat of the Commission in disseminating the LegislativeGuide and to cooperate in other areas of common interest.


374. The Commission took note with appreciation of thestatement of the representative of ECE and expressed itsgratitude to ECE for its interest in cooperating with theUNCITRAL secretariat.

E. Possible future work in the area of privatelyfinanced infrastructure projects

375. The view was expressed that the Legislative Guide,as it stood, would be a useful reference for domestic legis-lators in establishing a legal framework favourable to pri-vate investment in public infrastructure. Nevertheless, itwould be desirable for the Commission to formulate moreconcrete guidance in the form of model legislative provi-sions or even in the form of a model law dealing withspecific issues. Such a proposal had been made at the earlystages of the preparation of the Legislative Guide and hadsince been reiterated on various occasions. The preferencethat the Commission had expressed for the preparation of aLegislative Guide had been mainly attributable to a lack ofconsensus as to which of the various issues dealt with in theGuide might be suitable subjects of model legislative pro-visions. However, in the course of that work, a clearer un-derstanding had developed within the Commission withregard to the issues involved and the options available. Thelegislative recommendations adopted by the Commission atthe current session reflected that common understandingand represented a good starting point for future work aimedat providing more concrete guidance, for which there wasa pressing need, in particular in countries with economiesin transition and in developing countries.

376. Strong support was expressed for the above propos-als. It was stated that concrete legislative guidance in theform of a model law or model legislative provisions wouldbe especially useful for legislators and policy makers incountries that lacked the expertise or the human resourcesto analyse in depth the various issues discussed in the Leg-islative Guide. It was also said that, in its current form, theGuide was rather lengthy and some of the legislative rec-ommendations were not easy to translate into legislativelanguage. As to the appropriate time for starting such futurework, views differed as to whether the Commission shouldtake a decision at its current session or should await thecompletion of other ongoing projects.

377. Strong objections were voiced to the above propos-als. As a matter of principle, the proposals were objected toin the light of the potential difficulty and undesirability offormulating model legislative provisions on privately fi-nanced infrastructure projects in view of the diversity ofnational legal traditions and administrative practices. Fur-thermore, those projects typically raised highly complexlegal issues, some of which concerned matters of publicpolicy. The legislative recommendations had been carefullydrafted by the Commission to take into account that diver-sity. They represented the widest possible consensus thatcould have been achieved on the issues dealt with. TheCommission was reminded of its overall workload and ofthe limited resources available to its secretariat and wasurged not to embark upon a potentially time-consumingexercise of doubtful feasibility.

378. Other reservations, while not questioning in princi-ple the desirability or the feasibility of preparing a modellaw or model legislative provisions, were based on the needto allow the Legislative Guide to be first tested in practicebefore future work was undertaken in the same field. Con-cern was expressed that an immediate decision to preparea model law or model legislative provisions might be inter-preted as a sign of dissatisfaction by the Commission withthe work that had just been accomplished. The Commissionshould give itself sufficient time to follow up on the usemade of the Legislative Guide by domestic legislators andpolicy makers, to whom the Guide was addressed, so as tobe in a better position to make a decision on the desirabilityof preparing a new instrument.

379. After consideration of the various views expressed,it was decided that the question of the desirability and fea-sibility of preparing a model law or model legislative pro-visions on selected issues covered by the Legislative Guideshould be considered by the Commission at its thirty-fourthsession, in 2001. In order to assist the Commission in mak-ing an informed decision on the matter, it was agreed thatit would be desirable for the secretariat, in cooperation withother interested international organizations or internationalfinancial institutions, to organize a colloquium to dissemi-nate knowledge about the Legislative Guide. The partici-pants in the colloquium, who should include, to the extentpossible, experts from the various legal traditions and eco-nomic systems represented at the Commission, should beinvited to make recommendations on the desirability and,especially, the feasibility of a model law or model legisla-tive provisions in the area of privately financed infrastruc-ture projects for consideration by the Commission at itsthirty-fourth session. Alternatively, should such a collo-quium not be feasible, the secretariat was requested to seekthe views of outside experts representing, to the widestextent possible, the various legal traditions and economicsystems represented at the Commission on the matter andto prepare a report on the conclusions of its consultationswith experts for consideration by the Commission at itsthirty-fourth session.

V. ELECTRONIC COMMERCE

A. Draft uniform rules on electronic signatures

380. It was recalled that the Commission, at its thirtiethsession, in 1997, had endorsed the conclusions reached bythe Working Group on Electronic Commerce at its thirty-first session with respect to the desirability and feasibilityof preparing uniform rules on issues of digital signaturesand certification authorities and possibly on related matters(see A/CN.9/437, paras. 156 and 157). The Commissionentrusted the Working Group with the preparation of uni-form rules on the legal issues of digital signatures and cer-tification authorities.6 The Working Group began thepreparation of uniform rules for electronic signatures at itsthirty-second session (January 1998) on the basis of a noteprepared by the secretariat (A/CN.9/WG.IV/WP.73). At itsthirty-first session, in 1998, the Commission had before itthe report of the Working Group (A/CN.9/446). The Com-

6Ibid., Fifty-second Session, Supplement No. 17 (A/52/17),paras. 249-251.


mission noted that the Working Group, throughout itsthirty-first and thirty-second sessions, had experiencedmanifest difficulties in reaching a common understandingof the new legal issues that had arisen from the increaseduse of digital and other electronic signatures. However, itwas generally felt that the progress achieved so far indi-cated that the draft uniform rules on electronic signatureswere progressively being shaped into a workable structure.The Commission reaffirmed the decision it had taken at itsthirtieth session as to the feasibility of preparing such uni-form rules and noted with satisfaction that the WorkingGroup had become generally recognized as a particularlyimportant international forum for the exchange of viewsregarding the legal issues of electronic commerce and forthe preparation of solutions to those issues.7

381. The Working Group continued its work at its thirty-third (July 1998) and thirty-fourth (February 1999) sessionson the basis of notes prepared by the secretariat (A/CN.9/WG.IV/WP.76, 79 and 80). At its thirty-second session, in1999, the Commission had before it the reports of theWorking Group on the work of those two sessions(A/CN.9/454 and A/CN.9/457, respectively). While theCommission generally agreed that significant progress hadbeen made in the understanding of the legal issues of elec-tronic signatures, it was also felt that the Working Grouphad been faced with difficulties in building a consensus asto the legislative policy on which the uniform rules shouldbe based. After discussion, the Commission reaffirmed itsearlier decisions as to the feasibility of preparing suchuniform rules and expressed its confidence that moreprogress could be accomplished by the Working Group atits forthcoming sessions. While it did not set a specifictime-frame for the Working Group to fulfil its mandate, theCommission urged the Group to proceed expeditiouslywith the completion of the draft uniform rules. An appealwas made to all delegations to renew their commitment toactive participation in the building of a consensus withrespect to the scope and content of the draft uniform rules.8

382. The Working Group continued its work at its thirty-fifth (September 1999) and thirty-sixth (February 2000)sessions on the basis of notes prepared by the secretariat(A/CN.9/WG.IV/WP. 82 and 84). At the current session,the Commission had before it the report of the WorkingGroup on the work of those two sessions (A/CN.9/465 and467, respectively). It was noted that the Working Group, atits thirty-sixth session, had adopted the text of articles 1and 3-12 of the uniform rules. Some issues remained to beclarified as a result of the decision by the Working Groupto delete the notion of enhanced electronic signature fromthe draft uniform rules. A concern was expressed that, de-pending on the decisions to be made by the Working Groupwith respect to articles 2 and 13, the remainder of the draftprovisions might need to be re-examined to avoid creatinga situation where the standard set by the uniform ruleswould apply equally to electronic signatures that ensured ahigh level of security and to low-value certificates thatmight be used in the context of electronic communicationsthat were not intended to carry significant legal effect.

383. After discussion, the Commission expressed its ap-preciation for the efforts made by the Working Group andthe progress achieved in the preparation of the draft uni-form rules on electronic signatures. The Working Groupwas urged to complete its work with respect to the draftuniform rules at its thirty-seventh session and to review thedraft guide to enactment to be prepared by the secretariat.

B. Future work in the field of electronic commerce

384. The Commission held a preliminary exchange ofviews regarding future work in the field of electronic com-merce. Three topics were suggested as indicating possibleareas where work by the Commission would be desirableand feasible. The first dealt with electronic contracting,considered from the perspective of the United NationsSales Convention, which was generally felt to constitute areadily acceptable framework for on-line contracts dealingwith the sale of goods. It was pointed out that, for example,additional studies might need to be undertaken to determinethe extent to which uniform rules could be extrapolatedfrom the United Nations Sales Convention to govern deal-ings in services or “virtual goods”, that is, items (such assoftware) that might be purchased and delivered incyberspace. It was widely felt that, in undertaking suchstudies, careful attention would need to be given to thework of other international organizations such as the WorldIntellectual Property Organization (WIPO) and the WorldTrade Organization.

385. The second topic was dispute settlement. It wasnoted that the Working Group on Arbitration had alreadybegun discussing ways in which current legal instrumentsof a statutory nature might need to be amended or inter-preted to authorize the use of electronic documentationand, in particular, to do away with existing requirementsregarding the written form of arbitration agreements. It wasgenerally agreed that further work might be undertaken todetermine whether specific rules were needed to facilitatethe increased use of on-line dispute settlement mechanisms.In that context, it was suggested that special attention mightbe given to the ways in which dispute settlement techniquessuch as arbitration and conciliation might be made avail-able to both commercial parties and consumers. It waswidely felt that the increased use of electronic commercetended to blur the distinction between consumers and com-mercial parties. However, it was recalled that, in a numberof countries, the use of arbitration for the settlement ofconsumer disputes was restricted for reasons involvingpublic policy considerations and might not easily lend itselfto harmonization by international organizations. It was alsofelt that attention should be paid to the work undertaken inthat area by other organizations, such as the InternationalChamber of Commerce (ICC), the Hague Conference onPrivate International Law and WIPO, which was heavilyinvolved in dispute settlement regarding domain names onthe Internet.

386. The third topic was dematerialization of documentsof title, in particular in the transport industry. It was sug-gested that work might be undertaken to assess the desir-ability and feasibility of establishing a uniform statutoryframework to support the development of contractual

7Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), paras. 207-211.8Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17),

paras. 308-314.


schemes currently being set up to replace traditional paper-based bills of lading by electronic messages. It was widelyfelt that such work should not be restricted to maritime billsof lading, but should also envisage other modes of trans-portation. In addition, outside the sphere of transport law,such a study might also deal with issues of dematerializedsecurities. It was pointed out that the work of other inter-national organizations on those topics should also be moni-tored.

387. After discussion, the Commission welcomed theproposal to undertake studies on the three topics. While nodecision as to the scope of future work could be made untilfurther discussion had taken place in the Working Groupon Electronic Commerce, the Commission generally agreedthat, upon completing its current task, namely, the prepara-tion of draft uniform rules on electronic signatures, theWorking Group would be expected, in the context of itsgeneral advisory function regarding the issues of electroniccommerce, to examine, at its first meeting in 2001, some orall of the above-mentioned topics, as well as any additionaltopic, with a view to making more specific proposals forfuture work by the Commission at its subsequent meeting.It was agreed that work to be carried out by the WorkingGroup could involve consideration of several topics in par-allel as well as preliminary discussion of the contents ofpossible uniform rules on certain aspects of the above-men-tioned topics.

388. Particular emphasis was placed by the Commissionon the need to ensure coordination of work among thevarious international organizations concerned. In view ofthe rapid development of electronic commerce, a consider-able number of projects with possible impact on electroniccommerce were being planned or undertaken. The secre-tariat was requested to carry out appropriate monitoringand to report to the Commission as to how the function ofcoordination was fulfilled to avoid duplication of work andensure harmony in the development of the various projects.The area of electronic commerce was generally regarded asone in which the coordination mandate given toUNCITRAL by the General Assembly could be exercisedwith particular benefit to the global community and de-served corresponding attention from the Working Groupand the secretariat.

VI. SETTLEMENT OF COMMERCIAL DISPUTES

389. At its thirty-first session, the Commission held a spe-cial commemorative New York Convention Day on 10June 1998 to celebrate the fortieth anniversary of the Con-vention on the Recognition and Enforcement of ForeignArbitral Awards (New York, 10 June 1958). In addition torepresentatives of States members of the Commission andobservers, some 300 invited persons participated in theevent. The Secretary-General made the opening speech. Inaddition to speeches by participants in the diplomatic con-ference that had adopted the Convention, leading arbitra-tion experts presented reports on matters such as the pro-motion of the Convention, its enactment and application.Reports were also made on matters beyond the Conventionitself, such as the interplay between the Convention andother international legal texts on international commercial

arbitration and on difficulties encountered in practice butaddressed in existing legislative or non-legislative texts onarbitration.9

390. In reports presented at the commemorative confer-ence, various suggestions were made for presenting to theCommission some of the problems identified in practice soas to enable it to consider whether any related work by theCommission would be desirable and feasible. At its thirty-first session, in 1998, with reference to the discussions atthe New York Convention Day, the Commission had con-sidered that it would be useful to engage in a discussion ofpossible future work in the area of arbitration at its thirty-second session, in 1999 and had requested the secretariat toprepare a note that would serve as a basis for the consid-erations of the Commission.10

391. At its thirty-second session, in 1999, the Commis-sion had had before it the note it had requested, entitled“Possible future work in the area of international commer-cial arbitration” (A/CN.9/460).11 Welcoming the opportu-nity to discuss the desirability and feasibility of further de-velopment of the law of international commercialarbitration, the Commission had generally considered thatthe time had arrived to assess the extensive and favourableexperience with national enactments of the UNCITRALModel Law on International Commercial Arbitration(1985), as well as the use of the UNCITRAL ArbitrationRules and the UNCITRAL Conciliation Rules, and toevaluate in the universal forum of the Commission theacceptability of ideas and proposals for improvement ofarbitration laws, rules and practices.12

392. When the Commission discussed the topic, it leftopen the question of what form its future work might take.It was agreed that decisions on the matter should be takenlater as the substance of proposed solutions became clearer.Uniform provisions might, for example, take the form of alegislative text (such as model legislative provisions or atreaty) or a non-legislative text (such as a model contrac-tual rule or a practice guide). It was stressed that, even ifan international treaty were to be considered, it was notintended to be a modification of the Convention on theRecognition and Enforcement of Foreign Arbitral Awards(New York, 1958).13

393. The Commission entrusted the work to one of itsthree working groups, which it named Working Group on

9Enforcing Arbitration Awards under the New York Convention: Experi-ence and Prospects (United Nations publication, Sales No. E.99.V.2).

10Official Records of the General Assembly, Fifty-third Session, Supple-ment No. 17 (A/53/17), para. 235.

11The note drew on ideas, suggestions and considerations expressed indifferent contexts, such as the New York Convention Day (EnforcingArbitration Awards under the New York Convention, op. cit.); the Congressof the International Council for Commercial Arbitration, Paris, 3-6 May1998 (Improving the Efficiency of Arbitration Agreements and Awards:40 Years of Application of the New York Convention, International Councilfor Commercial Arbitration Congress Series No. 9, Kluwer Law Interna-tional, 1999); and other international conferences and forums, such as the1998 Freshfields lecture by Gerold Herrmann, “Does the world need addi-tional uniform legislation on arbitration?” (Arbitration International,vol. 15 (1999), No. 3, p. 211).

12Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 337.13Ibid., paras. 337-376 and 380.


Arbitration, and decided that the priority items for theWorking Group should be conciliation,14 requirement ofwritten form for the arbitration agreement,15 enforceabilityof interim measures of protection16 and possible enforce-ability of an award that had been set aside in the State oforigin.17

394. At its current session, the Commission had before itthe report of the Working Group on Arbitration, which hadheld its thirty-second session in Vienna from 20 to 31March 2000 (A/CN.9/468).

395. The Commission took note of the report with satis-faction and commended the work accomplished so far.Various observations were made to the effect that the workon the items on the agenda of the Working Group wastimely and necessary in order to foster the legal certaintyand predictability in the use of arbitration and conciliationin international trade. The Working Group, in addition tothe topics referred to it as a matter of priority, had identi-fied a number of other topics, with various levels of prior-ity, that had been suggested for possible future work(A/CN.9/468, paras. 107-109). The Commission reaffirmedthe mandate of the Working Group to decide on the timeand manner of dealing with those topics.

396. Several statements were made to the effect that, ingeneral, the Working Group, in deciding the priorities ofthe future items on its agenda, should pay particular atten-tion to what was feasible and practical and to issues wherecourt decisions left the legal situation uncertain or unsatis-factory. Topics that were mentioned in the Commission aspotentially worthy of consideration, in addition to thosewhich the Working Group might identify as such, were themeaning and effect of the more-favourable-right provisionof article VII of the 1958 New York Convention (A/CN.9/468, para. 109 (k)); raising claims in arbitral proceedingsfor the purpose of set-off and the jurisdiction of the arbitraltribunal with respect to such claims (para. 107 (g)); free-dom of parties to be represented in arbitral proceedings bypersons of their choice (para. 108 (c)); residual discretion-ary power to grant enforcement of an award notwithstand-ing the existence of a ground for refusal listed in article Vof the 1958 New York Convention (para. 109 (i));and the power by the arbitral tribunal to award interest(para. 107 (j)). It was noted with approval that, with respectto “on-line” arbitrations (i.e. arbitrations in which signifi-cant parts or even all of arbitral proceedings were con-ducted by using electronic means of communication)(para. 113), the Working Group on Arbitration would co-operate with the Working Group on Electronic Commerce.With respect to the possible enforceability of awards thathad been set aside in the State of origin (para. 107 (m)), theview was expressed that the issue was not expected to raisemany problems and that the case law that gave rise to theissue should not be regarded as a trend.

397. The Commission heard statements by observers onbehalf of the Chartered Institute of Arbitrators and the In-

ternational Union of Lawyers. In addition to expressingappreciation for the work on arbitration and conciliation bythe Commission and commenting on various items consid-ered by the Working Group, they offered to assist in thatwork. The Commission took note of those statements withappreciation.

398. The Commission took note of paragraph 115 of thereport of the Working Group referring to the considerationsof the ECE Advisory Group on the European Conventionon International Commercial Arbitration. The AdvisoryGroup had concluded, inter alia, that the European Conven-tion (Geneva, 1961) (a) remained useful; (b) had utilitybeyond that of existing conventions (in particular, as acommon set of minimum standards to be observed in inter-national arbitration); and (c) could be made even moreuseful to both existing and potential new contracting Statesif it were updated. The Commission also noted the recom-mendation of the Advisory Group to modify article IV ofthe Convention and the Agreement relating to Applicationof the European Convention on International CommercialArbitration and that no consensus had been reached as towhether any additional changes to the Convention shouldbe made.

399. The Commission called for coordination betweenthe Working Group on Arbitration and the ECE AdvisoryGroup. It was of the view that the ECE work should notoverlap the work undertaken at the global level by theCommission. It was also of the view that issues arisingfrom the European Convention beyond those in article IVwere of universal interest and that, if it was found that theyrequired work at the international level, the Commission,because of its universal representation and tradition inworking in the area of international commercial arbitration,was the proper forum to undertake such work, in coopera-tion with ECE. The Commission appealed to States mem-bers of the Commission and observer States to coordinatewithin their respective Governments the work of their del-egates in the two organizations considering internationalcommercial arbitration.

VII. INSOLVENCY LAW

400. At its thirty-second session, in 1999, the Commis-sion had had before it a proposal by Australia (A/CN.9/462/Add.1) on possible future work in the area of insol-vency law. The proposal referred to recent regional andglobal financial crises and the work undertaken in interna-tional forums in response to those crises. Reports fromthose forums stressed the need to strengthen the interna-tional financial system in three areas: transparency, ac-countability and management of international financial cri-ses by domestic legal systems. According to those reports,strong insolvency and debtor-creditor regimes were impor-tant means of preventing or limiting financial crises and offacilitating rapid and orderly workouts from excessive in-debtedness. The proposal before the Commission recom-mended that, in view of its universal membership, its pre-vious successful work on cross-border insolvency and itsestablished working relations with international organiza-tions that had expertise and interest in the law of insol-

14Ibid., paras. 340-343.15Ibid., paras. 344-350.16Ibid., paras. 371-373.17Ibid., paras. 374 and 375.


vency, the Commission was an appropriate forum for insol-vency to be included in its agenda. The proposal urged thatthe Commission consider entrusting a working group withthe development of a model law on corporate insolvency tofoster and encourage the adoption of effective nationalcorporate insolvency regimes.

401. The Commission had expressed its appreciation forthe proposal. It noted that different work projects had beenundertaken by other international organizations such as theInternational Monetary Fund (IMF), the World Bank andthe International Bar Association on the development ofstandards and principles for insolvency regimes. The broadobjective of those organizations, while differing in scopeand working methods as a consequence of their respectivemandates and membership, was to modernize insolvencypractices and laws. The initiatives taken in those organiza-tions demonstrated the need to assist States in reassessingtheir insolvency laws and practices. Those various initia-tives, however, also needed strengthened coordination,where appropriate, so as to avoid inefficient duplication ofwork and to achieve consistent results.

402. Recognition was expressed in the Commission forthe importance to all countries of strong insolvency re-gimes. It was felt that the type of insolvency regime that acountry had adopted had become a “front-line” factor ininternational credit ratings. Concern was expressed, how-ever, about the difficulties associated with work at the in-ternational level on insolvency legislation, which involvedsensitive and potentially diverging socio-political choices.In view of those difficulties, it was feared that the workmight not be brought to a successful conclusion. A univer-sally acceptable model law was in all likelihood not feasi-ble and any work to be done needed to take a flexibleapproach that would leave options and policy choices opento States. While the Commission heard expressions of sup-port for such flexibility, it was generally agreed that theCommission could not take a final decision on committingitself to establishing a working group to develop modellegislation or another text without further study of the workalready being undertaken by other organizations and con-sideration of the relevant issues.

403. To facilitate that further study, the Commission haddecided that one session of a working group should be heldto ascertain what, in the current landscape of efforts, wouldbe an appropriate product (such as a model law, modelprovisions, a set of principles or other type of text) and todefine the scope of the issues to be included in that product.It was pointed out that the importance and urgency of workon insolvency law had been identified in a number of inter-national organizations and there was wide agreement thatmore work was required in order to foster the developmentand adoption of effective national corporate insolvency re-gimes.18 Pursuant to that decision, the Working Group onInsolvency Law had held an exploratory session in Viennafrom 6 to 17 December 1999.

404. At its thirty-third session, the Commission had be-fore it the report of the Working Group on the work of itstwenty-second session (A/CN.9/469).

405. It was noted that the Working Group had consideredkey objectives of an insolvency regime and a number ofcore features of a national insolvency regime. The WorkingGroup had then reviewed various possible forms that aninstrument that the Commission might decide to preparemight take, such as a comparative study, a guide that out-lined practices and policy choices, a legislative guide witha similar approach as the legislative guide on privately fi-nanced infrastructure projects and model statutory provi-sions. It was also noted that the Working Group had agreedthat a universal, one-size-fits-all solution would not be fea-sible or desirable. However, there was agreement in theWorking Group that a legislative approach should be fol-lowed (A/CN.9/469, paras. 125-134).

406. The Commission welcomed the report of the Work-ing Group on Insolvency Law. There was general agree-ment in the Commission that a single model law on insol-vency was neither feasible nor necessary. It was notfeasible because national laws took different approachesand were making different policy choices in the area ofinsolvency law; it was therefore unrealistic to expect that asingle universal model might be agreed upon. It was alsonot necessary to promote a single model, since it was moreimportant for the facilitation of international trade to havea consistent and predictably applied insolvency regime thana uniform regime.

407. The Commission took note of the discussions in theWorking Group concerning the possible need for a statutorytext governing informal insolvency procedures includingout-of-court restructuring, which would also include thepossibility of binding dissenting creditors (A/CN.9/469,paras. 105–121). Reservations were expressed in the Com-mission regarding the proposition of developing such a re-gime. It was argued that informality and flexibility wereimportant hallmarks of negotiations aiming at out-of-courtrestructuring and that subjecting such an informal process toscrutiny by a court or another body might disturb the processin an undesirable manner. It was also said that the best wayto foster out-of-court restructuring procedures was to set upan effectively functioning regime governing formal, court-supervised insolvency proceedings. It was therefore sug-gested that any work on out-of-court restructuring should beconsidered together with, and in the broader context of,work towards a modern national insolvency regime.

408. Several references were made to the fact that variousinternational organizations were considering (from differentperspectives and aiming at not necessarily the same issues)the modernization of national insolvency regimes. Thoseorganizations included, in particular, the World Bank, IMF,the Asian Development Bank, the International Federationof Insolvency Professionals (INSOL International) andCommittee J of the International Bar Association. If theWorking Group were to be given a mandate to continue itswork, the views and results of work of those organizationsshould be taken into account in preparing the documentationfor the Working Group. It was therefore suggested that acolloquium should be held (similar to the UNCITRAL/INSOL Colloquium held in Vienna in 1994, which hadpreceded the work leading to the subsequent adoption of theUNCITRAL Model Law on Cross-Border Insolvency (seeA/CN.9/398). On behalf of INSOL International and Com-18Ibid., paras. 381-385.


mittee J of the International Bar Association, an offer wasmade to cooperate with the secretariat in organizing such acolloquium before the next session of the Working Group soas to facilitate considerations in the Group.

409. The Commission noted the recommendation that theWorking Group had made in its report (A/CN.9/398, para.140) and fully accepted it by giving the Group the mandateto prepare a comprehensive statement of key objectives andcore features for a strong insolvency, debtor-creditor re-gime, including consideration of out-of-court restructuring,and a legislative guide containing flexible approaches tothe implementation of such objectives and features, includ-ing a discussion of the alternative approaches possible andthe perceived benefits and detriments of such approaches.A legislative guide similar to that adopted by the Commis-sion for privately financed infrastructure projects would beuseful and could contain model legislative provisions,where appropriate. It was agreed that in carrying out itstask the Working Group should be mindful of the workunder way or already completed by other organizations,including IMF, the World Bank, the Asian DevelopmentBank, INSOL International and the International Bar Asso-ciation. It was noted that, in order to obtain the views andbenefit from the expertise of those organizations, the sec-retariat would organize a colloquium before the next ses-sion of the Working Group, in cooperation with INSOLInternational and the International Bar Association, as hadbeen offered by those organizations.

VIII. MONITORING THE IMPLEMENTATIONOF THE 1958 NEW YORK CONVENTION

410. It was recalled that the Commission, at its twenty-eighth session, in 1995, had approved the project, under-taken jointly with Committee D of the International BarAssociation, aimed at monitoring the legislative implemen-tation of the Convention on the Recognition and Enforce-ment of Foreign Arbitral Awards (New York, 1958).19 Itwas stressed that the purpose of the project, as approved bythe Commission, was limited to that aim and, in particular,that its purpose was not to monitor individual court deci-sions applying the Convention. In order to be able to pre-pare a report on the subject, the secretariat had sent to theStates parties to the Convention a questionnaire relating tothe legal regime in those States governing the recognitionand enforcement of foreign awards.

411. As at the beginning of the thirty-third session of theCommission, the secretariat had received 59 replies to thequestionnaire (out of a current total of 121 States parties).

412. The Commission repeated its appeal to States partiesto the Convention that had not yet replied to the question-naire to do so as soon as possible or, to the extent neces-sary, to inform the secretariat about any new developmentssince their previous replies to the questionnaire. The secre-tariat was requested to prepare, for a future session of theCommission, a note presenting the findings based on ananalysis of the information gathered.

IX. CASE LAW ON UNCITRAL TEXTS

413. The Commission noted with appreciation the ongo-ing work under the system that had been established for thecollection and dissemination of case law on UNCITRALtexts (CLOUT). It was noted that CLOUT was a most im-portant means of promoting the uniform interpretation andapplication of UNCITRAL texts by enabling interestedpersons, such as judges, arbitrators, lawyers or parties tocommercial transactions to take into account decisions andawards of other jurisdictions when rendering their ownjudgements or opinions or adjusting their actions to theprevailing interpretation of those texts.

414. The Commission expressed appreciation to the na-tional correspondents for their valuable work in the collec-tion of relevant decisions and arbitral awards and theirpreparation of case abstracts. It also expressed its apprecia-tion to the secretariat for compiling, editing, issuing anddistributing case abstracts. It was noted that, whereas62 jurisdictions had appointed national correspondents,there were another 26 jurisdictions that had not yet done so.Those jurisdictions would be entitled to make such an ap-pointment either by virtue of their being party to anUNCITRAL convention currently in force or by havingadopted legislation based on an UNCITRAL model law.Noting the importance of uniform reporting from all juris-dictions, the Commission urged States that had not yetdone so to appoint a national correspondent. It also urgedGovernments to assist their national correspondents to theextent possible in their work.

415. It was also noted that the number of States adheringto conventions or enacting legislation based on model lawsdrawn up by the Commission had increased significantly.The concern was expressed that, with the resultant increasein the caseload, the continuation of CLOUT would be atrisk without a significant increase in the human and finan-cial resources available to the secretariat of the Commis-sion.

X. TRANSPORT LAW

416. It was recalled that at its twenty-ninth session, in1996, the Commission had requested the secretariat to bethe focal point for gathering information, ideas and opin-ions as to problems in transport law that arose in practiceand possible solutions to those problems. Such informa-tion-gathering should be broadly based and should includeamong its sources, in addition to Governments, interna-tional organizations representing the commercial sectors in-volved in the carriage of goods by sea, such as the Interna-tional Maritime Committee (CMI), ICC, the InternationalUnion of Marine Insurance, the International Federation ofFreight Forwarders’ Associations, the International Cham-ber of Shipping and the International Association of Portsand Harbours.20

19Ibid., Fiftieth Session, Supplement No. 17 (A/50/17), paras. 401-404,and ibid., Fifty-first Session, Supplement No. 17 (A/51/17), paras. 238-243. 20Ibid., Fifty-first Session, Supplement No. 17 (A/51/17), paras. 210-215.


417. At its thirty-first session, in 1998, the Commissionheard a statement on behalf of CMI to the effect that itwelcomed the invitation to cooperate with the secretariat insoliciting views of the sectors involved in the internationalcarriage of goods and in preparing an analysis of that infor-mation. That analysis would allow the Commission to takean informed decision as to the desirable course of action.21

Strong support had been expressed at that session by theCommission for the exploratory work being undertaken byCMI and the secretariat of the Commission. The Commis-sion expressed its appreciation to CMI for its willingness toembark on that important and far-reaching project, forwhich few or no precedents existed at the internationallevel; the Commission was looking forward to being ap-prised of the progress of the work and to considering theopinions and suggestions resulting from it.22

418. At the thirty-second session of the Commission, in1999, it was reported on behalf of CMI that the Assemblyand the Executive Council of CMI had welcomed the ini-tiative to collect data on issues related to internationaltransport law that had so far not been internationally har-monized and that a CMI working group had been instructedto prepare a study on a broad area of issues in internationaltransport law with the aim of identifying the areas whereunification or harmonization were needed by the industriesinvolved. In undertaking the study, it had been realized thatthe industries involved were extremely interested in pursu-ing the project and had offered their technical and legalknowledge to assist in that endeavour. Based on that fa-vourable reaction and the preliminary findings of the CMIworking group, it appeared that further harmonization inthe field of transport law would greatly benefit interna-tional trade. The working group had found a number ofissues that had not been covered by the current unifyinginstruments. Some of the issues were regulated by nationallaws, which, however, were not internationally harmo-nized. Evaluated in the context of electronic commerce,that lack of harmonization became even more significant. Itwas also reported that the working group had identifiednumerous interfaces between the different types of con-tracts involved in international trade and transport of goods(such as sales contracts, contracts of carriage, insurancecontracts, letters of credit, freight forwarding contracts, aswell as a number of other ancillary contracts). The workinggroup intended to clarify the nature and function of thoseinterfaces and to collect and analyse the rules currentlygoverning them. That exercise would at a later stage in-clude a re-evaluation of principles of liability as to theircompatibility with a broader area of rules on the carriage ofgoods.

419. At the same session, the Commission had expressedits appreciation to CMI for having acted upon its requestfor cooperation and had requested the secretariat to con-tinue to cooperate with CMI in gathering and analysinginformation. The Commission was looking forward to re-ceiving a report at a future session presenting the results ofthe study and proposals for future work.23

420. At the current session, the Commission had before ita report of the Secretary-General on possible future work intransport law (A/CN.9/476), which described the progressof the work carried out by CMI in cooperation with thesecretariat of the Commission. It also heard an oral reporton behalf of CMI. In cooperation with the secretariat of theCommission, the CMI working group had launched an in-vestigation based on a questionnaire covering different le-gal systems addressed to the CMI member organizations.At the same time, a number of round-table meetings hadbeen held in order to discuss features of the future workwith international organizations representing various indus-tries. Those meetings showed the continued support andinterest of the industry in the project.

421. Pursuant to the receipt of replies to the question-naire, CMI had created an international subcommittee witha view to analysing the information and finding a basis forfurther work towards harmonizing the law in the area ofinternational transport of goods. It was reported that theenthusiasm encountered so far in the industry and the pro-visional findings about the areas of law that needed furtherharmonization made it likely that the project would beeventually transformed into a universally acceptable har-monizing instrument.

422. In the course of the discussions in the CMI subcom-mittee, it had been noted that although bills of lading werestill used, especially where a negotiable document was re-quired, the actual carriage of goods by sea sometimes rep-resented only a fragment of an international transport ofgoods. In the container trade, even a port-to-port bill oflading would involve receipt and delivery at some point notdirectly connected with the loading on to, or dischargefrom, the ocean vessel. Moreover, in most situations it wasnot possible to take delivery alongside the vessel. Further-more, where different modes of transport were used, therewere often gaps between mandatory regimes applying tothe various transport modes involved. It had been pro-posed, therefore, that in developing an internationally har-monized regime covering the relationships between theparties to the contract of carriage for the full duration of thecarrier’s custody of the cargo, issues that arose in connec-tion with activities that were integral to the carriage agreedto by the parties and that took place before loading andafter discharge should also be considered, as well as issuesthat arose under shipments where more than one mode oftransport was contemplated. Furthermore, while the empha-sis of the work, as originally conceived, had been on thereview of areas of law governing the transport of goodsthat had not previously been covered by internationalagreement, it had been increasingly felt that the currentbroadly based project should be extended to include anupdated liability regime that would complement the termsof the proposed harmonizing instrument.

423. The Commission took note with satisfaction of thereport of the Secretary-General (A/CN.9/476) and heardwith pleasure the oral report on behalf of CMI of the pre-liminary work accomplished thus far.

424. Several statements were made in the Commission tothe effect that the time had come to pursue actively harmo-nization in the area of the carriage of goods by sea, that

21Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), para. 264.22Ibid., para. 266.23Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 418.


increasing disharmony in the area of international carriageof goods was a source of concern and that it was necessaryto provide a certain legal basis to modern contract andtransport practices. The carriage of goods by sea was in-creasingly part of a warehouse-to-warehouse operation andthat factor should be borne in mind in conceiving futuresolutions. Approval was expressed for a concept of workthat went beyond liability issues and dealt with the contractof carriage in such a way that it would facilitate the export-import operation, which included the relationship betweenthe seller and the buyer (and possible subsequent buyers) aswell as the relationship between the parties to the commer-cial transaction and providers of financing. It was recog-nized that such a broad approach would involve some re-examination of the rules governing the liability for loss ofor damage to goods.

425. It was observed that the work of some regional or-ganizations, such as the Organization of American Statesand ECE, were currently considering transport law issues.It was considered that the texts already formulated in thoseorganizations would be useful in the work of the Commis-sion and also that the work in those organizations would befacilitated by universally applicable texts to be developedin the Commission. It was observed that ECE was currentlyconsidering whether to undertake work on uniform rulesfor the multimodal transport of goods. Concern was ex-pressed that, if any such work were to be undertaken by anorganization in which not all regions of the world wererepresented, it would interfere with efforts to prepare auniversally applicable regime. Hope was expressed that theorganizations concerned would coordinate their work so asto avoid duplication and that States would be mindful ofthe need for coordination within their own administrationsof the work of their delegates in those organizations.

426. The Commission took note of the fact that the sec-retariat was organizing in cooperation with CMI a Trans-port Law Colloquium to be held on 6 July 2000 in thecontext of the current session of the Commission. Thepurpose of the Colloquium was to gather ideas and expertopinions on problems that arose in the international car-riage of goods, in particular the carriage of goods by sea,and to incorporate that information into the report to bepresented to the Commission at its thirty-fourth session, in2001.

427. The Commission was pleased with the progressmade since its thirty-second session. It welcomed the fruit-ful cooperation between CMI and the secretariat. Severalstatements were made to the effect that it was necessarythroughout the preparatory work to involve the other inter-ested organizations, including those representing the inter-ests of cargo owners. It was stressed that only by ensuringthe cooperation of all interested industries at all stages ofthe preparatory work was there hope to develop a regimethat would be both broadly acceptable and capable of beingimplemented within a short span of time. The Commissionrequested the secretariat to continue to cooperate activelywith CMI with a view to presenting, at the next session ofthe Commission, a report identifying issues in transport lawin respect of which the Commission might undertake futurework and, to the extent possible, also presenting possiblesolutions.

XI. ENDORSEMENT OF TEXTSOF OTHER ORGANIZATIONS:

INCOTERMS 2000, ISP98 AND URCB

428. The Commission had before it three reports of theSecretary-General requesting the Commission’s endorse-ment of (a) the International Standby Practices (ISP98),(b) the Uniform Rules for Contract Bonds (URCB) and(c) Incoterms 2000 (A/CN.9/477, A/CN.9/478 and A/CN.9/479, respectively).

429. It was recalled that at its thirty-second session theCommission had been requested by the Institute of Interna-tional Banking Law and Practice to consider recommendingfor worldwide use the Rules on International Standby Prac-tices (ISP98), as endorsed by the Commission on BankingTechnique and Practice of ICC. The Commission had alsobeen notified of a request from the Secretary-General of ICCthat the Commission consider giving its formal recognitionand endorsement of URCB. In order to allow considerationof those requests, the Commission had before it the text ofISP98 (A/CN.9/459) and of URCB (A/CN.9/459/Add.1).However, while several delegations had indicated their de-sire to endorse the texts of ISP98 and URCB at that session,some delegations had indicated that, owing to the fact thatlate publication of the documents containing the latter texthad prevented them from carrying out the consultationsrequired prior to endorsement, they were not prepared toendorse the texts of ISP98 and URCB at that session. TheCommission had regretfully felt obliged to postpone consid-eration of endorsement until the thirty-third session.24

430. At the thirty-third session, as had already been thecase at the thirty-second session, reference was made to theimportance of ISP98 as private rules of practice intended toapply to standby letters of credit. It was pointed out that theidea of preparing such rules had been conceived during thedeliberations of the UNCITRAL Working Group on Inter-national Contract Practices, which had resulted in theUnited Nations Convention on Independent Guarantees andStand-by Letters of Credit. The ISP98 Rules had been for-mulated to complement the Convention. The ISP98 draft-ing process itself had been undertaken in regular consulta-tion with the UNCITRAL secretariat and had also beenused as an opportunity to promote adoption of the Conven-tion. In that context, the Commission recalled with particu-lar appreciation that adoption of the United Nations Con-vention on Independent Guarantees and Stand-by Letters ofCredit had been recommended to Governments by theBanking Commission of ICC. Reference was also made tothe importance of URCB as a commendable practical tooland to the need for wider awareness of that instrument.

431. The Commission welcomed the opportunity to fosterits cooperation with ICC. It was recalled that the Commis-sion had endorsed Incoterms 1990 at its twenty-fifth ses-sion, in 1992,25 and the Uniform Customs and Practice forDocumentary Credits (UCP 500) at its twenty-seventh ses-sion, in 1994.26 while it was generally felt that the technical

24Ibid., paras. 422-425.25Ibid., Forty-seventh Session, Supplement No. 17 (A/47/17), para. 161.26Ibid., Forty-ninth Session, Supplement No. 17 and corrigendum

(A/49/17 and Corr.1), para. 230.


quality of ISP98 and URCB made those instruments wor-thy of wider dissemination and use in international trade, aquestion was raised as to the meaning of an endorsement ofthose instruments by the Commission. It was pointed outthat, in a number of countries, not all provisions of ISP98would be in conformity with existing legal rules, whichmight not fully recognize, for example, the role of stand-byletters of credit as independent guarantees. In that connec-tion, concern was expressed that the notion of “endorse-ment” (which in a number of language versions was asynonym for “approval”) should not be misinterpreted asindicating that, once they had been “endorsed”, the instru-ments in their totality would necessarily become applicablein any country.

432. In response to that concern, it was generally agreedthat, in the context of legal instruments emanating fromother international organizations, “endorsement” should beinterpreted as an indication by the Commission that thoseinstruments were commended for use by the parties as arecord of good international commercial practices. How-ever, such an “endorsement” should carry no implication asto the conformity of those instruments with existing law. Inaddition, it was pointed out that the text of ISP98 itselfmade it clear that it was not intended to displace any pro-vision of applicable law, since article 1.02.a indicated thatthe rules contained in ISP98 were intended to “supplementthe applicable law to the extent not prohibited by that law”.

433. With respect to Incoterms 2000, consistent with itsprevious endorsement of the text of Incoterms 1990 at itstwenty-fifth session, in 1992,25 the Commission expressedits appreciation for the efforts that had led to the develop-ment of those rules of practice and welcomed the requestfor their endorsement.

434. After discussion, the Commission adopted the fol-lowing decision, endorsing the text of Incoterms 2000,ISP98 and URCB:

The United Nations Commission on InternationalTrade Law,

Expressing its appreciation to the International Cham-ber of Commerce for having transmitted to it the revisedtext of Incoterms 2000, the Rules on InternationalStandby Practices (ISP98) and the Uniform Rules forContract Bonds (URCB),

Congratulating the International Chamber of Com-merce on having made a further contribution to the fa-cilitation of international trade by revising Incoterms toadapt them to contemporary commercial practice, byadopting the Rules on International Standby Practices(ISP98), as prepared by the Institute of InternationalBanking Law and Practice, and by elaborating the Uni-form Rules for Contract Bonds (URCB),

Noting that Incoterms 2000, the Rules on InternationalStandby Practices (ISP98) and the Uniform Rules forContract Bonds (URCB) constitute a valuable contribu-tion to the facilitation of international trade,

Commends the use of Incoterms 2000, the Rules onInternational Standby Practices (ISP98) and the UniformRules for Contract Bonds (URCB) by the parties in in-ternational trade and financing transactions.

XII. TRAINING AND TECHNICAL ASSISTANCE

435. The Commission had before it a note by the secre-tariat (A/CN.9/473) setting forth the activities undertakensince its thirty-second session and indicating the directionof future activities being planned, in particular in view ofthe increase in the requests received by the secretariat. Itwas noted that training and technical assistance activitieswere typically carried out through seminars and briefingmissions, which were designed to explain the salient fea-tures of UNCITRAL texts and the benefits to be derivedfrom their adoption by States.

436. It was reported that, since the previous session, thefollowing seminars and briefing missions had been organ-ized: Johannesburg, South Africa (6 and 7 May 1999);Stellenbosch, South Africa (9 and 10 May 1999); Pretoria(11 and 12 May 1999); Yaoundé (10-12 May 1999);Abidjan (13 and 14 May 1999); Rio de Janeiro, Brazil(12 and 13 August 1999); Lima (19 and 20 August 1999);Cuzco, Peru (23-25 August 1999); Brasilia (30 and31 August 1999); São Paulo, Brazil (2 and 3 September1999); Moscow (2-4 November 1999); and Antananarivo(6-8 March 2000). The secretariat of the Commission re-ported that a number of requests had had to be turned downfor lack of sufficient resources and that for the remainderof 2000 only some of the requests made by countries inAfrica, Asia, Latin America and Eastern Europe could bemet.

437. The Commission expressed its appreciation to thesecretariat for the activities undertaken since its previoussession and emphasized the importance of the training andtechnical assistance programme for promoting awarenessand the wider adoption of the legal texts it had produced.Training and technical assistance were particularly usefulfor developing countries lacking expertise in the areas oftrade and commercial law covered by the work ofUNCITRAL and the training and technical assistance ac-tivities of the secretariat could play an important role in theeconomic integration efforts being undertaken by manycountries.

438. The Commission noted the various forms of techni-cal assistance that might be provided to States preparinglegislation based on UNCITRAL texts, such as review ofpreparatory drafts of legislation from the point of view ofUNCITRAL texts, preparation of regulations implementingsuch legislation and comments on reports of law reformcommissions, as well as briefings for legislators, judges,arbitrators, procurement officials and other users ofUNCITRAL texts as embodied in national legislation. Theupsurge in commercial law reform represented a crucialopportunity for the Commission to further significantly theobjectives of substantial coordination and acceleration ofthe process of harmonization and unification of interna-tional trade law, as envisaged by the General Assembly inits resolution 2205 (XXI) of 17 December 1966.

439. The Commission took note with appreciation of thecontributions made by Canada, Cyprus, Greece, Mexico,Switzerland and the United Kingdom of Great Britain andNorthern Ireland towards the seminar programme. It alsoexpressed its appreciation to Singapore for its contribution


to the Trust Fund for Granting Travel Assistance to Devel-oping States members of UNCITRAL. The Commissionfurthermore expressed its appreciation to those other Statesand organizations which had contributed to its programmeof training and assistance by providing funds or staff or byhosting seminars. Stressing the importance of extra-budgetary funding for carrying out training and technicalassistance activities, the Commission appealed once againto all States, international organizations and other inter-ested entities to consider making contributions to theUNCITRAL trust funds so as to enable the secretariat ofthe Commission to meet the increasing demands in devel-oping countries and newly independent States for trainingand assistance and to enable delegates from developingcountries to attend UNCITRAL meetings. It was also sug-gested that, in order to resolve the resource difficulties fac-ing the Commission, an attempt should be made to encour-age the private sector to contribute to the financing of theUNCITRAL assistance and training programme, in particu-lar since the private sector benefited a great deal from theoverall work of the Commission in the area of internationaltrade law.

440. In view of the limited resources available to the sec-retariat of the Commission, whether from budgetary orextrabudgetary resources, strong concern was expressed thatthe Commission could not fully implement its mandate withregard to training and technical assistance. Concern was alsoexpressed that, without effective cooperation and coordina-tion between the secretariat and development assistanceagencies providing or financing technical assistance, inter-national assistance might lead to the adoption of nationallaws that did not represent internationally agreed standards,including UNCITRAL conventions and model laws.

441. As regards the internship programme of the secre-tariat of the Commission, concern was expressed that themajority of the participants were nationals of developedcountries. An appeal was made to all States to considersupporting programmes that sponsored the participation ofnationals of developing countries in the internship pro-gramme.

442. In order to ensure the effective implementation of itstraining and assistance programme and the timely publica-tion and dissemination of its work, the Commission de-cided to recommend to the General Assembly that it re-quest the Secretary-General to increase substantially boththe human and the financial resources available to its sec-retariat.

XIII. STATUS AND PROMOTIONOF UNCITRAL TEXTS

443. On the basis of a note by the secretariat (A/CN.9/462), the Commission considered the status of the conven-tions and model laws emanating from its work, as well asthe status of the Convention on the Recognition and En-forcement of Foreign Arbitral Awards (New York, 1958).The Commission noted with pleasure the new action ofStates and jurisdictions subsequent to 4 June 1999 (date ofthe conclusion of the thirty-second session of the Commis-sion) regarding the following instruments:

(a) Convention on the Limitation Period in the Interna-tional Sale of Goods, concluded at New York on 14 June1974, as amended by the Protocol of 11 April 1980.Number of States parties: 17;

(b) [Unamended] Convention on the Limitation Periodin the International Sale of Goods (New York, 1974).Number of States parties: 24;

(c) United Nations Convention on the Carriage ofGoods by Sea, 1978 (Hamburg Rules). Number of Statesparties: 26;

(d) United Nations Convention on Contracts for theInternational Sale of Goods (Vienna, 1980). Number ofStates parties: 56;

(e) United Nations Convention on International Bills ofExchange and International Promissory Notes (New York,1988). The Convention has two States parties; it requireseight additional adherences for entry into force;

(f) United Nations Convention on the Liability of Op-erators of Transport Terminals in International Trade (Vi-enna, 1991). The Convention has two States parties; it re-quires three additional adherences for entry into force;

(g) United Nations Convention on Independent Guar-antees and Stand-by Letters of Credit (New York, 1995).The Convention has five States parties;

(h) Convention on the Recognition and Enforcement ofForeign Arbitral Awards (New York, 1958). Number ofStates parties: 121;

(i) UNCITRAL Model Law on International Commer-cial Arbitration, 1985. New jurisdiction that has enactedlegislation based on the Model Law: Macau Special Ad-ministrative Region of China;

(j) UNCITRAL Model Law on International CreditTransfers, 1992;

(k) UNCITRAL Model Law on Procurement of Goods,Construction and Services, 1994;

(l) UNCITRAL Model Law on Electronic Commerce,1996. New jurisdictions that have enacted legislation basedon the Model Law: Australia, Bermuda, France and HongKong Special Administrative Region of China. Uniformlegislation influenced by the Model Law and the principleson which it is based has been prepared in Canada and in theUnited States of America;

(m) UNCITRAL Model Law on Cross-Border Insol-vency, 1997. New jurisdictions that have enacted legisla-tion based on the Model Law: Eritrea and Mexico.

444. Appreciation was expressed for those legislative ac-tions on the texts of the Commission. A request was di-rected to States that had enacted or were about to enact amodel law prepared by the Commission, or were consider-ing legislative action regarding a convention resulting fromthe work of the Commission, to inform the secretariat ofthe Commission thereof. Such information would be usefulto other States in their consideration of similar legislativeaction.

445. Representatives and observers of a number of Statesreported that official action was being considered with aview to adherence to various conventions and to the adop-


tion of legislation based on various model laws prepared byUNCITRAL. It was noted that the UNCITRAL Model Lawon Electronic Commerce had become the single commonsource often cited by many countries.

446. It was noted that, despite the universal relevance andusefulness of those texts, a number of States had not yetenacted any of them. An appeal was directed to the repre-sentatives and observers who had been participating in themeetings of the Commission and its working groups tocontribute, to the extent that they in their discretion deemedappropriate, to facilitating consideration by legislative or-gans in their countries of texts of the Commission.

XIV. GENERAL ASSEMBLY RESOLUTIONON THE WORK OF THE COMMISSION

447. The United Nations Commission on InternationalTrade Law took note with appreciation of General Assem-bly resolution 54/103 of 9 December 1999 on the report ofthe Commission on the work of its thirty-second session. Inparticular, the Commission noted with appreciation that, inparagraph 2 of that resolution, the Assembly hadcommended the Commission for the progress made in itswork on receivables financing, electronic commerce, pri-vately financed infrastructure projects and the legislativeimplementation of the Convention on the Recognition andEnforcement of Foreign Arbitral Awards, adopted in NewYork on 10 June 1958.

448. The Commission also noted with appreciation that,in paragraph 3 of resolution 54/103, the General Assemblyhad appealed to Governments that had not yet done so toreply to the questionnaire circulated by the secretariat inrelation to the legal regime governing the recognition andenforcement of foreign arbitral awards.

449. The Commission further noted with appreciationthat, in paragraph 5 of resolution 54/103, the Assembly hadreaffirmed the mandate of the Commission, as the corelegal body within the United Nations system in the field ofinternational trade law, to coordinate legal activities in thatfield, and in that connection had called upon all bodies ofthe United Nations system and invited other internationalorganizations to bear in mind the mandate of the Commis-sion and the need to avoid duplication of effort and topromote efficiency, consistency and coherence in the uni-fication and harmonization of international trade law, andhad recommended that the Commission, through its secre-tariat, continue to maintain close cooperation with the otherinternational organs and organizations, including regionalorganizations, active in the field of international trade law.

450. The Commission noted with appreciation the deci-sion of the General Assembly, in paragraph 6 of resolution54/103, to reaffirm the importance, in particular for devel-oping countries, of the work of the Commission concernedwith training and technical assistance in the field of inter-national trade law, such as assistance in the preparation ofnational legislation based on legal texts of the Commission,and that, in paragraph 7, the Assembly had expressed the

desirability for increased efforts by the Commission, insponsoring seminars and symposia, to provide such train-ing and assistance.

451. The Commission also noted with appreciation theappeal by the General Assembly, in paragraph 7 (b) of theresolution, to Governments, the relevant United Nationsorgans, organizations, institutions and individuals to makevoluntary contributions to the UNCITRAL Trust Fund forSymposia and, where appropriate, to the financing of spe-cial projects. Furthermore, it was noted that the Assemblyhad appealed, in paragraph 8, to the United Nations Devel-opment Programme and other bodies responsible for devel-opment assistance, such as the International Bank for Re-construction and Development and the European Bank forReconstruction and Development, as well as to Govern-ments in their bilateral aid programmes, to support thetraining and technical assistance programme of the Com-mission and to cooperate and coordinate their activitieswith those of the Commission.

452. It was also appreciated that the General Assembly,in paragraph 9 of the resolution, had appealed to Govern-ments, the relevant United Nations organs, organizations,institutions and individuals, in order to ensure full partici-pation by all member States in the sessions of the Commis-sion and its working groups, to make voluntary contribu-tions to the trust fund for travel assistance to developingcountries that are members of the Commission, at theirrequest and in consultation with the Secretary-General.(The trust fund was established pursuant to Assembly reso-lution 48/32 of 9 December 1993.) The Commission fur-ther noted with appreciation the decision of the GeneralAssembly, in paragraph 10 of resolution 54/103, to con-tinue, in the competent Main Committee during the fifty-fourth session of the Assembly, its consideration of grant-ing travel assistance, within existing resources, to the leastdeveloped countries that were members of the Commis-sion, at their request and in consultation with the Secretary-General.

453. The Commission welcomed the request by the Gen-eral Assembly, in paragraph 11 of the resolution, to theSecretary-General to ensure and enhance the effective im-plementation of the programme of the Commission. TheCommission noted, however, that the resources available toits secretariat were not sufficient for it to implement itsmandate. The Commission noted, in particular, that its sec-retariat had fewer Professional staff than it had had whenthe Commission was established. It therefore recommendedto the Assembly that it request the Secretary-General tostrengthen the secretariat of the Commission, within theresources available to the secretariat as a whole, so as toenable it to meet the need for increased efforts in trade lawunification and harmonization and in trade law reform as-sistance so as to assist countries in sharing in the benefitsof international trade in a global economy.

454. The Commission also noted with appreciation thatthe General Assembly, in paragraph 12, had stressed theimportance of bringing into effect the conventions emanat-ing from the work of the Commission and that to that endit had urged States that had not yet done so to considersigning, ratifying or acceding to those conventions.


XV. COORDINATION AND COOPERATION:SECURITY INTERESTS

455. The Commission considered work undertaken byother organizations in the field of security interests on thebasis of a report of the Secretary-General (A/CN.9/475). Itwas noted that the subject of security interests was becom-ing increasingly important, at both the international leveland the national level, in particular in view of the potentialof modern secured credit laws to increase the availability oflower-cost credit and thus enhance the cross-border move-ment of goods and services. It was also noted that a numberof texts had been or were currently being prepared that,while indicating certain common trends, left a number ofissues unaddressed. The following problems were identi-fied: inadequacy of domestic laws, in particular with regardto international transactions and in view of the fact thatmandatory law and public policy issues were involved insecured transactions; the friction resulting from the possi-bility that more than one country’s law might govern asecurity interest; and the loss of security if the collateralcrossed national borders. A wide variety of possible solu-tions were mentioned, ranging from a model law dealingwith security interests in all types of asset, to a statement ofprinciples with a guide, a model law for priority systemsbased on registration or a convention or model law dealingwith particular types of asset (e.g. investment securities orintellectual property).

456. The observer from the secretariat of Unidroit statedthat in 1980, after UNCITRAL had assigned low priority tothe subject of security interests by discontinuing work forthe time being, Unidroit, having invested significant re-sources, had become the premier organization to undertakeand coordinate work in the field of secured credit law.Unidroit’s efforts were reflected in two conventions com-pleted and one draft convention being prepared. Further-more, in 1993, Unidroit had started work on the preparationof a model law on security interests. While the GoverningCouncil of Unidroit had in 1995 assigned low priority tothat project in view of the need for Unidroit to complete itswork on mobile equipment, once that work was completed,Unidroit could be expected to resume its work on themodel law. As a result, it was suggested that UNCITRALshould not undertake overlapping work in the field of se-curity interests, thus avoiding any duplication of efforts. Itwas also observed that the report of the Secretary-Generalmight have been based on a misunderstanding of the plansof Unidroit in that regard (A/CN.9/475, paras. 8 and 9).

457. In response, it was noted that coordination of thework of other organizations in the field of internationaltrade law was at the heart of the mandate of UNCITRALas a body in the work of which all States could participateon an equal footing and in all six official languages of theUnited Nations. It was also noted that the report by thesecretariat accurately reflected the fact that no action hadbeen taken since 1995, since the matter was not on thepriority list of Unidroit, as indicated in Unidroit papers,including the Unidroit work programme for the triennium1999-2001, and confirmed by the observer from theUnidroit secretariat at both the thirty-second and thirty-third sessions of the Commission.27

458. The Commission, as the core legal body in theUnited Nations system in the field of the unification andharmonization of international trade law, reaffirmed itsmandate to monitor work carried out in other organizationsin the field of international trade law, issuing recommenda-tions, when necessary, and to take any other action to carryout its mandate. With regard to the concern expressed as tothe risk that any work by UNCITRAL in the field of se-cured credit law might duplicate work carried out in otherorganizations, the Commission agreed that such a duplica-tion could be avoided with a cautious, measured approachthat would focus on particular types of asset. It was widelyfelt that the topic of security interests was so broad and theissues involved so complex that it would take work byseveral organizations to address all problems (as to the par-ticular suggestions made, see paras. 460-462 below). It wasagreed that it would be the responsibility of all relevantorganizations to cooperate with a view to ensuring consist-ency between the various texts and efficiency in the utili-zation of resources.

459. Expressing its appreciation for the report of the Sec-retary-General, the Commission went on to consider thesubstance of that report. It was generally agreed that secu-rity interests was an important subject and had beenbrought to the attention of the Commission at the righttime, in particular in view of the close link of securityinterests with the work of the Commission on insolvencylaw. It was widely felt that modern secured credit lawscould have a significant impact on the availability and thecost of credit and thus on international trade. Modern se-cured credit laws could alleviate the inequalities in theaccess to lower-cost credit between parties in developedcountries and parties in developing countries, and in theshare such parties had in the benefits of international trade.A note of caution was struck in that regard to the effect thatsuch laws needed to strike an appropriate balance in thetreatment of privileged, secured and unsecured creditors soas to become acceptable to States. It was also stated that, inview of the divergent policies of States, a flexible approachaimed at the preparation of a set of principles with a guide,rather than a model law, would be advisable. Furthermore,in order to ensure the optimal benefits from law reform,including financial-crisis prevention, poverty reduction andfacilitation of debt financing as an engine for economicgrowth, any effort on security interests would need to becoordinated with efforts on insolvency law.

460. As to the focus of any work to be undertaken, anumber of suggestions were made. One suggestion was thata uniform law should be prepared to deal with securityinterests in investment property (e.g. stocks, bonds, swapsand derivatives). Such securities, which were held, as en-tries in a register, by an intermediary and, physically, by adepositary institution, were important instruments on thebasis of which vast amounts of credit were extended notonly by commercial banks to their clients but also by cen-tral banks to commercial banks. It was also observed that,in view of the globalization of financial markets, a numberof jurisdictions were normally involved, the laws of whichwere often incompatible with each other or even inadequateto address the relevant problems. As a result, a great dealof uncertainty existed as to whether investors owning secu-rities and financiers extending credit and taking a pledge in27Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 420.


the securities had a right in rem and were protected, inparticular, in the case of the insolvency of an intermediary.It was also pointed out that a great deal of uncertainty aroseeven as to the law applicable to security interests in invest-ment property held by an intermediary and that the fact thatthe Hague Conference on Private International Lawplanned to address that matter indicated both its importanceand its urgency. In that regard, it was observed that workby UNCITRAL could be perfectly compatible with andcould usefully supplement any work undertaken by theHague Conference, in particular in view of the inherentlimitations of private international law rules in matters ofmandatory law and public policy.

461. Another suggestion was that a uniform law shouldbe prepared to deal with security interests in inventory (i.e.a constantly changing pool of tangible assets). It was statedthat the use of a changing pool of assets, whether tangibleor intangible, was an important feature of modern securedfinancing law. It was also observed that any work on inven-tory could usefully draw on the Commission’s work onreceivables and on practices that would be likely to draw apositive response from international financial markets. Thefollowing matters were mentioned as matters that wouldneed to be addressed in such a uniform law: the creationand scope of a security interest (which should include prop-erty acquired, and secure debts arising, even after the crea-tion of the interest); remedies upon default of the debtor;clear priority rules; and mechanisms ensuring the transpar-ency of any interest.

462. Yet another suggestion was that a uniform lawshould be prepared to deal with an international register ofsecurity rights. Such a register would enhance certainty andtransparency and, as a result, have a positive impact on theavailability and the cost of credit, which was badly neededfor the development of the world economy. To achieve thatresult, the register should encompass all types of securityinterest in all types of asset. In the discussion, the sugges-tion was made that a colloquium might be held by thesecretariat in cooperation with organizations representingthe relevant practice and industry as well as with interna-tional development institutions.

463. After discussion, the Commission requested the sec-retariat to prepare a study that would discuss in detail therelevant problems in the field of secured credit law and thepossible solutions for consideration by the Commission atits thirty-fourth session, in 2001. It was agreed that, afterconsidering the study, the Commission could decide at thatsession whether further work could be undertaken, onwhich topic and in which context. It was also agreed thatthe study could examine, in particular, whether currenttrends established sufficient common ground among legalsystems to make the preparation of a uniform law within areasonable period of time feasible. It was further agreedthat the study could discuss the advantages and disadvan-tages of the various solutions (i.e. a uniform law on alltypes of asset as compared with a set of principles with aguide or a uniform law on specific types of asset). Moreo-ver, it was agreed that the study should draw upon andbuild on work carried out by other organizations and thatany suggestions should take into account the need to avoidduplication of efforts.

XVI. OTHER BUSINESS

A. Bibliography

464. The Commission noted with appreciation the bibli-ography of recent writings related to the work of the Com-mission (A/CN.9/481).

465. The Commission stressed that it was important for itto have information that was as complete as possible withregard to publications, including academic theses, com-menting on the results of its work. It therefore requestedGovernments, academic institutions and other relevant or-ganizations to send copies of such publications to the sec-retariat.

B. Willem C. Vis International CommercialArbitration Moot

466. It was reported to the Commission that the Instituteof International Commercial Law at Pace UniversitySchool of Law, New York, had organized the seventhWillem C. Vis International Commercial Arbitration Mootin Vienna from 15 to 20 April 2000. Legal issues dealt withby the teams of students participating in the Moot had beenbased on the United Nations Convention on Contracts forthe International Sale of Goods, the UNCITRAL ModelLaw on International Commercial Arbitration and the Arbi-tration Rules of the London Court of International Arbitra-tion. In the 2000 Moot, some 79 teams had participatedfrom law schools in some 28 countries, involving about600 students and tutors and about 150 arbitrators. Theeighth Moot is to be held at Vienna from 6 to 12 April2001.

467. The Commission heard the report with interest. Spe-cial appreciation was expressed to the Institute of Interna-tional Commercial Law at Pace University School of Lawfor organizing the Moot and to the secretariat for sponsor-ing it. The Commission regarded the Moot, with its broadinternational participation, as an excellent method of dis-seminating information about uniform law texts and teach-ing international trade law.

C. Date and place of the thirty-fourth sessionof the Commission

468. It was decided that the Commission would hold itsthirty-fourth session in Vienna from 25 June to 13 July2001.

D. Sessions of working groups

469. The Commission approved the following scheduleof meetings for its working groups:

(a) The Working Group on Electronic Commerce is tohold its thirty-seventh session in Vienna from 18 to 29September 2000 and its thirty-eighth session in New Yorkfrom 26 February to 9 March 2001;


(b) The Working Group on Arbitration is to hold itsthirty-third session in Vienna from 20 November to 1 De-cember 2000 and its thirty-fourth session in New Yorkfrom 21 May to 1 June 2001;

(c) The Working Group on International Contract Prac-tices is to hold its twenty-third session in Vienna from 11to 22 December 2000 and its twenty-fourth session, as theWorking Group on Insolvency Law, in New York from 26March to 6 April 2001.

E. Retirement of the Secretary of the Commission

470. The Commission noted that its Secretary,Mr. Gerold Herrmann, was to retire on 31 January 2001.Mr. Herrmann had served as a member of the secretariatsince 1975 and as Secretary of the Commission since 1991.It was widely recognized that the time during whichMr. Herrmann had served as Secretary of the Commissionhad been a most productive one and that the secretariat ofthe Commission under the leadership of Mr. Herrmann hadmade an excellent contribution to that work despite thelimited resources available to it. The Commission ex-pressed its appreciation to Mr. Herrmann for his outstand-ing contribution to the process of unification and harmoni-zation of international trade law in general and toUNCITRAL in particular.

ANNEX I

Draft Convention on Assignment of Receivablesin International Trade

(Title, preamble and draft articles 1-17 as adopted by theCommission)*

PREAMBLE

The Contracting States,

Reaffirming their conviction that international trade on the basisof equality and mutual benefit is an important element in the pro-motion of friendly relations among States,

Considering that problems created by the uncertainties as to thecontent and the choice of legal regime applicable to the assign-ment of receivables constitute an obstacle to international trade,

Desiring to establish principles and adopt rules relating to theassignment of receivables that would create certainty and transpar-ency and promote modernization of law relating to assignments ofreceivables, while protecting existing assignment practices and fa-cilitating the development of new practices,

Desiring also to ensure the adequate protection of the interestsof the debtor in the case of an assignment of receivables,

Being of the opinion that the adoption of uniform rules govern-ing the assignment of receivables would promote the availabilityof capital and credit at more affordable rates and thus facilitate thedevelopment of international trade,

Have agreed as follows:

CHAPTER I

Scope of application

Article 1Scope of application

1. This Convention applies to:

(a) Assignments of international receivables and to interna-tional assignments of receivables as defined in this chapter, if,at the time of the conclusion of the contract of assignment, theassignor is located in a Contracting State; and

(b) Subsequent assignments provided that any prior assign-ment is governed by this Convention.

2. This Convention applies to a subsequent assignment thatsatisfies the criteria of paragraph 1 (a) of this article, notwith-standing that it did not apply to any prior assignment of the samereceivable.

3. This Convention does not affect the rights and obligationsof the debtor unless, at the time of the conclusion of the originalcontract, the debtor is located in a Contracting State or the lawgoverning the receivable is the law of a Contracting State.

[4. The provisions of chapter V apply to assignments of in-ternational receivables and to international assignments of receiva-bles as defined in this chapter independently of paragraphs 1 and2 of this article. However, those provisions do not apply if a Statemakes a declaration under article 37.]

5. The annex to this Convention applies in a ContractingState which has made a declaration under article 40.

Article 2Assignment of receivables

For the purposes of this Convention:

(a) “Assignment” means the transfer by agreement from oneperson (“assignor”) to another person (“assignee”) of all or partof, or an undivided interest in, the assignor’s contractual rightto payment of a monetary sum (“receivable”) from a third per-son (“the debtor”). The creation of rights in receivables as se-curity for indebtedness or other obligation is deemed to be atransfer;

(b) In the case of an assignment by the initial or any otherassignee (“subsequent assignment”), the person who makes thatassignment is the assignor and the person to whom that assign-ment is made is the assignee.

Article 3Internationality

A receivable is international if, at the time of the conclusion ofthe original contract, the assignor and the debtor are located indifferent States. An assignment is international if, at the time ofthe conclusion of the contract of assignment, the assignor and theassignee are located in different States.

Article 4Exclusions

1. This Convention does not apply to assignments:

(a) Made to an individual for his or her personal, family orhousehold purposes;

(b) Made by the delivery of a negotiable instrument, with anendorsement, if necessary;

*Articles 18-44 of the draft convention and articles 1-7 of the annex tothe draft convention, not yet considered by the Commission, appear inannex I to document A/CN.9/466, with an analytical commentary by thesecretariat in document A/CN.9/470 and comments by Governments andinternational organizations in documents A/CN.9/472 and Add.1-4.


(c) Made as part of the sale, or change in the ownership or thelegal status, of the business out of which the assigned receiva-bles arose.

2. This Convention does not apply to assignments of re-ceivables arising under or from:

(a) Transactions on a regulated exchange;

(b) Financial contracts governed by netting agreements, ex-cept a receivable owed on the termination of all outstandingtransactions;

(c) Bank deposits;

(d) Inter-bank payment systems or inter-bank payment agree-ments, or investment securities settlement systems;

(e) A letter of credit or independent guarantee;

(f) The sale, loan or holding of, or agreement to repurchase,investment securities.

3. This Convention does not:

(a) Affect whether a property right in real estate confers aright in a receivable related to that real estate or determine thepriority of such a right in the receivable with respect to thecompeting right of an assignee of the receivable;

(b) Make lawful the acquisition of property rights in real es-tate not permitted under the law of the State where the realestate is situated.

[4. This Convention does not apply to assignmentslisted in a declaration made under article 39 by the State inwhich the assignor is located, or with respect to the provi-sions of this Convention which deal with the rights andobligations of the debtor, by the State in which the debtoris located.]

CHAPTER II

General provisions

Article 5Definitions and rules of interpretation


(a) “Original contract” means the contract between theassignor and the debtor from which the assigned receivablearises;

(b) “Existing receivable” means a receivable that arises uponor before the conclusion of the contract of assignment; “futurereceivable” means a receivable that arises after the conclusionof the contract of assignment;

(c) “Writing” means any form of information that is accessi-ble so as to be usable for subsequent reference. Where thisConvention requires a writing to be signed, that requirement ismet if, by generally accepted means or a procedure agreed to bythe person whose signature is required, the writing identifiesthat person and indicates that person’s approval of the informa-tion contained in the writing;

(d) “Notification of the assignment” means a communicationin writing which reasonably identifies the assigned receivablesand the assignee;

(e) “Insolvency administrator” means a person or body, in-cluding one appointed on an interim basis, authorized in aninsolvency proceeding to administer the reorganization or liqui-dation of the assignor’s assets or affairs;

(f) “Insolvency proceeding” means a collective judicial or ad-ministrative proceeding, including an interim proceeding, in

which the assets and affairs of the assignor are subject to con-trol or supervision by a court or other competent authority forthe purpose of reorganization or liquidation;

(g) “Priority” means the right of a party in preference to an-other party;

(h) A person is located in the State in which it has its placeof business. If the assignor or the assignee has places of busi-ness in more than one State, the place of business is that placewhere the central administration of the assignor or the assigneeis exercised. If the debtor has places of business in more thanone State, the place of business is that which has the closestrelationship to the original contract. If a person does not havea place of business, reference is to be made to the habitualresidence of that person;

(i) “Law” means the law in force in a State other than its rulesof private international law;

(j) “Proceeds” means whatever is received in respect of anassigned receivable, whether in total or partial payment or othersatisfaction of the receivable. The term includes whatever isreceived in respect of proceeds. The term does not include re-turned goods;

(k) “Financial contract” means any spot, forward, future, op-tion or swap transaction involving interest rates, commodities,currencies, equities, bonds, indices or any other financial instru-ment, any repurchase or securities lending transaction, and anyother transaction similar to any transaction referred to aboveentered into in financial markets and any combination of thetransactions mentioned above;

(l) “Netting agreement” means an agreement which providesfor one or more of the following:

(i) The net settlement of payments due in the same cur-rency on the same date whether by novation or other-wise;

(ii) Upon the insolvency or other default by a party, thetermination of all outstanding transactions at their re-placement or fair market values, conversion of suchsums into a single currency and netting into a singlepayment by one party to the other; and

(iii) The set-off of amounts calculated as contemplated bythe preceding subparagraph (l) (ii) under two or morenetting agreements.

Article 6Party autonomy

Subject to article 21, the assignor, the assignee and the debtormay derogate from or vary by agreement provisions of this Con-vention relating to their respective rights and obligations. Such anagreement does not affect the rights of any person who is not aparty to the agreement.

Article 7Principles of interpretation

1. In the interpretation of this Convention, regard is to behad to its object and purpose as set forth in the preamble, to itsinternational character and to the need to promote uniformity in itsapplication and the observance of good faith in international trade.

2. Questions concerning matters governed by this Conven-tion which are not expressly settled in it are to be settled in con-formity with the general principles on which it is based or, in theabsence of such principles, in conformity with the law applicableby virtue of the rules of private international law.


CHAPTER III

Effects of assignment

Article 8Form of assignment

An assignment is valid as to form if it meets the form require-ments, if any form requirements exist, of either the law of theState in which the assignor is located or any other law applicableby virtue of the rules of private international law.

Article 9Effectiveness of bulk assignments, assignments of future

receivables and partial assignments

1. An assignment of existing or future, one or more, receiva-bles, and parts of, or undivided interests in, receivables is effectiveas between the assignor and the assignee, as well as against thedebtor, whether the receivables are described:

(a) Individually as receivables to which the assignment re-lates; or(b) In any other manner, provided that they can, at the time ofthe assignment or, in the case of future receivables, at the timeof the conclusion of the original contract, be identified as re-ceivables to which the assignment relates.

2. Unless otherwise agreed, an assignment of one or morefuture receivables is effective without a new act of transfer beingrequired to assign each receivable.

3. Except as provided in paragraph 1 of this article, article11 and paragraphs 2 and 3 of article 12, this Convention does notaffect any limitations on assignment arising from law.

4. An assignment of a receivable is not ineffective against,and the right of an assignee may not be denied priority with re-spect to the competing rights of, a person described insubparagraph (a) of article 24, solely because law other than thisConvention does not generally recognize an assignment describedin paragraph 1 of this article.

Article 10Time of assignment

Without prejudice to the rights of a person described in sub-paragraph (a) of article 24, an existing receivable is transferred,and a future receivable is deemed to be transferred, at the time ofthe conclusion of the contract of assignment, unless the assignorand the assignee have specified a later time.

Article 11Contractual limitations on assignments

1. An assignment of a receivable is effective notwithstandingany agreement between the initial or any subsequent assignor andthe debtor or any subsequent assignee limiting in any way theassignor’s right to assign its receivables.

2. Nothing in this article affects any obligation or liability ofthe assignor for breach of such an agreement, but the other partyto that agreement may not avoid the original contract or the as-signment contract on the sole ground of that breach. A person whois not party to such an agreement is not liable on the sole groundthat it had knowledge of the agreement.

3. This article applies only to assignments of receivables:

(a) Arising under an original contract for the supply or leaseof [goods], construction or services other than financial serv-ices, or for the sale or lease of real estate;

(b) Arising under an original contract for the sale, lease orlicence of industrial or other intellectual property or other infor-mation;

(c) Representing the payment obligation for a credit cardtransaction; or

(d) Owed to the assignor upon net settlement of payments duepursuant to a netting agreement involving more than two par-ties.

Article 12Transfer of security rights

1. A personal or property right securing payment of the as-signed receivable is transferred to the assignee without a new actof transfer. If such a right, under the law governing it, is transfer-able only with a new act of transfer, the assignor is obliged totransfer this right and any proceeds to the assignee.

2. A right securing payment of the assigned receivable istransferred under paragraph 1 of this article notwithstanding anagreement between the assignor and the debtor or other persongranting the right, limiting in any way the assignor’s right to as-sign the receivable or the right securing payment of the assignedreceivable.

3. Nothing in this article affects any obligation or liability ofthe assignor for breach of an agreement under paragraph 2 of thisarticle, but the other party to that agreement may not avoid theoriginal contract or the assignment contract on the sole ground ofthat breach. A person who is not a party to such an agreement isnot liable on the sole ground that it had knowledge of the agree-ment.

4. Paragraphs 2 and 3 of this article apply only to assign-ments of receivables:

(a) Arising under an original contract for the supply or leaseof [goods], construction or services other than financial serv-ices, or for the sale or lease of real estate;

(b) Arising under an original contract for the sale, lease orlicence of industrial or other intellectual property or other infor-mation;

(c) Representing the payment obligation for a credit cardtransaction; or

(d) Owed to the assignor upon net settlement of payments duepursuant to a netting agreement involving more than two par-ties.

5. The transfer of a possessory property right under para-graph 1 of this article does not affect any obligations of theassignor to the debtor or the person granting the property rightwith respect to the property transferred existing under the lawgoverning that property right.

6. Paragraph 1 of this article does not affect any requirementunder rules of law other than this Convention relating to the formor registration of the transfer of any rights securing payment of theassigned receivable.


CHAPTER IV

Rights, obligations and defences

Section IAssignor and assignee

Article 13Rights and obligations of the assignor and the assignee

1. The rights and obligations of the assignor and the assigneeas between them arising from their agreement are determined bythe terms and conditions set forth in that agreement, including anyrules or general conditions referred to therein.

2. The assignor and the assignee are bound by any usage towhich they have agreed and, unless otherwise agreed, by any prac-tices which they have established between themselves.

3. In an international assignment, the assignor and the as-signee are considered, unless otherwise agreed, to have implicitlymade applicable to the assignment a usage that in internationaltrade is widely known to, and regularly observed by, parties to theparticular practice.

Article 14Representations of the assignor

1. Unless otherwise agreed between the assignor and theassignee, the assignor represents at the time of the conclusion ofthe contract of assignment that:

(a) The assignor has the right to assign the receivable;

(b) The assignor has not previously assigned the receivable toanother assignee; and

(c) The debtor does not and will not have any defences orrights of set-off.

2. Unless otherwise agreed between the assignor and theassignee, the assignor does not represent that the debtor has, orwill have, the financial ability to pay.

Article 15Right to notify the debtor

1. Unless otherwise agreed between the assignor and theassignee, the assignor or the assignee or both may send the debtora notification of the assignment and a payment instruction, butafter notification is sent only the assignee may send a paymentinstruction.

2. A notification of the assignment or payment instructionsent in breach of any agreement referred to in paragraph 1 of thisarticle is not ineffective for the purposes of article 19 by reason ofsuch breach. However, nothing in this article affects any obliga-tion or liability of the party in breach of such an agreement for anydamages arising as a result of the breach.

Article 16Right to payment

1. As between the assignor and the assignee, unless other-wise agreed, and whether or not a notification of the assignmenthas been sent:

(a) If payment in respect of the assigned receivable is madeto the assignee, the assignee is entitled to retain the proceedsand goods returned in respect of the assigned receivable;

(b) If payment in respect of the assigned receivable is madeto the assignor, the assignee is entitled to payment of the pro-

ceeds and is also entitled to goods returned to the assignor inrespect of the assigned receivable; and

(c) If payment in respect of the assigned receivable is made toanother person over whom the assignee has priority, the as-signee is entitled to payment of the proceeds and is also entitledto goods returned to such person in respect of the assignedreceivable.

2. The assignee may not retain more than the value of itsright in the receivable.

Section IIDebtor

Article 17Principle of debtor protection

1. Except as otherwise provided in this Convention, an as-signment does not, without the consent of the debtor, affect therights and obligations of the debtor, including the payment termscontained in the original contract.

2. A payment instruction may change the person, address oraccount to which the debtor is required to make payment, but maynot:

(a) Change the currency of payment specified in the originalcontract; or

(b) Change the State specified in the original contract, inwhich payment is to be made, to a State other than that in whichthe debtor is located.

APPENDIX

RENUMBERING OF ARTICLES OF THE DRAFTCONVENTION

Current article number Former article number(annex I to the present document) (A/CN.9/466, annex I)

1 12 23 34 45 66 77 88 New article9 9

10 1011 1112 1213 1314 1415 1516 1617 17

ANNEX II

List of documents before the Commissionat its thirty-third session

[Annex II is reproduced in part three, III of this Yearbook]


B. United Nations Conference on Trade and Development (UNCTAD):extract from the report of the Trade and Development Board

(forty-seventh session) (TD/B/47/11 (Vol. I)

I. F. 2 Progressive development of the law of international trade: thirty-thirdannual report of the United Nations Commission on International Trade Law

2. At its 917th plenary meeting, on 20 October 2000, the Board took note of the reportof UNCITRAL on its thirty-third session (A/55/17).

C. General Assembly: report of the United Nations Commissionon International Trade Law on the work of its thirty-third session:

report of the Sixth Committee (A/55/608)

I. INTRODUCTION

1. At its 9th plenary meeting, on 11 September 2000, theGeneral Assembly, on the recommendation of the GeneralCommittee, decided to include in the agenda of its fifty-fifth session the item entitled “Report of the United NationsCommission on International Trade Law on the work of itsthirty-third session” and to allocate it to the Sixth Commit-tee.

2. The Sixth Committee considered the item at its 3rd,4th, 24th and 25th meetings, on 9 and 10 October and on3 and 8 November 2000. The views of the representativeswho spoke during the Committee’s consideration of theitem are reflected in the relevant summary records (A/C.6/55/SR.3, 4, 24 and 25).

3. For its consideration of the item, the Committee hadbefore it the report of the United Nations Commission onInternational Trade Law on the work of its thirty-third ses-sion.1

4. At the 3rd meeting, on 9 October, the Chairman of theUnited Nations Commission on International Trade Law atits thirty-third session introduced the report of the Commis-sion on the work of that session (see A/C.6/55/SR.3).

5. At the 4th meeting, on 10 October, the Chairman ofthe Commission made a statement in the light of the debate(see A/C.6/55/SR.4).

II. CONSIDERATION OF DRAFT RESOLUTIONA/C.6/55/L.5

6. At the 24th meeting, on 3 November, the representa-tive of Austria, on behalf of Algeria, Angola, Argentina,Armenia, Australia, Austria, Azerbaijan, Bahrain, Belgium,Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile,China, Colombia, Costa Rica, Croatia, Cyprus, the CzechRepublic, Denmark, Ecuador, Egypt, Finland, France,Germany, Greece, Guatemala, Haiti, Hungary, India, Indo-nesia, the Islamic Republic of Iran, Ireland, Israel, Italy,Japan, Lesotho, Liechtenstein, Lithuania, Luxembourg,Madagascar, Malta, Mexico, the Netherlands, New Zea-land, Nigeria, Norway, Peru, the Philippines, Poland, Por-tugal, Romania, the Russian Federation, Rwanda, SanMarino, Singapore, Slovakia, Slovenia, South Africa,Spain, Sweden, Thailand, the former Yugoslav Republic ofMacedonia, Turkey, Uganda, Ukraine, the United Kingdomof Great Britain and Northern Ireland, Uruguay and Ven-ezuela, subsequently joined by Belarus, Bolivia, Botswanaand Saudi Arabia, introduced a draft resolution entitled“Report of the United Nations Commission on Interna-tional Trade Law on the work of its thirty-third session”(A/C.6/55/L.5).

7. At its 25th meeting, on 8 November, the Committeeadopted draft resolution A/C.6/55/L.5 without a vote (seepara. 8).

III. RECOMMENDATIONOF THE SIXTH COMMITTEE

8. The Sixth Committee recommends to the General As-sembly the adoption of the following draft resolution:

[The text is not reproduced in this section. The draftresolution was adopted, with editorial changes, as Gen-eral Assembly resolution 55/151 (see section D below).]

1Official Records of the General Assembly, Fifty-fifth Session, Supple-ment No. 17 (A/55/17).


D. General Assembly resolution 55/151 of 12 December 2000

1Official Records of the General Assembly, Fifty-fifth Session, Supple-ment No. 17 (A/55/17).

2Ibid.

RESOLUTION ADOPTEDBY THE GENERAL ASSEMBLY

[on the report of the Sixth Committee (A/55/608)]

55/151. Report of the United Nations Commission onInternational Trade Law on the work of itsthirty-third session

The General Assembly,

Recalling its resolution 2205 (XXI) of 17 December1966, by which it created the United Nations Commissionon International Trade Law with a mandate to further theprogressive harmonization and unification of the law ofinternational trade and in that respect to bear in mind theinterests of all peoples, in particular those of developingcountries, in the extensive development of internationaltrade,

Reaffirming its conviction that the progressive harmoni-zation and unification of international trade law, in reduc-ing or removing legal obstacles to the flow of internationaltrade, especially those affecting the developing countries,would contribute significantly to universal economic coop-eration among all States on a basis of equality, equity andcommon interest and to the elimination of discrimination ininternational trade and, thereby, to the well-being of allpeoples,

Emphasizing the need for higher priority to be given tothe work of the Commission in view of the increasing valueof the modernization of international trade law for globaleconomic development and thus for the maintenance offriendly relations among States,

Stressing the value of participation by States at all levelsof economic development and from different legal systemsin the process of harmonizing and unifying internationaltrade law,

Having considered the report of the Commission on thework of its thirty-third session,1

Concerned that activities undertaken by other bodies ofthe United Nations system in the field of international tradelaw without coordination with the Commission might leadto undesirable duplication of efforts and would not be inkeeping with the aim of promoting efficiency, consistencyand coherence in the unification and harmonization of in-ternational trade law, as stated in its resolution 37/106 of 16December 1982,

Stressing the importance of the further development ofcase law on United Nations Commission on InternationalTrade Law texts in promoting the uniform application ofthe legal texts of the Commission and its value for govern-ment officials, practitioners and academics,

1. Takes note with appreciation of the report of theUnited Nations Commission on International Trade Law onthe work of its thirty-third session;2

2. Commends the Commission for the work on pri-vately financed infrastructure projects, which culminated in

the adoption of the UNCITRAL Legislative Guide on Pri-vately Financed Infrastructure Projects,3 as well as the im-portant progress made in its work on receivables financing;

3. Appeals to Governments that have not yet done soto reply to the questionnaire circulated by the Secretariat inrelation to the legal regime governing the recognition andenforcement of foreign arbitral awards and, in particular, tothe legislative implementation of the Convention on theRecognition and Enforcement of Foreign Arbitral Awards,done at New York on 10 June 1958;4

4. Invites States to nominate persons to work with theprivate foundation established to encourage assistance tothe Commission from the private sector;

5. Reaffirms the mandate of the Commission, as thecore legal body within the United Nations system in thefield of international trade law, to coordinate legal activitiesin this field and, in this connection:

(a) Calls upon all bodies of the United Nations systemand invites other international organizations to bear in mindthe mandate of the Commission and the need to avoidduplication of effort and to promote efficiency, consistencyand coherence in the unification and harmonization of in-ternational trade law;

(b) Recommends that the Commission, through its sec-retariat, continue to maintain close cooperation with theother international organs and organizations, including re-gional organizations, active in the field of internationaltrade law;

6. Also reaffirms the importance, in particular for de-veloping countries, of the work of the Commission con-cerned with training and technical assistance in the field ofinternational trade law, such as assistance in the preparationof national legislation based on legal texts of the Commis-sion;

7. Expresses the desirability for increased efforts bythe Commission, in sponsoring seminars and symposia, toprovide such training and technical assistance, and, in thisconnection:

(a) Expresses its appreciation to the Commission fororganizing seminars and briefing missions in Brazil,Cameroon, Côte d’Ivoire, Madagascar, Peru, the RussianFederation and South Africa;

(b) Expresses its appreciation to the Governmentswhose contributions enabled the seminars and briefingmissions to take place, and appeals to Governments, therelevant bodies of the United Nations system, organiza-tions, institutions and individuals to make voluntary contri-butions to the United Nations Commission on InternationalTrade Law Trust Fund for Symposia and, where appropri-ate, to the financing of special projects, and otherwise toassist the secretariat of the Commission in financing andorganizing seminars and symposia, in particular in develop-ing countries, and in the award of fellowships to candidatesfrom developing countries to enable them to participate insuch seminars and symposia;

3Ibid., para. 372.4United Nations, Treaty Series, vol. 330, No. 4739.


8. Appeals to the United Nations Development Pro-gramme and other bodies responsible for development as-sistance, such as the International Bank for Reconstructionand Development and the European Bank for Reconstruc-tion and Development, as well as to Governments in theirbilateral aid programmes, to support the training and tech-nical assistance programme of the Commission and to co-operate and coordinate their activities with those of theCommission;

9. Appeals to Governments, the relevant bodies of theUnited Nations system, organizations, institutions and indi-viduals, in order to ensure full participation by all MemberStates in the sessions of the Commission and its workinggroups, to make voluntary contributions to the trust fundfor travel assistance to developing countries that are mem-bers of the Commission, at their request and in consultationwith the Secretary-General;

10. Decides, in order to ensure full participation by allMember States in the sessions of the Commission and itsworking groups, to continue, in the competent Main Com-mittee during the fifty-fifth session of the General Assem-bly, its consideration of granting travel assistance to theleast developed countries that are members of the Commis-sion, at their request and in consultation with the Secretary-General;

11. Requests the Secretary-General to strengthen thesecretariat of the Commission within the bounds of theresources available so as to ensure and enhance the effec-tive implementation of the programme of the Commission;

12. Stresses the importance of bringing into effect theconventions emanating from the work of the Commissionfor the global unification and harmonization of interna-tional trade law, and to this end urges States that have notyet done so to consider signing, ratifying or acceding tothose conventions;

13. Requests the Secretary-General to submit to theGeneral Assembly at its fifty-sixth session a report on theimplications of increasing the membership of the Commis-sion, and invites Member States to submit their views onthis issue;

14. Expresses its appreciation to Gerold Herrmann,Secretary of the United Nations Commission on Interna-tional Trade Law since 1991, who will retire on 31 January2001, for his outstanding and devoted contribution to theprocess of unification and harmonization of internationaltrade law in general and to the Commission in particular.

84th plenary meeting12 December 2000

Part Two

STUDIES AND REPORTSON SPECIFIC SUBJECTS

71

A/CN.9/471

I. PRIVATELY FINANCED INFRASTRUCTURE PROJECTS

Draft chapters of a Legislative Guide on Privately Financed Infrastructure Projects:Report of the Secretary-General

(A/CN.9/471 and Add.1-9) [Original: English]

I. INTRODUCTION

1. At its twenty-ninth session, in 1996, having considereda note by the secretariat on “build-operate-transfer” (BOT)projects (A/CN.9/424), the United Nations Commission onInternational Trade Law decided to prepare a legislativeGuide to assist States in preparing or modernizing legisla-tion relevant to those projects.1 The Commission requestedthe secretariat to review issues suitable for treatment insuch a legislative Guide and to prepare draft materials forconsideration by the Commission.

2. At its thirtieth session, in 1997, the Commission con-sidered an annotated table of contents setting out the topicsproposed for inclusion in the legislative Guide (A/CN.9/438, annex). The Commission also considered initial draftsof chapters I, “Scope, purpose and terminology of theGuide”, II, “Parties and phases of privately financed infra-structure projects”, and V, “Preparatory measures”(A/CN.9/438/Add.1-3, respectively), of the Guide. After anexchange of views on the nature of the issues to be dis-cussed and possible methods for addressing them in theGuide, the Commission generally approved the line ofwork proposed by the secretariat, as contained in thosedocuments.2 The Commission requested the secretariat toseek the assistance of outside experts, as required, in thepreparation of future chapters and invited Governments toidentify experts who could be of assistance to the secre-tariat in that task.

3. At its thirty-first session, in 1998, the Commission hadbefore it revised versions of the earlier chapters, includinga revised table of contents, a draft of the introduction to thelegislative Guide, initial drafts of chapters I, “General leg-islative considerations”, II, “Sector structure and regula-tion”, III, “Selection of the concessionaire” and IV, “Con-clusion and general terms of the project agreement”(A/CN.9/444/Add.1-5). The Commission considered vari-

ous specific suggestions concerning the draft chapters, aswell as proposals for changing the structure of the legisla-tive Guide and reducing the number of chapters.3 TheCommission requested the secretariat to continue the prepa-ration of future chapters, with the assistance of outside ex-perts, for submission to the Commission at its thirty-secondsession.

4. At its thirty-second session, in 1999, the Commissionconsidered a complete draft of the legislative Guide, whichconsisted of the following: “Introduction and backgroundinformation on privately financed infrastructure projects”,and chapters I, “General legislative considerations”, II,“Project risks and government support”, III, “Selection ofthe concessionaire”, IV, “The project agreement”, V, “In-frastructure development and operation”, VI, “End ofproject term, extension and termination”, VII, “Governinglaw”, and VIII, “Settlement of disputes” (A/CN.9/458/Add.1-9, respectively). The Commission was informed thatthe secretariat had changed the overall structure of the leg-islative Guide and combined some of its chapters. TheCommission noted and generally approved the revisedstructure of the draft legislative Guide.4 The Commissionconsidered various specific suggestions concerning thedraft chapters.5

II. STRUCTURE AND CONTENTSOF THE DRAFT LEGISLATIVE GUIDE

5. At the Commission’s thirty-second session, in 1999, itwas observed that it was the first occasion on which thedraft Guide was available in its entirety. While it was gen-erally felt that the draft chapters covered most of the centralissues pertaining to privately financed infrastructureprojects, the view was expressed that the document wasrather lengthy and that adjustments were necessary in orderto make the Guide more accessible to the intended readers.6

1Official Records of the General Assembly, Fifty-first Session, Supple-ment No. 17 (A/51/17), paras. 225-230.

2Ibid., Fifty-second Session, Supplement No. 17 (A/52/17),paras. 231-247.

3Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), paras. 12-206.4Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 18.5Ibid., paras. 17-307.6Ibid., para. 18.


Therefore, while revising the draft chapters so as to reflectsuggestions made at the thirty-second session of the Com-mission, the secretariat has endeavoured to make the notesas concise as possible, taking into account the broad scopeof the Guide and the wide variety of issues raised by pri-vately financed infrastructure projects.

Introduction and background informationon privately financed infrastructure projects

6. An earlier draft of the introduction was contained indocument A/CN.9/458/Add.1. A revised draft, which takesinto account suggestions made at the thirty-second sessionof the Commission,7 is contained in an addendum to thepresent document (A/CN.9/471/Add.1).

Chapter I. General legislative and institutionalframework

7. An earlier draft of chapter I was contained in docu-ment A/CN.9/458/Add.2. A revised draft, which takes intoaccount suggestions made at the thirty-second session ofthe Commission,8 is contained in an addendum to thepresent document (A/CN.9/471/Add.2).

Chapter II. Project risks and government support

8. An initial draft of chapter II was contained in docu-ment A/CN.9/458/Add.3. A revised draft, which takes intoaccount suggestions made at the thirty-second session ofthe Commission,9 is contained in an addendum to thepresent document (A/CN.9/471/Add.3).

Chapter III. Selection of the concessionaire

9. An earlier version of this chapter was contained indocument A/CN.9/458/Add.4. A revised draft, which takesinto account suggestions made at the thirty-second sessionof the Commission,10 is contained in an addendum to thepresent document (A/CN.9/471/Add.4).

Chapter IV. Construction and operationof infrastructure

10. The draft chapter combines issues previously pro-posed for discussion in two separate chapters, namely,chapters IV, “The project agreement” (contained inA/CN.9/458/Add.5), and V, “Infrastructure developmentand operation” (also contained in A/CN.9/458/Add.6). Aconsolidated revised draft, which takes into account sug-gestions made at the thirty-second session of the Commis-

sion,11 is contained in an addendum to the present docu-ment (A/CN.9/471/Add.5).

Chapter V. Duration, extension and terminationof the project agreement

11. An earlier version of this chapter (previously num-bered chapter VI) was contained in document A/CN.9/458/Add.7. A revised draft, which takes into account sugges-tions made at the thirty-second session of the Commis-sion,12 is contained in an addendum to the present docu-ment (A/CN.9/471/Add.6).

Chapter VI. Settlement of disputes

12. An earlier version of this chapter (previously num-bered chapter VIII) was contained in document A/CN.9/458/Add.9. A revised draft, which takes into account sug-gestions made at the thirty-second session of the Commis-sion,13 is contained in an addendum to the present docu-ment (A/CN.9/471/Add.7).

Chapter VII. Other relevant areas of law

13. An earlier version of this chapter was contained indocument A/CN.9/458/Add.8. A revised draft, which takesinto account suggestions made at the thirty-second sessionof the Commission,14 is contained in an addendum to thepresent document (A/CN.9/471/Add.8).

Consolidated legislative recommendations

14. At the thirty-second session of the Commission it wasagreed that the legislative recommendations contained ineach chapter needed to be reformulated for greater uni-formity.15 With the assistance of experts, the secretariat hassince reviewed the recommendations in their entirety, so asto ensure their coherence and consistency with one another.In order to facilitate the Commission’s deliberations, allrecommendations contained in the individual chapters havebeen consolidated into an addendum to the present docu-ment (A/CN.9/471/Add.9). The Commission may wish toconsider the desirability of including such a consolidationof the recommendations in the final presentation of theGuide for the users’ ease of reference.

III. CONCLUSION

15. The Commission may wish to consider that, given theadvanced stage of preparation of the draft legislativeGuide, two days of its upcoming session would be suffi-cient for a final review of the legislative recommendationsand adoption of the Guide.

7Ibid., paras. 22-38.8Ibid., paras. 39-69.9Ibid., paras. 70-96.10Ibid., paras. 97-136.

11Ibid., paras. 137-205.12Ibid., paras. 206-253.13Ibid., paras. 287-307.14Ibid., paras. 254-282.15Ibid., para. 21.

Part Two. Studies and reports on specific subjects 73

A/CN.9/471/Add.1

Introduction and background informationon privately financed infrastructure projects*

CONTENTSParagraphs Page

A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-20 73

1. Organization and scope of the Guide . . . . . . . . . . . . . . . . . . . . . . . . 5-8 74

2. Terminology used in the Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-20 74

B. BACKGROUND INFORMATION ON PRIVATELY FINANCEDINFRASTRUCTURE PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-77 76

1. Private investment and infrastructure policy . . . . . . . . . . . . . . . . . . 23-29 76

2. Restructuring of infrastructure sectors . . . . . . . . . . . . . . . . . . . . . . . 30-46 77

3. Forms of private sector participation in infrastructure projects . . . 47-53 79

4. Financing structures and sources of financefor infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54-67 80

5. Main parties involved in implementing infrastructure projects . . . . 68-77 82

A. INTRODUCTION

1. The roles of the public and the private sectors in thedevelopment of infrastructure have evolved considerably inhistory. Public services such as gas street lighting, powerdistribution, telegraphy and telephony, steam railways andelectrical tramways were launched in the nineteenth cen-tury and in many countries they were provided by privatecompanies that had obtained a licence or concession fromthe Government. Numerous privately funded road or canalprojects were carried out at that time and there was a rapiddevelopment of international project financing, includinginternational bond offerings to finance railways or othermajor infrastructure.

2. However, during most of the twentieth century the in-ternational trend was, in turn, towards public provision ofinfrastructure and other services. Infrastructure operatorswere often nationalized and competition was reduced bymergers and acquisitions. The degree of openness of theworld economy also receded during this period. Infrastruc-ture sectors remained privately operated only in a relativelysmall number of countries, often with little or no competi-

*Section B of the present chapter is conceived as general backgroundinformation on matters that are examined from a legislative perspective inthe subsequent chapters of the Guide. For additional information, the readeris particularly advised to consult publications by other international organi-zations, such as the Guidelines for Infrastructure Development throughBuild-Operate-Transfer (BOT) Projects, prepared by the United NationsIndustrial Development Organization (UNIDO Publication, Sales No.UNIDO.95.6.E), the World Development Report 1994: Infrastructure forDevelopment (New York, Oxford University Press, 1994) and the WorldDevelopment Report 1996: From Plan to Market (New York, OxfordUniversity Press, 1996), both published by the World Bank, or FinancingPrivate Infrastructure (Washington, D.C., 1996), published by the Interna-tional Finance Corporation.

tion. In many countries the pre-eminence of the publicsector in infrastructure service provision became enshrinedin the constitution.

3. The current reverse trend towards private sector par-ticipation and competition in infrastructure sectors startedin the early 1980s and has been driven by general as wellas country-specific factors. Among the general factors aresignificant technological innovations; high indebtednessand stringent budget constraints limiting the public sector’sability to meet increasing infrastructure needs; the expan-sion of international and local capital markets, with a con-sequent improvement in access to private funding; and anincreasing number of successful international experienceswith private participation and competition in infrastructure.In many countries, new legislation was adopted, not only togovern such transactions, but also to modify the marketstructure and the rules of competition governing the sectorsin which they were taking place.

4. The purpose of the present Guide is to assist in theestablishment of a legal framework favourable to privateinvestment in public infrastructure. The advice provided inthe Guide aims at achieving a balance between the desire tofacilitate and encourage private participation in infrastruc-ture projects, on the one hand, and various public interestconcerns of the host country, on the other. The Guide dis-cusses a number of concerns of fundamental public interest,which, despite numerous differences of policy and legisla-tive treatment, are recognized in most legal systems. Pointsof public concern include matters such as continuity in theprovision of public services; adherence to environmentalprotection, health, safety and quality standards set by thehost country; fairness of prices charged to the public; non-discriminatory treatment of customers or users, full disclo-


sure of information pertaining to the operation of infrastruc-ture facilities and the flexibility needed to meet changedconditions, including expansion of the service to meet addi-tional demand. Fundamental concerns of the private sector,in turn, usually include issues such as stability of the legaland economic environment in the host country; transparencyof laws and regulations and predictability and impartiality intheir application; enforceability of property rights againstviolations by third parties; assurances that private property isrespected by the host country and not interfered with otherthan for reasons of public interest and only if compensationis paid; and freedom of the parties to agree on commercialterms that ensure a reasonable return on invested capitalcommensurate with the risks taken by private investors. TheGuide does not provide a single set of model solutions toaddress these concerns, but it helps the reader to evaluatedifferent approaches available and to choose the one mostsuitable in the national or local context.

1. Organization and scope of the Guide

5. Each chapter of the Guide contains a set of recom-mended legislative principles entitled “legislative recom-mendations”. The legislative recommendations are intendedto assist in the establishment of a legislative frameworkfavourable to privately financed infrastructure projects. Thelegislative recommendations contained in the Guide are fol-lowed by notes offering an analytical introduction with ref-erences to financial, regulatory, legal, policy and other is-sues raised in the subject area. The user is advised to read thelegislative recommendations together with the notes, whichprovide background information to enhance the understand-ing of the legislative recommendations.

6. The legislative recommendations deal with matters thatare important to address in legislation specifically con-cerned with privately financed infrastructure projects. Theydo not deal with other areas of law, which, as discussed innotes to the legislative recommendations, also have animpact on privately financed infrastructure projects.Moreover, the successful implementation of privately fi-nanced infrastructure projects typically requires variousmeasures beyond the establishment of an appropriate legis-lative framework, such as adequate administrative struc-tures and practices, organizational capability, technical ex-pertise, appropriate human and financial resources andeconomic stability. Although some of these matters arementioned in the notes, they are not addressed in the leg-islative recommendations.

7. The Guide is intended to be used as a reference bynational authorities and legislative bodies when preparingnew laws or reviewing the adequacy of existing laws andregulations. For that purpose, the Guide helps identify areasof law that are typically most relevant to private capitalinvestment in public infrastructure projects and discussesthe content of those laws which would be conducive toattracting private capital, national and foreign. The Guide isnot intended to provide advice on drafting agreements forthe execution of privately financed infrastructure projects.However, the Guide discusses some contractual issues (forinstance, in chaps. IV, “Construction and operation of in-

frastructure” and V, “Duration, extension and terminationof the project agreement”) to the extent that they relate tomatters that might usefully be addressed in the legislation.

8. The Guide pays special attention to infrastructureprojects that involve an obligation, on the part of the se-lected investors, to undertake physical construction, repairor expansion works in exchange for the right to charge aprice, either to the public or to a public authority, for theuse of the infrastructure facility or for the services it gen-erates. Although such projects are sometimes grouped withother transactions for the “privatization” of governmentalfunctions or property, the Guide is not concerned with “pri-vatization” transactions that do not relate to the develop-ment and operation of public infrastructure. In addition, theGuide does not address projects for the exploitation ofnatural resources, such as mining, oil or gas exploitationprojects under some “concession”, “licence” or “permis-sion” issued by the public authorities of the host country.

2. Terminology used in the Guide

9. The following paragraphs explain the meaning and useof certain expressions that appear frequently in the Guide.For terms not mentioned below, such as technical termsused in financial and business management writings, thereader is advised to consult other sources of information onthe subject, such as the Guidelines for Infrastructure Devel-opment through Build-Operate-Transfer (BOT) Projectsprepared by the United Nations Industrial DevelopmentOrganization (UNIDO).1

(a) “Public infrastructure” and “public services”

10. As used in the Guide, the expression “public infrastruc-ture” refers to physical facilities that provide services essen-tial to the general public. Examples of public infrastructurein this sense may be found in various sectors and includevarious types of facility, equipment or system: power gen-eration plants and power distribution networks (electricitysector); systems for local and long-distance telephone com-munications and data transmission networks (telecommuni-cations sector); desalination plants, waste water treatmentplants, water distribution facilities (water sector); facilitiesand equipment for waste collection and disposal (sanitationsector); and physical installations and systems used for pub-lic transportation, such as urban and inter-urban railways,underground trains, bus lines, roads, bridges, tunnels, ports,airlines and airports (transportation sector).

11. The line between “public” and “private” infrastructuremust be drawn by each country as a matter of publicpolicy. In some countries, airports are owned by the Gov-ernment; in others they are privately owned but subject toregulation or to the terms of an agreement with the compe-tent public authority. Hospital and medical facilities andprison and correctional facilities may be regarded as “pub-lic” or “private” infrastructure, depending on the country’spreferences. Often, but not always, power and telecommu-

1UNIDO publication, Sales No. UNIDO.95.6.E, hereafter referred to asthe UNIDO BOT Guidelines.


nication facilities are regarded as “public” infrastructure.No view is expressed in the Guide as to where the lineshould be drawn in a particular country.

12. The notions of “public infrastructure” and “publicservices” are well established in the legal tradition of somecountries, being sometimes governed by a specific body oflaw, which is typically referred to as “administrative law”(see chap. VII, “Other relevant areas of law”, ___). How-ever, in a number of other countries, apart from being sub-ject to special regulations, public services are not regardedas being intrinsically distinct from other types of business.As used in the Guide, the expressions “public services” and“public service providers” should not be understood in atechnical sense that may be attached to them under anyparticular legal system.

(b) “Concession”, “project agreement”and related expressions

13. In many countries, public services constitute govern-ment monopolies or are otherwise subject to special regu-lation. Where that is the case, the provision of a publicservice by an entity other than a public authority typicallyrequires an act of authorization by the appropriate govern-mental body. Different expressions are used to define suchacts of authorization under national laws and in some legalsystems various expressions may be used to denote differ-ent types of authorizations. Commonly used expressionsinclude terms such as “concession”, “franchise”, “licence”or “lease” (“affermage”). In some legal systems, in particu-lar those belonging to the civil law tradition, certain formsof infrastructure projects are referred to by well-definedlegal concepts such as “public works concession” or “pub-lic service concession”. As used in the Guide, the word“concession” is not to be understood in a technical sensethat may be attached to it under any particular legal systemor domestic law.

14. As used in the Guide, the term “project agreement”means an agreement between a public authority and theentity or entities selected by that public authority to carryout the project that sets forth the terms and conditions forthe construction or modernization, operation and mainte-nance of the infrastructure. Other expressions that may beused in some legal systems to refer to such an agreement,such as “concession agreement” or “concession contract”,are not used in the Guide.

15. The Guide uses the word “concessionaire” to refergenerally to an entity that carries out public infrastructureprojects under a concession issued by the public authoritiesof the host country. The term “project company” is some-times used in the Guide to refer specifically to an independ-ent legal entity established for the purpose of carrying outa particular project.

(c) References to national authorities

16. As used in the Guide, the word “Government” encom-passes the various public authorities of the host countryentrusted with executive or policy-making functions, at thenational, provincial or local level. The expression “public

authorities” is used to refer, in particular, to entities of, orrelated to, the executive branch of the Government. Theexpression “legislature” is used specifically with referenceto the organs that exercise legislative functions in the hostcountry.

17. The expression “contracting authority” is generallyused in the Guide to refer to the public authority of the hostcountry that has the overall responsibility for the projectand on behalf of which the project is awarded. Such author-ity may be national, provincial or local (see below,paras. 69 and 70).

18. The expression “regulatory agency” is used in theGuide to refer to the public authority that is entrusted withthe power to issue and enforce rules and regulations gov-erning the operation of the infrastructure. The regulatoryagency may be established by statute with the specific pur-pose of regulating a particular infrastructure sector.

(d) “Build-operate-transfer” and related expressions

19. The various types of projects referred to in this Guideas privately financed infrastructure projects are sometimesdivided into several categories, according to the type ofprivate participation or the ownership of the relevant infra-structure, as indicated below:

(a) Build-operate-transfer (BOT). An infrastructureproject is said to be a BOT project when the contractingauthority selects a concessionaire to finance and constructan infrastructure facility or system and gives the entity theright to operate it commercially for a certain period, at theend of which the facility is transferred to the contractingauthority;

(b) Build-transfer-operate (BTO). This expression issometimes used to emphasize that the infrastructure facilitybecomes the property of the contracting authority immedi-ately upon its completion, the concessionaire beingawarded the right to operate the facility for a certain period;

(c) Build-rent-operate-transfer (BROT) or “build-lease-operate-transfer” (BLOT). These are variations ofBOT or BTO projects where, in addition to the obligationsand other terms usual to BOT projects, the concessionairerents the physical assets on which the facility is located forthe duration of the agreement;

(d) Build-own-operate-transfer (BOOT). These areprojects in which a concessionaire is engaged for the fi-nancing, construction, operation and maintenance of agiven infrastructure facility in exchange for the right tocollect fees and other charges from its users. Under thisarrangement the private entity owns the facility and itsassets until it is transferred to the contracting authority;

(e) Build-own-operate (BOO). This expression refers toprojects where the concessionaire owns the facility perma-nently and is not under an obligation to transfer it back tothe contracting authority.

20. Besides acronyms used to highlight the particularownership regime, other acronyms may be used to empha-size one or more of the obligations of the concessionaire.In some projects, existing infrastructure facilities are turnedover to private entities to be modernized or refurbished,


operated and maintained, permanently or for a given periodof time. Depending on whether the private sector will ownsuch an infrastructure facility, those arrangements may becalled either “refurbish-operate-transfer” (ROT) or “mod-ernize-operate-transfer” (MOT), in the first case, or “refur-bish-own-operate” (ROO) or “modernize-own-operate”(MOO), in the latter. The expression “design-build-finance-operate” (DBFO) is sometimes used to emphasize the con-cessionaire’s additional responsibility for designing the fa-cility and financing its construction.

B. BACKGROUND INFORMATIONON PRIVATELY FINANCED

INFRASTRUCTURE PROJECTS

21. In most of the countries that have recently built newinfrastructure through private investment, privately fi-nanced infrastructure projects are an important tool inmeeting national infrastructure needs. Essential elements ofnational policies include the level of competition sought foreach infrastructure sector, the way in which the sector isstructured and the mechanisms used to ensure adequatefunctioning of infrastructure markets. National policies topromote private investment in infrastructure are often ac-companied by measures destined to introduce competitionbetween public service providers or to prevent abuse ofmonopolistic conditions where competition is not feasible.

22. In devising programmes to promote private sectorinvestment in the development and operation of public in-frastructure, a number of countries have found it useful toreview the assumptions under which public sector monopo-lies were established, including the historical circumstancesand political conditions that had led to their creation, witha view to (a) identifying those activities which still main-tain the characteristics of natural monopoly; and (b) assess-ing the feasibility and desirability of introducing competi-tion in certain infrastructure sectors.

1. Private investment and infrastructure policy

23. The measures that may be required to implement agovernmental policy to promote competition in variousinfrastructure sectors will depend essentially on the prevail-ing market structure. The main elements that characterize aparticular market structure include barriers to the entry ofcompetitors of an economic, legal, technical or other na-ture, the degree of vertical or horizontal integration, thenumber of companies operating in the market as well as theavailability of substitute products or services.

(a) Competition policy and monopolies

24. The term monopoly in the strict sense refers to a mar-ket with only one supplier. However, pure monopoly andperfect competition mark two ends of a spectrum. Mostmarkets for commodities or services are characterized by adegree of competition that lies between those two ends.Generally, monopolies can be classified as natural monopo-lies, legal monopolies and de facto monopolies; each ofthem may require different policy approaches:

(a) Natural monopolies. These are economic activitiesthat allow a single provider to supply the whole market ata lower cost than two or more providers. This situation istypical for economic activities that entail large investmentand high fixed costs, but decreasing costs of producing anadditional unit of services (e.g. an additional cubic metre ofwater) to attend an increase of demand. Natural monopoliestend to exhibit large upfront fixed investment requirementsthat make it difficult for a new company, lacking compa-rable economies of scale, to enter the market and undercutthe incumbent;

(b) Legal monopolies. Legal monopolies are estab-lished by law and may cover sectors or activities that are orare not natural monopolies. In the latter category, monopo-lies exist solely because competition is prohibited. Thedevelopments that had led many countries to the establish-ment of legal monopolies were often based on the consid-eration that national infrastructure needs, both in terms ofquality and quantity, could not be adequately met by leav-ing infrastructure to the free market;

(c) De facto monopolies. These monopolies may notnecessarily be the result of economic fundamentals or oflegal provisions, but simply of the absence of competition,resulting, for example, from the integrated nature of theinfrastructure company and its ability to control essentialfacilities to the exclusion of other suppliers.

25. Although monopolies are sometimes justified by le-gal, political or social grounds, they may produce negativeeconomic effects. A service provider operating under mo-nopolistic conditions is typically able to fix prices abovethose which would be charged in competitive conditions.The surplus profit that results from insufficient competitionimplies a transfer of wealth from consumers to producers.Monopolies have also been found to cause a net loss ofwelfare to the economy as a result of inflated prices gen-erated by artificially low production; a reduced rate of in-novation; and insufficient efforts to reduce productioncosts. Furthermore, in particular in infrastructure sectors,there may be secondary effects on other markets. (For ex-ample, lack of competition and efficiency in telecommuni-cations has negative repercussions through increases in costfor the economy at large.)

26. Despite their negative economic effects, monopoliesand other regulatory barriers to competition have some-times been maintained in the absence of natural monopolyconditions. One of the reasons cited for retaining monopo-lies is that they may be used to foster certain policy objec-tives, such as ensuring the provision of services in certainregions or to certain categories of consumers at low pricesor even below cost. Examples of services for which theprice may not cover costs include lifeline telephone, wateror power service, discounted transport for certain catego-ries of travellers (e.g. schoolchildren or senior citizens), aswell as other services for low-income or rural users. Amonopolistic service provider is able to finance the provi-sion of such services through internal “cross-subsidies”from other profitable services provided in other regions orto other categories of consumers.

27. Another reason sometimes cited for retaining legalmonopolies in the absence of natural monopoly conditions


is to make the sector more attractive to private investors.Private operators may insist on being granted exclusivityrights to provide a certain service so as to reduce the com-mercial risk of their investment. However, that objectivehas to be balanced against the interests of consumers andthe economy as a whole. For those countries where thegranting of exclusivity rights is found to be needed as anincentive to private investment, it may be advisable to con-sider restricting competition, though on a temporary basisonly (see chap. I, “General legislative and institutionalframework”, paras. 20-22).

(b) Scope for competition in different sectors

28. Until recently, monopolistic conditions prevailed inmost infrastructure sectors either because the sector was anatural monopoly or because regulatory barriers or otherfactors (e.g. vertically integrated structure of public serviceproviders) prevented effective competition. However, rapidtechnological progress has broadened the potential scopefor competition in infrastructure sectors, as discussedbriefly below:

(a) Telecommunication sector. New wireless technol-ogy not only makes mobile telecommunication servicespossible, but it is also increasingly competing with fixed(wireline) services. Fibre optic networks, cable televisionnetworks, data transmission over power lines, global satel-lite systems, increasing computing power, improved datacompression techniques, convergence between communi-cations, broadcasting and data processing are further con-tributing to the breakdown of traditional monopolies andmodes of service provision. As a result of these and otherchanges, telecommunication services have become com-petitive and countries are increasingly opening up the sec-tor to free entry, while limiting access only to services thatrequire the use of scarce public resources, such as radiofrequency;

(b) Energy sector. In the energy sector, combined-cyclegas turbines and other technologies allowing for efficientpower production on smaller scales and standardization inmanufacturing of power generation equipment have ledseveral countries to change the monopolistic and verticallyintegrated structure of domestic electricity markets. In-creasing computing power and improved data-processingsoftware make it easier to dispatch electricity across a gridand to organize power pools and other mechanisms to ac-cess the network and trade in electricity;

(c) Transport sector. Technology is in many cases alsoat the origin of changing patterns in the transport sector: theintroduction of containers and other innovations, such assatellite communications, making it possible to track ship-ments across the globe, have had profound consequences onshipping, port management and rail and truck transport,while fostering the development of intermodal transport.

29. Technological changes such as these have promptedthe legislatures in a number of countries to extend compe-tition to infrastructure sectors by adopting legislation thatabolishes monopolies and other barriers to entry, changesthe way infrastructure sectors are organized and establishesa regulatory framework fostering effective competition.The extent to which this can be done depends on the sector,the size of the market and other factors.

2. Restructuring of infrastructure sectors

30. In many countries, private participation in infrastruc-ture development has followed the introduction of meas-ures to restructure infrastructure sectors. Legislative actiontypically begins with the abolition of rules that prohibitprivate participation in infrastructure and the removal of allother legal impediments to competition that cannot be jus-tified by reasons of public interest. It should be noted,however, that the extent to which a particular sector may beopened to competition is a decision that is taken in the lightof the country’s overall economic policy. Some countries,in particular developing countries, might have a legitimateinterest in promoting the development of certain sectors oflocal industry and might thus choose not to open certaininfrastructure sectors to competition.

31. For monopolistic situations resulting from legal prohi-bitions rather than economic and technological fundamen-tals, the main legislative action needed to introduce compe-tition is the removal of the existing legal barriers. This mayneed to be reinforced by rules of competition (such as theprohibition of collusion, cartels, predatory pricing or otherunfair trading practices) and regulatory oversight (see chap.I, “General legislative and institutional framework”, paras.30-53). For a number of activities, however, effective com-petition may not be obtained through the mere removal oflegislative barriers without legislative measures to restruc-ture the sector concerned. In some countries, monopolieshave been temporarily maintained only for the time neededto facilitate a gradual, more orderly and socially acceptabletransition from a monopolistic to a competitive marketstructure.

(a) Unbundling of infrastructure services

32. In the experience of some countries it has been foundthat vertically or horizontally integrated infrastructure com-panies may be able to prevent effective competition. Inte-grated companies may try to extend their monopolisticpowers in one market or market segment to other marketsor market segments in order to extract monopoly rents inthose activities as well. Therefore, some countries havefound it necessary to separate the monopoly element (suchas the grid in many networks) from competitive elements ingiven infrastructure sectors. By and large, infrastructureservices tend to be competitive, whereas the underlyingphysical infrastructure often has monopolistic characteris-tics.

33. The separation of competitive activities from mo-nopolistic ones may in turn require the unbundling of ver-tically or horizontally integrated activities. Verticalunbundling occurs when upstream activities are separatedfrom downstream ones, for example, by separating produc-tion, transmission, distribution and supply activities in thepower sector. The objective is typically to separate keynetwork components or essential facilities from the com-petitive segments of the business. Horizontal unbundlingoccurs when one or more parallel activities of a monopolistpublic service provider are divided among separate compa-nies, which may either compete directly with each other inthe market (as is increasingly the case with power produc-


tion) or retain a monopoly over a smaller territory (as maybe the case with power distribution). Horizontal unbundlingrefers both to a single activity or segment being broken up(as in the power sector examples) and to substitutes beingorganized separately in one or more markets (as in the caseof separation of cellular services from fixed-line telephony,for example).

34. However, the costs and benefits of such changes needto be considered carefully. Costs may include the costsassociated with the change itself (e.g. transaction and tran-sition costs, including the loss incurred by companies thatlose benefits or protected positions as a result of the newscheme) and those resulting from the operation of the newscheme, in particular higher coordination costs resulting,for example, from more complicated network planning,technical standardization or regulation. Benefits, on theother hand, may include new investments, better or newservices, more choice and lower economic costs.

(b) Recent experience in major infrastructure sectors

(i) Telecommunications

35. Unbundling has not been too common in the telecom-munication sector. In some countries, long-distance andinternational services were separated from local services;competition was introduced in the former, while the latterremained largely monopolistic. In some of those countriesthat trend is now being reversed, with local telephone com-panies being allowed to provide long-distance services andlong-distance companies being allowed to provide localservices, all in a competitive context. Mandatory open ac-cess rules are common in the telecommunication sector ofthose countries where the historical public service provideroffers services in competition with other providers whilecontrolling essential parts of the network.

(ii) Electricity

36. Electricity laws recently enacted in various countriescall for the unbundling of the power sector by separatinggeneration, transmission and distribution. In some cases,supply is further distinguished from distribution in order toleave only the monopolistic activity (i.e. the transport ofelectricity for public use over wires) under a monopoly. Inthose countries, the transmission and distribution compa-nies do not buy or sell electricity but only transport itagainst a regulated fee. Trade in electricity occurs betweenproducers or brokers on the one hand and users on theother. In some of the countries concerned, competition islimited to large users only or is being phased in gradually.

37. Where countries have opted for the introduction ofcompetition in the power and gas sectors, new legislationhas organized the new market structure, stipulating to whatextent the market had to be unbundled (sometimes includ-ing the number of public service providers to be created outof the incumbent monopoly), or removed barriers to newentry. The same energy laws have also established specificcompetition rules, whether structural (e.g. prohibition ofcross-ownership between companies in different segmentsof the market, such as production, transmission and distri-

bution, or gas and electricity sale and distribution) or be-havioural (e.g. third-party access rules, prohibition of alli-ances or other collusive arrangements). New institutionsand regulatory mechanisms, such as power pools, dispatchmechanisms or energy regulatory agencies, have been es-tablished to make the new energy markets work. Finally,other aspects of energy law and policy have had to beamended in conjunction with these changes, including therules governing the markets for oil, gas, coal and otherenergy sources.

(iii) Water and sanitation

38. The most common market structure reform introducedin the water and sanitation sector is horizontal unbundling.Some countries have created several water utilities where asingle one existed before. This is particularly common in,but is not limited to, countries with separate networks thatare not or only slightly interconnected. In practice, it hasbeen found that horizontal unbundling facilitates compari-son of the performance of service providers.

39. Some countries have invited private investors to pro-vide bulk water to a utility or to build and operate watertreatment or desalination plants, for example. In such ver-tical unbundling, the private services (and the discrete in-vestments they require) are usually rendered under contractto a utility and do not fundamentally modify the monopo-listic nature of the market structure: the plants usually donot compete with each other and are usually not allowed tobypass the utility to supply customers. A number of coun-tries have introduced competition in bulk water supply andtransportation; in some cases, there are active water mar-kets. Elsewhere, competition is limited to expensive bottledor trucked water and private wells.

(iv) Transport

40. In the restructuring measures taken in various coun-tries, a distinction is made between transport infrastructureand transport services. The former may often have naturalmonopoly characteristics, whereas services are generallycompetitive. Competition in transport services should beconsidered not only within a single mode but also acrossmodes, since trains, trucks, buses, airlines and ships tend tocompete for passengers and freight.

41. With respect to railways, some countries have optedfor a separation between the ownership and operation ofinfrastructure (e.g. tracks, signalling systems and train sta-tions) on the one hand and of rail transport services (e.g.passenger and freight) on the other. In such schemes, thelaw does not allow the track operator also to operate trans-port services, which are operated by other companies oftenin competition with each other. Other countries have letintegrated companies operate infrastructure as well as serv-ices, but have enforced third-party access rights to the in-frastructure, sometimes called “trackage rights”. In thosecases, transport companies, whether another rail line or atransport service company, have right of access to the trackon certain terms and the company controlling the track hasthe obligation to grant such access.


42. In many countries, ports were until recently managedas public sector monopolies. When opening the sector toprivate participation, legislators have considered differentmodels. Under the landlord-port system, the port authorityis responsible for the infrastructure as well as overall coor-dination of port activities; it does not, however, provideservices to ships or merchandise. In service ports, the sameentity is responsible for infrastructure and services. Compe-tition between service providers (e.g. tugboats, stevedoringand warehousing) may be easier to establish and maintainunder the landlord system.

43. Legislation governing airports may also requirechanges, whether to allow private investment or competi-tion between or within airports. Links between airport op-eration and air traffic control may also need to be consid-ered carefully. Within airports, many countries haveintroduced competition in handling services, catering andother services to planes, as well as in passenger servicessuch as retail shops, restaurants, parking and the like. Insome countries, the construction and operation of a newterminal at an existing airport has been entrusted to a newoperator, thus creating competition between terminals. Inothers, new airports have been built on a BOT basis andexisting ones transferred to private ownership.

(c) Transitional measures

44. The transition from monopoly to market needs to becarefully managed. Political, social or other factors haveled some countries to pursue a gradual or phased approachto implementation. As technology and other outside forcesare constantly changing, some countries have adopted sec-tor reforms that could be accelerated or adjusted to takethose changing circumstances into account.

45. Some countries have felt that competition should notbe introduced at once. In such cases, legislation has pro-vided for temporary exclusivity rights, limitation in thenumber of public service providers or other restrictions oncompetition. Those measures are designed to give the in-cumbent adequate time to prepare for competition and toadjust prices, while providing the public service provideradequate incentives for investment and service expansion.Other countries have included provisions calling for theperiodic revision (at the time of price reviews, for example)of such restrictions with a view to ascertaining whether theconditions that justified them at the time when they wereintroduced still prevail.

46. Another transitional measure, at least in some coun-tries with government-owned public service providers, hasbeen the restructuring or privatization of the incumbentservice provider. In most countries where government-owned providers of public services have been privatized,liberalization has by and large either accompanied or pre-ceded privatization. Some countries have proceeded other-wise and have privatized companies with significant exclu-sivity rights, often to increase privatization proceeds. Theyhave, however, found it difficult and sometimes very ex-pensive to remove, restrict or shorten at a later stage theexclusive rights or monopolies protecting private or priva-tized public service providers.

3. Forms of private sector participationin infrastructure projects

47. Private sector participation in infrastructure projectsmay be devised in a variety of different forms, rangingfrom publicly owned and operated infrastructure to fullyprivatized projects. The appropriateness of a particularvariant for a given type of infrastructure is a matter to beconsidered by the Government in view of the nationalneeds for infrastructure development and an assessment ofthe most efficient ways in which particular types of infra-structure facilities may be developed and operated. In aparticular sector more than one option may be used.

(a) Public ownership and public operation

48. In cases where public ownership and control is de-sired, direct private financing as well as infrastructure op-eration under commercial principles may be achieved byestablishing a separate legal entity controlled by the Gov-ernment to own and operate the project. Such an entity maybe managed as an independent private commercial enter-prise that is subject to the same rules and business princi-ples that apply to private companies. Some countries havea well established tradition in operating infrastructure fa-cilities through these types of company. Opening the capi-tal of such companies to private investment or making useof such a company’s ability to issue bonds or other secu-rities may create an opportunity for attracting private in-vestment in infrastructure.

49. Another form of involving private participation inpublicly owned and operated infrastructure may be thenegotiation of “service contracts” whereby the public op-erator contracts out specific operation and maintenanceactivities to the private sector. The Government may alsoentrust a broad range of operation and maintenance activi-ties to a private entity acting on behalf of the contractingauthority. Under such an arrangement, which is sometimesreferred to as a “management contract”, the private opera-tor’s compensation may be linked to its performance, oftenthrough a profit-sharing mechanism, although compensa-tion on the basis of a fixed fee may also be used, in par-ticular where the parties find it difficult to establish mutu-ally acceptable mechanisms to assess the operator’sperformance.

(b) Public ownership and private operation

50. Alternatively, the whole operation of public infra-structure facilities may be transferred to private entities.One possibility is to give the private entity, usually for acertain period, the right to use a given facility, to supply therelevant services and to collect the revenue generated bythat activity. Such a facility may already be in existence ormay have been specially built by the private entity con-cerned. This combination of public ownership and privateoperation has the essential features of arrangements that insome legal systems may be referred to as “public worksconcessions” or “public service concessions”.

51. Another form of private participation in infrastructureis where a private entity is selected by the contracting au-


thority to operate a facility that has been built by or onbehalf of the Government, or whose construction has beenfinanced with public funds. Under such an arrangement,the operator assumes the obligation to operate and maintainthe infrastructure and is granted the right to charge for theservices it provides. In such a case, the operator assumesthe obligation to pay to the contracting authority a portionof the revenue generated by the infrastructure that is usedby the contracting authority to amortize the constructioncost. Such arrangements are referred to in some legal sys-tems as “lease” or “affermage”.

(c) Private ownership and operation

52. Under the third approach, the private entity not onlyoperates the facility, but also owns the assets related to it.Here, too, there may be substantial differences in the treat-ment of those projects under domestic laws, for instance asto whether the contracting authority retains the right toreclaim title to the facility or to assume responsibility for itsoperation (see also chap. IV, “Construction and operationof infrastructure”, paras. 23-29).

53. Where the facility is operated pursuant to a govern-mental licence, private ownership of physical assets (e.g. atelecommunication network) is often separable from thelicence to provide the service to the public (e.g. long-dis-tance telephone services), in that the licence can be with-drawn by the competent public authority under certain cir-cumstances. Thus, private ownership of the facility may notnecessarily entail an indefinite right to provide the service.

4. Financing structures and sourcesof finance for infrastructure

(a) Notion of project finance

54. Large-scale projects involving the construction of newinfrastructure facilities are often carried out by new corpo-rate entities specially established for that purpose by theproject promoters. Such a new entity, often called a“project company”, becomes the vehicle for raising fundsfor the project. Because the project company lacks an es-tablished credit or an established balance sheet on whichthe lenders can rely, the preferred financing modality forthe development of new infrastructure is called “projectfinance”. In a project finance transaction, credit will bemade available to the extent that the lenders can be satis-fied to look primarily to the project’s cash flow and earn-ings as the source of funds for the repayment of loans takenout by the project company. Other guarantees either areabsent or cover only certain limited risks. To that end, theproject’s assets and revenue, and the rights and obligationsrelating to the project, are independently estimated and arestrictly separated from the assets of the project company’sshareholders.

55. Project finance is also said to be “non-recourse” fi-nancing owing to the absence of recourse to the projectcompany’s shareholders. In practice, however, lenders areseldom ready to commit the large amounts needed for in-

frastructure projects solely on the basis of a project’s ex-pected cash flow or assets. The lenders may reduce theirexposure by incorporating into the project documents anumber of back-up or secondary security arrangements andother means of credit support provided by the project com-pany’s shareholders, the Government, purchasers or otherinterested third parties. This modality is commonly called“limited recourse” financing.

(b) Financing sources for infrastructure projects

56. Alternatives to traditional public financing are playingan increasing role in the development of infrastructure. Inrecent years, new infrastructure investment in variouscountries has included projects with exclusively or pre-dominantly private funding sources. The two main types offund are debt finance, usually in the form of loans obtainedon commercial markets, and equity investment. However,financing sources are not limited to those. Public and pri-vate investment have often been combined in arrangementssometimes called “public-private partnerships”.

(i) Equity capital

57. The first type of capital for infrastructure projects isprovided in the form of equity investment. Equity capital isobtained in the first place from the project promoters orother individual investors interested in taking stock in theconcessionaire. However, such equity capital normally rep-resents only a portion of the total cost of an infrastructureproject. In order to obtain commercial loans or to haveaccess to other sources of funds to meet the capital require-ments of the project, the project promoters and other indi-vidual investors have to offer priority payment to the lend-ers and other capital providers, thus accepting that theirown investment will only be paid after payment of thoseother capital providers. Therefore, the project promoterstypically assume the highest financial risk. At the sametime, they will hold the largest share in the project’s profitonce the initial investment is paid. Substantial equity in-vestment by the project promoters is typically welcomed bythe lenders and the Government, as it helps reduce theburden of debt service on the concessionaire’s cash flowand serves as an assurance of those companies’ commit-ment to the project.

(ii) Commercial loans

58. Debt capital often represents the main source of fund-ing for infrastructure projects. It is obtained on the financialmarket primarily by means of loans extended to the projectcompany by national or foreign commercial banks, typi-cally using funds that originate from short- to medium-termdeposits remunerated by those banks at floating interestrates. Consequently, loans extended by commercial banksare often subject to floating interest rates and normallyhave a maturity term shorter than the project period. How-ever, where feasible and economic, given financial marketconditions, banks may prefer to raise and lend medium- tolong-term funds at fixed rates, so as to avoid exposingthemselves and the concessionaire over a long period tointerest rate fluctuations, while also reducing the need forhedging operations. Commercial loans are usually provided


by lenders on condition that their payment takes prec-edence over the payment of any other of the borrower’sliabilities. Therefore, commercial loans are said to be“unsubordinated” or “senior” loans.

(iii) “Subordinated” debt

59. The third type of fund typically used in these projectsare “subordinated” loans, sometimes also called “mezza-nine” capital. Such loans rank higher than equity capital inorder of payment, but are subordinate to senior loans. Thissubordination may be general (i.e. ranking generally lowerthan any senior debt) or specific, in which case the loanagreements specifically identify the type of debt to whichit is subordinated. Subordinated loans are often provided atfixed rates, usually higher than those of senior debt. As anadditional tool to attract such capital, or sometimes as analternative to higher interest rates, providers of subordi-nated loans may be offered the prospect of direct participa-tion in capital gains, by means of the issue of preferred orconvertible shares or debentures, sometimes providing anoption to subscribe for shares of the concessionaire at pref-erential prices.

(iv) Institutional investors

60. In addition to subordinated loans provided by theproject promoters or by public financial institutions, subor-dinated debt may be obtained from financing companies,investment funds, insurance companies, collective invest-ment schemes (e.g. mutual funds), pension funds and otherso-called “institutional investors”. These institutions nor-mally have large sums available for long-term investmentand may represent an important source of additional capitalfor infrastructure projects. Their main reasons for acceptingthe risk of providing capital to infrastructure projects arethe prospect of remuneration and interest in diversifyinginvestment.

(v) Capital market funding

61. As more experience is gained with privately financedinfrastructure projects, increased use is being made of capi-tal market funding. Funds may be raised by the placementof preferred shares, bonds and other negotiable instrumentson a recognized stock exchange. Typically, the public offerof negotiable instruments requires regulatory approval andcompliance with requirements of the relevant jurisdiction,such as requirements concerning the information to be pro-vided in the prospectus of issuance and, in some jurisdic-tions, the need for prior registration. Bonds and other nego-tiable instruments may have no other security than thegeneral credit of the issuer or may be secured by a mort-gage or other lien on specific property.

62. The possibility of gaining access to capital markets isusually greater for existing public utilities with an estab-lished commercial record than for companies specially es-tablished to build and operate a new infrastructure andlacking the required credit rating. Indeed, a number ofstock exchanges require that the issuing company havesome established record over a certain minimum periodbefore being permitted to issue negotiable instruments.

(vi) Financing by Islamic financial institutions

63. One additional group of potential capital providers areIslamic financial institutions. Those institutions operateunder rules and practices derived from the Islamic legaltradition. One of the most prominent features of bankingactivities under their rules is the absence of interest pay-ments or strict limits to the right to charge interest andconsequently the establishment of other forms of consid-eration for the borrowed money, such as profit-sharing ordirect participation of the financial institutions in the resultsof the transactions of their clients. As a consequence oftheir operating methods, Islamic financial institutions maybe more inclined than other commercial banks to considerdirect or indirect equity participation in a project.

(vii) Financing by international financial institutions

64. International financial institutions may also play a sig-nificant role as providers of loans, guarantees or equity toprivately financed infrastructure projects. A number ofprojects have been co-financed by the World Bank, theInternational Finance Corporation or by regional develop-ment banks.

65. International financial institutions may also play aninstrumental role in the formation of “syndications” for theprovision of loans to the project. Some of those institutionshave special loan programmes under which they becomethe sole “lender of record” to a project, acting on its ownbehalf and on behalf of participating banks and assumingresponsibility for processing disbursements by participantsand for subsequent collection and distribution of loan pay-ments received from the borrower, either pursuant to spe-cific agreements or based on other rights that are availableunder their status of preferred creditor. Some internationalfinancial institutions may also provide equity or mezzaninecapital, by investing in capital market funds specialized insecurities issued by infrastructure operators. Lastly, inter-national financial institutions may provide guaranteesagainst a variety of political risks, which may facilitate theproject company’s task of raising funds in the internationalfinancial market (see chap. II, “Project risks and govern-ment support”, paras. 61-71).

(viii) Support by export credit and investmentpromotion agencies

66. Export credit and investment promotion agencies mayprovide support to the project in the form of loans, guaran-tees or a combination of both. The participation of exportcredit and investment promotion agencies may provide anumber of advantages, such as lower interest rates thanthose applied by commercial banks and longer-term loans,sometimes at a fixed interest rate (see chap. II, “Projectrisks and government support”, paras. 72-74).

(ix) Combined public and private finance

67. In addition to loans and guarantees extended by com-mercial banks and national or multilateral public financialinstitutions, in a number of cases public funds have beencombined with private capital for financing new projects.


Such public funds may originate from government incomeor sovereign borrowing. They may be combined with pri-vate funds as initial investment or as long-term payments,or may take the form of governmental grants or guarantees.Infrastructure projects may be co-sponsored by the Govern-ment through equity participation in the concessionaire,thus reducing the amount of equity and debt capital neededfrom private sources (see chap. II, “Project risks and gov-ernment support”, paras. 40 and 41).

5. Main parties involved in implementinginfrastructure projects

68. The parties to a privately financed infrastructureproject may vary greatly, depending on the infrastructuresector, the modality of private sector participation and thearrangements used for financing the project. The followingparagraphs identify the main parties in the implementationof a typical privately financed infrastructure project involv-ing the construction of a new infrastructure facility andcarried out under the “project finance” modality.

(a) The contracting authorityand other public authorities

69. The execution of a privately financed infrastructureproject frequently involves a number of public authoritiesin the host country at the national, provincial or local level.The contracting authority is the main body responsible forthe project within the Government. Furthermore, the execu-tion of the project may necessitate the active participation(e.g. for the issuance of licences or permits) of other publicauthorities in addition to the contracting authority, at thesame or at a different level of Government. Those authori-ties play a crucial role in the execution of privately fi-nanced infrastructure projects.

70. The contracting authority or another public authoritynormally identifies the project pursuant to its own policiesfor infrastructure development in the sector concerned anddetermines the type of private sector participation that wouldallow the most efficient operation of the infrastructure facil-ity. Thereafter, the contracting authority conducts the proc-ess that leads to the selection of the concessionaire. Further-more, throughout the life of the project, the Governmentmay need to provide various forms of support—legislative,administrative, regulatory and sometimes financial—so as toensure that the facility is successfully built and adequatelyoperated. Finally, in some projects the Government maybecome the ultimate owner of the facility.

(b) The project company and the project promoters

71. Privately financed infrastructure projects are usuallycarried out by a joint venture of companies including con-struction and engineering companies and suppliers ofheavy equipment interested in becoming the main contrac-tors or suppliers of the project. The companies that partici-pate in such a joint venture are referred to in the Guide asthe “promoters” of the project. Those companies will beintensively involved in the development of the project dur-ing its initial phase and their ability to cooperate with each

other and to engage other reliable partners will be essentialfor timely and successful completion of the work. Further-more, the participation of a company with experience inoperating the type of facility being built is an importantfactor to ensure the long-term viability of the project.Where an independent legal entity is established by theproject promoters, other equity investors not otherwise en-gaged in the project (usually institutional investors, invest-ment banks, bilateral or multilateral lending institutions,sometimes also the Government or a government-ownedcorporation) may also participate. The participation of localinvestors, where the project company is required to be es-tablished under the laws of the host country (see chap. IV,“Construction and operation of infrastructure”, paras. 12-18), is sometimes encouraged by the Government.

(c) Lenders

72. The risks to which the lenders are exposed in projectfinance, be it non-recourse or limited recourse, are consider-ably higher than in conventional transactions. This is evenmore the case where the security value of the physical assetsinvolved (e.g. a road, bridge or tunnel) is difficult to realize,given the lack of a “market” where such assets could easilybe sold, or act as obstacles to recovery or repossession. Thiscircumstance affects not only the terms under which theloans are provided (e.g. the usually higher cost of projectfinance and extensive conditions to funding), but also, as apractical matter, the availability of funds.

73. Owing to the magnitude of the investment requiredfor a privately financed infrastructure project, loans areoften organized in the form of “syndicated” loans with oneor more banks taking the lead role in negotiating the fi-nance documents on behalf of the other participating finan-cial institutions, mainly commercial banks. Commercialbanks that specialize in lending for certain industries aretypically not ready to assume risks with which they are notfamiliar (for a discussion of project risks and risk alloca-tion, see chap. II, “Project risks and government support”,paras. 8-29). For example, long-term lenders may not beinterested in providing short-term loans to finance infra-structure construction. Therefore, in large-scale projects,different lenders are often involved at different phases ofthe project. With a view to avoiding disputes that mightarise from conflicting actions taken by individual lenders ordisputes between lenders over payment of their loans, lend-ers extending funds to large projects sometimes do so un-der a common loan agreement. Where various credit facili-ties are provided under separate loan agreements, thelenders will typically negotiate a so-called “inter-creditoragreement”. An inter-creditor agreement usually containsprovisions dealing with matters such as provisions for dis-bursement of payments, pro rata or in a certain order ofpriority; conditions for declaring events of default and ac-celerating the maturity of credits; and coordination of fore-closure on security provided by the project company.

(d) International financial institutionsand export credit and investment promotion agencies

74. International financial institutions and export creditand investment promotion agencies will have concerns of


generally the same order as other lenders to the project. Inaddition to this, they will be particularly interested in en-suring that the project execution and its operation are not inconflict with particular policy objectives of those institu-tions and agencies. Increasing emphasis is being given byinternational financial institutions to the environmentalimpact of infrastructure projects and their long-termsustainability. The methods and procedures applied to se-lect the concessionaire will also be carefully considered byinternational financial institutions providing loans to theproject. Many global and regional financial institutions andnational development funding agencies have establishedguidelines or other requirements governing procurementwith funds provided by them, which is typically reflected intheir standard loan agreements (see also chap. III, “Selec-tion of the concessionaire”, para. 18).

(e) Insurers

75. Typically, an infrastructure project will involve casu-alty insurance covering its plant and equipment, third-partyliability insurance and worker’s compensation insurance.Other possible types of insurance include insurance forbusiness interruption, interruption in cash flows and costoverrun (see chap. IV, “Construction and operation of in-frastructure”, paras. 119 and 120). Those types of insuranceare usually available on the commercial insurance markets,although the availability of commercial insurance may belimited for certain extraordinary events outside the controlof the parties (e.g. war, riots, vandalism, earthquakes orhurricanes). The private insurance market is playing anincreasing role in coverage against certain types of politicalrisk, such as contract repudiation, failure by a public au-thority to perform its contractual obligations or unfair callsfor independent guarantees. In some countries, insuranceunderwriters structure comprehensive insurance packagesaimed at avoiding certain risks being left uncovered owingto gaps between individual insurance policies. In additionto private insurance, guarantees against political risks may

be provided by international financial institutions, such asthe World Bank, the Multilateral Investment GuaranteeAgency and the International Finance Corporation, by re-gional development banks or by export credit and invest-ment promotion agencies (see chap. II, “Project risks andgovernment support”, paras. 61-74).

(f) Independent experts and advisers

76. Independent experts and advisers play an importantrole at various stages of privately financed infrastructureprojects. Experienced companies typically supplement theirown technical expertise by retaining the services of outsideexperts and advisers, such as financial experts, internationallegal counsel or consulting engineers. Merchant and invest-ment banks often act as advisers to project promoters inarranging the finance and in formulating the project to beimplemented, an activity that, while essential to project fi-nance, is quite distinct from the financing itself. Independ-ent experts may advise the lenders to the project, for exam-ple, on the assessment of project risks in a specific hostcountry. They may also assist public authorities in devisingsector-specific strategies for infrastructure developmentand in formulating an adequate legal and regulatory frame-work. Furthermore, independent experts and advisers mayassist the contracting authority in the preparation of feasi-bility and other preliminary studies, in the formulation ofrequests for proposals or standard contractual terms andspecifications, in the evaluation and comparison of propos-als or in the negotiation of the project agreement.

77. In addition to private entities, a number of intergov-ernmental organizations (e.g. UNIDO and the regionalcommissions of the Economic and Social Council) and in-ternational financial institutions (e.g. the World Bank andthe regional development banks) have special programmeswhereby they may either provide this type of technicalassistance directly to the Government or assist the latter inidentifying qualified advisers.

A/CN.9/471/Add.2

Chapter I. General legislative and institutional framework

CONTENTS

Paragraphs Page

LEGISLATIVE RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

NOTES ON THE LEGISLATIVE RECOMMENDATIONS . . . . . . . . . . . . . . . 1-53 85

A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 85

B. Constitutional and legislative framework . . . . . . . . . . . . . . . . . . . . . 2-14 85

1. General guiding principles for a favourableconstitutional and legislative framework . . . . . . . . . . . . . . . . . 3-6 85

2. Constitutional law and privately financed infrastructureprojects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9 86

3. General and sector-specific legislation . . . . . . . . . . . . . . . . . . . 10-14 86


Paragraphs Page

C. Scope of authority to award concessions . . . . . . . . . . . . . . . . . . . . . 15-22 86

1. Authorized agencies and relevant fields of activity . . . . . . . . . 16-18 87

2. Purpose and scope of concessions . . . . . . . . . . . . . . . . . . . . . . 19-22 87

D. Administrative coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-29 87

1. Coordination of preparatory measures . . . . . . . . . . . . . . . . . . . 25-26 88

2. Arrangements for facilitating the issuance of licencesand permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-29 88

E. Authority to regulate infrastructure services . . . . . . . . . . . . . . . . . . 30-53 89

1. Sectoral competence and mandate of regulatoryagencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-35 89

2. Institutional mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-38 89

3. Powers of regulatory agencies . . . . . . . . . . . . . . . . . . . . . . . . . 39-42 90

4. Composition, staff and budget of regulatory agencies . . . . . . . 43-45 90

5. Regulatory process and procedures . . . . . . . . . . . . . . . . . . . . . . 46-48 91

6. Recourse against decisions of the regulatory agency . . . . . . . 49-50 91

7. Settlement of disputes between public service providers . . . . 51-53 91

LEGISLATIVE RECOMMENDATIONS

For host countries wishing to promote privately financedinfrastructure projects it is recommended that the followingprinciples be implemented by the law:

Constitutional and legislative framework(see paras. 2-14)

Recommendation 1. The legislative and institutionalframework for the implementation of privately financed in-frastructure projects should ensure transparency, fairnessand the long-term sustainability of projects. Undesirablerestrictions on private sector participation in infrastructuredevelopment and operation should be eliminated.

Scope of authority to award concessions(see paras. 15-22)

Recommendation 2. The law should identify the publicauthorities of the host country (including, as appropriate,national, provincial and local authorities) that are empow-ered to enter into agreements for the implementation ofprivately financed infrastructure projects.

Recommendation 3. Privately financed infrastructureprojects may include concessions for the construction andoperation of new infrastructure facilities and systems or themaintenance, modernization, expansion and operation ofexisting infrastructure facilities and systems.

Recommendation 4. The law should identify the sec-tors or types of infrastructure in respect of which conces-sions may be granted.

Recommendation 5. The law should specify whether aconcession might extend to the entire region under the ju-

risdiction of the respective contracting authority, to a geo-graphical subdivision thereof or to a discrete project, andwhether it might be awarded with or without exclusivity, asappropriate, in accordance with rules and principles of law,statutory provisions, regulations and policies applying tothe sector concerned. Contracting authorities might bejointly empowered to award concessions beyond a singlejurisdiction.

Administrative coordination (see paras. 23-29)

Recommendation 6. Institutional mechanisms shouldbe established to coordinate the activities of the public au-thorities responsible for issuing approvals, licences, permitsor authorizations required for the implementation of pri-vately financed infrastructure projects in accordance withstatutory or regulatory provisions on the construction andoperation of infrastructure facilities of the type concerned.

Authority to regulate infrastructure services(see paras. 30-53)

Recommendation 7. The authority to regulate infra-structure services should not be entrusted to entities thatdirectly or indirectly provide infrastructure services.

Recommendation 8. Regulatory competence should beentrusted to functionally independent bodies with a level ofautonomy sufficient to ensure that their decisions are takenwithout political interference or inappropriate pressuresfrom infrastructure operators and public service providers.

Recommendation 9. The rules governing regulatoryprocedures should be made public. Regulatory decisionsshould state the reasons on which they are based andshould be accessible to interested parties through publica-tion or other means.


Recommendation 10. The law should establish trans-parent procedures whereby the concessionaire may requesta review of regulatory decisions by an independent andimpartial body and should set forth the grounds on whicha request for review may be based and the availability ofcourt review.

Recommendation 11. Where appropriate, special pro-cedures should be established for handling disputes amongpublic service providers concerning alleged violations oflaws and regulations governing the relevant sector.

NOTES ON THE LEGISLATIVERECOMMENDATIONS

A. GENERAL REMARKS

1. The establishment of an appropriate and effective legalframework is a prerequisite to creating an environment thatfosters private investment in infrastructure. For countrieswhere such a legal framework already exists, it is importantto ensure that the law is sufficiently flexible and responsiveto keep pace with the developments in various infrastruc-ture sectors. This chapter deals with some general issuesthat domestic legislatures are advised to consider whensetting up or reviewing the legal framework for privatelyfinanced infrastructure projects in order to achieve theabove objectives. Section B (paras. 2-14) sets out generalconsiderations on the constitutional and legislative frame-work; section C (paras. 15-22) deals with the scope ofauthority to award infrastructure and public services con-cessions; section D (paras. 23-29) discusses possible meas-ures to enhance administrative coordination; and section E(paras. 30-53) deals with institutional and procedural ar-rangements for the regulation of infrastructure sectors.

B. CONSTITUTIONAL AND LEGISLATIVEFRAMEWORK

2. This section considers general guiding principles thatmay inspire the legal framework for privately financed in-frastructure projects. It further points out the possible im-plications that the constitutional law of the host countrymay have for the implementation of these projects. Lastly,this section deals briefly with possible choices to be maderegarding the level and type of instruments that might needto be enacted and their scope of application.

1. General guiding principles for a favourableconstitutional and legislative framework

3. In considering the establishment of an enabling legalframework or in reviewing the adequacy of the existingframework, domestic legislators may wish to take into ac-count some general principles that have inspired recentlegislative actions in various countries, which are discussedbriefly in the following paragraphs.

(a) Transparency

4. A transparent legal framework is characterized byclear and readily accessible rules and by efficient proce-dures for their application. Transparent laws and adminis-trative procedures create predictability, enabling potentialinvestors to estimate the costs and risks of their investmentand thus to offer their most advantageous terms. Transpar-ent laws and administrative procedures may also fosteropenness through provisions requiring the publication ofadministrative decisions and the disclosure of informationof public relevance. They also help to guard against arbi-trary or improper actions or decisions by the contractingauthority or its officials and thus help to promote confi-dence in a country’s infrastructure development pro-gramme. Transparency of laws and administrative proce-dures is of particular importance where foreign investmentis sought, since foreign companies may be unfamiliar withthe country’s practices for the award of infrastructureprojects.

(b) Fairness

5. The legal framework is both the means by which Gov-ernments regulate and ensure the provision of public serv-ices to their citizens and the means by which public serviceproviders and their customers may protect their rights. Afair legal framework takes into account the various (andsometimes possibly conflicting) interests of the Govern-ment, the public service providers and their customers andseeks to achieve an equitable balance between them. Theprivate sector’s business considerations, the users’ right toadequate services, both in terms of quality and price, theGovernment’s responsibility for ensuring the continuousprovision of essential services and its role in promotingnational infrastructure development are but a few of theinterests that deserve appropriate recognition in the law.

(c) Long-term sustainability

6. An important objective of domestic legislation on in-frastructure development is to ensure the long-term provi-sion of public services, with increasing attention being paidto environmental sustainability. Inadequate arrangementsfor the operation and maintenance of public infrastructureseverely limit efficiency in all sectors of infrastructure andresult directly in reduced service quality and increasedcosts for users. From a legislative perspective, it is impor-tant to ensure that the host country has the institutionalcapacity to undertake the various tasks entrusted to publicauthorities involved in infrastructure projects throughouttheir phases of implementation. Another measure to en-hance the long-term sustainability of a national infrastruc-ture policy is to achieve a correct balance between com-petitive and monopolistic provision of public services.Competition may reduce overall costs and provide moreback-up facilities for essential services. In certain sectors,competition has also helped to increase the productivity ofinfrastructure investment, to enhance responsiveness to theneeds of the customers and to obtain better quality forpublic services, thus improving the business environmentin all sectors of the economy.


2. Constitutional law and privately financedinfrastructure projects

7. The constitutional law of a number of countries refersgenerally to the duty of the State to ensure the provision ofpublic services. Some of them list the infrastructure andservices sectors that come under the responsibility of theState, while in others the task of identifying those sectorsis delegated to the legislator. Under some national consti-tutions, the provision of certain public services is reservedexclusively to the State or to specially created public enti-ties. Other constitutions, however, authorize the State toaward concessions to private entities for the developmentand operation of infrastructure and the provision of publicservices. In some countries, there are limitations to theparticipation of foreigners in certain sectors or require-ments that the State should participate in the capital of thecompanies providing public services.

8. For countries wishing to promote private investment ininfrastructure it is important to review existing constitu-tional rules so as to identify possible restrictions to theimplementation of privately financed infrastructureprojects. In some countries, privately financed infrastruc-ture projects have been delayed by uncertainties regardingthe extent of the State’s authority to award them. Some-times, concerns that those projects might contravene consti-tutional rules on State monopolies or on the provision ofpublic services have led to judicial disputes, with a conse-quent negative impact on the implementation of theprojects.

9. It is further important to take into account constitu-tional rules relating to the ownership of land or infrastruc-ture facilities. The constitutional law of some countriescontains limitations to private ownership of land and cer-tain means of production. In other countries, private prop-erty is recognized, but the constitution declares all orcertain types of infrastructure to be State property. Prohibi-tions and restrictions of this nature can be an obstacle to theexecution of projects that entail private operation, or pri-vate operation and ownership, of the relevant infrastructure(see further chap. IV, “Construction and operation of infra-structure”, paras. 23-29).

3. General and sector-specific legislation

10. Legislation frequently plays a central role in promot-ing private investment in public infrastructure projects. Thelaw typically embodies a political commitment, providesspecific legal rights and may represent an important guar-antee of stability of the legal and regulatory regime. Inmost countries, the implementation of privately financedinfrastructure projects was in fact preceded by legislativemeasures setting forth the general rules under which thoseprojects are awarded and executed.

11. In some countries, as a matter of constitutional law orlegislative practice, specific legislation may need to beadopted in respect of individual projects. In other countrieswith a well-established tradition of awarding concessions tothe private sector for the provision of public services, theGovernment is authorized by general legislation to award

to the private sector any activity carried out by the publicsector that has an economic value that makes such activitycapable of being exploited by private entities. General leg-islation of this type creates a framework for providing auniform treatment to issues that are common to privatelyfinanced projects in different infrastructure sectors.

12. However, by its very nature, general legislation isnormally not suitable to address all the particular require-ments of different sectors. Even in countries that haveadopted general legislation addressing cross-sectoral issues,it has been found that supplementary sector-specific legis-lation allows the legislator to formulate rules that take intoaccount the market structure in each sector (see above,“Introduction and background information on privately fi-nanced infrastructure projects”, paras. 21-46). It should benoted that in many countries sector-specific legislation wasadopted at a time when a significant portion, or even theentirety of the national infrastructure constituted State mo-nopolies. For countries interested in promoting private sec-tor investment in infrastructure it is advisable to reviewexisting sector-specific legislation so as to ascertain itssuitability for privately financed infrastructure projects.

13. Sector-specific legislation may further play an impor-tant role in establishing a framework for the regulation ofindividual infrastructure sectors (see below, paras. 30-53).Legislative guidance is particularly useful in countries atthe initial stages of setting up or developing national regu-latory capacities. Such legislation represents a useful assur-ance that the regulators do not have unlimited discretion inthe exercise of their functions, but are bound by the param-eters provided by the law. However, it is generally advis-able to avoid rigid or excessively detailed legislative provi-sions dealing with contractual aspects of theimplementation of privately financed infrastructureprojects, which in most cases would not be adequate totheir long-term nature (see further chap. IV, “Constructionand operation of infrastructure”, and chap. V, “Duration,extension and termination of the project agreement”).

14. Many countries have used legislation to establish thegeneral principles for the organization of infrastructuresectors and the basic policy, institutional and regulatoryframework. However, the law may not be the best instru-ment to set detailed technical and financial requirements.Many countries have preferred to enact regulations settingforth more detailed rules to implement the general provi-sions of domestic laws on privately financed infrastructureprojects. Regulations are found to be easier to adapt to achange in environment, whether the change results fromthe transition to market-based rules or from external devel-opments, such as new technologies or changing economicor market conditions. Whatever the instrument used, clarityand predictability are of the essence.

C. SCOPE OF AUTHORITYTO AWARD CONCESSIONS

15. The implementation of privately financed infrastruc-ture projects may require the enactment of special legisla-tion or regulations authorizing the State to entrust the pro-vision of public services to private entities. The enactment


of express legislative authorization may be an importantmeasure to foster the confidence of potential investors,national or foreign, in a national policy to promote privatesector investment in infrastructure. Central elements to theauthority to award concessions for infrastructure projectsare discussed in the following paragraphs.

1. Authorized agencies and relevant fields of activity

16. In some legal systems the Government’s responsibil-ity for the provision of public services may not be del-egated without prior legislative authorization. For thosecountries which wish to attract private investment in infra-structure, it is particularly important to state clearly in thelaw the authority to entrust entities other than public au-thorities of the host country with the right to provide cer-tain public services. Such a general provision may be par-ticularly important in those countries where public servicesare governmental monopolies or where it is envisaged toengage private entities to provide certain services that usedto be available to the public free of charge (see furtherchap. IV, “Construction and operation of infrastructure”,paras. 37 and 38).

17. Where general legislation is adopted, it is also advis-able to identify clearly the public authorities or levels ofgovernment competent to award infrastructure projects andto act as contracting authorities. In order to avoid unneces-sary delay, it is particularly advisable to have rules in placethat make it possible to ascertain the persons or offices thathave the authority to enter into commitments on behalf ofthe contracting authority (and, as appropriate, of other pub-lic authorities) at different stages of negotiation and to signthe project agreement. It is useful to consider the extent ofpowers that may be needed by authorities other than thecentral Government to carry out projects falling withintheir purview. For projects involving offices or agencies atdifferent levels of government (for example, national, pro-vincial or local), where it is not possible to identify inadvance all the relevant offices and agencies involved,other measures may be needed to ensure appropriate coor-dination among them (see below, paras. 23-29).

18. For purposes of clarity, it is advisable to identify insuch general legislation those sectors in which concessionsmay be awarded. Alternatively, where this is not deemedfeasible or desirable, the law might identify those activitieswhich may not be the object of a concession (for example,activities related to national defence or security).

2. Purpose and scope of concessions

19. It may be useful for the law to define the nature andpurpose of privately financed infrastructure projects forwhich concessions may be awarded in the host country.One possible approach may be to define the various catego-ries of projects according to the extent of the rights andobligations assumed by the concessionaire (for example,“build-operate-transfer”, “build-own-operate”, “built-transfer-operate” and “build-transfer”). However, given thewide variety of schemes that may come into play in con-nection with private investment in infrastructure, it may be

difficult to provide exhaustive definitions of all of them. Asan alternative, the law could generally provide that conces-sions may be awarded for the purpose of entrusting anentity, private or public, with the obligation to carry outinfrastructure works and deliver certain public services, inexchange for the right to charge a price for the use of thefacility or premises or for the service or goods it generates,or for other payment or remuneration agreed to by theparties. The law could further clarify that concessions maybe awarded for the construction and operation of a newinfrastructure facility or system or for maintenance, repair,refurbishment, modernization, expansion and operation ofexisting infrastructure facilities and systems, or only for themanagement and delivery of a public service.

20. Another important issue concerns the nature of therights vested in the concessionaire, in particular whetherthe right to provide the service is exclusive or whether theconcessionaire will face the competition from other infra-structure facilities or service providers. Exclusivity mayconcern the right to provide a service in a particular geo-graphical region (for example, a communal water distribu-tion company) or embrace the whole territory of the coun-try (for example, a national railway company); it may relateto the right to supply one particular type of goods or serv-ices to one particular customer (for example, a power gen-erator being the exclusive regional supplier to a powertransmitter and distributor) or to a limited group of custom-ers (for example, a national long-distance telephone carrierproviding connections to local telephone companies).

21. The decision whether or not to grant exclusivity rightsto a certain project or category of projects should be takenin the light of the host country’s policy for the sector con-cerned. As discussed earlier, the scope for competitionvaries considerably in different infrastructure sectors.While certain sectors, or segments thereof, have the char-acteristics of natural monopolies, in which case open com-petition is usually not an economically viable alternative,other infrastructure sectors have been successfully openedto free competition (see “Introduction and background in-formation on privately financed infrastructure projects”,paras. 28 and 29).

22. It is desirable therefore to deal with the issue of exclu-sivity in a flexible manner. Rather than excluding or pre-scribing exclusive concessions, it may be preferable for thelaw to authorize the grant of exclusive concessions when itis deemed to be in the public interest, such as in caseswhere the exclusivity is justified for the purpose of ensur-ing the technical or economical viability of the project. Thecontracting authority may be required to state the reasonsfor envisaging an exclusive concession prior to starting theprocedure to select the concessionaire. Such general legis-lation may be supplemented by sector-specific laws regu-lating the issue of exclusivity in a manner suitable for eachparticular sector.

D. ADMINISTRATIVE COORDINATION

23. Depending on the administrative structure of the hostcountry, privately financed infrastructure projects may re-quire the involvement of several public authorities, at vari-


ous levels of government. For instance, the competence tolay down regulations and rules for the activity concernedmay rest in whole or in part with a public authority at alevel different from the one that is responsible for provid-ing the relevant service. It may also be that both the regu-latory and the operational functions are combined in oneentity, but that the authority to award government contractsis centralized in a different public authority. For projectsinvolving foreign investment, it may also happen that cer-tain specific competences fall within the mandate of anagency responsible for approving foreign investment pro-posals.

24. Recent international experience has demonstrated theusefulness of entrusting a central unit within the host coun-try’s administration with the overall responsibility for for-mulating policy and providing practical guidance on pri-vately financed infrastructure projects. Such a central unitmay also be responsible for coordinating the input of themain public authorities that interface with the project com-pany. It is recognized, however, that such an arrangementmay not be possible in some countries, owing to their par-ticular administrative organization. Where it is not feasibleto establish such a central unit, other measures may beconsidered to ensure an adequate level of coordinationamong the various public authorities involved, as discussedin the following paragraphs.

1. Coordination of preparatory measures

25. One important measure to ensure the successful im-plementation of privately financed infrastructure projects isthe requirement that the relevant public authority conduct apreliminary assessment of the project’s feasibility, includ-ing economic and financial aspects such as expected eco-nomic advantages of the project, estimated cost and poten-tial revenue anticipated from the operation of theinfrastructure facility and the environmental impact of theproject. The studies prepared by the contracting authorityshould, in particular, identify clearly the expected output ofthe project, provide sufficient justification for the invest-ment, propose a modality for private sector participationand describe a particular solution to the output requirement.

26. Following the identification of the future project, it isfor the Government to establish its relative priority and toassign human and other resources for its implementation.At that point, it is desirable that the contracting authorityreview existing statutory or regulatory requirements relat-ing to the operation of infrastructure facilities of the typeproposed with a view to identifying the main public au-thorities whose input will be required for the implementa-tion of the project. It is also important at this stage to con-sider the measures that may be required in order for thecontracting authority and the other public authorities in-volved to perform the obligations they may reasonablyanticipate in connection with the project. For instance, theGovernment may need to make advance budgeting ar-rangements to enable the contracting authority or otherpublic authorities to meet financial commitments that ex-tend over several budgetary cycles, such as long-term com-mitments to purchase the project’s output (see chap. IV,“Construction and operation of infrastructure”, paras. 50

and 51). Furthermore, a series of administrative measuresmay be needed to implement certain forms of support pro-vided to the project, such as tax exemptions and customsfacilitation (see chap. II, “Project risks and governmentsupport”, paras. 51-54), which may require considerabletime.

2. Arrangements for facilitating the issuanceof licences and permits

27. Legislation may play a useful role in facilitating theissuance of licences and permits that may be needed in thecourse of a project (such as licences under foreign ex-change regulations; licences for the incorporation of theconcessionaire; authorizations for the employment of for-eigners; registration and stamp duties for the use or owner-ship of land; import licences for equipment and supplies;construction licences; licences for the installation of cablesor pipelines; licences for bringing the facility into opera-tion; and spectrum allocation for mobile communication).The required licences or permits may fall within the com-petence of various organs at different levels of the admin-istration and the time required for their issuance may besignificant, in particular when the approving organs or of-fices were not originally involved in conceiving the projector negotiating its terms. Delay in bringing an infrastructureproject into operation as a result of missing licences orpermits for reasons not attributable to the concessionaire islikely to result in an increase in the cost of the project andin the price paid by the users.

28. Thus, it is advisable to conduct an early assessment oflicences and permits needed for a particular project in orderto avoid delay in the implementation phase. A possiblemeasure to enhance the coordination in the issuance of li-cences and permits might be to entrust one organ with theauthority to receive the applications for licences and per-mits, to transmit them to the appropriate agencies and tomonitor the issuance of all licences and permits listed in therequest for proposals and other licences that might be intro-duced by subsequent regulations. The law may also author-ize the relevant agencies to issue provisional licences andpermits and provide a time period beyond which those li-cences and permits are deemed to be granted unless theyare rejected in writing.

29. However, it should be noted that the distribution ofadministrative authority among various levels of govern-ment (for example, local, regional and central) often re-flects fundamental principles of a country’s political or-ganization. Therefore, there are instances where the centralGovernment would not be in a position to assume respon-sibility for the issuance of all licences and permits or toentrust one single body with such a coordinating function.In those cases, it is important to introduce measures tocounter the possibility of delay that might result from suchdistribution of administrative authority, such as, for in-stance, agreements between the contracting authority andthe other public authorities concerned to facilitate the pro-cedures for a given project or other measures intended toensure an adequate level of coordination among the variouspublic authorities involved and to make the process ofobtaining licences more transparent and efficient. Further-


more, the Government might consider providing some as-surance that it will assist the concessionaire as much aspossible in obtaining licences required by domestic law, forinstance by providing information and assistance to biddersregarding the required licences, as well as the relevant pro-cedures and conditions. From a practical point of view, inaddition to coordination among various levels of govern-ment and various public authorities, there is a need to en-sure consistency in the application of criteria for the issu-ance of licences and for the transparency of theadministrative process.

E. AUTHORITY TO REGULATEINFRASTRUCTURE SERVICES

30. The provision of certain public services is generallysubject to a special regulatory regime that may consist ofsubstantive rules, procedures, instruments and institutions.That framework represents an important instrument to im-plement the governmental policy for the sector concerned(see “Introduction and background information on pri-vately financed infrastructure projects”, paras. 21-46). De-pending on the institutional structure of the country con-cerned and on the allocation of powers between differentlevels of government, provincial or local legislation maygovern some infrastructure sectors, in full or concurrentlywith national legislation.

31. Regulation of infrastructure services involves a widerange of general and sector-specific issues, which may varyconsiderably according to the social, political, legal andeconomic reality of each host country. While occasionallydiscussing some of the main regulatory issues that are en-countered in a similar context in different sectors (see, forinstance, chapter IV, “Construction and operation of infra-structure”, paras. 39-46 and 82-95), the Guide is not in-tended to exhaust the legal or policy issues arising out ofthe regulation of various infrastructure sectors. The term“regulatory agencies” refers to the institutional mechanismsrequired to implement and monitor the rules governing theactivities of infrastructure operators. Because the rules ap-plicable to infrastructure operation often allow for a degreeof discretion, a body is required to interpret and applythem, monitor compliance, impose sanctions and settle dis-putes arising out of the implementation of the rules. Thespecific regulatory tasks and the amount of discretion theyinvolve will be determined by the rules in question, whichcan vary widely.

32. The Guide assumes that the host country has in placethe proper institutional and bureaucratic structures andhuman resources necessary for the implementation of pri-vately financed infrastructure projects. Nevertheless, as acontribution to domestic legislatures considering the needfor, and desirability of, establishing regulatory agencies formonitoring the provision of public services, this sectiondiscusses some of the main institutional and proceduralissues that may arise in that connection. The discussioncontained in this section is illustrative of different optionsthat have been used in domestic legislative measures to setup a regulatory framework for privately financed infra-structure projects, but the Guide does not thereby advocate

the establishment of any particular model or administrativestructure. Practical information and technical advice maybe obtained from international financial institutions thatcarry out programmes to assist their member countries insetting up an adequate regulatory framework (such as theWorld Bank and the regional development banks).

1. Sectoral competence and mandateof regulatory agencies

33. Regulatory responsibilities may be organized on asectoral or cross-sectoral basis. Countries that have optedfor a sectoral approach have in many cases decided to placeclosely linked sectors or segments thereof under the sameregulatory structure (for example, a common regulatoryagency for power and gas or for airports and airlines).Other countries have organized regulation on across-sectoral basis, in some cases with one regulatoryentity for all infrastructure sectors, and in others with oneentity for utilities (water, power, gas, telecommunications)and one for transport. In some countries the competence ofregulatory agencies might also extend to several sectorswithin a given region.

34. Regulatory agencies whose competence is limited to aparticular sector usually foster the development of techni-cal, sector-specific expertise. Sector-specific regulationmay facilitate the development of rules and practices thatare tailored to the needs of the sector concerned. However,the decision between sector-specific and cross-sectoralregulation depends in part on the country’s regulatory ca-pacity. Countries with limited expertise and experience ininfrastructure regulation may find it preferable to reducethe number of independent structures and try to achieveeconomies of scale.

35. The law setting up a regulatory mechanism oftenstipulates a number of general objectives that should guidethe actions of regulatory agencies, such as the promotion ofcompetition, the protection of users’ interests, the satisfac-tion of demand, the efficiency of the sector or the publicservice providers, their financial viability, the safeguardingof the public interest or of public service obligations andthe protection of investors’ rights. Having one or two over-riding objectives helps clarify the mandate of regulatoryagencies and establish priorities among sometimes conflict-ing objectives. A clear mandate may also increase a regu-latory agency’s autonomy and credibility.

2. Institutional mechanisms

36. The range of institutional mechanisms for the regula-tion of infrastructure sectors varies greatly. While there arecountries that entrust regulatory functions to organs of theGovernment (for example, the concerned ministries or de-partments), other countries have preferred to establish au-tonomous regulatory agencies, separate from the Govern-ment. Some countries have decided to subject certaininfrastructure sectors to autonomous and independent regu-lation while leaving others under ministerial regulation.Sometimes, powers may also be shared between an autono-mous regulatory agency and the Government, as is often


the case with respect to licensing. From a legislative per-spective, it is important to devise institutional arrangementsfor the regulatory functions that ensure to the regulatoryagency an adequate level of efficiency, taking into accountthe political, legal and administrative tradition of the coun-try.

37. The efficiency of the regulatory regime is in mostcases a function of the objectiveness with which regulatorydecisions are taken. This, in turn, requires that regulatoryagencies should be able to take decisions without interfer-ence or inappropriate pressures from infrastructure opera-tors and public service providers. To that effect, legislativeprovisions in several countries require the independence ofthe regulatory decision-making process. In order to achievethe desired level of independence it is advisable to separatethe regulatory functions from operational ones by removingany regulatory functions that may still be vested with thepublic service providers and entrust them to a legally andfunctionally independent entity. Regulatory independenceis supplemented by provisions to prevent conflicts of inter-est, such as prohibitions for staff of the regulatory agencyto hold mandates, accept gifts, enter into contracts or haveany other relationship (directly or through family membersor other intermediaries) with regulated companies, theirparents or affiliates.

38. This leads to a related issue, namely the need to mini-mize the risk of decisions being made or influenced by abody that is also the owner of enterprises operating in theregulated sector or a body acting on political rather thantechnical grounds. In some countries it was felt necessaryto provide the regulatory agency with a certain degree ofautonomy vis-à-vis the political organs of government. In-dependence and autonomy should not be considered solelyon the basis of the institutional position of the regulatoryfunction, but also on the basis of its functional autonomy(i.e. the availability of sufficient financial and human re-sources to discharge their responsibilities adequately).

3. Powers of regulatory agencies

39. Regulatory agencies may have decision-making pow-ers, advisory powers or purely consultative powers or acombination of these different levels of powers dependingon the subject matter. In some countries, regulatory agen-cies were initially given limited powers, which were ex-panded later as the agencies established a track record ofindependence and professionalism. The legislation oftenspecifies which powers are vested with the Governmentand which with a regulatory agency. Clarity in this respectis important to avoid unnecessary conflicts and confusion.Investors, as well as consumers and other interested parties,should know to whom to turn with various requests, appli-cations or complaints.

40. Selection of public service providers, for example, isin many countries a process involving the Government aswell as the regulatory agency. If the decision to award aproject involves broad judgement of a political rather thantechnical nature, which may often be the case in the contextof infrastructure privatization, final responsibility oftenrests with the Government. If, however, the award criteria

are more technical, as may be the case with a liberal licens-ing regime for power generation or telecommunicationsservices, many countries entrust the decision to an inde-pendent regulatory agency. In other cases, the Governmentmay have to ask the regulatory agency’s opinion prior toawarding a concession. On the other hand, some countriesexclude direct involvement of regulatory agencies in theaward process on the basis that it could affect the way theylater regulate the provision of the service concerned.

41. The jurisdiction of regulatory agencies normally ex-tends to all enterprises operating in the sectors they regu-late, with no distinction between private and public enter-prises. The use of some regulatory powers or instrumentsmay be limited by law to the dominant public service pro-viders in the sector. A regulatory agency may, for example,have price policing powers only vis-à-vis the incumbent ordominant public service provider, while new entrants maybe allowed to set prices freely.

42. The matters on which regulatory agencies have topronounce themselves range from normative responsibili-ties (for example, rules on the award of concessions andconditions for certification of equipment) to the actualaward of concessions; the modification of such instru-ments; the approval of contracts or decisions proposed bythe regulated entities (for example, a schedule or contracton network access); the definition and monitoring of anobligation to provide certain services; the oversight overpublic service providers (in particular compliance with li-cence conditions, norms and performance targets); pricesetting or adjustments; vetting of subsidies, exemptions orother advantages that could distort competition in the sec-tor; sanctions; and dispute settlement.

4. Composition, staff and budgetof regulatory agencies

43. When setting up a regulatory agency, a few countrieshave opted for an agency comprised of a single officer,whereas most others have preferred a regulatory commis-sion. A commission may provide greater safeguards againstundue influence or lobbying and may limit the risk of rashregulatory decisions. A one-person regulatory agency, onthe other hand, may be able to reach decisions faster andmay be held more accountable. To improve the manage-ment of the decision-making process in a regulatory com-mission, the number of members is often kept small (typi-cally three or five members). Even numbers are oftenavoided to prevent a deadlock, though the chairman couldhave a casting vote.

44. To increase the regulatory agency’s autonomy, differ-ent institutions may be involved in the nomination process.In some countries regulatory agencies are appointed by thehead of State based on a list submitted by parliament; inothers the executive branch of the Government appoints theregulatory agency but subject to confirmation by parliamentor upon nominations submitted by parliament, user associa-tions or other bodies. Minimum professional qualificationsare often required of the officials of the regulatory agencies,as well as the absence of conflicts of interest that mightdisqualify them from the function. Terms of office of mem-


bers of regulatory boards may be staggered in order toprevent total turnover and appointment of all members by thesame administration; staggering also promotes continuity inregulatory decision-making. Terms of office are often for afixed term, may be non-renewable and may be terminatedbefore the expiry of the term for limited reasons only (suchas criminal conviction, mental incapacitation, gross negli-gence or dereliction of duty). Regulatory agencies are oftenfaced with experienced lawyers, accountants and other ex-perts working for the regulated industry and need to be ableto acquire the same level of expertise, skills and profession-alism, either in-house or by hiring outside advisers as needed.

45. Stable funding sources are critical in order for theregulatory agency to function adequately. In many coun-tries, the budget of the regulatory agency is funded by feesand other levies on the regulated industry. Fees may be setas a percentage of the turnover of the public service provid-ers or be levied for the award of licences, concessions orother authorizations. In some countries, the agency’s budgetis complemented as needed by budget transfers provided inthe annual finance law. However, this may create an elementof uncertainty that may reduce the agency’s autonomy.

5. Regulatory process and procedures

46. The regulatory framework typically includes proce-dural rules governing the way the institutions in charge ofthe various regulatory functions have to exercise their pow-ers. The credibility of the regulatory process requires trans-parency and objectivity, irrespective of whether regulatoryauthority is exercised by a government department or min-ister or by an autonomous regulatory agency. Rules andprocedures should be objective and clear so as to ensurefairness, impartiality and timely action by the regulatoryagency. For purposes of transparency, the law should re-quire that they be made public. Regulatory decisionsshould state the reasons on which they are based andshould be made accessible to interested parties, throughpublication or other appropriate means.

47. Transparency may be further enhanced, as required bysome laws, by the publication by the regulatory agency ofan annual report on the sector, including, for example, thedecisions taken during the exercise, the disputes that havearisen and the way they were settled. Such an annual reportmay also include the accounts of the regulatory agency andan audit thereof by an independent auditor. Legislation inmany countries further requires that this annual report besubmitted to a committee of parliament.

48. Regulatory decisions may have an impact on the inter-ests of diverse groups, including the concerned public serv-ice provider, its current or potential competitors and busi-ness or non-business users. In many countries, theregulatory process includes consultation procedures formajor decisions or recommendations. In some countries,that consultation takes the form of public hearings, in oth-ers of consultation papers on which comments from inter-ested groups are solicited. Some countries have also estab-lished consultative bodies comprised of users and otherconcerned parties and require that their opinion be soughtbefore major decisions and recommendations are made. To

enhance transparency, comments, recommendations oropinions resulting from the consultation process may haveto be published or made publicly available.

6. Recourse against decisionsof the regulatory agency

49. Another important element of the host country’s regu-latory regime are the mechanisms whereby public serviceproviders may request a review of regulatory decisions. Aswith the whole regulatory process, a high degree of trans-parency and credibility is essential. To be credible, thereview should be entrusted to an entity that is independentfrom the regulatory agency taking the original decision,from the political authorities of the host country and fromthe public service providers.

50. Review of decisions of regulatory agencies is often inthe jurisdiction of courts, but in some legal systems re-course against decisions by regulatory agencies is in theexclusive jurisdiction of special tribunals dealing solelywith administrative matters, which in some countries areseparate from the judicial system. If there are concerns overthe review process (for example, as regards possible delaysor the capacity of courts to make evaluations of the com-plex economic issues involved in regulatory decisions) re-view functions may be entrusted to another body, at leastin the first instance, before a final recourse to courts oradministrative tribunals. In some countries, requests forreview are considered by a high-level cross-sectoral inde-pendent oversight body. There are also countries whererequests for review are heard by a panel composed of per-sons holding specified judicial and academic functions. Asto the grounds on which a request for review may be based,in many cases there are limits, in particular as to the rightof the appellate body to substitute its own discretionaryassessment of facts for the assessment of the body whosedecision is being reviewed.

7. Settlement of disputesbetween public service providers

51. Disputes may arise between competingconcessionaires (for example, two operators of cellular te-lephony systems) or between concessionaires providingservices in different segments of the same infrastructuresector. Such disputes may involve allegations of unfairtrade practices (for example, price dumping), uncompeti-tive practices inconsistent with the country’s infrastructurepolicy (see “Introduction and background information onprivately financed infrastructure projects”, paras. 23-29) orviolation of specific duties of public service providers (seechap. IV, “Construction and operation of infrastructure”,paras. 82-93). In many countries, legislative provisionshave been found necessary in order to establish an appro-priate framework for the settlement of these disputes.

52. Firstly, the various parties may not have contractualarrangements with one another that could provide for anappropriate dispute settlement mechanism. Even where itwould be possible to establish a contractual mechanism, thehost country may have an interest that disputes involving


certain issues (for example, conditions of access to a giveninfrastructure network) be settled by a specific body inorder to ensure consistency in the application of the rel-evant rules. Furthermore, certain disputes between publicservice providers may involve issues that, under the laws ofthe host country, are not considered to be capable of beingsettled through arbitration.

53. Domestic laws often establish administrative proce-dures for handling disputes between public service provid-ers. Typically, public service providers may file complaints

with the regulatory agency or with another governmentalagency responsible for the application of the rules allegedto have been violated (for example, a governmental body incharge of enforcing competition laws and regulations),which in some countries has the authority to issue a bindingdecision on the matter. Such mechanisms, even wheremandatory, do not necessarily preclude resort by the ag-grieved persons to courts, although in some legal systemsthe courts may only have the power to control the legalityof the decision (for example, observance of due process)but not its merits.

A/CN.9/471/Add.3

Chapter II. Project risks and government support





B. Project risks and risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-29 93

1. Overview of main categories of project risk . . . . . . . . . . . . . . 11-20 94

2. Contractual arrangements for risk allocationand mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-29 95

C. Government support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-60 97

1. Policy considerations relating to government support . . . . . . . 32-34 97

2. Forms of government support . . . . . . . . . . . . . . . . . . . . . . . . . . 35-60 97

D. Guarantees provided by international financial institutions . . . . . . . 61-71 101

1. Guarantees provided by multilateral lending institutions . . . . . 62-66 102

2. Guarantees provided by the Multilateral InvestmentGuarantee Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67-71 102

E. Guarantees provided by export credit agencies and investmentpromotion agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72-74 103



Project risks and risk allocation (see paras. 8-29)

Recommendation 12. No unnecessary statutory orregulatory limitations should be placed upon the contract-ing authority’s ability to agree on an allocation of risks thatis suited to the needs of the project.

Government support (see paras. 30-60)

Recommendation 13. The law should clearly statewhich public authorities of the host country may provide

financial or economic support to the implementation ofprivately financed infrastructure projects and which typesof support they are authorized to provide.


A. GENERAL REMARKS

1. Privately financed infrastructure projects create oppor-tunities for reducing the commitment of public funds andother resources for infrastructure development and opera-tion. They also make it possible to transfer to the privatesector a number of risks that would otherwise be borne bythe Government. The precise allocation of risks among thevarious parties involved is typically defined after consid-eration of a number of factors, including the public interest


in the development of the infrastructure in question and thelevel of risk faced by the project company, other investorsand lenders (and the extent of their ability and readiness toabsorb those risks at an acceptable cost). Adequate riskallocation is essential to reducing project costs and to en-suring the successful implementation of the project. Con-versely, an inappropriate allocation of project risks maycompromise the project’s financial viability or hinder itsefficient management, thus increasing the cost at which theservice is provided.

2. In the past, debt financing for infrastructure projectswas obtained on the basis of credit support from projectsponsors, multilateral and national export credit agencies,Governments and other third parties. In recent years, thesetraditional sources have not been able to meet the growingneeds for infrastructure capital and financing has been in-creasingly obtained on a project finance basis.

3. Project finance, as a method of financing, seeks to es-tablish the creditworthiness of the project company on a“stand alone” basis, even before construction has begun orany revenues have been generated, and to borrow on thebasis of that credit. Commentators have observed thatproject finance may hold the key to unlocking the vastpools of capital theoretically available in the capital mar-kets for investment in infrastructure. However, project fi-nance has distinctive and demanding characteristics from afinancial point of view. Principal among these is that, in aproject finance structure, financing parties must rely mainlyupon the project company’s assets and cash flows for re-payment. If the project fails they will have no recourse, oronly limited recourse, to the financial resources of a spon-sor company or other third party for repayment (see also“Introduction and background information on privately fi-nanced infrastructure projects.”, paras. 54 and 55).

4. The financial methodology of project financing requiresa precise projection of the capital costs, revenues and pro-jected costs, expenses, taxes and liabilities of the project. Inorder to predict these numbers precisely and with certaintyand to create a financial model for the project, it is typicallynecessary to project the “base case” amounts of revenues,costs and expenses of the project company over a longperiod—often 20 years or more—in order to determine theamounts of debt and equity the project can support. Centralto this analysis is the identification and quantification ofrisks. For this reason, the identification, assessment, alloca-tion and mitigation of risks is at the heart of project financingfrom a financial point of view.

5. Among the most important, yet difficult, risks to assessand to mitigate are “political risks” (risks associated withadverse actions of the host Government, its agencies and itscourts, in particular in granting licences and permits, adopt-ing regulations applicable to the project company and itsmarkets, taxation and the performance and enforcement ofcontractual obligations) and “currency risks” (risks relatedto the value, transferability and convertibility of the localcurrency). In order to guard against such risks, in particu-lar, project finance structures have often incorporated in-surance or guarantees of international financial institutionsand export credit agencies as well as guarantees of the hostGovernment.

6. Section B of the present chapter (paras. 8-29) gives anoverview of the main risks encountered in privately financedinfrastructure projects and contains a brief discussion ofcommon contractual solutions for risk allocation, which em-phasizes the need to provide the parties with the necessaryflexibility for negotiating a balanced allocation of projectrisks. Section C (paras. 30-60) sets out policy considerationsthe Government may wish to take into account when design-ing the level of direct governmental support that may beprovided to infrastructure projects, such as the degree ofpublic interest in the execution of any given project and theneed to avoid the assumption by the Government of open-ended or excessive contingent liabilities. Section C consid-ers some additional support measures that have been used ingovernmental programmes to promote private investment ininfrastructure development, without advocating the use ofany of them in particular. Lastly, sections D (paras. 61-71)and E (paras. 72-74) outline guarantees and support meas-ures that may be provided by export credit agencies andinvestment promotion agencies.

7. Other chapters of this Guide deal with related aspects ofthe host Government’s legal regime that are of relevance tothe credit and risk analysis of a project. Depending upon thesector and type of project the emphasis will, of course, vary.The reader is referred in particular to chapters IV, “Con-struction and operation of infrastructure”; V, “Duration, ex-tension and termination of the project agreement”; VI, “Set-tlement of disputes”; and VII, “Other relevant areas of law”.

B. PROJECT RISKS AND RISK ALLOCATION

8. As used in this chapter, the notion of “project risks”refers to those circumstances which, in the assessment ofthe parties, may have a negative effect on the benefit theyexpect to achieve with the project. While there may beevents that would represent a serious risk for most parties(for example, the physical destruction of the facility by anatural disaster), each party’s risk exposure will vary ac-cording to its role in the project.

9. The expression “risk allocation” refers to the determi-nation of which party or parties should bear the conse-quences of the occurrence of events identified as projectrisks. For example, if the project company is obliged todeliver the infrastructure facility to the contracting author-ity with certain equipment in functioning condition, theproject company is bearing the risk that the equipment mayfail to function at the agreed performance levels. The oc-currence of that project risk, in turn, may have a series ofconsequences for the project company, including its liabil-ity for failure to perform a contractual obligation under theproject agreement or the applicable law (for example, pay-ment of damages to the contracting authority for delay inbringing the facility into operation); certain losses (for ex-ample, loss of revenue as a result of delay in beginningoperating the facility); or additional cost (for example, costof repair of faulty equipment or of securing replacementequipment).

10. The party bearing a given risk may take preventivemeasures with a view to limiting the likelihood of the risk,


as well as specific measures to protect itself, in whole or inpart, against the consequences of the risk. Such measuresare often referred to as “risk mitigation”. In the previousexample, the project company will carefully review thereliability of the equipment suppliers and the technologyproposed. The project company may require its equipmentsuppliers to provide independent guarantees concerning theperformance of their equipment. The supplier may also beliable to pay penalties or liquidated damages to the projectcompany for the consequences of failure of its equipment.In some cases, a more or less complex chain of contractualarrangements may be made to mitigate the consequences ofa project risk. For instance, the project company may com-bine the guarantees provided by the equipment supplierwith commercial insurance covering some consequences ofthe interruption of its business as a result of equipmentfailure.

1. Overview of main categories of project risk

11. For purposes of illustration, the following paragraphsprovide an overview of the main categories of project riskand give examples of certain contractual arrangements usedfor risk allocation and mitigation. For further discussion onthis subject, the reader is advised to consult other sourcesof information, such as the UNIDO BOT Guidelines.2

(a) Project disruption caused by events outsidethe control of the parties

12. The parties face the risk that the project may be dis-rupted by unforeseen or extraordinary events outside theircontrol, which may be of a physical nature, such as naturaldisasters—floods, storms or earthquakes—or the result ofhuman action, such as war, riots or terrorist attacks. Suchunforeseen or extraordinary events may cause a temporaryinterruption of the project execution or the operation of thefacility, resulting in construction delay, loss of revenue andother losses. Severe events may cause physical damage tothe facility or even destruction beyond repair (for a discus-sion of the legal consequences of the occurrence of suchevents, see chap. IV, “Construction and operation of infra-structure”, paras. 131-139).

(b) Project disruption caused by adverseacts of Government (“political risk”)

13. The project company and the lenders face the risk thatthe project execution may be negatively affected by acts ofthe contracting authority, another agency of the Govern-ment or the host country’s legislature. Such risks are oftenreferred to as “political risks” and may be divided intothree broad categories: “traditional” political risks (for ex-ample, nationalization of the project company’s assets orimposition of new taxes that jeopardize the project compa-ny’s prospects of debt repayment and investment recov-ery); regulatory risks (for example, introduction of morestringent standards for service delivery or opening of a

sector to competition) and “quasi-commercial” risks (forexample, breaches by the contracting authority or projectinterruptions due to changes in the contracting authority’spriorities and plans) (for a discussion of the legal conse-quences of the occurrence of such events, see chap. IV,“Construction and operation of infrastructure”, paras. 122-125). In addition to political risks originating from the hostcountry, some political risks may result from acts of a for-eign Government, such as blockades, embargoes or boy-cotts imposed by the Governments of the investors’ homecountries.

(c) Construction and operation risks

14. The main risks that the parties may face during theconstruction phase are the risks that the facility cannot becompleted at all or cannot be delivered according to theagreed schedule (completion risk); that the constructioncost exceeds the original estimates (construction cost over-run risk); or that the facility fails to meet performance cri-teria at completion (performance risk). Similarly, duringthe operational phase the parties may face the risk that thecompleted facility cannot be effectively operated or main-tained to produce the expected capacity, output or effi-ciency (performance risk); or that the operating costs ex-ceed the original estimates (operation cost overrun). Itshould be noted that construction and operation risks do notaffect only the private sector. The contracting authority andthe users in the host country may be severely affected byan interruption in the provision of needed services. TheGovernment, as representative of the public interest, will begenerally concerned about safety risks or environmentaldamage caused by improper operation of the facility.

15. Some of these risks may be brought about by theproject company or its contractors or suppliers. For in-stance, construction cost overrun and delay in completionmay be the result of inefficient construction practices,waste, insufficient budgeting or lack of coordinationamong contractors. Failure of the facility to meet perform-ance criteria may also be the result of defective design,inadequacy of the technology used or faulty equipmentdelivered by the project company’s suppliers. During theoperational phase, performance failures may be the conse-quence, for example, of faulty maintenance of the facilityor negligent operation of mechanical equipment. Operationcost overruns may also derive from inadequate manage-ment.

16. However, some of these risks may also result fromspecific actions taken by the contracting authority, by otherpublic authorities or even the host country’s legislature.Performance failures or cost overruns may be the conse-quence of the inadequacy of the technical specificationsprovided by the contracting authority during the selectionof the concessionaire. Delays and cost overruns may alsobe brought about by actions of the contracting authoritysubsequent to the award of the project (delays in obtainingapprovals and permits, additional costs caused by changesin requirements due to inadequate planning, interruptionscaused by inspecting agencies or delays in delivering theland on which the facility is to be built). General legislativeor regulatory measures, such as more stringent safety or

2See “Introduction and background information on privately financedinfrastructure projects”, footnote 1 on page 74.


labour standards, may also result in higher construction oroperating costs. Shortfalls in production may be caused bythe non-delivery of the necessary supplies (for example,power or gas) on the part of public authorities.

(d) Commercial risks

17. “Commercial risks” relate to the possibility that theproject cannot generate the expected revenue because ofchanges in market prices or demand for the goods or serv-ices it generates. Both of these forms of commercial riskmay seriously impair the project company’s capacity toservice its debt and may compromise the financial viabilityof the project.

18. Commercial risks vary greatly according to the sectorand type of project. The risk may be regarded as minimalor moderate where the project company has a monopolyover the service concerned or when it supplies a singleclient through a standing off-take agreement. However,commercial risks may be considerable in projects that de-pend on market-based revenues, in particular where theexistence of alternative facilities or supply sources makes itdifficult to establish a reliable forecast of usage or demand.This may be a serious concern, for instance, in tollroadprojects, since tollroads face competition from toll-freeroads. Depending on the ease with which drivers may haveaccess to toll-free roads, the toll revenues may be difficultto forecast, especially in urban areas where there may bemany alternative routes and roads may be built or improvedcontinuously. Furthermore, traffic usage has been found tobe even more difficult to forecast in the case of newtollroads, especially those which are not an addition to anexisting toll facility system, because there is no existingtraffic to use as an actuarial basis.

(e) Exchange rate and other financial risks

19. Exchange rate risk relates to the possibility thatchanges in foreign exchange rates alter the exchange valueof cash flows from the project. Prices and user fees chargedto local users or customers will most likely be paid for inlocal currency, while the loan facilities and sometimes alsoequipment or fuel costs may be denominated in foreigncurrency. This risk may be considerable, since exchangerates are particularly unstable in many developing countriesor countries whose economies are in transition. In additionto exchange rate fluctuations, the project company mayface the risk that foreign exchange control or lowering re-serves of foreign exchange may limit the availability in thelocal market of foreign currency needed by the projectcompany to service its debt or repay the original invest-ment.

20. Another risk faced by the project company concernsthe possibility that interest rates may rise, forcing theproject to bear additional financing costs. This risk may besignificant in infrastructure projects given the usually largesums borrowed and the long duration of the project, withsome loans extending over a period of several years. Loansare often given at a fixed rate of interest (for example,fixed-rate bonds) to reduce the interest rate risk. In addi-

tion, the finance package may include hedging facilitiesagainst interest rate risks, for example, by way of interestrate swaps or interest rate caps.

2. Contractual arrangements for risk allocationand mitigation

21. It follows from the above that the parties need to takeinto account a wide range of factors to allocate project riskseffectively. For this reason, it is generally not advisable tohave in place statutory provisions that limit unnecessarilythe negotiators’ ability to achieve a balanced allocation ofproject risks, as appropriate to the needs of individualprojects. Nevertheless, it may be useful for the Governmentto provide some general guidance to officials acting onbehalf of domestic contracting authorities, for instance, byformulating advisory principles on risk allocation.

22. Practical guidance provided to contracting authoritiesin a number of countries often refers to general principles forthe allocation of project risks. One such principle is thatspecific risks should normally be allocated to the party bestable to assess, control and manage the risk. Additional guid-ing principles envisage the allocation of project risks to theparty with the best access to hedging instruments (that is,investment schemes to offset losses in one transaction byrealizing a simultaneous gain on another) or the greatestability to diversify the risks or to mitigate them at the lowestcost. In practice, however, risk allocation is often a factor ofboth policy considerations (for example, the public interestin the project or the overall exposure of the contractingauthority under various projects) and the negotiatingstrength of the parties. Furthermore, in allocating projectrisks it is important to consider the financial strength of theparties to which a specific risk is allocated and their abilityto bear the consequences of the risk, should it occur.

23. It is usually for the project company and its contrac-tors to assume ordinary risks related to the developmentand operation of the infrastructure. For instance, comple-tion, cost overrun and other risks typical of the constructionphase are usually allocated to the construction contractor orcontractors through a turnkey construction contract,whereby the contractor assumes full responsibility for thedesign and construction of the facility at a fixed price,within a specified completion date and according to par-ticular performance specifications (see chap. IV, “Con-struction and operation of infrastructure”, para. 70). Theconstruction contractor is typically liable to pay liquidateddamages or penalties for any late completion. In addition,the contractor is also usually required to provide a guaran-tee of performance, such as a bank guarantee or a suretybond. Separate equipment suppliers are also usually re-quired to provide guarantees in respect of the performanceof their equipment. Guarantees of performance provided bycontractors and equipment suppliers are often comple-mented by similar guarantees provided by the concession-aire to the benefit of the contracting authority. Similarly,the project company typically mitigates its exposure tooperation risks by entering into an operation and mainte-nance contract in which the operating company undertakesto achieve the required output and assumes the liability forthe consequences of operational failures. In most cases,


arrangements of this type will be an essential requirementfor a successful project. The lenders, for their part, willseek protection against the consequences of those risks, byrequiring the assignment of the proceeds of any bonds is-sued to guarantee the contractor’s performance, for in-stance. Loan agreements typically require that the proceedsfrom contract bonds be deposited in an account pledged tothe lenders (that is, an “escrow account”), as a safeguardagainst misappropriation by the project company or againstseizure by third parties (for example, other creditors). Nev-ertheless, the funds paid under the bonds are regularly re-leased to the project company as needed to cover repaircosts or operating and other expenses.

24. The contracting authority, on the other hand, will beexpected to assume those risks which relate to events attrib-utable to its own actions, such as inadequacy of technicalspecifications provided during the selection process or de-lay caused by failure to provide agreed supplies on time.The contracting authority may also be expected to bear theconsequences of disruptions caused by acts of Government,for instance by agreeing to compensate the project com-pany for loss of revenue due to price control measures (seechap. IV, “Construction and operation of infrastructure”,para. 124). While some political risks may be mitigated byprocuring insurance, such insurance, if at all available forprojects in the country concerned, may not be obtainable atan acceptable cost. Thus, prospective investors and lendersmay turn to the Government, for instance, to obtain assur-ances against expropriation or nationalization and guaran-tees that proper compensation will be payable in the eventof such action (see para. 50). Depending on their assess-ment of the level of risk faced in the host country, prospec-tive investors and lenders may not be ready to pursue aproject in the absence of those assurances or guarantees.

25. Most of the project risks referred to in the precedingparagraphs can, to a greater or lesser extent, be regarded asfalling within the control of one party or the other. How-ever, a wide variety of project risks result from eventsoutside the control of the parties or are attributable to theacts of third parties and other principles of risk allocationmay thus need to be considered.

26. For example, the project company could expect thatthe interest rate risk, together with the inflation risk, wouldbe passed on to the end-users or customers of the facilitythrough price increases, although this may not always bepossible because of market-related circumstances or pricecontrol measures. The price structure negotiated betweenthe project company and the contracting authority will de-termine the extent to which the project company will avoidthose risks or whether it will be expected to absorb some ofthem (see chap. IV, “Construction and operation of infra-structure”, paras. 36-46).

27. Another category of risk that may be allocated undervarying schemes concerns extraneous events such as war,civil disturbance, natural disasters or other events whollyoutside the control of the parties. In traditional infrastruc-ture projects carried out by the public sector, the publicentity concerned usually bears the risk, for example, ofdestruction of the facility by natural disasters or similarevents, to the extent that those risks may not be insurable.

In privately financed infrastructure projects the Govern-ment may prefer this type of risk to be borne by the projectcompany. However, depending on their assessment of theparticular risks faced in the host country, the private sectormay not be ready to bear those risks. Therefore, in practicethere is not a single solution to cover this entire category ofrisk and special arrangements are often made to deal witheach of them. For example, the parties may agree that theoccurrence of some of those events may exempt the af-fected party from the consequences of failure to performunder the project agreement and there will be contractualarrangements providing solutions for some of their adverseconsequences, such as contract extensions to compensatefor delay resulting from events or even some form of directpayment under special circumstances (see chap. IV, “Con-struction and operation of infrastructure”, paras. 131-139).Those arrangements will be supplemented by commercialinsurance purchased by the project company, where avail-able at an acceptable cost (see chap. IV, “Construction andoperation of infrastructure”, paras. 119 and 120).

28. Special arrangements may also need to be negotiatedfor the allocation of commercial risks. Projects such as mo-bile telecommunication projects usually have a relativelyhigh direct cost recovery potential and in most cases theproject company is expected to carry out the project with-out sharing those risks with the contracting authority andwithout recourse to support from the Government. In otherinfrastructure projects, such as power-generation projects,the project company may revert to contractual arrange-ments with the contracting authority or other public author-ity in order to reduce its exposure to commercial risks, forexample, by negotiating long-term off-take agreements thatguarantee a market for the product at an agreed price. Pay-ments may take the form of actual consumption or avail-ability charges or combine elements of both; the applicablerates are usually subject to escalation or indexation clausesin order to protect the real value of revenues from the in-creased costs of operating an ageing facility (see also chap.IV, “Construction and operation of infrastructure”, paras.50 and 51). Lastly, there are relatively capital-intensiveprojects with more slowly developing cost recovery poten-tial, such as water supply and some tollroad projects, whichthe private sector may be reluctant to carry out withoutsome form of risk-sharing with the contracting authority,for example, through fixed revenue assurances or agreedcapacity payments regardless of actual usage (see alsochap. IV, “Construction and operation of infrastructure”,paras. 48 and 49).

29. The risk allocation eventually agreed to by the con-tracting authority and the project company will be reflectedin their mutual rights and obligations, as set forth in theproject agreement. The possible legislative implications ofcertain provisions commonly found in project agreementsare discussed in other chapters of the Guide (see chaps. IV,“Construction and operation of infrastructure”, and V, “Du-ration, extension and termination of the project agreement”).Various other agreements will also be negotiated by theparties to mitigate or reallocate the risks they assume (forexample, loan agreements; construction, equipment supply,operation and maintenance contracts; direct agreement be-tween the contracting authority and the lenders; and off-takeand long-term supply agreements, where applicable).


C. GOVERNMENT SUPPORT

30. The discussion in the preceding section shows that theparties may use various contractual arrangements to allo-cate and mitigate project risks. Nevertheless, those arrange-ments may not always be sufficient to ensure the level ofcomfort required by private investors to participate in pri-vately financed infrastructure projects. It may also be foundthat certain additional government support is needed toenhance the attractiveness of private investment in infra-structure projects in the host country.

31. Government support may take various forms. Gener-ally, any measure taken by the Government to enhance theinvestment climate for infrastructure projects may be re-garded as governmental support. From that perspective, theexistence of legislation enabling the Government to awardprivately financed infrastructure projects or the establish-ment of clear lines of authority for the negotiation andfollow-up of infrastructure projects (see chap. I, “Generallegislative and institutional framework”, paras. 23-29) mayrepresent important measures to support the execution ofinfrastructure projects. As used in the Guide, however, theexpression “government support” has a narrower connota-tion and refers in particular to special measures, in mostcases of a financial or economic nature, that may be takenby the Government to enhance the conditions for the ex-ecution of a given project or to assist the project companyin meeting some of the project risks, above and beyond theordinary scope of the contractual arrangements agreed tobetween the contracting authority and the project companyto allocate project risks. Government support measures,where available, are typically an integral part of govern-mental programmes to attract private investment for infra-structure projects.

1. Policy considerations relatingto government support

32. In practice, a decision to support the implementationof a project is based on an assessment by the Governmentof the economic or social value of the project and whetherthat justifies additional governmental support. The Govern-ment may estimate that the private sector alone may not beable to finance certain projects at an acceptable cost. TheGovernment may also consider that particular projects maynot materialize without certain support measures that miti-gate some of the project risks. Indeed, the readiness ofprivate investors and lenders to carry out large projects ina given country is not only based on their assessment ofspecific project risks, but is also influenced by their com-fort with the investment climate in the host country, inparticular in the infrastructure sector. Factors to which pri-vate investors may attach special importance include thehost country’s economic system and the degree of develop-ment of market structures and the degree to which thecountry has already succeeded with privately financed in-frastructure projects over a period of years.

33. For the above reasons, a number of countries haveadopted a flexible approach for dealing with the issue ofgovernmental support. In some countries, this has beendone by legislative provisions that tailor the level and type

of support to the specific needs of individual infrastructuresectors. In other countries, this has been achieved by pro-viding the host Government with sufficient legislative au-thority to extend certain types of assurance or guaranteewhile preserving its discretion not to make them availablein all cases. However, the host Government will be inter-ested in ensuring that the level and type of support pro-vided to the project does not result in the assumption ofopen-ended liabilities. Indeed, over-commitment of publicauthorities through guarantees given to a specific projectmay prevent them from extending guarantees in otherprojects of perhaps even greater public interest.

34. The efficiency of governmental support programmesfor private investment in infrastructure may be enhancedby the introduction of appropriate techniques for budgetingfor governmental support measures or for assessing thetotal cost of other forms of governmental support. For ex-ample, loan guarantees provided by public authorities usu-ally have a cost lower than the cost of loan guaranteesprovided by commercial lenders. The difference (less thevalue of fees and interests payable by the project company)represents a cost for the Government and a subsidy for theproject company. However, loan guarantees are often notrecorded as expenses until such time as a claim is made.Thus, the actual amount of the subsidy granted by theGovernment is not recorded, which may create the incor-rect impression that loan guarantees entail a lesser liabilitythan direct subsidy payments. Similarly, the financial andeconomic cost of tax exemptions granted by the Govern-ment may not be apparent, which makes them less transpar-ent than other forms of direct governmental support. Forthese reasons, countries that are contemplating establishingsupport programmes for privately financed infrastructureprojects may need to devise special methods for estimatingthe budgetary cost of support measures such as tax exemp-tions, loans and loan guarantees provided by public au-thorities that take into account the expected present valueof future costs or loss of revenue.

2. Forms of government support

35. The availability of direct governmental support, be itin the form of financial guarantees, public loans or revenueassurances, may be an important element in the financialstructuring of the project. The following paragraphs brieflydescribe forms of governmental support that are sometimesauthorized under domestic laws and discuss possible legis-lative implications they may have for the host country,without advocating the use of any of them in particular.

36. Generally, besides the administrative and budgetarymeasures that may be needed to ensure the fulfilment ofgovernmental commitments throughout the duration of theproject, it is advisable for the legislature to consider thepossible need for an explicit legislative authorization toprovide certain forms of support. Where government sup-port is found advisable, it is important for the legislature tobear in mind the host country’s obligations under interna-tional agreements on regional economic integration or tradeliberalization, which may limit the ability of public authori-ties of the contracting States to provide support, financialor otherwise, to companies operating in their territories.


Furthermore, where a Government is contemplating sup-port for the execution of an infrastructure project, that cir-cumstance should be made clear to all prospective biddersat an appropriate time during the selection proceedings (seechap. III, “Selection of the concessionaire”, para. 67).

(a) Public loans and loan guarantees

37. In some cases, the law authorizes the Government toextend interest-free or low-interest loans to the projectcompany to lower the project’s financing cost. Dependingon the accounting rules to be followed, some interest-freeloans provided by public agencies can be recorded as rev-enue in the project company’s accounts, with loan pay-ments being treated as deductible costs for tax and account-ing purposes. Moreover, subordinate loans provided by theGovernment may enhance the financial terms of the projectby supplementing senior loans provided by commercialbanks without competing with senior loans for repayment.Governmental loans may be generally available to allproject companies in a given sector or they may be limitedto providing temporary assistance to the project companyin the event that certain project risks materialize. The totalamount of any such loan may be further limited to a fixedsum or to a percentage of the total project cost.

38. In addition to public loans, some national laws author-ize the contracting authority or other agency of the hostGovernment to provide loan guarantees for the repaymentof loans taken by the project company. Loan guarantees areintended to protect the lenders (and, in some cases, inves-tors providing funds to the project as well) against defaultby the project company. Loan guarantees do not entail animmediate disbursement of public funds and they mayappear more attractive to the Government than direct loans.However, loan guarantees may represent a substantial con-tingent liability and the Government’s exposure may besignificant, especially in the event of total failure by theproject company. Indeed, the Government would in mostcases find little comfort in a possible subrogation in therights of the lenders against an insolvent project company.

39. Thus, in addition to introducing general measures toenhance the efficiency of governmental support pro-grammes (see para. 34), it may be advisable to considerconcrete provisions to limit the Government’s exposureunder loan guarantees. Rules governing the provision ofloan guarantees may provide a maximum ceiling, whichcould be expressed as a fixed sum or, if more flexibility isneeded, a certain percentage of the total investment in anygiven project. Another measure to circumscribe the contin-gent liabilities of the guaranteeing agency may be to definethe circumstances under which such guarantees may beextended, taking into account the types of project risk theGovernment may be ready to share. For instance, if theGovernment considers sharing only the risks of temporarydisruption caused by events outside the control of the par-ties, the guarantees could be limited to the event that theproject company is rendered temporarily unable to serviceits loans owing to the occurrence of specially designatedunforeseeable events outside the project company’s con-trol. If the Government wishes to extend a greater degree ofprotection to the lenders, the guarantees may cover the

project company’s permanent failure to repay its loans forthe same reasons. In such a case, however, it is advisablenot to remove the incentives for the lenders to arrange forthe continuation of the project, for instance by identifyinganother suitable concessionaire or by stepping in throughan agent appointed to remedy the project company’s de-fault (see chap. IV, “Construction and operation of infra-structure”, paras. 147-150). The call on the governmentalguarantees could thus be conditional upon the prior exhaus-tion of other remedies available to the lenders under theproject agreement, the loan agreements or their directagreements with the contracting authority, if any. In anyevent, full loan guarantees by the Government amountingto a total protection of the lenders against the risk of defaultby the project company are not a common feature of infra-structure projects carried out under the project finance mo-dality.

(b) Equity participation

40. Another form of additional support by the Govern-ment may consist of direct or indirect equity participationin the project company. Equity participation by the Gov-ernment may help achieve a more favourable ratio betweenequity and debt by supplementing the equity provided bythe project sponsors, in particular where other sources ofequity capital, such as investment funds, cannot be tappedby the project company. Equity investment by the Govern-ment may also be useful to satisfy legal requirements of thehost country concerning the composition of locally estab-lished companies. The company laws of some jurisdictions,or special legislation on infrastructure projects, require acertain amount of participation of local investors in locallyestablished companies. However, it may not always bepossible to secure the required level of local participationon acceptable terms. Local investors may lack the interestor financial resources to invest in large infrastructureprojects; they may also be averse to or lack experience indealing with specific project risks.

41. Governmental participation may involve certain risksthat the Government may wish to consider. In particular,there is a risk that such participation may be understood asan implied guarantee by the Government, so that the par-ties, or even third parties, may expect the Government toback the project fully or eventually even take it over at itsown cost if the project company fails. Where such an im-plied guarantee is not intended, appropriate provisionsshould be made to clarify the limits of governmental in-volvement in the project.

(c) Subsidies

42. Tariff subsidies are used in some countries to supple-ment the project company’s revenue when the actual in-come of the project falls below a certain minimum level.The provision of the services in some areas where theproject company is required to operate may not be a prof-itable undertaking, because of low demand or high opera-tional costs or because the project company is required toprovide the service to a certain segment of the populationat low cost. Thus, the law in some countries authorizes the


Government to undertake to extend subsidies to the projectcompany in order to make it possible to provide the serv-ices at a lower price.

43. Subsidies usually take the form of direct payments tothe project company, either lump-sum payments or pay-ments calculated specifically to supplement the projectcompany’s revenue. In the latter case, the Governmentshould ensure that it has in place adequate mechanisms forverifying the accuracy of subsidy payments made to theproject company, by means, for example, of audit and fi-nancial disclosure provisions in the project agreement. Analternative to direct subsidies may be to allow the projectcompany to cross-subsidize less profitable activities withrevenue earned in more profitable ones. This may be doneby combining in the same concession both profitable andless profitable activities or areas of operation, or by grant-ing to the project company the commercial exploitation ofa separate and more profitable ancillary activity (see paras.48-60).

44. However, it is important for the legislature to considerpractical implications and possible legal obstacles to theprovision of subsidies to the project company. For exam-ple, subsidies are found to distort free competition and thecompetition laws of many countries prohibit the provisionof subsidies or other forms of direct financial aid that arenot expressly authorized by legislation. Subsidies may alsobe inconsistent with the host country’s international obliga-tions under international agreements on regional economicintegration or trade liberalization.

(d) Sovereign guarantees

45. In connection with privately financed infrastructureprojects, the term “sovereign guarantees” is sometimesused to refer to any of two types of guarantee provided bythe host Government. The first type includes guaranteesissued by the host Government to cover the breach of ob-ligations assumed by the contracting authority under theproject agreement. A second category includes guaranteesthat the project company will not be prevented by the Gov-ernment from exercising certain rights that are granted to itunder the project agreement or that derive from the laws ofthe country, for example, the right to repatriate profits atthe end of the project. Whatever form such guarantees maytake, it is important for the Government and the legislatureto consider the Government’s ability to assess and manageefficiently its own exposure to project risks and to deter-mine the acceptable level of direct or contingent liabilitiesit can assume.

(i) Guarantees of performanceby the contracting authority

46. Performance guarantees may be used where the con-tracting authority is a separate or autonomous legal entitythat does not engage the responsibility of the Governmentitself. Such guarantees may be issued in the name of theGovernment or of a public financial institution of the hostcountry. They may also take the form of a guarantee issuedby international financial institutions that are backed by a

counter-guarantee by the Government (see paras. 61-71).Guarantees given by the Government may be useful instru-ments to protect the project company from the conse-quences of default by the contracting authority or otherpublic authority assuming specific obligations under theproject agreement. The most common situations in whichsuch guarantees are used include the following:

(a) Off-take guarantees. Under these arrangements,the Government guarantees payment of goods and servicessupplied by the project company to public entities. Pay-ment guarantees are often used in connection with paymentobligations under off-take agreements in the power-genera-tion sector (see chap. IV, “Construction and operation ofinfrastructure”, para. 50). Such guarantees may be of par-ticular importance where the main or sole customer of theproject company is a government monopoly. Additionalcomfort is provided to the project company and lenderswhen the guarantee is subscribed by an international finan-cial institution;

(b) Supply guarantees. Supply guarantees may alsobe provided to protect the project company from the con-sequences of default by public sector entities providinggoods and supplies required for the operation of the facili-ty—fuel, electricity or water, for example—or to securepayment of indemnities for which the contracting entitymay become liable under the supply agreement;

(c) General guarantees. These are guarantees in-tended to protect the project company against any form ofdefault by the contracting authority, rather than default onspecifically designated obligations. Although general per-formance guarantees may not be very frequent, there arecases in which the project company and the lenders mayregard them as a condition necessary for executing theproject. This may be the case, for example, where the ob-ligations undertaken by the contracting authority are notcommensurate with its creditworthiness, as may happen inconnection with large concessions granted by municipali-ties or other autonomous entities. Guarantees by the Gov-ernment may be useful to ensure specific performance, forexample, when the host Government undertakes to substi-tute for the contracting entity in the performance of certainacts (for example, delivery of an appropriate site for dis-posal of by-products).

47. Generally, it is important not to overestimate the ad-equacy of sovereign guarantees alone to protect the projectcompany against the consequences of default by the con-tracting authority. Except when their purpose is to ensurespecific performance, sovereign guarantees usually have acompensatory function. Thus, they may not substitute forappropriate contractual remedies in the event of default bythe contracting authority (see chap. IV, “Construction andoperation of infrastructure”, paras. 140-150). Differenttypes of contractual remedies, or combinations thereof,may be used to deal with various events of default, forexample, liquidated damages in the event of default andprice increases or contract extensions in the event of addi-tional delay in project execution caused by acts of the con-tracting authority. Furthermore, in order to limit the Gov-ernment’s exposure and to reduce the risk of calls on theguarantee, it is advisable to consider measures to encouragethe contracting authority to live up to its obligations under


the project agreement or to make efforts to control thecauses of default. Such measures may include express sub-rogation rights of the guarantor against the contractingauthority or internal control mechanisms to ensure the ac-countability of the contracting authority or its agents in theevent, for instance, of wanton or reckless breach of its ob-ligations under the project agreement resulting in a call onthe sovereign guarantee.

(ii) Guarantees against adverse acts of Government

48. Unlike performance guarantees, which protect theproject company against the consequences of default by thecontracting authority, the guarantees considered here relateto acts of other authorities of the host country that are det-rimental to the rights of the project company or otherwisesubstantially affect the implementation of the project agree-ment. Such guarantees are often referred to as “politicalrisk guarantees”.

49. One type of guarantee contemplated in national lawsconsists of foreign exchange guarantees, which usuallyfulfil three functions: to guarantee the convertibility of thelocal earnings into foreign currency, to guarantee the avail-ability of the required foreign currency and to guarantee thetransferability abroad of the converted sums. Foreign ex-change guarantees are common in privately financed infra-structure projects involving a substantial amount of debtdenominated in currencies other than the local currency, inparticular in those countries which do not have freely con-vertible currencies. Some laws also provide that such aguarantee may be backed by a bank guarantee issued infavour of the project company. A foreign exchange guaran-tee is not normally intended to protect the project companyand the lenders against the risks of exchange rate fluctua-tion or market-induced devaluation, which are consideredto be ordinary commercial risks. However, in practice,Governments have sometimes agreed to assist the projectcompany in cases where the project company is unable torepay its debts in foreign currency owing to extreme de-valuation of the local currency.

50. Another important type of guarantee may be to assurethe company and its shareholders that they will not be ex-propriated without adequate compensation. Such a guaran-tee would typically extend both to confiscation of propertyowned by the project company in the host country and tothe nationalization of the project company itself, that is,confiscation of shares of the project company’s capital.This type of guarantee is usually provided for in laws deal-ing with direct foreign investment and in bilateral invest-ment protection treaties (see chap. VII, “Other relevantareas of law”, ___).

(e) Tax and customs benefits

51. Another method for the host Government to supportthe execution of privately financed projects could be togrant some form of tax and customs exemption, reductionor benefit. Domestic legislation on foreign direct invest-

ment often provides special tax regimes to encourage for-eign investment and in some countries it has been founduseful expressly to extend such a taxation regime to foreigncompanies participating in privately financed infrastructureprojects (see also chap. VII, “Other relevant areas of law”,__).

52. Typical tax exemptions or benefits include exemptionfrom income or profit tax or from property tax on the fa-cility, or exemptions from income tax on interest due onloans and other financial obligations assumed by theproject company. Some laws provide that all transactionsrelated to a privately financed infrastructure project will beexempted from stamp duties or similar charges. In somecases, the law establishes some preferential tax treatment orprovides that the project company will benefit from thesame favourable tax treatment generally given to foreigninvestments. Sometimes the tax benefit takes the form of amore favourable income tax rate, combined with a decreas-ing level of exemption during the initial years of theproject. Such exemptions and benefits are sometimes ex-tended to the contractors engaged by the project company,in particular foreign contractors.

53. Further taxation measures sometimes used to promoteprivately financed infrastructure projects are exemptionsfrom withholding tax to foreign lenders providing loans tothe project. Under many legal systems, any interest, com-mission or fee in connection with a loan or indebtednessthat is borne directly or indirectly by locally establishedcompanies or is deductible against income earned locally isdeemed to be local income for taxation purposes. There-fore, both local and foreign lenders to infrastructureprojects may be liable to the payment of income tax in thehost country, which the project company may be requiredto withhold from payments to foreign lenders, as non-resi-dents of the host country. Income tax due by the lenders inthe host country is typically taken into account in the ne-gotiations between the project company and the lendersand may result in a higher financial cost for the project. Insome countries, the competent organs are authorized togrant exemptions from withholding tax in connection withpayments to non-residents that are found to be made for apurpose that promotes or enhances the economic or techno-logical development of the host country or are otherwisedeemed to be related to a purpose of public relevance

54. Besides tax benefits or exemptions, national lawssometimes facilitate the import of equipment for the use ofthe project company by means of exemption from customsduties. Such exemption typically applies to the payment ofimport duties on equipment, machinery, accessories, rawmaterials and materials imported into the country for pur-poses of conducting preliminary studies, designing, con-structing and operating infrastructure projects. In the eventthat the project company wishes to transfer or sell the im-ported equipment on the domestic market, the approval ofthe contracting authority usually needs to be obtained andthe relevant import duties, turnover tax or other taxes needto be paid in accordance with the laws of the country.Sometimes the law authorizes the Government either togrant an exemption from customs duty or to guarantee thatthe level of duty will not be raised to the detriment of theproject.


(f) Protection from competition

55. An additional form of governmental support may con-sist of assurances that no competing infrastructure projectwill be developed for a certain period or that no agency ofthe Government will compete with the project company,directly or through another concessionaire. Assurances ofthis sort serve as a guarantee that the exclusivity rights thatmay be granted to the concessionaire (see chap. I, “Generallegislative and institutional framework”, paras. 20-22) willnot be nullified during the life of the project. Protectionfrom competition may be regarded by the project companyand the lenders as an essential condition for participating inthe development of infrastructure in the host country. Somenational laws contain provisions whereby the Governmentundertakes not to facilitate or support the execution of aparallel project that might generate competition to theproject company. In some cases, the law contains an under-taking by the Government that it will not alter the terms ofsuch exclusivity to the detriment of the project companywithout the project company’s consent.

56. Provisions of this type may be intended to foster theconfidence of the project sponsors and the lenders that thebasic assumptions under which the project was awardedwill be respected. However, they may be inconsistent withthe host country’s international obligations under agree-ments on regional economic integration and trade liberali-zation. Furthermore, they may limit the ability of the Gov-ernment to deal with an increase in the demand for theservice concerned as the public interest may require or toensure the availability of the services to various categoriesof user. It is therefore important to consider carefully theinterests of the various parties involved. For instance, therequired price level to allow profitable exploitation of atollroad may exceed the paying capacity of low-incomesegments of the public. Thus, the contracting authority mayhave an interest in maintaining open to the public a toll-freeroad as an alternative to a new tollroad. At the same time,however, if the contracting authority decides to improve orupgrade the alternative road, the traffic flow may be di-verted from the tollroad built by the project company, thusaffecting its flow of income. Similarly, the Governmentmay wish to introduce free competition for the provision oflong-distance telephone services in order to expand theavailability and reduce the cost of telecommunication serv-ices (for a brief overview of issues relating to competition,see “Introduction and background information on privatelyfinanced infrastructure projects”, paras. 24-29). The conse-quence of such a measure, however, may be a significanterosion of the income anticipated by the project company.

57. Generally, it may be useful to authorize the Govern-ment, where appropriate, to give assurances that the projectcompany’s exclusive rights will not be unduly affected bysubsequent changes in governmental policies without ap-propriate compensation. However, it may not be advisableto adopt statutory provisions that rule out the possibility ofsubsequent changes in the Government’s policy for thesector concerned, including a decision to promote compe-tition or to build parallel infrastructure. The possible con-sequences of such future changes for the project companyshould be dealt with by the parties in contractual provisions

dealing with changes in circumstances (see chap. IV, “Con-struction and operation of infrastructure”, paras. 121-130).It is particularly advisable to provide the contracting au-thority with the necessary power to negotiate with theproject company the compensation that may be due for lossor damage that may result from a competing infrastructureproject subsequently launched by the contracting authorityor from any equivalent measure of the Government thatadversely affects the project company’s exclusive rights.

(g) Ancillary revenue sources

58. One additional form of support to the execution ofprivately financed infrastructure projects may be to allowthe project company to diversify its investment throughadditional concessions for the provision of ancillary serv-ices or the exploitation of other activities. In some cases,alternative sources of revenue may also be used as a sub-sidy to the project company for the purpose of pursuing apolicy of low or controlled prices for the main service.Provided that the ancillary activities are sufficiently profit-able, they may enhance the financial feasibility of a project:the right to collect tolls on an existing bridge, for example,may be an incentive for the execution of a new toll bridgeproject. However, the relative importance of ancillary rev-enue sources should not be overemphasized.

59. In order to allow the project company to pursue ancil-lary activities, it may be necessary for the Government toreceive legislative authorization to grant the project com-pany the right to use property belonging to the contractingauthority for the purposes of such activities (for example,land adjacent to a highway for construction of service ar-eas) or the right to charge fees for the use of a facility builtby the contracting authority. Where it is felt necessary tocontrol the development and possibly the expansion ofsuch ancillary activities, the approval of the contractingauthority might be required in order for the project com-pany to undertake significant expansion of facilities usedfor ancillary activities.

60. Under some legal systems, certain types of ancillarysource of revenue offered by the Government may be re-garded as a concession separate from the main concessionand it is therefore advisable to review possible limitations tothe project company’s freedom to enter into contracts for theoperation of ancillary facilities (see chap. IV, “Constructionand operation of infrastructure”, paras. 100 and 101).

D. GUARANTEES PROVIDEDBY INTERNATIONAL FINANCIAL INSTITUTIONS

61. Besides guarantees given directly by the host Govern-ment, there may be guarantees issued by international fi-nancial institutions, such as the World Bank, the Multilat-eral Investment Guarantee Agency and the regionaldevelopment banks. Such guarantees usually protect theproject company against certain political risks, but undersome circumstances they may also cover breach of theproject agreement, for instance, where the project companydefaults on its loans as a result of the breach of an obliga-tion by the contracting authority.


1. Guarantees providedby multilateral lending institutions

62. In addition to lending to Governments and public au-thorities, multilateral lending institutions, such as theWorld Bank and the regional development banks, have de-veloped programmes to extend loans to the private sector.Sometimes they can also provide guarantees to commerciallenders for public and private sector projects. In mostcases, such guarantees provided by those institutions re-quire a counter-guarantee from the host Government.

63. Guarantees by multilateral lending institutions are de-signed to mitigate the risks of default on sovereign contrac-tual obligations or long-maturity loans that private lendersare not prepared to bear and are not equipped to evaluate.For instance, guarantees provided by the World Bank maytypically cover specified risks (the partial risk guarantee) orall credit risks during a specified part of the financing term(the partial credit guarantee), as summarized below. Mostregional development banks provide guarantees underterms similar to those of the World Bank.

(a) Partial risk guarantees

64. A partial risk guarantee covers specified risks arisingfrom non-performance of sovereign contractual obligationsor certain political force majeure events. Such guaranteesensure payment in the case of debt service default resultingfrom the non-performance of contractual obligations under-taken by Governments or their agencies. They may covervarious types of non-performance, such as failure to main-tain the agreed regulatory framework, including price for-mulas; failure to deliver inputs, such as fuel supplied to aprivate power company; failure to pay for outputs, such aspower purchased by a government utility from a powercompany or bulk water purchased by a local public distri-bution company; failure to compensate for project delaysor interruptions caused by government actions or politicalevents; procedural delays; and adverse changes in ex-change control laws or regulations.

65. When multilateral lending institutions participate infinancing a project, they sometimes provide support in theform of a waiver of recourse that they would otherwisehave to the project company in the event that default iscaused by events such as political risks. For example, amultilateral lending institution taking a completion guaran-tee from the project company may accept that it cannotenforce that guarantee if the reason for failure to completewas a political risk reason.

(b) Partial credit guarantees

66. Partial credit guarantees are provided to private sectorborrowers with a government counter-guarantee. They aredesigned to cover the portion of financing that falls duebeyond the normal tenure of loans provided by privatelenders. These guarantees are generally used for projectsinvolving private sector participation that need long-term

funds to be financially viable. A partial credit guaranteetypically extends maturities of loans and covers all eventsof non-payment for a designated part of the debt service.

2. Guarantees provided by the MultilateralInvestment Guarantee Agency

67. The Multilateral Investment Guarantee Agency(MIGA) offers long-term political risk insurance coverageto new investments originating in any member country anddestined for any developing member country other than thecountry from which the investment originates. New invest-ment contributions associated with the expansion, moderni-zation or financial restructuring of existing projects are alsoeligible, as are acquisitions that involve the privatization ofState enterprises. Eligible forms of foreign investment in-clude equity, shareholder loans and loan guarantees issuedby equity holders, provided the loans and loan guaranteeshave terms of at least three years. Loans to unrelated bor-rowers can also be insured, as long as a shareholder invest-ment in the project is concurrently insured. Other eligibleforms of investment are technical assistance, managementcontracts and franchising and licensing agreements, pro-vided they have terms of at least three years and the remu-neration of the investor is tied to the operating results of theproject. MIGA insures against the following risks: foreigncurrency transfer restrictions, expropriation, breach of con-tract, war and civil disturbance.

(a) Transfer restrictions

68. The purpose of guarantees of foreign currency trans-fer extended by MIGA is similar to that of sovereign for-eign exchange guarantees that may be provided by the hostGovernment (see para. 49). This guarantee protects againstlosses arising from an investor’s inability to convert localcurrency (capital, interest, principal, profits, royalties andother remittances) into foreign exchange for transfer out-side the host country. The coverage insures against exces-sive delays in acquiring foreign exchange caused by actionor failure to act by the host Government, by adversechanges in exchange control laws or regulations and bydeterioration in conditions governing the conversion andtransfer of local currency. Currency devaluation is not cov-ered. On receipt of the blocked local currency from aninvestor, MIGA pays compensation in the currency of itscontract of guarantee.

(b) Expropriation

69. This guarantee protects against loss of the insured in-vestment as a result of acts by the host Government thatmay reduce or eliminate ownership of, control over orrights to the insured investment. In addition to outright na-tionalization and confiscation, “creeping” expropriation—aseries of acts that, over time, have an expropriatory ef-fect—is also covered. Coverage is provided on a limitedbasis for partial expropriation (for example, confiscation offunds or tangible assets). Bona fide, non-discriminatory


measures taken by the host Government in the exercise oflegitimate regulatory authority are not covered. For totalexpropriation of equity investments, MIGA pays the netbook value of the insured investment. For expropriation offunds, MIGA pays the insured portion of the blockedfunds. For loans and loan guarantees, the Agency insuresthe outstanding principal and any accrued and unpaid inter-est. Compensation is paid upon assignment of the inves-tor’s interest in the expropriated investment (for example,equity shares or interest in a loan agreement) to MIGA.

(c) Breach of contract

70. This guarantee protects against losses arising from thehost Government’s breach or repudiation of a contract withthe investor. In the event of an alleged breach or repudia-tion, the investor must be able to invoke a dispute resolu-tion mechanism (for example, arbitration) under the under-lying contract and obtain an award for damages. If, after aspecified period of time, the investor has not received pay-ment or if the dispute resolution mechanism fails to func-tion because of actions taken by the host Government,MIGA will pay compensation.

(d) War and civil disturbance

71. This guarantee protects against loss from damage to,or the destruction or disappearance of, tangible assetscaused by politically motivated acts of war or civil distur-bance in the host country, including revolution, insurrec-tion, coup d’état, sabotage and terrorism. For equity invest-ments, MIGA will pay the investor’s share of the least ofthe book value of the assets, their replacement cost or thecost of repair of damaged assets. For loans and loan guar-antees, MIGA will pay the insured portion of the principaland interest payments in default as a direct result of dam-age to the assets of the project caused by war and civildisturbance. War and civil disturbance coverage also ex-tends to events that, for a period of one year, result in aninterruption of project operations essential to overall finan-cial viability. This type of business interruption is effectivewhen the investment is considered a total loss; at that point,MIGA will pay the book value of the total insured equityinvestment.

E. GUARANTEES PROVIDEDBY EXPORT CREDIT AGENCIES

AND INVESTMENT PROMOTION AGENCIES

72. Insurance against certain political, commercial and fi-nancial risks, as well as direct lending, may be obtainedfrom export credit agencies and investment promotionagencies. Export credit agencies and investment promotionagencies have typically been established in a number ofcountries to assist in the export of goods or services origi-nating from that country. Export credit agencies act onbehalf of the Governments of the countries supplyinggoods and services for the project. Most export credit agen-cies are members of the International Union of Credit andInvestment Insurers (Berne Union), whose main objectives

include promoting international cooperation and fostering afavourable investment climate; developing and maintainingsound principles of export credit insurance; and establish-ing and sustaining discipline in the terms of credit for in-ternational trade.

73. While the support available differs from country tocountry, export credit agencies typically offer two lines ofcoverage:

(a) Export credit insurance. In the context of the fi-nancing of privately financed infrastructure projects, theessential purpose of export credit insurance is to guaranteepayment to the seller whenever a foreign buyer of exportedgoods or services is allowed to defer payment. Exportcredit insurance may take the form of “supplier credit” or“buyer credit” insurance arrangements. Under the suppliercredit arrangements the exporter and the importer agree oncommercial terms that call for deferred payment evidencedby negotiable instruments (for example, bills of exchangeor promissory notes) issued by the buyer. Subject to proofof creditworthiness, the exporter obtains insurance from anexport credit agency in its home country. Under the buyercredit modality, the buyer’s payment obligation is financedby the exporter’s bank, which in turn obtains insurancecoverage from an export credit agency. Export credits aregenerally classified as short-term (repayment terms of usu-ally under two years), medium-term (usually two to fiveyears) and long-term (over five years). Official support byexport credit agencies may take the form of “pure cover”,by which is meant insurance or guarantees given to export-ers or lending institutions without financing support. Offi-cial support may also be given in the form of “financingsupport”, which is defined as including direct credits to theoverseas buyer, refinancing and all forms of interest ratesupport;

(b) Investment insurance. Export credit agencies mayoffer insurance coverage either directly to a borrower or tothe exporter for certain political and commercial risks.Typical political and commercial risks include war, insur-rection or revolution; expropriation, nationalization or req-uisition of assets; non-conversion of currency; and lack ofavailability of foreign exchange. Investment insurance pro-vided by export credit agencies typically protects the inves-tors in a project company established overseas against theinsured risks, but not the project company itself. Invest-ment insurance cover tends to be extended to a wide rangeof political risks. Export credit agencies prepared to coversuch risks will typically require sufficient information onthe legal system of the host country.

74. The conditions under which export credit agencies ofmember countries of the Organisation for Economic Coop-eration and Development (OECD) offer support to bothsupplier and buyer credit transactions have to be in accord-ance with the OECD Arrangement on Guidelines for Offi-cially Supported Export Credits (also referred to as the“OECD consensus”). The main purpose of the Arrange-ment is to provide a suitable institutional framework toprevent unfair competition by means of official support forexport credits. In order to avoid market-distorting subsi-dies, the Arrangement regulates the conditions of terms ofinsurances, guarantees or direct lending supported by Gov-ernments.


A/CN.9/471/Add.4

Chapter III. Selection of the concessionaire

CONTENTS

Paragraphs Page



A. General considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-33 107

1. Selection procedures covered by the Guide . . . . . . . . . . . . . . . 3-4 107

2. General objectives of selection procedures . . . . . . . . . . . . . . . 5-16 108

3. Special features of selection procedures for privatelyfinanced infrastructure projects . . . . . . . . . . . . . . . . . . . . . . . . . 17-26 109

4. Preparations for the selection proceedings . . . . . . . . . . . . . . . . 27-33 110

B. Pre-selection of bidders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-50 111

1. Invitation to the pre-selection proceedings . . . . . . . . . . . . . . . . 35-37 111

2. Pre-selection criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38-40 112

3. Issues relating to the participation of bidding consortia . . . . . 41-42 112

4. Pre-selection and domestic preferences . . . . . . . . . . . . . . . . . . 43-44 113

5. Contribution towards costs of participationin the selection proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-46 113

6. Pre-selection proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47-50 113

C. Procedures for requesting proposals . . . . . . . . . . . . . . . . . . . . . . . . . 51-84 114

1. Phases of the procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52-58 114

2. Content of the final request for proposals . . . . . . . . . . . . . . . . 59-70 115

3. Clarifications and modifications . . . . . . . . . . . . . . . . . . . . . . . . 71-72 117

4. Evaluation criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73-77 117

5. Submission, opening, comparison and evaluationof proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78-82 118

6. Final negotiations and project award . . . . . . . . . . . . . . . . . . . . 83-84 119

D. Direct negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85-96 120

1. Circumstances authorizing the use of direct negotiations . . . . 89 120

2. Measures to enhance transparency in direct negotiations . . . . 90-96 121

E. Unsolicited proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97-117 122

1. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98-106 122

2. Procedures for handling unsolicited proposals . . . . . . . . . . . . . 107-117 123

F. Review procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118-122 125

G. Notice of project award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 126

H. Record of selection and award proceedings . . . . . . . . . . . . . . . . . . . 124-130 126



General considerations (see paras. 1-33)

Recommendation 14. The law should provide for theselection of the concessionaire through transparent and ef-

ficient competitive procedures adapted to the particularneeds of privately financed infrastructure projects.

Pre-selection of bidders (see paras. 34-50)

Recommendation 15. The bidders should demonstratethat they meet the pre-selection criteria the contractingauthority considers appropriate for the particular project,including:


(a) Adequate professional and technical qualifications,human resources, equipment and other physical facilities asnecessary to carry out all the phases of the project, namelyengineering, construction, operation and maintenance;

(b) Sufficient ability to manage the financial aspects ofthe project and capability to sustain the financing require-ments for the engineering, construction and operationalphases of the project;

(c) Appropriate managerial and organizational capabil-ity, reliability and experience, including previous experi-ence in operating public infrastructure.

Recommendation 16. The bidders should be allowed toform consortia to submit proposals, provided that eachmember of a pre-selected consortium may participate, ei-ther directly or through subsidiary companies, in only onebidding consortium.

Recommendation 17. The contracting authority shoulddraw up a short list of the pre-selected bidders who willsubsequently be invited to submit proposals upon comple-tion of the pre-selection phase.

Procedure for requesting proposals (see paras. 51-84)

Single-stage and two-stage procedures(see paras. 52-58)

Recommendation 18. Upon completion of the pre-se-lection proceedings, the contracting authority should invitethe pre-selected bidders to submit final proposals.

Recommendation 19. Notwithstanding the above, thecontracting authority may use a two-stage procedure torequest proposals from pre-selected bidders when it is notfeasible for the contracting authority to formulate projectspecifications or performance indicators and contractualterms in a manner sufficiently detailed and precise to per-mit final proposals to be formulated. Where a two-stageprocedure is used, the following provisions apply:

(a) The contracting authority should first call upon thepre-selected bidders to submit proposals relating to outputspecifications and other characteristics of the project aswell as to the proposed contractual terms;

(b) The contracting authority should convene a meetingof bidders to clarify questions concerning the initial requestfor proposals;

(c) Following examination of the proposals received,the contracting authority should review and, as appropriate,revise the initial project specifications and contractualterms prior to issuing a final request for proposals.

Content of the final request for proposals(see paras. 59-70)

Recommendation 20. The final request for proposalsshould include at least the following:

(a) General information as may be required by the bid-ders in order to prepare and submit their proposals;

(b) Project specifications and performance indicators,as appropriate, including the contracting authority’s re-quirements regarding safety and security standards andenvironmental protection;

(c) The contractual terms proposed by the contractingauthority;

(d) The criteria for evaluating the proposals, the rela-tive weight to be accorded to each such criterion and themanner in which criteria are to be applied in the evaluationof proposals.

Clarifications and modifications (see paras. 71 and 72)

Recommendation 21. The contracting authority may,whether on its own initiative or as a result of a request forclarification by a bidder, modify the final request for pro-posals by issuing addenda at a reasonable time prior to thedeadline for submission of proposals.

Evaluation criteria (see paras. 73-77)

Recommendation 22. The criteria for the evaluationand comparison of the technical proposals should concernthe effectiveness of the proposal submitted by the bidder inmeeting the needs of the contracting authority, includingthe following:

(a) Technical soundness;

(b) Operational feasibility;

(c) Quality of services and measures to ensure theircontinuity;

(d) Social and economic development potential offeredby the proposals.

Recommendation 23. The criteria for the evaluationand comparison of the financial and commercial proposalsmay include, as appropriate:

(a) The present value of the proposed tolls, fees andother charges over the concession period;

(b) The present value of the proposed direct paymentsby the contracting authority, if any;

(c) The costs for design and construction activities,annual operation and maintenance costs, present value ofcapital costs and operating and maintenance costs;

(d) The extent of financial support, if any, expectedfrom the Government;

(e) Soundness of the proposed financial arrangements;

(f) The extent of acceptance of the proposed contrac-tual terms.

Submission, opening, comparison and evaluationof proposals (see paras. 78-82)

Recommendation 24. The contracting authority mayestablish thresholds with respect to quality, technical andcommercial aspects to be reflected in the proposals in ac-cordance with the criteria set out in the request for propos-als. Proposals that fail to achieve the thresholds should beregarded as non-responsive.

Recommendation 25. Whether or not it has followedpre-selection proceedings, the contracting authority mayretain the right to require the bidders to demonstrate theirqualifications again in accordance with criteria and proce-dures set forth in the request for proposals or the pre-selec-


tion documents, as appropriate. Where pre-selection pro-ceedings have been followed, the criteria shall be the sameas those used in the pre-selection proceedings.

Final negotiations (see paras. 83 and 84)

Recommendation 26. The contracting authority shouldrank all responsive proposals on the basis of the evaluationcriteria set forth in the request for proposals and invite forfinal negotiation of the project agreement the bidder thathas attained the best rating. Final negotiations may notconcern those terms of the contract which were stated asnon-negotiable in the final request for proposals.

Recommendation 27. If it becomes apparent to the con-tracting authority that the negotiations with the bidder in-vited will not result in a project agreement, the contractingauthority should inform that bidder that it is terminating thenegotiations and then invite for negotiations the other bid-ders on the basis of their ranking until it arrives at a projectagreement or rejects all remaining proposals.

Direct negotiations (see paras. 85-96)

Recommendation 28. The law should set forth the ex-ceptional circumstances under which the contracting au-thority may be authorized by a higher authority to selectthe concessionaire through direct negotiations, such as:

(a) When there is an urgent need for ensuring continu-ity in the provision of the service and engaging in a com-petitive selection procedure would therefore be impractical;

(b) In case of projects of short duration and with ananticipated initial investment value not exceeding a speci-fied low amount;

(c) Reasons of national defence or national security;

(d) Cases where there is only one source capable ofproviding the required service (for example, because it re-quires the use of patented technology or uniqueknow-how);

(e) When an invitation to the pre-selection proceedingsor a request for proposals has been issued but no applica-tions or proposals were submitted or all proposals failed tomeet the evaluation criteria set forth in the request for pro-posals and if, in the judgement of the contracting authority,issuing a new request for proposals would be unlikely toresult in a project award;

(f) Other cases where the higher authority authorizessuch an exception for compelling reasons of public interest.

Recommendation 29. The law may require that the fol-lowing procedures be observed in direct negotiations:

(a) The contracting authority should publish a notice ofthe negotiation proceedings and engage in negotiationswith as many companies judged capable of carrying out theproject as circumstances permit;

(b) The contracting authority should establish and makeknown to bidders the qualification criteria and the criteriafor evaluating the proposals and should determine the rela-tive weight to be accorded to each such criterion and themanner in which criteria are to be applied in the evaluationof the proposals;

(c) The contracting authority should treat proposals ina manner that avoids the disclosure of their contents tocompeting bidders;

(d) Any such negotiations between the contracting au-thority and bidders should be confidential and one party tothe negotiations should not reveal to any other person anytechnical, price or other commercial information relating tothe negotiations without the consent of the other party;

(e) Following completion of negotiations, the contract-ing authority should request all bidders remaining in theproceedings to submit, by a specified date, a best and finaloffer with respect to all aspects of their proposals;

(f) Proposals should be evaluated and ranked accord-ing to the criteria for the evaluation of proposals estab-lished by the contracting authority.

Unsolicited proposals (see paras. 97-117)

Recommendation 30. By way of exception to the selec-tion procedures described in legislative recommendations14-27, the contracting authority may be authorized to han-dle unsolicited proposals pursuant to specific proceduresestablished by the law for handling unsolicited proposals,provided that such proposals do not relate to a project forwhich selection procedures have been initiated or an-nounced by the contracting authority.

Procedures for determining the admissibility ofunsolicited proposals (see paras. 110-112)

Recommendation 31. Following receipt and prelimi-nary examination of an unsolicited proposal, the contract-ing authority should inform the author, within a reasonablyshort period, whether or not there is a potential public in-terest in the project. If the project is found to be in thepublic interest, the contracting authority should invite theauthor to submit a formal proposal in sufficient detail toallow the contracting authority to make a proper evaluationof the concept or technology and determine whether theproposal meets the conditions set forth in the law and islikely to be successfully implemented on the scale of theproposed project.

Recommendation 32. The author of an unsolicited pro-posal should retain title to all documents submittedthroughout the procedure and those documents should bereturned to it in the event the proposal is rejected.

Procedures for handling unsolicited proposalsthat do not involve proprietary concepts or technology(see paras. 113 and 114)

Recommendation 33. The contracting authority shouldinitiate competitive selection procedures under recommen-dations 14-27 if it is found that the envisaged output of theproject can be achieved without the use of a process, de-sign, methodology or engineering concept for which theauthor of the unsolicited proposal possesses exclusiverights or if the proposed concept or technology is not trulyunique or new. The author of the unsolicited proposalshould be invited to participate in such proceedings andmight be given a premium for submitting the proposal.


Procedures for handling unsolicited proposalsinvolving proprietary concepts or technology(see paras. 115-117)

Recommendation 34. If it appears that the envisagedoutput of the project cannot be achieved without using aprocess, design, methodology or engineering concept forwhich the author of the unsolicited proposal possesses ex-clusive rights, the contracting authority should seek to ob-tain elements of comparison for the unsolicited proposal.For that purpose, the contracting authority should publish adescription of the essential output elements of the proposalwith an invitation for other interested parties to submit al-ternative or comparable proposals within a certain reason-able period.

Recommendation 35. The contracting authority mayengage in negotiations with the author of the unsolicitedproposal if no alternative proposals are received, subject toapproval by a higher authority. If alternative proposals aresubmitted, the contracting authority should invite all theproponents to negotiations in accordance with the provi-sions of legislative recommendation 29 (b)-(f).

Review procedures (see paras. 118-122)

Recommendation 36. Bidders who claim to have suf-fered, or who may suffer, loss or injury owing to a breachof a duty imposed on the contracting authority by the lawmay seek review of the contracting authority’s acts in ac-cordance with the laws of the host country.

Notice of project award (see para. 123)

Recommendation 37. The contracting authority shouldcause a notice of the award of the project to be published.The notice should identify the concessionaire and include asummary of the essential terms of the project agreement.

Record of selection and award proceedings(see paras. 124-130)

Recommendation 38. The contracting authority shouldkeep an appropriate record of key information pertaining tothe selection and award proceedings. The law should setforth the requirements for public access.


A. GENERAL CONSIDERATIONS

1. The present chapter deals with methods and proce-dures recommended for use in the award of privately fi-nanced infrastructure projects. In line with the advice ofinternational organizations, such as UNIDO1 and the WorldBank,2 the Guide expresses a preference for the use ofcompetitive selection procedures, rather than negotiationswith bidders, while recognizing that direct negotiations

might also be used, according to the legal tradition of thecountry concerned (see also paras. 85-88).

2. The selection procedures recommended in this chapterpresent some of the features of the principal method for theprocurement of services under the UNCITRAL Model Lawon Procurement of Goods, Construction and Services (the“UNCITRAL Model Procurement Law”).3 A number ofadaptations have been introduced to take into account theparticular needs of privately financed infrastructureprojects, such as a clearly defined pre-selection phase.Where appropriate, this chapter refers the reader to provi-sions of the UNCITRAL Model Procurement Law, whichmay, mutatis mutandis, supplement the selection proceduredescribed herein.

1. Selection procedures covered by the Guide

3. Private investment in infrastructure may take variousforms, each requiring special methods for selecting theconcessionaire. For the purpose of discussing possible se-lection methods for the infrastructure projects dealt with inthe Guide, a distinction may be made between three mainforms of private investment in infrastructure:

(a) Purchase of public utility enterprises. Private capi-tal may be invested in public infrastructure through thepurchase of physical assets or the shares of public utilityenterprises. Such transactions are often carried out in ac-cordance with rules governing the award of contracts forthe disposition of state property. In many countries, the saleof shares of public utility enterprises requires prior legisla-tive authorization. Disposition methods often include offer-ing of shares on stock markets or competitive proceedingssuch as auctions or invitations to bid whereby the propertyis awarded to the qualified party offering the highest price;

(b) Provision of public services without development ofinfrastructure. In other types of project, the service provid-ers own and operate all the equipment necessary and some-times compete with other suppliers for the provision of therelevant service. Some national laws establish special pro-cedures whereby the State may authorize a private entity tosupply public services by means of exclusive ornon-exclusive “licences”. Licences may be publicly offeredto interested parties who satisfy the qualification require-ments set forth by the law or established by the licensingauthority. Sometimes licensing procedures involve publicauctions to interested qualified parties;

(c) Construction and operation of public infrastructure.In projects for the construction and operation of publicinfrastructure, a private entity is engaged to provide bothworks and services to the public. The procedures governingthe award of those contracts are in some aspects similar tothose which govern public procurement of construction andservices. National laws provide a variety of methods forpublic procurement, ranging from structured competitivemethods, such as tendering proceedings, to less structurednegotiations with prospective suppliers.

1UNIDO BOT Guidelines, p. 96.2International Bank for Reconstruction and Development, Procurement

under IBRD and IDA Loans, 1996, para. 3.13 (a).

3The UNCITRAL Model Law on Procurement of Goods, Constructionand Services and its accompanying Guide to Enactment were adopted by theUnited Nations Commission on International Trade Law at its twenty-seventh session, held in New York from 31 May to 17 June 1994.


4. This chapter deals primarily with selection proceduressuitable for use in relation to infrastructure projects thatinvolve an obligation, on the part of the selected privateentity, to undertake physical construction, repair or expan-sion works in the infrastructure concerned with a view tosubsequent private operation (that is, those referred to inpara. 3 (c)). It does not deal specifically with other methodsof selecting providers of public services through licensingor similar procedures, or of merely disposing of State prop-erty through capital increases or offerings of shares.

2. General objectives of selection procedures

5. For the award of contracts for infrastructure projects,the contracting authority may either apply methods andprocedures already provided in the laws of the host countryor establish procedures specifically designed for that pur-pose. In either situation, it is important to ensure that suchprocedures are generally conducive to attaining the funda-mental objectives of rules governing the award of publiccontracts. Those objectives are briefly discussed below.

(a) Economy and efficiency

6. In connection with infrastructure projects, economyrefers to the selection of a concessionaire that is capable ofperforming works and delivering services of the desiredquality at the most advantageous price or that offers thebest commercial proposal. In most cases, economy is bestachieved by means of procedures that promote competitionamong bidders. Competition provides them with incentivesto offer their most advantageous terms, and it can encour-age them to adopt efficient or innovative technologies orproduction methods in order to do so.

7. It should be noted, however, that competition does notnecessarily require the participation of a large number ofbidders in a given selection process. For large projects inparticular, there may be reasons for the contracting author-ity to wish to limit the number of bidders to a manageablenumber (see para. 20). Provided that appropriate proce-dures are in place, the contracting authority can take advan-tage of effective competition even where the competitivebase is limited.

8. Economy can often be promoted through participationby foreign companies in selection proceedings. Not onlycan foreign participation expand the competitive base, itcan also lead to the acquisition by the contracting authorityand its country of technologies that are not available lo-cally. Foreign participation in selection proceedings may benecessary where there exists no domestic expertise of thetype required by the contracting authority. A country wish-ing to achieve the benefits of foreign participation shouldensure that its relevant laws and procedures are conduciveto such participation.

9. Efficiency refers to selection of a concessionairewithin a reasonable amount of time, with minimal admin-istrative burdens and at reasonable cost both to the con-tracting authority and to participating bidders. In additionto the losses that can accrue directly to the contracting

authority from inefficient selection procedures (owing, forexample, to delayed selection or high administrative costs),excessively costly and burdensome procedures can lead toincreases in the overall project costs or even discouragecompetent companies from participating in the selectionproceedings altogether.

(b) Promotion of integrity of and confidencein the selection process

10. Another important objective of rules governing theselection of the concessionaire is to promote the integrityof and confidence in the process. Thus, an adequate selec-tion system will usually contain provisions designed toensure fair treatment of bidders, to reduce or discourageunintentional or intentional abuses of the selection processby persons administering it or by companies participatingin it and to ensure that selection decisions are taken on aproper basis.

11. Promoting the integrity of the selection process willhelp to promote public confidence in the process and in thepublic sector in general. Bidders will often refrain fromspending the time and sometimes substantial sums ofmoney to participate in selection proceedings unless theyare confident that they will be treated fairly and that theirproposals or offers have a reasonable chance of being ac-cepted. Those which do participate in selection proceedingsin which they do not have that confidence would probablyincrease the project cost to cover the higher risks and costsof participation. Ensuring that selection proceedings are runon a proper basis could reduce or eliminate that tendencyand result in more favourable terms to the contracting au-thority.

12. To guard against corruption by government officials,including employees of the contracting authorities, the hostcountry should have in place an effective system of sanc-tions. These could include sanctions of a criminal naturethat would apply to unlawful acts of officials conductingthe selection process and of participating bidders. Conflictsof interest should also be avoided, for instance by requiringthat officials of the contracting authority, their spouses,relatives and associates abstain from owning a debt or eq-uity interest in a company participating in a selection proc-ess or accepting to serve as a director or employee of sucha company. Furthermore, the law governing the selectionproceedings should obligate the contracting authority toreject offers or proposals submitted by a party who gives oragrees to give, directly or indirectly, to any current orformer officer or employee of the contracting authority orother public authority a gratuity in any form, an offer ofemployment or any other thing or service of value, as aninducement with respect to an act or decision of or proce-dure followed by the contracting authority in connectionwith the selection proceedings. These provisions may besupplemented by other measures, such as the requirementthat all companies invited to participate in the selectionprocess undertake neither to seek to influence unduly thedecisions of the public officials involved in the selectionprocess nor otherwise to distort the competition by meansof collusive or other illicit practices (that is, the so-called“integrity agreement”). Also, in the procurement practices


adopted by some countries, bidders are required to guaran-tee that no official of the procuring entity has been or shallbe admitted by the bidder to any direct or indirect benefitarising from the contract or the award thereof. Breach ofsuch a provision typically constitutes a breach of an essen-tial term of the contract.

13. The confidence of investors may be further fosteredby adequate provisions to protect the confidentiality ofproprietary information submitted by them during the se-lection proceedings. This should include sufficient assur-ances that the contracting authority will treat proposals insuch a manner as to avoid the disclosure of their contentsto competing bidders; that any discussions or negotiationswill be confidential; and that trade or other information thatbidders might include in their proposals will not be madeknown to their competitors.

(c) Transparency of laws and procedures

14. Transparency of laws and procedures governing theselection of the concessionaire will help to achieve anumber of the policy objectives already mentioned. Trans-parent laws are those in which the rules and procedures tobe followed by the contracting authority and by bidders arefully disclosed, are not unduly complex and are presentedin a systematic and understandable way. Transparent proce-dures are those which enable the bidders to ascertain whatprocedures have been followed by the contracting authorityand the basis of decisions taken by it.

15. One of the most important ways to promote transpar-ency and accountability is to include provisions requiringthat the contracting authority maintain a record of the se-lection proceedings (see paras. 124-130). A record summa-rizing key information concerning those proceedings facili-tates the exercise of the right of aggrieved bidders to seekreview. That in turn will help to ensure that the rules gov-erning the selection proceedings are, to the extent possible,self-policing and self-enforcing. Furthermore, adequaterecord requirements in the law will facilitate the work ofpublic authorities exercising an audit or control functionand promote the accountability of contracting authorities tothe public at large as regards the award of infrastructureprojects.

16. An important corollary of the objectives of economy,efficiency, integrity and transparency is the availability ofadministrative and judicial procedures for the review ofdecisions made by the authorities involved in the selectionproceedings (see paras. 118-122).

3. Special features of selection procedures forprivately financed infrastructure projects

17. Generally, economy in the award of public contractsis best achieved through methods that promote competitionamong a range of bidders within structured, formal proce-dures. Competitive selection procedures, such as tendering,are usually prescribed by national laws as the rule for nor-mal circumstances in procurement of goods or construc-tion.

18. The formal procedures and the objectivity and pre-dictability that characterize the competitive selection proce-dures generally provide optimal conditions for competition,transparency and efficiency. Thus, the use of competitiveselection procedures in privately financed infrastructureprojects has been recommended by UNIDO, which hasformulated detailed practical guidance on how to structurethose procedures.1 The rules for procurement under loansprovided by the World Bank also advocate the use of com-petitive selection procedures and provide that a concession-aire selected pursuant to bidding procedures acceptable tothe World Bank is generally free to adopt its own proce-dures for the award of contracts required to implement theproject. However, where the concessionaire was not itselfselected pursuant to those competitive procedures, theaward of subcontracts has to be done pursuant to competi-tive procedures acceptable to the World Bank.2

19. It should be noted, however, that no international leg-islative model has thus far been specifically devised forcompetitive selection procedures in privately financed in-frastructure projects. On the other hand, domestic laws oncompetitive procedures for the procurement of goods, con-struction or services may not be entirely suitable for pri-vately financed infrastructure projects. International experi-ence in the award of privately financed infrastructureprojects has in fact revealed some limitations of traditionalforms of competitive selection procedures, such as the ten-dering method. In view of the particular issues raised byprivately financed infrastructure projects, which are brieflydiscussed below, it is advisable for the Government toconsider adapting such procedures for the selection of theconcessionaire.

(a) Range of bidders to be invited

20. The award of privately financed infrastructureprojects typically involves complex, time-consuming andexpensive proceedings, and the sheer scale of most infra-structure projects reduces the likelihood of obtaining pro-posals from a large number of suitably qualified bidders. Infact, competent bidders may be reluctant to participate inprocurement proceedings for high-value projects if thecompetitive field is too large and where they run the risk ofhaving to compete with unrealistic proposals or proposalssubmitted by unqualified bidders. Open tendering withouta pre-selection phase is therefore usually not advisable forthe award of infrastructure projects.

(b) Definition of project requirements

21. In traditional public procurement of constructionworks the procuring authority usually assumes the positionof a maître d’ouvrage or employer, while the selected con-tractor carries out the function of the performer of theworks. The procurement procedures emphasize the inputsto be provided by the contractor, that is, the contractingauthority establishes clearly what is to be built, how and bywhat means. It is therefore common for invitations to ten-der for construction works to be accompanied by extensiveand very detailed technical specifications of the type ofworks and services being procured. In those cases, the


contracting authority will be responsible for ensuring thatthe specifications are adequate to the type of infrastructureto be built and that such infrastructure will be capable ofbeing operated efficiently.

22. However, for many privately financed infrastructureprojects, the contracting authority may envisage a differentallocation of responsibilities between the public and theprivate sector. In those cases, after having established aparticular infrastructure need, the contracting authority mayprefer to leave to the private sector the responsibility forproposing the best solution for meeting such a need, subjectto certain requirements that may be established by the con-tracting authority (for example, regulatory performance orsafety requirements, sufficient evidence that the technicalsolutions proposed had been previously tested and satisfac-torily met internationally acceptable safety and other stand-ards). The selection procedure used by the contracting au-thority may thus give more emphasis to the output expectedfrom the project (that is, the services or goods to be pro-vided) than to technical details of the works to be per-formed or means to be used to provide those services.

(c) Evaluation criteria

23. For projects to be financed, owned and operated bypublic authorities, goods, construction works or servicesare typically purchased with funds available under ap-proved budgetary allocations. With the funding sourcesusually secured, the main objective of the procuring entityis to obtain the best value for the funds it spends. There-fore, in those types of procurement the decisive factor inestablishing the winner among the responsive and techni-cally acceptable proposals is often the global price offeredfor the construction works, which is calculated on the basisof the cost of the works and other costs incurred by thecontractor, plus a certain margin of profit.

24. Privately financed infrastructure projects, in turn, aretypically expected to be financially self-sustainable, with thedevelopment and operational costs being recovered from theproject’s own revenue. Therefore, a number of other factorswill need to be considered in addition to the construction andoperation cost and the price to be paid by the users. Forinstance, the contracting authority will need to considercarefully the financial and commercial feasibility of theproject, the soundness of the financial arrangements pro-posed by the bidders and the reliability of the technicalsolutions used. Such interest exists even where no govern-mental guarantees or payments are involved, because unfin-ished projects or projects with large cost overruns or higherthan expected maintenance costs often have a negative im-pact on the overall availability of needed services and on thepublic opinion in the host country. Also, the contractingauthority will aim at formulating qualification and evalua-tion criteria that give adequate weight to the need to ensurethe continuous provision of and, as appropriate, universalaccess to the public service concerned. Furthermore, giventhe usually long duration of infrastructure concessions, thecontracting authority will need to satisfy itself as to thesoundness and acceptability of the arrangements proposedfor the operational phase and will weigh carefully the serviceelements of the proposals (see para. 74).

(d) Negotiations with bidders

25. Laws and regulations governing tendering proceed-ings often prohibit negotiations between the contractingauthority and the contractors concerning a proposal submit-ted by them. The rationale for such a strict prohibition,which is also contained in article 35 of the UNCITRALModel Procurement Law, is that negotiations might resultin an “auction”, in which a proposal offered by one con-tractor is used to apply pressure on another contractor tooffer a lower price or an otherwise more favourable pro-posal. As a result of that strict prohibition, contractors se-lected to provide goods or services pursuant to traditionalprocurement procedures are typically required to signstandard contract documents provided to them during theprocurement proceedings.

26. The situation is different in the award of privatelyfinanced infrastructure projects. The complexity and longduration of such projects makes it unlikely that the con-tracting authority and the selected bidder could agree onthe terms of a draft project agreement without negotiationand adjustments to adapt those terms to the particular needsof the project. This is particularly true for projects involv-ing the development of new infrastructure where the finalnegotiation of the financial and security arrangements takesplace only after the selection of the concessionaire. It isimportant, however, to ensure that these negotiations arecarried out in a transparent manner and do not lead tochanges to the basis on which the competition was carriedout (see paras. 83 and 84).

4. Preparations for the selection proceedings

27. The award of privately financed infrastructureprojects is in most cases a complex exercise requiring care-ful planning and coordination among the offices involved.By ensuring that adequate administrative and personnelsupport is available to conduct the type of selection pro-ceeding that it has chosen, the Government plays an essen-tial role in promoting confidence in the selection process.

(a) Appointment of the award committee

28. One important preparatory measure is the appoint-ment of the committee that will be responsible for evaluat-ing the proposals and making an award recommendation tothe contracting authority. The appointment of qualified andimpartial members to the selection committee is not only arequirement for an efficient evaluation of the proposals, butmay further foster the confidence of bidders in the selectionprocess.

29. Another important preparatory measure is the appoint-ment of the independent advisers who will assist the con-tracting authority in the selection procedures. The contract-ing authority may need, at this early stage, to retain theservices of independent experts or advisers to assist in es-tablishing appropriate qualification and evaluation criteria,defining performance indicators (and, if necessary, projectspecifications) and preparing the documentation to be is-sued to bidders. Consultant services and advisers may also


be retained to assist the contracting authority in the evalu-ation of proposals, drafting and negotiation of the projectagreement. Consultants and advisers can be particularlyhelpful by bringing a range of technical expertise that maynot always be available in the host country’s civil service,such as technical or engineering advice (for example, ontechnical assessment of the project or installations andtechnical requirements of contract); environmental advice(for example, environmental assessment and operation re-quirements); or financial advice (for example, on financialprojections, review of financing sources, assessing the ad-equate ratio between debt and equity and drafting of finan-cial information documents).

(b) Feasibility and other studies

30. As indicated earlier (see chap. I, “General legislativeand institutional framework”, para. 25), one of the initialsteps that should be taken by the Government in relation toa proposed infrastructure project is to conduct a prelimi-nary assessment of its feasibility, including economic andfinancial aspects such as expected economic advantages ofthe project, estimated cost and potential revenue anticipatedfrom the operation of the infrastructure facility. The optionto develop infrastructure as a privately financed projectrequires a positive conclusion on the feasibility and finan-cial viability of the project. An assessment of the project’senvironmental impact should also ordinarily be carried outby the contracting authority as part of its feasibility studies.In some countries, it has been found useful to provide forsome public participation in the preliminary assessment ofthe project’s environmental impact and the various optionsavailable to minimize it.

31. Prior to starting the proceedings leading to the selec-tion of a prospective concessionaire, it is advisable for thecontracting authority to review and, as required, expandthose initial studies. In some countries contracting authori-ties are advised to formulate model projects for referencepurposes (typically including a combination of estimatedcapital investment, operation and maintenance costs) priorto inviting proposals from the private sector. The purposeof such model projects is to demonstrate the viability of thecommercial operation of the infrastructure and theaffordability of the project in terms of total investment costand cost to the public. They will also provide the contract-ing authority with a useful tool for comparison and evalu-ation of proposals. The confidence of bidders will be pro-moted by evidence that the technical, economical andfinancial assumptions of the project, as well as the pro-posed role of the private sector, have been carefully consid-ered by the contracting authority.

(c) Preparation of documentation

32. Selection proceedings for the award of privately fi-nanced infrastructure projects typically require the prepara-tion of extensive documentation, including a project out-line, pre-selection documents, the request for proposals,instructions for preparing proposals and a draft of theproject agreement. The quality and clarity of the documentsissued by the contracting authority plays a significant rolein ensuring an efficient and transparent selection procedure.

33. Standard documentation prepared in sufficiently pre-cise terms may be an important element to facilitate thenegotiations between bidders and prospective lenders andinvestors. It may also be useful for ensuring consistency inthe treatment of issues common to most projects in a givensector. However, in using standard contract terms it is ad-visable to bear in mind the possibility that a specific projectmay raise issues that had not been anticipated when thestandard document was prepared or that the project maynecessitate particular solutions that might be at variancewith the standard terms. Careful consideration should begiven to the need to achieve an appropriate balance be-tween the level of uniformity desired for project agree-ments of a particular type and the flexibility that might beneeded for finding project-specific solutions.

B. PRE-SELECTION OF BIDDERS

34. Given the complexity of privately financed infrastruc-ture projects the contracting authority may wish to limit thenumber of bidders from whom proposals will subsequentlybe requested only to those who satisfy certain qualificationcriteria. In traditional government procurement, the pre-selection proceedings may consist of the verification ofcertain formal requirements, such as adequate proof oftechnical capability or prior experience in the type of pro-curement, so that all bidders who meet the pre-selectioncriteria are automatically admitted to the tendering phase.The pre-selection proceedings for privately financed infra-structure projects, in turn, may involve elements of evalu-ation and selection. This may be the case, for example,where the contracting authority establishes a ranking ofpre-selected bidders (see para. 48).

1. Invitation to the pre-selection proceedings

35. In order to promote transparency and competition, itis advisable that the invitation to the pre-selection proceed-ings be made public in a manner that reaches an audiencewide enough to provide an effective level of competition.The laws of many countries identify publications, usuallythe official gazette or other official publication, in whichthe invitation to the pre-selection proceedings is to be pub-lished. With a view to fostering participation of foreigncompanies and maximizing competition, the contractingauthority may wish to have the invitations to the pre-selec-tion proceedings made public also in a language customar-ily used in international trade, in a newspaper of wide in-ternational circulation or in a relevant trade publication ortechnical or professional journal of wide international cir-culation. One possible medium for such publication isDevelopment Business, published by the Department ofPublic Information of the United Nations Secretariat.

36. Pre-selection documents should contain sufficient in-formation for bidders to be able to ascertain whether theworks and services entailed by the project are of a type thatthey can provide and, if so, how they can participate in theselection proceedings. The invitation to the pre-selectionproceedings should, in addition to identifying the infra-


structure to be built or renovated, contain information onother essential elements of the project, such as the servicesto be delivered by the concessionaire, the financial arrange-ments envisaged by the contracting authority (for example,whether the project will be entirely financed by user fees ortolls or whether public funds may be provided as directpayments, loans or guarantees) and, where already known,a summary of the main required terms of the project agree-ment to be entered into as a result of the selection proceed-ings.

37. In addition to that, the invitation to the pre-selectionproceedings should include general information similar tothe information typically provided in pre-selection docu-ments under general rules on public procurement.4

2. Pre-selection criteria

38. Generally, bidders should be required to demonstratethat they possess the professional and technical qualifica-tions, financial and human resources, equipment and otherphysical facilities, managerial capability, reliability andexperience necessary to carry out the project. Additionalcriteria that might be particularly relevant for privately fi-nanced infrastructure projects may include the ability tomanage the financial aspects of the project and previousexperience in operating public infrastructure or in provid-ing services under regulatory oversight (for example, qual-ity indicators of their past performance, size and type ofprevious projects carried out by the bidders); the level ofexperience of the key personnel to be engaged in theproject; sufficient organizational capability (includingminimum levels of construction, operation and mainte-nance equipment); capability to sustain the financing re-quirements for the engineering, construction and opera-tional phases of the project (demonstrated, for instance, byevidence of the bidders’ ability to provide an adequateamount of equity to the project, and sufficient evidencefrom reputable banks attesting the bidder’s good financialstanding). Qualification requirements should cover allphases of an infrastructure project, including financingmanagement, engineering, construction, operation andmaintenance, where appropriate. In addition, the biddersshould be required to demonstrate that they meet such otherqualification criteria as would typically apply under thegeneral procurement laws of the host country.5

39. One important aspect to be considered by the con-tracting authority relates to the relationship between theaward of one particular project and the governmentalpolicy pursued for the sector concerned (see “Introductionand background information on privately financed infra-structure projects”, paras. 21-46). Where competition issought, the Government may be interested in ensuring thatthe relevant market or sector is not dominated by one en-terprise (for example, that the same company does notoperate more than a certain limited number of local tel-ephone companies within a given territory). To implementsuch a policy and to avoid market domination by bidderswho may have already been awarded a concession within agiven sector of the economy, the contracting authority maywish to include in the pre-selection documents for newconcessions provisions that limit the participation or pre-vent another award to such bidders. For purposes of trans-parency, it is desirable for the law to provide that, wherethe contracting authority reserves the right to reject a pro-posal on those or similar grounds, adequate notice of thatcircumstance must be included in the invitation to the pre-selection proceedings.

40. Qualification requirements should apply equally to allbidders. A contracting authority should not impose anycriterion, requirement or procedure with respect to thequalifications of bidders that has not been set forth in thepre-selection documents. When considering the profes-sional and technical qualifications of bidding consortia, thecontracting authority should consider the individual spe-cialization of the consortium members and assess whetherthe combined qualifications of the consortium members areadequate to meet the needs of all phases of the project.

3. Issues relating to the participationof bidding consortia

41. Given the large scale of most infrastructure projects,the interested companies typically participate in the selec-tion proceedings through consortia especially formed forthat purpose. Therefore, information required from mem-bers of bidding consortia should relate to the consortium asa whole as well as to its individual participants. For thepurpose of facilitating the liaison with the contracting au-thority, it may be useful to require in the pre-selectiondocuments that each consortium designate one of its mem-bers as a focal point for all communications with the con-tracting authority. It is generally advisable for the contract-ing authority to require that the members of biddingconsortia submit a sworn statement undertaking that, ifawarded the contract, they shall bind themselves jointlyand severally for the obligations assumed in the name ofthe consortium under the project agreement. Alternatively,the contracting authority may reserve itself the right torequire at a later stage that the members of the selectedconsortium establish an independent legal entity to carryout the project (see also chap. IV, “Construction and opera-tion of infrastructure”, paras. 12-18).

42. It is also advisable for the contracting authority toreview carefully the composition of consortia and theirparent companies. It may happen that one company, di-rectly or through subsidiary companies, joins more than

4For example, instructions for preparing and submitting pre-selectionapplications; any documentary evidence or other information that must besubmitted by bidders to demonstrate their qualifications; and the manner,place and deadline for the submission of applications (see UNCITRALModel Procurement Law, art. 7, para. 3).

5For example, that they have legal capacity to enter into the projectagreement; that they are not insolvent, in receivership, bankrupt or beingwound up, their affairs are not being administered by a court or a judicialofficer, their business activities have not been suspended and they are notthe subject of legal proceedings for any of the foregoing; that they havefulfilled their obligations to pay taxes and social security contributions inthe State; that they have not, and their directors or officers have not, beenconvicted of any criminal offence related to their professional conduct orthe making of false statements or misrepresentations as to their qualifica-tions to enter into a procurement contract within a certain period of yearspreceding the commencement of the selection proceedings or have not beenotherwise disqualified pursuant to administrative suspension or disbarmentproceedings (see UNCITRAL Model Procurement Law, art. 6, para. 1 (b)).


one consortium to submit proposals for the same project.Such a situation should not be allowed, since it raises therisk of leakage of information or collusion between com-peting consortia, thus undermining the credibility of theselection proceedings. It is therefore advisable to provide inthe invitation to the pre-selection proceedings that each ofthe members of a qualified consortium may participate,either directly or through subsidiary companies, in only onebid for the project. A violation of this rule should cause thedisqualification of the consortium and of the individualmember companies.

4. Pre-selection and domestic preferences

43. The laws of some countries provide for some sort ofpreferential treatment for domestic entities or afford specialtreatment to bidders that undertake to use national goods oremploy local labour. Such preferential or special treatmentis sometimes provided as a material qualification require-ment (for example, a minimum percentage of national par-ticipation in the consortium) or as a condition for partici-pating in the selection procedure (for example, to appointa local partner as a leader of the bidding consortium).

44. Domestic preferences may give rise to a variety ofissues. Firstly, their use is not permitted under the guide-lines of some international financial institutions and mightbe inconsistent with international obligations entered intoby many States pursuant to agreements on regional eco-nomic integration or trade facilitation. Furthermore, fromthe perspective of the host country it is important to weighthe expected advantages against the disadvantage of de-priving the contracting authority of the possibility of ob-taining better options to meet the national infrastructureneeds. It is also important not to allow total insulation fromforeign competition so as not to perpetuate lower levels ofeconomy, efficiency and competitiveness of the concernedsectors of national industry. This is the reason why manycountries that wish to provide some incentive to nationalsuppliers, while at the same time taking advantage of inter-national competition, do not contemplate a blanket exclu-sion of foreign participation or restrictive qualification re-quirements. Domestic preferences may take the form ofspecial evaluation criteria establishing margins of prefer-ence for national bidders or bidders who offer to procuresupplies, services and products in the local market. Themargin of preference technique, which is provided in arti-cle 34, paragraph 4 (d), of the UNCITRAL Model Procure-ment Law, is more transparent than subjective qualificationor evaluation criteria. Furthermore, it allows the contractingauthority to favour local bidders that are capable of ap-proaching internationally competitive standards, and it doesso without simply excluding foreign competition. Wheredomestic preferences are envisaged, they should be an-nounced in advance, preferably in the invitation to the pre-selection proceedings.

5. Contribution towards costs of participationin the selection proceedings

45. The price charged for the pre-selection documentsshould only reflect the cost of printing such documents and

providing them to the bidders. It should not be used as anadditional tool to limit the number of bidders. Such a prac-tice is both ineffective and adds to the already considerablecost of participation in the pre-selection proceedings. Thehigh costs of preparing proposals for infrastructure projectsand the relatively high risks that a selection procedure maynot lead to a contract award may function as a deterrent forsome companies to join in a consortium to submit a pro-posal, in particular when they are not familiar with theselection procedures applied in the host country.

46. Therefore, some countries authorize the contractingauthority to consider arrangements for compensating pre-selected bidders if the project cannot proceed for reasonsoutside their control or for contributing to the costs in-curred by them after the pre-selection phase, when justifiedin a particular case by the complexity involved and theprospect of significantly improving the quality of the com-petition. When such contribution or compensation is envis-aged, appropriate notice should be given to potential bid-ders at an early stage, preferably in the invitation to thepre-selection proceedings.

6. Pre-selection proceedings

47. The contracting authority should respond to any re-quest by a bidding consortium for clarification of the pre-selection documents that is received by the contractingauthority within a reasonable time prior to the deadline forthe submission of applications so as to enable the biddersto make a timely submission of their application. The re-sponse to any request that might reasonably be expected tobe of interest to other bidders should, without identifyingthe source of the request, be communicated to all biddersto which the contracting authority provided the pre-selec-tion documents.

48. In some countries, practical guidance on selectionprocedures encourages domestic contracting authorities tolimit the prospective proposals to the lowest possiblenumber sufficient to ensure meaningful competition (forexample, three or four). For that purpose, those countriesapply a quantitative rating system for technical, managerialand financial criteria, taking into account the nature of theproject. Quantitative pre-selection criteria are found to bemore easily applicable and transparent than qualitative cri-teria involving the use of merit points. However, in devis-ing a quantitative rating system, it is important to avoidunnecessary limitation of the contracting authority’s discre-tion in assessing the qualifications of bidders. The contract-ing authority may also need to take into account the factthat the procurement guidelines of some multilateral finan-cial institutions prohibit the use of pre-selection proceed-ings for the purpose of limiting the number of bidders to apredetermined number. In any event, where such a ratingsystem is to be used, that circumstance should be clearlystated in the pre-selection documents.

49. Upon completion of the pre-selection phase, the con-tracting authority usually draws up a short list of the pre-selected bidders which will subsequently be invited to sub-mit proposals. One practical problem sometimes faced by


contracting authorities concerns proposals for changes inthe composition of bidding consortia during the selectionproceedings. From the perspective of the contracting au-thority, it is generally advisable to exercise caution in re-spect of proposed substitutions of individual members ofbidding consortia after the closing of the pre-selectionphase. Changes in the composition of consortia may sub-stantially alter the basis on which the pre-selected biddingconsortia were short-listed by the contracting authority andmay give rise to questions about the integrity of the selec-tion proceedings. As a general rule, only pre-selected bid-ders should be allowed to participate in the selection phase,unless the contracting authority can satisfy itself that a newconsortium member meets the pre-selection criteria to sub-stantially the same extent as the retiring member of theconsortium.

50. While the criteria used for pre-selecting biddersshould not be weighted again at the evaluation phase, thecontracting authority may wish to reserve itself the right torequire, at any stage of the selection process, that the bid-ders again demonstrate their qualifications in accordancewith the same criteria used to pre-select them.

C. PROCEDURESFOR REQUESTING PROPOSALS

51. This section discusses the procedures for requestingproposals from the pre-selected bidders. The proceduresdescribed herein are in a number of respects similar to theprocedures for the solicitation of proposals under the pre-ferred method for the procurement of services provided inthe UNCITRAL Model Procurement Law, with some adap-tations needed to fit the needs of contracting authoritiesawarding infrastructure projects.

1. Phases of the procedure

52. Following the pre-selection of bidders, it is advisablefor the contracting authority to review its original feasibil-ity study and the definition of the output and performancerequirements and to consider whether a revision of thoserequirements is needed in the light of the information ob-tained during the pre-selection proceedings. At this stage,the contracting authority should have already determinedwhether a single or a two-stage procedure will be used torequest proposals.

(a) Single-stage procedure

53. The decision between having a single or a two-stageprocedure for requesting proposals will depend on the na-ture of the contract, on how precisely the technical require-ments can be defined and whether output results (or per-formance indicators) are used for selection of theconcessionaire. If it is deemed both feasible and desirablefor the contracting authority to formulate performance in-dicators or project specifications to the necessary degree of

precision or finality, the selection process may be struc-tured as a single-stage procedure. In that case, after havingconcluded the pre-selection of bidders, the contracting au-thority would proceed directly to issuing a final request forproposals (see paras. 59-72).

(b) Two-stage procedure

54. There are cases, however, in which it may not be fea-sible for the contracting authority to formulate its require-ment in sufficiently detailed and precise project specifica-tions or performance indicators to permit proposals to beformulated, evaluated and compared uniformly on the basisof those specifications and indicators. This may be the case,for instance, when the contracting authority has not deter-mined the type of technical and material input that wouldbe suitable for the project in question (for example, thetype of construction material to be used in a bridge). Insuch cases, it might be considered undesirable, from thestandpoint of obtaining the best value, for the contractingauthority to proceed on the basis of specifications or indi-cators it has drawn up in the absence of discussions withbidders as to the exact capabilities and possible variationsof what is being offered. For that purpose, the contractingauthority may wish to divide the selection proceedings intotwo stages and allow a certain degree of flexibility for dis-cussions with bidders.

55. Where the selection procedure is divided into twostages, the initial request for proposals typically calls uponthe bidders to submit proposals relating to output specifica-tions and other characteristics of the project as well as tothe proposed contractual terms. The invitation for bidswould allow bidders to offer their own solutions for meet-ing the particular infrastructure need in accordance withdefined standards of service. The proposals submitted atthis stage would typically consist of solutions on the basisof a conceptual design or performance indicators withoutindication of financial elements, such as the expected priceor level of remuneration.

56. To the extent the terms of the contractual arrange-ments are already known by the contracting authority, theyshould be included in the request for proposals, possibly inthe form of a draft of the project agreement. Knowledge ofcertain contractual terms, such as the risk allocation envis-aged by the contracting authority, is important in order forthe bidders to formulate their proposals and discuss the“bankability” of the project with potential lenders. Theinitial response to those contractual terms, in particular therisk allocation envisaged by the contracting authority, mayhelp the contracting authority assess the feasibility of theproject as originally conceived. However, it is important todistinguish between the procedure to request proposals andthe negotiation of the final contract, after the project hasbeen awarded. The purpose of this initial stage is to enablethe contracting authority to formulate its requirement sub-sequently in a manner that enables a final competition to becarried out on the basis of a single set of parameters. Theinvitation of initial proposals at this stage should not leadto a negotiation of the terms of the contract prior to its finalaward.


57. The contracting authority may then convene a meet-ing of bidders to clarify questions concerning the requestfor proposals and accompanying documentation. The con-tracting authority may, in the first stage, engage in discus-sions with any bidder concerning any aspect of its proposal.The contracting authority should treat proposals in such amanner as to avoid the disclosure of their contents to com-peting bidders. Any discussions need to be confidential andone party to the discussions should not reveal to any otherperson any technical, financial or other information relatingto the discussions without the consent of the other party.

58. Following those discussions, the contracting authorityshould review and, as appropriate, revise the initial outputspecifications. In formulating those revised specifications,the contracting authority should be allowed to delete ormodify any aspect of the technical or quality characteristicsof the project originally set forth in the request for propos-als and any criterion originally set forth in those documentsfor evaluating and comparing proposals. Any such deletion,modification or addition should be communicated to bid-ders in the invitation to submit final proposals. Bidders notwishing to submit a final proposal should be allowed towithdraw from the selection proceedings without forfeitingany security that they may have been required to provide.

2. Content of the final request for proposals

59. At the final stage, the contracting authority shouldinvite the bidders to submit final proposals with respect tothe revised project specifications, performance indicatorsand contractual terms. The request for proposals shouldgenerally include all information necessary to provide abasis to enable the bidders to submit proposals that meetthe needs of the contracting authority and that the contract-ing authority can compare in an objective and fair manner.

(a) General information to bidders

60. General information to bidders should cover, asappropriate, those items which are ordinarily includedin solicitation documents or requests for proposals forthe procurement of goods, construction and services.6 Par-ticularly important is the disclosure of the criteria to beused by the contracting authority in determining thesuccessful proposal and the relative weight of such criteria(see paras. 73-77).

(i) Information on feasibility studies

61. It is advisable to include in the general informationprovided to bidders instructions for the preparation of fea-sibility studies they may be required to submit with their

final proposals. Such feasibility studies typically cover, forinstance, the following aspects:

(a) Commercial viability. In particular in projects fi-nanced on a non-recourse or limited recourse basis, it isessential to establish the need for the project outputs and toevaluate and project such needs over the proposed opera-tional life of the project, including expected demand (forexample, traffic forecasts for roads) and pricing (for exam-ple, tolls);

(b) Engineering design and operational feasibility.Bidders should be requested to demonstrate the suitabilityof the technology they propose, including equipment andprocesses, to national, local and environmental conditions,the likelihood of achieving the planned performance leveland the adequacy of the construction methods and sched-ules. This study should also define the proposed organiza-tion, methods and procedures for operating and maintain-ing the completed facility;

(c) Financial viability. Bidders should be requestedto indicate the proposed sources of financing for the con-struction and operation phases, including debt capital andequity investment. While the loan and other financingagreements in most cases are not executed until after thesigning of the project agreement, the bidders should berequired to submit sufficient evidence of the lenders’ inten-tion to provide the specified financing. In some countries,bidders are also required to indicate the expected financialinternal rate of return in relation to the effective cost ofcapital corresponding to the financing arrangements pro-posed. Such information is intended to allow the contract-ing authority to consider the reasonableness andaffordability of the proposed prices or fees to be chargedby the concessionaire and the potential for subsequent in-creases therein;

(d) Environmental impact. This study should identifypossible negative or adverse effects on the environment asa consequence of the project and indicate corrective meas-ures that need to be taken to ensure compliance with theapplicable environmental standards. Such a study shouldtake into account, as appropriate, the relevant environmen-tal standards of international financial institutions and ofnational, provincial and local authorities.

(ii) Information on bid securities

62. It is advisable for the request for proposals to indicateany requirements of the contracting authority with respectto the issuer and the nature, form, amount and other prin-cipal terms of any bid security that the bidders may berequired to provide so as to cover those losses which mayresult from withdrawal of proposals or failure by the se-lected bidder to conclude a project agreement. In order toensure fair treatment of all bidders, requirements that referdirectly or indirectly to the conduct by the bidder submit-ting the proposal should not relate to conduct other thanwithdrawal or modification of the proposal after the dead-line for submission of proposals or before the deadline if sostipulated in the request for proposals; failure to achievefinancial closing; failure to sign the project agreement ifrequired by the contracting authority to do so; and failureto provide required security for the fulfilment of the projectagreement after the proposal has begn accepted or to com-

6For example, instructions for preparing and submitting proposals, in-cluding the manner, place and deadline for the submission of proposals andthe period of time during which proposals shall be in effect and anyrequirements concerning tender securities; the means by which bidders mayseek clarifications of the request for proposals, and a statement as towhether the contracting authority intends, at this stage, to convene a meet-ing of bidders; the place, date and time for the opening of proposals and theprocedures to be followed for opening and examining proposals; and themanner in which the proposals will be evaluated (see UNCITRAL ModelProcurement Law, arts. 27 and 38).


ply with any other condition prior to signing the projectagreement specified in the request for proposals. Safe-guards should be included to ensure that a bid securityrequirement is only imposed fairly and for the purposeintended.7

(iii) Qualification of bidders

63. Where no pre-selection of bidders was carried outprior to the issuance of the request for proposals or whenthe contracting authority retains the right to require thebidders to demonstrate again their qualifications, the re-quest for proposals should set out the information thatneeds to be provided by the bidders to substantiate theirqualifications (see paras. 38-40).

(b) Project specifications and performance indicators

64. The level of detail provided in the specifications, aswell as the appropriate balance between the input and out-put elements, will be influenced by considerations of issuessuch as the type and ownership of the infrastructure and theallocation of responsibilities between the public and theprivate sectors (see paras. 21 and 22). It is generally advis-able for the contracting authority to bear in mind thelong-term needs of the project and to formulate its specifi-cations in a manner that allows it to obtain sufficient infor-mation to select the bidder that offers the highest quality ofservices at the best economic terms. The contracting au-thority may find it useful to formulate the project specifi-cations in a way that defines adequately the output andperformance required without being overly prescriptive inhow that is to be achieved. Project specifications and per-formance indicators typically cover items such as the fol-lowing:

(a) Description of project and expected output. Ifthe services require specific buildings, such as a transportterminal or an airport, the contracting authority may wish toprovide no more than outline planning concepts for thedivision of the site into usage zones on an illustrative basis,instead of plans indicating the location and size of individualbuildings, as would normally be the case in traditional pro-curement of construction services. However, where in thejudgement of the contracting authority it is essential for thebidders to provide detailed technical specifications, the re-quest for proposals should include, at least, the followinginformation: description of the works and services to beperformed, including technical specifications, plans, draw-ings and designs; time schedule for the execution of worksand provision of services; and the technical requirements forthe operation and maintenance of the facility;

(b) Minimum applicable design and performancestandards, including appropriate environmental standards.Performance standards are typically formulated in terms ofthe desired quantity and quality of the outputs of the facil-ity. Proposals that deviate from the relevant performancestandards should be regarded as non-responsive;

(c) Quality of services. For projects involving the pro-vision of public services, the performance indicators shouldinclude a description of the services to be provided and therelevant standards of quality to be used by the contractingauthority in the evaluation of the proposals. Where appro-priate, reference should be made to any general obligationsof public service providers as regards expansion and con-tinuity of the service so as to meet the demand of the com-munity or territory served, ensuring non-discriminatoryavailability of services to the users and grantingnon-discriminatory access of other service providers to anypublic infrastructure network operated by the concession-aire, under the terms and conditions established in theproject agreement (see chap. IV, “Construction and opera-tion of infrastructure”, paras. 82-93).

65. Bidders should be instructed to provide the informa-tion necessary in order for the contracting authority toevaluate the technical soundness of proposals, their opera-tional feasibility and responsiveness to standards of qualityand technical requirements, including the following infor-mation:

(a) Preliminary engineering design, including proposedschedule of works;

(b) Project cost, including operating and maintenancecost requirements and proposed financing plan (for exam-ple, proposed equity contribution or debt);

(c) The proposed organization, methods and proce-dures for the operation and maintenance of the projectunder bidding;

(d) Description of quality of services.

66. Each of the above-mentioned performance indicatorsmay require the submission of additional information bythe bidders, according to the project being awarded. For theaward of a concession for distribution of electricity in aspecific region, for example, indicators may include mini-mum technical standards such as: (a) specified voltage (andfrequency) fluctuation at consumer level; (b) duration ofoutages (expressed in hours per year); (c) frequency ofoutages (expressed in a number per year); (d) losses; (e)number of days to connect a new customer; (f) commercialstandards for customer relationship (for example, numberof days to pay bills, to reconnect installations or to respondto customers’ complaints).

(c) Contractual terms

67. It is advisable for the bidding documents to providesome indication of how the contracting authority expects toallocate the project risks (see also chaps. II, “Project risksand government support”, and IV, “Construction and op-eration of infrastructure”). This is important in order to setthe terms of debate for negotiations on certain details of the

7Article 32 of the UNCITRAL Model Procurement Law provides certainimportant safeguards, including, inter alia, the requirement that the con-tracting authority should make no claim to the amount of the tender securityand should promptly return, or procure the return of, the tender securitydocument, after whichever of the following that occurs earliest: (a) theexpiry of the tender security; (b) the entry into force of the project agree-ment and the provision of a security for the performance of the contract, ifsuch a security is required by the request for proposals; (c) the terminationof the selection process without the entry into force of a project agreement;or (d) the withdrawal of the proposal prior to the deadline for the submissionof proposals, unless the request for proposals stipulates that no such with-drawal is permitted.


project agreement (see paras. 83 and 84). If risk allocationis left entirely open, the bidders may respond by seeking tominimize the risks they accept, which may frustrate thepurpose of seeking private investment for developing theproject. Furthermore, the request of proposals should con-tain information on essential elements of the contractualarrangements envisaged by the contracting authority, suchas:

(a) The duration of the concession or invitations to bid-ders to submit proposals for the duration of the concession;

(b) Formulas and indices to be used in adjustments toprices;

(c) Government support and investment incentives, ifany;

(d) Bonding requirements;

(e) Requirements of regulatory agencies, if any;

(f) Monetary rules and regulations governing foreignexchange remittances;

(g) Revenue-sharing arrangements, if any;

(h) Indication of the categories of assets that the con-cessionaire would be required to transfer to the contractingauthority or make available to a successor concessionaire atthe end of the project period;

(i) Where a new concessionaire is being selected tooperate an existing infrastructure, a description of the assetsand property that will be made available to the concession-aire;

(j) The possible alternative, supplementary or ancillaryrevenue sources (for example, concessions for exploitationof existing infrastructure), if any, that may be offered to thesuccessful bidder.

68. Bidders should be instructed to provide the informa-tion necessary in order for the contracting authority toevaluate the financial and commercial elements of the pro-posals and their responsiveness to the proposed contractualterms. The financial proposals should normally include thefollowing information:

(a) For projects in which the concessionaire’s income isexpected to consist primarily of tolls, fees or charges paidby the customers or users of the infrastructure facility, thefinancial proposal should indicate the proposed price struc-ture. For projects in which the concessionaire’s income isexpected to consist primarily of payments made by thecontracting authority or another public authority to amor-tize the concessionaire’s investment, the financial proposalshould indicate the proposed amortization payments andrepayment period;

(b) The present value of the proposed prices or directpayments based on the discounting rate and foreign ex-change rate prescribed in the bidding documents;

(c) If it is estimated that the project would require fi-nancial support by the Government, the level of such sup-port, including, as appropriate, any subsidy or guaranteeexpected from the Government or the contracting authority;

(d) The extent of risks assumed by the bidders duringthe construction and operation phase, including unforeseenevents, insurance, equity investment and other guaranteesagainst those risks.

69. In order to limit and establish clearly the scope of thenegotiations that will take place following the evaluation ofproposals (see paras. 83 and 84), the final request for pro-posals should indicate which are the terms of the projectagreement that are deemed not negotiable.

70. It is useful for the contracting authority to require thatthe final proposals submitted by the bidders contain evi-dence showing the comfort of the bidder’s main lenderswith the proposed commercial terms and allocation ofrisks, as outlined in the request for proposals. Such a re-quirement might play a useful role in resisting pressures toreopen commercial terms at the stage of final negotiations.In some countries, bidders are required to initial and returnto the contracting authority the draft project agreement to-gether with their final proposals as a confirmation of theiracceptance of all terms in respect of which they did notpropose specific amendments.

3. Clarifications and modifications

71. The right of the contracting authority to modify therequest for proposals is important in order to enable it toobtain what is required to meet its needs. It is thereforeadvisable to authorize the contracting authority, whether onits own initiative or as a result of a request for clarificationby a bidder, to modify the request for proposals by issuingan addendum at any time prior to the deadline for submis-sion of proposals. However, when amendments are madethat would reasonably require bidders to spend additionaltime preparing their proposals, such additional time shouldbe granted by extending the deadline for submission ofproposals accordingly.

72. Generally, clarifications, together with the questionsthat gave rise to the clarifications, and modifications mustbe communicated promptly by the contracting authority toall bidders to whom the contracting authority provided therequest for proposals. If the contracting authority convenesa meeting of bidders, it should prepare minutes of themeeting containing the requests submitted at the meetingfor clarification of the request for proposals and its re-sponses to those requests and should send copies of theminutes to the bidders.

4. Evaluation criteria

73. The award committee should rate the technical andfinancial elements of each proposal in accordance with thepredisclosed rating systems for the technical evaluationcriteria and should specify in writing the reasons for itsrating. Generally, it is important for the contracting author-ity to achieve an appropriate balance between evaluationcriteria relating to the physical investment (for example, theconstruction works) and evaluation criteria relating to theoperation and maintenance of the infrastructure and thequality of services to be provided by the concessionaire.Adequate emphasis should be given to the long-term needsof the contracting authority, in particular the need to ensurethe continuous delivery of the service at the required levelof quality and safety.


(a) Evaluation of technical aspects of the proposals

74. Technical evaluation criteria are designed to facilitatethe assessment of the technical, operational, environmentaland financing viability of the proposal vis-à-vis the pre-scribed specifications, indicators and requirements pre-scribed in the bidding documents. To the extent practicable,the technical criteria applied by the contracting authorityshould be objective and quantifiable, so as to enable pro-posals to be evaluated objectively and compared on a com-mon basis. This reduces the scope for discretionary or ar-bitrary decisions. Regulations governing the selectionprocess might spell out how such factors are to be formu-lated and applied. Technical proposals for privately fi-nanced infrastructure projects are usually evaluated in ac-cordance with the following criteria:

(a) Technical soundness. Where the contractingauthority has established minimum engineering design andperformance specifications or standards, the basic designof the project should conform to those specifications orstandards. Bidders should be required to demonstrate thesoundness of the proposed construction methods andschedules;

(b) Operational feasibility. The proposed organiza-tion, methods and procedures for operating and maintain-ing the completed facility must be well defined, shouldconform to the prescribed performance standards andshould be shown to be workable;

(c) Quality of services. Evaluation criteria used by thecontracting authority should include an analysis of themanner in which the bidders undertake to maintain andexpand the service, including the guarantees offered forensuring its continuity;

(d) Environmental standards. The proposed designand the technology of the project to be used should be inaccordance with the environmental standards set forth inthe request for proposals. Any negative or adverse effectson the environment as a consequence of the project asproposed by the bidders should be properly identified,including the corresponding corrective or mitigatingmeasures;

(e) Enhancements. These may include other terms theauthor of the project may offer to make the proposals moreattractive, such as revenue-sharing with the contractingauthority, fewer governmental guarantees or reduction inthe level of government support;

(f) Potential for social and economic development.Under this criterion, the contracting authority may take intoaccount the potential for social and economic developmentoffered by the bidders, including benefits to under-privileged groups of persons and businesses, domesticinvestment or other business activity, the encouragement ofemployment, the reservation of certain production fordomestic suppliers, the transfer of technology and thedevelopment of managerial, scientific and operationalskills;

(g) Qualification of bidders. When no pre-selectionwas made by the contracting authority prior to the issuanceof the request for proposals, the contracting authorityshould not accept a proposal if the bidders that submittedthe proposals are not qualified.

(b) Evaluation of financial and commercial aspectsof the proposals

75. In addition to criteria for the technical evaluation ofproposals, the contracting authority needs to define criteriafor assessing and comparing the financial proposals. Forprojects in which the concessionaire’s income is expectedto consist primarily of tolls, fees or charges paid by thecustomers or users of the infrastructure facility, the assess-ment and comparison of the financial elements of the finalproposals is typically based on the present value of theproposed tolls, fees, rentals and other charges over theconcession period according to the prescribed minimumdesign and performance standards. For projects in whichthe concessionaire’s income is expected to consist prima-rily of payments made by the contracting authority to am-ortize the concessionaire’s investment, the assessment andcomparison of the financial elements of the final proposalsis typically based on the present value of the proposedschedule of amortization payments for the facility to beconstructed according to the prescribed minimum designand performance standards, plans and specifications.

76. However, the contracting authority’s assessment offinancial elements of the final proposals should not be lim-ited to a comparison of the unit prices offered for the ex-pected output. In order to consider adequately the financialfeasibility of the proposals and the likelihood of subsequentincreases in the proposed prices, additional criteria mayneed to be considered, such as the costs for design andconstruction activities; annual operation and maintenancecosts; present value of capital costs and operating costs;and the amount of subsidy, if any, expected from the Gov-ernment. The contracting authority should assess whetherthe proposed financing plan, including the proposed ratiobetween equity investment and debt, is adequate to meetthe construction, operating and maintenance costs of theproject.

77. In establishing the criteria for the evaluation of finan-cial proposals, it is important for the contracting authorityto consider carefully the relative importance of the pro-posed unit price for the expected output as an evaluationcriterion. While the unit price is an important factor forensuring objectiveness and transparency in the choice be-tween equally responsive proposals, it should be noted thatthe notion of “price” usually does not have the same valuefor the award of privately financed infrastructure projectsas it has in the procurement of goods and services. Indeed,the remuneration of the concessionaire is often the com-bined result of charges paid by the users, ancillary revenuesources and direct subsidies or payments made by the pub-lic entity awarding the contract. Therefore, while the unitprice for the expected output retains its role as an importantelement of comparison of proposals, it may not always beregarded as the most important factor.

5. Submission, opening, comparisonand evaluation of proposals

78. Proposals should be required to be submitted in writ-ing, signed and placed in sealed envelopes. A proposal


received by the contracting authority after the deadline forthe submission of proposals should not be opened andshould be returned to the bidder that submitted it. For thepurpose of ensuring transparency, national laws often pre-scribe formal procedures for the opening of proposals, usu-ally at a time previously specified in the request for propos-als, and require that the bidders that have submittedproposals, or their representatives, be permitted by the con-tracting authority to be present at the opening of proposals.Such a requirement helps to minimize the risk that the pro-posals might be altered or otherwise tampered with andrepresents an important guarantee of the integrity of theproceedings.

79. In view of the complexity of privately financed infra-structure projects and the variety of evaluation criteria usu-ally applied in the award of the project, it may be advisablefor the contracting authority to apply a two-step evaluationprocess whereby non-financial criteria would be taken intoconsideration separately from, and perhaps before, finan-cial criteria so as to avoid situations where undue weightwould be given to certain elements of the financial criteria(such as the unit price) to the detriment of the non-financialcriteria.

80. To that end, in some countries bidders are required toformulate and submit their technical and financial propos-als in two separate envelopes. The two-envelope system issometimes used because it permits the contracting authorityto evaluate the technical quality of proposals without beinginfluenced by their financial components. However, themethod has been criticized as being contrary to the objec-tive of economy in the award of public contracts. In par-ticular, there is said to be a danger that, by selecting pro-posals initially on the basis of technical merit alone andwithout reference to price, a contracting authority might betempted to select, upon the opening of the first envelope,proposals offering technically superior works and to rejectproposals offering less sophisticated solutions that never-theless meet the contracting authority’s needs at an overalllower cost. International financial institutions, such as theWorld Bank, do not accept the two-envelope system forprojects financed by them because of concerns that thesystem gives margin to a higher degree of discretion in theevaluation of proposals and makes it more difficult to com-pare them in an objective manner.

81. As an alternative to the use of a two-envelope system,the contracting authorities may require both technical andfinancial proposals to be contained in one single proposal,but structure their evaluation in two stages, as in the evalu-ation procedure provided in article 42 of the UNCITRALModel Procurement Law. At an initial stage, the contract-ing authority typically establishes a threshold with respectto quality and technical aspects to be reflected in the tech-nical proposals in accordance with the criteria as set out inthe request for proposals, and rates each technical proposalin accordance with such criteria and the relative weight andmanner of application of those criteria as set forth in therequest for proposals. The contracting authority then com-pares the financial and commercial proposals that have at-tained a rating at or above the threshold. When the techni-cal and financial proposals are to be evaluatedconsecutively, the contracting authority should initially as-

certain whether the technical proposals are prima facie re-sponsive to the request for proposals (that is, whether theycover all items required to be addressed in the technicalproposals). Incomplete proposals, as well as proposals thatdeviate from the request for proposals, should be rejectedat this stage. While the contracting authority may ask bid-ders for clarifications of their proposals, no change in amatter of substance in the proposal, including changesaimed at making a non-responsive proposal responsive,should be sought, offered or permitted at this stage.

82. In addition to deciding whether to use a two-envelopesystem or a two-stage evaluation procedure, it is importantfor the contracting authority to disclose the relative weightto be accorded to each evaluation criterion and the mannerin which criteria are to be applied in the evaluation of pro-posals. Two possible approaches might be used to reach anappropriate balance between financial and technical aspectsof the proposals. One possible approach is to consider asmost advantageous the proposal that obtains the highestcombined rating in respect of both price and non-priceevaluation criteria. Alternatively, the price proposed for theoutput (for example, the water or electricity price or thelevel of tolls) might be the deciding factor in establishingthe winning proposal among the responsive proposals (thatis, those which have passed the threshold with respect toquality and technical aspects). In any event, in order topromote the transparency of the selection process and toavoid improper use of non-price evaluation criteria, it isadvisable to require the awarding committee to providewritten reasons for selecting a proposal other than the oneoffering the lowest unit price for the output.

6. Final negotiations and project award

83. The contracting authority should rank all responsiveproposals on the basis of the evaluation criteria set forth inthe request for proposals and invite the best rated bidder forfinal negotiation of certain elements of the project agree-ment. The final negotiations should be limited to fixing thefinal details of the transaction documentation and satisfyingthe reasonable requirements of the selected bidder’s lend-ers. One particular problem faced by contracting authoritiesis the danger that the negotiations with the selected biddermight lead to pressures to amend, to the detriment of theGovernment or the consumers, the price or risk allocationoriginally contained in the proposal. Changes in essentialelements of the proposal should not be permitted, as theymay distort the assumptions on the basis of which the pro-posals were submitted and rated. Therefore, the negotia-tions at this stage may not concern those terms of the con-tract which were deemed not negotiable in the final requestfor proposals (see para. 69). The risk of reopening commer-cial terms at this late stage could be further minimized byinsisting that the selected bidder’s lenders indicate theircomfort with the risk allocation embodied in their bid at astage where there is competition among bidders (see para.70). The contracting authority’s financial advisers mightcontribute to this process by advising whether bidders’proposals are realistic and what levels of financial commit-ment are appropriate at each stage. The process of reachingfinancial close can itself be quite lengthy.


84. The contracting authority should inform the remainingresponsive bidders that they may be considered for negotia-tion if the negotiations with the bidder with better ratingsdo not result in a project agreement. If it becomes apparentto the contracting authority that the negotiations with theinvited bidder will not result in a project agreement, thecontracting authority should inform that bidder that it isterminating the negotiations and then invite for negotia-tions the next bidder on the basis of its ranking until itarrives at a project agreement or rejects all remaining pro-posals. To avoid the possibility of abuse and unnecessarydelay, the contracting authority should not reopen negotia-tions with any bidder with whom they have already beenterminated.

D. DIRECT NEGOTIATIONS

85. In the legal tradition of certain countries, privatelyfinanced infrastructure projects involve the delegation bythe contracting authority of the right and duty to provide apublic service. As such, they are subject to a special legalregime that differs in many respects from the regime thatapplies generally to the award of public contracts for thepurchase of goods, construction or services.

86. Given the very particular nature of the services re-quired (including their complexity, amount of investmentinvolved and completion time), the procedures used placethe accent on the contracting authority’s freedom to choosethe operator who best suits its need, in terms of profes-sional qualification, financial strength, ability to ensure thecontinuity of the service, equal treatment of the users andquality of the proposal. In contrast to the competitive selec-tion procedures usually followed for the award of publiccontracts, which sometimes may appear to be excessivelyrigid, selection by direct negotiation is characterized by ahigh degree of flexibility as to the procedures involved anddiscretion on the part of the contracting authority. How-ever, freedom of negotiation does not mean arbitrarychoice and the laws of those countries provide proceduresto ensure transparency and fairness in the conduct of theselection process.

87. In those countries where tendering is under normalcircumstances the rule for public procurement of goods,construction and services, guidelines issued to contractingauthorities advise the use of direct negotiations wheneverpossible for the award of privately financed infrastructureprojects. The rationale for encouraging negotiations inthose countries is that in negotiating with bidders the Gov-ernment is not bound by predetermined requirements orrigid specifications and has more flexibility for taking ad-vantage of innovative or alternative proposals that may besubmitted by the bidders in the selection proceedings, aswell as for changing and adjusting its own requirements inthe event that more attractive options for meeting the infra-structure needs are formulated during the negotiations.

88. Direct negotiations generally afford a high degree offlexibility that some countries have found beneficial to theselection of the concessionaire. Coupled with appropriatemeasures to ensure transparency, integrity and fairness,

direct negotiations carried out in those countries have led tosatisfactory results. However, direct negotiations may havea number of disadvantages that make them less suitable tobe used as a principal selection method in a number ofcountries. Because of the high level of flexibility and dis-cretion afforded to the contracting authority, direct negotia-tions require highly skilled personnel with sufficient expe-rience in negotiating complex projects. They also require awell structured negotiating team, clear lines of authorityand a high level of coordination and cooperation among allthe offices involved. The use of direct negotiations for theaward of privately financed infrastructure projects maytherefore not represent a viable alternative for countriesthat do not have the tradition of using such methods for theaward of large government contracts. Another disadvantageof direct negotiations is that they may not ensure the levelof transparency and objectivity that can be achieved bymore structured competitive methods. In some countriesthere might be concerns that the higher level of discretionin direct negotiations might carry with it a higher risk ofabusive or corrupt practices. In view of the above, the hostcountry may wish to prescribe the use of competitive selec-tion procedures as a rule for the award of privately fi-nanced infrastructure projects and to reserve direct negotia-tions only for exceptional cases.

1. Circumstances authorizing the useof direct negotiations

89. For purposes of transparency as well as for ensuringdiscipline in the award of projects, it might be generallydesirable for the law to identify the exceptional circum-stances under which the contracting authority may be au-thorized to select the concessionaire through direct negotia-tions. They may include, for example, the following:

(a) When there is an urgent need for ensuring immedi-ate provision of the service and engaging in a competitiveselection procedure would therefore be impractical, pro-vided that the circumstances giving rise to the urgencywere neither foreseeable by the contracting authority northe result of dilatory conduct on its part. Such an excep-tional authorization may be needed, for instance, in casesof interruption in the provision of a given service or wherean incumbent concessionaire fails to provide the service atacceptable standards or if the project agreement is re-scinded by the contracting authority, when engaging in acompetitive selection procedure would be impractical inview of the urgent need to ensure the continuity of theservice;

(b) In the case of projects of short duration and with ananticipated initial investment value not exceeding a speci-fied low amount;

(c) Reasons of national defence or security;

(d) Cases where there is only one source capable ofproviding the required service (for example, because it canbe provided only by the use of patented technology orunique know-how);

(e) When an invitation to the pre-selection proceedingsor a request for proposals has been issued, but no applica-tions or proposals were submitted or all proposals wererejected and, in the judgement of the contracting authority,


issuing a new request for proposals would be unlikely toresult in a project award. However, in order to reduce therisk of abuse in changing the selection method, the con-tracting authority should only be authorized to resort todirect negotiations when such a possibility was expresslyprovided for in the original request for proposals.

2. Measures to enhance transparencyin direct negotiations

90. Procedures to be followed in procurement throughnegotiation are typically characterized by a higher degreeof flexibility than the procedures applied to other methodsof procurement. Few rules and procedures are establishedto govern the process by which the parties negotiate andconclude their contract. In some countries, procurementlaws allow contracting authorities virtually unrestrictedfreedom to conduct negotiations as they see fit. The laws ofother countries establish a procedural framework for nego-tiation designed to maintain fairness and objectivity and tobolster competition by encouraging participation of bid-ders. Provisions on procedures for selection through nego-tiation address a variety of issues discussed below, in par-ticular, requirements for approval of the contractingauthority’s decision to select the concessionaire throughnegotiation, selection of negotiating partners, criteria forcomparison and evaluation of offers, and recording of theselection proceedings.

(a) Approval

91. A threshold requirement found in many countries isthat a contracting authority must obtain the approval of ahigher authority prior to engaging in selection throughnegotiation. Such provisions generally require the applica-tion for approval to be in writing and to set forth thegrounds necessitating the use of negotiation. Approval re-quirements are intended, in particular, to ensure that thenegotiation method of selection is used only in appropriatecircumstances.

(b) Selection of negotiating partners

92. In order to make the negotiation proceedings as com-petitive as possible, it is advisable to require the contractingauthority to engage in negotiations with as many compa-nies judged susceptible of meeting the need as circum-stances permit. Beyond such a general provision, there isno specific provision in the laws of some countries on theminimum number of contractors or suppliers with whomthe contracting authority is to negotiate. The laws of someother countries, however, require the contracting authority,where practicable, to negotiate with, or to solicit proposalsfrom, a minimum number of bidders (three, for example).The contracting authority is permitted to negotiate with asmaller number in certain circumstances, in particular,when fewer than the minimum number of contractors orsuppliers were available.

93. For the purpose of enhancing transparency, it is alsoadvisable to require a notice of the negotiation proceedings

to be given to bidders in a specified manner. For example,the contracting authority may be required to publish thenotice in a particular publication normally used for thatpurpose. Such notice requirements are intended to bring theprocurement proceedings to the attention of a wider rangeof bidders than might otherwise be the case, thereby pro-moting competition. Given the magnitude of most infra-structure projects, the notice should normally contain cer-tain minimum information (a description of the project, forexample, or qualification requirements) and should be is-sued in sufficient time to allow bidders to prepare offers.Generally the formal eligibility requirements applicable tobidders in competitive selection proceedings should alsoapply in negotiation proceedings.

94. In some countries, notice requirements are waivedwhen the contracting authority resorts to negotiation fol-lowing unsuccessful bidding proceedings (see para. 89 (e)),if all qualified contractors or suppliers that submitted bidsare permitted to participate in the negotiations or if no bidsat all were received.

(c) Criteria for comparison and evaluation of offers

95. Another useful measure to enhance the transparencyand effectiveness of direct negotiations consists of estab-lishing general criteria that proposals are requested to meet(for example, general performance objectives or outputspecifications), as well as criteria for comparing and evalu-ating offers made during the negotiations and for selectingthe winning concessionaire (for example, the technicalmerit of an offer, prices, operating and maintenance costsand the profitability and development potential of theproject agreement). The contracting authority should iden-tify the proposals that appear to meet those criteria andengage in discussions with the author of each such proposalin order to refine and improve upon the proposal to thepoint where it is satisfactory to the contracting authority.The price of each proposal does not enter into those discus-sions. When the proposals have been finalized, it may beadvisable for the contracting authority to seek a best andfinal offer on the basis of the clarified proposals. It isrecommendable that bidders should include with their finaloffer evidence that the risk allocation that the offer embod-ies would be acceptable to their proposed lenders. From thebest and final offers received, the preferred bidder can thenbe chosen. The project would then be awarded to the partyoffering the “most economical” or “most advantageous”proposal in accordance with the criteria for selecting thewinning concessionaire set forth in the invitation to nego-tiate. It is recommended that the contracting authority’sintention to seek a best and final offer or not should bestated in the invitation to negotiate.

(d) Record of selection proceedings

96. The contracting authority should be required to estab-lish a record of the selection proceedings (see paras.124-130) and should publish a notice of the award of theproject (see para. 123). In some countries, transparency isfurther enhanced by requiring that the project agreement beopened to public inspection.


E. UNSOLICITED PROPOSALS

97. Public authorities are sometimes approached directlyby private companies who submit proposals for the devel-opment of projects in respect of which no selection proce-dures have been opened. These proposals are usually re-ferred to as “unsolicited proposals”. Unsolicited proposalsmay result from the identification by the private sector ofan infrastructure need that may be met by a privately fi-nanced project. They may also involve innovative propos-als for infrastructure management and offer the potentialfor transfer of new technology to the host country.

1. Policy considerations

98. One possible reason sometimes cited for waiving therequirement of competitive selection procedures is to pro-vide an incentive for the private sector to submit proposalsinvolving the use of new concepts or technologies to meetthe contracting authority’s needs. By the very nature ofcompetitive selection procedures, no bidder has an assur-ance of being awarded the project, unless it wins the com-petition. The cost of formulating proposals for large infra-structure projects may be a deterrent for companiesconcerned about their ability to match proposals submittedby competing bidders. In contrast, the private sector maysee an incentive for the submission of unsolicited proposalsin rules that allow a contracting authority to negotiate suchproposals directly with their authors. The contracting au-thority, too, may have an interest in the possibility of en-gaging in direct negotiations in order to stimulate the pri-vate sector to formulate innovative proposals forinfrastructure development.

99. At the same time, however, the award of projectspursuant to unsolicited proposals and without competitionfrom other bidders may expose the Government to seriouscriticism, in particular in cases involving exclusive conces-sions. In addition, prospective lenders, including multilat-eral and bilateral financial institutions, may have difficultyin lending or providing guarantees for projects that havenot been the subject of competitive selection proceedings.They may fear the possibility of challenge and cancellationby future Governments (for example, because the projectaward may be deemed subsequently to have been the resultof favouritism or because the procedure did not provideobjective parameters for comparing prices, technical ele-ments and the overall effectiveness of the project) or legalor political challenge by other interested parties, such ascustomers dissatisfied with increased prices or competingcompanies alleging unjust exclusion from a competitiveselection procedure.

100. In view of the above considerations, it is importantfor the host country to consider the need for, and the desir-ability of, devising special procedures for handling unsolic-ited proposals that differ from the procedures usually fol-lowed for the award of privately financed infrastructureprojects. For that purpose, it may be useful to analyse twosituations most commonly mentioned in connection withunsolicited proposals, namely, unsolicited proposals claim-ing to involve the use of new concepts or technologies to

address the contracting authority’s infrastructure needs andunsolicited proposals claiming to address an infrastructureneed not already identified by the contracting authority.

(a) Unsolicited proposals claiming to involvethe use of new concepts or technologies to address

the contracting authority’s infrastructure needs

101. Generally, for infrastructure projects that require theuse of some kind of industrial process or method, the con-tracting authority would have an interest in stimulating thesubmission of proposals incorporating the most advancedprocesses, designs, methodologies or engineering conceptswith demonstrated ability to enhance the project’s outputs(by significantly reducing construction costs, for example,accelerating project execution, improving safety, enhancingproject performance, extending economic life, reducingcosts of facility maintenance and operations or reducingnegative environmental impact or disruptions during eitherthe construction or the operational phase of the project).

102. The contracting authority’s legitimate interestsmight also be achieved through appropriately modifiedcompetitive selection procedures instead of a special set ofrules for handling unsolicited proposals. For instance, if thecontracting authority is using selection procedures thatemphasize the expected output of the project, without beingprescriptive about the manner in which that output is to beachieved (see paras. 64-66), the bidders would have suffi-cient flexibility to offer their own proprietary processes ormethods. In such a situation, the fact that each of the bid-ders has its own proprietary processes or methods wouldnot pose an obstacle to competition, provided that all theproposed methods are technically capable of generating theoutput expected by the contracting authority.

103. Adding the necessary flexibility to the competitiveselection procedures may in these cases be a more satisfac-tory solution than devising special non-competitive proce-dures for dealing with proposals claiming to involve newconcepts or technologies. With the possible exception ofproprietary concepts or technologies whose uniquenessmay be ascertained on the basis of the existing intellectualproperty rights, a contracting authority may face consider-able difficulties in defining what constitutes a new conceptor technology. Such a determination may require the serv-ices of costly independent experts, possibly from outsidethe host country, to avoid allegations of bias. A determina-tion that a project involves a novel concept or technologymight also be met by claims from other interested compa-nies also claiming to have appropriate new technologies.

104. However, a somewhat different situation may arise ifthe uniqueness of the proposal or its innovative aspects aresuch that it would not be possible to implement the projectwithout using a process, design, methodology or engineer-ing concept for which the proponent or its partners possessexclusive rights, either worldwide or regionally. The exist-ence of intellectual property rights in relation to a methodor technology may indeed reduce or eliminate the scope formeaningful competition. This is why the procurement lawsof most countries authorize procuring entities to engage in


single-source procurement if the goods, construction orservices are available only from a particular supplier orcontractor or if the particular supplier or contractor hasexclusive rights over the goods, construction or servicesand no reasonable alternative or substitute exists (see theUNCITRAL Model Procurement Law, art. 22).

105. In such a case, it would be appropriate to authorizethe contracting authority to negotiate the execution of theproject directly with the proponent of the unsolicited pro-posal. The difficulty, of course, would be how to establish,with the necessary degree of objectivity and transparency,that there exists no reasonable alternative or substitute tothe method or technology contemplated in the unsolicitedproposal. For that purpose, it is advisable for the contract-ing authority to establish procedures for obtaining elementsof comparison for the unsolicited proposal.

(b) Unsolicited proposals claiming to addressan infrastructure need not already identified

by the contracting authority

106. The merit of unsolicited proposals of this type con-sists of the identification of a potential for infrastructuredevelopment that has not been considered by the authori-ties of the host country. However, in and of itself this cir-cumstance should not normally provide sufficient justifica-tion for a directly negotiated project award in which thecontracting authority has no objective assurance that it hasobtained the most advantageous solution for meeting itsneeds.

2. Procedures for handling unsolicited proposals

107. In the light of the above considerations, it is advis-able for the contracting authority to establish transparentprocedures for determining whether an unsolicited proposalmeets the required conditions and whether it is in the con-tracting authority’s interest to pursue it.

(a) Restrictions to the receivabilityof unsolicited proposals

108. In the interest of ensuring proper accountability forpublic expenditures, some domestic laws provide that nounsolicited proposal may be considered if the execution ofthe project would require significant financial commit-ments from the contracting authority or other public au-thority such as guarantees, subsidies or equity participation.The reason for such a limitation is that the procedures forhandling unsolicited proposals are typically less elaboratethan ordinary selection procedures and may not ensure thesame level of transparency and competition that would oth-erwise be achieved. However, there may be reasons forallowing some flexibility in the application of this condi-tion. In some countries, the presence of government sup-port other than direct government guarantees, subsidy orequity participation (for example, the sale or lease of publicproperty to authors of project proposals) does not necessar-ily disqualify a proposal from being treated and accepted asan unsolicited proposal.

109. Another condition for consideration of an unsolic-ited proposal is that it should relate to a project for whichno selection procedures have been initiated or announcedby the contracting authority. The rationale for handling anunsolicited proposal without using a competitive selectionprocedure is to provide an incentive for the private sectorto identify new or unanticipated infrastructure needs or toformulate innovative proposals for meeting those needs.This justification may no longer be valid if the project hasalready been identified by the authorities of the host coun-try and the private sector is merely proposing a technicalsolution different from the one envisaged by the contract-ing authority. In such a case, the contracting authoritycould still take advantage of innovative solutions by apply-ing a two-stage selection procedure (see paras. 54-58).However, it would not be consistent with the principle offairness in the award of public contracts to entertain unso-licited proposals outside selection proceedings alreadystarted or announced.

(b) Procedures for determining the admissibilityof unsolicited proposals

110. A company or group of companies that approachesthe Government with a suggestion for private infrastructuredevelopment should be requested to submit an initial pro-posal containing sufficient information to allow the con-tracting authority to make a prima facie assessment ofwhether the conditions for handling unsolicited proposalsare met, in particular whether the proposed project is in thepublic interest. The initial proposal should include, for in-stance, the following information: statement of the author’sprevious project experience and financial standing; descrip-tion of the project (type of project, location, regional im-pact, proposed investment, operational costs, financial as-sessment and resources needed from the Government orthird parties); the site (ownership and whether land or otherproperty will have to be expropriated); and a description ofthe service and the works.

111. Following a preliminary examination, the contract-ing authority should inform the company, within a reason-ably short period, whether or not there is a potential publicinterest in the project. If the contracting authority reactspositively to the project, the company should be invited tosubmit a formal proposal, which, in addition to the itemscovered in the initial proposal, should contain a technicaland economical feasibility study (including characteristics,costs and benefits) and an environmental impact study.Furthermore, the author of the proposal should be requiredto submit satisfactory information regarding the concept ortechnology contemplated in the proposal. The informationdisclosed should be in sufficient detail to allow the con-tracting authority to evaluate the concept or technologyproperly and to determine whether it meets the requiredconditions and is likely to be successfully implemented onthe scale of the proposed project. The company submittingthe unsolicited proposal should retain title to all documentssubmitted throughout the procedure and those documentsshould be returned to it in the event the proposal is rejected.

112. Once all the required information is provided by theauthor of the proposal, the contracting authority should


decide, within a reasonably short period, whether it intendsto pursue the project and, if so, what procedure will beused. Choice of the appropriate procedure should be madeon the basis of the contracting authority’s preliminary de-termination as to whether or not the implementation of theproject would be possible without the use of a process,design, methodology or engineering concept for which theproposing company or its partners possess exclusive rights.

(c) Procedures for handling unsolicited proposalsthat do not involve proprietary concepts or technology

113. If the contracting authority, upon examination of anunsolicited proposal, decides that there is public interest inpursuing the project, but the implementation of the projectis possible without the use of a process, design, methodol-ogy or engineering concept for which the proponent or itspartners possess exclusive rights, the contracting authorityshould be required to award the project by using the pro-cedures that would normally be required for the award ofprivately financed infrastructure projects, such as, for in-stance, the competitive selection procedures described inthis Guide (see paras. 34-84). However, the selection pro-cedures may include certain special features so as to pro-vide an incentive to the submission of unsolicited propos-als. These incentives may consist of the followingmeasures:

(a) The contracting authority could undertake not toinitiate selection proceedings regarding a project in respectof which an unsolicited proposal was received without in-viting the company that submitted the original proposal;

(b) The original bidder might be given some form ofpremium for submitting the proposal. In some countriesthat use a merit-point system for the evaluation of financialand technical proposals the premium takes the form of amargin of preference over the final rating (that is, a certainpercentage over and above the final combined rating ob-tained by that company in respect of both financial andnon-financial evaluation criteria). One possible difficulty ofsuch a system is the risk of setting the margin of preferenceso high as to discourage competing meritorious bids, thusresulting in the receipt of a project of lesser value in ex-change for the preference given to the innovative bidder.Alternative forms of incentives may include the reimburse-ment, in whole or in part, of the costs incurred by theoriginal author in the preparation of the unsolicited pro-posal. For purposes of transparency, any such incentivesshould be announced in the request for proposals.

114. Notwithstanding the incentives that may be pro-vided, the author of the unsolicited proposal should gener-ally be required to meet essentially the same qualificationcriteria as would be required of the bidders participating ina competitive selection proceedings (see paras. 38-40).

(d) Procedures for handling unsolicited proposalsinvolving proprietary concepts or technology

115. If it appears that the innovative aspects of the pro-posal are such that it would not be possible to implementthe project without using a process, design, methodology or

engineering concept for which the author or its partnerspossess exclusive rights, either worldwide or regionally, itmay be useful for the contracting authority to confirm thatpreliminary assessment by applying a procedure for obtain-ing elements of comparison for the unsolicited proposal.One such procedure may consist of the publication of adescription of the essential output elements of the proposal(for example, the capacity of the infrastructure facility,quality of the product or the service or price per unit) withan invitation to other interested parties to submit alternativeor comparable proposals within a certain period. Such adescription should not include input elements of the unso-licited proposal (the design of the facility, for example, orthe technology and equipment to be used), in order to avoiddisclosing to potential competitors proprietary informationof the person who had submitted the unsolicited proposal.The period for submitting proposals should be commensu-rate with the complexity of the project and should affordthe prospective competitors sufficient time to formulatetheir proposals. This may be a crucial factor for obtainingalternative proposals, for example, if the bidders wouldhave to carry out detailed subsurface geological investiga-tions that might have been carried out over many monthsby the original bidder, who would want the geological find-ings to remain secret.

116. The invitation for comparative or competitive pro-posals should be published with a minimum frequency (forexample, once every week for three weeks) in at least onenewspaper of general circulation. It should indicate thetime and place where bidding documents may be obtainedand should specify the time during which proposals may bereceived. It is important for the contracting authority toprotect the intellectual property rights of the original authorand to ensure the confidentiality of proprietary informationreceived with the unsolicited proposal. Any such informa-tion should not form part of the bidding documents. Boththe original bidder and any other company that wishes tosubmit an alternative proposal should be required to submita bid security (see para. 62). Two possible avenues maythen be pursued, according to the reactions received to theinvitation:

(a) If no alternative proposals are received, the con-tracting authority may reasonably conclude that there is noreasonable alternative or substitute to the method or tech-nology contemplated in the unsolicited proposal. This find-ing of the contracting authority should be appropriatelyrecorded and the contracting authority could be authorizedto engage in direct negotiations with the original propo-nent. It may be advisable to require that the decision of thecontracting authority be reviewed and approved by thesame authority whose approval would normally be requiredin order for the contracting authority to select a concession-aire through direct negotiation (see para. 89). Some coun-tries whose laws mandate the use of competitive proce-dures have used these procedures in order to establish thenecessary transparency required to avoid future challengesto the award of a concession following an unsolicited pro-posal. In those countries, the mere publication of an invi-tation to bid would permit an award to the bidder whooriginally submitted the unsolicited proposal, even if its bidwere the only one received. This is so because compliancewith competitive procedures typically requires that the pos-sibility of competition should have been present and not


necessarily that competition actually occurred. Publicitycreates such a possibility and adds a desirable degree oftransparency;

(b) If alternative proposals are submitted, the con-tracting authority should invite all the bidders to nego-tiations with a view to identifying the most advantageousproposal for carrying out the project (see paras. 90-96).In the event that the contracting authority receives asufficiently large number of alternative proposals, whichappear prima facie to meet its infrastructure needs, theremay be scope for engaging in full-fledged competitiveselection procedures (see paras. 34-84), subject to anyincentives that may be given to the author of the originalproposal (see para. 113 (b)).

117. The contracting authority should be required to es-tablish a record of the selection proceedings (paras.124-130) and to publish a notice of the award of the project(see para. 123).

F. REVIEW PROCEDURES

118. The existence of fair and efficient review proceduresis one of the basic requirements for attracting serious andcompetent bidders and for reducing the cost and the lengthof award proceedings. An important safeguard of properadherence to the rules governing the selection procedure isthat bidders have the right to seek review of actions by thecontracting authority in violation of those rules or of therights of bidders. Various remedies and procedures areavailable in different legal systems and systems of admin-istration, which are closely linked to the question of reviewof governmental actions. Whatever the exact form of re-view procedures, it is important to ensure that an adequateopportunity and effective procedures for review are pro-vided. It is particularly useful to establish a workable“pre-contract” recourse system (that is, procedures for re-viewing the contracting authority’s acts as early in the se-lection proceedings as feasible). Such a system increasesthe possibility of taking corrective actions by the contract-ing authority before loss is caused and helps to reducecases where monetary compensation is the only option leftto redress the consequences of an improper action by thecontracting authority. Elements for the establishment of anadequate review system are contained in chapter VI of theUNCITRAL Model Procurement Law.

119. Appropriate review procedures should establish inthe first place that bidders have a right to seek review ofdecisions affecting their rights. In the first instance, thatreview may be sought from the contracting authority itself,in particular where the project is yet to be awarded. Thismay facilitate economy and efficiency, since in manycases, in particular prior to the awarding of the project, thecontracting authority may be quite willing to correct proce-dural errors, of which it may even not have been aware. Itmay also be useful to provide for a review by higher ad-ministrative organs of the Government, where such a pro-cedure would be consistent with constitutional, judicial andadministrative structures. Finally, most domestic procure-ment regimes affirm the right to judicial review, whichshould generally also be available in connection with theaward of infrastructure projects.

120. In order to strike a workable balance between, on theone hand, the need to preserve the rights of bidders and theintegrity of the selection process and, on the other, the needto limit disruption of the selection process, domestic lawsoften include a number of restrictions on review proce-dures. These include limitation of the right to review tobidders; time limits for filing of applications for review andfor disposition of cases, including time limits for any sus-pension of the selection proceedings that may apply at thelevel of administrative review; and exclusion from the re-view procedures of a number of decisions that are left tothe discretion of the contracting authority and that do notdirectly involve questions of the fairness of treatment ac-corded to bidders. In most legal systems, administrativereview procedures are available to bidders to challengedecisions by contracting authorities, although judicial re-view procedures may not be universally available.

121. There exist in most States mechanisms and proce-dures for review of acts of administrative organs and otherpublic entities. In some States, review mechanisms andprocedures have been established specifically for disputesarising in the context of procurement by those organs andentities. In other States, those disputes are dealt with bymeans of the general mechanisms and procedures for re-view of administrative acts. Certain important aspects ofproceedings for review, such as the forum where reviewmay be sought and the remedies that may be granted, arerelated to fundamental conceptual and structural aspects ofthe legal system and the system of State administration inevery country. Many legal systems provide for review ofacts of administrative organs and other public entities be-fore an administrative body that exercises hierarchical au-thority or control over the organ or entity. In legal systemsthat provide for such hierarchical administrative review, thequestion of which body or bodies are to exercise that func-tion in respect of acts of particular organs or entities de-pends largely on the structure of the State administration.In the context of general procurement laws, for example,some States provide for review by a body that exercisesoverall supervision and control over procurement in theState (such as a central procurement board); in other Statesthe review function is performed by the body that exercisesfinancial control and oversight over operations of the Gov-ernment and of the public administration. In some States,the review function in relation to particular types of casesinvolving administrative organs or other public entities isperformed by specialized independent administrative bod-ies whose competence is sometimes referred to as“quasi-judicial”. Those bodies are not, however, consideredin those States to be courts within the judicial system.

122. Many national legal systems provide for judicialreview of acts of administrative organs and public entities.In several of those legal systems judicial review is providedin addition to administrative review, while in other systemsonly judicial review is provided. Some legal systems pro-vide only administrative review, and not judicial review. Insome legal systems where both administrative and judicialreview is provided, judicial review may be sought onlyafter opportunities for administrative review have beenexhausted; in other systems the two means of review areavailable as options. The main issue raised concerning ju-dicial review is the effect that a judgement that annuls a


public bidding would have on the awarded contract, espe-cially when public works have already been initiated. Pro-curement laws tend to attempt to strike a balance betweenthe conflicting interests of the public sector, that is, theneed to uphold the integrity of the procurement procedureand not to delay the rendering of a public service, and theinterest of the bidders to preserve their rights. Except wherea project agreement was the result of unlawful acts, a goodsolution is that a judgement should not render the projectagreement void, but award damages to the injured party. Itis usually agreed that such damages should not include lossof profits, but be limited to the cost incurred by the bidderin preparing the bid.

G. NOTICE OF PROJECT AWARD

123. Project agreements frequently include provisionsthat are of direct interest for parties other than the contract-ing authority and the concessionaire and who might have alegitimate interest in being informed about certain essentialelements of the project. This is the case in particular forprojects involving the provision of a service directly to thegeneral public. For transparency purposes, it may be advis-able to establish procedures for publicizing those terms ofthe project agreement which may be of public interest.Such a requirement should apply regardless of the methodused by the contracting authority to select the concession-aire (for example, whether through competitive selectionprocedures, direct negotiations or as a result of an unsolic-ited proposal). One possible procedure may be to requirethe contracting authority to publish a notice of the award ofthe project, indicating the essential elements of the pro-posed agreements, such as: (a) the name of the concession-aire; (b) a description of the works and services to be per-formed by the concessionaire; (c) the duration of theconcession; (d) the price structure; (e) a summary of theessential rights and obligations of the concessionaire andthe guarantees to be provided by it; (f) a summary of themonitoring rights of the contracting authority and remediesfor breach of the project agreement; (g) a summary of theessential obligations of the Government, including anypayment, subsidy or compensation offered by it; and (h)any other essential term of the project agreement, as pro-vided in the request for proposals.

H. RECORD OF SELECTIONAND AWARD PROCEEDINGS

124. In order to ensure transparency and accountabilityand to facilitate the exercise of the right of aggrieved bid-ders to seek review of decisions made by the contractingauthority, the contracting authority should be required tokeep an appropriate record of key information pertaining tothe selection proceedings.

125. The record to be kept by the contracting authorityshould contain, as appropriate, such general informationconcerning the selection proceedings as is usually requiredto be recorded for public procurement (such as the informa-tion listed in article 11 of the UNCITRAL Model Procure-ment Law), as well as information of particular relevance

for privately financed infrastructure projects. Such infor-mation may include the following:

(a) A description of the project for which the contract-ing authority requested proposals;

(b) The names and addresses of the companies partici-pating in bidding consortia and the name and address of themembers of the bidders with whom the project agreementhas been entered into; and a description of the publicityrequirements, including copies of the publicity used or ofthe invitations sent;

(c) If changes to the composition of the pre-selectedbidders are subsequently permitted, a statement of the rea-sons for authorizing such changes and a finding as to thequalifications of any substitute or additional consortia con-cerned;

(d) Information relative to the qualifications, or lackthereof, of bidders; and a summary of the evaluation andcomparison of proposals, including the application of anymargin of preference;

(e) A summary of the conclusions of the preliminaryfeasibility studies commissioned by the contracting author-ity and a summary of the conclusions of the feasibilitystudies submitted by the qualified bidders;

(f) A summary of any requests for clarification of thepre-selection documents or the request for proposals, theresponses thereto, as well as a summary of any modifica-tion of those documents;

(g) A summary of the principal terms of the proposalsand of the project agreement;

(h) If the contracting authority has found most advan-tageous a proposal other than the proposal offering thelowest unit price for the expected output, a justification ofthe reasons for that finding by the awarding committee;

(i) If all proposals were rejected, a statement to thateffect and the grounds for rejection;

(j) If the negotiations with the consortium that submit-ted the most advantageous proposal and any subsequentnegotiations with remaining responsive consortia did notresult in a project agreement, a statement to that effect andof the grounds therefor.

126. For selection proceedings that involve direct nego-tiations (see para. 89), it may be useful to include in therecord of those proceedings, in addition to requirementsreferred to in paragraph 125 that may be applicable, thefollowing additional information:

(a) A statement of the grounds and circumstances onwhich the contracting authority relied to justify the directnegotiation;

(b) The type of publicity used or the name and addressof the company or companies directly invited to the nego-tiations;

(c) The name and address of the company or compa-nies that requested to participate and those which wereexcluded from participating, if any, and the grounds fortheir exclusion;

(d) If the negotiations did not result in a project agree-ment, a statement to that effect and of the grounds therefor;


(e) The justification given for the selection of the finalconcessionaire.

127. For selection proceedings engaged in as a result ofunsolicited proposals (see paras. 107-117), it may be usefulto include in the record of those proceedings, in addition torequirements referred to in paragraph 125 that may beapplicable, the following additional information:

(a) The name and address of the company or compa-nies submitting the unsolicited proposal and a brief descrip-tion of it;

(b) A certification by the contracting authority that theunsolicited proposal was found to be of public interest andto involve new concepts or technologies, as appropriate;

(c) The type of publicity used or the name and addressof the company or companies directly invited to the nego-tiations;

(d) The name and address of the company or compa-nies that requested to participate and those which wereexcluded from participating, if any, and the grounds fortheir exclusion;

(e) If the negotiations did not result in a project agree-ment, a statement to that effect and of the grounds therefor;

(f) The justification given for the selection of the finalconcessionaire.

128. It is advisable for the rules on record requirements tospecify the extent and the recipients of the disclosure. Set-ting the parameters of disclosure involves balancing factorssuch as the general desirability, from the standpoint of theaccountability of contracting authorities, of broad disclo-sure; the need to provide bidders with information neces-sary to enable them to assess their performance in the pro-ceedings and to detect instances in which there are

legitimate grounds for seeking review; and the need toprotect the bidders’ confidential trade information. In viewof these considerations, it may be advisable to provide twolevels of disclosure, as envisaged in article 11 of theUNCITRAL Model Procurement Law. The information tobe provided to any member of the general public may belimited to basic information geared to the accountability ofthe contracting authority to the general public. However, itis advisable to provide for the disclosure for the benefit ofbidders of more detailed information concerning the con-duct of the selection, since that information is necessary toenable the bidders to monitor their relative performance inthe selection proceedings and to monitor the conduct of thecontracting authority in implementing the requirements ofthe applicable laws and regulations.

129. Moreover, appropriate measures should be taken toavoid the disclosure of confidential trade information ofsuppliers and contractors. That is true in particular withrespect to what is disclosed concerning the evaluation andcomparison of proposals, as excessive disclosure of suchinformation may be prejudicial to the legitimate commer-cial interests of bidders. As a general rule, the contractingauthority should not disclose more detailed informationrelating to the examination, evaluation and comparison ofproposals and proposal prices, except when ordered to doso by a competent court.

130. Provisions on limited disclosure of information relat-ing to the selection process would not preclude the appli-cability to certain parts of the record of other statutes in theenacting State that confer on the public at large a generalright to obtain access to government records. Disclosure ofthe information in the record to legislative or parliamentaryoversight bodies may be mandated pursuant to the lawapplicable in the host country.

A/CN.9/471/Add.5

Chapter IV. Construction and operation of infrastructure

CONTENTS

Paragraphs Page



A. General provisions of the project agreement . . . . . . . . . . . . . . . . . . 1-11 130

1. Legislative approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4 130

2. The law governing the project agreement . . . . . . . . . . . . . . . . 5-8 130

3. Conclusion of the project agreement . . . . . . . . . . . . . . . . . . . . 9-11 131

B. Organization of the concessionaire . . . . . . . . . . . . . . . . . . . . . . . . . . 12-18 131

C. The project site, assets and easements . . . . . . . . . . . . . . . . . . . . . . . 19-32 132

1. Acquisition of land required for execution of the project . . . . 20-22 133

2. Ownership of project assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-29 133

3. Easements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-32 134


Paragraphs Page

D. Financial arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-51 135

1. Financial obligations of the concessionaire . . . . . . . . . . . . . . . 34-35 135

2. Tariff setting and tariff control . . . . . . . . . . . . . . . . . . . . . . . . . 36-46 135

3. Financial obligations of the contracting authority . . . . . . . . . . 47-51 137

E. Security interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52-61 138

1. Security over physical assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 54-55 138

2. Security over intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . 56-57 138

3. Securities over trade receivables . . . . . . . . . . . . . . . . . . . . . . . . 58-60 139

4. Security over shares of the project company . . . . . . . . . . . . . . 61 139

F. Assignment of the concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62-63 140

G. Transfer of controlling interest in the project company . . . . . . . . . 64-68 140

H. Construction works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69-79 141

1. Review and approval of construction plans . . . . . . . . . . . . . . . 72 141

2. Variation in the project terms . . . . . . . . . . . . . . . . . . . . . . . . . . 73-76 141

3. Monitoring powers of the contracting authority . . . . . . . . . . . 77-78 142

4. Guarantee period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 142

I. Operation of infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80-97 142

1. Performance standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82-83 143

2. Extension of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84-85 143

3. Continuity of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86-87 143

4. Equal treatment of customers or users . . . . . . . . . . . . . . . . . . . 88-89 144

5. Interconnection and access to infrastructure networks . . . . . . . 90-93 144

6. Disclosure requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94-95 144

7. Enforcement powers of the concessionaire . . . . . . . . . . . . . . . 96-97 145

J. General contractual arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . 98-150 145

1. Subcontracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99-104 145

2. Liability with respect to users and third parties . . . . . . . . . . . 105-107 146

3. Performance guarantees and insurance . . . . . . . . . . . . . . . . . . . 108-120 147

4. Changes in conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121-130 149

5. Exemption provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131-139 150

6. Event of default and remedies . . . . . . . . . . . . . . . . . . . . . . . . . 140-150 152



General provisions on the project agreement(see paras. 1-11)

Recommendation 39. The law might identify the coreterms to be provided in the project agreement, which mayinclude those terms referred to in recommendations _____below.

Recommendation 40. Unless otherwise provided, theproject agreement is governed by the law of the host coun-try.

Organization of the concessionaire (see paras. 12-18)

Recommendation 41. The contracting authority shouldhave the option to require that the selected bidders establishan independent legal entity with a seat in the country.

Recommendation 42. The project agreement shouldspecify the minimum capital of the project company andthe procedures for obtaining the approval of the contractingauthority to its statutes and by-laws of the project companyand fundamental changes therein.

The project site, assets and easements (see paras. 19-32)

Recommendation 43. The project agreement shouldspecify, as appropriate, which assets will be public propertyand which assets will be the private property of the con-


cessionaire. The project agreement should further identifywhich assets the concessionaire is required to transfer to thecontracting authority or to a new concessionaire upon ex-piry or termination of the project agreement; which assetsthe contracting authority, at its option, may purchase fromthe concessionaire; and which assets the concessionairemay freely remove or dispose of upon expiry or termina-tion of the project agreement.

Recommendation 44. The contracting authority shouldassist the concessionaire in the acquisition of easementsneeded for the operation, construction and maintenance ofthe facility. The law might empower the concessionaireto enter upon, transit through, do work or fix installationsupon property of third parties, as required for the construc-tion and operation of the facility.

Financial arrangements (see paras. 33-51)

Recommendation 45. The law should enable the con-cessionaire to collect tariffs or user fees for the use of thefacility or the services it provides. The project agreementshould provide for methods and formulas for the adjust-ment of those tariffs or user fees.

Recommendation 46. Where the tariffs or fees chargedby the concessionaire are subject to external control by aregulatory agency, the law should set forth the mechanismsfor periodic and extraordinary revisions of the tariff adjust-ment formulas.

Recommendation 47. The contracting authority shouldhave the power, where appropriate, to agree to make directpayments to the concessionaire as a substitute for, or inaddition to, service charges to be paid by the users or toenter into commitments for the purchase of fixed quantitiesof goods or services.

Security interests (see paras. 52-61)

Recommendation 48. The concessionaire should be re-sponsible for raising the funds required to construct andoperate the infrastructure facility and, for that purpose,should have the right to secure any financing required forthe project with a security interest in any of its property,with a pledge of shares of the project company, with apledge of the proceeds and receivables arising out of theconcession or with other suitable security, without preju-dice to any rule of law that might prohibit the creation ofsecurity interests in public property in the possession of theconcessionaire.

Assignment of the concession (see paras. 62 and 63)

Recommendation 49. The project agreement should setforth the conditions under which the contracting authoritymight give its consent to an assignment of the concession,including the acceptance by the new concessionaire of allobligations under the project agreement and evidence ofthe new concessionaire’s technical and financial capabilityas necessary for providing the service. The concessionshould not be assigned to third parties without the consentof the contracting authority.

Transfer of controlling interest in the project company(see paras. 64-68)

Recommendation 50. The transfer of a controlling in-terest in the capital of a concessionaire company may re-quire the consent of the contracting authority.

Construction works (see paras. 69-79)

Recommendation 51. The project agreement should setforth the procedures for the review and approval of con-struction plans and specifications by the contracting author-ity, the contracting authority’s right to monitor the con-struction of, or improvements to, the infrastructure facility,the conditions under which the contracting authority mayorder variations in respect of construction specificationsand the procedures for testing and final inspection, ap-proval and acceptance of the facility, its equipment andappurtenances.

Operation of infrastructure (see paras. 80-97)

Recommendation 52. The project agreement should setforth, as appropriate, the extent of the concessionaire’sobligations to ensure:

(a) The adaptation of the service so as to meet the ac-tual demand for the service;

(b) The continuity of the service;(c) The availability of the service under essentially the

same conditions to all users;(d) The non-discriminatory access, as appropriate, of

other service providers to any public infrastructure networkoperated by the concessionaire.

Recommendation 53. The project agreement should setforth:

(a) The extent of the concessionaire’s obligation to pro-vide the contracting authority or a regulatory agency, asappropriate, with reports and other information on its op-erations;

(b) The procedures for monitoring the concessionaire’sperformance and for the taking of such reasonable actionsas the contracting authority or a regulatory agency mayfind appropriate, to ensure that the infrastructure facility isproperly operated and the services are provided in accord-ance with the applicable legal and contractual require-ments.

Recommendation 54. The concessionaire should havethe right to issue and enforce rules governing the use of thefacility, subject to the approval of the contracting authorityor a regulatory agency.

General contractual arrangements (see paras. 98-150)

Recommendation 55. The contracting authority mayreserve the right to review and approve major contracts tobe entered into by the concessionaire, in particular con-tracts with the concessionaire’s own shareholders or relatedpersons. The contracting authority’s approval should notnormally be withheld except where the contracts containprovisions inconsistent with the project agreement or mani-festly contrary to the public interest or to mandatory rulesof a public law nature.


Recommendation 56. The concessionaire and its lend-ers, insurers and other contracting partners should be freeto choose the law applicable to govern their contractualrelations, except where such a choice would violate thehost country’s public policy.


(a) The forms, duration and amounts of the guaranteesof performance that the concessionaire may be required toprovide in connection with the construction and the opera-tion of the facilities;

(b) The insurance policies that the concessionaire maybe required to maintain;

(c) The compensation to which the concessionaire maybe entitled following the occurrence of legislative changesor other changes in the economic or financial conditionsthat render the performance of the obligation substantiallymore onerous than originally foreseen. The project agree-ment should further provide mechanisms for revising theterms of the project agreement following the occurrence ofany such changes;

(d) The extent to which either party may be exemptfrom liability for failure or delay in complying with anyobligation under the project agreement owing to circum-stances beyond their reasonable control;

(e) Remedies available to the contracting authority andthe concessionaire in the event of default by the other party.

Recommendation 58. The project agreement should setforth the circumstances under which the contracting author-ity may temporarily take over the operation of the facilityfor the purpose of ensuring the effective and uninterrupteddelivery of the service in the event of serious failure by theconcessionaire to perform its obligations.

Recommendation 59. The contracting authority shouldbe authorized to enter into agreements with the lendersproviding for the appointment, with the consent of thecontracting authority, of a new concessionaire to performunder the existing project agreement if the concessionaireseriously fails to deliver the service required or if otherspecified events occur that could justify the termination ofthe project agreement.


A. GENERAL PROVISIONSOF THE PROJECT AGREEMENT

1. The “project agreement” between the contracting au-thority and the concessionaire is the central contractualdocument in an infrastructure project. The project agree-ment defines the scope and purpose of the project as wellas the rights and obligations of the parties; it provides de-tails on the execution of the project and sets forth the con-ditions for the operation of the infrastructure or the deliveryof the relevant services. Project agreements may be con-tained in a single document or may consist of more thanone separate agreement between the contracting authorityand the concessionaire. This section discusses the relationbetween the project agreement and the host country’s leg-

islation on privately financed infrastructure projects. It alsodiscusses procedures and formalities for the conclusion andentry into force of the project agreement.

1. Legislative approaches

2. Domestic legislation often contains provisions dealingwith the content of the project agreement. In some coun-tries, the law merely refers to the need for an agreementbetween the concessionaire and the contracting authority,while the laws of other countries contain extensive manda-tory provisions concerning the content of clauses to beincluded in the agreement. An intermediate approach istaken by those laws which list a number of issues that needto be addressed in the project agreement without regulatingin detail the content of its clauses.

3. General legislative provisions on certain essential ele-ments of the project agreement may serve the purpose ofestablishing a general framework for the allocation of rightsand obligations between the parties. They may be intendedto ensure consistency in the treatment of certain contractualissues and to provide guidance to the public authoritiesinvolved in the negotiation of project agreements at differentlevels of government (national, provincial or local). Suchguidance may be found particularly useful by contractingauthorities lacking experience in the negotiation of projectagreements. Lastly, legislation may sometimes be requiredso as to provide the contracting authority with the power toagree on certain types of provisions.

4. However, general legislative provisions dealing in de-tail with the rights and obligations of the parties mightdeprive the contracting authority and the concessionaire ofthe necessary flexibility to negotiate an agreement thattakes into account the needs and particularities of a specificproject. Therefore, it is advisable to limit the scope of gen-eral legislative provisions concerning the project agreementto those strictly necessary, such as, for instance, provisionson matters for which prior legislative authorization mightbe needed or those which might affect the interests of thirdparties or provisions relating to essential policy matters onwhich variation by agreement is not admitted.

2. The law governing the project agreement

5. Statutory provisions on the law applicable to theproject agreement are not frequently found in domesticlegislation on privately financed infrastructure projects.Where they do appear, they usually provide for the appli-cation of the laws of the host country by a general refer-ence to domestic law or by mentioning special statutory orregulatory texts that apply to the project agreement. Insome legal systems there may be an implied submission tothe laws of the host country, even in the absence of a statu-tory provision to that effect.

6. The law governing the project agreement includes therules contained in laws and regulations of the host countryrelated directly to privately financed infrastructure projects,where specific legislation on the matter exists. The mainelements of those laws have been considered in previous


chapters of the Guide. In some countries the project agree-ment may be subject to administrative law, while in othersthe project agreement may be governed by private law (seechap. VII, “Other relevant areas of law”, ___). The govern-ing law also includes legal rules of other fields of law thatapply to the various issues that arise during the executionof an infrastructure project (see chap. VII, “Other relevantareas of law”, ___). Some of those rules may be of anadministrative or other public law nature and their applica-tion in the host country may be mandatory, such as thosedealing with environmental protection measures and healthand labour conditions. Some domestic laws expressly iden-tify the matters that are subject to rules of mandatory appli-cation. However, a number of issues arising out of theproject agreement or the operation of the facility may notbe the subject of mandatory rules of a public law nature.This is typically the case of most contractual issues arisingunder the project agreement (for example, formation, valid-ity and breach of contract, including liability and compen-sation for breach of contract and wrongful termination).

7. Host countries wishing to adopt legislation on pri-vately financed infrastructure projects where no such legis-lation exists may need to address the various issues raisedby such projects in more than one statutory instrument.Other countries may wish to introduce legislation dealingonly with certain issues that have not already been ad-dressed in a satisfactory manner in existing laws and regu-lations. For instance, specific legislation on privately fi-nanced infrastructure projects could establish the particularfeatures of the procedures to select the concessionaire andrefer, as appropriate, to existing legislation on the award ofgovernment contracts for details on the administration ofthe process. By the same token, when adopting legislationon privately financed infrastructure projects, host countriesmay need to repeal the application of certain laws and regu-lations that, in the view of the legislature, constitute obsta-cles to their implementation.

8. For purposes of clarity, it may be useful to provideinformation to potential investors concerning those statu-tory and regulatory texts which are directly applicable tothe execution of privately financed infrastructure projectsand, as appropriate, those whose application has been re-pealed by the legislature. However, as it would not bepossible to list exhaustively in the law all the statutes orregulations of direct or subsidiary relevance for privatelyfinanced infrastructure projects, such a list might best beprovided in a non-legislative document, such as a promo-tional brochure or general information provided to bidderswith the request for proposals (see chap. III, “Selection ofthe concessionaire”, para. 60).

3. Conclusion of the project agreement

9. For projects as complex as infrastructure projects, it isnot unusual for several months to elapse in the final nego-tiations (see chap. III, “Selection of the concessionaire”,paras. 83 and 84) before the parties are ready to sign theproject agreement. Additional time may also be needed inorder to accomplish certain formalities that are often pre-scribed by law, such as approval of the project agreementby a higher authority. The entry into force of the project

agreement or of certain categories of project agreement isin some countries subject to an act of parliament or eventhe adoption of special legislation. Given the cost entailedby delay in the implementation of the project agreement, itis advisable to find ways of expediting the final negotia-tions in order to avoid unnecessary delay in the conclusionof the project agreement.

10. A number of factors have been found to cause delayin negotiations, such as inexperience of the parties, poorcoordination between different public authorities, uncer-tainty as to the extent of governmental support and difficul-ties in establishing security arrangements acceptable to thelenders. The Government may make a significant contribu-tion by providing adequate guidance to negotiators actingon behalf of the contracting authority in the country. Theclearer the understanding of the parties as to the provisionsto be made in the project agreement, the greater thechances that the negotiation of the project agreement willbe conducted successfully. Conversely, where importantissues remain open after the selection process and littleguidance is provided to the negotiators as to the substanceof the project agreement, there may be considerable risk ofcostly and protracted negotiations as well as of justifiedcomplaints that the selection process was not sufficientlytransparent and competitive (see also chap. III, “Selectionof the concessionaire”, paras. 83 and 84).

11. The procedures for conclusion and entry into force ofthe project agreement should also be reviewed with a viewto expediting matters and avoiding the adverse conse-quences of delays in the project’s timetable. In some coun-tries the power to bind the contracting authority or theGovernment, as appropriate, is delegated in the relevantlegislation to designated officials, so that the entry intoforce of the project agreement occurs upon signature orupon the completion of certain formalities, such as publica-tion in the official gazette. In countries where such a pro-cedure would not be feasible or where final approvals byanother entity may still be required, it would be desirableto consider streamlining the approval procedures. Wheresuch procedures are perceived as arbitrary or cumbersome,the Government may be requested to provide sufficientguarantees to the concessionaire and the lenders againstsuch risk (see chap. II, “Project risks and government sup-port”, paras. 45-50). In some countries where approval re-quirements exist, contracting authorities have sometimesbeen authorized to compensate the selected bidder for costsincurred during the selection process and in preparationsfor the project, should final approval be withheld for rea-sons not attributable to the selected bidder.

B. ORGANIZATION OF THE CONCESSIONAIRE

12. Certain requirements concerning the organization ofthe concessionaire are often found in domestic legislationand are elaborated upon by detailed provisions in projectagreements. They typically deal with issues such as theestablishment of the concessionaire as a legal entity, itscapital, scope of activities, statutes and by-laws. In mostcases, the selected bidders establish a project company asan independent legal entity with its own juridical personal-ity, which then becomes the concessionaire under the


project agreement. A project company established as anindependent legal entity is the vehicle typically used forraising financing under the project finance modality (see“Introduction and background information on privately fi-nanced infrastructure projects”, para. 54). Its establishmentfacilitates coordination in the execution of the project andprovides a mechanism for protecting the interests of theproject, which may not necessarily coincide with the indi-vidual interests of all of the project promoters. This aspectmay be of particular importance where significant portionsof the services or supplies required by the project are to beprovided by members of the project consortium.

13. The project company is usually required to be estab-lished within a reasonably short period after the award ofthe project. Since a substantial part of the liabilities andobligations of the concessionaire, including long-term ones(project agreement, loan and security agreements and con-struction contracts), are usually agreed upon at an earlystage, the project may benefit from being independentlyrepresented at the time those instruments are negotiated.However, firm and final commitments by the lenders andother capital providers cannot reasonably be expected to beavailable prior to the final award of the concession.

14. Entities providing public services are often required tobe established as legal entities under the laws of the hostcountry. This requirement reflects the legislature’s interestto ensure, inter alia, that public service providers complywith domestic accounting and publicity provisions (such aspublication of financial statements or requirements to makepublic certain corporate acts). However, this emphasizesthe need for the host country to have adequate companylaws in place (see chap. VII, “Other relevant areas of law”,___). The ease with which the project company can beestablished, with due regard to reasonable requirementsdeemed to be of public interest, may help to avoid unnec-essary delay in the implementation of the project.

15. Another important issue concerns the equity invest-ment required for the establishment of the project com-pany. The contracting authority has a legitimate interest inseeking an equity level that ensures a sound financial basisfor the project company and guarantees its capability tomeet its obligations. However, as the total investmentneeded as well as the ideal proportion of debt and equitycapital vary from project to project, it may be undesirableto provide a legislative requirement of a fixed sum as mini-mum capital for all companies carrying out infrastructureprojects in the country. The contracting authority mightinstead be given more flexibility to arrive at a desirableamount of equity investment commensurate with theproject’s financial needs. For instance, the expected equityinvestment might be expressed as a desirable ratio betweendebt and equity in the request for proposals and might beincluded among the evaluation criteria for financial andcommercial proposals, so as to stimulate competitionamong the bidders (see chap. III, “Selection of the conces-sionaire”, paras. 75 and 76).

16. In any event, it is advisable to review legislative pro-visions or regulatory requirements relating to the organiza-tion of the concessionaire so as to ensure their consistencywith international obligations assumed by the host country.

Provisions that restrict or require specific types of legalentity or joint venture through which a service suppliermay supply a service and limitations on the participation offoreign capital in terms of a maximum percentage limit onforeign share-holding or the total value of individual oraggregate foreign investment may be inconsistent with spe-cific obligations undertaken by the signatory States of cer-tain international agreements on economic integration orthe liberalization of trade in services.

17. Domestic laws sometimes contain provisions concern-ing the scope of activities of the project company, requir-ing, for instance, that they be limited to the developmentand operation of a particular project. Such restrictions mayserve the purpose of ensuring the transparency of theproject’s accounts and preserving the integrity of its assets,by segregating the assets, proceeds and liabilities of thisproject from those of other projects or other activities notrelated to the project. Also, such a requirement may facili-tate the assessment of the performance of each project sincedeficits or profits could not be covered with, or set offagainst, debts or proceeds from other projects or activities.

18. The contracting authority might also wish to be as-sured that the statutes and by-laws of the project companywill adequately reflect the obligations assumed by the com-pany in the project agreement. For this reason, projectagreements sometimes provide that the entry into force ofchanges in the statutes and by-laws of the project companyis effective upon approval by the contracting authority.Where the contracting authority or another public authorityparticipates in the project company, provisions are some-times made to the effect that certain decisions necessitatethe positive vote of the contracting authority in the meetingof the shareholders or board. In any event, it is importantto weigh the public interests represented through the con-tracting authority against the need to afford the projectcompany the flexibility necessary for the conduct of itsbusiness. Where it is deemed necessary to require the con-tracting authority’s approval to proposed amendments tothe statutes and by-laws of the project company, it is advis-able to limit such a requirement to cases concerning provi-sions deemed to be of fundamental importance (for exam-ple, amount of capital, classes of shares and their privilegesor liquidation procedures), which should be identified inthe project agreement.

C. THE PROJECT SITE, ASSETSAND EASEMENTS

19. Provisions relating to the site of the project are anessential part of most project agreements. They typicallydeal with issues such as the acquisition of the required land,title to land and project assets, and easements required bythe concessionaire to carry out works or to operate the in-frastructure. To the extent that the project agreement con-templates transfer of public property to the concessionaireor the creation of a right of use regarding public property,prior legislative authority may be required. Legislation mayalso be needed to facilitate the acquisition of the requiredproperty or easements when the project site is not locatedon public property.


1. Acquisition of land required for executionof the project

20. Where a new infrastructure facility is to be built onpublic land (that is, land owned by the contracting author-ity or another public authority) or an existing infrastructurefacility is to be modernized or rehabilitated, it will nor-mally be for the owner of such land or facility to make itavailable to the concessionaire. The situation is more com-plex when the land is not already owned by the contractingauthority and needs to be purchased from its owners. Inmost cases, the concessionaire would not be in the bestposition to assume responsibility for purchasing the landneeded for the project, in view of the potential delay andexpense involved in negotiations with a possibly largenumber of individual owners and, as may be necessary insome jurisdictions, to undertake complex searches of titledeeds and review of chains of previous property transfersso as to establish the regularity of the title of individualowners. It is therefore typical for the contracting authorityto assume responsibility for providing the land required forthe implementation of the project, so as to avoid unneces-sary delay or increase in project cost as a result of theacquisition of land. The contracting authority may purchasethe required land from its owners or, if necessary, acquireit compulsorily.

21. The procedure whereby private property is compulso-rily acquired by the Government against the payment ofappropriate compensation to the owners, which is referredto in domestic legal systems by various technical expres-sions, such as “expropriation”, is referred to in the presentGuide as “compulsory acquisition”. In countries where thelaw contemplates more than one type of procedure forcompulsory acquisition, it may be desirable to authorize thecompetent public authorities to carry out all acquisitionsrequired for privately financed infrastructure projects pur-suant to the most efficient of those procedures, such as thespecial procedures that in some countries apply for reasonsof compelling public need (see chap. VII, “Other relevantareas of law”, ___).

22. The power to acquire property compulsorily is usuallyvested in the Government, but the laws of a number ofcountries also authorize infrastructure operators or publicservice providers (such as railway companies, electricityauthorities or telephone companies) to perform certain ac-tions for the compulsory acquisition of private propertyrequired for providing or expanding their services to thepublic. In those countries in particular where the award ofcompensation to the owners of the property compulsorilyacquired is adjudicated in court proceedings, it has beenfound useful to delegate to the concessionaire the authorityto carry out certain acts relating to the compulsory acqui-sition, while the Government remains responsible foraccomplishing those acts which, under the relevant legisla-tion, are preconditions to the initiation of the acquisitionproceedings. Upon acquisition, the land often becomespublic property, although in some cases the law mayauthorize the contracting authority and the concessio-naire to agree on a different arrangement, taking intoaccount their respective shares in the cost of acquiring theproperty.

2. Ownership of project assets

23. As indicated earlier, private sector participation in in-frastructure projects may be devised in a variety of differ-ent forms, ranging from publicly owned and operated infra-structure to fully privatized projects (see “Introduction andbackground information on privately financed infrastruc-ture projects”, paras. 47-53). Irrespective of the host coun-try’s general or sectoral policy, it is important that theownership regime of the various assets involved be clearlydefined and based on sufficient legislative authority. How-ever, there may be no compelling need for detailed legis-lative provisions on this matter. In various countries it wasfound sufficient to provide legislative guidance as to mat-ters that need to be addressed in the project agreement.

24. In some legal systems, physical infrastructure requiredfor the provision of public services is generally regarded aspublic property, even where it was originally acquired orcreated with private funds. This would typically includeany property especially acquired for the construction of thefacility in addition to any property that might have beenmade available to the concessionaire by the contracting au-thority. However, during the life of the project the conces-sionaire may make extensive improvements or additions tothe facility. It may not always be easily ascertainable underthe applicable law whether or not such improvements oradditions become an integral part of the public assets heldin possession by the concessionaire or whether some ofthem may be separable from the public property held bythe concessionaire and become the concessionaire’s privateproperty. It is therefore advisable for the project agreementto specify, as appropriate, which assets will be public prop-erty and which will become the private property of theconcessionaire.

25. The need for clarity in respect of ownership of projectassets is not limited to legal systems where physical infra-structure required for the provision of public services isregarded as public property. Generally, where the contract-ing authority provides the land or facility required to ex-ecute the project, it is advisable for the project agreementto specify, as appropriate, which assets will remain publicproperty and which will become the private property of theconcessionaire. The concessionaire may either receive titleto such land or facilities or be granted only a leaseholdinterest or the right to use the land or facilities and buildupon it, in particular where the land remains public prop-erty. In either case, the nature of the concessionaire’s rightsshould be clearly established, as this will directly affect theconcessionaire’s ability to create security interests inproject assets for the purpose of raising financing for theproject (see paras. 54 and 55).

26. In addition to the ownership of assets during the du-ration of the concession period, it is important to considerthe ownership regime upon expiry or termination of theproject agreement. In some countries the law places par-ticular emphasis on the contracting authority’s interest inthe physical assets related to the project and generally re-quire the handover to the contracting authority of all ofthem, whereas in other countries privately financed infra-structure projects are regarded primarily as a means of pro-


curing services over a specified period, rather than of con-structing assets. Thus, the laws of the latter countries limitthe concessionaire’s handover obligations to public assetsand property originally made available to the concession-aire or certain other assets deemed to be necessary to en-sure provision of the service. Sometimes, such property istransferred directly from the concessionaire to another con-cessionaire who succeeds it in the provision of the service.

27. Differences in legislative approaches often reflect thevarying role of the public and private sectors under differ-ent legal and economic systems, but may also be the resultof practical considerations on the part of the contractingauthority. One practical reason for the contracting authorityto allow the concessionaire to retain certain assets at theend of the project period may be the desire to lower thecost at which the service will be provided. If the projectassets are likely to have a residual value for the concession-aire and that value can be taken into account during theselection process, the contracting authority may expect thetariffs charged for the service to be lower. Indeed, if theconcessionaire does not expect to have to cover the entirecost of the assets in the life of the project, but can coverpart of it by selling them, or using them for other purposes,after the project agreement expires, there is a possibilitythat the service may be provided at a lower cost than if theconcessionaire had to cover all its costs in the life of theproject. Moreover, certain assets may require such exten-sive refurbishing or technological upgrading at the end ofthe project period that it might not be cost-effective for thecontracting authority to claim them. There may also beresidual liabilities or consequential costs, for instance, be-cause of liability for environmental damage or demolitioncosts.

28. For these reasons, the laws of some countries do notcontemplate an unqualified transfer of all assets to the con-tracting authority, but allow a distinction between threemain categories of assets:

(a) Assets that must be transferred to the contractingauthority. This category typically includes public prop-erty that was used by the concessionaire to provide theservice concerned. Assets may include both facilities madeavailable to the concessionaire by the contracting authorityand new facilities built by the concessionaire pursuant tothe project agreement. Some laws also require the transferof assets, goods and property subsequently acquired by theconcessionaire for the purpose of operating the facility, inparticular where they become part of, or are permanentlyaffixed to, the infrastructure facility to be handed over tothe contracting authority;

(b) Assets that may be purchased by the contractingauthority, at its option. This category usually includes as-sets originally owned by the concessionaire, or subse-quently acquired by it, which, without being indispensableor strictly necessary for the provision of the service, mayenhance the convenience or efficiency of operating thefacility or the quality of the service;

(c) Assets that remain the private property of theconcessionaire. These are assets owned by the concession-aire that do not fall under (b) above. Typically the contract-ing authority is not entitled to such assets, which may befreely removed or disposed of by the concessionaire.

29. In the light of the above, it is useful to require in thelaw that the project agreement specify, as appropriate,which assets will be public property and which assets willbe the private property of the concessionaire. The projectagreement should identify which assets the concessionaireis required to transfer to the contracting authority or to anew concessionaire upon expiry or termination of theproject agreement; which assets the contracting authority,at its option, may purchase from the concessionaire andwhich assets the concessionaire may freely remove or dis-pose of upon expiry or termination of the project agree-ment. These provisions should be complemented by con-tractual criteria for establishing, as appropriate, thecompensation to which the concessionaire may be entitledin respect of assets transferred to the contracting authorityor to a new concessionaire or purchased by the contractingauthority upon expiry or termination of the project agree-ment (see chap. V, “Duration, extension and termination ofthe project agreement”, ___).

3. Easements

30. Special arrangements may be required, in cases wherethe concessionaire needs to transit on or through the prop-erty of third parties to access the project site or to performor maintain any works required for the provision of theservice (for example, to place traffic signs on adjacentlands; to install poles or electric transmission lines abovethird parties’ property; to install and maintain transformingand switching equipment; to trim trees that interfere withtelephonic lines placed on abutting property; or to lay oil,gas or water pipes).

31. The right to use another person’s property for a spe-cific purpose or to do work on it is often referred to by theword “easement”. Easements usually require the consent ofthe owner of the property to which they pertain, unlesssuch rights are provided by the law. Usually it is not anexpeditious or cost-effective solution to leave it to the con-cessionaire to acquire easements directly from the ownersof the properties concerned. Instead it is more frequent thatthose easements are compulsorily acquired by the contract-ing authority simultaneously with the project site.

32. A somewhat different alternative might be for the lawitself to empower public service providers to enter, passthrough or do work or fix installations upon the property ofthird parties, as required for the construction, operation andmaintenance of public infrastructure. Such an approach,which may obviate the need to acquire easements in respectof individual properties, may be used in sector-specific leg-islation where it is deemed possible to determine, in ad-vance, certain minimum easements that may be needed bythe concessionaire. For instance, a law specific to thepower generation sector may lay down the conditions un-der which the concessionaire obtains a right of cabling forthe purpose of placing and operating basic and distributionnetworks on property belonging to third parties. Such aright may be needed for a number of measures, such asestablishing or placing underground and overhead cables,as well as establishing supporting structures and transform-ing and switching equipment; maintaining, repairing and


removing any of those installations; establishing a safetyzone along underground or overhead cables; or removingobstacles along the wires or encroaching on the safetyzone. Under some legal systems, the owners may be enti-tled to compensation should the extent of the rights grantedto the concessionaire be such that the use of the propertiesby their owners is substantially hindered.

D. FINANCIAL ARRANGEMENTS

33. Financial arrangements typically include provisionsconcerning the concessionaire’s obligations to raise fundsfor the project, outline the mechanisms for disbursing andaccounting for funds, establish methods for calculating andadjusting the tariffs charged by the concessionaire and dealwith the types of security interests that may be establishedin favour of the concessionaire’s creditors. It is importantto ensure that the laws of the host country facilitate or atleast do not pose obstacles to the financial management ofthe project.

1. Financial obligations of the concessionaire

34. In privately financed infrastructure projects the con-cessionaire is typically responsible for raising the fundsrequired to construct and operate the infrastructure facility.The concessionaire’s obligations in this regard are typicallyset forth in detailed provisions in the project agreement. Inmost cases, the contracting authority or other public au-thorities would be interested in limiting their financial ob-ligations to those specifically expressed in the projectagreement or those forms of direct support that the Govern-ment has agreed to extend to the project.

35. The amount of private capital contributed directly bythe project company’s shareholders typically representsonly a portion of the total proposed investment. A fargreater portion derives from loans extended to the conces-sionaire by commercial banks and international financialinstitutions and from the proceeds of the placement ofbonds and other negotiable instruments on the capital mar-ket (see “Introduction and background information on pri-vately financed infrastructure projects”, paras. 54-67). It istherefore important to ensure that the law does not unnec-essarily restrict the concessionaire’s ability to enter into thefinancial arrangements it sees fit for the purpose of financ-ing the infrastructure.

2. Tariff setting and tariff control

36. Tariffs or usage fees charged by the concessionairemay be the main (sometimes even the sole) source of rev-enue to recover the investment made in the project in theabsence of subsidies or payments by the contracting au-thority (see paras. 47-51) or the Government (see chap. II,“Project risks and government support,” paras. 30-60). Theconcessionaire will therefore seek to be able to set andmaintain tariffs and fees at a level that ensures sufficientcash flow for the project. However, in some legal systemsthere may be limits to the concessionaire’s freedom to es-

tablish tariffs and fees. The cost at which public servicesare provided is typically an element of the Governments’sinfrastructure policy and a matter of immediate concern forlarge sections of the public. Thus, the regulatory frame-work in many countries includes special rules to controltariffs and fees for the provision of public services. Further-more, statutory provisions or general rules of law in somelegal systems establish parameters for pricing goods orservices, for instance by requiring that tariffs meet certainstandards of “reasonableness”, “fairness” or “equity”.

(a) The concessionaire’s authority to collect tariffs

37. In a number of countries prior legislative authoriza-tion may be necessary in order for a concessionaire tocollect tariffs for the provision of public services or todemand a fee for the use of public infrastructure facilities.The absence of such a general provision in legislation hasin some countries given rise to judicial disputes challengingthe concessionaire’s authority to charge a tariff for theservice.

38. Where it is deemed necessary to include in generallegislation provisions concerning the level of tariffs anduser fees, they should seek to achieve a balance betweenthe interests of investors and current and future users. It isadvisable that statutory criteria for determining tariffs andfees take into account, in addition to social factors the Gov-ernment regards as relevant, the concessionaire’s interest inachieving a level of cash flow that ensures the economicviability and commercial profitability of the project. Fur-thermore, it is advisable to provide the parties with thenecessary authority to negotiate appropriate arrangements,including compensation provisions, in order to address situ-ations where the application of tariff control rules directlyor indirectly related to the provision of public services mayresult in fixing tariffs or fees below the level required forthe profitable operation of the project (see para. 124).

(b) Tariff control methods

39. Domestic laws often subject tariffs or user fees tosome control mechanism. Many countries have chosen toset only the broad tariff principles in legislation while leav-ing their actual implementation to the regulatory agencyconcerned and to the terms and conditions of licences orconcessions. This approach is advisable because formulasare sector-specific and may require adaptation during thelife of a project. Where tariff control measures are used, thelaw typically requires that the tariff formula be advertisedwith the request for proposals and be incorporated into theproject agreement. Tariff control systems typically consistof formulas for the adjustment of tariffs and monitoringprovisions to ensure compliance with the parameters fortariff adjustment. The most common tariff control methodsused in domestic laws are based on rate-of-return andprice-cap principles. There are also hybrid regimes thathave elements of both. It should be noted that a well-func-tioning tariff control mechanism requires detailed commer-cial and economic analysis and that the brief discussion thatfollows offers only an overview of selected issues and pos-sible solutions.


(i) Rate-of-return method

40. Under the rate-of-return method, the tariff adjustmentmechanism is devised so as to allow the concessionaire anagreed rate of return on its investment. The tariffs for anygiven period are established on the basis of the concession-aire’s overall revenue requirement to operate the facility,which involves determining its expenses, the investmentsundertaken to provide the services and the allowed rate ofreturn. Reviews of the tariffs are undertaken periodically,sometimes whenever the contracting authority or other in-terested parties consider that the actual revenue is higher orlower than the revenue requirement of the facility. For thatpurpose, the contracting authority verifies the expenses ofthe facility, determines to what extent investments under-taken by the concessionaire are eligible for inclusion in therate base and calculates the revenues that need to be gen-erated to cover the allowable expenses and the return oninvestment agreed upon. The rate-of-return method is typi-cally used in connection with the supply of public servicesfor which a constant demand can be forecast, such aspower, gas or water supply. For facilities or services ex-posed to greater elasticity of demand, such as tollroads, itmight not be possible to keep the concessionaire’s rate ofreturn constant by regular tariff adjustments.

41. The rate-of-return method has been found to providea high degree of security for infrastructure operators, sincethe concessionaire is assured that the tariffs charged will besufficient to cover its operating expenses and allow theagreed rate of return. Because tariffs are adjusted regularly,thus keeping the concessionaire’s rate of return essentiallyconstant, investment in companies providing public serv-ices is exposed to little market risk. The result is typicallylower costs of capital. The possible disadvantage of therate-of-return method is that it provides little incentive forinfrastructure operators to minimize their costs because ofthe assurance that those costs will be recovered throughtariff adjustments. However, some level of incentive mayexist if the tariffs are not adjusted instantaneously or if theadjustment does not apply retroactively. It should be notedthat the implementation of the rate-of-return method re-quires a substantial amount of information, as well as ex-tensive negotiations (for example, on eligible expendituresand cost allocation).

(ii) Price-cap method

42. Under the price-cap method, a tariff formula is set fora given period (such as four or five years) taking into ac-count future inflation and future efficiency gains expectedfrom the facility. Tariffs are allowed to fluctuate within thelimits set by the formula. In some countries, the formula isa weighted average of various indices, in others it is a con-sumer price index minus a productivity factor. Where sub-stantial new investments are required, the formula may in-clude an additional component to cover these extra costs.The formula can apply to all services of the company or toselected groups of services only, and different formulasmay be used for different groups. The periodic readjust-ment of the formula is, however, based on the rate-of-re-turn type of calculations, requiring the same type of de-tailed information as indicated above, though on a lessfrequent basis.

43. The implementation of the price-cap method may beless complex than the rate-of-return method. The price-capmethod has been found to provide greater incentives forpublic service providers, since the concessionaire retainsthe benefits of lower than expected costs until the nextadjustment period. At the same time, however, public serv-ice providers are typically exposed to more risk under theprice-cap method than under the rate-of-return method. Inparticular, the concessionaire faces the risk of loss whenthe costs turn out to be higher than expected, since theconcessionaire cannot raise the tariffs until the next tariffadjustment. The greater risk exposure increases the costs ofcapital. If the project company’s returns are not allowed torise, there might be difficulties in attracting new invest-ment. Also, the company might be tempted to lower thequality of the service in order to reduce costs.

(iii) Hybrid methods

44. Many tariff adjustment methods currently being usedcombine elements of both the rate-of-return and the price-cap methods with a view to both reducing the risk borne bythe service providers and providing sufficient incentives forefficiency in the operation of the infrastructure. One suchhybrid method employs sliding scales for adjusting the tar-iffs that ensure upward adjustment when the rate of returnfalls below a certain threshold and downward adjustmentwhen the rate of return exceeds a certain maximum, withno adjustment for rates of return falling between those lev-els. Other possible approaches to balancing the rate-of-re-turn and price-cap methods include a review by the con-tracting authority of the investments made by theconcessionaire to ensure that they meet the criteria of use-fulness in order to be taken into account when calculatingthe concessionaire’s revenue requirement. Another tariffadjustment technique that may be used to set tariffs, ormore generally to monitor tariff levels, is benchmark oryardstick pricing. By comparing the various cost compo-nents of one public service provider with those of anotherand with international norms, the contracting authority maybe able to judge whether tariff adjustments requested by thepublic service provider are reasonable.

(c) Policy considerations on tariff control

45. Each of the main tariff adjustment methods discussedabove has its own advantages and disadvantages and vary-ing impact on private sector investment decisions (seeparas. 41 and 43). This should be taken into account by thelegislature when considering the appropriateness of tariffcontrol methods to domestic circumstances. Differentmethods may also be used for different infrastructure sec-tors. Some laws indeed authorize the contracting authorityto apply either a price-cap or rate-of-return method in theselection of concessionaires, according to the scope andnature of investments and services. In choosing a tariff con-trol method, it is important to take into account the impactof the various policy options on private sector investmentdecisions . Whatever mechanism is chosen, the capacity ofthe contracting authority or the regulatory agency to moni-tor adequately the performance of the concessionaire and toimplement the adjustment method satisfactorily should becarefully considered (see also chap. I, “General legislativeand institutional framework”, paras. 30-53).


46. It is important to bear in mind that tariff adjustmentformulas cannot be set once and for all, as technology,exchange rates, wage levels, productivity and other factorsare bound to change significantly, sometimes even unpre-dictably, over the concession period. Furthermore, tariffadjustment formulas are typically drawn up assuming acertain level of output or demand and may lead to unsatis-factory results if the volume of output or demand changesconsiderably. Therefore, many countries have establishedmechanisms for revision of tariff formulas, including peri-odic revisions (every four or five years, say) of the formulaor ad hoc revisions whenever it is demonstrated that theformula has failed to ensure adequate compensation to theconcessionaire (see also paras. 59-68). The tariff regimewill also require adequate stability and predictability toenable public service providers and users to plan accord-ingly and to allow financing based on a predictable rev-enue. Investors and lenders may be particularly concernedabout regulatory changes affecting the tariff adjustmentmethod. Thus, they typically require the tariff adjustmentformula to be incorporated into the project agreement.

3. Financial obligationsof the contracting authority

47. Where the concessionaire offers services directly tothe general public, the contracting authority or other publicauthority may undertake to make direct payments to theconcessionaire as a substitute for, or in addition to, servicecharges to be paid by the users. Where the concessionaireproduces a commodity for further transmission or distribu-tion by another service provider, the contracting authoritymay undertake to purchase that commodity wholesale at anagreed price and on agreed conditions. The main examplesof such arrangements are discussed briefly below.

(a) Direct payments

48. Direct payments by the contracting authority havebeen used in some countries as a substitute for, or as asupplement to, payments by the end users, in particular intollroad projects, through a mechanism known as “shadowtolling”. Shadow tolls are arrangements whereby the con-cessionaire assumes the obligation to develop, build, fi-nance and operate a road or another transportation facilityfor a set number of years in exchange for periodic pay-ments in place of, or in addition to, real or explicit tollspaid by users. Shadow toll schemes may be used to addressrisks that are specific to transportation projects, in particu-lar the risk of lower-than-expected traffic levels (see chap.II, “Project risks and government support”, para. 18). Fur-thermore, shadow toll schemes may be politically moreacceptable than direct tolls, for example, where it is fearedthat the introduction of toll payments on public roads maygive rise to protests by road users. However, where sucharrangements involve some form of subsidy to the projectcompany, their conformity with certain obligations of thehost country under international agreements on regionaleconomic integration or trade liberalization should be care-fully considered.

49. Shadow tolls may involve a substantial expenditurefor the contracting authority and require close and exten-sive monitoring by the contracting authority. In countriesthat have used shadow tolls for the development of newroad projects, payments by the contracting authority to theconcessionaire are based primarily on actual traffic levels,as measured in vehicle-miles. It is considered advisable toprovide that payments are not made until traffic begins, sothat the concessionaire has an incentive to open the road asquickly as possible. At the same time, it has been founduseful to calculate payments on the basis of actual trafficfor the duration of the concession. This system gives theconcessionaire a reason to ensure that usage of the roadwill be disrupted as little as possible by repair works. Al-ternatively, the project agreement could contain a penaltyor liquidated damages clause for lack of lane availabilityresulting from repair works. The concessionaire is typicallyrequired to perform continuous traffic counts to calculateannual vehicle-miles, which are verified periodically by thecontracting authority. A somewhat modified system maycombine both shadow tolls and direct tolls paid by theusers. In such a system, shadow tolls are only paid bythe contracting authority in the event that the traffic levelover a certain period falls below the agreed minimumlevel necessary for the concessionaire to operate the roadprofitably.

(b) Purchase commitments

50. In the case of independent power plants or other fa-cilities that generate goods or services capable of beingdelivered on a long-term basis to an identified purchaser,the contracting authority or other public authority often as-sume an obligation to purchase such goods and services, atan agreed rate, as they are offered by the concessionaire.Contracts of this type are usually referred to as “off-takeagreements”. Off-take agreements often include two typesof payments: payments for the availability of the produc-tion capacity and payments for units of actual consumption.In a power generation project, for example, the power pur-chase agreement may contemplate the following charges:

(a) Capacity charges. These are charges payable re-gardless of actual output in a billing period and are calcu-lated to be sufficient to pay all of the concessionaire’s fixedcosts incurred to finance and maintain the project, includ-ing debt service and other ongoing financing expenses,fixed operation and maintenance expenses and a certainrate of return. The payment of capacity charges is oftensubject to the observance of certain performance or avail-ability standards;

(b) Consumption charges. These charges are not in-tended to cover all of the concessionaire’s fixed costs, butrather to pay the variable or marginal costs that the conces-sionaire has to bear to generate and deliver a given unit ofthe relevant service or good (such as a kilowatt-hour ofelectricity). Consumption charges are usually calculated tocover the concessionaire’s variable operating costs, such asthat of fuel consumed when the facility is operating, watertreatment expenses and costs of consumables. Variablepayments are often tied to the concessionaire’s own vari-able operating costs or to an index that reasonably reflectschanges in operating costs.


51. From the perspective of the concessionaire, a com-bined scheme of capacity and consumption charges is par-ticularly useful to ensure cost recovery where the transmis-sion or distribution function for the goods or servicesgenerated by the concessionaire is subject to a monopoly.However, the capacity charges provided in the off-takeagreement should be commensurate with the other sourcesof generating capacity available to, or actually used by, thecontracting authority. In order to ensure the availability offunds for payments by the contracting authority under theoff-take agreement, it is advisable to consider whether ad-vance budgeting arrangements are required. Payments un-der an off-take agreement may be backed by a guaranteeissued by the host Government or by a national or interna-tional guarantee agency (see chap. II, “Project risks andgovernment support”, paras. 46 and 47).

E. SECURITY INTERESTS

52. Generally, security interests in personal property pro-vide the secured creditor with essentially two kinds ofrights: a property right allowing the secured creditor, inprinciple, to repossess the property or have a third partyrepossess and sell it, and a priority right to receive paymentwith the proceeds from the sale of the property in the eventof default by the debtor. Security arrangements in projectfinance generally play a defensive or preventive role byensuring that, in the event a third party acquires thedebtor’s operations (for example, by foreclosure, in bank-ruptcy or directly from the debtor) all of the proceedsresulting from the sale of those assets will go first torepayment of outstanding loans. Nevertheless, lenderswould generally aim at obtaining security interests thatallow them to foreclose and take possession of a projectthey can take over and operate either to restore its economi-cal viability with a view to reselling at an appropriate timeor to retaining the project indefinitely and collecting anongoing revenue.

53. Security arrangements are crucial for financing infra-structure projects, in particular where the financing is struc-tured under the “project finance” modality. The financingdocuments for privately financed infrastructure projectstypically include both security over physical assets relatedto the project and security over intangible assets held by theconcessionaire. A few of the main requirements for thesuccessful closure of the security arrangements are dis-cussed below. It should be noted, however, that, in somelegal systems, any security given to lenders that makes itpossible for them to take over the project is only allowedunder exceptional circumstances and under certain specificconditions, namely, that the creation of such security re-quires the agreement of the contracting authority; that thesecurity should be granted for the specific purpose of facili-tating the financing or operation of the project; and that thesecurity interests should not affect the obligations under-taken by the concessionaire. Those conditions often derivefrom general principles of law or from statutory provisionsand cannot be waived by the contracting authority throughcontractual arrangements.

1. Security over physical assets

54. The negotiation of security arrangements required inorder to obtain financing for the project may face legalobstacles where project assets are public property. If theconcessionaire lacks title to the property it will in manylegal systems have no (or only limited) power to encumbersuch property. Where limitations of this type exist, the lawmay still facilitate the negotiation of security arrangementsfor instance by indicating the types of asset in respect ofwhich such security interests may be created or the type ofsecurity interest that is permissible. In some legal systems,a concessionaire that is granted a leasehold interest or rightto use certain property may create a security interest overthe leasehold interest or right to use.

55. Furthermore, security interests may also be createdwhere the concession encompasses different types of publicproperty, such as when title to adjacent land (and not onlythe right to use it) is granted to a railway company in ad-dition to the right to use the public infrastructure. Where itis possible to create any form of security interests in respectof assets owned by, or required to be handed over to, thecontracting authority or assets in relation to which the con-tracting authority has a contractual option of purchase (seepara. 28), the law may require the approval of the contract-ing authority in order for the concessionaire to create suchsecurity interests.

2. Security over intangible assets

56. The main intangible asset in an infrastructure projectis the concession itself, that is, the concessionaire’s right tooperate the infrastructure or to provide the relevant service.In most legal systems, the concession provides its holderwith the authority to control the entire project and entitlesthe concessionaire to earn the revenue generated by theproject. Thus, the value of the concession well exceeds thecombined value of all of the physical assets involved in aproject. Because the concession holder would usually havethe right to possess and dispose of all project assets (withthe possible exception of those which are owned by otherparties, such as public property in the possession of theconcessionaire), the concession would typically encompassboth present and future assets of a tangible or intangiblenature. The lenders may therefore regard the concession asan essential component of the security arrangements nego-tiated with the concessionaire. A pledge of the concessionitself may have various practical advantages for the conces-sionaire and the lenders, in particular in legal systems thatwould not otherwise allow the creation of security over allof a company’s assets or which do not generally recognizenon-possessory security interests (see chap. VII, “Otherrelevant areas of law”, ___). These advantages may includeavoiding the need to create separate security interests foreach project asset, allowing the concessionaire to continueto deal with those assets in the ordinary course of businessand making it possible to pledge certain assets withouttransferring actual possession of the assets to the creditors.Furthermore, a pledge of the concession may entitle thelenders, in case of default by the concessionaire, to averttermination of the project by taking over the concessionand making arrangements for continuation of the project


under another concessionaire. A pledge of the concessionmay, therefore, represent a useful complement to or, undercertain circumstances, a substitute for a direct agreementbetween the lenders and the contracting authority concern-ing the lenders’ step-in rights (see paras. 147-150).

57. However, in some legal systems there may be obstaclesto a pledge of the concession in the absence of expresslegislative authorization. Under various legal systems, secu-rity interests may only be created in respect of assets that canbe freely transferable by the grantor of the security. Since theright to operate the infrastructure is in most cases not trans-ferable without the consent of the contracting authority (seeparas. 62 and 63), in some legal systems it may not bepossible for the concessionaire to create security interestsover the concession itself. Recent legislation in some civillaw jurisdictions has removed that obstacle by creating aspecial category of security interest, sometimes referred toby expressions such as “hipoteca de concesión de obrapública” or “prenda de concesión de obra pública” (“publicworks concession mortgage” or “pledge of public worksconcession”), which generally provides the lenders with anenforceable security interest covering all of the rightsgranted to the concessionaire under the project agreement.However, in order to protect the public interest, the lawrequires the consent of the contracting authority for anymeasure by the lenders to enforce such a right, under condi-tions to be provided in an agreement between the contractingauthority and the lenders. A somewhat more limited solutionhas been achieved in some common law jurisdictions inwhich a distinction has been made between the non-transfer-able right to carry out a certain activity under a governmen-tal licence (that is, the “public rights” arising under thelicence) and the right to claim proceeds received by thelicensee (the latter’s “private rights” under the licence).

3. Securities over trade receivables

58. Another form of security typically given in connec-tion with most privately financed infrastructure projects isan assignment to lenders of proceeds from contracts withcustomers of the concessionaire. Those proceeds may con-sist of the proceeds of a single contract (such as a powerpurchase commitment by a power distribution entity) or ofa large number of individual transactions (such as monthlypayment of gas or water bills). Those proceeds typicallyinclude the tariffs charged to the public for the use of theinfrastructure (for example, tolls on a tollroad) or the pricepaid by the customers for the goods or services provided bythe concessionaire (electricity charges, for example). Theymay also include the revenue of ancillary concessions. Se-curity of this type is a typical element of the financingarrangements negotiated with the lenders and the loanagreements often require that the proceeds of infrastructureprojects be deposited in an escrow account managed by atrustee appointed by the lenders. Such a mechanism mayalso play an essential role in the issuance of bonds andother negotiable instruments by the concessionaire.

59. Security over trade receivables plays a central role infinancing arrangements that involve the placement ofbonds and other negotiable instruments. Those instrumentsmay be issued by the concessionaire itself, in which case

the investors purchasing the security will become its credi-tors, or they may be issued by a third party to whom theproject receivables have been assigned through a mecha-nism known as “securitization”. Securitization involves thecreation of financial securities backed by the project’s rev-enue stream, which is pledged to pay the principal andinterest of that security. Securitization transactions usuallyinvolve the establishment of a legal entity separate from theconcessionaire and especially dedicated to the business ofsecuritizing assets or receivables. This legal entity is oftenreferred to as a “special-purpose vehicle”. The concession-aire assigns project receivables to the special-purpose vehi-cle, which, in turn, issues to investors interest-bearing in-struments that are backed by the project receivables. Thesecuritized bondholders thereby acquire the right to theproceeds of the concessionaire’s transactions with its cus-tomers. The concessionaire collects the tariffs from the cus-tomers and transfers the funds to the special-purpose vehi-cle, which then transfers it to the securitized bondholders.In some countries, recent legislation has expressly recog-nized the concessionaire’s authority to assign project re-ceivables to a special-purpose vehicle, which holds andmanages the receivables for the benefit of the project’screditors. With a view to protecting the bondholdersagainst the risk of insolvency of the concessionaire, it maybe advisable to adopt the necessary legislative measures toenable the legal separation between the concessionaire andthe special-purpose vehicle.

60. In most cases it would not be practical for the conces-sionaire to specify individually the receivables being as-signed to the creditors. Assignment of receivables inproject finance therefore typically takes the form of a bulkassignment of future receivables. Statutory provisions rec-ognizing the concessionaire’s authority to pledge the pro-ceeds of infrastructure projects have been included in re-cent domestic legislation in various legal systems.However, there may be considerable uncertainty in variouslegal systems with regard to the validity of the wholesaleassignment of receivables and of future receivables. It istherefore important to ensure that domestic laws on secu-rity interests do not hinder the ability of the parties effec-tively to assign trade receivables in order to obtain financ-ing for the project (see chap. VII, “Other relevant areas oflaw”, ___).

4. Security over shares of the project company

61. Where the concession may not be assigned or trans-ferred without the consent of the contracting authority (seeparas.___), the law sometimes prohibits the establishmentof security over the shares of the project company. Itshould be noted, however, that security over the shares ofthe project company is commonly required by lenders inproject finance transactions and that general prohibitionson the establishment of such security may limit the projectcompany’s ability to raise funding for the project. As withother forms of security, it may therefore be useful for thelaw to authorize the concessionaire’s shareholders to createsuch security, subject to the contracting authority’s priorapproval, where an approval would be required for thetransfer of equity participation in the project company (seeparas. 64-68).


F. ASSIGNMENT OF THE CONCESSION

62. Concessions are granted in view of the particularqualifications and reliability of the concessionaire and inmost legal systems they are not freely transferable. Indeed,domestic laws often prohibit the assignment of the conces-sion without the consent of the contracting authority. Thepurpose of these restrictions is typically to ensure the con-tracting authority’s control over the qualifications of infra-structure operators or public service providers.

63. Some countries have found it useful to mention in thelegislation the conditions under which approval for thetransfer of a concession prior to its expiry may be granted,such as, for example, acceptance by the new concessionaireof all obligations under the project agreement and evidenceof the new concessionaire’s technical and financial capabil-ity to provide the service. General legislative provisions ofthis type may be supplemented by specific provisions in theproject agreement setting forth the scope of those restric-tions, as well as the conditions under which the consent ofthe contracting authority may be granted. However, itshould be noted that restrictions typically apply to the vol-untary transfer of its rights by the concessionaire; they donot preclude the compulsory transfer of the concession toan entity appointed by the lenders, with the consent of thecontracting authority, for the purpose of averting termina-tion due to serious default by the concessionaire (see alsoparas. 147-150).

G. TRANSFER OF CONTROLLING INTERESTIN THE PROJECT COMPANY

64. The contracting authority may be concerned that theoriginal members of the bidding consortium maintain theircommitment to the project throughout its duration and thateffective control over the project company will not betransferred to entities unknown to the contracting authority.Concessionaires are selected to carry out infrastructureprojects at least partly on the basis of their experience andcapabilities for that sort of project (see chap. III, “Selectionof the concessionaire”, paras. 38-40). Contracting authori-ties are therefore concerned that, if the concessionaire’sshareholders are entirely free to transfer their investment ina given project, there will be no assurance as to who willactually be delivering the relevant services.

65. Contracting authorities may draw reassurance fromthe experience that the selected bidding consortium demon-strated in the pre-selection phase and from the performanceguarantees provided by the parent organizations of theoriginal consortium and its subcontractors. In practice,however, the reassurance that may result from the apparentexpertise of the shareholders in the concessionaire shouldnot be overemphasized. Where a separate legal entity isestablished to carry out the project, which is often the case(see para. 12), the backing of the concessionaire’s share-holders, should the project run into difficulties, may belimited to their maximum liability. Thus, restrictions on thetransferability of investment, in and of themselves, may notrepresent sufficient protection against the risk of perform-ance failure by the concessionaire. In particular, these re-

strictions are not a substitute for appropriate contractualremedies under the project agreement, such as monitoringof the level of service provided (see paras. 147-150) ortermination without full compensation in case of unsatis-factory performance (see chap. V, “Duration, extension andtermination of the project agreement”, ___).

66. In addition to the above, restrictions on the transfer-ability of shares in companies providing public servicesmay also present some disadvantages for the contractingauthority. As noted earlier (see “Introduction and back-ground information on privately financed infrastructureprojects”, paras. 54-67), there are numerous types of fund-ing available from different investors for different risk andreward profiles. The initial investors, such as constructioncompanies and equipment suppliers, will seek to be re-warded for the higher risks they take on, while subsequentinvestors may require a lesser return commensurate withthe reduced risks they bear. Most of the initial investorshave finite resources and need to recycle capital in order tobe able to participate in new projects. Therefore, those in-vestors might not be willing to tie up capital in long-termprojects. At the end of the construction period, the initialinvestors might prefer to sell their interest on to a second-ary equity provider whose required rate of return is less.Once usage is more certain, another refinancing could takeplace. However, if the investors’ ability to invest and re-invest capital for project development is restricted by con-straints on the transferability of shares in infrastructureprojects, there is a risk of a higher cost of funding. In somecircumstances it may not be possible to fund a project atall, as some investors whose involvement may be crucialfor the implementation of the project may not be willing toparticipate. From a long-term perspective, the developmentof a market place for investment in public infrastructuremay be hindered if investors are unnecessarily constrainedin the freedom to transfer their interest in privately fi-nanced infrastructure projects.

67. For the above reasons, it may be advisable to limit therestrictions on the transfer of a controlling interest in theproject company to a certain period of time (for example,a certain number of years after the entry into force of theproject agreement) or to situations where such restrictionsare justified by reasons of public interest. One such situa-tion may be where the concessionaire is in possession ofpublic property or where the concessionaire receives loans,subsidies, equity or other forms of direct governmentalsupport. In these cases, the contracting authority’s account-ability for the proper use of public funds requires assur-ances that the funds and assets are entrusted to a solidcompany, to which the original investors remain committedduring a reasonable period. Another situation that may jus-tify imposing limitations on the transfer of shares of con-cessionaire companies may be where the contracting au-thority has an interest in preventing transfer of shares toparticular investors. For example, the contracting authoritymay wish to control acquisition of controlling shares ofpublic service providers to avoid the formation ofoligopolies or monopolies in liberalized sectors. Or it maynot be thought appropriate for a company that had de-frauded one part of Government to be employed by anotherthrough a newly acquired subsidiary.


68. In these exceptional cases it may be advisable to re-quire that the initial investors seek the prior consent of thecontracting authority before transferring their equity par-ticipation. It should be made clear in the project agreementthat any such consent should not be unreasonably withheldor unduly delayed. For transparency purposes, it may alsobe advisable to establish the grounds for withholding ap-proval and to require the contracting authority to specify ineach instance the reasons for any refusal. The appropriateduration of such limitations—whether for a particularphase of the project or for the entire concession term—mayneed to be considered on a case-by-case basis. In someprojects, it may be possible to relax such restrictions afterthe facility has been completed. It is also advisable toclarify in the project agreement whether these limitations, ifany, should apply to the transfer of any participation in theconcessionaire, or whether the concerns of the contractingauthority will focus on one particular investor (such as. aconstruction company or the facility designer) while theconstruction phase lasts or for a significant time beyond.

H. CONSTRUCTION WORKS

69. Contracting authorities purchasing construction workstypically act as the employer under a construction contractand retain extensive monitoring and inspection rights, in-cluding the right to review the construction project andrequest modifications to it, to follow closely the construc-tion work and schedule, to inspect and formally accept thecompleted work and to give final authorization for the op-eration of the facility.

70. On the other hand, in many privately financed infra-structure projects, the contracting authority may prefer totransfer such responsibility to the concessionaire. Instead ofassuming direct responsibility for managing the details ofthe project, the contracting authorities may prefer to trans-fer that responsibility to the concessionaire by requiring thelatter to assume full responsibility for the timely comple-tion of the construction. The concessionaire, too, will beinterested in ensuring that the project is completed on timeand that the cost estimate is not exceeded, and will typi-cally negotiate fixed-price, fixed-time turnkey contractsthat include guarantees of performance by the constructioncontractors. Therefore, in privately financed infrastructureprojects it is the concessionaire that for most purposes per-forms the role that the employer would normally play un-der a construction contract.

71. For these reasons, legislative provisions on the con-struction of privately financed infrastructure facilities are insome countries limited to a general definition of the con-cessionaire’s obligation to perform the public works inaccordance with the provisions of the project agreementand give the contracting authority the general right tomonitor the progress of the work with a view to ensuringthat it conforms to the provisions of the agreement. In thosecountries, more detailed provisions are then left to theproject agreement.

1. Review and approval of construction plans

72. Where it is felt necessary to deal with constructionworks and related matters in legislation, it is advisable todevise procedures that help to keep completion time andconstruction costs within estimates and lower the potentialfor disputes between the concessionaire and the public au-thorities involved. For instance, where statutory provisionsrequire that the contracting authority review and approvethe construction project, the project agreement should es-tablish a deadline for the review of the construction projectand provide that the approval shall be deemed to be grantedif no objections are made by the contracting authoritywithin the relevant period. It may also be useful to set outin the project agreement the grounds on which the contract-ing authority may raise objections to or request modifica-tions in the project, such as safety, defence, security, envi-ronmental concerns or non-conformity with thespecifications.

2. Variation in the project terms

73. During the course of construction of an infrastructurefacility, it is common for situations to arise that make itnecessary or advisable to alter certain aspects of the con-struction. The contracting authority may therefore wish toretain the right to order changes in respect of such aspectsas the scope of construction, the technical characteristics ofequipment or materials to be incorporated in the work orthe construction services required under the specifications.Such changes are referred to in this Guide as “variations”.As used in the Guide, the word “variation” does not includetariff adjustments or revisions made as a result of costchanges or currency fluctuations (see paras. 39-44). Like-wise, renegotiation of the project agreement in cases ofsubstantial change in conditions (see paras. 126-130) is notregarded in the Guide as a variation.

74. Given the complexity of most infrastructure projects,it is not possible to exclude the need for variations in theconstruction specifications or other requirements of theproject. However, such variations often cause delay in theexecution of the project or in the delivery of the publicservice; they may also render the performance under theproject agreement more onerous for the concessionaire.Furthermore, the cost of implementing extensive variationorders may exceed the concessionaire’s own financialmeans, thus requiring substantial additional funding thatmay not be obtainable at an acceptable cost. It is thereforeadvisable for the contracting authority to consider measuresto control the possible need for variations. The quality ofthe feasibility studies required by the contracting authorityand of the specifications provided during the selectionprocess (see chap. III, “Selection of the concessionaire”,paras. 61 and 64-66) play an important role in avoidingsubsequent changes in the project.

75. The project agreement should set forth the specificcircumstances under which the contracting authority mayorder variations in respect of construction specificationsand the compensation that may be due to the concession-aire, as appropriate, to cover the additional cost and delay


entailed by implementing the variations. The project agree-ment should also clarify the extent to which the conces-sionaire is obliged to implement those variations andwhether the concessionaire may object to variations and, ifso, on which grounds. According to the contractual practiceof some legal systems, the concessionaire may be releasedof its obligations when the amount of additional costs en-tailed by the modification exceeds a set maximum limit.

76. Various contractual approaches for dealing with vari-ations have been used in large construction contracts todeal with the extent of the contractor’s obligation to imple-ment changes and the required adjustments in the contractprice or contract duration. Such solutions may also be used,mutatis mutandis, to deal with variations sought by thecontracting authority under the project agreement.1 Itshould be noted, however, that in infrastructure conces-sions the project company’s payment consists of user feesor prices for the output of the facility, rather than a globalprice for the construction work. Thus, compensation meth-ods used in connection with infrastructure concessionssometimes include a combination of various methods, rang-ing from lump-sum payments to tariff increases, or exten-sions of the concession period. For instance, there may bechanges that result in an increase in the cost that the con-cessionaire may be able to absorb and finance itself andamortize by means of an adjustment in the tariff or pay-ment mechanism, as appropriate. If the concessionaire can-not refinance or fund the changes itself, the parties maywish to consider lump-sum payments as an alternative to anexpensive and complicated refinancing structure.

3. Monitoring powers of the contracting authority

77. In some legal systems, public authorities purchasingconstruction works customarily retain the power to orderthe suspension or interruption of the works for reasons ofpublic interest. However, with a view to providing somereassurance to potential investors, it may be useful to limitthe possibility of such interference and to provide that nosuch interruption should be of a duration or extent greaterthan is necessary, taking into consideration circumstancesthat gave rise to the requirement to suspend or interrupt thework. It may also be useful to agree on a maximum periodof suspension and to provide for appropriate compensationto the concessionaire. Furthermore, guarantees may be pro-vided to ensure payment of compensation or to indemnifythe concessionaire for loss resulting from suspension of theproject (see also chap. II, “Project risks and governmentsupport”, paras. 48-50).

78. In some legal systems, facilities built for use in con-nection with the provision of certain public services be-come public property once construction is finished (seepara. 24). In such cases, the law often requires that thecompleted facility be formally accepted by the contractingauthority or another public authority. Such formal accept-

ance is typically given only after inspection of the com-pleted facility and satisfactory conclusion of the necessarytests to ascertain that the facility is operational and meetsthe specifications and technical and safety requirements.Even where formal acceptance by the contracting authorityis not required (for example, where the facility remains theproperty of the concessionaire), provisions concerning finalinspection and approval of the construction work by thecontracting authority are often required in order to ensurecompliance with health, safety, building or labour regula-tions. The project agreement should set out in detail thenature of the completion tests or the inspection of the com-pleted facility; the timetable for the tests (for instance, itmay be appropriate to undertake partial tests over a period,rather than a single test at the end); the consequences offailure to pass a test; and the responsibility for organizingthe resources for the test and covering the correspondingcosts. In some countries, it has been found useful to author-ize the facility to operate on a provisional basis, pendingfinal approval by the contracting authority, and to providean opportunity for the concessionaire to rectify defects thatmight be found at that juncture.

4. Guarantee period

79. The construction contracts negotiated by the conces-sionaire will typically provide for a quality guarantee underwhich the contractors assume liability for defects in theworks and for inaccuracies or insufficiencies in technicaldocuments supplied with the works, except for reasonableexclusions (such as normal wear and tear or faulty mainte-nance or operation by the concessionaire). Additional li-ability may also derive from statutory provisions or generalprinciples of law under the applicable law, such as a specialextended liability period for structural defects in works,which is provided in some legal systems. The projectagreement should provide that final approval or acceptanceof the facility by the contracting authority will not releasethe construction contractors from any liability for defects inthe works and for inaccuracies or insufficiencies in techni-cal documents that may be provided under the constructioncontracts and the applicable law.

I. OPERATION OF INFRASTRUCTURE

80. Conditions for the operation and maintenance of thefacility, as well as for quality and safety standards, areoften enumerated in the law and spelled out in detail in theproject agreement. In addition, especially in the fields ofelectricity, water and sanitation and public transportation,the contracting authority or an independent regulatoryagency may exercise an oversight function over the opera-tion of the facility. An exhaustive discussion of legal issuesrelating to the conditions of operation of infrastructure fa-cilities would exceed the scope of this Guide. The follow-ing paragraphs therefore contain only a brief presentationof some of the main issues.

81. Regulatory provisions on infrastructure operation andlegal requirements for the provision of public services areintended to achieve various objectives of public relevance.

1For a discussion of approaches and possible solutions used in construc-tion contracts for complex industrial works, see the UNCITRAL LegalGuide on Drawing Up Contracts for the Construction of Industrial Works(United Nation publication, Sales No. E.87.V.10), chap. XXIII, “Variationclauses”.


Given the usually long duration of infrastructure projects,there is a possibility that such provisions and requirementsmay need to be changed during the life of the project agree-ment. It is important, however, to bear in mind the privatesector’s need for a stable and predictable regulatory frame-work. Changes in regulations or the frequent introductionof new and stricter rules may have a disruptive impact onthe implementation of the project and compromise its fi-nancial viability. Therefore, while contractual arrange-ments may be agreed to by the parties to counter the ad-verse effects of subsequent regulatory changes (see paras.122-125), regulatory agencies would be well advised toavoid excessive regulation or unreasonably frequentchanges in existing rules.

1. Performance standards

82. Public service providers generally have to meet a setof technical and service standards. Such standards are inmost cases too detailed to figure in legislation and may beincluded in implementing decrees, regulations or other in-struments. Service standards are often spelled out in greatdetail in the project agreement. They include quality stand-ards, such as requirements with respect to water purity andpressure; ceilings on the length of time to perform repairs;ceilings on the number of defects or complaints; timelyperformance of transport services; continuity in supply; andhealth, safety and environmental standards. Legislationmay, however, impose the basic principles that will guidethe establishment of detailed standards or require compli-ance with international standards.

83. The contracting authority typically retains the powerto monitor the adherence of the project company to theregulatory performance standards. The concessionaire willbe interested in avoiding as much as possible any interrup-tion in the operation of the facility and in protecting itselfagainst the consequences of any such interruption. It willseek assurances that the exercise by the contracting author-ity of its monitoring or regulatory powers does not causeundue disturbance or interruption in the operation of thefacility and that it does not result in undue additional coststo the concessionaire.

2. Extension of services

84. In some legal systems, an entity operating under agovernmental concession to provide certain essential serv-ices such as electricity or potable water to a community orterritory and its inhabitants is held to assume an obligationto provide a service system that is reasonably adequate tomeet the demand of the community or territory. That obli-gation often relates not only to the historical demand at thetime the concession was awarded, but implies an obligationto keep pace with the growth of the community or territoryserved and gradually to extend the system as may be re-quired by the reasonable demand of the community or ter-ritory.

85. In some legal systems, the obligation has the nature ofa public duty that may be invoked by any resident of the

relevant community or territory. In other legal systems, ithas the nature of a statutory or contractual obligation thatmay be enforced by the contracting authority or by a regu-latory agency, as the case may be. In some legal systems,this obligation is not absolute and unqualified. The conces-sionaire’s duty to extend its service facilities may indeeddepend upon various factors, such as the need and cost ofthe extension and the revenue that may be expected as aresult of the extension; the concessionaire’s financial situ-ation; the public interest in effecting such an extension; andthe scope of the obligations assumed by the concessionairein that regard under the project agreement. In some legalsystems, the concessionaire may be under an obligation toextend its service facilities even if the particular extensionis not immediately profitable or even if, as a result of theextensions being carried out, the concessionaire’s territorymight eventually include unprofitable areas. That obliga-tion is nevertheless subject to some limits, since the conces-sionaire is not required to carry out extensions that place anunreasonable burden on it or its customers. Depending onthe particular circumstances, the cost of carrying out exten-sions of service facilities may be absorbed by the conces-sionaire, passed on to the customers or end users in theform of tariff increases or extraordinary charges or ab-sorbed in whole or in part by the contracting authority orother public authority by means of subsidies or grants.Given the variety of factors that may need to be taken intoaccount in order to assess the reasonableness of any par-ticular extension, the project agreement should define thecircumstances under which the concessionaire may be re-quired to carry out extensions in its service facilities andthe appropriate methods for financing the cost of any suchextension.

3. Continuity of service

86. Another obligation of public service providers is toensure the continuous provision of the service under mostcircumstances, except for narrowly defined exemptingevents (see also paras. 132-134). In some legal systems,that obligation has the nature of a statutory duty that ap-plies even if it is not expressly stated in the project agree-ment. The corollary of that rule, in legal systems where itexists, is that various circumstances under general princi-ples of contract law might authorize a contract party tosuspend or discontinue the performance of its obligations,such as economic hardship or breach by the other party,cannot be invoked by the concessionaire as grounds forsuspending or discontinuing, in whole or in part, the provi-sion of a public service. In some legal systems, the con-tracting authority may even have special enforcement pow-ers to compel the concessionaire to resume providingservice in the event of unlawful discontinuance.

87. That obligation, too, is subject to a general rule ofreasonableness. Various legal systems recognize the con-cessionaire’s right to fair compensation for having to de-liver the service under situations of hardship (see paras.126-130). Moreover, in some legal systems, it is held thata public service provider may not be required to operatewhere its overall operation results in a loss. Where thepublic service as a whole, and not only one or more of its


branches or territories, ceases being profitable, the conces-sionaire may have the right to direct compensation by thecontracting authority or, alternatively, the right to terminatethe project agreement. However, termination typically re-quires the consent of the contracting authority or a judicialdecision. In legal systems that allow such a solution, it isadvisable to clarify in the project agreement which extraor-dinary circumstances would justify the suspension of theservice or even release the concessionaire from its obliga-tions under the project agreement (see also chap. V, “Du-ration, extension and termination of the project agreement”,___).

4. Equal treatment of customers or users

88. Entities that provide certain services to the generalpublic are, in some jurisdictions, under a specific obligationto ensure the availability of the service under essentially thesame conditions to all users and customers falling withinthe same category. However, differentiation based on areasonable and objective classification of customers andusers is accepted in those legal systems as long as likecontemporaneous service is rendered to consumers andusers engaged in like operations under like circumstances.It may thus not be inconsistent with the principle of equaltreatment to charge different prices or to offer differentaccess conditions to different categories of users (for exam-ple, domestic consumers, on the one hand, and business orindustrial consumers, on the other), provided that the dif-ferentiation is based on objective criteria and correspondsto actual differences in the situation of the consumers or theconditions under which the service is provided to them.Nevertheless, where a difference in charges or other condi-tions of service is based on actual differences in service(such as higher charges for services provided at hours ofpeak consumption), it typically has to be commensuratewith the amount of difference.

89. In addition to differentiation established by the con-cessionaire itself, different treatment of certain users orcustomers may be the result of legislative action. In manycountries, the law requires that specific services must beprovided at particularly favourable terms to certain catego-ries of users and customers, such as discounted transportfor schoolchildren or senior citizens, or reduced water orelectricity rates for lower-income or rural users. Publicservice providers may recoup these service burdens or costsin several ways, including through government subsidies,through funds or other official mechanisms created to sharethe financial burden of these obligations among all publicservice providers or through internal cross-subsidies frommore profitable services (see chap. II, “Project risks andgovernment support”, paras. 42-44).

5. Interconnection and accessto infrastructure networks

90. Companies operating infrastructure networks in sec-tors such as railway transport, telecommunications orpower or gas supply are sometimes required to allow other

companies to have access to the network. That requirementmay be stated in the project agreement or in sector-specificlaws or regulations. Interconnection and access require-ments have been introduced in certain infrastructure sectorsas a complement to reforms in the structure of a givensector; in others, they have been adopted to foster compe-tition in sectors that remained fully or partially integrated(for a brief discussion of market structure issues, see “In-troduction and background information”, paras. 21-46).

91. Network operators are often required to provide ac-cess on terms that are fair and non-discriminatory from afinancial as well as a technical point of view. Non-discrimi-nation implies that the new entrant or service providershould be able to use the infrastructure of the networkoperator on conditions that are not less favourable thanthose granted by the network operator to its own servicesor to those of competing providers. It should be noted,however, that many pipeline access regimes, for example,do not require completely equal terms for the carrier andrival users. The access obligation may be qualified in someway. It may, for instance, be limited to spare capacity onlyor be subject to reasonable, rather than equal, terms andconditions.

92. While access pricing is usually cost-based, regulatoryagencies often retain the right to monitor access tariffs toensure that they are high enough to give adequate incentiveto invest in the required infrastructure and low enough toallow new entrants to compete on fair terms. Where thenetwork operator provides services in competition withother providers, there may be requirements that its activi-ties be separated from an accounting point of view in orderto determine the actual cost of the use by third parties ofthe network or parts of it.

93. Technical access conditions may be equally importantand network operators may be required to adapt their net-work to satisfy the access requirements of new entrants.Access may be to the network as a whole or to monopolis-tic parts or segments of the network (sometimes also re-ferred to as bottleneck or essential facilities). Many govern-ments allow service providers to build their owninfrastructure or to use alternative infrastructure whereavailable. In such cases, the service provider may onlyneed access to a small part of the network and cannot,under many regulations, be forced to pay more than thecost corresponding to the use of the specific facility itneeds, such as the local telecommunications loop, transmis-sion capacity for the supply of electricity or the use of atrack section of railway.

6. Disclosure requirements

94. Many domestic laws impose on public service provid-ers an obligation to provide to the regulatory agency accu-rate and timely information on their operations and to grantit specific enforcement rights. The latter may encompassinquiries and audits, including detailed performance andcompliance audits, sanctions for non-cooperative compa-nies and injunctions or penalty procedures to enforce dis-closure.


95. Public service providers are normally required tomaintain and disclose to the regulatory agency their finan-cial accounts and statements and to maintain detailed costaccounting allowing the regulatory agency to track variousaspects of the company’s activities separately. Financialtransactions between the concessionaire company and af-filiated companies may also require scrutiny, as conces-sionaire companies may try to transfer profits to non-regu-lated businesses or foreign affiliates. Infrastructureoperators may also have detailed technical and perform-ance reporting requirements. As a general rule, however, itis important to define reasonable limits to the extent andtype of information that infrastructure operators are re-quired to submit. Furthermore, appropriate measuresshould be taken to protect the confidentiality of any propri-etary information that the concessionaire and its affiliatedcompanies may submit to the regulatory agency.

7. Enforcement powers of the concessionaire

96. In countries with a well-established tradition ofawarding concessions for the provision of public services,the concessionaire may have the power to establish rulesdesigned to facilitate the provision of the service (such asinstructions to users or safety rules), take reasonable meas-ures to ensure compliance with those rules and suspend theprovision of service for emergency or safety reasons. Forthat purpose, general legislative authority, or even case-by-case authorization from the legislature, may be required inmost legal systems. The extent of powers given to the con-cessionaire is usually defined in the project agreement,however, and may not need to be provided in detail inlegislation. It may be advisable to provide that the rulesissued by the concessionaire become effective upon ap-proval by the regulatory agency or the contracting author-ity, as appropriate. However, the right to approve operatingrules proposed by the concessionaire should not be arbi-trary and the concessionaire should have the right to appeala decision to refuse approval of the proposed rules (see alsochap. I, “General legislative and institutional framework”,paras. 49 and 50).

97. Of particular importance for the concessionaire is thequestion whether the provision of the service may be dis-continued because of default or non-compliance by its us-ers. Despite the concessionaire’s general obligation to en-sure the continuous provision of the service (see paras. 86and 87), many legal systems recognize that entities provid-ing public services may establish and enforce rules thatprovide for shutting off of the service for a consumer oruser who has defaulted in payment for it or who has seri-ously infringed the conditions for using it. The power to doso is often regarded as crucial in order to prevent abuse andensure the economic viability of the service. However,given the essential nature of certain public services, thatpower may require legislative authority in some legal sys-tems. Furthermore, there may be a number of expressed orimplied limitations upon or conditions for the exercise ofthat power, such as special notice requirements and specificconsumer remedies. Additional limitations and conditionsmay derive from the application of general consumer pro-tection rules (see chap. VII, “Other relevant areas of law”,___).

J. GENERAL CONTRACTUAL ARRANGEMENTS

98. This section discusses selected contractual arrange-ments that typically appear in project agreements in varioussectors and are often reflected in standard contract clausesused by domestic contracting authorities. Although essen-tially contractual in nature, the arrangements discussed inthis section may have some important implications for thelegislation of the host country, according to its particularlegal system.

1. Subcontracting

99. Given the complexity of infrastructure projects, theconcessionaire typically retains the services of one or moreconstruction contractors to perform some or the bulk of theconstruction work under the project agreement. The conces-sionaire may also wish to retain the services of contractorswith experience in the operation and maintenance of infra-structure during the operational phase of the project. The lawsof some countries generally acknowledge the concession-aire’s right to enter into contracts as needed for the executionof the construction work. A legislative provision recognizingthe concessionaire’s authority to subcontract may be particu-larly useful in countries where there are limitations to theability of government contractors to subcontract.

(a) Choice of subcontractors

100. The concessionaire’s freedom to hire subcontractorsis in some countries restricted by rules that prescribe theuse of tendering and similar procedures for the award ofsubcontracts by public service providers. Such statutoryrules have often been adopted when infrastructure facilitieswere primarily or exclusively operated by the Government,with little or only marginal private sector investment. Thepurpose of such statutory rules is to ensure economy, effi-ciency, integrity and transparency in the use of publicfunds. However, in the case of privately financed infra-structure projects, such provisions may discourage the par-ticipation of potential investors, since the project sponsorstypically include engineering and construction companiesthat participate in the project in the expectation that theywill be given the main contracts for the execution of theconstruction and other work.

101. The concessionaire’s freedom to select its subcon-tractors is not unlimited, however. In some countries, theconcessionaire has to identify in its proposal which con-tractors will be retained, including information on theirtechnical capability and financial standing. Other countrieseither require that such information be provided at the timethe project agreement is concluded or subject such con-tracts to prior review and approval by the contracting au-thority. The purpose of such provisions is to avoid possibleconflicts of interest between the project company and itsshareholders, a point that would normally also be of inter-est to the lenders, who may wish to ensure that the projectcompany’s contractors are not overpaid. In any event, if itis deemed necessary for the contracting authority to havethe right to review and approve the project company’s sub-contracts, the project agreement should clearly define thepurpose of such review and approval procedures and the


circumstances under which the contracting authority’s ap-proval may be withheld. As a general rule, approval shouldnot normally be withheld unless the subcontracts are foundto contain provisions manifestly contrary to the public in-terest (for example, provisions for excessive payments tosubcontractors or unreasonable limitations of liability) orcontrary to mandatory rules having the nature of public lawthat apply to the execution of privately financed infrastruc-ture projects in the host country.

(b) Governing law

102. It is common for the concessionaire and its contrac-tors to choose a law that is familiar to them and that in theirview adequately governs the issues addressed in their con-tracts. Depending upon the type of contract, different issuesconcerning the governing law clause will arise. For example,equipment supply and other contracts may be entered intowith foreign companies and the parties may wish to choosea law known to them as providing, for example, an adequatewarranty regime for equipment failure or non-conformity ofequipment. In turn, the concessionaire may agree to theapplication of the laws of the host country in connectionwith contracts entered into with local customers.

103. Domestic laws specific to privately financed infra-structure projects seldom contain provisions concerning thelaw governing the contracts entered into by the concession-aire. In fact, most countries have found no compelling rea-son for making specific provisions concerning the law gov-erning the contracts between the concessionaire and itscontractors and have preferred to leave the question to achoice-of-law clause in their contracts or to the applicablerules of private international law. It should be noted, how-ever, that the freedom to choose the applicable law forcontracts and other legal relationships is in some legal sys-tems subject to conditions and restrictions pursuant to rulesof private international law or certain rules of public law ofthe host country. For instance, States parties to some re-gional economic integration agreements are obliged to enactharmonized provisions of private international law dealing,inter alia, with contracts between public service providersand their contractors. While rules of private internationallaw often allow considerable freedom to choose the lawgoverning commercial contracts, that freedom is in somecountries restricted for contracts and legal relationships thatare not qualified as commercial, such as, for instance, certaincontracts entered into by public authorities of the host coun-try (for example, guarantees and assurances by the Govern-ment, power purchase or fuel supply commitments by apublic authority) or contracts with consumers.

104. In some cases, provisions have been included in domesticlegislation for the purpose of clarifying, as appropriate, that thecontracts entered into between the concessionaire and its contrac-tors are governed by private law and that the contractors are notagents of the contracting authority. A provision of that type may insome countries have a number of practical consequences, such as nosubsidiary liability of the contracting authority for the acts of thesubcontractors or No obligation on the part of the responsible publicentity to pay worker’s compensation for work-related illness, injuryor death to the subcontractors’ employees.

2. Liability with respect to users and third parties

105. Defective construction or operation of an infrastruc-ture facility may result in the death of or personal injury toemployees of the concessionaire, users of the facility orother third parties or in damage to their property. The is-sues concerning damages to be paid to third parties in suchcases are complex and may be governed not by rules of thelaw applicable to the project agreement governing contrac-tual liability, but rather by applicable legal rules governingextra-contractual liability, which are often mandatory.Also, in some legal systems, there are special mandatoryrules governing the extra-contractual liability of publicauthorities to which the contracting authority may be sub-ject. Moreover, the project agreement cannot limit the li-ability of the concessionaire or the contracting authority tocompensate third parties who are not parties to the projectagreement. It is therefore advisable for the contracting au-thority and the concessionaire to provide for the internalallocation of risks between them as regards damages to bepaid to third parties due to death, personal injury or damageto their property, to the extent that this allocation is notgoverned by mandatory rules. It is also advisable for theparties to provide for insurance against such risks (seeparas. 119 and 120).

106. If a third party suffers personal injury or damage toits property as a result of the construction or operation ofthe facility and brings a claim against the contracting au-thority, the law may provide that the concessionaire aloneshould bear any responsibility in that regard and that con-tracting authority should not bear any liability as regardssuch third party claims, except where the damage wascaused by the serious default or recklessness of the con-tracting authority. It may be useful to provide, in particular,that the mere approval of the design or specification of thefacility by the contracting authority or its acceptance of theconstruction works or final authorization for the operationof the facility or its use by the public does not entail theassumption by the contracting authority of any liability fordamage sustained by users of the facility or other thirdparties arising out of the construction or operation of thefacility or the inadequacy of the approved design or speci-fications. Moreover, since provisions on the allocation ofliability may not be enforceable against third parties underthe applicable law, it may be advisable for the projectagreement to provide that the contracting authority shouldbe protected and indemnified in respect of compensationclaims brought by third parties who sustain injury or dam-age to their property resulting from the construction or op-eration of the infrastructure facility.

107. The project agreement should also provide that theparties should inform each other of any claim or proceed-ings or anticipated claims or proceedings against them inrespect of which the contracting authority is entitled to beindemnified and give reasonable assistance to one anotherin the defence of such claims or proceedings to the extentpermitted by the law of the country where such proceed-ings are instituted.


3. Performance guarantees and insurance

108. The obligations of the concessionaire are usuallycomplemented by the provision of some form of guaranteeof performance in the event of default and insurance cov-erage against a number of risks. The law in some countriesgenerally requires that adequate guarantees of performancebe provided by the concessionaire and refer the matter tothe project agreement for further details. In other countries,the law contains more detailed provisions, for instance re-quiring the offer of a certain type of guarantee up to astated percentage of the basic investment.

(a) Types, functions and natureof performance guarantees

109. Performance guarantees are generally of two types.Under one type, the monetary performance guarantee, theguarantor undertakes only to pay the contracting authorityfunds up to a stated limit to satisfy the liabilities of theconcessionaire in the event of the latter’s failure to per-form. Monetary performance guarantees may take the formof a contract bond, a stand-by letter of credit or an on-demand guarantee. Under the other type of guarantee, theperformance bond, the guarantor chooses one of two op-tions: (a) to rectify defective or finish incomplete construc-tion itself; or (b) to obtain another contractor to rectifydefective or finish incomplete construction and compensatethe contracting authority for losses caused by the failure toperform. The value of such an undertaking is limited to astated amount or a certain percentage of the contract value.Under a performance bond, the guarantor also frequentlyreserves the option to discharge its obligations solely by thepayment of money to the contracting authority. Perform-ance bonds are generally furnished by specialized guaran-tee institutions, such as bonding and insurance companies.A special type of performance bond is the maintenancebond, which protects the contracting authority against fu-ture failures that could arise during the start-up or mainte-nance period and serve as guarantee that any repair ormaintenance work during the post-completion warrantyperiod will be duly carried out by the concessionaire.

110. As regards their nature, performance guarantees maybe generally divided into independent guarantees and ac-cessory guarantees. A guarantee is said to be “independent”if the guarantor’s obligation is independent from the con-cessionaire’s obligations under the project agreement. Un-der an independent guarantee (often called a first-demandguarantee) or a stand-by letter of credit, the guarantor orissuer is obligated to make payment on demand by thebeneficiary and the latter is entitled to recover under theinstrument if it presents the document or documents stipu-lated in the terms of the guarantee or stand-by letter ofcredit. Such a document might be simply a statement by thebeneficiary that the contractor has failed to perform. Theguarantor or issuer is not entitled to withhold payment onthe ground that there has in fact been no failure to performunder the main contract; however, under the law applicableto the instrument, payment may in very exceptional andnarrowly defined circumstances be refused or restrained

(for example, when the claim by the beneficiary is mani-festly fraudulent). In contrast, a guarantee is accessorywhen the obligation of the guarantor involves more thanthe mere examination of a documentary demand for pay-ment in that the guarantor may have to evaluate evidenceof liability of the contractor for failure to perform under theworks contract. The nature of the link may vary under dif-ferent guarantees and may include the need to prove thecontractor’s liability in arbitral proceedings. By their na-ture, performance bonds have an accessory character to theunderlying contract.

(b) Advantages and disadvantages of various typesof performance guarantee

111. From the perspective of the contracting authority,monetary performance guarantees may be particularly use-ful in covering additional costs that may be incurred by thecontracting authority as a result of delay or default by theconcessionaire. Monetary performance guarantees may alsoserve as an instrument to put pressure on the concessionaireto complete construction in time and to perform its otherobligations in accordance with the requirements of theproject agreement. However, the amount of those guaran-tees is typically only a fraction of the economic value ofthe obligation guaranteed and is usually not sufficient tocover the cost of engaging a third party to perform insteadof the concessionaire or its contractors.

112. From the perspective of the contracting authority, afirst-demand guarantee has the advantage of assuringprompt recovery of funds under the guarantee, without evi-dence of failure to perform by the contractor or of theextent of the beneficiary’s loss. Furthermore, guarantorsfurnishing monetary performance guarantees, in particularbanks, prefer first-demand guarantees, as the conditions areclear as to when their liability to pay accrues, and the guar-antors will thus not be involved in disputes between thecontracting authority and the concessionaire as to whetheror not there has been a failure to perform under the projectagreement. Another advantage for a bank issuing a first-demand guarantee is the possibility of quick and efficientrecovery of the sums paid under a first-demand guaranteeby direct access to the concessionaire’s assets.

113. A disadvantage to the contracting authority of afirst-demand guarantee or a stand-by letter of credit is thatthose instruments may increase the overall project costs,since the concessionaire is usually obliged to obtain and setaside large counter-guarantees in favour of the institutionsissuing the first-demand guarantee or the stand-by letter ofcredit. Also, a concessionaire that furnishes such a guaran-tee may wish to take out insurance against the risk of re-covery by the contracting authority under the guarantee orthe stand-by letter of credit when there has been in fact nofailure to perform by the concessionaire and the cost of thatinsurance is included in the project cost. The concession-aire also may include in the project cost the potential costsof any action that it may need to institute against the con-tracting authority to obtain the repayment of the sum im-properly claimed.


114. A disadvantage to the concessionaire of a first-de-mand guarantee or a stand-by letter of credit is that, if thereis recovery by the contracting authority when there hasbeen no failure to perform by the concessionaire, the lattermay suffer immediate loss if the guarantor or the issuer ofthe letter of credit reimburses itself from the assets of theconcessionaire after payment to the contracting authority.The concessionaire may also experience difficulties anddelays in recovering from the contracting authority the sumimproperly claimed.

115. The terms of an accessory guarantee usually requirethe beneficiary to prove the failure of the contractor toperform and the extent of the loss suffered by the benefi-ciary. Furthermore, the defences available to the debtor ifit is sued for a failure to perform are also available to theguarantor. Accordingly, there is a risk that the contractingauthority may face a protracted dispute when it makes aclaim under the bond. In practice, this risk may be reduced,for instance, if the submission of claims under the terms ofthe bond is subject to a procedure such as that provided inarticle 7 (j)(i) of the Uniform Rules on Contract Bonds,drawn up by the International Chamber of Commerce.2

Article 7 (j)(i) of the Uniform Rules provides that notwith-standing any dispute or difference between the principaland the beneficiary in relation to the performance of thecontract or any contractual obligation, a default for thepurposes of payment of a claim under a contract bond shallbe deemed to be established upon issue of a certificate ofdefault by a third party (who may without limitation be anindependent architect or engineer or referee) if the bond soprovides and the service of such a certificate or a certifiedcopy thereof upon the guarantor. Where such a procedureis adopted, the contracting authority may be entitled toobtain payment under the contract bond even though itsentitlement to that payment is disputed by the concession-aire.

116. As a reflection of the lesser risk borne by the guar-antor, the monetary limit of liability of the guarantor maybe considerably higher than under a first-demand guaran-tee, thus covering a larger percentage of work under theproject agreement. A performance bond may also be ad-vantageous if the contracting authority cannot convenientlyarrange for the rectification of faults or completion of con-struction itself and requires the assistance of a third party toarrange for rectification or completion. Where, however,the construction involves the use of a technology knownonly to the concessionaire, rectification or completion by athird person may not be feasible and a performance bondmay not have the last-mentioned advantage over a mon-etary performance guarantee. For the concessionaire, acces-sory guarantees have the advantage of preserving the con-cessionaire’s borrowing power, since accessory guarantees,unlike first-demand guarantees and stand-by letters ofcredit, do not affect the concessionaire’s line of credit withthe lenders.

117. It flows from the above considerations that differenttypes of guarantees may be useful in connection with the

various obligations assumed by the concessionaire. While itis useful to require the concessionaire to provide adequateguarantees of performance, it is advisable to leave it to theparties to determine the extent to which guarantees areneeded and which guarantees should be provided in respectof the various obligations assumed by the concessionaire,rather than requiring in the law only one form of guaranteeto the exclusion of others. It should be noted that theproject company itself will require a series of performanceguarantees to be provided by its contractors (see para. 6)and that additional guarantees to the benefit of the contract-ing authority usually increase the overall cost and complex-ity of a project. In some countries, practical guidance pro-vided to domestic contracting authorities advises them toconsider carefully whether and under what circumstancessuch guarantees are required, which specific risks or lossthey should cover and which type of guarantee is bestsuited in each case. The ability of the project company toraise finance for the project may be jeopardized by bondrequirements set at an excessive level.

118. One particular problem of privately financed infra-structure projects concerns the duration of the guarantee.The contracting authority may have an interest in obtainingguarantees of performance that remain valid during theentire life of the project, covering both the construction andthe operational phase. However, given the long duration ofinfrastructure projects and the difficulty in evaluating thevarious risks that may arise, it may be problematic for theguarantor to issue a performance bond for the whole dura-tion of the project or to procure reinsurance for its obliga-tions under the performance bond. In practice, this problemis compounded by stipulations that the non-renewal of aperformance bond constitutes a reason for a call on thebond, so that merely allowing the project company to pro-vide bonds for shorter periods may not be a satisfactorysolution. One possible solution, used in some countries, isto require separate bonds for the construction and the op-eration phase, thus allowing for better assessment of risksand reinsurance prospects. Such a system may be enhancedby defining in precise terms the risk to be covered duringthe operation period, thus allowing for a better assessmentof risks and a reduction of the total amount of the bond.Another possibility to be considered by the contractingauthority may be to require the provision of performanceguarantees during specific crucial periods, rather than forthe entire duration of the project. For instance, a bondmight be required during the construction phase and last foran appropriate period beyond completion, so as to coverpossible latent defects. Such a bond might then be replacedby a performance bond for a certain number of years ofoperation, as appropriate in order for the project companyto demonstrate its capability to operate the facility in ac-cordance with the required standards. If the project compa-ny’s performance proves to be satisfactory, the bond re-quirement might be waived for the remainder of theoperation phase, up to a certain period before the end of theconcession term, when the project company might be re-quired to place another bond to guarantee its obligations inconnection with the handing over of assets and other meas-ures for the orderly wind-up of the project, as appropriate(see chap. V, “Duration, extension and termination of theproject agreement”, ___).

2The text of the Uniform Rules on Contract Bonds is reproduced indocument A/CN.9/459/Add.1.


(c) Insurance arrangements

119. Insurance arrangements made in connection withprivately financed infrastructure projects typically vary ac-cording to the phase to which they apply, with certain typesof insurance only being purchased during a particularproject phase. Some forms of insurance, such as businessinterruption insurance, may be purchased by the conces-sionaire in its own interest, while other forms of insurancemay be a requirement under the laws of the host country.Forms of insurance often required by law include insurancecoverage against damage to the facility, third-party liabilityinsurance, workers’ compensation insurance and pollutionand environmental damage insurance.

120. Mandatory insurance policies under the laws of thehost country often need to be obtained from a local insur-ance company or from another institution admitted to op-erate in the country, which in some cases may pose anumber of practical difficulties. In some countries, the typeof coverage usually offered may be more limited than thestandard coverage available on the international market, inwhich case the concessionaire may remain exposed to anumber of perils that may exceed its self-insurance capac-ity. That risk is particularly serious in connection withenvironmental damage insurance. Further difficulties mayarise in some countries as a result of limitations on theability of local insurers to reinsure the risks on the interna-tional insurance and reinsurance markets. As a conse-quence, the project company may often need to procureadditional insurance outside the country, thus adding to theoverall cost of financing the project.

4. Changes in conditions

121. Privately financed infrastructure projects normallylast for a long period of time, during which many circum-stances relevant to the project may change. The impact ofmany changes may be automatically covered in the projectagreement, either through financial arrangements such as atariff structure that includes an indexation clause (see paras.39-46), or by the assumption by either party, expressly orby exclusion, of certain risks (for example, if the price offuel or electricity supply is not taken into account in theindexation mechanisms, then the risk of higher than ex-pected prices is absorbed by the concessionaire). However,there are changes that might not lend themselves easily toinclusion in an automatic adjustment mechanism or that theparties may prefer to exclude from such a mechanism.From a legislative perspective, two particular categoriesdeserve special attention: legislative or regulatory changesand unexpected changes in economic conditions.

(a) Legislative and regulatory changes

122. Given the long duration of privately financed infra-structure projects, the concessionaire may face additionalcosts in meeting its obligations under the project agreement

because of future, unforeseen changes in legislation apply-ing to its activities. In extreme cases, legislation could evenmake it financially or physically impossible for the conces-sionaire to carry on with the project. For the purpose ofconsidering the appropriate solution for dealing with legis-lative changes, it may be useful to distinguish between leg-islative changes having a particular incidence on privatelyfinanced infrastructure projects or on one specific project,on the one hand, and general legislative changes affectingother economic activities also, and not only infrastructureoperation, on the other hand.

123. All business organizations, in the private and publicsectors alike, are subject to changes in law and generallyhave to deal with the consequences that such changes mayhave for business, including the impact of changes on theprice of or demand for their products. Possible examplesmight include changes in the structure of capital allowancesthat apply to entire classes of assets, whether owned by thepublic or private sector and whether related to infrastruc-ture projects or not; regulations that affect the health andsafety of construction workers on all construction projects,not just infrastructure projects; and changes in the regula-tions on the disposal of hazardous substances. Generalchanges in law may be regarded as an ordinary businessrisk rather than a risk specific to the concessionaire’s ac-tivities and it may be difficult for the Government to under-take to protect infrastructure operators from the economicand financial consequences of changes in legislation thataffect other business organizations equally. Thus, theremay not be a prima facie reason why the concessionaireshould not bear the consequences of general legislativerisks, including the risk of costs arising from changes inlaw applying to the whole business sector.

124. Nevertheless, it is important to take into accountpossible limitations in the concessionaire’s capacity to re-spond to or absorb cost increases that result from generallegislative changes. Infrastructure operators are often sub-ject to service standards and tariff control mechanisms thatmake it difficult for them to respond to changes in the lawin the same manner as other private companies (by increas-ing tariffs or by reducing services, for example). Wheretariff control mechanisms are provided in the project agree-ment, the concessionaire will seek to obtain assurancesfrom the contracting authority and the regulatory agency,as appropriate, that it will be allowed to recover the addi-tional costs entailed by changes in legislation by means oftariff increases. Where such an assurance cannot be given,it is advisable to empower the contracting authority to ne-gotiate with the concessionaire the compensation to whichthe concessionaire may be entitled in the event that tariffcontrol measures do not allow for full recovery of the ad-ditional costs generated by general legislative changes.

125. A different situation arises when the concessionairefaces increased costs as a result of specific legislativechanges that target the particular project, a class of similarprojects or privately financed infrastructure projects in gen-eral. Such changes cannot be regarded as an ordinary busi-ness risk and may significantly alter the economic and fi-nancial assumptions based on which the project agreementwas negotiated. Thus, the contracting authority often agreesto bear the additional cost resulting from specific legisla-


tion that targets the particular project, a class of similarprojects or privately financed infrastructure projects in gen-eral. For example, in highways projects, legislation aimedat a specified road project or road operating company, or atthat class of privately operated road projects, might resultin a tariff adjustment under the relevant provisions in theproject agreement.

(b) Changes in economic conditions

126. Some legal systems have rules that allow a revisionof the terms of the project agreement following changes inthe economic or financial conditions that, without prevent-ing the performance of a party’s contractual obligations,render the performance of those obligations substantiallymore onerous than originally foreseen at the time they wereentered into. In some legal systems, the possibility of arevision of the terms of the agreement is generally impliedin all Government contracts or is expressly provided for inthe relevant legislation.

127. The financial and economic considerations for theconcessionaire’s investment are negotiated in the light ofassumptions based on the circumstances prevailing at thetime of the negotiations and the reasonable expectations ofthe parties as to how those circumstances will evolve dur-ing the life of the project. To a certain extent, projectionsof economic and financial parameters and sometimes evena certain margin of risk, will normally be included in theformulation of the financial proposals by the bidders (seechap. III, “Selection of the concessionaire”, para. 68).However, certain events may occur that the parties couldnot reasonably have anticipated when the project agree-ment was negotiated and that, had they been taken intoaccount, would have resulted in a different risk allocationor consideration for the concessionaire’s investment. Giventhe long duration of infrastructure projects, it is importantto devise mechanisms to deal with the financial and eco-nomic impact of such events. Revision rules have beenapplied in a number of countries and have been founduseful to help parties find equitable solutions for ensuringthe continued economic and financial viability of infra-structure projects, thus averting a disruptive failure of per-formance by the concessionaire. However, revision rulesmay also have some disadvantages, in particular from theperspective of the Government.

128. As with general legislative changes, changes in eco-nomic conditions are risks to which most business organi-zations are exposed without having recourse to a generalguarantee of the Government that would protect themagainst the economic and financial effects of thosechanges. An unqualified obligation of the contracting au-thority to compensate the concessionaire for changes ofeconomic conditions may result in a reversion to the publicsector of a substantial portion of the commercial risks origi-nally allocated to the concessionaire and represent an open-ended financial liability. Furthermore, it should be notedthat the proposed tariff level and the essential elements ofrisk allocation are important, if not decisive, factors in theselection of the concessionaire. An excessively generousrecourse to renegotiation of the project may lead to unreal-

istically low proposals being submitted during the selectionprocedure in the expectation of tariff increases once theproject has been awarded. Thus, the contracting authoritymay have an interest in establishing reasonable limits forstatutory or contractual provisions authorizing revisions ofthe project agreement following changes in economic con-ditions.

129. It may be desirable to provide in the project agree-ment that a change in circumstances that justifies a revisionof the project agreement must have been beyond the con-trol of the concessionaire and of such a nature that theconcessionaire could not reasonably be expected to havetaken it into account at the time the project agreement wasnegotiated or to have avoided or overcome its conse-quences. For example, a tollroad operator holding an exclu-sive concession might not be expected to take into accountand assume the risk of traffic shortfalls brought about bythe subsequent opening of an alternative toll-free road byan entity other than the contracting authority. However, theconcessionaire would normally be expected to take intoaccount the possibility of reasonable labour cost increasesover the life of the project. Thus, under normal circum-stances, the fact that wages turned out to be higher thanexpected would not be sufficient reason for revising theproject agreement.

130. It may also be desirable to provide in the projectagreement that a request for revision of the project agree-ment requires that the alleged changes of economic andfinancial conditions amount to a certain minimum value inproportion to the total project cost or the concessionaire’srevenue. Such a rule might be useful in order to avoidcumbersome adjustment negotiations for small changesuntil the changes have accumulated to comprise a signifi-cant figure. In some countries, there are rules that establisha ceiling for the cumulative amount of periodic revisions ofthe project agreement. The purpose of such rules is to avoidthe misuse of the change mechanism as a means for achiev-ing an overall financial balance that bears no relation to theone contemplated in the original project agreement. Fromthe perspective of the concessionaire and the lenders, how-ever, such limitations may represent exposure to consider-able risk in the event, for instance, of dramatic cost in-creases resulting from an extraordinarily radical change ofcircumstances. Therefore, both the desirability of introduc-ing a ceiling and the appropriate amount of such ceilingneed to be carefully considered.

5. Exemption provisions

131. During the life of an infrastructure project, eventsmay occur that impede the performance by a party of itscontractual obligations. The events causing such an impedi-ment are typically outside either party’s control and may beof a physical nature, such as a natural disaster, or may bethe result of human action, such as war, riots or terroristattacks. Many legal systems generally recognize that aparty that fails to perform a contractual obligation becauseof the occurrence of certain types of events may be ex-empted from the consequences of any such failure to per-form.


(a) Definition of exempting impediments

132. Exempting impediments typically include occur-rences beyond the control of a party that cause the party tobe unable to perform its obligation and that the party hasbeen unable to overcome by the exercise of due diligence.Common examples include the following: natural disasters(such as cyclones, floods, droughts, earthquakes, storms,fires or lightning); war (whether declared or not) or othermilitary activity, including riots and civil disturbance; fail-ure or sabotage of facilities, acts of terrorism, criminaldamage or the threat of such acts; radioactive or chemicalcontamination or ionizing radiation; effects of the naturalelements, including geological conditions that cannot beforeseen and resisted; and employees’ strikes of excep-tional importance.

133. Some laws make only a general reference to exempt-ing impediments, whereas other laws contain extensive listsof circumstances that excuse the parties from performanceunder the project agreement. The latter technique mayserve the purpose of ensuring a consistent treatment of thematter for all projects developed under the relevant legisla-tion, thus avoiding situations where one concessionaireobtains a more favourable allocation of risks than that pro-vided in other project agreements. However, it is importantto consider the possible disadvantages of setting forth instatutory or regulatory provisions a list of events that are tobe considered exempting impediments for all cases. Thereis a risk that the list might be incomplete, leaving out im-portant impediments. Furthermore, certain natural disasters,such as storms, cyclones and floods, may be normal condi-tions at a particular time of the year at the project site. Assuch, those natural disasters may represent risks that anypublic service provider acting in the region would be ex-pected to assume.

134. Another aspect that may need to be carefully consid-ered is whether and to what extent certain acts of publicauthorities other than the contracting authority may consti-tute exempting impediments. The concessionaire may berequired to secure a licence or other official approval forthe performance of certain of its obligations. The projectagreement might thus provide that, if the licence or ap-proval is refused, or if it is granted but later withdrawnbecause of the concessionaire’s own failure to meet therelevant criteria for the issuance of the licence or approval,the concessionaire cannot rely on the refusal as an exempt-ing impediment. However, if the licence or approval is re-fused or withdrawn for extraneous or improper motives, itwould be equitable to provide that the concessionaire mayrely on the refusal as an exempting impediment. A furtherpossibility of impediment might be an interruption of theproject brought about by a public authority or organ ofgovernment other than the contracting authority, for in-stance, because of changes in governmental plans and poli-cies that require the interruption or major revision of theproject that substantially affect the original design. In suchsituations, it may be important to consider the institutionalrelationship between the contracting authority and the pub-lic authority that brings about the impediment as well astheir degree of independence from one another. An eventclassified as an exempting impediment may in some casesamount to an outright breach of the project agreement by

the contracting authority, depending on whether the con-tracting authority could reasonably control or influence theacts of the other public authority.

(b) Consequences for the parties

135. During the construction phase, the occurrence of ex-empting impediments usually justifies an extension of thetime allowed for the completion of the facility. In that con-nection, it is important to consider the implications of anysuch extension for the overall duration of the project, inparticular where the construction phase is taken into ac-count for calculating the total concession period. Delays inthe completion of the facility reduce the operational periodand may adversely affect the global revenue estimates ofthe concessionaire and the lenders. It may therefore be ad-visable to consider under what circumstances it may bejustified to extend the concession period so as to take intoaccount possible extensions that occur during the construc-tion phase. Lastly, it is advisable to provide that, if theevent in question is of a permanent nature, the parties mayhave the option to terminate the project agreement (see alsochap. V, “Duration, extension and termination of theproject agreement”, ___).

136. Another important question is whether the conces-sionaire will be entitled to compensation for loss of rev-enue or property damage that results from the occurrenceof exempting impediments. The answer to that question isgiven by the risk allocation provided in the project agree-ment. Except for cases in which the Government providessome form of direct support, privately financed infrastruc-ture projects are typically undertaken at the concession-aire’s own risk, including the risk of losses that may resultfrom natural disasters and other exempting impediments,against which the concessionaire is usually required to pro-cure adequate insurance coverage. Thus, some laws ex-pressly exclude any form of compensation to the conces-sionaire in the event of loss or damage that results from theoccurrence of exempting impediments. It does not neces-sarily follow, however, that an event qualified as an ex-empting impediment may not, at the same time, justify arevision of the terms of the project agreement so as torestore its economic and financial balance (see also paras.126-130).

137. However, a different type of risk allocation is some-times contemplated for projects involving the constructionof facilities that are permanently owned by the contractingauthority or facilities that are required to be transferred tothe contracting authority at the end of the project period. Insome countries, the contracting authority is authorized tomake arrangements for assisting the concessionaire to re-pair or rebuild infrastructure facilities damaged by naturaldisasters or similar occurrences defined in the projectagreement, provided that the possibility of such assistancewas contemplated in the request for proposals. Sometimesthe contracting authority is authorized to agree to pay com-pensation to the concessionaire in case of an interruption ofthe work for more than a certain number of days up to amaximum time limit, if the interruption is caused by anevent for which the concessionaire is not responsible.


138. Should the concessionaire become unable to performbecause of any such impediment and should the parties failto achieve an acceptable revision of the contract, some na-tional laws authorize the concessionaire to terminate theproject agreement, without prejudice to the compensationthat might be due under the circumstances (see chap. V,“Duration, extension and termination of the project agree-ment”, ___).

139. Statutory and contractual provisions on exemptingimpediments also need to be considered in the light of otherrules governing the provision of the service concerned. Thelaw in some legal systems requires public service providersto make every effort to continue providing the service de-spite the occurrence of circumstances defined as contrac-tual impediments (see paras. 86 and 87). In those cases, itis advisable to consider the extent to which such an obliga-tion may reasonably be imposed on the concessionaire andwhat compensation may be due for the additional costs andhardship faced by it.

6. Events of default and remedies

140. Generally, there is a wide range of remedies that theparties may agree on to deal with the consequences of de-fault, culminating with termination. The following para-graphs discuss general considerations on events of defaultand remedies by either party (see paras. 141 and 142).They consider the legislative implication of certain types ofremedies intended to rectify the causes of default and pre-serve the continuity of the project, in particular the inter-vention of the contracting authority (see paras. 143-146) orthe substitution of the concessionaire (see paras. 147-150).The ultimate remedy of terminating the project agreementand the consequences that may result from termination arediscussed elsewhere in the Guide (see chap. V, “Duration,extension and termination of the project agreement”, ___).

(a) General considerations on failuresto perform and remedies

141. The remedies for default by the concessionaire typi-cally include those which are customary in construction orlong-term service contracts such as forfeiture of guarantees,contractual penalties and liquidated damages.3 In mostcases, such remedies are typically contractual in nature anddo not give rise to significant legislative considerations.Nevertheless, it is important to establish adequate proce-dures for ascertaining failures and giving opportunity forrectifying such failures. In some countries, the impositionof contractual penalties requires findings of official inspec-tions and other procedural steps, including review by seniorofficials of the contracting authority prior to the imposition

of more serious sanctions. Those procedures may be com-plemented by provisions distinguishing between defectsthat can be rectified and those which cannot, and settingdown the corresponding procedures and remedies. It isusually advisable to require that the concessionaire begiven notice requiring it to remedy the breach within asufficient period. It may also be advisable to contemplatethe payment of penalties or liquidated damages by the con-cessionaire in the event of non-performance of essentialobligations and to clarify that no penalties apply in case ofbreach of secondary or ancillary obligations and for whichother remedies may be obtained under national law. Fur-thermore, a performance monitoring system that providesfor penalties or liquidated damages may be complementedby a scheme of bonuses payable to the concessionaire forimproving over agreed terms.

142. While the contracting authority may protect itselfagainst the consequences of default by the concessionairethrough a variety of judicially enforceable contractual ar-rangements, the remedies available to the concessionairemay be subject to a number of limitations under the appli-cable law. Important limitations may derive from rules oflaw that recognize the immunity of public authorities fromjudicial suit and enforcement measures. Depending on thelegal nature of the contracting authority or of other publicauthorities that assume obligations vis-à-vis the conces-sionaire, the latter may be deprived of the possibility ofenforcing measures of execution to secure the fulfilment ofobligations entered into by those public entities (see alsochap. VI, “Settlement of disputes”, ___). This situationmakes it the more important to provide mechanisms to pro-tect the concessionaire against the consequences of defaultby the contracting authority, for example by means of gov-ernmental guarantees covering specific events of default orguarantees provided by third parties, such as multilaterallending institutions (see also chap. II, “Project risks andgovernment support”, paras. 61-71).

(b) Step-in rights for the contracting authority

143. Some national laws expressly authorize the contract-ing authority to take over temporarily the operation of thefacility, normally in case of failure to perform by the con-cessionaire, in particular where the contracting authorityhas a statutory duty to ensure the effective delivery at alltimes of the service concerned. In some legal systems, sucha prerogative is considered to be inherent in most govern-ment contracts and may be presumed to exist even withoutbeing expressly mentioned in legislation or in the projectagreement.

144. It should be noted that the contracting authority’sright to intervene, its “step-in right”, is an extreme meas-ure. Private investors may fear that the contracting author-ity may use it, or threaten to use it, in order to impose itsown desires about the way in which the service is provided,or even to get control of the project assets. It is thereforeadvisable to define as clearly as possible the circumstancesin which step-in rights can be exercised. It is important to

3For a discussion of remedies used in construction contracts for complexindustrial works, see the UNCITRAL Legal Guide on Drawing Up Contractsfor the Construction of Industrial Works, chap. XVIII, “Delay, defects andother failures to perform”.


limit the contracting authority’s right to intervene to casesof serious failure of services and not merely in case ofdissatisfaction with the concessionaire’s performance. Itmay be useful to clarify in the law that the contractingauthority’s intervention in the project is temporary and isintended to remedy a specific, urgent problem that theconcessionaire has failed to remedy. The concessionaireshould resume responsibility for service delivery once theemergency situation has been remedied.

145. The contracting authority’s ability to step in may belimited in that it may be difficult immediately to identifyand engage a subcontractor to carry out the actions that thecontracting authority is stepping in to do. Furthermore, fre-quent interventions carry a risk of the reversion to the con-tracting authority of risks that have been transferred in theproject agreement to the concessionaire. The concession-aire should not rely on the contracting authority to step into deal with a particular risk instead of handling it itself, asrequired by the project agreement.

146. It is advisable to clarify in the project agreementwhich party bears the cost of an intervention by the con-tracting authority. In most cases, the concessionaire shouldbear the costs incurred by the contracting authority whenthe intervention is caused by a performance failure attrib-utable to the concessionaire’s own fault. In some cases, toprevent disputes about liability and about the appropriatelevel of costs, the agreement may authorize the contractingauthority to take steps to remedy the problem itself andthen charge the actual cost of having done so (including itsown administrative costs) to the concessionaire. However,when such intervention takes place following the occur-rence of an exempting impediment (see paras. 131-139),the parties might agree on a different solution, dependingon how that particular risk has been allocated in the projectagreement.

(c) Step-in rights for the lendersand compulsory transfer of the concession

147. During the life of the project situations may arisewhere, because of default by the concessionaire or the oc-currence of an extraordinary event outside the concession-aire’s control, it may nevertheless be in the interest of theparties to avert termination of the project (see chap. V,“Duration, extension and termination of the project agree-ment”, ___) by allowing the project to continue under theresponsibility of a different concessionaire. The lenders,whose main security is the revenue generated by theproject, are particularly concerned about the risk of inter-ruption or termination of the project prior to repayment ofthe loans. In the event of default of or an impediment af-fecting the concessionaire, the lenders will be interested inensuring that the work will not be left incomplete and thatthe concession will be operated profitably. The contractingauthority, too, may be interested in allowing the project tobe carried out by a new concessionaire, as an alternative forhaving to take it over and continue it under its own respon-sibility.

148. Clauses allowing the lenders to select, with the con-sent of the contracting authority, a new concessionaire toperform under the existing project agreement have beenincluded in a number of recent agreements for large infra-structure projects. Such clauses are typically supplementedby a direct agreement between the contracting authorityand the lenders who are providing finance to the conces-sionaire. The main purpose of such a direct agreement is toallow the lenders to avert termination by the contractingauthority when the concessionaire is in default by substitut-ing a concessionaire that will continue to perform under theproject agreement in place of the concessionaire in default.Unlike the contracting authority’s right to intervene, whichrelates to a specific, temporary and urgent failure of theservice, lenders’ step-in rights are for cases where the con-cessionaire’s failure to provide the service is recurrent orcan reasonably be regarded as irremediable. In the experi-ence of countries that have recently made use of such directagreements, it has been found that the ability to head offtermination and provide an alternative concessionaire givesthe lenders additional security against default by the con-cessionaire. At the same time, it provides the contractingauthority an opportunity to avoid the disruption entailed byterminating the project agreement, thus maintaining conti-nuity of service.

149. However, in some countries, the implementation ofsuch clauses may face difficulties in the absence of legisla-tive authorization. The concessionaire’s inability to carryout its obligations is usually a ground for the contractingauthority to take over the operation of the facility or termi-nate the agreement (see chap. V, “Duration, extension andtermination of the project agreement”, ___). For the purposeof selecting a new concessionaire to succeed the defaultingone, the contracting authority often needs to follow the sameprocedures that applied to the selection of the original con-cessionaire and it might not be possible for the contractingauthority to agree in consultation with the lenders on engag-ing a new concessionaire that has not been selected pursuantto those procedures. On the other hand, even where thecontracting authority is authorized to negotiate with a newconcessionaire under emergency conditions, a new projectagreement might need to be entered into with the new con-cessionaire and there may be limitations to its ability toassume the obligations of its predecessor.

150. Therefore, it may be useful to acknowledge in thelaw the contracting authority’s right to enter into agree-ments with the lenders providing for the appointment, withthe consent of the contracting authority, of a new conces-sionaire to perform under the existing project agreement,when the concessionaire seriously fails to deliver the serv-ice required under the project agreement or following theoccurrence of other specified events that could justify thetermination of the project agreement. The agreement be-tween the contracting authority and the lenders should,inter alia, specify the following: the circumstances in whichthe lenders are permitted to substitute a new concession-aire; the procedures for the substitution of the concession-aire; the grounds for refusal by the contracting authority ofa proposed substitute; and the obligations of the lenders tomaintain the service at the same standards and on the sameterms as required by the project agreement.


A/CN.9/471/Add.6

Chapter V. Duration, extension and termination of the project agreement

CONTENTS

Paragraphs Page



A. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 155

B. Duration of the project agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5 155

C. Extension of the project agreement . . . . . . . . . . . . . . . . . . . . . . . . . 6-8 155

D. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-35 156

1. Termination by the contracting authority . . . . . . . . . . . . . . . . . 14-27 157

2. Termination by the concessionaire . . . . . . . . . . . . . . . . . . . . . . 28-33 159

3. Termination by either party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-35 160

E. Consequences of expiry or terminationof the project agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-62 160

1. Transfer of project-related assets . . . . . . . . . . . . . . . . . . . . . . . 37-42 160

2. Financial arrangements upon termination . . . . . . . . . . . . . . . . . 43-49 161

3. Wind-up and transitional measures . . . . . . . . . . . . . . . . . . . . . . 50-62 163


For host countries wishing to promote privately financedinfrastructure projects it is recommended that the followingprinciples should be implemented by the law:

Duration and extension of the project agreement(see paras. 2-8)

Recommendation 60. The duration of the concessionshould be specified in the project agreement.

Recommendation 61. The term of the concessionshould not be extended, except in those circumstancesspecified in the law, such as:

(a) Completion delay or interruption of operation dueto the occurrence of circumstances beyond either party’sreasonable control;

(b) Project suspension brought about by acts of thecontracting authority or other public authorities;

(c) To allow the concessionaire to recover additionalcosts arising from requirements of the contracting authoritynot originally foreseen in the project agreement that theconcessionaire would not be able to recover during thenormal term of the project agreement.

Termination of the project agreement (see paras. 9-35)

Termination by the contracting authority

Recommendation 62. The contracting authority shouldhave the right to terminate the project agreement:

(a) In the event that it can no longer be reasonablyexpected that the concessionaire will be able or willing toperform its obligations, owing to insolvency, seriousbreach or otherwise;

(b) For reasons of public interest, subject to payment ofcompensation to the concessionaire.

Termination by the concessionaire

Recommendation 63. The concessionaire should havethe right to terminate the project agreement under excep-tional circumstances specified in the law, such as:

(a) In the event of serious breach by the contractingauthority or other public authority as regards the fulfilmentof their obligations under the project agreement;

(b) In the event that the concessionaire’s performanceis rendered substantially more onerous as a result of vari-ation orders or other acts of the contracting authority, un-foreseen changes in conditions or acts of other public au-thorities and that the parties have failed to agree on anappropriate revision of the project agreement.

Termination by either party

Recommendation 64. Either party should have the rightto terminate the project agreement in the event that theperformance of its obligations is rendered impossible bythe occurrence of circumstances beyond either party’s rea-sonable control. The parties should also have the right toterminate the project agreement by mutual consent.


Consequences of expiry or termination of the projectagreement (see paras. 36-62)

Transfer of assets to the contracting authority or to anew concessionaire

Recommendation 65. The project agreement should laydown the criteria for establishing, as appropriate, the com-pensation to which the concessionaire may be entitled inrespect of assets transferred to the contracting authority orto a new concessionaire or purchased by the contractingauthority upon expiry or termination of the project agree-ment.

Financial arrangements upon termination

Recommendation 66. The project agreement shouldstipulate how compensation due to either party in the eventof termination of the project agreement is to be calculated,providing, where appropriate, for compensation for the fairvalue of works performed under the project agreement andfor losses, including lost profits.

Wind-up and transfer measures

Recommendation 67. The project agreement should setout, as appropriate, the rights and obligations of the partieswith respect to:

(a) The transfer of technology required for the opera-tion of the facility;

(b) The training of the contracting authority’s personnelor of a successor concessionaire in the operation and main-tenance of the facility;

(c) The provision, by the concessionaire, of operationand maintenance services and the supply of spare parts, ifrequired, for a reasonable period after the transfer of thefacility to the contracting authority or to a successor con-cessionaire.


A. GENERAL REMARKS

1. Most privately financed infrastructure projects are un-dertaken for a certain period, at the end of which the con-cessionaire transfers to the contracting authority the re-sponsibility for the operation of the infrastructure facility.Section B deals with elements to be taken into accountwhen establishing the concession period. Section C dealswith the question of whether and under what circumstancesthe project agreement may be extended. Section D consid-ers circumstances that may authorize the termination of theproject agreement prior to the expiry of its term. Lastly,section E deals with the consequences of the expiry or ter-mination of the project agreement, including the transfer ofproject assets and the compensation to which either partymay be entitled upon termination, and the wind-up of theproject.

B. DURATION OF THE PROJECT AGREEMENT

2. The laws of some countries contain provisions thatlimit the duration of infrastructure concessions to a certainnumber of years. Some laws establish a general limit formost infrastructure projects and special limits for projectsin particular infrastructure sectors. In some countries thereare maximum duration periods only for certain infrastruc-ture sectors.

3. The desirable duration of a project agreement maydepend on a number of factors, such as the operational lifeof the facility; the period during which the service is likelyto be required; the expected useful life of the assets asso-ciated with the project; how changeable the technologyrequired for the project is; and the time needed for theconcessionaire to repay its debts and amortize the initialinvestment. The notion of economic “amortization”, in thiscontext, refers to the gradual charging of the investmentmade against project revenue on the assumption that thefacility would have no residual value at the end of theproject term. Given the difficulty of establishing a singlestatutory limit for the duration of infrastructure projects, itis advisable to provide the contracting authority with someflexibility to negotiate, in each case, a term that is appro-priate to the project in question.

4. In some legal systems, this result is achieved by pro-visions that require that all concessions should be subject toa maximum duration period, without specifying anynumber of years. Sometimes the law only indicates whichelements are to be taken into account for determining theduration of the concession, which may include the natureand amount of investment required to be made by the con-cessionaire and the normal amortization period for the par-ticular facilities and installations concerned. Some project-or sector-specific laws provide for a combined system re-quiring that the project agreement should provide for theexpiry of the concession at the end of a certain period oronce the debts of the concessionaire have been fully repaidand a certain revenue, production or usage level has beenachieved, whichever is the earliest.

5. However, where it is found necessary to adopt statu-tory limits, the maximum period should be sufficiently longto allow the concessionaire to repay its debts fully and toachieve a reasonable profit. Furthermore, it may be usefulto authorize the contracting authority, in exceptional cases,to agree to longer concession periods, taking into accountthe amount of the investment and the required recoveringperiod, and subject to special approval procedures.

C. EXTENSION OF THE PROJECT AGREEMENT

6. In the contracting practice of some countries, the con-tracting authority and the concessionaire may agree on oneor more extensions of the concession period. More often,however, domestic laws only authorize an extension of theproject agreement under exceptional circumstances. In thiscase, upon expiry of the project agreement the contractingauthority is normally required to select a new concession-aire, normally using the same procedures applied to select


the concessionaire whose concession has expired (for adiscussion of selection procedures, see chap. III, “Selectionof the concessionaire”).

7. A number of countries have found it useful to requirethat exclusive concessions be rebid from time to time ratherthan freely extended by the parties. Periodic rebidding maygive the concessionaire strong performance incentives. Theperiod between the initial award and the first (and subse-quent) rebidding should take into account the level of in-vestment and other risks faced by the concessionaire. Forexample, for solid waste collection concessions not requir-ing heavy fixed investments, the periodicity may be rela-tively short (three to five years, for example), whereaslonger periods may be desirable for power or water distri-bution concessions. In most countries, rebidding coincideswith the end of the project term, but in others a concessionmay be granted for a long period (say 99 years), with pe-riodic rebidding (for instance, every 10 or 15 years). In thelatter mechanism, which has been adopted in a few coun-tries, the first rebidding occurs before the concessionairehas fully recouped its investments. As an incentive to theincumbent operator, some laws provide that the conces-sionaire may be given preference over other bidders in theaward of subsequent concessions for the same activity.However, the concessionaire may have rights to compensa-tion if it does not win the next bidding round, in which caseall or part of the bidding proceeds may revert to the incum-bent concessionaire. Requiring that the winning biddershould pay off the incumbent concessionaire for anyproperty rights and for the investment not yet recoveredreduces the longer-term risk faced by investors and lendersand provides them a valuable exit option (see paras. 39and 40).

8. Notwithstanding the above, it is advisable not to ex-clude entirely the option to negotiate an extension of theconcession period under certain specified circumstances.The duration of an infrastructure project is one of the mainfactors taken into account in the negotiation of financialarrangements and has a direct impact on the price of theservices provided by the concessionaire. The parties mayfind that an extension of the project agreement (as a sub-stitute for or combined with other compensation mecha-nisms) may be a useful option to deal with unexpectedimpediments or other changes of circumstances arisingduring the life of the project. Such circumstances may in-clude any of the following: extension to compensate forproject suspension or loss of profit due to the occurrence ofimpeding events (see chap. IV, “Construction and opera-tion of infrastructure”, paras. 131-139); extension to com-pensate for project suspension brought about by the con-tracting authority or other public authorities (see chap. IV,“Construction and operation of infrastructure”, paras. 140and 141); or extension to allow the concessionaire to re-cover the cost of additional work required to be done on thefacility and which the concessionaire would not be able torecover during the normal term of the project agreementwithout unreasonable tariff increases (see chap. IV, “Con-struction and operation of infrastructure”, paras. 73-76).For purposes of transparency and accountability, in somecountries the extension of the concession period is subjectto a global cumulative limit or requires the approval of aspecially designated public authority.

D. TERMINATION

9. The grounds for termination of the project agreementbefore the expiry of its term and the consequences of anysuch termination are often dealt with in domestic legisla-tion. Usually the law authorizes the parties to terminate theproject agreement following the occurrence of certain typesof events. The main interest of all parties involved in aprivately financed infrastructure project is to ensure thesatisfactory completion of the facility and the continuousand orderly provision of the relevant public service. Giventhe serious consequences of termination, as provision of theservice may be interrupted or even discontinued, termina-tion should under most circumstances be regarded as ameasure of last resort. The conditions for the exercise ofthis right by either party should be carefully considered.While they may not need to be identical, it is generallydesirable to achieve a broadly equitable balance of rightsand conditions regarding termination for both parties.

10. In addition to identifying the circumstances or typesof events that may give rise to a termination right, it isadvisable for the parties to consider appropriate proceduresto establish whether there are valid grounds for terminatingthe project agreement. Of particular importance is the ques-tion whether the project agreement may be unilaterally ter-minated or whether termination requires a decision by ajudicial or other dispute settlement body.

11. The concessionaire is usually not allowed to terminatethe project agreement without cause and in some legalsystems termination by the concessionaire even in the eventof breach by the contracting authority requires a final judi-cial decision. However, in some countries, pursuant to rulesapplicable to contracts with government entities, such aright may be exercised by public authorities, subject topayment of compensation to the concessionaire. In othercountries, however, an exception is made in the case ofpublic service concessions, whose contractual nature isfound to be incompatible with unilateral termination rights.Lastly, some legal systems do not recognize unilateral ter-mination rights for public authorities. However, projectpromoters and lenders would be concerned about the riskof premature or unjustified termination by the contractingauthority, even where a decision to terminate might besubject to review through the dispute settlement mecha-nism. It should also be noted that giving the contractingauthority the unilateral right to terminate the project agree-ment would not be an adequate substitute for well-designedcontractual mechanisms of performance monitoring or forappropriate guarantees of performance (see chap. IV,“Construction and operation of infrastructure”, paras.80-97 and 108-120).

12. Provisions concerning termination should therefore bebrought into line with the remedies for breach provided inthe project agreement. In particular, it is useful to distin-guish the conditions for termination from those for step-inby the contracting authority (see chap. IV, “Constructionand operation of infrastructure”, paras. 143-146). It is alsoimportant to consider the contracting authority’s termina-tion rights against the background of the financing agree-ments negotiated by the concessionaire with its lenders. In


most cases, events that may lead to the termination of theproject agreement would also constitute events of defaultunder the loan agreements, with the consequence that theentire outstanding debt of the concessionaire may fall dueimmediately. It would thus be useful to attempt to avoid therisk of termination by allowing the lenders to propose an-other concessionaire when termination of the project agree-ment with the original concessionaire appears imminent(see chap. IV, “Construction and operation of infrastruc-ture”, paras. 108-120).

13. In the light of the above, it is generally advisable toprovide that the termination of the project agreement inmost cases require a final finding by the dispute settlementbody provided in the agreement. Such a requirement wouldreduce concerns about premature or unjustified recourse totermination. At the same time, it would not preclude thetaking of appropriate measures to ensure the continuity ofthe service, pending the final decision of the dispute settle-ment body, as long as contractual remedies for breach, suchas step-in rights for the contracting authority and the lend-ers, are provided in the project agreement. In countrieswhere such a requirement would not be consistent withgeneral principles of administrative law applicable to gov-ernment contracts, it might be important to ensure, at least,that the contracting authority’s right to terminate theproject agreement should be without prejudice to the con-cessionaire’s right to seek subsequent judicial review of thecontracting authority’s decision to terminate.

1. Termination by the contracting authority

14. The contracting authority’s termination rights usuallyrelate to three categories of circumstances: serious breachby the concessionaire; insolvency or bankruptcy ofthe concessionaire; and termination for reasons of publicinterest.

(a) Serious breach by the concessionaire

15. The contracting authority has the duty to ensure thatpublic services are provided in accordance with applicablelaws, regulations and contractual provisions. Thus, anumber of domestic laws expressly recognize the contract-ing authority’s right to terminate the project agreement inthe event of breach by the concessionaire. Because of thedisruptive effects of termination and in the interest of pre-serving the continuity of the service, it is not advisable toregard termination as a sanction for each and any instanceof unsatisfactory performance by the concessionaire. Onthe contrary, it is generally advisable to resort to the ex-treme remedy of termination only in cases of “particularlyserious” or “repeated” failures to perform, especially whenit can no longer be reasonably expected that the conces-sionaire will be able or willing to perform under the projectagreement. Many legal systems use specific technical ex-pressions to refer to situations where the degree of breachby one contracting party is of such a nature that the otherparty may terminate their contractual relation before theexpiry of its term (for example, “fundamental breach”,“material breach” or similar expressions). Such situationsare referred to in the Guide as “serious breach”.

16. Circumscribing the possibility of termination to casesof serious breach may give assurance to lenders and projectpromoters that they will be protected against unreasonableor premature decisions by the contracting authority. Thelaw may generally provide for the contracting authority’sright to terminate the project agreement upon seriousbreach by the concessionaire and leave it for the projectagreement to define further the notion of serious breachand, as appropriate, provide illustrative examples of it.From a practical point of view, it is not advisable to at-tempt, by statute or in the project agreement, to provide alist of the events that justify termination.

17. As a general rule, it is desirable that the concession-aire be granted an additional period of time to fulfil itsobligations and to avert the consequences of its breachprior to the contracting authority’s resorting to remedies.For example, the concessionaire should be given noticespecifying the nature of the relevant circumstances andrequiring it to rectify them within a certain period. Thepossibility might also be given for the lenders and sureties,as the case may be, to avert the consequences of the con-cessionaire’s breach, for instance by temporarily engaginga third party to cure the consequences of breach by theconcessionaire, in accordance with the terms of the per-formance bonds provided to the contracting authority or theterms of a direct agreement between the lenders and thecontracting authority (see chap. IV, “Construction and op-eration of infrastructure”, paras. 108-120 and 147-150).The project agreement may also provide that, if the circum-stances are not rectified before the expiry of the relevantperiod, the contracting authority may then terminate theproject agreement, subject to first notifying the lenders andgiving them an opportunity within a certain period to exer-cise any right of substitution that the lenders might have inaccordance with a direct agreement between them and thecontracting authority. However, reasonable deadlines needto be set, since the contracting authority cannot be expectedto bear indefinitely the continuing cost of a situation ofbreach of the project agreement by the concessionaire.Furthermore, the procedures should be without prejudice tothe contracting authority’s right to step in to avert the riskof disruption of service by the concessionaire (see chap.IV, “Construction and operation of infrastructure”, paras.145 and 146).

(i) Serious breach before the beginning of construction

18. The concessionaire typically needs to accomplish aseries of steps prior to undertaking construction works.Some of these requirements may even constitute conditionsprecedent to the entry into force of the project agreement.Examples of events that often justify the withdrawal of theconcession award at an early stage include the following:

(a) Failure to secure the required financial means, tosign the project agreement or to establish the project com-pany within the established deadline;

(b) Failure to obtain licences or permits required forpursuing the activity that is the object of the concession;

(c) Failure to undertake the construction of the facility,to commence development of the project or to submit the


plans and designs required within a set period of time fromthe award of the concession.

19. Termination should in principle be reserved for situa-tions where the contracting authority may no longer rea-sonably expect that the selected concessionaire will takethe necessary measures to commence execution of theproject. In that connection, it is important for the contract-ing authority to take into account any circumstances thatmay excuse the concessionaire’s delay in fulfilling its ob-ligations. Furthermore, the concessionaire should not sufferthe consequences of inaction or error on the part of thecontracting authority or other public authorities. For in-stance, the termination of the project agreement would notnormally be justified if the concessionaire’s failure to ob-tain government licences and permits within the agreedschedule was not attributable to the concessionaire’s ownfault.

(ii) Serious breach during the construction phase

20. Examples of events that may justify the termination ofthe project agreement during the construction phase includethe following:

(a) Failure to observe building regulations, specifica-tions or minimum design and performance standards andnon-excusable failure to complete work within the agreedschedule;

(b) Failure to provide or renew the required guaranteesin the agreed terms;

(c) Violation of essential statutory or contractual obli-gations.

21. Termination should be commensurate with the degreeof breach by the concessionaire and the consequences ofbreach for the contracting authority. For instance, the con-tracting authority may have a legitimate interest in specify-ing a date when the construction must be completed andmay therefore be justified in regarding a delay in comple-tion as an event of breach and hence a ground for termina-tion. However, delay alone, in particular if it is not exces-sive in relation to the specifications of the projectagreement, might not be sufficient reason for terminationwhen the contracting authority is otherwise satisfied of theconcessionaire’s ability to complete the construction in ac-cordance with the required quality standards and its com-mitment to doing so.

(iii) Serious breach during the operational phase

22. Examples of particular instances of breach that typi-cally justify the termination of the concession during theoperational phase include any of the following:

(a) Serious failure to provide services in accordancewith the statutory and contractual standards of quality, in-cluding disregard of price control measures;

(b) Non-excusable suspension or interruption of theprovision of the service without prior consent from thecontracting authority;

(c) Serious failure by the concessionaire to maintain thefacility, its equipment and appurtenances in accordancewith the agreed standards of quality or non-excusable delayin carrying out maintenance works in accordance with theagreed plans, schedules and timetables;

(d) Failure to comply with sanctions imposed by thecontracting authority or the regulatory agency, as appropri-ate, for infringements of the concessionaire’s duties.

23. For the purpose of enhancing transparency and integ-rity in governmental matters, the laws of some countriesalso provide for the termination of project agreements if theconcessionaire is guilty of tax fraud or other types offraudulent acts, or if its agents or employees are involvedin bribery of public officials and other corrupt practices(see also chap. VII, “Other relevant areas of law”, paras.50-52). The later considerations underscore the importanceof designing effective mechanisms to combat corruptionand bribery and to afford the concessionaire the opportu-nity to file complaints against demands for illegal paymentsor unlawful threats by officials of the host country.

(b) Insolvency of the concessionaire

24. Infrastructure services typically need to be providedcontinuously and for that reason most domestic laws stipu-late that the agreement may be terminated if the conces-sionaire is declared insolvent or bankrupt. In order to en-sure the continuity of the service, the assets and propertyrequired to be handed over to the contracting authority maybe excluded from the insolvency proceedings and the lawmay require prior governmental approval for any act ofdisposition by a liquidator or insolvency administrator ofany categories of assets owned by the concessionaire.

25. In legal systems that allow the establishment of secu-rity interests over the concession itself (see chap. IV, “Con-struction and operation of infrastructure”, para. 57), the lawusually provides that the contracting authority may, in con-sultation with the secured creditors, appoint a temporaryadministrator so as to ensure the continued provision of therelevant service, until the secured creditors admitted to theinsolvency proceedings decide, upon the recommendationof the insolvency administrator, whether the activity shouldbe pursued or whether the right to exploit the concessionshould be put to a bidding process.

(c) Termination for reasons of public interest

26. In the contracting practice of some countries, publicauthorities procuring construction works traditionally retainthe right to terminate the construction contract for reasonsof public interest (that is, without having to provide anyjustification other than that the termination is in the Gov-ernment’s interest). In some common law jurisdictions, thatright, which is sometimes referred to as “termination forconvenience”, can only be exercised if expressly providedfor in a statute or in the relevant contract. Several legalsystems belonging to the civil law tradition also recognizea similar power of public authorities to terminate contracts


for reasons of public interest or “general interest”. In somecountries, such a right may be implied in the Government’scontracting power, even in the absence of an explicit statu-tory or contractual provision to that effect. The Govern-ment’s right to terminate for reasons of public interest, inthose legal systems which recognize it, is regarded as es-sential in order to preserve the Government’s unfetteredability to exercise its functions affecting the public good.

27. Nevertheless, the conditions for the exercise of thisright, and the consequences of doing so, should be care-fully considered. The authority to determine what consti-tutes public interest may lie within the Government’s dis-cretion, so that the contracting authority’s decision toterminate the project agreement could only be challengedunder specific circumstances (for instance, improper mo-tive, “détournement de pouvoir”). However, a general andunqualified right to terminate the project agreement forreasons of public interest may represent an imponderablerisk that neither the concessionaire nor the lenders may beready to accept without sufficient guarantees that they willreceive prompt compensation for the loss sustained. Thepossibility of termination for reasons of public interest,where contemplated, should therefore be made known toprospective investors on the earliest possible occasion andshould be expressly mentioned in the draft project agree-ment circulated with the request for proposals (see chap.III, “Selection of the concessionaire”, para. 67). The com-pensation due for termination for reasons of public interestmay, in practice, cover items that are taken into accountwhen calculating the compensation that is due for termina-tion for serious breach by the contracting authority (seepara. 42). Furthermore, it is generally advisable to limit theexercise of the right to terminate the project agreement tosituations where such termination is needed for a compel-ling reason of public interest, which should be restrictivelyinterpreted (for example, where major subsequent changesin governmental plans and policies require the integrationof a project into a larger network or where changes in thecontracting authority’s plans require major project revi-sions that substantially affect the original design or theproject’s commercial feasibility under private operation).In particular, it is not advisable to regard the right of ter-mination for reasons of public interest as a substitute forother contractual remedies in case of dissatisfaction withthe concessionaire’s performance (see chap. IV, “Construc-tion and operation of infrastructure”, paras. 140-150).

2. Termination by the concessionaire

28. While the contracting authority in some legal systemsmay retain an unqualified right to terminate the projectagreement, the grounds for termination by the concession-aire are usually limited to serious breach by the contractingauthority or other exceptional situations and do not nor-mally include a general right to terminate the project agree-ment at will. Moreover, some legal systems do not recog-nize the concessionaire’s right to terminate the projectagreement unilaterally, but only the right to request a thirdparty, such as the competent court, to declare the termina-tion of the project agreement.

(a) Serious breach by the contracting authority

29. Generally, the concessionaire’s right to terminate theproject agreement is limited to situations where the con-tracting authority is found to be in breach of a substantialpart of its obligations (such as failure to make agreed pay-ments to the concessionaire or failure to issue licences re-quired for the operation of the facility for reasons otherthan the concessionaire’s own fault). In those legal systemswhere the contracting authority has the right to requestmodifications in the project, the concessionaire may havethe right to terminate the project agreement if the contract-ing authority alters or modifies the original project in sucha fashion as to cause a substantial increase in the amount ofinvestment required and the parties fail to agree on theappropriate amount of compensation (see chap. IV, “Con-struction and operation of infrastructure”, paras. 73-76).

30. In addition to serious breach by the contracting au-thority itself, it may be equitable to authorize terminationby the concessionaire should the latter be rendered unableto provide the service as a result of acts of public authori-ties other than the contracting authority, such as failure toprovide certain measures of support required for the execu-tion of the project agreement (see chap. II, “Project risksand government support”, paras. 35-60).

31. Although termination by the concessionaire may notalways require a final finding by a judicial or other disputesettlement body, there may be limits to the remedies avail-able to the concessionaire in the event of breach by thecontracting authority. Pursuant to a rule of law followed inmany legal systems, a party to a contract may withholdperformance of its obligations in the event of breach by theother party of a substantial part of its obligations. However,in some legal systems that rule does not apply to govern-ment contracts and the law provides instead that govern-ment contractors are not excused from performing solelyon the ground of breach by the contracting authority unlessand until the contract is rescinded by a judicial or arbitraldecision.

32. Limitations on the concessionaire’s right to withholdperformance are typically intended to ensure the continuityof public services (see chap. IV, “Construction and opera-tion of infrastructure”, paras. 86 and 87). Nevertheless, itshould be noted that while the contracting authority maymitigate the consequences of breach by the concessionaireby using its right to step in, the concessionaire does notusually have a comparable remedy. In the event of seriousbreach by the contracting authority, the concessionaire maysustain considerable or even irreparable damage, dependingon the time required to obtain a final decision releasing theconcessionaire from its obligations under the project agree-ment. These circumstances underscore the importance ofgovernment guarantees in respect of obligations assumedby contracting authorities (see chap. II, “Project risks andgovernment support”, paras. 45-50) and the need for allow-ing the parties the choice of expeditious and effective dis-pute settlement mechanisms (see chap. VI, “Settlement ofdisputes”, paras. 3-42).


(b) Changes in conditions

33. Domestic laws often allow the concessionaire to ter-minate the project agreement if the concessionaire’s per-formance has been rendered substantially more onerous bythe occurrence of an unforeseen change in conditions andthe parties have failed to agree on an appropriate revisionto adapt the project agreement to the changed conditions(see chap. IV, “Construction and operation of infrastruc-ture”, paras. 126-130).

3. Termination by either party

(a) Impediment of performance

34. Some laws provide that the parties may terminate theproject agreement if the performance of their obligations isrendered permanently impossible as a result of a circum-stance defined in the project agreement as an exemptingimpediment (see chap. IV, “Construction and operation ofinfrastructure”, paras. 132-139). In that connection, it isadvisable to provide in the project agreement that if theexempting impediment persists for a certain period or if thecumulative duration of two or more exempting impedi-ments exceeds a certain time, the agreement may be termi-nated by either party. If the execution of the project isrendered impossible on legal grounds, because of changesin legislation or as a result of judicial decisions affectingthe validity of the project agreement, for instance, such atermination right might not require any period of time toelapse and might be exercised immediately upon thechange of legislation or other legal obstacle becoming ef-fective.

(b) Mutual consent

35. Some domestic laws authorize the parties to terminatethe project agreement by mutual consent, usually subject tothe approval of a higher authority. Legislative power to thiseffect may be needed by the contracting authority in legalsystems where the termination by mutual consent mightamount to a discontinuation of the public service for whichthe contracting authority is responsible.

E. CONSEQUENCES OF EXPIRYOR TERMINATION OF THE PROJECT AGREEMENT

36. The concessionaire’s right to operate the facility andto provide the relevant service typically finishes upon ex-piry of the project term or termination of the project agree-ment. Unless the infrastructure is to be permanently ownedby the concessionaire, the expiry or termination of theproject agreement often requires the transfer of assets to thecontracting authority or to another concessionaire whoundertakes to operate the facility. There may be importantfinancial consequences that will need to be regulated indetail in the project agreement, in particular in the event of

termination by either party. The parties will also need toagree on various wind-up measures to ensure the orderlytransfer of the responsibility for operating the facility andproviding the service.

1. Transfer of project-related assets

37. In most cases, the assets and property originally madeavailable to the concessionaire and other goods related tothe project are to revert to the contracting authority uponexpiry or termination of the project agreement (see chap.IV, “Construction and operation of infrastructure”, paras.23-29). In a typical “build-operate-transfer” project, theconcessionaire would also be obliged to transfer to thecontracting authority the physical infrastructure and otherproject-related assets upon expiry or termination of theproject agreement. The assets required to be transferred tothe contracting authority often include intangible assets,such as outstanding receivables and other rights existing atthe time of transfer. Depending on the project, the assets tobe transferred may include specific technology orknow-how (see paras. 51-55). It should be noted that insome projects the assets are transferred directly from theconcessionaire to another concessionaire who succeeds it inthe provision of the service.

(a) Transfer of assets to the contracting authority

38. Different arrangements may be needed, depending onthe type of asset to be transferred (see chap. IV, “Construc-tion and operation of infrastructure”, para. 28):

(a) Assets that must be transferred to the contractingauthority. In the legal tradition of some countries, at theend of the project term, the concessionaire is required totransfer such assets free of any liens and encumbrances andat no cost to the contracting authority, except for compen-sation for improvements made to, or modernization of, theproperty for the purpose of ensuring the continuity of theservice the cost of which has not yet been recovered by theconcessionaire. In practice, such a rule presupposes thenegotiation of a concession period sufficiently long and alevel of revenue high enough for the concessionaire toamortize fully its investment and to repay its debts in full.Other laws allow for more flexibility by authorizing thecontracting authority to compensate the concessionaire forthe residual value, if any, of assets built by the concession-aire;

(b) Assets that may be purchased by the contractingauthority, at its option. If the contracting authority de-cides to exercise its option to purchase those assets, theconcessionaire is normally entitled to compensation corre-sponding to their fair market value at the time. However, ifthose assets were expected to be fully amortized (that is, ifthe concessionaire’s financing arrangements do not envis-age any expectation of residual value of the assets), thenthe price paid might be only nominal. In the contractingpractice of some countries, it is usual for contracting au-thorities to be granted some security interest in such assetsas a guarantee for their effective transfer;


(c) Assets that remain the private property of theconcessionaire. Typically these assets may be freely re-moved or disposed of by the concessionaire.

(b) Transfer of assets to a new concessionaire

39. As indicated earlier, the contracting authority maywish to rebid the concession at the end of the project agree-ment, rather than to operate the facility itself (see para. 3).For that purpose, it may be useful for the law to require theconcessionaire to make the assets available to a new con-cessionaire. In order to ensure an orderly transition andcontinuity of the service, the concessionaire should be re-quired to cooperate with the new concessionaire in thehandover. The transfer of assets between theconcessionaires may require that some compensation bepaid to the incumbent concessionaire, depending onwhether or not the assets have been amortized.

40. One important element to consider in this connectionis the structure of the financial proposal formulated by theconcessionaire during the selection process (see also chap.IV, “Construction and operation of infrastructure”, para.27). In public infrastructure projects, one of the basic as-sumptions of the bidders’ financial proposal is that all as-sets required to be built or acquired for the project will befully amortized (that is, their cost will be recovered in full)in the life of the project. Thus, the financial proposals willnot normally include an expectation of residual value forthe assets at the end of the project period. In such cases,there may not be a prima facie reason for requiring a suc-cessor concessionaire to pay any compensation to the origi-nal concessionaire, which may be required to make all as-sets available to its successor at no cost or only for anominal consideration. Indeed, if the concessionaire hasachieved its expected return, a transfer payment from asuccessor concessionaire would be an additional cost thatwould ultimately have to be remunerated by the pricescharged by the successor under the second agreement.However, if the tariff level contemplated in the concession-aire’s original proposal was based on the assumption ofsome residual value of the assets at the end of the projectperiod or if the financial proposal assumed significant rev-enue from third parties, the concessionaire might be enti-tled to compensation for assets handed over to a successorconcessionaire.

(c) Condition of assets at the time of transfer

41. Where assets are handed over to the contracting au-thority or transferred directly to a new concessionaire uponthe expiry of the concession period, the concessionaire istypically obligated to transfer them, free of liens or encum-brances, and in such condition as would be necessary fornormal functioning of the infrastructure facility, taking intoaccount the needs of the service. The contracting authori-ty’s right to receive those assets in such operating conditionis complemented in some laws by the obligation imposedupon the concessionaire to keep and transfer the project insuch proper condition as prudent maintenance requires andto provide some sort of guarantee to that effect (see chap.

IV, “Construction and operation of infrastructure”, para.118). Where the contracting authority requires the assets tobe returned in a prescribed condition, the required condi-tions should be reasonable. While it may be reasonable forthe contracting authority to require that the assets havesome defined period of residual life, it would not be rea-sonable to expect them to be as new. Furthermore, theserequirements may not be applicable in the event of termi-nation of the project agreement, in particular terminationprior to successful completion of the construction phase.

42. It is advisable to devise procedures for ascertainingthe condition of the assets that should be transferred to thecontracting authority. It may be useful, for example, toestablish a committee comprised of representatives of boththe contracting authority and the concessionaire to establishwhether the facilities are in the prescribed condition andconform to the relevant requirements set forth in the projectagreement. The project agreement may also provide for theappointment and terms of reference of such a committee,which may be given authority to request reasonable meas-ures by the concessionaire to repair or eliminate any de-fects and deficiencies found in the facilities. It may beadvisable to provide for a special inspection to take placeone year prior to the termination of the concession, follow-ing which the contracting authority may require additionalmaintenance measures by the concessionaire so as to en-sure that the goods are in proper condition at the time of thetransfer. The contracting authority may wish to require thatthe concessionaire provide special guarantees for the satis-factory handover of the facilities (see chap. IV, “Construc-tion and operation of infrastructure”, para. 118). The con-tracting authority might draw on such guarantees to pay therepair cost of damaged assets or property.

2. Financial arrangements upon termination

43. Termination of the project agreement may occur be-fore the concessionaire has been able to recover its invest-ment, repay its debts and yield the expected profit, whichmay cause significant loss to the concessionaire. Loss mayalso be sustained by the contracting authority, which mayneed to make additional investment or incur considerableexpense in order, for instance, to ensure the completion ofthe facility or the continued provision of the relevant serv-ices. In view of these circumstances, project agreementstypically contain extensive provisions dealing with the fi-nancial rights and obligations of the parties upon termina-tion. The usual standards of compensation typically varyaccording to the various grounds for termination. Neverthe-less, the following factors are usually taken into account incompensation arrangements:

(a) Outstanding debt, equity investment and anticipatedprofit. Project termination is typically included among theevents of default in the concessionaire’s loan agreements.Since loan agreements usually include a so-called “accel-eration clause”, whereby the entire debt may become dueupon the occurrence of an event of default, the immediateloss sustained by the concessionaire upon termination ofthe project agreement may include the amount of debt thenoutstanding. Whether and to what extent such a loss might


be compensated for by the contracting authority usuallydepends on the grounds for terminating the project agree-ment. Partial compensation may be limited to an amountcorresponding to the value of works satisfactorily per-formed by the concessionaire, whereas full compensationwould cover the entire outstanding debt. Another categoryof loss that is sometimes taken into account in compensa-tion arrangements refers to loss of equity investment by theproject promoters, to the extent that such an investment hasnot yet been recovered at the time of termination. Lastly,termination also deprives the concessionaire of future prof-its that the facility may generate. Although lost profits arenot usually regarded as actual damage, in exceptional cir-cumstances, such as wrongful termination by the contract-ing authority, the current value of expected future profitmay be included in the compensation due to the conces-sionaire;

(b) Degree of completion, residual value and amortiza-tion of assets. Contractual compensation schemes forvarious termination grounds typically include compensa-tion commensurate with the degree of completion of theworks at the time of termination. The value of the works isusually determined on the basis of the investment requiredfor construction (in particular if the termination takes placeduring the construction phase), the replacement cost or the“residual” value of the facility. The residual value meansthe market value of the infrastructure at the time of termi-nation. Market value may be difficult to determine or eveninexistent for certain types of physical infrastructure (suchas bridges or roads) or for facilities whose operational lifeis close to expiry. Sometimes the residual value may beestimated taking into account the expected usefulness ofthe facility for the contracting authority. However, difficul-ties may be found in establishing the value of unfinishedworks, in particular if the amount of the investment stillrequired by the contracting authority to render the facilityoperational would exceed the amount actually invested bythe concessionaire. In any event, full payment of residualvalue seldom takes place, in particular where the project’srevenue constitutes the sole remuneration for the conces-sionaire’s investment. Thus, instead of full compensationfor the facility’s value, the concessionaire often receivescompensation only for the residual value of assets that havenot yet been fully amortized at the time of termination.

(a) Termination due to breach by the concessionaire

44. The concessionaire is not usually entitled to damagesin the event of termination due to its own breach. In somecases the concessionaire may be under an obligation to paydamages to the contracting authority, although, in practice,a defaulting concessionaire whose debts are declared dueby its creditors would seldom have sufficient financialmeans left for actual payment of such damages.

45. It should be noted that termination due to breach, evenwhere it is regarded as a sanction for serious performancefailures, should not result in the unjust enrichment of eitherparty. Thus, termination does not necessarily entail a rightfor the contracting authority to take over assets withoutmaking any payment to the concessionaire. An equitablesolution for dealing with this issue may be to distinguish

between the different types of asset, according to the ar-rangements envisaged for them in the project agreement(see para. 38):

(a) Assets that must be transferred to the contractingauthority. Where the project agreement requires the auto-matic transfer of project assets to the contracting authorityat the end of the project agreement, termination on breachdoes not usually entail the payment of compensation to theconcessionaire for those assets, except for the residualvalue of work satisfactorily performed, to the extent that ithas not yet been amortized by the concessionaire;

(b) Assets that may be purchased by the contractingauthority, at its option. Financial compensation may beadequate in cases where the contracting authority has anoption to buy the assets at market value on expiry of theproject agreement or the right to require that such an optionbe given to the winner of a new project award. However,it may be legitimate to envisage a financial compensationthat is less than the full value of the assets so as to stimulateperformance by the concessionaire. By the same token,such compensation may not need to cover the full cost ofrepaying the concessionaire’s outstanding debt. It is advis-able to set forth the details of the formula for financialcompensation in the project agreement (that is, whether itcovers the break-up value of the asset or the lesser of theoutstanding debt and the alternative use value);

(c) Assets that remain the private property of theconcessionaire. Assets in the concessionaire’s privateproperty that do not fall under (a) or (b) above may usuallybe removed and disposed of by the concessionaire, so thatthe need for compensation arrangements seldom arises.However, a different situation may arise in the case of fullyprivatized projects, where all assets, including those essen-tial for the provision of the services, are owned by theconcessionaire. In such cases, in order to ensure the conti-nuity of the services, the contracting authority may find itnecessary to take over the assets, even though not contem-plated in the project agreement. In such cases, it would beequitable to compensate the concessionaire for the fairmarket value of the assets. The project agreement may,however, provide that the compensation should be reducedby the costs incurred by the contracting authority in oper-ating the facility or engaging another operator.

(b) Termination due to breachby the contracting authority

46. The concessionaire is usually entitled to full compen-sation for loss sustained as a result of termination ongrounds attributable to the contracting authority. The com-pensation due to the concessionaire usually includes com-pensation for the value of the works and installations, to theextent they have not already been amortized, as well as forthe loss caused to the concessionaire, including lost profits,which are usually calculated on the basis of the concession-aire’s revenue during previous financial years, when termi-nation occurs during the operational phase, or are based ona projection of the expected benefit during the durationoriginally envisaged. The concessionaire may be entitled tofull compensation of debt and equity, including debt serv-ice and lost profits.


(c) Termination on other grounds

47. When considering compensation arrangements for ter-mination due to circumstances unrelated to breach by eitherparty, it may be useful to distinguish exempting impedi-ments from termination declared by the contracting author-ity for reasons such as public interest or other similar rea-sons.

(i) Termination due to exempting impediments

48. By definition, exempting impediments are events be-yond the parties’ control and, as a general rule, terminationunder such circumstances might not give rise to claims fordamages by either party. However, there may be circum-stances where it might be equitable to provide for somecompensation to the concessionaire, such as fair compensa-tion for works already completed, in particular where, be-cause of the specialized nature of the assets, they cannot beremoved by the concessionaire or meaningfully used by it,but may be effectively used by the contracting authority forthe purpose of providing the relevant service (a bridge, forinstance). However, since termination in such cases cannotbe attributed to the contracting authority, the compensationdue to the concessionaire may not necessarily need to be“full” compensation (that is, repayment of debt, equity andlost profits).

(ii) Termination for convenience

49. Where the project agreement recognizes the contract-ing authority’s right to terminate for its convenience, thecompensation payable to the concessionaire usually coverscompensation for the same items included in compensationpayable upon termination for breach by the contractingauthority (see para. 46), although not necessarily to the fullextent. In order to establish the equitable amount of com-pensation due to the concessionaire, it may be useful todistinguish between termination for convenience during theconstruction phase and termination for convenience duringthe operational phase:

(a) Termination for convenience during the construc-tion phase. If the project agreement is terminated duringthe construction phase, the compensation arrangementsmay be similar to those which are followed in connectionwith large construction contracts that allow for terminationfor convenience. In those cases, the contractor is usuallyentitled to the portion of the price that is attributable to theconstruction satisfactorily performed, as well as for ex-penses and losses incurred by the contractor arising fromthe termination. However, since the contracting authoritydoes not normally pay a price for the construction workcarried out by the concessionaire, the main criterion forcalculating compensation would typically be the total in-vestment effectively made by the concessionaire up to thetime of termination, including all sums actually disbursedunder the loan facilities extended by the lenders to theconcessionaire for the purpose of carrying out constructionunder the project agreement, and expenses related to thecancellation of loan agreements. One additional question iswhether and to what extent the concessionaire may be en-titled to recover lost profit for the portion of the contract

that has been terminated for convenience. On the one hand,the concessionaire might have foregone other businessopportunities in anticipation of completing the project andoperating the facility through the anticipated duration ofthe concession. On the other hand, an obligation of thecontracting authority to compensate the concessionaire forits lost profit might make it financially prohibitive for thecontracting authority to exercise its right of termination forconvenience. One approach may be for the project agree-ment to establish a scale of payments to be made by thecontracting authority as compensation for lost profits andthe amount of the payments depending upon the stage ofthe construction that has been completed when the projectagreement is terminated for convenience;

(b) Termination for convenience during the operationalphase. As regards the construction work satisfactorilycompleted by the concessionaire, the compensation ar-rangements may be the same as for termination for conven-ience during the construction phase. However, equitablecompensation for termination for convenience during theoperational phase might require fair compensation for lostprofits. The higher standard of compensation in this casemay be justified by the fact that, unlike termination duringthe construction phase, when the contracting authoritymight need to undertake to complete the work at its ownexpense, upon termination during the operational phase thecontracting authority might be able to receive a completedfacility capable of being operated profitably. Compensationfor lost profits is often calculated on the basis of the con-cessionaire’s revenue during a certain number of previousfinancial years, but in some cases other elements, such asthe anticipated profit on the basis of the agreed tariffs, mayneed to be taken into account. This is so because in someinfrastructure projects such as toll roads and similarprojects, which are characterized by high financial costsand relatively low income at the early stages of operation,termination may occur before the project has a history ofprofitability.

3. Wind-up and transitional measures

50. Where the facility is transferred to the contractingauthority at the end of the concession period, the partiesmay need to make a series of arrangements in order toensure that the contracting authority will be able to operatethe facility at the prescribed standards of efficiency andsafety. The project agreement may provide for the conces-sionaire’s obligation to transfer certain technology orknow-how required to operate the infrastructure facility.The project agreement may also provide for the continua-tion, for a certain transitional period, of certain obligationsof the concessionaire in respect of the operation and main-tenance of the facility. It may further include an obligation,on the part of the concessionaire, to supply or facilitate thesupply of spare parts that may be needed by the contractingauthority to carry out repairs in the facility. It should benoted, however, that the concessionaire might not be in aposition to undertake itself some of the transitional meas-ures referred to below, since in most cases the concession-aire would have been established for the sole purpose ofcarrying out the project and would need to procure therelevant technology or spare parts from third parties.


(a) Transfer of technology

51. In some cases, the facility transferred to the contract-ing authority will embody various technological processesnecessary for the generation of certain goods, such aselectricity or potable water, or the provision of the rel-evant services, such as telephone services. The contractingauthority will often wish to acquire a knowledge of thoseprocesses and their application. The contracting authoritywill also wish to acquire the technical information andskills necessary for the operation and maintenance of thefacility. Even where the contracting authority has thebasic capability to undertake certain elements of theoperation and maintenance (for example, building or civilengineering), the contracting authority may need to ac-quire a knowledge of special technical processes neces-sary to effect the operation in a manner appropriate to thefacility in question. The communication to the contractingauthority of that knowledge, information and skills isoften referred to as the “transfer of technology”. Obliga-tions concerning the transfer of technology cannot beunilaterally imposed on the concessionaire and, in prac-tice, these matters are the subject of extensive negotiationsbetween the parties concerned. While the host country hasa legitimate interest in gaining access to the technologyneeded to operate the facility, due account should betaken of the commercial interests and business strategiesof the private investors.

52. Differing contractual arrangements can be adoptedfor the transfer of technology and the performance of theother obligations necessary to construct and operate thefacility. The transfer of technology itself may occur indifferent ways, for example, through the licensing ofindustrial property, through the creation of a joint venturebetween the parties or the supply of confidentialknow-how. The Guide does not attempt to deal compre-hensively with contract negotiation and drafting relatingto the licensing of industrial property or the supply ofknow-how, as this subject has already been dealt with indetail in publications issued by other United Nationsbodies.1 The following paragraphs merely note certainmajor issues concerning the communication of skillsnecessary for the operation and maintenance of the facilitythrough the training of the contracting authority’s person-nel or through documentation.

53. The most important method of conveying to the con-tracting authority the technical information and skills nec-essary for the proper operation and maintenance of theworks is the training of the contracting authority’s person-nel. In order to enable the contracting authority to decideon its training requirements, in the request for proposals orduring the contract negotiations the contracting authoritymight request the concessionaire to supply the contractingauthority with an organizational chart showing the person-nel requirements for the operation and maintenance of theworks, including the basic technical and other qualifica-tions the personnel must possess. Such a statement of re-quirements should be sufficiently detailed to enable thecontracting authority to determine the extent of trainingrequired in relation to the personnel available to it. Theconcessionaire will often have the capability to provide thetraining. In some cases, however, the training may be givenmore effectively by a consulting engineer or through aninstitution specializing in training.

54. Technical information and skills necessary for theproper operation and maintenance of the facility may alsobe conveyed through the supply of technical documenta-tion. The documentation to be supplied may consist ofplans, drawings, formulas, manuals of operation and main-tenance and safety instructions. It may be advisable to listin the project agreement the documents to be supplied. Theconcessionaire may be required to supply documents thatare comprehensive and clearly drafted and are in a speci-fied language. It may be advisable to obligate the conces-sionaire, at the request of the contracting authority, to givedemonstrations of procedures described in the documenta-tion if the procedures cannot be understood without dem-onstrations.

55. The points in time when the documentation is to besupplied may be specified. The project agreement mayprovide that the supply of all documentation is to be com-pleted by the time fixed in the contract for completion ofthe construction. The parties may also wish to provide thattransfer of the facility is not to be considered completedunless all documentation relating to the operation of theworks and required under the contract to be delivered priorto the completion has been supplied. It may be advisable toprovide that some documentation, such as operating manu-als, is to be supplied during the course of construction, assuch documentation may enable the contracting authority’spersonnel or engineer to obtain an understanding of theworking of machinery or equipment while it is beingerected.

(b) Assistance in connection with operation andmaintenance of the facility after its transfer

56. The degree of assistance from the concessionaireneeded by the contracting authority with regard to the sup-ply of spare parts and services will depend on the technol-ogy and skilled personnel available to the contracting au-thority. If the contracting authority lacks personnelsufficiently skilled for the technical operation of the facil-

1The negotiation and drafting of contracts for the licensing of industrialproperty and the supply of know-how is dealt with in detail in WorldIntellectual Property Organization, Licensing Guide for Developing Coun-tries (WIPO publication No. 620 (E), 1977). The main issues to be consid-ered in negotiating and drafting such contracts are set forth in the Guidelinesfor Evaluation of Transfer of Technology Agreements, Development andTransfer of Technology Series, No. 12 (ID/233, 1979), and in the Guide forUse in Drawing Up Contracts Relating to the International Transfer ofKnow-How in the Engineering Industry (United Nations publication, SalesNo. E.70.II.E.15). Another relevant publication is the Handbook on theAcquisition of Technology by Developing Countries (United Nations pub-lication, Sales No. E.78.II.D.15). For a discussion of transfer of technologyin the context of contracts for the construction of industrial works, see theUNCITRAL Legal Guide on Drawing Up International Contracts for theConstruction of Industrial Works (United Nations publication, Sales No.E.87.V.10), chap. VI, “Transfer of technology”.


ity, it may wish to obtain the concessionaire’s assistance inoperating the facility, at least for an initial period. Thecontracting authority may, in some cases, wish the conces-sionaire to provide the personnel to occupy many of thetechnical posts in the facility, while in other cases the con-tracting authority may wish the concessionaire only to pro-vide technical experts to collaborate in an advisory capacitywith the contracting authority’s personnel in the perform-ance of a few highly specialized operations.

57. In order to assist the contracting authority in operatingand maintaining the facility, the project agreement mayobligate the concessionaire to submit, prior to the transferof the facility, an operation and maintenance programmedesigned to keep the facility operating over its remaininglifetime at the level of efficiency required under the projectagreement. An operation and maintenance programmewould include matters such as an organizational chartshowing the key personnel required for the technical opera-tion of the facility and the functions to be discharged byeach person; periodic inspection of the facility; lubrication,cleaning and adjustment; and replacement of defective orworn-out parts. Maintenance may also include operationsof an organizational character, such as establishing a main-tenance schedule or maintenance records. The concession-aire may also be required by the contracting authority tosupply operation and maintenance manuals setting out ap-propriate operation and maintenance procedures. Thosemanuals should be in a format and language readily under-stood by the contracting authority’s personnel.

58. An effective means of training the contracting au-thority’s personnel in operation and maintenance proce-dures may be to provide in the project agreement that thepersonnel of the contracting authority are to be associatedwith the personnel of the concessionaire in carrying out theoperation and maintenance for a certain time prior to orbeyond the transfer of the facility. The positions to be oc-cupied by the personnel employed by the contracting au-thority can then be identified and their qualifications andexperience specified. In order to avoid friction and ineffi-ciency, it is desirable that any authority to be exercised bythe personnel of each party over the personnel of the otherduring the relevant period be clearly described.

(c) Supplies of spare parts

59. In projects that provide for the transfer of the facilityto the contracting authority, the contracting authority willhave to obtain spare parts to replace those which are wornout or damaged and to maintain, repair and operate thefacility. Spare parts may not be available locally and thecontracting authority may have to depend on the conces-sionaire to supply them. The planning of the parties withrespect to the supply of spare parts and services after thetransfer of the facility would be greatly facilitated if theparties were to anticipate and provide in the project agree-ment for the needs of the contracting authority in that re-gard. However, given the long duration of most infrastruc-

ture projects, it may be difficult for the parties to anticipateand provide in the project agreement for the needs of thecontracting authority after the transfer of the facility.

60. A possible approach may be for the parties to enterinto a separate contract regulating these matters.2 Such acontract may be entered into closer in time to the transferof the facility, when the contracting authority may have aclearer view of its requirements. If spare parts are manufac-tured not by the concessionaire but for the concessionaireby suppliers, the contracting authority may prefer to enterinto contracts with those suppliers rather than to obtainthem from the concessionaire or, alternatively, the contract-ing authority may wish to have the concessionaire procurethem as the contracting authority’s agent.

61. It is desirable for the contracting authority’s personnelto develop the technical capacity to install the spare parts.For this purpose, the project agreement may obligate theconcessionaire to supply the necessary instruction manuals,tools and equipment. The instruction manuals should be ina format and language readily understood by the contract-ing authority’s personnel. The contract may also require theconcessionaire to furnish “as built” drawings indicatinghow the various pieces of equipment interconnect and howaccess can be obtained to them to enable the spare parts tobe installed and to enable maintenance and repairs to becarried out. In certain cases, it may be appropriate for theconcessionaire to be required to train the contracting au-thority’s personnel in the installation of spare parts.

(d) Repairs

62. It is in the contracting authority’s interest to enter intocontractual arrangements that will ensure that the facilitywill be repaired expeditiously in the event of a breakdown.In many cases, the concessionaire may be better qualifiedthan a third person to effect repairs. In addition, if theproject agreement prevents the contracting authority fromdisclosing to third persons the technology supplied by theconcessionaire, this may limit the selection of third personsto effect repairs to those who provide assurances regardingnon-disclosure of the concessionaire’s technology that areacceptable to the concessionaire. On the other hand, ifmajor items of equipment have been manufactured for theconcessionaire by suppliers, the contracting authority mayfind it preferable to enter into independent contracts forrepair with them. In defining the nature and duration ofrepair obligations imposed on the concessionaire, if any, itis advisable to do so clearly and to distinguish them fromobligations assumed by the concessionaire under qualityguarantees to remedy defects in the facility.

2The Economic Commission for Europe has prepared a Guide on Draw-ing Up International Contracts for Services Relating to Maintenance, Re-pair and Operation of Industrial and Other Works, which may, mutatismutandis, assist parties in drafting a separate contract or contracts dealingwith maintenance and repair of the facility after its transfer to the contract-ing authority (ECE/TRADE/154).


A/CN.9/471/Add.7

Chapter VI. Settlement of disputes

CONTENTS

Paragraphs Page




B. Disputes between the contracting authorityand the concessionaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-42 167

1. General considerations on methods for preventionand settlement of disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9 167

2. Commonly used methods for preventingand settling disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-42 168

C. Disputes between the concessionaire and its lenders,contractors and suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 173

D. Disputes between the concessionaire and its customers . . . . . . . . . 44-46 173


Disputes between the contracting authorityand the concessionaire (see paras. 3-42)

Recommendation 68. The contracting authority shouldbe free to agree to dispute settlement mechanisms regardedby the parties as suited to the needs of the project, includ-ing arbitration.

[Recommendation 68bis. The law should indicatewhether and, if so, to what extent the contracting authoritymay raise a plea of sovereign immunity, both as a bar to thecommencement of arbitral or judicial proceedings as wellas a defence against enforcement of the award or judge-ment.]

Disputes between the concessionaire and its lenders,contractors and suppliers (see para. 43)

Recommendation 69. The concessionaire and theproject promoters should be free to choose the appropriatemechanisms for settling commercial disputes amongproject promoters or disputes between the concessionaireand its lenders, contractors, suppliers and other businesspartners.

Disputes between the concessionaire and its customers(see paras. 44-46)

Recommendation 70. The concessionaire may be re-quired to make available simplified and efficient mecha-nisms for handling claims submitted by its customers orusers of the infrastructure facility.


A. GENERAL REMARKS

1. An important factor for the implementation of pri-vately financed infrastructure projects is the legal frame-work in the host country for the settlement of disputes.Investors, contractors and lenders will be encouraged toparticipate in projects in countries where they have theconfidence that any disputes arising out of contracts form-ing part of the project will be resolved fairly and effi-ciently. By the same token, efficient procedures for avoid-ing disputes or settling them expeditiously will facilitate theexercise of the contracting authority’s monitoring functionsand reduce the contracting authority’s overall administra-tive cost. In order to create a more hospitable climate forinvestors, the legal framework of the host country shouldgive effect to certain basic principles, such as the follow-ing: foreign firms should be guaranteed access to the courtsunder substantially the same conditions as domestic ones;parties to private contracts should have the right to chooseforeign law as the law applicable to their contracts; foreignjudgements should be enforceable; and there should be nei-ther unnecessary restrictions to access to non-judicial dis-pute settlement mechanisms nor legal impediments for thecreation of facilities for settling disputes amicably outsidethe judicial system.

2. Privately financed infrastructure projects typically re-quire the establishment of a network of interrelated con-tracts and other legal relationships involving various par-ties. Legislative provisions dealing with the settlement of


disputes arising in the context of these projects must takeaccount of the diversity of relations, which may call fordifferent dispute settlement methods depending on the typeof dispute and the parties involved. The main disputes maybe divided into three broad categories:

(a) Disputes arising under agreements between theconcessionaire and the contracting authority and othergovernmental agencies. In most civil law countries, theproject agreement is governed by administrative law (seechap. VII, “Other relevant areas of law”, paras. 24-27),while in other countries the agreement is in principle gov-erned by contract law as supplemented by special provi-sions developed for government contracts for the provisionof public services. This regime may have implications forthe dispute settlement mechanism that the parties to theproject agreement may be able to agree upon. Similar con-siderations may also apply to certain contracts entered intobetween the concessionaire and governmental agencies orgovernment-owned companies supplying goods or servicesto the project or purchasing goods or services generated bythe infrastructure facility;

(b) Disputes arising under contracts and agreementsentered into by the project promoters or the concessionairewith related parties for the implementation of the project.These contracts usually include at least the following: (i)contracts between parties holding equity in the projectcompany (e.g. shareholders’ agreements, agreements re-garding the provision of additional financing or arrange-ments regarding voting rights); (ii) financing and relatedagreements, which involve, apart from the project com-pany, parties such as commercial banks, governmentallending institutions, international lending institutions andexport credit insurers; (iii) contracts between the projectcompany and contractors, which themselves may be con-sortia of contractors, equipment suppliers and providers ofservices; (iv) contracts between the project company andthe parties who operate and maintain the project facility;and (v) contracts between the concessionaire and privatecompanies for the supply of goods and services needed forthe operation and maintenance of the facility;

(c) Disputes between the concessionaire and otherparties. These other parties include the users or customersof the facility. These users may be, for example, a govern-ment-owned utility company that purchases electricity orwater from the project company so as to resell it to theultimate users; commercial companies, such as airlines orshipping lines contracting for the use of the airport or port;or individual persons paying for the use of a toll road. Theparties to these disputes may not necessarily be bound byany prior legal relationship of a contractual or similar nature.

B. DISPUTES BETWEEN THE CONTRACTINGAUTHORITY AND THE CONCESSIONAIRE

3. Disputes that arise under the project agreement fre-quently involve problems that do not often arise in connec-tion with other types of contracts. This is due to the com-plexity of infrastructure projects and the fact that they areto be performed over a long period of time, with a numberof enterprises participating in the construction and in theoperational phases. In addition, disputes under projectagreements may concern highly technical matters con-

nected with the construction processes, the technology in-corporated in the works and the conditions for operatingthe facility. Furthermore, these projects usually involvegovernmental agencies and a high level of public interest.These circumstances place emphasis on the need to havemechanisms in place that avoid as much as possible theescalation of disagreements between the parties and pre-serve their business relationship; that prevent the disruptionof the construction works or the provision of the services;and that are tailored to the particular characteristics of thedisputes that may arise.

4. Some of the main considerations particular to the vari-ous phases of implementation of privately financed infra-structure projects are discussed in this section. The settle-ment of the concessionaire’s grievances in connection withdecisions by regulatory agencies has been considered in thecontext of the authority to regulate infrastructure services(see chap. I, “General legislative and institutional frame-work”, paras. 51-53). The settlement of disputes arisingduring the process of selecting a concessionaire (that is,pre-contractual disputes) has also been dealt with earlier inthe Guide (see chap. III, “Selection of the concessionaire”,paras. 118-122).

1. General considerations on methods for preventionand settlement of disputes

5. The issues that most frequently give rise to disputesduring the life of the project agreement are those related topossible breaches of the agreement during the constructionphase, the operation of the infrastructure facility or in con-nection with the expiry or termination of the project agree-ment. These disputes may be very complex and they ofteninvolve highly technical matters that need to be resolvedspeedily in order not to disrupt the construction or theoperation of the infrastructure facility. For these reasons itis advisable for the parties to devise mechanisms that allowfor the choice of competent experts to assist in the settle-ment of disputes. Furthermore, the long duration of pri-vately financed infrastructure projects makes it importantto devise mechanisms to prevent, as much as possible, dis-putes from arising so as to preserve the business relation-ship between the parties.

6. With a view to achieving the objectives mentionedabove, project agreements often provide for compositedispute-settlement clauses designed to prevent, to the ex-tent possible, disputes from arising, to foster reachingagreed solutions and to put in place efficient dispute settle-ment methods when disputes nevertheless arise. Suchclauses typically provide for a sequential series of stepsstarting with an early warning of issues that may developinto a dispute unless the parties take action to prevent them.When a dispute does occur it is provided that the partiesshould exchange information and discuss the dispute witha view to identifying a solution. If the parties are unable toresolve the dispute themselves, then either party may re-quire participation of an independent and impartial thirdparty to assist them to find an acceptable solution. In mostcases, adversarial dispute settlement mechanisms are onlyused when the disputes cannot be settled through the use ofsuch conciliatory methods.


7. However, there may be limits to the parties’ freedomto agree to certain dispute prevention or dispute settlementmethods: one such limit may arise from the subject matterof the dispute; another limit may in some legal systemsarise from the governmental character of the contractingauthority. In some legal systems, the traditional positionhas been that the Government and its agencies may notagree on certain dispute settlement methods, in particular,arbitration. This position has often been restricted to meanthat it does not apply to public enterprises of industrialor commercial character, which, in their relations withthird parties, act pursuant to private law or commerciallaw.

8. Limitations to the freedom to agree on dispute settle-ment methods, including arbitration, may also relate to thelegal nature of the project agreement. Under some civil lawsystems, project agreements may be regarded as adminis-trative contracts, with the consequence that disputes arisingthereunder need to be settled through the judiciary orthrough administrative courts of the host country. Underother legal systems, similar prohibitions may be expresslyincluded in legislation or judicial precedents directly appli-cable to project agreements, or may be the result of estab-lished contract practices, usually based on legislative rulesor regulations.

9. For countries that wish to allow the use of non-judicialmethods, including arbitration, for the settlement of dis-putes arising in connection with privately financed infra-structure projects, it is important to remove possible legalobstacles and to provide a clear authorization for domesticcontracting authorities to agree on dispute settlement meth-ods. The absence of such legislative authority may give riseto questions as to the validity of the dispute-settlementclause and cause delay in the settlement of disputes. If, forexample, an arbitral tribunal finds that the arbitrationagreement has been validly concluded despite any subse-quent defence that the contracting authority had no authori-zation to conclude it, the question may reappear at the rec-ognition and enforcement stage before a court in the hostcountry or before a court of a third country where theaward is to be recognized or enforced.

2. Commonly used methods for preventingand settling disputes

10. The following paragraphs set out the essential featuresof methods used for preventing and settling disputes andconsider their suitability for the various phases of largeinfrastructure projects, namely, the construction phase, theoperational phase and the post-termination phase. Althoughthe project agreement usually provides for composite dis-pute prevention and dispute settlement mechanisms, careshould be taken to avoid excessively complex proceduresor to impose too many layers of different procedures. Thebrief presentation of selected methods for dispute preven-tion and dispute settlement methods contained in the fol-lowing paragraphs is intended to inform legislators aboutthe particular features and usefulness of these variousmethods. It should not be understood as a recommendationfor the use of any particular combination of methods.

(a) Early warning

11. Early warning provisions may be an important tool toavoid disputes. Under these provisions, if one of the partiesto a contract feels that events that have occurred, or claimsthat the party intends to make, have the potential to causedisputes, these events or claims should be brought to theattention of the other party as soon as possible. Delays inmaking these claims are not only a source of conflict, be-cause they are likely to surprise the other party and thereforecreate resentment and hostility, but they also render theclaims more difficult to prove. For that reason, early warningprovisions typically require the claiming party to submit aquantified claim, along with the necessary proof, within anestablished time period. To make the provision effective, asanction is frequently included for non-compliance with theprovision, such as the loss of the right to pursue the claim oran increased burden of proof. In infrastructure projects, earlywarning frequently refers to events that might adverselyaffect the quality of the works or the public services, in-crease their cost, cause delays or endanger the continuity ofthe service. Early warning provisions are therefore usefulthroughout the duration of an infrastructure project.

(b) Partnering

12. Another tool that is used as a means of dispute avoid-ance is partnering. The object of partnering is to create,through mutually developed formal strategies and from theoutset of a project, an environment of trust, teamwork andcooperation among all key parties involved in the project.Partnering has been found to be useful to avoid disputes andto commit the parties to work efficiently to achieve the goalsof the project. The partnering relationships are defined inworkshops attended by the key parties to the project, andusually organized by the contracting authority. At the initialworkshop, a mutual understanding of the concept ofpartnering is established, goals for the project for all theparties are defined and a procedure to resolve critical issuesquickly is developed. At the conclusion of this workshop, a“partnering charter” is drafted and signed by the partici-pants, signifying their commitment to work jointly towardsthe success of the project. The charter usually includes anissue resolution procedure designed to determine claims andresolve other problems, beginning at the lowest possiblelevel of management and at the earliest possible opportunity.If a solution is not reached within a given time-frame, theissue is raised to the next level of management. Outsiders tothe project are only called in if no agreement by the peopleresponsible for the project is achieved.

(c) Facilitated negotiation

13. The purpose of this procedure is to aid the parties in thenegotiation process. The parties appoint a facilitator at thecommencement of the project. His function is to assist theparties in resolving any disputes, without providing subjec-tive opinions on the issues, but rather coaxing them intoanalysing thoroughly the merits of their cases. This proce-dure is specially useful when there are numerous partiesinvolved who would find it difficult to negotiate and coor-dinate all the differing opinions without such facilitation.


(d) Mediation and conciliation

14. The term “conciliation” is used in the Guide as abroad notion referring to proceedings in which a person ora panel assists the parties in an independent and impartialmanner in their attempt to reach an amicable settlement oftheir dispute. Conciliation differs from negotiations be-tween the parties in dispute (in which the parties wouldtypically engage after the dispute has arisen) in that concili-ation involves independent and impartial assistance to settlethe dispute, whereas in settlement negotiations between theparties no third-person assistance is involved. The differ-ence between conciliation and arbitration is that concilia-tion ends either in the settlement of the dispute agreed bythe parties or it ends unsuccessfully; in arbitration, how-ever, the arbitral tribunal imposes a binding decision on theparties, unless they have settled the dispute before theaward is made. In practice, such conciliation proceedingsare referred to by various expressions, including “media-tion”. Nevertheless, in the legal tradition of some countries,a distinction is drawn between conciliation and mediationto emphasize the fact that, in conciliation, a third party istrying to bring together the disputing parties to help themreconcile their differences, while mediation goes further byallowing the mediator to suggest terms for the resolution ofthe dispute. However, the terms “conciliation” and “media-tion” are used as synonyms more frequently than not.

15. Conciliation is increasingly being increasingly prac-tised in various parts of the world, including in regionswhere it was not commonly used in the past. This trend isreflected, inter alia, in the establishment of a number ofprivate and public bodies offering conciliation services tointerested parties. The conciliation procedure is usually pri-vate, confidential, informal and easily pursued. It may alsobe quick and inexpensive. The conciliator may assume mul-tiple roles and is in general more active than a facilitator. Heor she may frequently challenge the parties’ position tostress weaknesses that usually facilitate agreement and, ifauthorized, may suggest possible settlement scenarios. Theprocedure is generally non-binding and the conciliator’sresponsibility is to facilitate settlement by directing the par-ties’ attention to the issues and possible solutions, rather thanpassing judgement. This procedure is particularly usefulwhen there are many parties involved and it would thereforebe difficult to achieve an agreement by direct negotiations.

16. If the parties provide for conciliation in the project agree-ment, they will have to settle a number of procedural ques-tions in order to increase the chance of a settlement. Settlingsuch procedural questions is greatly facilitated by the in-corporation into the contract, by reference, of a set of conci-liation rules such as the UNCITRAL Conciliation Rules.1

Other sets of conciliation rules have been prepared byvarious international and national organizations.

(e) Non-binding expert appraisal

17. This is a procedure where a neutral third party ischarged with providing an appraisal on the merits of thedispute and suggested outcome. It serves as a “realitycheck” showing the contesting parties what the possibleoutcome of the more expensive and usually slower bindingprocedures such as arbitration or court proceedings wouldbe. This procedure is useful where the parties have diffi-culty in communicating because their positions have be-come entrenched or where they do not see clearly theweaknesses of their positions or the strengths of the otherparty’s positions. A non-binding expert appraisal is usuallyfollowed by negotiations, either direct or facilitated.

(f) Mini-trial

18. This procedure assumes the form of a mock trial inwhich site-level personnel of each party make submissionsto a “tribunal” composed of a senior executive of eachparty and a third neutral person. After the submissions,which are typically to be made within predetermined timeperiods, the executives enter into a facilitated negotiationprocedure with the assistance of a neutral person, to try toreach an agreement taking advantage of the issues that havebeen elucidated during the “trial”. Counsel for the partiesare frequently present and are useful in identifying the rel-evant issues. The purpose of the mini-trial is to informsenior executives of the issues involved in the dispute andto serve as a reality check of what the outcome of a realtrial might be.

(g) Senior executive appraisal

19. This procedure is similar to the mini-trial but it is lessadversarial and uses a more consensus-oriented approach.The procedure begins with the presentation of short posi-tion papers by each party, followed by short responses. Atan “appraisal conference” headed by a facilitator, a seniorexecutive from each of the parties makes brief oral presen-tations elucidating the issues submitted in the position pa-pers or other points raised by the parties or the facilitator.This conference is followed by a negotiation meeting,chaired by the facilitator, with a view to reaching an agree-ment. Both the mini-trial and the senior executive appraisaltend to be less of a strong reality check than thenon-binding expert appraisal and therefore less likely tomotivate difficult decisions in the absence of commercialpressure to do so.

(h) Review of technical disputesby independent experts

20. During the construction phase, the parties may wish toconsider providing for certain types of disputes to be re-ferred to an independent expert appointed by both parties.This method may be of particular use in connection withdisagreements relating to technical aspects of the construc-tion of the infrastructure facility (for example, whether theworks comply with contractual specifications or technicalstandards).

1For the report of the United Nations Commission on International TradeLaw on the work of its thirteenth session, see Official Records of theGeneral Assembly, Thirty-fifth Session, Supplement No. 17 (A/35/17), para.106 (Yearbook of the United Nations Commission on International TradeLaw; vol. XI, 1980, part one, chap. II, sect. A (United Nations publication,Sales No. E.81.V.8)). The UNCITRAL Conciliation Rules have also beenreproduced in booklet form (United Nations publication, Sales No.E.81.V.6). Accompanying the Rules is a model conciliation clause, whichreads:“Where, in the event of a dispute arising out of or relating to thiscontract, the parties wish to seek an amicable settlement of that dispute byconciliation, the conciliation shall take place in accordance with theUNCITRAL Conciliation Rules as at present in force”. The use of theUNCITRAL Conciliation Rules was recommended by the General Assem-bly in its resolution 35/52 of 4 December 1980.


21. The parties may, for instance, appoint a design inspec-tor or a supervisor engineer, respectively, to review disa-greements relating to the inspection and approval of thedesign, and the progress of construction works (see chap.IV, “Construction and operation of infrastructure”, paras.69-79). The independent experts should have expertise inthe designing and construction of similar projects. Thepowers of the independent expert (such as whether the in-dependent expert makes recommendations or issues bind-ing decisions), as well as the circumstances under whichthe independent expert’s advice or decision may be soughtby the parties, should be set forth in the project agreement.In some large infrastructure projects, for instance, the ad-vice of the independent expert may be sought by the con-cessionaire whenever there is a disagreement between theconcessionaire and the contracting authority as to whethercertain aspects of the design or construction works conformwith the applicable specifications or contractual obliga-tions. Referral of a matter to a design inspector or to asupervising engineer, as appropriate, may be particularlyrelevant in connection with provisions in the project agree-ment that require prior consent of the contracting authorityfor certain actions by the concessionaire, such as final au-thorization for operation of the infrastructure facility (seechap. IV, “Construction and operation of infrastructure”,para. 78).

22. Independent experts have been often used for the set-tlement of technical disputes under construction contracts,and the various mechanisms and procedures developed inthe practice of the construction industry may be used,mutatis mutandis, in connection with privately financedinfrastructure projects. However, it should be noted that thescope of disputes between the contracting authority and theconcessionaire is not necessarily the same as would be thecase for disputes that typically arise under a constructioncontract. This is so because the respective positions of thecontracting authority and the concessionaire under theproject agreement are not fully comparable with those ofthe owner and the performer of works under a constructioncontract. For instance, disputes concerning the amount ofpayment due to the contractor for the quantities of worksactually performed, which are frequent in construction con-tracts, are not typical for the relations between contractingauthority and concessionaire, since the latter does not usu-ally receive payments from the contracting authority for theconstruction works performed.

(i) Dispute review boards

23. Project agreements for large infrastructure projectsoften establish permanent boards composed of experts ap-pointed by both parties, possibly with the assistance of anappointing authority, for the purpose of assisting in thesettlement of disputes that may arise during the construc-tion and the operational phases (referred to in the Guide as“dispute review boards”). Proceedings before a dispute re-view board can be informal and expeditious, and tailored tosuit the characteristics of the dispute that it is called uponto settle. The appointment of a dispute review board mayprevent misunderstandings or differences between the par-ties from developing into formal disputes that would re-quire settlement in arbitral or judicial proceedings. In fact,

its effectiveness as a tool for avoiding disputes is one of thespecial strengths of this procedure, but a dispute reviewboard may also serve as a mechanism to resolve disputes,in particular when the board is given the power to renderbinding decisions.

24. Under the dispute review board procedure, the partiestypically select, at the outset of the project, three expertsrenowned for their knowledge in the field of the project toconstitute the board. These experts may be replaced if theproject comprises different stages that may require differ-ent expertise (that is, different expertise will be requiredduring the construction of the facility from during the lateradministration of the public service), and in some largeinfrastructure projects more than one board has been estab-lished. For example, one dispute review board may dealexclusively with disputes regarding matters of a technicalnature (e.g. engineering design, fitness of certain technol-ogy, compliance with environmental standards) whereasanother board may deal with disputes of a contractual orfinancial nature (regarding, for instance, the amount ofcompensation due for delay in issuing licences or disagree-ments on the application of price adjustment formulas).Each board member should be experienced in the particulartype of project, including experience in the interpretationand administration of project agreements, and should un-dertake to remain impartial and independent of the parties.These persons may be furnished with periodic reports onthe progress of construction or on the operation of the in-frastructure facility, as appropriate, and may be informedimmediately of differences arising between the parties.They may meet with the parties, either at regular intervalsor when the need arises, to consider differences that havearisen and to suggest possible ways of resolving those dif-ferences.

25. In their capacity as agents to avert disputes, the mem-bers of the board may make periodic visits to the projectsite, meet with the parties and keep informed of theprogress of the work. These meetings help identify anypotential conflicts early, before they start festering and turninto full-fledged disputes. When potential conflicts are de-tected, the board proposes solutions, which, given the ex-pertise and prestige of its members, are likely to be ac-cepted by the parties. Referral of a dispute triggers anevaluation by the board, which is done in an informalmanner, typically by discussion with the parties during aregular site visit. The board controls the discussion, buteach party is given a full opportunity to state its views, andthe dispute review board is free to ask questions and torequest documents and other evidence. The advantages ofconducting hearings at the job site, soon after the eventshave occurred and before adversarial positions have hard-ened, are obvious. The board then meets privately andseeks to formulate a recommendation or a decision. If theparties do not accept these proposals and disputes do arise,the board, if authorized to do so by the parties, is in aunique position to solve them expeditiously because of itsfamiliarity with the problems and contractual documents.

26. Given their usually long duration, many circum-stances relevant to the execution of privately financed in-frastructure projects may change before the end of the con-cession term. While the impact of some changes may be


automatically covered in the project agreement (see chap.IV, “Construction and operation of infrastructure”, paras.126-130) there are changes that might not lend themselveseasily to inclusion in an automatic adjustment mechanismor that the parties may prefer to exclude from such amechanism. It is therefore important for the parties to es-tablish mechanisms for dealing with disputes that may arisein connection with changing circumstances. This is of par-ticular significance for the operational phase of the project.Where the parties have agreed on rules that allow a revisionof the terms of the project agreement following certaincircumstances, the question may arise as to whether thosecircumstances have occurred and, if so, how the contractualterms should be changed or supplemented. With a view tofacilitating a resolution of possible disputes and avoiding astalemate in case the parties are unable to agree on a con-tract revision, it is advisable for the parties to clarifywhether and to what extent certain contractual terms maybe changed or supplemented by the dispute review board.It may be noted, in this context, that the parties might notalways be able to rely on an arbitral tribunal or a domesticcourt for that purpose. Indeed, under some legal systems,courts and arbitrators are not competent to change or sup-plement contractual terms. Under other legal systems,courts and arbitrators may do so only if they are expresslyso authorized by the parties. Under yet other legal systems,arbitrators may do so but courts may not.

27. The law governing arbitral or judicial proceedingsmay determine the extent to which the parties may author-ize arbitrators or a court to review a decision of the disputereview board. Excluding such review has the advantagethat the decision of the dispute review board would beimmediately final and binding. However, permitting such areview gives the parties greater assurance that the decisionwill be correct. Early clauses on dispute review boards didnot provide that their recommendations would becomebinding if not challenged in arbitral or judicial proceedings.In practice, however, the combination of the persuasiveforce of unanimous recommendations by independent ex-perts agreed by the parties has led both contracting authori-ties and project companies to accept the recommendationsvoluntarily rather than litigate. Recent contract provisionson dispute review boards usually provide that a decision ofthe board, while not immediately binding on the parties,becomes binding unless one or both parties refer the dis-pute to arbitration or initiate judicial proceedings within aspecified period of time. Apart from avoiding potentiallyprotracted litigation, the parties often take into account thepotential difficulty of overcoming what might be regardedby the court or arbitral tribunal as a powerful recommenda-tion, inasmuch as it had been made by independent expertsfamiliar with the project from the outset and was based oncontemporaneous observation of the project prior to, and atthe time of, the dispute having first arisen.

28. Although this occurs very rarely, the parties mayagree to make the board’s decision final and binding. Itshould be noted, however, that despite the parties’ agree-ment to be bound by the board’s decision, under manylegal systems, the decision by the dispute review board,while binding as a contract, may not be enforceable in asummary proceeding, such as a proceeding for the enforce-ment of an arbitral award, since it does not have the status

of an arbitral award. If the parties contemplate providingfor proceedings before a dispute review board, it will benecessary for them to settle various aspects of those pro-ceedings in the project agreement. It would be desirable forthe project agreement to delimit as precisely as possible theauthority conferred upon the dispute review board. Withregard to the nature of their functions, the project agree-ment might authorize the dispute review board to makefindings of fact and to order interim measures. It mcyspecify the functions to be performed by the dispute reviewboard and the type of issues with which they may deal. Ifthe parties are permitted to initiate arbitral or judicial pro-ceedings within a specified period of time after the decisionis rendered, the parties might specify that findings of factmade by a dispute review board are to be regarded as con-clusive in arbitral or judicial proceedings. The projectagreement might also obligate the parties to implement adecision by the dispute review board concerning interimmeasures or a decision on the substance of specified issues;if the parties fail to do so, they will be considered as havingfailed to perform a contractual obligation. Regarding theduration of the board’s functions, the project agreementmay provide that the board will continue to function for acertain period beyond the expiry or termination of theproject agreement, in order to deal with disputes that mayarise at that stage (for example, disputes as to the conditionof and compensation due for assets handed over to thecontracting authority).

(j) Non-binding arbitration

29. This procedure is sometimes used when lessadversarial methods such as facilitated negotiation, concili-ation or dispute review board procedures have been unsuc-cessful. Non-binding arbitration is conducted in the samemanner as binding arbitration, and the same rules may beused except that the procedure ends with a recommenda-tion. The procedure contemplates that the parties will pro-ceed directly to litigation if the dispute is still unresolvedunder non-binding arbitration. Those who choose this pro-cedure do so (a) if they have reservations about the bindingnature of arbitration; or (b) as an incentive to avoid botharbitration and litigation, arbitration because it would seemredundant to go through the same procedure twice and liti-gation because of its length and cost.

(k) Arbitration

30. In recent years, arbitration has been used increasinglyfor settling disputes arising under privately financed infra-structure projects. Arbitration is typically used both for thesettlement of disputes that arise during the construction oroperation of the infrastructure facility and for the settle-ment of disputes related to the expiry or termination of theproject agreement. Arbitration is preferred by private inves-tors and lenders, in particular foreign ones, since arbitralproceedings may be structured by the parties so as to beless formal than judicial proceedings and better suited tothe needs of the parties and to the specific features of thedisputes likely to arise under the project agreement. Theparties can choose as arbitrators persons who have expertknowledge of the particular type of project. They maychoose the place where the arbitral proceedings are to beconducted. They can also choose the language or languages


to be used in the arbitral proceedings. Arbitral proceedingsmay be less disruptive of business relations between theparties than judicial proceedings. The proceedings andarbitral awards can be kept confidential, while judicial pro-ceedings and decisions usually cannot. Furthermore, theenforcement of arbitral awards in countries other than thecountry in which the award was rendered is facilitated bythe wide acceptance of the Convention on the Recognitionand Enforcement of Foreign Arbitral Awards of 1958.2

31. With regard, in particular, to infrastructure projectsinvolving foreign investors, it may be noted that a frame-work for the settlement of disputes between the contractingauthority and foreign companies participating in a projectconsortium may be provided through adherence to theConvention on the Settlement of Investment Disputes be-tween States and Nationals of Other States.3 The Conven-tion, which has thus far been adhered to by 131 States,established the International Centre for the Settlement ofInvestment Disputes (ICSID). ICSID is an autonomousinternational organization with close links to the WorldBank. ICSID provides facilities for the conciliation andarbitration of disputes between member countries and in-vestors who qualify as nationals of other member countries.Recourse to ICSID conciliation and arbitration is voluntary.However, once the parties to a contract or dispute haveconsented to arbitration under the ICSID Convention, nei-ther can withdraw its consent unilaterally. All ICSID mem-bers, whether or not parties to the dispute, are required bythe Convention to recognize and enforce ICSID arbitralawards. The consent of the parties to ICSID arbitration maybe given with regard to an existing dispute or with respectto a defined class of future disputes. The consent of theparties need not, however, be expressed in relation to aspecific project; a host country might in its legislation onthe promotion of investment offer to submit disputes aris-ing out of certain classes of investment to the jurisdictionof ICSID and the investor might give its consent by accept-ing the offer in writing.

32. Bilateral investment agreements may also provide aframework for the settlement of disputes between the con-tracting authority and foreign companies. In these treaties,the host State typically extends to investors that qualify asnationals of the other signatory State a number of assur-ances and guarantees (see chap. VII, “Other relevant areasof law”, paras. 4-6) and expresses its consent to arbitration,for instance, by referral to ICSID or to an arbitral tribunalapplying the UNCITRAL Arbitration Rules.

(i) Sovereign immunity

33. When arbitration is allowed and agreed upon betweenthe parties to the project agreement, the implementation ofan agreement to arbitrate may be frustrated or hindered ifthe contracting authority is able to plead sovereign immu-nity, either as a bar to the commencement of arbitral pro-ceedings or as a defence against recognition and enforce-ment of the award. Sometimes the law on this matter is not

clear, which may raise concerns with the interested parties(for instance, the concessionaire, project promoters andlenders) that an agreement to arbitrate might not be effec-tive. In order to address such possible concerns, it is advis-able to review the law on this topic and to indicate theextent to which the contracting authority may raise a pleaof sovereign immunity.

34. In addition, a contracting authority against which anaward has been issued may raise a plea of immunity fromexecution against public property. There is a diversity ofapproaches to the question of sovereign immunity fromexecution. For example, under some national laws immunitydoes not cover governmental entities when engaged in com-mercial activities. In other national laws a link is requiredbetween the property to be attached and the claim in that, forexample, immunity cannot be pleaded in respect of fundsallocated for economic or commercial activity governed byprivate law upon which the claim is based or that immunitycannot be pleaded with respect to assets set aside by the Stateto pursue its commercial activities. In some countries, it isconsidered that it is for the Government to prove that theassets to be attached are in non-commercial use.

35. In some contracts involving entities that might pleasovereign immunity, clauses have been included to the ef-fect that the Government waives its right to plead sovereignimmunity. Such a consent or waiver might be contained inthe project agreement or an international agreement; it maybe limited to recognizing that certain property is used orintended to be used for commercial purposes. Such writtenclauses may be necessary inasmuch as it is not clearwhether the conclusion of an arbitration agreement andparticipation in arbitral proceedings by the governmentalentity constitutes an implied waiver of sovereign immunityfrom execution.

36. The legislator may wish to review its laws on thismatter and, to the extent considered advisable, clarify inwhich areas contracting authorities may not plead sover-eign immunity.

(ii) Effectiveness of the arbitration agreementand enforceability of the award

37. The effectiveness of an agreement to arbitrate dependson the legislative regime where the arbitration takes place.If the legislative regime for arbitration in the host countryis seen as unsatisfactory, for instance, because it is found topose unreasonable restrictions on party autonomy, a partymight wish to agree on a place of arbitration outside thehost country. It is therefore important for the host countryto ensure that the domestic legislative regime for arbitrationresolves the principal procedural issues in a manner appro-priate for international arbitration cases. Such a regime iscontained in the UNCITRAL Model Law on InternationalCommercial Arbitration.4

2See United Nations, Treaty Series, vol. 330, No. 4739, p. 38, reproducedin the Register of Conventions and Other Instruments concerning Interna-tional Trade Law; vol. II (United Nations publication, Sales No. E.73.V.3).

3United Nations Treaty Series, vol. ___, No. 8359, p. 160.

4For the report of the United Nations Commission on International TradeLaw on the work of its eighteenth session. See Official Records of theGeneral Assembly, Fortieth Session, Supplement No. 17 (A/40/17), para.332 and annex I. The General Assembly, in its resolution 40/72 of 11December 1985, recommended that all States give due consideration to theModel Law on International Commercial Arbitration, in view of the desir-ability of uniformity of the law of arbitral procedures and the specific needsof international commercial arbitration practice.


38. If the arbitration takes place outside the host countryor if an award rendered in the host country would need tobe enforced abroad, the effectiveness of the arbitrationagreement would also depend on legislation governing therecognition and enforcement of arbitral awards. The Con-vention on the Recognition and Enforcement of ForeignArbitral Awards (see para. 30), inter alia, deals with therecognition of an arbitration agreement and the grounds onwhich the court may refuse to recognize or enforce anaward. The Convention is generally regarded as providingan acceptable and balanced regime for the recognition andenforcement of arbitral awards. The fact that the host coun-try is a party to the Convention is likely to be seen as acrucial element in assessing the legal certainty of bindingcommitments and of the reliability of arbitration as amethod for solving disputes by arbitration with parties fromthe country. It would also facilitate the enforcement abroadof an arbitral award rendered in the host country.

(l) Judicial proceedings

39. As indicated earlier, in some legal systems, pursuantto mandatory rules of a public law nature, the settlement ofdisputes arising out of project agreements whereby theconcessionaire is entrusted with the provision of publicservices is a matter of the exclusive competence of thedomestic judiciary or administrative courts. In some coun-tries, governmental agencies lack the power to agree toarbitration, except under specific circumstances (see paras.7-9), while in other legal systems the parties have the free-dom to choose between judicial and arbitral proceedings.

40. Where it is possible for the parties to choose betweenjudicial and arbitral proceedings, the contracting authoritymay see reasons for leaving any dispute to be resolved bythe courts of the host country. Those courts are familiarwith the law of the country, which often includes specificlegislation directly applicable to the project agreement.Furthermore, the contracting authority and other govern-mental agencies of the host country that might be involvedin the dispute may prefer local courts because of the famili-arity with the court procedures and the language of theproceedings. It may also be considered that, to the extentproject agreements involve issues of public policy and theprotection of public interest, State courts are in a betterposition to give them proper effect.

41. However, such a view by the contracting authoritymay not be shared by prospective investors, financiers andother private parties. These parties may consider that arbi-tration is preferable to judicial proceedings because arbitra-tion, being to a larger degree subject to the agreement ofthe parties than judicial proceedings, is in a position toresolve a dispute more efficiently. Private investors, inparticular foreign ones, may also be reluctant to submit tothe jurisdiction of domestic courts functioning under rulesunfamiliar to them. In some countries it has been found thatallowing the parties to choose the dispute settlementmechanism helped to attract foreign investment for thedevelopment of its infrastructure.

42. In considering whether any dispute should be resolvedin judicial proceedings or whether an arbitration agreementshould be entered into, where such choice is permitted under

the applicable law, factors typically taken into account bythe parties include, for example, their confidence that thecourts competent to decide a dispute will be unbiased andthat the dispute will be resolved without inordinate delay.The efficiency of the national judicial system and the avail-ability of forms of judicial relief that are adequate to disputesthat might arise under the project agreement are additionalfactors to be taken into account. Furthermore, in view of thehighly technical and complex issues involved in infrastruc-ture projects, the parties will also consider the implicationsof using arbitrators selected for their particular knowledgeand experience as compared to domestic courts which maylack specific knowledge or experience in handling the tech-nical questions in the area where the dispute arose. Anotherconsideration may be the confidentiality of arbitration pro-ceedings, relative informality of arbitral procedures, and thepossibly greater flexibility arbitrators may have in awardingappropriate remedies, all of which may be beneficial forpreserving and developing the long-term relationship im-plicit in project agreements.

C. DISPUTES BETWEEN THE CONCESSIONAIREAND ITS LENDERS, CONTRACTORS

AND SUPPLIERS

43. It is generally accepted in domestic laws that partiesto commercial transactions, and in particular internationalcommercial transactions, are free to agree on the forum thatwill decide in a binding decision any dispute that may arisefrom those transactions. In international transactions, arbi-tration has become the preferred method, whether or not itis preceded by, or combined with, conciliation. As to con-tracts between the concessionaire and the lenders, contrac-tors and suppliers, which invariably form part of privatelyfinanced infrastructure projects, in many countries the par-ties are free to subject disputes to arbitration, to select theplace of arbitration and to determine whether or not anyarbitration case should be administered by an arbitral insti-tution. These contracts are generally considered commer-cial agreements to which, as regards dispute settlementclauses, general rules regarding commercial contracts areapplicable. Host countries wishing to establish a hospitablelegal climate for privately financed infrastructure projectswould be well advised to review their laws with respect tothese contracts so as to eliminate any uncertainty regardingthe freedom of the parties to agree to dispute settlementmechanisms of their choice.

D. DISPUTES BETWEEN THE CONCESSIONAIREAND ITS CUSTOMERS

44. Depending on the type of project, the concessionaire’scustomers may include various persons and entities, suchas, for example, a government-owned utility company thatpurchases electricity or water from the concessionaire so asto resell it to the ultimate users; commercial companies,such as airlines or shipping lines contracting for the use ofthe airport or port; or individual persons paying for the useof a toll road. The considerations and policies regardingcontracts with the end-purchasers of the goods or servicessupplied by the project company may vary according to


who the parties to those contracts are, the conditions underwhich the services are provided and the applicable regula-tory regime.

45. In some countries, public service providers are re-quired by law to establish special simplified and efficientmechanisms for handling claims brought by their custom-ers. Such special regulation is typically limited to certainindustrial sectors and applies to purchases of goods or serv-ices by customers. Statutory requirements for the establish-ment of such dispute settlement mechanisms may applygenerally to claims brought by any of the concessionaire’scustomers or may be limited to customers who are indi-vidual persons acting in their non-commercial capacity.The concessionaire’s obligation may be limited to the es-tablishment of a mechanism for receiving and dealing withcomplaints by individual consumers. Such mechanismsmay include a special facility or department set up withinthe project company for receiving and handling claimsexpeditiously, for instance by making available to the cus-tomers standard claim forms or toll-free telephone numbersfor voicing grievances. If the matter is not satisfactorilyresolved, the customer may have the right to file a com-plaint with a regulatory agency, if any, which in somecountries may have the authority to issue a binding deci-

sion on the matter. Such mechanisms are often optional forthe consumer and typically do not preclude resort by theaggrieved persons to courts.

46. If the customers are utility companies (such as apower distribution company) or commercial enterprises(for instance, a large factory purchasing power directlyfrom an independent producer) who freely choose the serv-ices provided by the concessionaire and negotiate the termsof their contracts, the parties would typically settle anydisputes by methods usual in trade contracts, includingarbitration. Accordingly, there may not be a need for ad-dressing the settlement of these disputes in legislation relat-ing to privately financed infrastructure projects. However,where the concessionaire’s customers are govern-ment-owned entities, their ability to agree on dispute settle-ment methods may be limited by rules of administrativelaw governing the settlement of disputes involving govern-mental entities. For countries that wish to allow the use ofnon-judicial methods, including arbitration, for the settle-ment of disputes between the concessionaire and itsgovernment-owned customers, it is important to removepossible legal obstacles and to provide a clear authorizationfor those entities to agree on dispute settlement methods(see paras. 7-9).

A/CN.9/471/Add.8

Chapter VII. Other relevant areas of law



B. Other relevant areas of law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-52 175

1. Promotion and protection of investment . . . . . . . . . . . . . . . . . . 4-6 175

2. Property law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9 175

3. Security interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-16 176

4. Intellectual property law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-21 177

5 Rules and procedures on compulsory acquisitionof private property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-23 178

6. Rules on government contracts and administrative law . . . . . 24-27 178

7. Private contract law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-29 179

8. Company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-33 179

9. Tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-39 179

10. Accounting rules and practices . . . . . . . . . . . . . . . . . . . . . . . . . 40-41 180

11. Environmental protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-44 181

12. Consumer protection laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-46 181

13. Insolvency law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47-49 181

14. Anti-corruption measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50-52 182

C. International agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53-57 182

1. Membership in multilateral financial institutions . . . . . . . . . . . 54 182

2. General agreements on trade facilitation and promotion . . . . . 55 182

3. International agreements on specific industries . . . . . . . . . . . . 56-57 183


A. GENERAL REMARKS

1. The stage of development of the relevant laws of thehost country, the stability of its legal system and the ad-equacy of remedies available to private parties are essentialelements of the overall legal framework for privately fi-nanced infrastructure projects. By reviewing and, as appro-priate, improving its laws in those areas of immediate rel-evance for privately financed infrastructure projects, thehost country will make an important contribution to secur-ing a hospitable climate for private sector investment ininfrastructure. Greater legal certainty and a favourable legalframework will translate into a better assessment of countryrisks by lenders and project sponsors. This will have apositive influence on the cost of mobilizing private capitaland reduce the need for governmental support or guaran-tees (see chap. II, “Project risks and government support”,paras. 30-60).

2. Section B points out a few selected aspects of the lawsof the host country that, without necessarily dealing di-rectly with privately financed infrastructure projects, mayhave an impact on their implementation (see paras. 3-52).Section C indicates the possible relevance of a few interna-tional agreements for the implementation of privately fi-nanced infrastructure projects in the host country (seeparas. 53-57).

B. OTHER RELEVANT AREAS OF LAW

3. In addition to issues pertaining to legislation directedspecifically towards privately financed infrastructureprojects, a favourable legal framework also requires sup-portive provisions in other areas of legislation. Private in-vestment in infrastructure will be encouraged by the exist-ence of legislation that promotes and protects privateinvestment in economic activities. The following para-graphs pinpoint only a few selected aspects of other fieldsof law that may have an impact on the implementation ofinfrastructure projects. The existence of adequate legal pro-visions in those other fields may facilitate a number oftransactions necessary to carry out infrastructure projectsand help to reduce the perceived legal risk of investment inthe host country.

1. Promotion and protection of investment

4. One matter of particular concern for the project con-sortia and the lenders is the degree of protection affordedto investment in the host country. Foreign investors in thehost country will require assurances that they will be pro-tected from nationalization or dispossession without judi-cial review and appropriate compensation in accordancewith the rules in force in the host country and in accord-ance with international law. Project promoters will also beconcerned about their ability, inter alia, to bring to thecountry without unreasonable restriction the qualified per-sonnel required to work with the project, to import neededgoods and equipment, to gain access to foreign exchange asneeded and to transfer abroad or repatriate their profits orsums needed to repay loans that the company has enteredinto for the purpose of the infrastructure project. In addi-

tion to specific guarantees that may be provided by theGovernment (see chap. II, “Project risks and governmentsupport”, paras. 45-50), legislation on promotion and pro-tection of investment may play an important role in con-nection with privately financed infrastructure projects. Forcountries that already have adequate investment protectionlegislation, it may be useful to consider expressly extend-ing the protection provided in such legislation to privateinvestment in infrastructure projects.

5. An increasing number of countries have entered intobilateral investment agreements that aim at facilitating andprotecting the flow of investment between the contractingparties. Investment protection agreements usually containprovisions concerning the admission and treatment of for-eign investment; transfer of capital between the contractingparties (payment of dividends abroad or repatriation of in-vestment, for example); availability of foreign exchangefor transfer or repatriation of proceeds of investment; pro-tection from expropriation and nationalization; and settle-ment of investment disputes. The existence of such anagreement between the host country and the originatingcountry or countries of the project sponsors may play animportant role in their decision to invest in the host coun-try. Depending on its terms, such an agreement may reducethe need for assurances or guarantees by the Governmentgeared to individual infrastructure projects. Multilateraltreaties may also be a source of investment protection pro-visions.

6. Moreover, in a number of countries rules aimed at fa-cilitating and protecting the flow of investment (which alsoinclude areas such as immigration legislation, import con-trol and foreign exchange rules) are contained in legislationthat might not necessarily be based on a bilateral or mul-tilateral treaty

2. Property law

7. It is desirable for the property laws of the host countryto reflect acceptable international standards, contain ad-equate provisions on the ownership and use of land andbuildings, as well as movable and intangible property, andensure the concessionaire’s ability to purchase, sell, trans-fer and license the use of property, as appropriate. Consti-tutional provisions protecting property rights have beenfound to be important factors in fostering private invest-ment in many countries.

8. Where the concessionaire owns the land on which thefacility is built, it is important that the ownership of theland can be clearly and unequivocally established throughadequate registration and publicity procedures. The conces-sionaire and lenders will need clear proof that ownership ofthe land will not be subject to dispute. They will thereforebe reluctant to commit funds to the project if the laws ofthe host country do not provide adequate means for ascer-taining ownership of the land.

9. It is also necessary to provide effective mechanismsfor the enforcement of the property and possessory rightsgranted to the concessionaire against violation by thirdparties. Enforcement should also extend to easements and


rights of way that may be needed by the concessionaire forproviding and maintaining the relevant service (such asplacing of poles and cables on private property to ensurethe distribution of electricity) (see chap. IV, “Constructionand operation of infrastructure”, paras. 30-35).

3. Security interests

10. As indicated earlier (see chap. IV, “Construction andoperation of infrastructure”, paras. 52-61), security ar-rangements in privately financed infrastructure projectsmay be complex and consist of a variety of forms of secu-rity, including fixed security over physical assets of theconcessionaire (for example, mortgages or charges),pledges of shares of the concessionaire and assignment ofintangible assets (receivables) of the project. While the loanagreements are usually subject to the governing law chosenby the parties, the laws of the host country will in mostcases determine the type of security that can be enforcedagainst assets located in the host country and the remediesavailable.

11. Differences in the type of security or limitations in theremedies available under the laws of the host country maybe a cause of concern to potential lenders. It is thereforeimportant to ensure that domestic laws provide adequatelegal protection to secured creditors and do not hinder theability of the parties to establish appropriate security ar-rangements. Because of the significant differences betweenlegal systems regarding the law of security interests, theGuide does not discuss in detail the technicalities of therequisite legislation and the following paragraphs provideonly a general outline of the main elements of a modernregime for secured transactions.

12. In some legal systems, security interests can be cre-ated in virtually all kinds of assets, including intellectualproperty, whereas in other systems security interests canonly be created in a limited category of assets, such as landand buildings. In some countries, security interests can becreated over assets that do not yet exist (future assets) andsecurity may be taken over all of a company’s assets, whileallowing the company to continue to deal with those assetsin the ordinary course of business. Some legal systemsprovide for a non-possessory security interest, so that secu-rity can be taken over assets without taking actual posses-sion of the assets; in other systems, as regards those assetswhich are not subject to a title registration system, securitymay only be taken by physical possession or constructivepossession. Under some systems, enforcement of the secu-rity interest can be undertaken without court involvement,whereas in other systems it may only be enforced throughcourt procedures. Some countries provide enforcementremedies that not only include sale of the asset, but alsoenable the secured lender to operate the asset either bytaking possession or appointing a receiver; in other coun-tries, judicial sale may be the primary enforcement mecha-nism. Under some systems, certain types of security willrank ahead of preferential creditors, whereas in others thepreferential creditors rank ahead of all types of security. Insome countries, creation of a security interest is cost-effi-cient, with minimal fees and duties payable, whereas inother countries it can be costly. In some countries, the

value of the amount of security taken may be unlimited,while in others the value of security cannot be excessive incomparison with the debt owed. Some legal systems im-pose obligations on the secured lender on enforcement ofthe security, such as the obligation to take steps ensuringthat assets will be sold at fair market value.

13. Basic legal protection may include provisions ensur-ing that fixed security (such as a mortgage) is a registrableinterest and that, once such security is registered in theregister of title or other public register, any purchaser of theproperty to which the security attaches should take theproperty subject to such security. This may be difficult,since in many countries no specialized registers of titleexist. Furthermore, security should be enforceable againstthird parties, which may require that they have the natureof a property right and not a mere obligation, and shouldentitle the person receiving security to a sale, in enforce-ment proceedings, of the assets taken as security.

14. Another important aspect concerns the flexibilitygiven to the parties to define the assets that are given assecurity. In some legal systems, broad freedom is given tothe parties in the definition of assets that may be given assecurity. In some legal systems, it is possible to create se-curity that covers all the assets of an enterprise, making itpossible to sell the enterprise as a going concern, whichmay enable an enterprise in financial difficulties to be res-cued while increasing the recovery of the secured creditor.Other legal systems, however, allow only the creation ofsecurity that attaches to specific assets and do not recognizesecurity covering the entirety of the debtor’s assets. Theremay also be limitations on the debtor’s ability to trade ingoods given as security. The existence of limitations andrestrictions of this type makes it difficult or even impossi-ble for the debtor to create security over generically de-scribed assets or over assets traded in the ordinary courseof its business.

15. Given the long-term nature of privately financed in-frastructure projects, the parties may wish to be able todefine the assets that are given as security specifically orgenerally. They may also wish such security to coverpresent or future assets and assets that might change duringthe life of the security. It may be desirable to review exist-ing provisions on security interests with a view to includingprovisions enabling the parties to agree on suitable securityarrangements.

16. Thus far, no comprehensive uniform regime or modelfor the development of domestic security laws has beendeveloped by international intergovernmental bodies. Gov-ernments might be advised, however, to take account ofvarious efforts being undertaken in different organizations.A model for the development of modern legislation on se-curity interests is offered in the Model Law on SecuredTransactions, which was prepared by the European Bankfor Reconstruction and Development (EBRD) to assist leg-islative reform efforts in central and eastern Europeancountries. Besides general provisions on who can createand who can receive a security right and general rulesconcerning the secured debts and the charged property, theEBRD Model Law on Secured Transactions covers othermatters, such as the creation of security rights, the interests


of third parties, enforcement of security and registrationproceedings.

[Note for the Commission: Appropriate reference will bemade to the draft convention on assignment in receivablesfinancing developed by the Working Group on Interna-tional Contract Practices, as well as to other internationalinitiatives (such as the draft model inter-American law onsecured transactions currently being considered by the Or-ganization of American States in the context of prepara-tions for the Sixth Inter-American Conference on PrivateInternational Law and the UNIDROIT draft convention oninternational interests in mobile equipment).]

4. Intellectual property law

17. Privately financed infrastructure projects frequentlyinvolve the use of new or advanced technologies protectedunder patents or similar intellectual property rights. Theymay also involve the formulation and submission of origi-nal or innovative solutions, which may constitute the pro-ponent’s proprietary information under copyright protec-tion. Therefore, private investors, national and foreign,bringing new or advanced technology into the host countryor developing original solutions will need to be assured thattheir intellectual property rights will be protected and thatthey will be able to enforce those rights against infringe-ments, which may require the enactment of criminal lawprovisions designed to combat infringements of intellectualproperty rights.

18. A legal framework for the protection of intellectualproperty may be provided by adherence to internationalagreements regarding the protection and registration of in-tellectual property rights. It would be desirable tostrengthen the protection of intellectual property rights inline with such instruments as the Paris Convention for theProtection of Industrial Property of 1883.1 The Conventionapplies to industrial property in the widest sense, includinginventions, marks, industrial designs, utility models, tradenames, geographical indications and the repression of un-fair competition. The Convention provides that, as regardsthe protection of industrial property, each contracting Statemust grant national treatment. It also provides for the rightof priority in the case of patents, marks and industrial de-signs and establishes a few common rules that all the con-tracting States must follow in relation to patents, marks,industrial designs, trade names, indications of source, un-fair competition and national administrations. A frameworkfor further international patent protection is provided underthe Patent Cooperation Treaty of 1970, which makes itpossible to seek patent protection for an invention simulta-neously in each of a large number of countries by filing aninternational patent application. In some countries, interna-tional standards are supplemented by legislation aimed ataffording legal protection to new technological develop-ments, such as legislation that protects intellectual propertyrights in computer software and computer hardware design.

19. Other important instruments providing internationalprotection of industrial property rights are the MadridAgreement Concerning the International Registration ofMarks of 1891,2 the Protocol Relating to the Madrid Agree-ment of 1989 and the Common Regulations under theMadrid Agreement and the Protocol Relating thereto of1998. The Madrid Agreement provides for the internationalregistration of marks (both trademarks and service marks)at the International Bureau of the World Intellectual Prop-erty Organization (WIPO). International registration ofmarks under the Madrid Agreement has effect in severalcountries, potentially in all the contracting States (exceptthe country of origin). Furthermore, the Trademark LawTreaty of 1994 simplifies and harmonizes procedures forthe application for registration of trademarks, changes afterregistration and renewal.

20. In the area of industrial designs, the Hague AgreementConcerning the International Deposit of Industrial Designsof 19253 provides for the international deposit of industrialdesigns at the International Bureau of WIPO. The interna-tional deposit has, in each of the contracting States desig-nated by the applicant, the same effect as if all the formali-ties required by the domestic law for the grant of protectionhad been complied with by the applicant and as if all ad-ministrative acts required to that end had been accom-plished by the office of that country.

21. The most comprehensive multilateral agreement onintellectual property to date is the Agreement onTrade-Related Aspects of Intellectual Property Rights (the“TRIPS Agreement”) which was negotiated under the aus-pices of the World Trade Organization (WTO) and cameinto effect on 1 January 1995. The areas of intellectualproperty that it covers are copyright and related rights (thatis, the rights of performers, producers of sound recordingsand broadcasting organizations); trademarks, includingservice marks; geographical indications, including appella-tions of origin; industrial designs; patents, including theprotection of new varieties of plants; the layout-designs ofintegrated circuits; and undisclosed information, includingtrade secrets and test data. In respect of each of the mainareas of intellectual property covered by it, the TRIPSAgreement sets out the minimum standards of protection tobe provided by each contracting party by requiring, first,compliance with the substantive obligations, inter alia, ofthe Paris Convention in its most recent version. The mainsubstantive provisions of the Paris Convention are incorpo-rated by reference and thus become obligations under theTRIPS Agreement. The TRIPS Agreement also adds a sub-stantial number of additional obligations on matters wherethe pre-existing conventions on intellectual property aresilent or were seen as being inadequate. In addition to that,the Agreement lays down certain general principles appli-cable to all procedures for the enforcement of intellectualproperty rights. Furthermore, the TRIPS Agreement con-tains provisions on civil and administrative procedures and

1As revised at Brussels on 14 December 1900, at Washington, D.C., on2 June 1911, at The Hague on 6 November 1925, at London on 2 June 1934,at Lisbon on 31 October 1958 and at Stockholm on 14 July 1967 and asamended on 2 October 1979.

2As revised at Brussels on 14 December 1900, at Washington, D.C., on2 June 1911, at The Hague on 6 November 1925, at London on 2 June 1934,at Nice on 15 June 1957 and at Stockholm on 14 July 1967.

3With the Additional Act of Monaco of 1961, the Complementary Act ofStockholm of 1967 as amended on 28 September 1979 and the RegulationsUnder the Hague Agreement Concerning the International Deposit of Indus-trial Designs of 1998.


remedies, provisional measures, special requirements re-lated to border measures and criminal procedures, whichspecify, in a certain amount of detail, the procedures andremedies that must be available so that intellectual propertyrights can effectively be enforced by their holders.

5. Rules and procedures on compulsory acquisitionof private property

22. Where the Government assumes responsibility for pro-viding the land required for the implementation of theproject, that land may be either purchased from its ownersor, if necessary, compulsorily acquired against the paymentof adequate compensation by procedures sometimes referredto as “compulsory acquisition” or “expropriation” (see chap.IV, “Construction and operation of infrastructure”, paras.20-22). Many countries have legislation governing compul-sory acquisition of private property and that legislationwould probably apply to the compulsory acquisition of prop-erty required for privately financed infrastructure projects.

23. Compulsory acquisition may be carried out in judicialor administrative proceedings or may be effected by an adhoc legislative act. In most cases, the proceedings involveboth administrative and judicial phases, which may belengthy and complex. The Government may thus wish toreview existing provisions on compulsory acquisition forreasons of public interest with a view to assessing theiradequacy to the needs of large infrastructure projects and todetermining whether such provisions allow quick and cost-effective procedures, while affording adequate protectionto the rights of the owners. To the extent permitted by law,it is important to enable the Government to take possessionof the property without unnecessary delay, so as to avoidincreased project costs.

6. Rules on government contractsand administrative law

24. In many legal systems belonging to or influenced bythe tradition of civil law, the provision of public servicesmay be governed by a body of law known as “administra-tive law”, which regulates a wide range of governmentalfunctions. Such systems operate under the principle that theGovernment can exercise its powers and functions either bymeans of an administrative act or an administrative con-tract. It is also generally understood that, alternatively, theGovernment may enter into a private contract, subject tothe law governing private commercial contracts. The differ-ences between the two types of contract may be significant.

25. Under the concept of the administrative contract, thefreedom and autonomy enjoyed by the parties to a privatecontract are subordinate to the public interest. In some legalsystems, the Government has the right to modify the scopeand terms of administrative contracts or even terminatethem for reasons of public interest, usually subject to com-pensation for loss sustained by the private contracting party(see chap. V, “Duration, extension and termination of theproject agreement”, ___). Additional rights might includeextensive monitoring and inspection rights, as well as theright to impose sanctions on the private operator for failure

to perform. This is often balanced by the requirement thatother changes may be made to the contract as may be nec-essary to restore the original financial equilibrium betweenthe parties and to preserve the contract’s general value forthe private contracting party (see chap. IV, “Constructionand operation of infrastructure”, paras. 126-130). In somelegal systems, disputes arising out of government contractsare subject to the exclusive jurisdiction of special tribunalsdealing solely with administrative matters, which in somecountries are separate from the judicial system (see chap.VI, “Settlement of disputes”, ___).

26. The existence of a special legal regime applicable toinfrastructure operators and public service providers is notlimited to the legal systems referred to above. Although inother legal systems influenced by the tradition of commonlaw no such categorical distinction is made between admin-istrative contracts and private contracts, similar conse-quences may be achieved by different means. While undersuch systems of law it is frequently held that the rule of lawis best maintained by subjecting the Government to ordi-nary private law, it is generally recognized that the admin-istration cannot by contract fetter the exercise of its sover-eign functions. It cannot hamper its future executiveauthority in the performance of those governmental func-tions which affect the public interest. Under the doctrine ofsovereign acts, which is upheld in some common law juris-dictions, the Government as contractor is excused from theperformance of its contracts if the Government as sover-eign enacts laws, regulations or orders in the public interestthat prevent that performance. Thus, the law may permit apublic authority to interfere with vested contractual rights.Usually such action is limited so that the changes cannot beof such magnitude that the other party could not fairlyadapt to them. In those circumstances, the private party isordinarily entitled to some sort of compensation or equita-ble adjustment. In anticipation of such possibilities, insome countries a standard “changes” clause is included ina governmental contract that enables the Government toalter the terms on a unilateral basis or that provides forchanges as a result of an intervening sovereign act.

27. Special prerogatives for governmental agencies arejustified in those legal systems by reasons of public inter-est. It is however recognized that special governmentalprerogatives, in particular the power to alter the terms ofcontracts unilaterally, may, if improperly used, adverselyaffect the vested rights of government contractors. For thisreason, countries with a well-established tradition of pri-vate participation in infrastructure projects have developeda series of control mechanisms and remedies to protectgovernment contractors against arbitrary or improper actsby public authorities, such as access to impartial disputesettlement bodies and full compensation schemes for gov-ernmental wrongdoing. Where protection of this nature isnot afforded, rules of law providing public authorities withspecial prerogatives may be regarded by potential investorsas an imponderable risk, which may discourage them frominvesting in particular jurisdictions. For this reason, somecountries have reviewed their legislation on governmentcontracts so as to provide the degree of protection neededto foster private investment and remove those provisionswhich gave rise to concern about the long-term contractualstability required for infrastructure projects.


7. Private contract law

28. The laws governing private contracts play an impor-tant role in connection with contracts entered into by theconcessionaire with subcontractors, suppliers and other pri-vate parties. The domestic law on private contracts shouldprovide adequate solutions to the needs of the contractingparties, including flexibility in devising the contractsneeded for the construction and operation of the infrastruc-ture facility. Apart from some essential elements of ad-equate contract law, such as general recognition of partyautonomy, judicial enforceability of contract obligationsand adequate remedies for breach of contract, the laws ofthe host country may create a favourable environment forprivately financed infrastructure projects by facilitatingcontractual arrangements likely to be used in thoseprojects. An adequate set of rules of private internationallaw is also important, given the likelihood that contractsentered into by the concessionaire will include some inter-national elements.

29. Where new infrastructure is to be built, the conces-sionaire may need to import large quantities of supplies andequipment. Greater legal certainty for such transactionswill be ensured if the laws of the host country containprovisions specially adapted to international sales contracts.A particularly suitable legal framework may be providedby adherence to the United Nations Convention on Con-tracts for the International Sale of Goods (Vienna, 1980)4

or other international instruments dealing with specificcontracts, such as the UNIDROIT Convention on Interna-tional Financial Leasing (Ottawa, 1988),5 drawn up by theInternational Institute for the Unification of Private Law(UNIDROIT).

8. Company law

30. In most projects involving the development of a newinfrastructure, the project promoters will establish theproject company as a separate legal entity in the host coun-try (see chap. IV, “Construction and operation of infra-structure”, paras. 12-18). It is recognized that the projectcompany may take various forms in different countries,which may not necessarily entail a corporation. As in mostcases it is a corporate form that is selected, it is particularlyimportant for the host country to have adequate companylaws with modern provisions on essential matters such asestablishment procedures, corporate governance, issuanceof shares and their sale or transfer, accounting and financialstatements and protection of minority shareholders. Fur-thermore, the recognition of the investors’ ability to estab-lish separate entities to serve as special-purpose vehiclesfor raising financing and disbursing funds may facilitate theclosing of project finance transactions (see chap. IV, “Con-struction and operation of infrastructure”, para. 59).

31. Although various corporate forms may be used, acommon characteristic is that the concessionaire’s owners(or shareholders) will require that their liability be limitedto the value of their shares in the company’s capital. If itis intended that the concessionaire will offer shares to thepublic, limited liability will be necessary, as the prospectiveinvestors will usually only purchase those shares for theirinvestment value and will not be closely involved in theoperation of the concessionaire. It is therefore importantthat the laws of the host country provide adequately for thelimitation of liability of shareholders. Furthermore, ad-equate provisions governing the issuance of bonds, deben-tures or other securities by commercial companies will en-able the concessionaire to obtain funds from investors onthe security market, thus facilitating the financing of certaininfrastructure projects.

32. Legislation should establish the responsibilities of di-rectors and administrators of the concessionaire, includingthe basis for criminal responsibility. It can also set outprovisions for the protection of third parties affected by anybreach of corporate responsibility. Modern company lawsoften contain specific provisions regulating the conduct ofmanagers so as to prevent conflicts of interest. Provisionsof this type require that managers act in good faith in thebest interest of the company and do not use their positionto foster their own or any other person’s financial intereststo the detriment of the company. Provisions intended tocurb conflicts of interest in corporate management may beparticularly relevant in connection with infrastructureprojects, where the concessionaire may wish to engage itsown shareholders, at some stage of the project, to performwork or provide services in connection with it (see chap.IV, “Construction and operation of infrastructure”, paras.100 and 101).

33. It is important for the law to regulate adequately thedecision-making process both for meetings of the share-holders and meetings of management organs of the com-pany (the board of directors or supervisory board, for ex-ample). Protection of shareholders’ rights and, in particular,protection for minority shareholders from abuse by control-ling or majority shareholders are important elements ofmodern company laws. Mechanisms for the settlement ofdisputes among shareholders are also critical. It is useful torecognize the right of the shareholders to regulate a numberof additional matters concerning the management of theconcessionaire through agreements among themselves orthrough management contracts with the directors of theconcessionaire.

9. Tax law

34. In addition to possible tax incentives that may begenerally available in the host country or that may be spe-cially granted to privately financed infrastructure projects(see chap. II, “Project risks and government support”,paras. 51-54), the general taxation regime of the host coun-try plays a significant role in the investment decisions ofprivate companies. Beyond an assessment of the impact oftaxation in the project cost and the expected margin ofprofit, private investors consider questions such as the

4Official Records of the United Nations Conference on Contracts for theInternational Sale of Goods, Vienna, 10 March-1 April 1980 (United Na-tions publication, Sales No. E.82.V.5), part I.

5Acts and Proceedings of the Diplomatic Conference for the adoption ofthe draft Unidroit Conventions on International Factoring and Interna-tional Financial Leasing, Ottawa, 9-28 May 1988, vol. I.


overall transparency of the domestic taxation system, thedegree of discretion exercised by taxation authorities, theclarity of guidelines and instructions issued to taxpayersand the objectivity of criteria used to calculate tax liabili-ties. This may be a complex matter, in particular in thosecountries where the authority to establish or increase taxesor to enforce tax legislation has been decentralized.

35. Privately financed infrastructure projects are typicallyhighly leveraged and require a predictable cash flow. Forthat reason, it is crucial for all potential tax implications tobe readily assessable throughout the life of the project.Unanticipated changes in the taxes that reduce that cashflow can have serious consequences for the project. Insome countries, the Government is authorized to enter intoagreements with the investors for the purpose of guarantee-ing that the cash flow of the project will not be adverselyaffected by unexpected increases in taxation. Such arrange-ments are sometimes referred to as “tax stabilization agree-ments”. However, the Government may be restrained, byconstitutional law or for political reasons, from providingthis type of guarantee, in which case the parties may agreeon compensation or contractual revision mechanisms fordealing with cost increases due to tax changes (see alsochap. IV, “Construction and operation of infrastructure”,paras. 122-125).

36. Most national tax regimes fall into one of three gen-eral categories. One approach is worldwide taxation withcredits, in which all income earned anywhere is taxed inthe home country and double taxation is avoided throughthe use of a foreign tax credit system; home country taxesare reduced by the amount of foreign taxes already paid. Ifthis approach is used by an investor’s home country, theinvestor’s tax liability can be no less than it would be athome. Under a different taxation approach, the foreign in-come that has already been subject to foreign tax is exemptfrom taxation by the home country of the investor. Undera territorial approach, foreign income is exempt from homecountry taxation altogether. Investors in home countriesthat use the latter two systems of taxation would benefitfrom tax holidays and lower tax rates in the host country,but such tax relief would offer no incentive to an investorlocated in a tax haven.

37. The parties involved in the project may have differentconcerns over potential tax liability. Investors are usuallyconcerned about the taxation of profits earned in the hostcountry, taxation on payments made to contractors, suppli-ers, investors and lenders, and tax treatment of any capitalgains (or losses) when the concessionaire is wound up.Investors may find that payments used to reduce taxesunder their home country regime (such as payments forinterest on borrowed funds, investigation costs, biddingcosts and foreign exchange losses) may not be available inthe host country, or vice versa. Since foreign tax credits areonly allowed for foreign income taxes, investors need toensure that any income tax paid in the host country satisfiesthe definition of income tax of their own country’s taxingauthority. Similarly, the project company in the host coun-try may be treated for tax purposes as a different type ofentity in the home country. In projects where the assetsbecome public property, this may preclude deductions fordepreciation under the laws of the home country.

38. One particular problem of privately financed infra-structure projects involving foreign investment is the pos-sibility that foreign companies participating in a projectconsortium may be exposed to double taxation, that is,taxation of profits, royalties and interests in their own homecountries as well as in the host country. The timing of taxpayments and requirements to pay withholding taxes canalso pose problems. A number of countries have enteredinto bilateral agreements to eliminate or at least reduce thenegative effects of double taxation and the existence ofsuch agreements between the host country and the homecountries of the project sponsors often plays a role in theirtax considerations.

39. Ultimately, it is the cumulative effect of all taxes com-bined that needs to be taken into consideration. For exam-ple, there may be taxes imposed by more than one level oftaxing authority; in addition to taxation by the nationalGovernment, the concessionaire may also face municipal orprovincial taxes. There may also be certain levies otherthan income taxes, which often are due and payable beforethe concessionaire has earned any revenues. These includesales taxes, sometimes referred to as “turnover taxes”,value-added taxes, property taxes, stamp duties and importduties. Sometimes special provisions can be made to offerrelief from these payments as well.

10. Accounting rules and practices

40. In several countries, companies are required by law tofollow internationally acceptable standard accounting prac-tices and retain the services of professional accountants oraccounting auditors. Among the reasons for this is that theadoption of standard accounting practices is a measuretaken to achieve uniformity in the valuation of businesses.In connection with the selection of the concessionaire, theuse of standard accounting practices may also facilitate thetask of evaluating the financial standing of bidders in orderto determine whether they meet the pre-selection criteriarequired by the contracting authority (see chap. III, “Selec-tion of the concessionaire”, paras. 38-40). Standard ac-counting practices are also essential for carrying out auditsof the profits of companies, which may be required for theapplication of tariff structures and the monitoring of theconcessionaire’s performance by the regulatory body (seechap. IV, “Construction and operation of infrastructure”,paras. 39-46).

41. Special accounting rules for infrastructure operatorshave also been introduced in some countries to take intoaccount the particular revenue profile of infrastructureprojects. Projects involving the construction of infrastruc-ture facilities, in particular roads and other transportationfacilities, are typically characterized by a relatively shortinvestment period, with high financial cost and no revenuestream, followed by a longer period with increasing rev-enue and decreasing financial cost and, under normal cir-cumstances, stable operating costs. Accordingly, if tradi-tional accounting rules were applied, the particularfinancial structure of such projects would need to be re-corded in the project company’s accounts as a period ofcontinuous negative results followed by a long period ofnet profit. This would not only have negative conse-


quences, for instance, for the project company’s credit rat-ing during the construction phase, but might also result ina disproportionate tax debt during the operational phase ofthe project. In order to avoid such a distortion, some coun-tries have adopted special accounting rules for companiesundertaking infrastructure projects that take into accountthe fact that the financial results of privately financed infra-structure projects may only become positive on a medium-term basis. Those special rules typically authorize infra-structure developers to defer part of the financial costaccrued during the deficit phase to the subsequent financialyears, in accordance with financial schedules provided inthe project agreement. However, the special accountingrules are typically without prejudice to other rules of lawthat may prohibit the distribution of dividends during fi-nancial years closed with negative results.

11. Environmental protection

42. Environmental protection encompasses a wide varietyof issues, ranging from handling of wastes and hazardoussubstances to relocation of persons displaced by large land-use projects. It is widely recognized that environmental pro-tection is a critical prerequisite to sustainable development.Environmental protection legislation is likely to have a di-rect impact on the implementation of infrastructure projectsat various levels, and environmental matters are among themost frequent causes of disputes. Environmental protectionlaws may include various requirements, such as the consentby various environmental authorities, evidence of no out-standing environmental liability, assurances that environ-mental standards will be maintained, commitments to rem-edy environmental damage and notification requirements.These laws often require prior authorization for the exerciseof a number of business activities, which may be particularlystringent for some types of infrastructure (for instance, wastewater treatment, waste collection, the coal-fired power sec-tor, power transmission, roads and railways).

43. It is therefore advisable to include in legislation meas-ures that make obligations arising from environmental lawstransparent. It is important to ensure the highest possibledegree of clarity in provisions concerning the tests that maybe applied by the environmental authorities, the documen-tary and other requirements to be met by the applicants, theconditions under which licences are to be issued and thecircumstances that justify the denial or withdrawal of alicence. Particularly important are provisions that guaranteethe applicant’s access to expeditious appeals procedures andjudicial recourse, as appropriate. It may also be advisable toascertain to the extent possible, prior to the final award of theproject, whether the conditions for obtaining the requiredenvironmental licences are met. In some countries, specialpublic authorities or advocacy groups may have the right toinstitute legal proceedings to seek to prevent environmentaldamage, which may include the right to seek the withdrawalof a licence deemed to be inconsistent with applicable envi-ronmental standards. In some of those countries, it has beenfound useful to involve representatives of the public in theproceedings that lead to the issuance of environmental li-cences. The legislation may also establish the range of pen-alties that may be imposed and specify the parties that maybe held responsible for the damage.

44. Adhering to treaties relating to the protection of theenvironment may help to strengthen the international regimeof environmental protection. A large number of internationalinstruments have been developed in the past decades toestablish common international standards. These include thefollowing: Agenda 216 and the Rio Declaration on Environ-ment and Development,7 adopted by the United NationsConference on Environment and Development in 1992; theWorld Charter for Nature (General Assembly resolution 37/7, annex); the Basel Convention on the Control ofTransboundary Movement of Hazardous Wastes and TheirDisposal of 1989; the Convention on Environmental ImpactAssessment in a Transboundary Context of 1991; and theConvention on the Protection and Use of TransboundaryWatercourses and International Lakes of 1992.

12. Consumer protection laws

45. A number of countries have special rules of law onconsumer protection. Consumer protection laws varygreatly from country to country, both in the way they areorganized and in their substance. Nevertheless, consumerprotection laws often include provisions such as favourabletime limits for asserting claims and enforcing contractualrights; special rules for the interpretation of contractswhose terms are not usually negotiated with the consumer(sometimes referred to as “adhesion contracts”); extendedwarranties in favour of consumers; special terminationrights; access to simplified dispute settlement instances (seealso chap. VI, “Settlement of disputes”, ___) or other pro-tective measures.

46. From the concessionaire’s perspective, it is importantto consider whether the host country’s laws on consumerprotection may limit or hinder the concessionaire’s ability toenforce, for instance, its right to obtain payment for theservices provided, to adjust prices or to discontinue servicesto customers who breach essential terms of their contracts orviolate essential conditions for the provision of the services.

13. Insolvency law

47. The insolvency of an infrastructure operator or publicservice provider raises a number of issues that have ledsome countries to establish special rules to deal with suchsituations, including rules that enable the contracting au-thority to take the measures required to ensure the continu-ity of the project (see chap. V, “Duration, extension andtermination of the project agreement”, ___). The continuityin the provision of the service may be achieved by meansof a legal framework that allows for the rescue of enter-prises facing financial difficulties, such as reorganizationand similar proceedings. In the event that bankruptcy pro-ceedings become inevitable, the secured lenders will bespecially concerned about provisions concerning securedclaims, in particular as to whether secured creditors may

6Report of the United Nations Conference on Environment and Develop-ment, Rio de Janeiro, 3-14 June 1992 (United Nations publication, SalesNo. E.93.I.8 and corrigenda), vol. I, Resolutions Adopted by the Confer-ence, resolution 1, annex II.

7Ibid., annex I.


foreclose on the security despite the opening of bankruptcyproceedings, whether secured creditors are given priorityfor payments made with the proceeds of the security andhow claims of secured creditors are ranked. As noted ear-lier, a substantial portion of the concessionaire’s debt takesthe form of “senior” loans, with the lenders requiring prec-edence of payment over payment of the subordinated debtof the concessionaire (see “Introduction and backgroundinformation on privately financed infrastructure projects”,para. 58). The extent to which the lenders will be able toenforce such subordination arrangements will depend onthe rules and provisions of the laws of the country thatgovern the ranking of creditors in insolvency proceedings.The legal recognition of party autonomy on the establish-ment of contractual subordination of different classes ofloans may facilitate the financing of infrastructure projects.

48. Among the issues that the legislation should addressare the following: the question of the ranking of creditors;the relationship between the insolvency administrator andcreditors; legal mechanisms for reorganization of the insol-vent debtor; special rules designed to ensure the continuityof the public service in case of insolvency of the conces-sionaire; and provisions on avoidance of transactions en-tered into by the debtor shortly before the opening of theinsolvency proceedings.

49. In large infrastructure projects, the insolvency of theproject company is likely to involve creditors from morethan one country or affect assets located in more than onecountry. It may therefore be desirable for the host countryto have provisions in place that facilitate judicial coopera-tion, court access for foreign insolvency administrators andrecognition of foreign insolvency proceedings. A suitablemodel that may be used by countries wishing to adopt leg-islation for that purpose is provided in the UNCITRALModel Law on Cross-Border Insolvency.

14. Anti-corruption measures

50. The investment and business environment in the hostcountry may also be enhanced by measures to fight corrup-tion in the administration of government contracts. It isparticularly important for the host country to take effectiveand concrete action to combat bribery and related illicitpractices, in particular to pursue effective enforcement ofexisting laws prohibiting bribery.

51. The enactment of laws that incorporate internationalagreements and standards on integrity in the conduct ofpublic business may represent a significant step in thatdirection. Important standards are contained in two resolu-tions of the United Nations General Assembly: resolution51/59 of 12 December 1996, by which the Assemblyadopted the International Code of Conduct for Public Of-ficials, and resolution 51/191 of 16 December 1996, bywhich it adopted the United Nations Declaration againstCorruption and Bribery in International Commercial Trans-actions. Other important instruments include the Conven-tion on Combating Bribery of Foreign Public Officials inInternational Business Transactions of 1997, which wasnegotiated under the auspices of the Organisation for Eco-nomic Cooperation and Development.

52. Furthermore, it is important that the rules covering thefunctioning of contracting authorities and the monitoring ofpublic contracts ensure the required degree of transparencyand integrity. Where such rules do not exist, appropriatelegislation and regulations should be developed andadopted. Simplicity and consistency, coupled with theelimination of unnecessary procedures that prolong the ad-ministrative procedures or make them cumbersome, areadditional elements to be taken into consideration in thiscontext.

C. INTERNATIONAL AGREEMENTS

53. In addition to the internal legislation of the host coun-try, privately financed infrastructure projects may be af-fected by international agreements entered into by the hostcountry. The implications of certain international agree-ments is discussed briefly below, in addition to other inter-national agreements mentioned throughout the LegislativeGuide.

1. Membership in multilateral financial institutions

54. Membership in multilateral financial institutions suchas the World Bank, the International Development Associa-tion, the International Finance Corporation, the MultilateralInvestment Guarantee Agency and the regional develop-ment banks may have a direct impact on privately financedinfrastructure projects in various ways. Firstly, the hostcountry’s membership in those institutions is typically arequirement in order for projects in the host country toreceive financing and guarantees provided by those institu-tions. Secondly, the rules on financing and guarantee in-struments provided by those institutions typically contain avariety of terms and conditions of direct relevance for theterms of the project agreement and the loan agreementsnegotiated by the concessionaire (for example, a clause ofnegative pledge of public assets and provision of counter-guarantees in favour of the multilateral financial institu-tion). Lastly, multilateral financial institutions usually fol-low a number of policy objectives whose implementationthey seek to ensure in connection with projects supportedby them (such as adherence to internationally acceptableenvironmental standards, long-term sustainability of theproject beyond the initial concession period and transpar-ency and integrity in the selection of the concessionaire andthe disbursement of their loans).

2. General agreements on trade facilitationand promotion

55. A number of multilateral agreements have been nego-tiated to promote free trade at the global level. The mostnotable of those agreements have been negotiated under theauspices of the General Agreement on Tariffs and Tradeand later WTO. Those agreements may contain generalprovisions on trade promotion and facilitation of trade ingoods (such as a most-favoured-nation clause or prohibi-tion of the use of quantitative restrictions and other dis-criminatory trade barriers) and on the promotion of fairtrade practices (such as prohibition of dumping and limita-


tions on the use of subsidies). Some specific agreementsare aimed at the removal of barriers for the provision ofservices by foreigners in the contracting States or promot-ing transparency and eliminating discrimination of suppli-ers in public procurement. Those agreements may be rel-evant for national legislation on privately financedinfrastructure projects that contemplates restrictions on theparticipation of foreign companies in infrastructure projectsor establishes preferences for national entities or for theprocurement of supplies on the local market.

3. International agreements on specific industries

56. In the context of the negotiations on basic telecommu-nications concluded as part of the General Agreement onTrade in Services (GATS), a number of States members ofWTO representing most of the world market for telecom-munication services have made specific commitments tofacilitate trade in telecommunication services. It should benoted that all WTO member States (even those which havenot made specific telecommunication commitments) arebound by the general GATS rules on services, includingspecific requirements dealing with most-favoured-nationtreatment, transparency, regulation, monopolies and busi-ness practices. The WTO telecommunication agreementadds sector- and country-specific commitments to the over-

all GATS agreement. Typical commitments cover theopening of various segments of the market, including voicetelephony, data transmission and enhanced services, tocompetition and foreign investment. Legislators of currentor prospective WTO member States should thus ensure thatthe country’s telecommunication laws are consistent withthe GATS agreement and their specific telecommunicationcommitments.

57. Another important sector-specific agreement at the in-ternational level is the Energy Charter Treaty, concluded atLisbon on 17 December 1994 and in force since 16 April1998, which has been enacted to promote long-term coop-eration in the energy field. The Treaty provides for variouscommercial measures, such as the development of openand competitive markets for energy materials and productsand the facilitation of transit and access to and transfer ofenergy technology. Furthermore, the Treaty aims at avoid-ing market distortions and barriers to economic activity inthe energy sector and promotes the opening of capitalmarkets to encourage the flow of capital in order to financetrade in materials and products. The Treaty also containsregulations about investment promotion and protection:equitable conditions for investors, monetary transfers re-lated to investments, compensation for losses due to war,civil disturbance or other similar events and compensationfor expropriation.

A/CN.9/471/Add.9

CONSOLIDATED LEGISLATIVE RECOMMENDATIONS

CONTENTS

Recommendations Page

I. GENERAL LEGISLATIVE AND INSTITUTIONALFRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-11 185

Constitutional and legislative framework . . . . . . . . . . . . . . . . . . . . . . . . . 1 185

Scope of authority to award concessions . . . . . . . . . . . . . . . . . . . . . . . . . 2-5 185

Administrative coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 185

Authority to regulate infrastructure services . . . . . . . . . . . . . . . . . . . . . . 7-11 185

II. PROJECT RISKS AND GOVERNMENT SUPPORT . . . . . . . . . . . . . . 12-13 185

Project risks and risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 185

Government support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 185

III. SELECTION OF THE CONCESSIONAIRE . . . . . . . . . . . . . . . . . . . . . 14-38 185

General considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 185

Preselection of bidders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-17 186

Procedure for requesting proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-27 186

Direct negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-29 187

Unsolicited proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-35 187

Review procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 188

Notice of project award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 188

Record of selection and award proceedings . . . . . . . . . . . . . . . . . . . . . . . 38 188


Recommendations Page

IV. CONSTRUCTION AND OPERATIONOF INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39-59 188

General provisions on the project agreement . . . . . . . . . . . . . . . . . . . . . . 39-40 188

Organization of the concessionaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-42 188

The project site and easements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43-44 188

Financial arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-47 189

Security interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 189

Assignment of the concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 189

Transfer of controlling interest in the project company . . . . . . . . . . . . . 50 189

Construction works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 189

Infrastructure operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52-54 189

General contractual arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55-59 190

V. DURATION, EXTENSION AND TERMINATIONOF THE PROJECT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60-67 190

Duration and extension of the project agreement . . . . . . . . . . . . . . . . . . 60-61 190

Termination of the project agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62-64 190

Consequences of expiry or termination of the project agreement . . . . . 65-67 191

VI. SETTLEMENT OF DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68-70 191

Disputes between the contracting authorityand the concessionaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68-68bis 191

Disputes between the concessionaire and its lenders, contractorsand suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 191

Disputes between the concessionaire and its customers . . . . . . . . . . . . . 70 191

FOREWORD

Each chapter of the Guide contains a set of recommended legislative principles entitled“Legislative Recommendations”. The Legislative Recommendations are intended to as-sist in the establishment of a legislative framework favourable to privately financedinfrastructure projects. The Legislative Recommendations contained in the Guide arefollowed by notes which offer an analytical introduction with references to financial,regulatory, legal, policy, and other issues raised in the subject area. The full text of allLegislative Recommendations contained in the Guide is reproduced hereafter for ease ofreference. The user is advised to read the Legislative Recommendations together with thenotes, which provide background information to enhance the understanding of the Leg-islative Recommendations.

The Legislative Recommendations deal with matters that are important to address inlegislation specifically concerned with privately financed infrastructure projects. They donot deal with other areas of law which, as discussed in notes to the Legislative Recom-mendations, also have an impact on privately financed infrastructure projects. Moreover,the successful implementation of privately financed infrastructure projects typically re-quires various measures beyond the establishment of an appropriate legislative frame-work, such as adequate administrative structures and practices, organizational capability,technical expertise, appropriate human and financial resources, and economic stability.


For host countries wishing to promote privately financedinfrastructure projects it is recommended that the followingprinciples should be implemented by the law:

I. GENERAL LEGISLATIVEAND INSTITUTIONAL FRAMEWORK

Constitutional and legislative framework(see chap. I, “General legislative

and institutional framework”, paras. 2-14)

Recommendation 1. The legislative and institutionalframework for the implementation of privately financed in-frastructure projects should ensure transparency, fairness,and the long-term sustainability of projects. Undesirablerestrictions to private sector participation in infrastructuredevelopment and operation should be eliminated.

Scope of authority to award concessions(see chap. I, “General legislative


Recommendation 2. The law should identify the publicauthorities of the host country (including, as appropriate,national, provincial and local authorities) which are em-powered to enter into agreements for the implementation ofprivately financed infrastructure projects.

Recommendation 3. Privately financed infrastructureprojects may include concessions for the construction andoperation of new infrastructure facilities and systems or themaintenance, modernization, expansion and operation ofexisting infrastructure facilities and systems.

Recommendation 4. The law should identify the sec-tors or types of infrastructure in respect of which conces-sions may be granted.

Recommendation 5. The law should specify the extentto which a concession might extend to the entire regionunder the jurisdiction of the respective contracting author-ity, to a geographical subdivision thereof or to a discreteproject, and whether it might be awarded with or withoutexclusivity, as appropriate, in accordance with rules andprinciples of law, statutory provisions, regulations and poli-cies applying to the sector concerned. Contracting authori-ties might be jointly empowered to award concessions be-yond a single jurisdiction.

Administrative coordination (see chap. I, “Generallegislative and institutional framework”, paras. 23-29)

Recommendation 6. Institutional mechanisms shouldbe established to coordinate the activities of the public au-thorities responsible for issuing approvals, licences, permitsor authorizations required for the implementation of pri-vately financed infrastructure projects in accordance withstatutory or regulatory provisions on the construction andoperation of infrastructure facilities of the type concerned.

Authority to regulate infrastructure services(see chap. I, “General legislative


Recommendation 7. The authority to regulate infra-structure services should not be entrusted to entities whichdirectly or indirectly provide infrastructure services.

Recommendation 8. Regulatory competence should beentrusted to functionally independent bodies with a suffi-cient level of autonomy to ensure that their decisions aretaken without political interference or inappropriate pres-sures from infrastructure operators and public service pro-viders.

Recommendation 9. The rules governing regulatoryprocedures should be published. Regulatory decisionsshould state the reasons on which they are based and beaccessible to interested parties through publication or othermeans.

Recommendation 10. The law should establish trans-parent procedures whereby the concessionaire may requesta review of regulatory decisions by an independent andimpartial body and set forth the grounds on which a requestfor review may be based and the availability of court re-view.

Recommendation 11. Where appropriate, special pro-cedures should be established for handling disputes amongpublic service providers concerning alleged violations oflaws and regulations governing the relevant sector.

II. PROJECT RISKSAND GOVERNMENT SUPPORT

Project risks and risk allocation (see chap. II,“Project risks and government support”, paras. 8-29)

Recommendation 12. No unnecessary statutory orregulatory limitations should be placed upon the contract-ing authority’s ability to agree on an allocation of risks thatis suited to the needs of the project.

Government support (see chap. II, “Project risksand government support”, paras. 30-60)

Recommendation 13. The law should clearly statewhich public authorities of the host country may providefinancial or economic support to the implementation ofprivately financed infrastructure projects and which typesof support they are authorized to provide.

III. SELECTION OF THE CONCESSIONAIRE

General considerations (see chap. III,“Selection of the concessionaire”, paras. 1-33)

Recommendation 14. The law should provide for theselection of the concessionaire through transparent and ef-


ficient competitive procedures adapted to the particularneeds of privately financed infrastructure projects.

Pre-selection of bidders (see chap. III,“Selection of the concessionaire”, paras. 34-50)

Recommendation 15. The bidders should demonstratethat they meet the preselection criteria which the contract-ing authority considers appropriate for the particularproject, including:

(a) Adequate professional and technical qualifications,human resources, equipment and other physical facilities,as necessary to carry out all the phases of the project,namely engineering, construction, operation and mainte-nance;

(b) Sufficient ability to manage the financial aspects ofthe project and capability to sustain the financing require-ments for the engineering, construction and operationalphases of the project;

(c) Appropriate managerial and organizational capabil-ity, reliability and experience, including previous experi-ence in operating public infrastructure.

Recommendation 16. The bidders should be allowed toform consortia to submit proposals, provided that eachmember of a preselected consortium may participate, eitherdirectly or through subsidiary companies, in only one bid-ding consortium.

Recommendation 17. The contracting authority shouldelaborate a short list of the preselected bidders which willbe subsequently invited to submit proposals upon comple-tion of the preselection phase.

Procedure for requesting proposals (see chap. III,“Selection of the concessionaire”, paras. 51-84)

Single-stage and two-stage procedurefor requesting proposals

Recommendation 18. Upon completion of thepreselection proceedings, the contracting authority shouldinvite the preselected bidders to submit final proposals.

Recommendation 19. Notwithstanding the above, thecontracting authority may use a two-stage procedure torequest proposals from preselected bidders when it is notfeasible for the contracting authority to formulate projectspecifications or performance indicators and contractualterms in a manner sufficiently detailed and precise to per-mit final proposals to be formulated. Where a two-stageprocedure is used, the following provisions apply:

(a) The contracting authority should first call upon thepreselected bidders to submit proposals relating to outputspecifications and other characteristics of the project aswell as to the proposed contractual terms;

(b) The contracting authority may convene a meetingof bidders to clarify questions concerning the initial requestfor proposals;

(c) Following examination of the proposals received,the contracting authority may review and, as appropriate,revise the initial project specifications and contractualterms prior to issuing a final request for proposals.

Content of the final request for proposals

Recommendation 20. The final request for proposalsshould include at least the following:

(a) General information as may be required by the bid-ders in order to prepare and submit their proposals;

(b) Project specifications and performance indicators,as appropriate, including the contracting authority’s re-quirements regarding safety and security standards andenvironmental protection;

(c) The contractual terms proposed by the contractingauthority;

(d) The criteria for evaluating the proposals, the rela-tive weight to be accorded to each such criterion and themanner in which they are to be applied in the evaluation ofproposals.

Clarifications and modifications

Recommendation 21. The contracting authority may,whether on its own initiative or as a result of a request forclarification by a bidder, modify the final request for pro-posals by issuing addenda at a reasonable time prior to thedeadline for submission of proposals.

Evaluation criteria

Recommendation 22. The criteria for the evaluationand comparison of the technical proposals should concernthe effectiveness of the proposal submitted by the bidder inmeeting the needs of the contracting authority, includingthe following:

(a) Technical soundness;

(b) Operational feasibility;

(c) Quality of services and measures to ensure theircontinuity;

(d) Social and economic-development potential offeredby the proposals.

Recommendation 23. The criteria for the evaluationand comparison of the financial and commercial proposalsmay include, as appropriate:

(a) The present value of the proposed tolls, fees, andother charges over the concession period;

(b) The present value of the proposed direct paymentsby the contracting authority, if any;

(c) The costs for design and construction activities,annual operation and maintenance costs, present value ofcapital costs and operating and maintenance costs;


(d) The extent of financial support, if any, expectedfrom the Government;

(e) Soundness of the proposed financial arrangements;

(f) The extent of acceptance of the proposed contrac-tual terms.

Submission, opening, comparison and evaluationof proposals

Recommendation 24. The contracting authority mayestablish thresholds with respect to quality, technical andcommercial aspects to be reflected in the proposals in ac-cordance with the criteria as set out in the request for pro-posals. Proposals which fail to achieve the thresholdsshould be regarded as non-responsive.

Recommendation 25. Whether or not it has usedpreselection proceedings the contracting authority may re-tain the right to require the bidders to demonstrate againtheir qualifications in accordance with criteria and proce-dures set forth in the request for proposals or thepreselection documents, as appropriate. Where preselectionproceedings have been used, the criteria shall be the sameas those used in the preselection proceedings.

Final negotiations

Recommendation 26. The contracting authority shouldrank all responsive proposals on the basis of the evaluationcriteria set forth in the request for proposals and invite forfinal negotiation of the project agreement the bidder thathas attained the best rating. Final negotiations may notconcern those terms of the contract that were stated as non-negotiable in the final request for proposals.

Recommendation 27. If it becomes apparent to theawarding authority that the negotiations with the bidderinvited will not result in a project agreement, the awardingauthority should inform that bidder that it is terminating thenegotiations and then invite for negotiations the other bid-ders on the basis of their ranking until it arrives at a projectagreement or rejects all remaining proposals.

Direct negotiations (see chap. III,“Selection of the concessionaire”, paras. 85-96)

Recommendation 28. The law should set forth the ex-ceptional circumstances under which the contracting au-thority may be authorized by a higher authority to selectthe concessionaire through direct negotiations, such as:

(a) When there is an urgent need for ensuring continu-ity in the provision of the service, and engaging in a com-petitive selection procedure would therefore be impractical;

(b) In case of projects of short duration and with ananticipated initial investment value not exceeding a speci-fied low amount;

(c) Reasons of national defence or national security;

(d) Cases where there is only one source capable ofproviding the required service (e.g. because it requires theuse of patented technology or unique know-how);

(e) When an invitation to the preselection proceedingsor a request for proposals has been issued but no applica-tions or proposals were submitted or all proposals failed tomeet the evaluation criteria set forth in the request for pro-posals, and in the judgement of the contracting authorityissuing a new request for proposals would be unlikely toresult in a project award;

(f) Other cases where the higher authority authorizessuch an exception for compelling reasons of public interest.

Recommendation 29. The law may require that the fol-lowing procedures be observed in direct negotiations:

(a) The contracting authority should publish a notice ofthe negotiation proceedings and engage in negotiationswith as many companies judged capable of carrying out theproject as circumstances permit;

(b) The contracting authority should establish and makeknown to bidders the qualification criteria and the criteriafor evaluating the proposals and determine the relativeweight to be accorded to each such criterion and the man-ner in which they are to be applied in the evaluation of theproposals;

(c) The contracting authority should treat proposals ina manner which avoids the disclosure of their contents tocompeting bidders;

(d) Any such negotiations between the contracting au-thority and bidders should be confidential and one party tothe negotiations should not reveal to any other person anytechnical, price or other commercial information relating tothe negotiations without the consent of the other party;

(e) Following completion of negotiations, the contract-ing authority should request all bidders remaining in theproceedings to submit, by a specified date, a best and finaloffer with respect to all aspects of their proposals;

(f) Proposals should be evaluated and ranked accord-ing to the criteria for the evaluation of proposals estab-lished by the contracting authority.

Unsolicited proposals (see chap. III,“Selection of the concessionaire”, paras. 97-117)

Recommendation 30. By way of exception to the selec-tion procedures described in legislative recommendations12 to 25, the contracting authority may be authorized tohandle unsolicited proposals pursuant to specific proce-dures established by the law for handling unsolicited pro-posals, provided that such proposals should not relate to aproject for which selection procedures have been initiatedor announced by the contracting authority.

Procedures for determining the admissibilityof unsolicited proposals

Recommendation 31. Following receipt and prelimi-nary examination of an unsolicited proposal, the contract-


ing authority should inform the proponent, within a reason-ably short period, whether or not there is a potential publicinterest in the project. If the project is found to be in thepublic interest, the contracting authority should invite theproponent to submit a formal proposal in sufficient detail toallow the contracting authority to properly evaluate theconcept or technology and determine whether the proposalmeets the conditions set forth in the law and is likely to besuccessfully implemented at the scale of the proposedproject.

Recommendation 32. The proponent should retain titleto all documents submitted throughout the procedure, andthose documents should be returned to it in the event theproposal is rejected.

Procedures for handling unsolicited proposalsthat do not involve proprietary concepts or technology

Recommendation 33. The contracting authority shouldinitiate competitive selection procedures under recommen-dations 12 to 25 above if it is found that the envisagedoutput of the project can be achieved without the use of aprocess, design, methodology or engineering concept forwhich the author of the unsolicited proposal possesses ex-clusive rights or if the proposed concept or technology isnot truly unique or new. The author of the unsolicited pro-posal should be invited to participate in such proceedingsand might be given a premium for submitting the proposal.

Procedures for handling unsolicited proposals involvingproprietary concepts or technology

Recommendation 34. If it appears that the envisagedoutput of the project cannot be achieved without using aprocess, design, methodology or engineering concept forwhich the author of the unsolicited proposal possesses ex-clusive rights, the contracting authority should seek to ob-tain elements of comparison for the unsolicited proposal.For that purpose, the contracting authority should publish adescription of the essential output elements of the proposalwith an invitation for other interested parties to submit al-ternative or comparable proposals within a certain reason-able period.

Recommendation 35. The contracting authority mayengage in negotiations with the author of the unsolicitedproposal if no alternative proposals are received, subject toapproval by a higher authority. If alternative proposals aresubmitted, the contracting authority should invite all theproponents to negotiations in accordance with the provi-sions of legislative recommendation 28 (b) to (f).

Review procedures (see chap. III,“Selection of the concessionaire”, paras. 118-122)

Recommendation 36. Bidders who claim to have suf-fered, or who may suffer, loss or injury due to a breach ofa duty imposed on the contracting authority by the law mayseek review of the contracting authority’s acts in accord-ance with the laws of the host country.

Notice of project award (see chap. III,“Selection of the concessionaire”, para. 123)

Recommendation 37. The contracting authority shouldcause a notice of the award of the project to be published.The notice should identify the concessionaire and include asummary of the essential terms of the project agreement.

Record of selection and award proceedings(see chap. III, “Selection of the concessionaire”,

paras. 124-130)

Recommendation 38. The contracting authority shouldkeep an appropriate record of key information pertaining tothe selection and award proceedings. The law should setforth the public access requirements.

IV. CONSTRUCTION AND OPERATIONOF INFRASTRUCTURE

General provisions on the project agreement(see chap. IV, “Construction and operation

of infrastructure”, paras. 1-11)

Recommendation 39. The law might identify the coreterms to be provided in the project agreement which mayinclude those terms referred to in recommendations 39 to65 below.

Recommendation 40. Unless otherwise provided, theproject agreement is governed by the law of the host country.

Organization of the concessionaire (see chap. IV,“Construction and operation of infrastructure”,

paras. 12-18)

Recommendation 41. The contracting authority shouldhave the option to require that the selected bidders establishan independent legal entity with a seat in the country.

Recommendation 42. The project agreement shouldspecify the minimum capital of the project company andthe procedures for obtaining the approval of the contractingauthority to its statutes and by-laws of the project companyand fundamental changes therein.

The project site and easements (see chap. IV,“Construction and operation of infrastructure”,

paras. 19-32)

Recommendation 43. The project agreement shouldspecify, as appropriate, which assets will be public propertyand which assets will be the private property of the conces-sionaire. The project agreement should identify which as-sets the concessionaire is required to transfer to the con-tracting authority or to a new concessionaire upon expiry ortermination of the project agreement; which assets the con-tracting authority, at its option, may purchase from the


concessionaire; and which assets the concessionaire mayfreely remove or dispose of upon expiry or termination ofthe project agreement.

Recommendation 44. The contracting authority shouldassist the concessionaire in the acquisition of easementsneeded for the operation, construction and maintenance ofthe facility. The law might empower the concessionaire toenter upon, transit through, do work or fix installationsupon, property of third parties, as required for the construc-tion and operation of the facility.

Financial arrangements (see chap. IV,“Construction and operation of infrastructure”,

paras. 33-51)

Recommendation 45. The law should enable the con-cessionaire to collect tariffs or user fees for the use of thefacility or the services it provides. The project agreementshould provide for methods and formulas for the adjust-ment of those tariffs or user fees.

Recommendation 46. Where the tariffs or fees chargedby the concessionaire are subject to external control by aregulatory body, the law should set forth the mechanismsfor periodic and extraordinary revisions of the tariff adjust-ment formulas.

Recommendation 47. The contracting authority shouldhave the power, where appropriate, to agree to make directpayments to the concessionaire as a substitute for, or inaddition to, service charges to be paid by the users or toenter into commitments for the purchase of fixed quantitiesof goods or services.

Security interests (see chap. IV,“Construction and operation of infrastructure”,

paras. 52-61)

Recommendation 48. The concessionaire should be re-sponsible for raising the funds required to construct andoperate the infrastructure facility and, for that purpose,should have the right to secure any financing required forthe project with a security interest in any of its property,with a pledge of shares of the project company, with apledge of the proceeds and receivables arising out of theconcession, or with other suitable security, without preju-dice to any rule of law that might prohibit the creation ofsecurity interests in public property in the possession of theconcessionaire.

Assignment of the concession (see chap. IV,“Construction and operation of infrastructure”,

paras. 62-63)

Recommendation 49. The project agreement should setforth the conditions under which the contracting authoritymight give its consent to an assignment of the concession,including the acceptance by the new concessionaire of allobligations under the project agreement and evidence ofthe new concessionaire’s technical and financial capability

as necessary for providing the service. The concessionshould not be assigned to third parties without the consentof the contracting authority .

Transfer of controlling interest in the projectcompany (see chap. IV, “Construction

and operation of infrastructure”, paras. 64-68)

Recommendation 50. The transfer of a controlling in-terest in the capital of a concessionaire company may re-quire the consent of the contracting authority.

Construction works (see chap. IV, “Constructionand operation of infrastructure”, paras. 69-79)

Recommendation 51. The project agreement should setforth the procedures for the review and approval of con-struction plans and specifications by the contracting author-ity, the contracting authority’s right to monitor the con-struction of, or improvements to, the infrastructure facility,the conditions under which the contracting authority mayorder variations in respect of construction specificationsand the procedures for testing and final inspection, ap-proval and acceptance of the facility, its equipment andappurtenances.

Infrastructure operation (see chap. IV, “Constructionand operation of infrastructure”, paras. 80-97)

Recommendation 52. The project agreement should setforth, as appropriate, the extent of the concessionaire’s ob-ligations to ensure:

(a) The adaptation of the service so as to meet the ac-tual demand for the service;

(b) The continuity of the service;

(c) The availability of the service under essentially thesame conditions to all users;

(d) The non-discriminatory access, as appropriate, ofother service providers to any public infrastructure networkoperated by the concessionaire.


(a) The extent of the concessionaire’s obligation to pro-vide the contracting authority or a regulatory body, as ap-propriate, with reports and other information on its opera-tions;

(b) The procedures for monitoring the concessionaire’sperformance and for taking such reasonable actions as thecontracting authority or a regulatory body may find appro-priate, to ensure that the infrastructure facility is properlyoperated and the services are provided in accordance withthe applicable legal and contractual requirements.

Recommendation 54. The concessionaire should havethe right to issue and enforce rules governing the use of thefacility, subject to the approval of the contracting authorityor a regulatory body.


General contractual arrangements (see chap. IV,“Construction and operation of infrastructure”,

paras. 98-150)

Recommendation 55. The contracting authority mayreserve the right to review and approve major contracts tobe entered into by the concessionaire, in particular con-tracts with the concessionaire’s own shareholders or relatedpersons. The contracting authority’s approval should notnormally be withheld except where the contracts containprovisions inconsistent with the project agreement or mani-festly contrary to the public interest or to mandatory rulesof a public law nature.

Recommendation 56. The concessionaire and its lend-ers, insurers and other contracting partners should be freeto choose the law applicable to govern their contractualrelations, except where such a choice would violate thehost country’s public policy.


(a) The forms, duration and amounts of the guaranteesof performance that the concessionaire may be required toprovide in connection with the construction and the opera-tion of the facility;

(b) The insurance policies that the concessionaire maybe required to maintain;

(c) The compensation to which the concessionaire maybe entitled following the occurrence of legislative changesor other changes in the economic or financial conditionsthat render the performance of the obligation substantiallymore onerous than originally foreseen. The project agree-ment should further provide mechanisms for revising theterms of the project agreement following the occurrence ofany such changes;

(d) The extent to which either party may be exemptfrom liability for failure or delay in complying with anyobligation under the project agreement due to circum-stances beyond their reasonable control;

(e) Remedies available to the contracting authority andthe concessionaire in the event of default by the otherparty.

Recommendation 58. The project agreement should setforth the circumstances under which the contracting author-ity may temporarily take over the operation of the facilityfor the purpose of ensuring the effective and uninterrupteddelivery of the service in the event of serious failure by theconcessionaire to perform its obligations.

Recommendation 59. The contracting authority shouldbe authorized to enter into agreements with the lenders pro-viding for the appointment, with the consent of the con-tracting authority, of a new concessionaire to perform un-der the existing project agreement if the concessionaireseriously fails to deliver the service required or if otherspecified events occur that could justify the termination ofthe project agreement.

V. DURATION, EXTENSION ANDTERMINATION OF THE PROJECT AGREEMENT

Duration and extension of the project agreement(see chap. V, “Duration, extension and termination

of the project agreement”, paras. ___)

Recommendation 60. The duration of the concessionshould be specified in the project agreement.

Recommendation 61. The term of the concessionshould not be extended, except for those circumstancesspecified in the law, such as:

(a) Completion delay or interruption of operation dueto the occurrence of circumstances beyond either party’sreasonable control;

(b) Project suspension brought about by acts of thecontracting authority or other public authorities;

(c) To allow the concessionaire to recover additionalcosts arising from requirements of the contracting authoritynot originally foreseen in the project agreement which theconcessionaire would not be able to recover during thenormal term of the project agreement.

Termination of the project agreement (see chap. V,“Duration, extension and terminationof the project agreement”, paras. ___)

Termination by the contracting authority

Recommendation 62. The contracting authority shouldhave the right to terminate the project agreement:

(a) In the event that it can no longer be reasonablyexpected that the concessionaire will be able or willing toperform its obligations, due to insolvency, serious defaultor otherwise;

(b) For reasons of public interest, subject to payment ofcompensation to the concessionaire.

Termination by the concessionaire

Recommendation 63. The concessionaire should havethe right to terminate the project agreement under excep-tional circumstances specified in the law, such as:

(a) In the event of serious default by the contractingauthority or other public authority as regards the fulfilmentof their obligations under the project agreement;

(b) In the event that the concessionaire’s performanceis rendered substantially more onerous as a result of vari-ation orders or other acts of the contracting authority, un-foreseen changes in conditions or acts of other public au-thorities and that the parties have failed to agree on anappropriate revision of the project agreement.

Termination by either party

Recommendation 64. Either party should have the rightto terminate the project agreement in the event that theperformance of its obligations is rendered impossible bythe occurrence of circumstances beyond either party’s rea-sonable control. The parties should further have the right toterminate the project agreement by mutual consent.


Consequences of expiry or termination of the projectagreement (see chap. V, “Duration, extension andtermination of the project agreement”, paras. ___)

Transfer of assets to the contracting authority or to anew concessionaire

Recommendation 65. The project agreement should laydown the criteria for establishing, as appropriate, the com-pensation to which the concessionaire may be entitled inrespect of assets transferred to the contracting authority or toa new concessionaire or purchased by the contracting au-thority upon expiry or termination of the project agreement.

Financial arrangements upon termination

Recommendation 66. The project agreement shouldstipulate how compensation due to either party in the eventof termination of the project agreement is to be calculated,providing, where appropriate, for compensation for the fairvalue of works performed under the project agreement, andfor losses, including lost profits.

Wind-up and transfer measures

Recommendation 67. The project agreement should setout, as appropriate, the rights and obligations of the partieswith respect to:

(a) The transfer of technology required for the opera-tion of the facility;

(b) The training of the contracting authority’s personnelor of a successor concessionaire in the operation and main-tenance of the facility;

(c) The provision, by the concessionaire, of operationand maintenance services and the supply of spare parts, ifrequired, for a reasonable period after the transfer of thefacility to the contracting authority or to a successor con-cessionaire.

VI. SETTLEMENT OF DISPUTES

Disputes between the contracting authority and theconcessionaire (see chap. VI, “Settlement of disputes”,

paras. ___)

Recommendation 68. The contracting authority shouldbe free to agree to dispute settlement mechanisms regardedby the parties as suited to the needs of the project, includ-ing arbitration.

[Recommendation 68bis. The law should indicatewhether, and, if so, to what extent the contracting authoritymay raise a plea of sovereign immunity, both as a bar to thecommencement of arbitral or judicial proceedings as wellas a defence against enforcement of the award or judge-ment.]

Disputes between the concessionaire and its lenders,contractors and suppliers (see chap. VI,

“Settlement of disputes”, paras. ___)

Recommendation 69. The concessionaire should befree to choose the appropriate mechanisms for settlingcommercial disputes among the project sponsors, or dis-putes between the concessionaire and its lenders, contrac-tors, suppliers and other business partners.

Disputes between the concessionaire and its customers(see chap. VI, “Settlement of disputes”, paras. ___)

Recommendation 70. The concessionaire may be re-quired to make available simplified and efficient mecha-nisms for handling claims submitted by its customers orusers of the infrastructure facility.

193

II. ASSIGNMENT IN RECEIVABLES FINANCING

A. Report of the Working Group on International Contract Practices onthe work of its thirty-first session

(Vienna, 11-22 October 1999 (A/CN.9/466) [Original: English]

CONTENTS

Paragraphs Page

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-17 194

II. DELIBERATIONS AND DECISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19 196

III. DRAFT ARTICLES OF THE DRAFT CONVENTIONON ASSIGNMENT [IN RECEIVABLES FINANCING][OF RECEIVABLES IN INTERNATIONAL TRADE]* . . . . . . . . . . . . 20-164 196

Article 24. Competing rights of several assignees . . . . . . . . . . . . 20-24 196

“Location” of the parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-30 196

Article 25. Competing rights of assignee and creditorsof the assignor or insolvency administrator . . . . . . . . 32-41 198

Article 26. Competing rights with respect to payments . . . . . . . . 42-53 199

Article 4. Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54-86 201

Article 2. Assignment of receivables . . . . . . . . . . . . . . . . . . . . . . 87-91 206

Article 3. Internationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92-93 206

Article 5. Definitions and rules of interpretation . . . . . . . . . . . . . 94-95 206

“Location” of the parties (continued) . . . . . . . . . . . . . . . . . . . . . . . . 96-100 207

Form of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101-103 208

Article 10. Contractual limitations on assignments . . . . . . . . . . . . 104-106 208

Article 12. Limitations relating to Governmentsand other public entities . . . . . . . . . . . . . . . . . . . . . . . . 107-115 209

Article 15. Right to notify the debtor . . . . . . . . . . . . . . . . . . . . . . 116-117 210

Article 16. Right to payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118-123 210

Article 19. Debtor’s discharge by payment . . . . . . . . . . . . . . . . . . 124-132 211

Article 20. Defences and rights of set-off of the debtor . . . . . . . 133-136 212

Article 21. Agreement not to raise defences or rightsof set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137-140 212

Article 22. Modification of the original contract . . . . . . . . . . . . . . 141-142 213

Article 23. Recovery of payments . . . . . . . . . . . . . . . . . . . . . . . . . 143-144 213

Scope and purpose of chapter V . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145-149 213

Article 27. Law applicable to the contract of assignment . . . . . . 150-153 214

Article 28. Law applicable to the rights and obligationsof the assignee and the debtor . . . . . . . . . . . . . . . . . . . 154-158 214

Article 29. Law applicable to conflicts of priority . . . . . . . . . . . . 159-160 215

Article 30. Mandatory rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161-162 215

Article 31. Public policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163-164 215

*Only articles and issues discussed at this session are listed in this report. With the exception of the proposalwith regard to the issue of location of the parties, issues are listed in the order they were discussed. The annexto this report contains the consolidated text of the draft Convention and the annex to the draft Convention as awhole, as adopted by the Working Group.


Paragraphs Page

IV. ANNEX TO THE DRAFT CONVENTION . . . . . . . . . . . . . . . . . . . . . . 165-191 215

A. General comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165-166 215

B. Discussion of draft articles of the annex . . . . . . . . . . . . . . . . . . . . . 167-187 216

Section I. Priority rules based on registration . . . . . . . . . . . . . . 167-170 216

Article 1. Priority among several assignees . . . . . . . . . . . . . . . . 167-168 216

Article 2. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . 169-170 216

Section II. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171-180 217

Article 3. Establishment of a registration system . . . . . . . . . . . 171-172 217

Article 4. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173-178 217

Article 5. Registry searches . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179-180 218

Section III. Priority rules based on the time of the contractof assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181-187 218

Article 6. Priority among several assignees . . . . . . . . . . . . . . . 181-185 218

Article 7. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . 186-187 218

C. Proposal as to the application of the annex . . . . . . . . . . . . . . . . . . . 188-191 219

V. FINAL PROVISIONS OF THE DRAFT CONVENTION . . . . . . . . . . . 192-208 219

Article 33. Conflicts with international agreements . . . . . . . . . . 192-195 219

Article 34. Application of chapter V . . . . . . . . . . . . . . . . . . . . . . 196-197 220

Article 35. Other exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198-201 220

Article 36. Application of the annex . . . . . . . . . . . . . . . . . . . . . . 202-203 220

Article 37. Insolvency rules or procedures not affectedby this Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . 204-205 220

Provisions for the transitional application of the draft Convention 206 221

Revision and amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207-208 221

VI. REPORT OF THE DRAFTING GROUP . . . . . . . . . . . . . . . . . . . . . . . . 209-214 221

VII. FUTURE WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 222

Annexes

I. Consolidated text of the draft Convention . . . . . . . . . . . . . . . . . . . . . . . . 222

II. Renumbering of articles of the draft Convention . . . . . . . . . . . . . . . . . . 229

I. INTRODUCTION

1. At the present session, the Working Group on Interna-tional Contract Practices continued its work on the prepa-ration of a uniform law on assignment in receivables fi-nancing, pursuant to a decision taken by the Commission atits twenty-eighth session (Vienna, 2-26 May 1995).1 Thiswas the eighth session devoted to the preparation of thisuniform law, tentatively entitled the draft Convention onAssignment in Receivables Financing.

2. The Commission’s decision to undertake work on as-signment in receivables financing was taken in response to

suggestions made to it in particular at the UNCITRAL Con-gress, “Uniform Commercial Law in the 21st Century” (heldin New York in conjunction with the twenty-fifth session,17-21 May 1992). A related suggestion made at the Con-gress was for the Commission to resume its work on securityinterests in general, which the Commission at its thirteenthsession (1980) had decided to defer for a later stage.

3. At its twenty-sixth to twenty-eighth sessions (1993 to1995), the Commission discussed three reports prepared bythe secretariat concerning certain legal problems in the areaof assignment of receivables (A/CN.9/378/Add.3, A/CN.9/397 and A/CN.9/412). Having considered those reports, theCommission concluded that it would be both desirable andfeasible to prepare a set of uniform rules, the purpose ofwhich would be to remove obstacles to receivables financ-

1Official Records of the General Assembly, Fiftieth Session, SupplementNo. 17 (A/50/17), paras. 374-381.


ing arising from the uncertainty existing in various legalsystems as to the validity of cross-border assignments (inwhich the assignor, the assignee and the debtor would notbe in the same country) and as to the effects of such assign-ments on the debtor and other third parties.2

4. At its twenty-fourth session (Vienna, 8-19 November1995), the Working Group commenced its work by consid-ering a number of preliminary draft uniform rules con-tained in a report of the Secretary-General entitled “Discus-sion and preliminary draft of uniform rules” (A/CN.9/412).At that session, the Working Group was urged to strive fora legal text aimed at increasing the availability of lower-cost credit (A/CN.9/420, para. 16).

5. At its twenty-ninth session (1996), the Commissionhad before it the report of the twenty-fourth session of theWorking Group (A/CN.9/420). The Commission expressedappreciation for the work accomplished and requested theWorking Group to proceed with its work expeditiously.3

6. At its twenty-fifth and twenty-sixth sessions (NewYork, 8-19 July and Vienna, 11-22 November 1996 respec-tively), the Working Group continued its work by consid-ering different versions of the draft uniform rules containedin two notes prepared by the secretariat (A/CN.9/WG.II/WP.87 and A/CN.9/WG.II/WP.89 respectively). At thosesessions, the Working Group adopted the working assump-tions that the text being prepared would take the form of aconvention (A/CN.9/432, para. 28) and would include con-flict-of-laws provisions (A/CN.9/434, para. 262).

7. At its thirtieth session (1997), the Commission hadbefore it the reports of the twenty-fifth and twenty-sixthsessions of the Working Group (A/CN.9/432 and A/CN.9/434). The Commission noted that the Working Group hadreached agreement on a number of issues and that the mainoutstanding issues included the effects of the assignment onthird parties, such as the creditors of the assignor and theadministrator in the insolvency of the assignor.4 In addi-tion, the Commission noted that the draft Convention hadaroused the interest of the receivables financing communityand Governments, since it had the potential of increasingthe availability of credit at more affordable rates.5

8. At its twenty-seventh and twenty-eighth sessions (Vi-enna, 20-31 October 1997 and New York, 2-13 March1998 respectively), the Working Group considered twonotes prepared by the secretariat (A/CN.9/WG.II/WP.93and A/CN.9/WG.II/WP.96 respectively). At its twenty-sev-enth session, the Working Group had decided that basicpriority rules of the draft Convention would be private in-ternational law rules and the substantive law priority rulesof the draft Convention would be subject to an opt-in byStates (A/CN.9/445, paras. 26-27), while, at its twenty-eighth session, the Working Group had adopted the sub-stance of draft articles 14 to 16, dealing with the relation-

ship between the assignor and the assignee, and 18 to 22,dealing with the relationship between the assignee and thedebtor (A/CN.9/447, paras. 161-164).

9. At its thirty-first session (1998), the Commission hadbefore it the report of the twenty-seventh and twenty-eighthsessions of the Working Group (A/CN.9/445 and A/CN.9/447). The Commission expressed appreciation for the workaccomplished and requested the Working Group to proceedwith its work expeditiously so as to complete its work in1999 and submit the draft Convention for adoption by theCommission at its thirty-third session (2000).6

10. At its twenty-ninth and thirtieth sessions (Vienna, 5-16October 1998 and New York, 1-12 March 1999 respec-tively), the Working Group considered three notes preparedby the secretariat (A/CN.9/WG.II/WP.96, A/CN.9/WG.II/WP.98 and A/CN.9/WG.II/WP.102), as well as a note con-taining the report of a group of experts prepared by thePermanent Bureau of the Hague Conference on Private In-ternational Law (A/CN.9/WG.II/WP.99). At those sessions,the Working Group adopted the substance of the preambleand draft articles 1(1) and (2), 5 (g) to (j), 18 (5bis), 23 to 33and 41 to 50 (A/CN.9/455, para. 17) and the title, the pream-ble and draft articles 1 to 24 (A/CN.9/456, para. 18).

11. At its thirty-second session (1999), the Commissionhad before it the report of the twenty-ninth and thirtiethsessions of the Working Group (A/CN.9/455 and A/CN.9/456). The Commission expressed appreciation for the workaccomplished by the Working Group and requested theWorking Group to proceed with its work expeditiously so asto make it possible for the draft Convention, along with thereport of the next session of the Working Group, to becirculated to Governments for comments in good time andfor the draft Convention to be considered by the Commis-sion for adoption at its thirty-third session (2000). As regardsthe subsequent procedure for adopting the draft Convention,the Commission noted that it would have to decide at its nextsession whether it should recommend adoption by the Gen-eral Assembly or by a diplomatic conference to be speciallyconvened by the General Assembly for that purpose.7

12. The Working Group, which was composed of allStates members of the Commission, held the present ses-sion at Vienna from 11 to 22 October 1999. The sessionwas attended by representatives of the following Statesmembers of the Working Group: Algeria, Australia, Aus-tria, Bulgaria, Cameroon, China, Colombia, Egypt, Fin-land, France, Germany, Honduras, Hungary, Iran (IslamicRepublic of), Italy, Japan, Lithuania, Mexico, Nigeria,Romania, Russian Federation, Singapore, Spain, Thailand,United Kingdom of Great Britain and Northern Ireland,United States of America and Uruguay.

13. The session was attended by observers from the follow-ing States: Benin, Bolivia, Cambodia, Canada, Congo,Czech Republic, Gabon, Georgia, Greece, Guatemala, Indo-nesia, Iraq, Ireland, Lebanon, Libyan Arab Jamahiriya, Na-mibia, Netherlands, Poland, Republic of Korea, Saudi Ara-bia, Slovakia, Sweden, Switzerland, Tunisia and Turkey.

2Official Records of the General Assembly, Forty-eighth Session, Supple-ment No. 17 (A/48/17), paras. 297-301; Official Records of the GeneralAssembly, Forty-ninth Session, Supplement No. 17 (A/49/17), paras. 208-214; and Official Records of the General Assembly, Fiftieth Session, Sup-plement No. 17 (A/50/17), paras. 374-381.

3Ibid., Fifty-first Session, Supplement No. 17 (A/51/17), para. 234.4Ibid., Fifty-second Session, Supplement No. 17 (A/52/17), para. 254.5Ibid., para. 256.

6Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), para. 230.7Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 330.


14. The session was attended by observers from the fol-lowing international organizations: Association of the Barof the City of New York (ABCNY), Commercial FinanceAssociation (CFA), European Federation of NationalFactoring Associations (EUROPAFACTORING), FactorsChain International (FCI), Fédération bancaire de l’Unioneuropéenne, Federacion Latinoamericana de Bancos(FELABAN) and International Institute for the Unificationof Private Law (Unidroit).

15. The Working Group elected the following officers:

Chairman: Mr. David MORÁN BOVIO (Spain)

Rapporteur: Ms. Victoria GAVRILESCU (Romania)

16. The Working Group had before it the following docu-ments: the provisional agenda (A/CN.9/WG.II/WP.103), anote by the secretariat entitled “Draft Convention on As-signment in Receivables Financing: text with remarks andsuggestions” (A/CN.9/WG.II/WP.104), and two other notesby the secretariat entitled “Commentary to the draft Con-vention on Assignment in Receivables Financing” (A/CN.9/WG.II/WP.105 and 106).

17. The Working Group adopted the following agenda:

1. Election of officers.2. Adoption of the agenda.3. Preparation of draft Convention on Assignment

in Receivables Financing.4. Other business.5. Adoption of the report.

II. DELIBERATIONS AND DECISIONS

18. The Working Group considered pending issues iden-tified in the text of the draft Convention with language insquare brackets or in the remarks of the secretariat (A/CN.9/WG.II/WP.104). Noting that the provisions of thedraft Convention dealing with conflicts of priority had notbeen sufficiently discussed at the previous session, theWorking Group decided to begin its deliberations withdraft articles 23 to 26 and to consider in that context theissue of “location”. Also noting the importance of scopeand exclusions, before continuing in the numerical order ofthe draft articles, the Working Group addressed exclusionsin draft article 4.

19. The deliberations and conclusions of the WorkingGroup, including its consideration of various draft provi-sions, are set forth below in chapters III to VII. The Work-ing Group considered draft articles 1 (3), 2 to 5, 8, 10 to 12,16, 19 to 29 and 33 to 42 of the draft Convention, as wellas draft articles 1 to 7 of the annex to the draft Convention.With the exception of the wording within square bracketswhich was referred to the Commission, the Working Groupadopted the draft Convention and the annex thereto as awhole. Having completed its work, the Working Groupdecided to submit the draft Convention to the Commissionfor adoption at its thirty-third session (New York, 12 Juneto 7 July 2000).

III. DRAFT CONVENTION ON ASSIGNMENT[IN RECEIVABLES FINANCING]

[OF RECEIVABLES IN INTERNATIONAL TRADE]

Article 24. Competing rights of several assignees

20. The text of draft article 24 as considered by theWorking Group was as follows:

“(1) Priority among several assignees of the same re-ceivables from the same assignor is governed by the lawof the State in which the assignor is located.

“(2) An assignee entitled to priority may at any timesubordinate unilaterally or by agreement its priority infavour of any existing or future assignees.”

21. In order to avoid leaving to the law of the assignor’slocation issues that were intended to be covered by thedraft Convention (e.g. the question whether an assigneemay give a notification with regard to future receivables soas to obtain priority under the law of the assignor’s loca-tion), the Working Group decided to include at the begin-ning of paragraph (1) language along the opening words ofdraft article 27 (1): “With the exception of matters whichare settled in this Convention”.

22. Confirming its understanding that paragraph (1) ap-plied to a conflict of priority between a foreign and a do-mestic assignee of the same domestic receivables from thesame assignor (A/CN.9/445, para. 22), the Working Groupdecided to include at the end of paragraph (1) languagealong the following lines: “This rule applies even if one ofthe assignees is an assignee in a domestic assignment ofdomestic receivables”.

23. The question was raised as to whether a conflict withan inventory financier or a supplier of goods with a reten-tion of title, who had a right in the proceeds from the saleof the inventory or the goods, would be covered by draftarticle 24. In response, it was observed that the reference indraft article 25 (1) to “the assignor’s creditors” was suffi-cient to encompass conflicts with inventory financiers andsuppliers of goods on credit. In any case, it was stated, ifthe right of such persons in the proceeds was contractual,they should be treated as assignees.

24. After discussion, the Working Group adopted draftarticle 24 as amended and referred it to the drafting group.

“Location” of the parties

25. In the context of its discussion of draft article 24, theWorking Group considered the meaning of the term “loca-tion” (defined in draft article 5 (j) and (k)). The WorkingGroup based its discussion on a draft prepared by the sec-retariat, which was as follows:

“(i) a party is located in the State in which it has itsplace of business;

“(ii) if the assignor or the assignee have more than oneplace of business, the place of business is that which hasthe closest relationship to the contract of assignment. Ifthe debtor has more than one place of business, the placeof business is that which has the closest relationship to


the original contract. If a party does not have a place ofbusiness, reference is to be made to the habitual resi-dence of that party;

“(iii) for the purposes of articles 24 to 26, the placewhere the central administration of an entity is exercisedde facto is deemed to be the place of business with theclosest relationship to the contract of assignment[;

“(iv) several assignors or assignees are located at theplace in which their authorized agent or trustee is lo-cated].”

26. It was noted that that text was an attempt to build on thecommon points that emerged from the discussion at theprevious session of the Working Group. Those points were:that the need for certainty was much stronger in the priorityprovisions than in the scope provisions; that the scope ofapplication of the draft Convention should be as broad aspossible; that, in order to achieve a sufficient degree of debtor-protection, at least, with regard to the debtor’s location,reference should be made to the relevant place of business;and that a solution with regard to the priority provisions couldbe built around the concept of central administration/chiefexecutive office of an entity (A/CN.9/456, paras. 35-37).

27. Support was expressed in favour of the above-men-tioned text. However, the concern was expressed that theapplication of two different location rules could lead toinconsistent results. The concern was also expressed thatadoption of a central-administration test would result inpriority conflicts involving branch offices being inappropri-ately subjected to the law of the location of the head office,even if that jurisdiction had nothing to do with the transac-tions that gave rise to such conflicts. In order to addressthose concerns, a number of suggestions were made. Onesuggestion was that a more flexible rule along the lines ofdraft article 5 (k) (iv) should be established, allowing par-ties to prove that the place of central administration was notthe place most closely connected to the relevant transaction.That suggestion was objected to on the ground that such arule would introduce an unacceptable degree of uncertainty.

28. Another suggestion was to devise a rule along the linesof the above-mentioned text with an exception for branchoffices of banks. In support of that suggestion, it was ob-served that, although branch offices had no separate legalpersonality from that of the head office, they were subject tothe financial services regulations of the country in whichthey were located in respect of their activities in that country.It was also stated that the exception referred only to branchoffices of banks, since it was normal practice for banks tooperate through branch offices, while other industries oper-ated more through subsidiaries, which were separate legalpersons even if they operated under the instructions of theparent company. While that suggestion was met with inter-est, the view was expressed that there was no reason to limitthe exception to branch offices of banks. It was also said thatthe formulation of such a limited exception would be a verydifficult task since there was no universally acceptable defi-nition of the term “bank”. It was, therefore, suggested thatthe exception should apply to branch offices in general. Thatsuggestion was objected to on the ground that such an excep-tion would undermine the certainty achieved by a centraladministration-based rule, since third parties would need to

do a factual search to establish which branch office a trans-action was most closely connected to. It was stated thatproblems might arise from a double assignment of the samereceivables by the head office and a branch office. It wasalso observed that a solution along the lines of the above-mentioned text, offering two different location rules, wouldbe preferable to one rule with a broad exception for branchoffices in general.

29. In the discussion, it was agreed that subparagraph (iv)of the above-mentioned text should be deleted. It was ob-served that assignments by multiple assignors were rare inpractice and, in any case, the application of the draft Con-vention only to the assignment of an interest in receivables,which fell within the ambit of the draft Convention underchapter I, was an appropriate result. As to assignments tomultiple assignees, it was stated that such assignments werepart of well-developed practices in which parties normallysettled the matter of location in their agreements. It wasalso agreed that the reference to a “de facto” central admin-istration, contained in subparagraph (iii), was superfluousand could be deleted on the understanding that the actualplace of central administration was meant. It was observedthat use of the words “de facto” could inadvertently raiseinterpretation questions as to whether there was another “dejure” central administration (i.e. one artificially designatedin the constitutive or other documents of a legal entity). Itwas also stated that the words “is exercised”, which wereintended to reflect a fact, were sufficient in clarifying thatthe actual place of central administration was meant.

30. After discussion, the Working Group decided that, forthe continuation of the discussion, two alternatives shouldbe included in the text of draft article 5 with regard to thedefinition of the term “location”, one alternative along thelines of the text mentioned in paragraph 25 above andanother that would read along the following lines:

“A person is located in the State in which it has its placeof business. If an assignor or assignee has more than oneplace of business, it is located in the State in which it hasits central administration. If a debtor has more than oneplace of business, it is located in the State in which it hasthat place of business which has the closest relationship tothe original contract. [A branch of a person [engaged inthe business of accepting deposits or providing otherbanking services] is deemed to be a separate person.] If aperson does not have a place of business, it is located inthe State of its habitual residence.”

The Working Group left the specific formulation ofthose alternatives to the drafting group (for the continua-tion of the discussion on “location”, see paras. 96-100).

Renvoi

31. In order to avoid the risk of renvoi (i.e. the applicationof the law designated by the private international law pro-visions—conflict of laws—of a State other than the forumState), the Working Group decided to include in draft arti-cle 5 a new subparagraph along the following lines: “‘law’means the law in force in a State other than its rules ofprivate international law”.


Article 25. Competing rights of assignee and creditorsof the assignor or insolvency administrator


“(1) Priority between an assignee and the assignor’screditors is governed by the law of the State in which theassignor is located.

“(2) In an insolvency proceeding, priority between theassignee and the assignor’s creditors is governed by thelaw of the State in which the assignor is located.

“(3) Notwithstanding paragraphs (1) and (2), the appli-cation of a provision of the law of the State in which theassignor is located may be refused by a court or othercompetent authority only if that provision is manifestlycontrary to the public policy of the forum State.

“(4) If an insolvency proceeding is commenced in aState other than the State in which the assignor is lo-cated, except as provided in this article, this Conventiondoes not affect the rights of the insolvency administratoror the rights of the assignor’s creditors.

“(5) If an insolvency proceeding is commenced in aState other than the State in which the assignor islocated, any [non-consensual] [preferential] right orinterest which under the law of the forum State wouldhave priority over the interest of an assignee has suchpriority notwithstanding paragraph (2). [A State maydeposit at any time a declaration identifying those[non-consensual] [preferential] rights or interests whichhave priority over the interests of an assignee notwith-standing application of the priority rule set out in para-graph (2).]

“(6) An assignee asserting rights under this article hasno less rights than an assignee asserting rights underother law.”

33. With regard to paragraphs (1) and (2), the WorkingGroup confirmed its understanding that they were intendedto apply irrespective of the place in which a proceedingcommenced.

34. Recalling its decision to include at the beginning ofdraft article 24 the words “With the exception of matterswhich are settled in this Convention” (see para. 21), theWorking Group decided that the same wording should beincluded in draft article 25 to apply to both paragraphs (1)and (2).

35. The Working Group noted that, in paragraph (2), theterm “assignor’s creditors” had been substituted for theterm “insolvency administrator”, since: in some legal sys-tems, the insolvency administrator did not become theholder of the rights of the creditors; and, in some reorgani-zation proceedings, there might be no insolvency adminis-trator. However, in view of the fact that, in other legalsystems, the insolvency administrator did become theholder of the creditors’ rights, the Working Group decidedthat a reference to the insolvency administrator should beinserted in paragraph (2).

36. As to the policy underlying paragraph (3), it wasnoted that it was intended to strike a balance between theneed to ensure certainty and the need to preserve funda-mental policy decisions of the law of the forum State.Accordingly, the right of the forum State to set aside aprovision of the law applicable was recognized and, at thesame time, limited to cases in which that provision wasmanifestly contrary to the public policy of the forum State.It was observed that, by definition, paragraph (3) referredto international public policy, the application of whichcould result in setting aside a priority rule of the law appli-cable but not in the positive application of a priority rulereflecting the public policy of the forum State. The Work-ing Group noted that the matter was appropriately ex-plained in the commentary (see A/CN.9/WG.II/WP.106,paras. 89-90).

37. As to the scope of paragraph (3), a number of sugges-tions were made. One suggestion was that paragraph (3)should be revised to be made applicable only in the case ofa conflict of priority arising in an insolvency proceeding. Insupport of that suggestion, it was stated that a broaderpublic policy exception would create uncertainty and thushave a negative impact on the availability and the cost ofcredit. It was also observed that such an approach would bein line with paragraph (5), which was intended to preservesuper-priority rights arising by operation of law only in aninsolvency proceeding. That suggestion was objected to onthe ground that the right of a court or other authority toapply its own public policy could not be limited. It wasstated that such a limitation could reduce the acceptabilityof the draft Convention. It was also said that, in any case,it would be doubtful whether such a limitation, even ifincluded in paragraph (3), would be implemented bycourts. Another suggestion was that paragraph (3) shouldbe revised to be made applicable only to cases in which aproceeding commenced in a State other than the State ofthe assignor’s location. While it was agreed that a conflictbetween the applicable law and the public policy of theforum State could arise only if two jurisdictions were in-volved, it was generally felt that no change was necessary.Paragraphs (1) and (2) were generally thought to suffi-ciently reflect the understanding that, if the law applicableto priority and the law governing any insolvency or otherproceeding were laws of a single jurisdiction, the internalrules of that jurisdiction would resolve any conflict. Yetanother suggestion was that the words “notwithstandingparagraphs (1) and (2)” were superfluous and should bedeleted. On the understanding that even without thosewords paragraph (3) sufficiently reflected the fact that itapplied both within and outside an insolvency proceeding,the Working Group approved that suggestion.

38. With regard to paragraph (4), the Working Groupnoted that it was intended to preserve rights of the insol-vency administrator or the assignor’s creditors in a pro-ceeding opened in a State other than the State of theassignor’s location (“secondary insolvency proceeding”).Such rights, while falling short of reflecting the publicpolicy of the forum State, were based on rules of manda-tory law (e.g. the right to challenge the validity of an as-signment on the ground that it was a preferential or fraudu-lent transfer). It was observed that, in view of the fact thatparagraphs (1) and (2) dealt with priority questions without


affecting special rights based on insolvency law, paragraph(4) was superfluous and could be deleted. It was also statedthat the words “except as provided in this article” raiseddoubts as to whether the rights that were intended to bepreserved were in fact protected. After discussion, theWorking Group decided that paragraph (4) should be de-leted.

39. As to paragraph (5), it was noted that it was intendedto preserve super-priority rights (e.g. in favour of the Statefor tax claims or of employees for wages) in the case of aninsolvency proceeding commenced in a State other than theState of the assignor’s location. A number of suggestionswere made as to the appropriate term to reflect those super-priority rights. One suggestion was that those rights shouldbe qualified as non-consensual rights. That suggestion wasobjected to on the ground that it might not sufficientlycover preferential rights which arose out of consensual re-lationships. Another suggestion was that the term “prefer-ential” should be used. That suggestion was objected to onthe ground that it would inadvertently result in broadeningthe scope of the exception from the rule of paragraph (2)and in giving priority to creditors of the assignor that hada property right in receivables recognized in a court judge-ment. Yet another suggestion was that no qualification ofthe rights arising under the law of the forum State wasnecessary. That suggestion too was objected on the groundthat it would in effect overturn the rule of paragraph (2)and subject priority to the law of the forum State. Yetanother suggestion was that the super-priority rights meantin paragraph (5) could be described as preferential rightsarising by operation of the law of the forum and havingpriority status in an insolvency proceeding in the forumState. That suggestion received sufficient support.

40. With regard to paragraph (6), the Working Groupnoted that it was originally intended to ensure that an as-signee asserting priority under the substantive law provi-sions of the draft Convention would not have less rightsthan if it asserted priority under substantive law outside thedraft Convention (A/CN.9/455, para. 40; and A/CN.9/445,para. 44). It was also noted that, once the Working Groupdecided to turn the priority rules of the draft Conventioninto private international law rules (A/CN.9/445, para. 22),paragraph (6) did not appear to be appropriate. It was ob-served that paragraph (6) appeared suggesting that, al-though a conflict of priority was covered by the draft Con-vention, a law other than the law of the assignor’s locationmight be applicable. After discussion, the Working Groupdecided that paragraph (6) should be deleted.

41. The Working Group adopted draft article 25 asamended and referred it to the drafting group.

Article 26. Competing rights with respect to payments


“[(1) If payment with respect to the assigned receiv-able is made to the assignee, the assignee has a propertyright in whatever is received in respect of the assignedreceivable.

“(2) If payment with respect to the assigned receivableis made to the assignor, the assignee has a property rightin whatever is received in respect of the assigned receiv-able if:

(a) what is received is money, cheques, wire trans-fers, credit balances in deposit accounts or similarassets (“cash receipts”);(b) the assignor has collected the cash receipts underinstructions from the assignee to hold the cash receiptsfor the benefit of the assignee; and(c) the cash receipts are held by the assignor for thebenefit of the assignee separately from assets of theassignor, such as in the case of a separate deposit ac-count containing only cash receipts from receivablesassigned to the assignee.

“(3) With respect to the property rights referred to inparagraphs (1) and (2) of this article, the assignee has thesame priority as it had in the assigned receivables.

“(4) If payment with respect to the assigned receivableis made to the assignor and the requirements of para-graph (2) are not met, priority with respect to whateveris received is determined as follows:

(a) if what is received is a receivable, priority isgoverned by the law of the State in which the assignoris located;(b) if what is received is an asset other than a receiv-able, priority is governed by the law of the State inwhich it is located.

“(5) Paragraphs (3) to (5) of article 25 apply to a con-flict of priority arising between an assignee and the in-solvency administrator or the assignor’s creditors withrespect to whatever is received.]”

43. The Working Group noted that paragraphs (1) and (2)were intended to give the assignee a right in rem in proceeds,without affecting the order of priority established in para-graphs (3) and (4). It also noted that, in order to better reflectthat understanding, the secretariat had separated the issue ofpriority in proceeds from the issue of the remedies availableto an assignee with priority in such proceeds and addressedthose issues in two separate provisions that were as follows:

“Article 26. Priority in proceeds

“(1) Priority among several assignees of the same re-ceivables from the same assignor and between the as-signee and the assignor’s creditors or the insolvencyadministrator with respect to whatever is received inpayment [, or other discharge,] of the assigned receivableis determined as follows:

(a) if what is received is a receivable, priority isgoverned by the law of the State in which the assignoris located;(b) if what is received is an asset other than a receiv-able, priority is governed by the law of the State inwhich it is located.

“(2) Paragraphs (3) to (5) of article 25 apply to a con-flict of priority arising between an assignee and theassignor’s creditors or the insolvency administrator withrespect to whatever is received in payment [, or otherdischarge,] of the assigned receivable.


“Article 26bis. Rights in rem in proceeds

“(1) With the exception of the cases foreseen in para-graphs (2) to (4) of this article, whether an assignee [hasa right in rem or ad personam in] [is entitled to claim andretain] whatever is received in payment [, or other dis-charge, ] of the assigned receivable is subject to the lawgoverning priority under article 26 of this Convention.

“(2) If payment [, or other discharge,] with respect tothe assigned receivable is made to the assignee, the as-signee with priority over the assignor’s creditors or theinsolvency administrator under article 26 of this Conven-tion has [a right in rem in] [the right to retain] whateveris received up to the value of its right in the receivable[,including interest].

“(3) If payment [, or other discharge,] with respect tothe assigned receivable is made to the assignor, the as-signee with priority over the assignor’s creditors or theinsolvency administrator under article 26 of this Conven-tion has [a right in rem] [the right to retain] whatever isreceived up to the value of its right in the receivable[, including interest,] if:

(a) the assignor has received payment [, or other dis-charge,] under instructions from the assignee to holdwhatever it received for the benefit of the assignee;and(b) whatever the assignor received is held by theassignor for the benefit of the assignee separately andis reasonably identifiable from assets of the assignor,such as in the case of a separate deposit account con-taining only cash receipts from receivables assigned tothe assignee.”

44. The Working Group decided to use those draft articlesas a basis for the continuation of its deliberations.

Priority in proceeds

45. It was generally agreed that priority in proceeds thatwere receivables, including receivables in the form of ne-gotiable instruments, as well as balances in deposit andsecurities accounts, should be governed by the law of theassignor’s location.

46. With regard to priority in other types of proceeds,such as goods, a number of suggestions were made. Onesuggestion was to retain draft article 26 (1) (b), proposedby the secretariat, as it was or with the addition of languageaimed at ensuring that the rights of third parties in goodswere not affected. That suggestion did not receive suffi-cient support. Another suggestion was that priority in pro-ceeds in the form of goods should be governed by the lawof the assignor’s location. In support of that view, it wasobserved that the application of the law of a single andeasily determinable jurisdiction would enhance certainty. Itwas also stated that such an approach would be in line withthe approach taken with regard to priority in receivables,which deviated from the traditional approach of the law ofthe “location” of a receivable (i.e. of the place in which itwas payable). That suggestion was objected to on theground that such an approach could frustrate the expecta-tions of third parties in the country where the goods werelocated and reduce the acceptability of the draft Conven-

tion. Yet another suggestion was that a distinction shouldbe drawn between goods received in total or partial satis-faction of the receivable and goods returned (e.g. becausethey were defective and the sale contract had been can-celled or because the sale contract allowed the buyer toreturn those goods after a trial period). It was stated that theformer type of goods were another form of the same re-ceivable and priority with respect to those goods should besubject to the same rule as priority with respect to receiva-bles, while the latter type of goods had no relationship withthe receivable and priority with respect to those goodsshould be subject to the law of their location. That sugges-tion attracted sufficient support. The Working Group re-quested that the commentary include an explanation of thenotion of “returned goods”.

47. In the discussion, the Working Group noted that theissue of proceeds arose also in the context of article 16 withrespect to the relationship between the assignor and theassignee. The question was raised as to whether the assign-ee’s right in proceeds as against the assignor should extendto goods given in total or partial satisfaction of the assignedreceivable. The Working Group postponed discussion ofthat question until it had completed its review of draft ar-ticle 16 (see para. 120).

48. It was agreed that the term “proceeds” should be de-fined, without prejudice to the question whether “returnedgoods” would be covered in draft article 16 (see para. 120).Language along the lines of draft article 16 (1) (a) wasgenerally considered to be acceptable (“whatever is re-ceived with respect of the assigned receivable”), with theaddition of the notions of payment and satisfaction of theassigned receivable, whether total or partial. As to the useof the term “discharge”, objections were raised on theground that that term implied payment in full.

49. After discussion, the Working Group adopted draftarticle 26 as amended and referred its formulation, as wellas the formulation of the definition of the term “proceeds”,to the drafting group.

Rights in rem in proceeds

50. With regard to draft article 26bis, a number of con-cerns were expressed. One concern was that draft article26bis was complicated and inappropriately dealt with sub-stantive law issues in paragraph (1) and private interna-tional law issues in paragraphs (2) and (3). Another con-cern was that in creating rights in rem in proceeds, draftarticle 26bis was inconsistent with fundamental notions oflaw in many countries that did not recognize such rightsand yet provided sufficient protection for assignees. Yetanother concern was that draft article 26bis was unneces-sary since parties could structure their transactions so as tomeet their needs.

51. In response, it was stated that a right in rem in thelimited cases described in paragraphs (2) and (3) of draftarticle 26bis could significantly facilitate non-notificationfactoring transactions, securitization transactions and trans-actions involving sovereign receivables, in which assignorsreceived payments on behalf of assignees and normallyheld such payments in separate accounts, since, with such


a right, assignees would be protected in the case of insol-vency of assignors. If, in order to be protected, assigneeswould need to notify debtors and structure their transac-tions so as to receive payments themselves, non-notifica-tion and the other practices mentioned above would behampered and the costs of those transactions would in-crease. It was also observed that, the estate of the assignorhaving been enriched through the credit provided by theassignee to the assignor in return for the receivables, allow-ing the insolvency administrator or the creditors of theassignor to receive payment of the receivables should beconsidered as unjust enrichment. Furthermore, it was statedthat, while such in rem rights in proceeds of receivablesmight be foreign to many jurisdictions, fiduciary arrange-ments, on the basis of which assignors received paymentson behalf of assignees and had certain obligations asagainst such assignees, were not unknown, if not in statu-tory, at least, in case law of those jurisdictions. It was,therefore, suggested that, if an assignee had priority in theassigned receivable, the assignee or the assignor receivedpayment, payment was received by the assignor on behalfof the assignee and the proceeds of payment were held bythe assignor separately, that assignee should be given pri-ority with regard to those proceeds. That suggestion re-ceived sufficient support.

52. In the discussion, the suggestion was made that therules to be prepared should also cover the extent of theassignee’s right in the assigned receivable, the existenceand the extent of the assignee’s right in proceeds, as wellas the existence and the extent of the right of a creditor,who had a right in other property of the assignor, whichright was, by operation of law, extended to the assignedreceivable. That suggestion too received sufficient support.

53. After discussion, the Working Group requested thedrafting group to formulate a specific rule with regard topriority in proceeds along the lines mentioned in para-graphs 51 and 52 above, which would not address thequestion of the legal nature of rights in proceeds. TheWorking Group left to the drafting group the question ofconsolidating the priority rules contained in section III ofchapter IV of the draft Convention in one or more rules.


54. The text of draft article 4 as considered by the Work-ing Group was as follows:

“[(1)] This Convention does not apply to assignments:(a) made for personal, family or household pur-poses;(b) to the extent made by the delivery of a negoti-able instrument, with any necessary endorsement;(c) made as part of the sale, or change in the own-ership or the legal status, of the business out of whichthe assigned receivables arose.

“[(2) This Convention does not apply to assignmentslisted in a declaration made under draft article 35 by theState in which the assignor is located, or with respect tothe provisions of this Convention which deal with therights and obligations of the debtor, by the State inwhich the debtor is located.]”

General remarks

55. Some doubt was expressed as to whether draft article4 was necessary. The Working Group recalled its decisionthat the scope of application of the draft Convention shouldnot be limited by reference to the commercial or financingpurpose of a transaction. The Working Group also recalledits decision that assignments for consumer purposes andcertain practices that did not need to be regulated should beexcluded. The Working Group, therefore, confirmed itsdecision that draft article 4 should be retained and decidedthat the brackets in paragraph (2) should be removed on theunderstanding that draft article 35 would be reviewed at alater stage (as to the brackets around draft article 4 (2), seeparas. 86, 199-201 and 211).

56. The Working Group went on to consider exclusionsrelating to assignments for consumer purposes, assign-ments of receivables arising from financial instruments,funds transfer orders, payment and securities settlementsystems and from deposit accounts, as well as assignmentsof receivables arising from the sale and lease of aircraft andother types of mobile equipment.

Assignments for consumer purposes

57. It was noted that subparagraph (a) was intended to limitthe scope of the draft Convention to commercial transactions,whether they related to trade or to consumer receivables. Itwas also noted, however, that, in its current formulation,subparagraph (a) might result in excluding inappropriatelycertain commercial transactions, such as: assignments ofinsurance policies from consumers to financing institutions;and assignments from consumers to financing institutions inreturn for loans used for consumer purposes. In order toaddress that problem, a number of suggestions were made.One suggestion was to ensure that only assignments “exclu-sively” for consumer purposes would be excluded. Anothersuggestion was to exclude transactions “made from an indi-vidual to an individual for personal, family or householdpurposes”. Neither suggestion was found to be sufficient inreflecting the general understanding of the Working Groupthat only assignments from a consumer to a consumer shouldbe excluded. Another suggestion was to make explicit refer-ence to the term “consumer”. That suggestion was objectedto on the ground that the term “consumer” was not univer-sally understood in the same way.

58. Yet another suggestion was that subparagraph (a)should be replaced by a general provision aimed at ensur-ing that the rights of consumers were not affected by thedraft Convention. It was stated that that provision might belimited to consumer-protection legislation. That suggestionwas objected to on the grounds that such a provision wouldbe unnecessary in view of the fact that the draft Conventionwas not intended to override consumer-protection law; andwould inadvertently result in excluding significant prac-tices involving the assignment of consumer receivables.The Working Group confirmed its decision that, unlike theUnidroit Convention on International Factoring (Ottawa,1988; hereinafter referred to as “the Ottawa Convention”),the application of which was limited to trade receivables,the draft Convention should cover commercial practicesinvolving the assignment of consumer receivables.


59. After discussion, the Working Group decided thatonly assignments made from a business entity or a con-sumer to a consumer and only if made for consumer pur-poses should be excluded, adopted subparagraph (a) onthat understanding and referred its exact formulation to thedrafting group.

Assignments of receivables arising from financialinstruments, funds transfer orders, paymentand securities settlement systems, and deposit accounts

60. It was stated that financial instruments, such asmoney-market and stock-exchange instruments, swaps andderivatives, were traditionally governed by internationalstandard agreements, such as the International Swaps andDerivatives Association (ISDA) Master Agreement and theInternational Securities Market Association (ISMA) MasterAgreement, or other national standard agreements. It wasalso observed that those standard agreements usually in-cluded a clause under which a party could not assign itsclaim against the other party without that party’s consent.In the case of a breach of such a clause, it was said, a partyhad the right to terminate not only the transaction in ques-tion but all the transactions governed by a master agree-ment. It was added that many master agreements containeda cross-default clause, under which, in the case of any suchbreach, all the transactions governed by all those masteragreements could be terminated. In addition, it was ob-served that, under standardized arrangements existing withregard to the execution of funds transfer orders and pay-ment of securities among participants of payments and se-curities settlement systems, the assignment of receivablesfrom transfer orders was normally prohibited. Moreover, itwas said that it was normal practice for financing institu-tions to preclude in their general terms and conditions theirclients from assigning receivables arising from deposit ac-counts. It was explained that such receivables were regu-larly used as collateral for credit facilities offered by fi-nancing institutions to their clients.

61. It was observed that, contrary to such practices, draftarticle 10 (1) validated assignments made in violation of ananti-assignment clause, without, however, precluding thedebtor from terminating the transactions in question or alltransactions governed by a master agreement or more thanone master agreement with a cross-default clause. It was alsostated that such a result could undermine international finan-cial markets. In addition, it was observed that validating theassignment of receivables arising from deposit accounts inviolation of anti-assignment clauses could impair the rela-tionship between financing institutions and their clients,pose problems in the use of those deposit accounts as collat-eral for credit facilities offered by such institutions andincrease the risk of money laundering. Moreover, draft arti-cle 20 (3), under which the debtor could not raise against theassignee any claim that the debtor might have against theassignor for breach of an anti-assignment clause, was said tocreate serious problems for swaps and derivatives markets.It was explained that such a provision would render uselessnetting arrangements that formed a key component of suchfinancial transactions. It was also stated that such a provisionwould run counter to normal practices existing under masterrepurchase and master netting agreements.

62. There was general agreement in the Working Groupthat the above-mentioned concerns should be addressed.Differing views were expressed, however, as to the mostappropriate way to address them. One view was that, inorder to avoid undermining well-functioning practices,transactions involving money market or stock exchangeinstruments, swaps and derivatives, and receivables arisingfrom transfer orders or settlements through payment orsecurities settlement systems should be excluded from thescope of the draft Convention by way of a blanket exclu-sion in draft article 4. In support of that view, it was ob-served that an exclusion in draft article 4 was preferable forreasons of simplicity and predictability. Alternatively, ifconsensus could not be reached by the Working Group onsuch a blanket exclusion, such transactions could be cov-ered by the draft Convention on the condition that an as-signment made without the consent of the debtor would betreated as null and void. The suggestion was also made thatthe latter approach could be followed in any case with re-gard to receivables from deposit accounts.

63. In order to implement the first suggestion mentionedabove, it was stated that a new paragraph should be addedto the preamble in order to express the specificity of re-ceivables arising from deposit accounts as well as receiva-bles arising from transactions involving such financial in-struments.

64. Concerning receivables arising from deposit accounts,language along the following lines was proposed:

“Article 1. Scope of application

“(1) This Convention applies to:

...

(d) receivables arising from deposit accounts subjectto the conditions of article 8 (3)”.

“Chapter III. Validity and effects of assignment

“Article 8. Validity and effectivenessof bulk assignments, assignments of future receivables,

partial assignments and assignments of receivablesarising from deposit accounts

...

“(3) An assignment of receivable(s) arising from de-posit accounts is valid and effective subject to the priorexplicit consent of the debtor. Any assignment made inbreach of this provision shall be deemed null and voidunder the present Convention.”

65. Concerning receivables arising from transactions in-volving financial instruments, language along the followinglines was proposed:

“Article 4. Exclusions

“[(3)] This Convention does not apply to receivablesarising from:

(a) transactions involving financial instruments suchas money-market or stock exchange instruments,swaps and other derivatives,


(b) transactions involving the temporary assignmentof securities for cash,(c) transfer orders or settlements through a paymentor securities settlement system.”

66. Alternatively, in the event that consensus could not bereached on the amendments mentioned in paragraph 65above, language along the following lines was proposed:

“Article 1. Scope of application

“(1) This Convention applies to:

...(e) receivables arising from transactions:

(i) involving financial instruments such as money-market and stock exchange instruments, swaps andother derivatives, receivables arising from transac-tions involving the temporary assignment of securi-ties for cash and, in both cases, any collateral relatedto, under the express reservation of article 10 (2) (i),(ii) transfer orders or settlements through a pay-ment or securities settlement system under the ex-press reservation of article 10 (2) (ii).”

“Article 10. Contractual limitations on assignment

“(2) Paragraph (1) shall not apply to receivables aris-ing from:

(i) transactions involving financial instrumentssuch as money-market and stock exchange instru-ments, swaps and other derivatives, receivablesarising from transactions involving the temporaryassignment of securities for cash, unless the debtorhas explicitly consented to the assignment, whetheror not there is a contractual clause limiting in anyway the assignor’s right to assign its receivables,(ii) transfer orders or settlements through paymentor securities settlement systems, unless the rules ofsuch systems explicitly authorize such assignment.”

67. Whether the Working Group preferred the wordingmentioned above in paragraph 65 or in paragraph 66above, the following definitions were proposed for additionto draft article 5:

“(...) ‘Derivatives’ means forward transactions relatedto stock exchange or market prices of [...] securities,money-market instruments, currencies, units of account,commodities, precious metals or interest rates or otherincome or to the creditworthiness of debtors, includingspot and forward foreign exchange transactions and op-tions on the above defined transactions or any combina-tion thereof, or similar transactions.

“(...) ‘Payment or securities settlement systems’ meanscontractual arrangements between three or more partici-pants with common rules for the settlement of paymentor security transfer orders and any collateral related tobetween the participants, supported by a centralcounterparty, settlement agent or clearing house.

“(...) ‘Temporary assignment of securities for cash’means repurchase and reverse repurchase transactions, aswell as borrowing and lending transactions on financial

instruments, such as securities or money-market instru-ments and similar transactions.”

68. While the proposals mentioned above were met withgreat interest, the view was expressed that an outright ex-clusion or an invalidation of assignments not only asagainst the debtor but as against all parties would go farbeyond what was needed to address the above-mentioneddebtor-related concerns. It was stated that such an approachwould unnecessarily deprive assignees of even a right inthe proceeds after payment by the debtor of a financialreceivable. In addition, it was observed that a blanket ex-clusion could result in excluding composite transactionsinvolving the assignment of both trade and financial re-ceivables. The suggestion was, therefore, made that itwould be preferable to include those transactions in thescope of the draft Convention, while making the necessaryadjustments so as to address the debtor-related concerns.

69. As to the types of adjustments that would need to bemade, it was stated that rules dealing with payment to anew creditor (draft articles 17-19), rights of set-off of thedebtor (draft article 20 (2) and (3)) and the right of thedebtor to modify the original contract (draft article 22)should apply only to trade receivables (i.e. receivables aris-ing from the sale of goods or the provision of services) andto transactions in which there was no restriction on assign-ment in the original contract. As a result, it was said, ifthere was a contractual restriction on the assignment of areceivable other than a trade receivable, the assignmentwould have no effect on the debtor’s rights and obligations(i.e. the debtor would not need to pay the assignee andwould not lose its rights of set-off or its right to modify theoriginal contract), unless the debtor consented to the as-signment. In view of that additional protection and in orderto avoid the problems described above with regard to de-fault and cross-default rules in master agreements (seeparas. 60 and 61), the debtor of a receivable other than atrade receivable would not have the right to claim breachof, or terminate, the original contract on account of theassignment.

70. Such an approach was said to have several advan-tages, including the following: that it would address thespecial interests of debtors of financial receivables; that itwould preserve an acceptable debtor-protection regime fordebtors of trade and consumer receivables; that, in the caseof an assignment of a financial receivable, it would allowthe application of the draft Convention as between theassignor and the assignee and as against competing assign-ees, creditors of the assignor and the administrator in theinsolvency of the assignor; and that it would avoid thedifficulty in defining financial receivables, which would bedifficult to define as indicated in the above-mentioned pro-posal (see para. 67).

71. Language along the following lines was proposed:

“Article 5. Definitions and rules of interpretation

“(...)“trade receivable” means a receivable arisingunder an original contract for the sale or lease of goodsor the provision of services.


“Article ... Special Provisions Relating to Debtorson Receivables that are not Trade Receivables

“(1) This article applies only to a receivable that is nota trade receivable and only to the extent of a restrictionon assignment provided in an agreement described inarticles 10 (1) and 11 (2).

“(2) Notwithstanding articles 17, 18 and 19, an assign-ment of the receivable, and receipt by the debtor of anotification of the assignment or payment instruction,shall have no effect under this Convention on the debt-or’s rights or obligations except to the extent that thedebtor consents.

“(3) Notwithstanding article 20 (2), nothing in thisConvention limits any right of the debtor to raise againstthe assignee any defence or set-off available to thedebtor, even if the defence or set-off became available tothe debtor after the time notification of the assignmentwas received.

“(4) Notwithstanding article 22, nothing in this Con-vention limits the effectiveness against the assignee of anagreement concluded at any time between the assignorand the debtor to modify the original contract.

“(5) Notwithstanding articles 10 (2) and 11 (3), anassignor who assigns a receivable is not liable to thedebtor for breach of the restriction on assignment and thebreach shall have no effect.”

72. It was also proposed that language along the follow-ing lines could be added at the end of articles 10, 11, 17,18, 19, 20 and 22:

“(...) In the case of a receivable that is not a trade re-ceivable, this article is subject to article ....”

It was stated that, if needed, a provision might also beadded to article 4 directing attention to the special provi-sions mentioned above.

73. The proposal set forth in paragraphs 71 and 72 abovewas met with interest. As a matter of policy, it was widelyfelt that the Working Group should try to retain as broad ascope of application as possible, while ensuring that theconcerns of the industry were addressed. If, after consulta-tion with the industry, that approach were proven to beunworkable, a blanket exclusion could be considered. Inresponse to a question as to the impact of the proposal onthe legislative treatment of the assignment of financial re-ceivables, it was stated that certain provisions of the draftConvention would not apply to debtor-related issues (e.g.discharge of the debtor or rights of set-off of the debtor),which would be left, as a result, to law applicable outsidethe draft Convention. However, it was said, the rest of theprovisions of the draft Convention would apply (e.g. draftarticle 10 (1), and, as a result, the assignment would beeffective as between the assignor or the assignor’s creditorsand the assignee). In addition, it was pointed out that para-graph (5) was based on the assumption that, once the debt-or’s rights were not affected by the assignment, the debtordid not need to terminate any agreement. It was explainedthat paragraph (5) was intended to address the problemraised with regard to systemic risks arising in the case of abreach of an anti-assignment clause in the case of masteragreements with cross-default clauses.

74. As to the merits of an approach based on a definitionof trade receivables, it was stated that, in defining the well-known notion of trade receivables, the proposed textavoided the need for a list of financial receivables, whichcould be neither homogeneous nor exhaustive. However, anumber of concerns were expressed. One concern was thatthe reference to services in the definition of trade receiva-bles could inadvertently result in financial receivables be-ing treated as trade receivables. In order to address thatconcern, it was suggested that reference should be made to“services other than financial services”. That suggestionreceived broad support. Another concern was that, in defin-ing financial receivables in a negative way, the proposalmight inadvertently result in subjecting inappropriately theassignment of certain types of trade receivables to a specialregime (e.g. trade receivables held by a financing institu-tion and assigned to another financing institution). In orderto address that concern, it was suggested that the proposedtext would need to be examined carefully in consultationwith the relevant industry so as to ensure that all differentpractices were treated appropriately. That suggestion tooreceived sufficient support. Yet another concern was that itmight not be appropriate to define in essence the scope ofthe draft Convention in a negative way. In response, it wasobserved that such an approach was often followed in leg-islative texts and, in the present case, presented the obviousadvantage of being based on the well-known notion oftrade receivables.

75. As to the special regime for the assignment of finan-cial receivables in the proposal, it was stated that it was inline with the policy of the Working Group to cover a rangeof transactions that would be as broad as possible, whileaddressing the concerns of the relevant industry. However,the concern was expressed that the proposed text did notmake it sufficiently clear whether the special regime apply-ing to the assignment of financial receivables was coveredin the draft Convention or was left to law applicable out-side the draft Convention. The concern was also expressedthat paragraphs (1) to (4) of the proposed text might appearas conferring positive rights rather than creating a specialregime under the draft Convention for debtors of financialreceivables.

76. For those reasons, the proposal was made that draftarticles 10, 11, 17, 18, 19, 20 and 22 should not apply tothe assignment of receivables other than trade receivablesand that, with respect to such assignments, the mattersaddressed in those provisions should be left to law outsidethe draft Convention. There was support for that proposal.It was stated that it might better address the concerns of theindustry. It was also observed that that proposal was in linewith the policy underlying the proposal mentioned above inparagraphs 64 to 67. The concern was expressed, however,that that proposal went beyond its intended purpose of pro-tecting debtors of financial receivables to the extent that itwould unnecessarily result in an anti-assignment clauseinvalidating an assignment even as between the assignor orthe assignor’s creditors and the assignee.

77. After discussion, the Working Group was unable toreach a conclusion on the matter and decided that a newarticle 4bis with two alternatives along the lines of theproposals mentioned in paragraphs 71, 72 and 76 above


should be included in the text of the draft Convention forthe continuation of the discussion after consultation withthe relevant industry. The formulation of new draft article4bis was referred to the drafting group.

Assignments of receivables arising from the saleor lease of aircraft and other types of mobile equipment

78. It was noted that the International Institute for theUnification of Private International Law (Unidroit) was cur-rently preparing, in cooperation with the International CivilAviation Organization (ICAO), a draft convention on secu-rity and other interests in mobile equipment and an aircraftprotocol, while further equipment-specific protocols werebeing prepared in cooperation with other organizations. Itwas also noted that those texts were aimed at reducing thecost of financing of mobile equipment, the application towhich of the lex situs created uncertainty as to the effective-ness of security and similar interests in view of the movementof such equipment across borders and of certain mandatoryaspects of national secured transactions law. Furthermore, itwas noted that the draft convention and protocols addressedthe assignment of receivables arising from the sale and leaseof mobile equipment, as well as of insurance proceeds in thecase of damage to or loss of such equipment. As to the maindifferences between the draft Convention and those texts, itwas noted that, unlike the draft Convention, those texts:provided a system of self-help, which included the right ofthe financier to repossess the mobile equipment, even afterthe commencement of an insolvency proceeding; based pri-ority in the equipment and the receivables arising from thesale and lease of equipment on the time of registration in anequipment-specific registry; and, in view of the high value ofthe equipment involved, provided that the secured obligation(the receivable for the price of the receivable) followed thelegal regime of the accessory security or other similar rightin the mobile equipment.

79. The Working Group considered ways to avoid con-flicts between the draft Convention and those texts. It wasnoted that, in order to determine whether assignments ofreceivables arising from the sale and lease of mobile equip-ment could be excluded from the draft Convention or fromthe draft convention and protocols, the Working Groupneeded to either know the status of current law and practiceor to be prepared to draw conclusions as to any generallyacceptable new practices that, although they were not suf-ficiently accommodated under current law, could be ac-commodated by a new uniform law.

80. The view was expressed, however, that, at least, re-ceivables arising from the sale and lease of aircraft andspacecraft should be excluded from the scope of the draftConvention. In support of that view, it was observed that theassignment of such receivables was an integral part of air-craft and spacecraft financing and should be left to aircraftand spacecraft financing law. Potential financiers of suchreceivables, it was said, would tend to look to the aircraftregistry in order to determine their priority status and todecide whether to provide credit and at what cost. On theother hand, it was stated, receivables arising from ticket saleswere normally part of securitization schemes and should notbe excluded from the scope of the draft Convention. It wasalso observed that attempting to address the assignment of

such receivables in the draft Convention might reduce theacceptability of the draft Convention to the aircraft industry.In that connection, it was suggested that the commercialfinancing industry, which included also aircraft financiersand was supporting a scope of the draft Convention thatwould be as broad as possible, could address that matter inconsultation with the aircraft industry, with a view to achiev-ing a more coordinated treatment of aircraft and receivablesfinancing matters in the draft Convention.

81. After discussion, the Working Group generally felt thatit did not have the specific information necessary to make adecision for a blanket exclusion of aircraft and spacecraftreceivables from the scope of the draft Convention.

82. The Working Group next turned to the questionwhether any conflict between the draft Convention andthose other texts could be left to treaty law. Differing viewswere expressed. One view was that draft article 33 (2),allowing a State to declare, in the case of a conflict, towhich text it wished to give precedence and draft article 35,allowing States to exclude further practices, were suffi-cient. It was stated, however, that such an approach wouldresult in disparity of legal treatment of the relevant mattersand in uncertainty to the extent that States would take dif-fering approaches. Another view was that the matter couldbe left to general principles of treaty law, under which themore specific or more recent text would prevail. It wasstated, however, that that approach should be only the lastresort if agreement could not be reached on another ap-proach, since commercial transactions required a higherdegree of certainty than could be achieved under such atreaty-law approach.

83. Yet another view was that the draft Conventionshould give, in a uniform way for all States, precedence toother texts dealing with secured transactions with respect,at least, to aircraft receivables secured by or associatedwith aircraft and registered in an aircraft registry. Languagealong the following lines was proposed:

“This Convention does not prevail over any interna-tional convention or other multilateral or bilateral agree-ment which has been or may be entered into by a Con-tracting State and which contains provisions concerningsecurity interests, conditional sales under reservations oftitle and leasing agreements with respect to aircraft andreceivables arising from the sale or lease secured by orassociated with such equipment.”

84. The view was expressed that the same approach mightneed to be followed with respect to the assignment of re-ceivables arising from the sale or lease of spacecraft, as wellas with regard to the assignment of any insurance proceedsarising in the case of damage to or loss of spacecraft.

85. Yet another view was that the determination of whethera protocol would supersede the draft Convention could bemade in each protocol on the basis of a decision as towhether receivables should be part of specific equipmentrather than receivables financing. It was observed, however,that for the draft Convention to refer that matter to eachprotocol, those texts should be final and the Working Groupwould need to have sufficient knowledge of their contents.It was stated, that, in particular, the scope of those texts


should be sufficiently clear. In that connection, it was ob-served that the absence of a definite list of equipment to becovered created the concern that the creation of security andsimilar rights in “any uniquely identifiable object” might becovered. On the other hand, that concern was said to beunjustified, since it was generally understood among themembers of the group preparing the draft convention andprotocols that work would be limited to high-value mobileequipment only. It was stated, however, that the concern waslegitimate, since the terms “high-value mobile equipment”were not sufficiently clear, or were, at least, not universallyunderstood in the same way. In view of the above, it wassuggested that the Working Group should not feel pressuredto make a decision. It was pointed out that more informationand consultation with the relevant sectors of the industry wasnecessary and that the matter was of a political nature andmight need to be left to the Commission.

86. After discussion, the Working Group agreed that thetext of draft article 4 (2) should remain unchanged andwithout square brackets (see, however, para. 211). It wasalso agreed that, for the continuation of the discussion,draft article 33 should include a third paragraph withinsquare brackets along the lines mentioned in paragraph 83above. That matter was referred to the drafting group. Itwas generally understood that, in any case, draft article 33would need to be revisited with a view to ensuring that itaddressed appropriately conflicts with other internationaltexts (see paras. 192-195).



“For the purposes of this Convention:(a) ‘Assignment’ means the transfer by agreementfrom one person (‘assignor’) to another person (‘as-signee’) of the assignor’s contractual right to paymentof a monetary sum (‘receivable’) from a third person(‘the debtor’). The creation of rights in receivables assecurity for indebtedness or other obligation isdeemed to be a transfer;(b) In the case of an assignment by the initial or anyother assignee (‘subsequent assignment’), the personwho makes that assignment is the assignor and theperson to whom that assignment is made is the as-signee.”

88. It was noted that, under subparagraph (a), what con-stituted a “contractual” right was left to law applicableoutside the draft Convention. In order to avoid the uncer-tainty that could result in view of the divergences existingbetween legal systems, it was noted that the term “contrac-tual” right could be defined in the draft Convention in anegative way (e.g. “a right to payment of a monetary sumother than one arising by operation of law or determined ina court judgement”). It was also noted that the WorkingGroup might wish to clarify whether the term “receivable”included: damages for breach of contract (liquidated ornot); interest for late payment (contractual interest, statu-tory interest or interest liquidated in a court judgement);sums payable as dividends (present or future) arising fromshares; and receivables based on arbitral awards.

89. In respect of damages for breach of contract, differingviews were expressed. One view was that damages shouldnot be treated as receivables. It was stated that the claim ofthe seller for the purchase price of goods sold under acontract of sale was a right to payment flowing directlyfrom the contract. To the contrary, the claim for damagesof the buyer, e.g. for delivery of non-conforming goods bythe seller was the result of a contract violation and as suchshould not be considered as a “contractual right”, unless itwas liquidated in a settlement agreement. The prevailingview, however, was that damages for breach of contractshould be treated in the same way as contractual receiva-bles. In support of that view, it was said that the assigneeshould be entitled to all payment rights the assignor hadbeen entitled to under the original contract. If damageswere to be excluded, it was explained, in some cases theassignee’s rights in the assigned receivables would be frus-trated. In that connection, regret was expressed that thescope of the draft Convention was limited to contractualrights to payment, excluding contractual rights other thanrights to payment and non-contractual receivables.

90. With regard to interest for late payment, it was widelyfelt that it was included in the term “receivable” if interestwas owed under the original contract. In respect of divi-dends, it was agreed that they should be treated as contrac-tual receivables, whether they were declared or were future,since they arose under a contractual relationship reflectedin the share. As to receivables based on arbitral awards, itwas generally thought that they should not be covered bythe draft Convention.

91. After discussion, the Working Group adopted draftarticle 2 unchanged. It was agreed that all the matters men-tioned above could usefully be explained in the commen-tary.



“A receivable is international if, at the time it arises,the assignor and the debtor are located in differentStates. An assignment is international if, at the time ofthe conclusion of the contract of assignment, theassignor and the assignee are located in different States.”

93. As a matter of drafting, it was noted that, in order toalign the first with the second sentence of draft article 3 andto limit the references in the text to the time when a receiv-able arose, the words “at the time of the conclusion of theoriginal contract” might be substituted for the words “at thetime it arises”. Subject to that change, the Working Groupadopted draft article 3 and referred it to the drafting group.



“For the purposes of this Convention:(a) ‘original contract’ means the contract betweenthe assignor and the debtor from which the assignedreceivable arises;


(b) a receivable is deemed to arise at the time whenthe original contract is concluded;

(c) ‘existing receivable’ means a receivable thatarises upon or before the conclusion of the contract ofassignment; ‘future receivable’ means a receivablethat arises after the conclusion of the contract of as-signment;

[(d) ‘receivables financing’ means any transaction inwhich value, credit or related services are provided forvalue in the form of receivables. Receivables financ-ing includes factoring, forfaiting, securitization,project financing and refinancing;](e) ‘writing’ means any form of information that isaccessible so as to be usable for subsequent reference.Where this Convention requires a writing to be signed,that requirement is met if, by generally acceptedmeans or a procedure agreed to by the person whosesignature is required, the writing identifies that personand indicates that person’s approval of the informationcontained in the writing;

(f) ‘notification of the assignment’ means a com-munication in writing which reasonably identifies theassigned receivables and the assignee;

(g) ‘insolvency administrator’ means a person orbody, including one appointed on an interim basis,authorized in an insolvency proceeding to administerthe reorganization or liquidation of the assignor’s as-sets or affairs;

(h) ‘insolvency proceeding’ means a collective ju-dicial or administrative proceeding, including an in-terim proceeding, in which the assets and affairs of theassignor are subject to control or supervision by acourt or other competent authority for the purpose ofreorganization or liquidation;

(i) ‘priority’ means the right of a party in prefer-ence to another party;[(j) [For the purposes of articles 24 and 25,] an in-dividual is located in the State in which it has its ha-bitual residence; a corporation is located in the State inwhich it is incorporated; a legal person other than acorporation is located in the State in which its consti-tutive document is filed and, in the absence of a fileddocument, in the State in which it has its chief execu-tive office.][(k) [For the purposes of articles 1 and 3:]

(i) the assignor is located in the State in which ithas that place of business which has the clos-est relationship to the assignment;

(ii) the assignee is located in the State in which ithas that place of business which has the clos-est relationship to the assignment;

(iii) the debtor is located in the State in which ithas that place of business which has the clos-est relationship to the original contract;

(iv) in the absence of proof to the contrary, theplace of central administration of a party ispresumed to be the place of business whichhas the closest relationship to the relevantcontract. If a party does not have a place ofbusiness, reference is to be made to its ha-bitual residence[;

(v) several assignors or assignees are located atthe place in which their authorized agent ortrustee is located]].”

95. On the understanding that direct reference would bemade in draft articles 3 and 8 (2) to the time of the conclu-sion of the original contract, the Working Group decided todelete subparagraph (b). With regard to subparagraph (d),the Working Group decided to postpone discussion until ithad completed its review of the title and the preamble ofthe draft Convention. As to subparagraphs (j) and (k), theWorking Group recalled its decision to replace them witha new provision (see paras. 25-30).

“Location” of the parties (continued)

96. Recalling its earlier discussion of the issue of location,addressed in subparagraphs (j) and (k) (see paras. 25-30),the Working Group reopened discussion on the basis of atext that was as follows:


...

“(j) (i) a person is located in the State in whichit has its place of business;

(ii) Variant Aif the assignor or the assignee has more thanone place of business, the place of business isthat which has the closest relationship to thecontract of assignment. For the purposes ofarticles 24 to [...], the place of business withthe closest relationship to the contract of as-signment is deemed to be the place where thecentral administration of the assignor is exer-cised;

Variant Bif the assignor or the assignee has more thanone place of business, the place of business isthat place where its central administration isexercised [.A branch [of a person engaged inthe business of accepting deposits or provid-ing other banking services] is deemed to be aseparate person];

(iii) if the debtor has more than one place of busi-ness, the place of business is that which hasthe closest relationship to the original con-tract;

(iv) if a person does not have a place of business,reference is to be made to the habitual resi-dence of that person;”

97. On the grounds that a single location rule would bepreferable, the Working Group decided to delete variant Aof subparagraph (j) (ii). Discussion focused on the brack-eted language contained in variant B. A number of con-cerns were expressed. One concern was that, in the case ofan assignment of the same receivables by the head officeand by a branch in another country, application of thebracketed language would result in priority between com-peting assignments of the same receivables from the sameassignor being governed by the laws of two States. Anotherconcern was that the bracketed language appeared to distin-


guish between place of business and place of a branch. Yetanother concern was that use of the term “branch” appearedto be problematic in view of the fact that increasingly trans-actions were closed through regional offices, departmentsor units in different countries. Yet another concern was thatrelating each assignment to the branch from which it wasmade might create uncertainty, since third parties could notbe aware of the internal structure of the assignor and deter-mine the place in which decisions were made. Yet anotherconcern was that, in view of the fact that no distinction wasmade between branches in the same country and branchesin different countries, one legal entity risked to be treatedas a group of separate legal entities.

98. In order to address those concerns, a number of sug-gestions were made. One suggestion was that the bracketedlanguage in variant B should be replaced by wording alongthe following lines: “or, in the case of branches, where thebranch with which the assignment has the closest relation-ship is located”. A related suggestion was to have a loca-tion rule along the lines of variant B with the exception justmentioned as to branch offices of banks only. While somesupport was expressed in favour of those suggestions, theywere objected to on the grounds that, in the case of assign-ments made from branches in different countries, theywould result in priority between competing assignmentsbeing governed by different laws. Another suggestion wasthat, in order to avoid that problem, reference should bemade to the place with which the original contract had theclosest relationship. While that suggestion was met withsome interest, it was also objected to on the grounds that,in the case of bulk assignments involving multiple originalcontracts, priority issues would be referred to a multiplicityof laws. Yet another suggestion was that reference shouldbe made to the branch in whose books the assigned re-ceivables were carried. Language along the following lineswas proposed to replace the bracketed wording insubparagraph (j) (ii):

“Notwithstanding the foregoing sentence, if, immedi-ately prior to the assignment, the receivable is carried onthe books of a branch of a financial services provider,the assignor is located in the State in which that branchis located. If, immediately after the assignment, the re-ceivable is carried on the books of a branch of financialservices provider, the assignee is located in the State inwhich that branch is located.

99. In addition, definitions along the following lines wereproposed for inclusion in draft article 5:

“(...) A ‘financial service provider’ is a bank or otherfinancial institution that, in the ordinary course of itsbusiness, accepts deposits, makes loans or [providesother financial services’].

“(...) A ‘branch’ of a financial service provider is aplace of business of the financial service provider that islocated in a different State than the financial serviceprovider’s place of central administration and that isseparately regulated by the State in which the branch islocated under the laws applicable to financial serviceproviders in that State.

“(...) A receivable ‘is carried on the books’ of a branchof a financial service provider if either:

(i) under [accounting] [regulatory] standards ap-plicable to the branch, the receivable is anasset of that branch; or

(ii) in cases in which, because the financial serv-ice provider’s interest in the receivable isonly as security, the receivable is not [consid-ered] an asset of the financial service pro-vider, the rights for which the receivable issecurity are an asset of that branch.”

100. Due to the lack of time, the Working Group was notable to discuss the proposed text. It was understood that theinclusion of the proposed text in the report would allowStates to consider its merits in their preparations for theCommission session.

Form of assignment

101. It was noted that, after the deletion of the provisionthat dealt with form of an assignment, formal validity wasleft to the law applicable outside the draft Convention. Inview of the fact that priority presupposed both substantiveand formal validity, it was noted that an assignee wouldhave to ensure that it had a valid assignment under theprovisions of the draft Convention and under the law gov-erning formal validity, as well as priority under the law ofthe assignor’s location. In order to avoid such complica-tions, it was suggested that the formal validity of the as-signment as a transfer of property should be explicitly ad-dressed in the draft Convention, perhaps by reference to thelaw of the assignor’s location.

102. Differing views were expressed, however, as to thelaw that was most appropriate to govern formal validity.One view was that subjecting formal validity to the law ofthe assignor’s location would enhance certainty and wouldsimplify compliance on the part of the assignee, whichmight have an impact on whether priority would be vestedin the assignee. Another view was that it would be moreconsistent with current trends in private international law toprovide in the alternative that the assignment would bevalid if it met the requirements of the law of the assignor’slocation or the law of the State in which the assignmentwas made. Yet another view was that a reference to the lawof the assignor’s location might run counter to private in-ternational law practice. It was also pointed out that such anapproach might have a negative impact on internationaltrade practices, since the law of the assignor’s locationmight be irrelevant to the transaction in question.

103. After discussion, it was agreed that the draft Con-vention should not contain any provision in respect of for-mal validity and that that matter should be left to the lawoutside the draft Convention.

Article 10. Contractual limitations on assignments


“(1) An assignment of a receivable is effective not-withstanding any agreement between the initial or anysubsequent assignor and the debtor or any subsequent


assignee, limiting in any way the assignor’s right to as-sign its receivables.

“(2) Nothing in this article affects any obligation orliability of the assignor for breach of such an agreement.A person who is not party to such an agreement is notliable under that agreement for its breach.”

105. It was noted that the second sentence of paragraph(2) appeared to be stating the obvious (i.e. that the assigneecould not have contractual liability for breach of a contractto which the assignee was not a party). In order to reflectthe meaning intended by the Working Group (A/CN.9/455,paras. 50 and 51), it was suggested that the words “underthat agreement for its breach” could be replaced by lan-guage along the following lines: “even if it had knowledgeof such an agreement” or “on the sole ground that it hadknowledge of such an agreement” or “unless that personacts with the specific intent to cause loss or recklesslyand with actual knowledge that the loss would be likely toresult”.

106. It was agreed that the third alternative introduced aninappropriate limitation on any liability that the assigneemight have under law applicable outside the draft Conven-tion. After discussion, the second alternative was found tobe preferable on the ground that it reflected in a clearerway that it was not intended to establish liability of theassignee if something more than knowledge was involved.Subject to that change and to any other changes the Work-ing Group agreed upon so as to address issues of financialreceivables (see para. 86), the Working Group adopteddraft article 10 and referred it to the drafting group.

Article 12. Limitations relating to Governmentsand other public entities


“Articles 10 and 11 do not affect the rights and obli-gations of a debtor, or of any person granting a personalor property right securing payment of the assigned re-ceivable, if that debtor or person is a governmental de-partment[, agency, organ, or other unit, or any subdivi-sion thereof, unless:

(a) the debtor or person is a commercial entity; or

(b) the receivable or the granting of the right arisesfrom commercial activities of that debtor or person.]”

108. It was recalled that draft article 12 was the result ofa decision made at the previous session of the WorkingGroup to ensure that sovereign debtors were not affectedby assignments made in violation of anti-assignmentclauses included in public procurement and other similarcontracts. The Working Group thought that any interfer-ence with the legal regime of such contracts should beavoided, since it could seriously affect the acceptability ofthe draft Convention (A/CN.9/456, para. 115).

109. The concern was expressed that the reference to“commercial entity” and “commercial activities” insubparagraphs (a) and (b) would result in draft article 12failing to protect sovereign debtors in those countries

where government entities and their activities did not nor-mally operate under a specific body of public law but weregoverned by the same rules as “commercial” entities andactivities. With a view to alleviating that concern, whilereflecting even more strongly the above-mentioned policydecision, the following text was proposed as a substitute fordraft article 12:

“(1) Articles 10 and 11 do not apply to the assignmentof a receivable arising from a contract where the debtoris a public entity.

“(2) A ‘public entity’ includes a government depart-ment, a federal, regional or local authority or a bodycontrolled by a public entity.

“(3) A ‘body controlled by public entity’ is any body(a) established for the specific purpose of meetingneeds in the general interest, not having an industrialor commercial character;(b) having a legal personality; and(c) financed for the most part or subject to manage-ment supervision by a public entity or having an ad-ministrative managerial or supervisory body morethan half of whose members are appointed by a publicentity.”

110. Some support was expressed in favour of the pro-posal. The concern was expressed, however, that the pro-posed exception was excessively broad in that it wouldresult in protecting inappropriately sovereign debtors whoacted as commercial parties or in the context of commercialtransactions. In order to address that concern, it was sug-gested that the exception should be limited to public enti-ties acting in the exercise of their public functions. Thatsuggestion was objected to on the ground that it was theprerogative of each State to determine which types of pub-lic entities it wished to protect.

111. It was widely felt, however, that both the proposedtext and draft article 12, in establishing a rule that would beapplicable to all sovereign debtors, might go beyond theirintended purpose. It was observed that such a rule wouldresult in protecting sovereign debtors who might not needsuch protection or who could be protected by other means(e.g. by a statutory anti-assignment limitation to the extentit was not affected by the draft Convention). It was statedthat, while such sovereign debtors could decide whether tomake use of the protection they were afforded by virtue ofdraft article 12 by determining whether to include an anti-assignment clause in their contracts, draft article 12 wouldstill be seen as codifying generally acceptable good prac-tice, a conclusion that the Working Group had neverreached.

112. In addition, it was stated that the possibility of acontractual limitation to assignment invalidating the assign-ment as against a sovereign debtor might inadvertentlyraise the risk of non-collection from a sovereign debtor andthus raise the cost of credit to all sovereign debtors, irre-spective of whether they needed the protection providedunder draft article 12. Moreover, it was pointed out thatallowing anti-assignment clauses in public procurementcontracts to invalidate assignments as against a sovereigndebtor could inadvertently raise the cost of credit to small-


and medium-size suppliers of goods and services, whichwould make it even harder for them to compete for publicprocurement contracts with large suppliers who normallyhad alternative sources of credit.

113. As a compromise, it was suggested that draft article12 should be revised so as to allow States to freely deter-mine which entities they wished to protect, but only by wayof a reservation in respect of the application of draft articles10 and 11 to sovereign debtors. It was widely felt that anew provision should be added to that effect to the finalclauses of the draft Convention along the following lines:“A State may declare at any time that it will not be boundby draft articles 10 and 11 if the debtor or any persongranting a personal or property right securing payment ofthe assigned receivable is located in that State at the timeof the conclusion of the original contract and is a Govern-ment, central or local, any subdivision thereof, or any pub-lic entity. If a State has made such a declaration, articles 10and 11 do not affect the rights and obligations of thatdebtor or person”. The suggestion was also made that thedeclaration should specify the types of entities to be pro-tected. That suggestion was objected to on the ground thatit would inappropriately limit the ability of States in effec-tively making use of their right to make such a declaration.

114. In the discussion, some doubt was expressed as towhether powerful debtors, such as sovereign debtors de-served any special protection. The view was also expressedthat sovereign debtors could be protected in the same wayas debtors of financial receivables. In response, it wasstated that issues concerning sovereign debtors were differ-ent from those arising with regard to debtors of financialreceivables and included the need for special protection forpublic funds as well as the need of sovereign debtors to beable to determine that they were dealing with reliable insti-tutions.

115. After discussion, the Working Group decided thatdraft article 12 should be deleted, adopted the new provi-sion mentioned in paragraph 113 above and referred itsspecific formulation and exact placement in chapter VI (fi-nal provisions) to the drafting group.



“(1) Unless otherwise agreed between the assignor andthe assignee, the assignor or the assignee or both maysend the debtor a notification of the assignment and apayment instruction, but after notification is sent onlythe assignee may send a payment instruction.

“(2) A notification of the assignment or payment in-struction sent in breach of any agreement referred to inparagraph (1) of this article is not ineffective for thepurposes of article 19 by reason of such breach. How-ever, nothing in this article affects any obligation or li-ability of the party in breach of such an agreement forany damages arising as a result of the breach.”

117. It was noted that the first sentence of draft article 15(2) appeared to deal with debtor-related issues and might

be moved to draft article 18 or 19. The Working Groupadopted draft article 15 and referred the matter to the draft-ing group.



“(1) Unless otherwise agreed between the assignor andthe assignee and whether or not a notification of theassignment has been sent:

(a) if payment with respect to the assigned receiv-able is made to the assignee, the assignee is entitled toretain whatever is received in respect of the assignedreceivables;(b) if payment with respect to the assigned receiv-able is made to the assignor, the assignee is entitled topayment of whatever has been received by theassignor.

“(2) If payment with respect to the assigned receivableis made to another person over whom the assignee haspriority, the assignee is entitled to payment of whateverhas been received by such person.

“(3) The assignee may not retain more than the valueof its right in the receivable.”

119. The concern was expressed that draft article 16might appear as dealing with rights of third parties in pro-ceeds. In order to alleviate that concern, it was suggestedthat: the chapeau of paragraph (1) should be reformulatedalong the following lines: “As between the assignor and theassignee, unless otherwise agreed, and whether or not ...”;and that paragraph (2) should be moved to the end of para-graph (1) as subparagraph (c). Those suggestions receivedbroad support.

120. Recalling its decision that “proceeds” in the case ofcompeting third-party rights should not include returnedgoods (see paras. 46-48), the Working Group decided that,as between the assignor and the assignee, the assignee hadthe right to claim payment in cash or in kind, as well as anyproceeds in the form of returned goods. It was stated thatthere was no reason to limit the ability of the assignor andthe assignee to agree that the assignee could claim anyreturned goods. It was also observed that, even in the ab-sence of an agreement, a default rule allowing the assigneeto claim any returned goods could reduce the risks of non-collection from the debtor and thus have a positive impacton the cost of credit.

121. In response to questions raised, it was observed thatparagraph (3) applied to both paragraphs (1) and (2) in thatit was intended to reflect current practice in assignments byway of security. In line with such practice, paragraphs (1)and (2) allowed the assignee to claim full payment from thedebtor, the assignor or a third party, while paragraph (3)provided that it could retain only an amount up to the valueof its right in the assigned receivable, including any interestif interest was owed on the ground of contract or law. Itwas agreed that that matter could usefully be clarified inthe commentary.


122. In addition, it was stated that no reference to con-trary agreement of the parties was necessary in paragraph(3), since the right in the assigned receivable flowed fromthe contract and it was subject to party autonomy, whichwas recognized in a general way in draft article 13.

123. Subject to the changes mentioned in paragraphs 119and 120 above, the Working Group adopted draft article 16and referred it to the drafting group.

Article 19. Debtor’s discharge by payment


“(1) Until the debtor receives notification of the assign-ment, the debtor is entitled to be discharged by paying inaccordance with the original contract.

“(2) After the debtor receives notification of the as-signment, subject to paragraphs (3) to (8) of this article,the debtor is discharged only by paying the assignee oras otherwise instructed.

“(3) If the debtor receives notification of more thanone assignment of the same receivables made by thesame assignor, the debtor is discharged by paying in ac-cordance with the first notification received.

“(4) If the debtor receives more than one payment in-struction relating to a single assignment of the same re-ceivables by the same assignor, the debtor is dischargedby paying in accordance with the last payment instruc-tion received from the assignee before payment.

“(5) If the debtor receives notification of one or moresubsequent assignments, the debtor is discharged by pay-ing in accordance with the notification of the last of suchsubsequent assignments.

“(6) If the debtor receives notification of the assign-ment from the assignee, the debtor is entitled to requestthe assignee to provide within a reasonable period oftime adequate proof that the assignment has been madeand, unless the assignee does so, the debtor is dischargedby paying the assignor. Adequate proof includes, but isnot limited to, any writing emanating from the assignorand indicating that the assignment has taken place.

“(7) This article does not affect any other ground onwhich payment by the debtor to the person entitled topayment, to a competent judicial or other authority, or toa public deposit fund discharges the debtor.

“[(8) This article does not affect any ground on whichthe debtor may be discharged by paying a person towhom an invalid assignment has been made.]”

125. With regard to paragraph (2), it was agreed that itshould make clear that after notification the debtor could bedischarged only by paying the assignee or, if otherwiseinstructed, in accordance with the payment instructionsgiven by the assignee. As a matter of drafting, it was agreedthat paragraphs (1) and (2) could be consolidated in oneprovision.

126. As to paragraph (6), it was noted that, if the paymentobligation became due during the time when the assignee

was expected to provide adequate proof and the debtorfailed to pay, the debtor could be in default and becomeliable to damages and interest for late payment. It was alsonoted that the understanding of the Working Group so farhad been that the payment obligation would be suspended.In order to avoid any uncertainty, it was suggested that thematter be addressed explicitly in paragraph (6) by provid-ing either that the payment obligation should be suspendedor that the debtor could be discharged by paying theassignor.

127. The suggestion to allow the debtor to discharge itsobligation by paying the assignor was objected to on thegrounds that: it would result in codifying a rule that wouldbe inappropriate in principle; and it could lead to abuses bydebtors acting in bad faith or in collusion with the assignorand waiting until payment became due before requestingadequate proof, so as to continue paying the assignor or todelay payment. Some support was expressed in favour of asuspension of payments. It was stated that a debtor, inparticular if it were a consumer debtor, would be in a dif-ficult position if faced with a notification from an un-known, foreign assignee. In such a situation, it was pointedout, the debtor would not have sufficient time to examinethe notification, would be subject to payment of damagesand interest, if it delayed payment, and would not be dis-charged, if it paid an assignee who was not an assignee (i.e.the assignment was null and void, e.g. for fraud or duress).In order to address those concerns, a number of suggestionswere made. One suggestion was to limit the application ofparagraph (6) to cases in which the debtor had legitimatedoubts. Another suggestion was that the assignee should bequalified as a “purported” assignee. Yet another suggestionwas to define adequate proof by reference solely to a writ-ing emanating from the assignor.

128. The prevailing view, however, was that the mattershould not be explicitly addressed in the text of the draftConvention. It was stated that explicitly stating in para-graph (6) that the debtor could pay the assignor or that thepayment obligation could be suspended might inadvert-ently result in encouraging abusive practices. In addition, itwas observed that, if the debtor were able to continue tomake payment to the assignor, even if the assignor hadbecome insolvent or had ceased to exist, the assigneewould find itself at a significant disadvantage. As to theproblem of fraudulent assignees, it was widely felt that itrarely occurred in practice and, in any case, was suffi-ciently addressed in paragraph (7), which allowed debtorsto obtain a valid discharge by paying in accordance withtheir own national law.

129. As to paragraph (7), it was noted that it might inad-vertently result in a debtor ignoring a notification givenunder the draft Convention (e.g. because it related to futurereceivables, which might not be allowed under other law)and paying someone else in accordance with other law. Itwas, therefore, suggested that the paragraph be amended tovalidate payment under other law only if it were made toa legitimate assignee under the draft Convention, whilelimiting recourse to payment into court.

130. It was widely felt, however, that such an approachwould actually narrow the protection available to the


debtor. It was stated that paragraph (7) was originally in-tended to ensure that if, under other law apart from thedraft Convention, there was a mechanism that would en-able the debtor to obtain a discharge, the debtor should notbe precluded from resorting to that mechanism.

131. As to paragraph (8), it was suggested that it shouldbe deleted, since it either stated an obvious rule or placedon the debtor the risk of having to determine the validity ofthe assignment in order to obtain a valid discharge.

132. After discussion and subject to the consolidation ofparagraphs (1) and (2), the change to paragraph (2) men-tioned in paragraph 125 above and the deletion of para-graph (8), the Working Group adopted draft article 19 andreferred it to the drafting group.

Article 20. Defences and rights of set-off of the debtor


“(1) In a claim by the assignee against the debtor forpayment of the assigned receivables, the debtor mayraise against the assignee all defences or rights of set-offarising from the original contract of which the debtorcould avail itself if such claim were made by theassignor.

“(2) The debtor may raise against the assignee anyother right of set-off, provided that it was available to thedebtor at the time notification of the assignment wasreceived.

“(3) Notwithstanding paragraphs (1) and (2), defencesand rights of set-off that the debtor could raise pursuantto article 10 against the assignor for breach of agree-ments limiting in any way the assignor’s right to assignits receivables are not available to the debtor against theassignee.”

134. The Working Group considered the questionwhether rights of set-off arising from contracts between theassignor and the debtor that were closely related to theoriginal contract (e.g. a maintenance or other service agree-ment supporting the original sales contract) should betreated in the same way as rights of set-off arising from theoriginal contract (i.e. the debtor should be able to raisethem against the assignee irrespective of whether theyarose before or after notification). It was generally agreedthat such rights of set-off should receive the same treatmentunder the draft Convention as rights arising from the origi-nal contract. It was also agreed that, in expressing such anotion of “close connection” in the draft Convention, atten-tion should be given to avoiding a formulation that wouldcover too wide a range of contracts. Language along thefollowing lines was proposed: “rights of set-off arisingfrom the same transaction as the original contract”.

135. It was noted that paragraph (2) referred to rights ofset-off being “available” at the time of notification for thenotification to cut off such rights of set-off. In order todispel any uncertainties and disparities that might existwith respect to the law applicable to set-off, it was sug-

gested that reference should be made to the law governingthe original contract. That suggestion was objected to onthe grounds that it would not be appropriate to attemptaddressing in the draft Convention such a general privateinternational law issue. The suggestion was also objectedsince the law governing the original contract might not bethe appropriate law and would, in any case, fail to covernon-contractual grounds of set-off (see paras. 155-156).

136. Subject to the change referred to in paragraph 134above, the Working Group adopted draft article 20 andreferred it to the drafting group.

Article 21. Agreement not to raise defencesor rights of set-off


“(1) Without prejudice to the law governing the protec-tion of the debtor in transactions made primarily forpersonal, family or household purposes in the State inwhich the debtor is located, the debtor may agree withthe assignor in a signed writing not to raise against theassignee the defences and rights of set-off that it couldraise pursuant to article 20. Such an agreement precludesthe debtor from raising against the assignee those de-fences and rights of set-off.

“(2) The debtor may not exclude:(a) defences arising from fraudulent acts on the partof the assignee;(b) defences based on the debtor’s incapacity.

“(3) Such an agreement may only be modified by anagreement in a signed writing. The effect of such amodification as against the assignee is determined byarticle 22 (2).”

138. It was noted that the reference to debtors in transac-tions for “personal, family or household purposes”, con-tained in paragraph (1) (as well as in draft article 23), wasqualified by the term “primarily”, so as to ensure that thelimitation would apply only to transactions for purely con-sumer purposes (i.e. transactions between consumers). Itwas widely felt, however, that, in order to be consistentwith the purpose of protecting consumer debtors, that pro-vision should apply to transactions serving consumer pur-poses with respect to one party and commercial purposesfrom the perspective of the other party (i.e. transactionsbetween a consumer and a business entity).

139. It was also noted that paragraphs (1) and (3) referredto a signed writing, without clarifying whether the signa-ture of the debtor only or both the debtor and the assignorwas required. It was agreed that the provision shouldclarify that the writing needed to be signed only by thedebtor, since the debtor was the party whose rights wouldbe affected by a modification of an agreement to waivedefences.

140. Subject to those changes, the Working Groupadopted draft article 21 and referred it to the draftinggroup.


Article 22. Modification of the original contract


“(1) An agreement concluded before notification of theassignment between the assignor and the debtor that af-fects the assignee’s rights is effective as against the as-signee and the assignee acquires corresponding rights.

“(2) After notification of the assignment, an agreementbetween the assignor and the debtor that affects the as-signee’s rights is ineffective as against the assignee un-less:

(a) the assignee consents to it; or(b) the receivable is not fully earned by performanceand either modification is provided for in the originalcontract or, in the context of the original contract, areasonable assignee would consent to the modification.

“(3) Paragraphs (1) and (2) of this article do not affectany right of the assignor or the assignee for breach of anagreement between them.”

142. It was noted that paragraph (1) referred to notifica-tion, without clarifying whether it was effective when sentto or received by the debtor. The Working Group agreedthat the relevant point of time was the time when notifica-tion was received by the debtor, since as of that time thedebtor could discharge its obligation only in accordancewith the assignee’s payment instructions. Noting that thematter was addressed in draft article 18, the WorkingGroup adopted draft article 22 unchanged.

Article 23. Recovery of payments


“Without prejudice to the law governing the protectionof the debtor in transactions made primarily for personal,family or household purposes in the State in which thedebtor is located and the debtor’s rights under article 20,failure of the assignor to perform the original contractdoes not entitle the debtor to recover from the assignee asum paid by the debtor to the assignor or the assignee.”

144. Subject to the deletion of the word “primarily”, theWorking Group adopted draft article 23 and referred it tothe drafting group (see para. 138).

Scope and purpose of chapter V

145. Differing views were expressed as to the scope orthe purpose of the private international law rules of thedraft Convention, a matter addressed in paragraph (3) ofdraft article 1, the text of which as considered by theWorking Group was as follows:

“[(3) The provisions of chapter V apply [to assign-ments of international receivables and to internationalassignments of receivables as defined in this chapterindependently of paragraphs (1) and (2) of this article][independently of the provisions of this chapter]. How-ever, those provisions do not apply if a State makes adeclaration under article 34.]”

146. One view was that the application of chapter Vshould only supplement the substantive law provisions ofthe draft Convention and thus apply only to the transactionsfalling within the ambit of the draft Convention as definedin chapter I. In support of that view, it was stated that, froma legislative policy point of view, it would not be appropri-ate to attempt, in essence, to prepare a mini private inter-national law convention within a substantive law conven-tion. If chapter V were to supplement the substantive lawprovisions of the draft Convention, it was stated, it mightbe sufficient to retain only draft article 28 in section II ofchapter IV with the opening words that appeared withinsquare brackets. It was stated that, in such a case, draftarticle 28 could address matters not covered in the substan-tive law part of the draft Convention, such as the questionof the law applicable to set-off and to statutory assignabil-ity, and would not need to be subject to an opt-out clause.In addition, it was pointed out that draft article 27 could bedeleted, since it addressed the contractual aspects of assign-ment, namely a matter which was not the main focus of thedraft Convention and might already be sufficiently regu-lated by private international law (even though the princi-ple of freedom of choice of the applicable law might not becommon to all legal systems). Moreover, it was observedthat draft articles 29 to 31 could be deleted, since thematters addressed in those provisions were already suffi-ciently covered in draft articles 24 to 26. On the other hand,if chapter V were to be retained, it was suggested that itshould be subject to an opt-in rather than an opt-out clause.That suggestion received significant support.

147. The Working Group noted that, in principle, itwould not be appropriate to limit the application of privateinternational law rules on the basis of the substantive lawnotions contained in chapter I (i.e. only to assignments asdefined in draft article 2, or only to international transac-tions as defined in draft article 3 or only if the assignor orthe debtor was located in a Contracting State).

148. However, in an effort to reach consensus, the viewwas expressed that the application of chapter V could belimited to international transactions as defined in chapter I,irrespective of whether the assignor or the debtor had theirlocation in a Contracting State or the law governing thereceivable was the law of a Contracting State (an approachwhich had a precedence in article 1 (3) of the United Na-tions Convention on Independent Guarantees and Stand-byLetters of Credit). In support of that view, it was pointedout that such an approach would allow States that did nothave adequate private international law rules on assign-ments or no rules at all to benefit from the rules containedin chapter V. While it was admitted that those rules re-flected general principles which would need to be supple-mented by other principles of private international law, itwas observed that, in their generality, the provisions ofchapter V introduced rules that might be useful for manyStates and usefully clarified matters (e.g. priority issues)over which a great degree of uncertainty prevailed in pri-vate international law. In addition, it was stated that, oncethe priority rules in draft articles 24 to 26 had becomegenerally acceptable, there was no substantive reason tolimit their application on the basis of the substantive lawnotions contained in chapter I. As to States that had ad-equate rules on assignment, it was pointed out that they


could always opt out of chapter V. Those suggestions alsoreceived significant support, although some delegationsfavoured retention of draft articles 28 and 29 only.

149. After discussion, the Working Group was not able toreach agreement. It was, therefore, decided that paragraph(3) of article 1 should be revised along the following linesand be retained within square brackets:

“[(3) The provisions of chapter V apply to assignmentsof international receivables and to international assign-ments of receivables as defined in this chapter independ-ently of paragraphs (1) and (2) of this article. However,those provisions do not apply if a State makes a decla-ration under article 34.]”

It was also decided that the opening words in draft articles27 and 28, as well as draft article 29 as a whole (with theexception of the opening words which could be deleted; seepara. 160), should remain in square brackets, pending finaldetermination of the issue of the scope of chapter V. Fur-thermore, the Working Group agreed that draft articles 30and 31 raised questions that would need to be discussedfurther and decided that those provisions too should beplaced within square brackets.

Article 27. Law applicable to the contractof assignment


“(1) [With the exception of matters which are settled inthis Convention,] the contract of assignment is governedby the law expressly chosen by the assignor and theassignee.

“(2) In the absence of a choice of law by the assignorand the assignee, the contract of assignment is governedby the law of the State with which the contract of assign-ment is most closely connected. In the absence of proofto the contrary, the contract of assignment is presumed tobe most closely connected with the State in which theassignor has its place of business. If the assignor hasmore than one place of business, reference is to be madeto the place of business most closely connected to thecontract. If the assignor does not have a place of busi-ness, reference is to be made to its habitual residence.

“(3) If the contract of assignment is connected withone State only, the fact that the assignor and the assigneehave chosen the law of another State does not prejudicethe application of the law of the State with which theassignment is connected if that law cannot be derogatedfrom by contract.”

151. In order to reflect more clearly the matters thatshould be subject to party autonomy, the Working Groupdecided to substitute for “the contract of assignment” theterms “the rights and obligations of the assignor and theassignee under the contract of assignment”. A suggestion toalso include a reference to the “conclusion and validity ofthe contract of assignment” was objected to on the groundsthat those terms were not universally understood in thesame way and their use could create uncertainty.

152. The Working Group also considered whether para-graphs (2) and (3) were necessary. It was noted that, if thethrust of draft article 27 was to recognize party autonomywithout going into any detail, paragraph (2) might not beabsolutely necessary, in particular in view of the fact thatthe transactions intended to be covered were likely to benegotiated by highly sophisticated parties who normallyincluded a choice of law clause in their contracts. As toparagraph (3), it was noted that it might not be useful with-out any detailed rules as to the relevant connecting factors(e.g. characteristic performance under article 4 (2) of theConvention on the law Applicable to Contractual Obliga-tions “the Rome Convention” with the fall-back position ofarticle 4 (5) of the Rome Convention if the characteristicperformance could not be determined). The prevailingview, however, was that paragraphs (2) and (3) reflectedimportant rules that might not exist in all legal systems andshould thus be retained.

153. Subject to the change mentioned in paragraph 151above and to the final determination of the scope of chapterV, the Working Group adopted draft article 27 and referredit to the drafting group.

Article 28. Law applicable to the rights and obligationsof the assignee and the debtor


“[With the exception of matters which are settled inthis Convention,] the law governing the receivable towhich the assignment relates determines its assignability,the relationship between the assignee and the debtor, theconditions under which the assignment can be invokedagainst the debtor and any question whether the debtor’sobligations have been discharged.”

155. The Working Group considered, once more, the is-sue of the law applicable to rights of set-off. It was notedthat the general principle as to contractual rights of set-offwas that they were governed by the law of the contractfrom which they arose. It was also noted that, in line withthat approach, the law governing rights of set-off would bethe same as the law governing the receivable, if such rightsof set-off arose from the original contract, and different, ifrights of set-off arose from another contract.

156. In support of addressing the question of the law ap-plicable to rights of set-off, it was stated that such an ap-proach would enhance certainty and could have a benefi-cial impact on the cost of credit, since rights of set-offarose often and were bound to increase the risk of non-payment by the debtor. However, it was stated that, in or-der to achieve that result, rights of set-off should be sub-jected to the law governing the receivable. In view of thedifficulty of the matter and the lack of consensus as to thelaw applicable to set-off, the Working Group recalled andconfirmed its decision not to address that matter (seepara. 135).

157. The Working Group next considered the questionwhether draft article 28 should govern statutory assignabil-ity. It was noted that the application of the law governing


the receivable might not be appropriate in the case of statu-tory assignability. Such an approach could inadvertentlyresult in allowing the assignor and the debtor to evadepossible statutory limitations, which involved matters ofmandatory law or public policy, by choosing a convenientlaw to govern the receivable.

158. The Working Group recalled its decision not to in-clude any additional provisions in draft article 28 on theunderstanding that statutory limitations to assignability,which would normally flow from mandatory law, would bepreserved under draft article 30 (A/CN.9/456, para. 117).However, upon reflection, the Working Group decided thatdraft article 28 should be limited to contractual assignabil-ity. Subject to that change and to the final determination ofthe scope of chapter V, the Working Group adopted draftarticle 28 and referred it to the drafting group.

Article 29. Law applicable to conflicts of priority


“[With the exception of matters which are settled inchapter IV:]

(a) priority among several assignees of the same re-ceivables from the same assignor is governed by thelaw of the State in which the assignor is located;(b) priority between an assignee and the assignor’screditors is governed by the law of the State in whichthe assignor is located;(c) priority between an assignee and the insolvencyadministrator is governed by the law of the State inwhich the assignor is located;[(d) if an insolvency proceeding is commenced in aState other than the State in which the assignor is lo-cated, any non-consensual right or interest which un-der the law of the forum would have priority over theinterest of an assignee has such priority notwithstand-ing subparagraph (c), but only to the extent that suchpriority was specified by the forum State in an instru-ment deposited with the depositary prior to the timewhen the assignment was made;](e) an assignee asserting rights under this article hasno less rights than an assignee asserting rights underother law.]”

160. It was noted that draft article 29 appeared withinsquare brackets since, if chapter V were to supplement thesubstantive law part of the draft Convention, draft article29 would repeat the rules in draft articles 24 and 25 andshould be deleted. It was also noted that, if chapter V wereto apply whether or not the assignor or the debtor werelocated in a Contracting State, the opening words wouldnot be necessary, since chapter V would apply to mattersnot addressed in the draft Convention, while draft articles24 and 25 would apply to matters addressed in the draftConvention. Subject to that change, the alignment of draftarticle 29 with draft articles 24 and 25 and the final deter-mination of the scope of chapter V, the Working Groupadopted draft article 29 and referred it to the draftinggroup.

Article 30. Mandatory rules


“(1) Nothing in articles 27 and 28 restricts the applica-tion of the rules of the law of the forum State in a situ-ation where they are mandatory irrespective of the lawotherwise applicable.

“(2) Nothing in articles 27 and 28 restricts the applica-tion of the mandatory rules of the law of another Statewith which the matters settled in those articles have aclose connection if and in so far as, under the law of thatother State, those rules must be applied irrespective ofthe law otherwise applicable.”

162. Pending final determination of the scope of chapterV (see paras. 145-149) , the Working Group decided thatdraft article 30 should be retained within square brackets.

Article 31. Public policy


“With regard to matters settled in this chapter, the ap-plication of a provision of the law specified in this chap-ter may be refused by a court or other competent author-ity only if that provision is manifestly contrary to thepublic policy of the forum State.”

164. Pending final determination of the scope of chapterV (see paras. 145-149), the Working Group decided thatdraft article 31 should be retained within square brackets.

IV. ANNEX TO THE DRAFT CONVENTION

A. General comments

165. It was noted that the annex could be replaced by twoprovisions along the following lines:

“Article X. Revision and amendment

“1. At the request of not less than one third of theContracting States to this Convention, the depositaryshall convene a conference of the Contracting States forrevising or amending it.

“2. Any instrument of ratification, acceptance, ap-proval or accession deposited after the entry into force ofan amendment to this Convention is deemed to apply tothe Convention as amended.

“Article Y. Revision of the priority regime

“1. Notwithstanding the provisions of article X, a con-ference of Contracting States only for the purpose ofestablishing an international regime for the public filingof notices to address issues of priority arising in thecontext of assignment of receivables under this Conven-tion is to be convened by the depositary in accordancewith paragraph 2 of this article.


“2. A revision conference is to be convened by thedepositary when not less than one fourth of the Contract-ing States so request. The depositary shall request allContracting States invited to the conference to submitsuch proposals as they may wish the conference to exam-ine and shall notify all Contracting States invited of theprovisional agenda and of all the proposals submitted.

“3. Any decision by the conference must be taken by atwo-thirds majority of the participating States. The con-ference may adopt all measures necessary to establish aneffective international regime for the public filing ofnotices to address priority issues arising in the context ofthe assignment of receivables under this Convention. NoState shall be bound to participate directly or indirectlyin the international regime so established.

“4. Any amendment adopted is communicated by thedepositary to all the Contracting States for acceptanceand to all the States signatories of the Convention forinformation. Such amendment enters into force on thefirst day of the month following one year after its accept-ance by two thirds of the Contracting States. Acceptanceis to be effected by the deposit of a formal instrument tothat effect with the depositary.

“5. After entry into force of an amendment a Contract-ing State which has accepted the amendment is entitledto apply the Convention as amended in its relations withContracting States which have not within six monthsafter the adoption of the amendment notified the deposi-tary that they are not bound by the amendment.

“6. Any instrument of ratification, acceptance, ap-proval or accession deposited after the entry into force ofan amendment to this Convention is deemed to apply tothe Convention as amended.”

166. It was generally agreed that the annex should beretained, since it could provide States with some guidance asto a substantive law priority regime. As to the registrationregime envisaged in the annex, it was stated that it couldenhance certainty as to rights of financiers, thus reducing therisks and the costs involved in financing transactions. Withregard to draft articles X and Y, it was stated that draft articleX would be better placed in the final clauses, while draftarticle Y paragraph (3) could be retained either in the finalprovisions or in draft article 3 of the annex, perhaps with amore flexible formulation, which would not refer to a diplo-matic conference. In response to a question, it was notedthat, under draft article 36, States could choose one or noneof the options offered in the annex (see paras. 188-191 and203). The Working Group proceeded to consider the sub-stantive rules contained in the draft annex.

B. Discussion of draft articles of the annex

Section I. Priority rules based on registration

Article 1. Priority among several assignees

167. The text of draft article 1 of the annex as consideredby the Working Group was as follows:

“As between assignees of the same receivables fromthe same assignor, priority is determined by the order in

which certain information about the assignment is regis-tered under this Convention, regardless of the time oftransfer of the receivables. If no assignment is registered,priority is determined on the basis of the time of theassignment.”

168. The Working Group was agreed that the registrymeant in draft article 1 of the annex was a notice and not adocument registry, in the sense that only certain informationabout the assignment needed to be registered and not thedocument of the assignment as a whole. It was widely feltthat, for the operation of the registration system to be quick,simple and inexpensive, it would need to be based on regis-tration of a limited amount of data. As a matter of drafting,a number of suggestions were made, including that referenceshould be made to “data”, “notice” or “document”. Thesuggestion to refer to “document of assignment” was ob-jected to on the ground that it could inadvertently give theimpression that a document-filing system was involved.Subject to that change, the Working Group adopted draftarticle 1 of the annex and referred it to the drafting group.

Article 2. Priority between the assignee and theinsolvency administrator or the creditors of the assignor


“[Subject to articles 25 (3) and (4) of this Conventionand 4 of this annex,] an assignee has priority over aninsolvency administrator and creditors of the assignor,including creditors attaching the assigned receivables, if:

(a) the receivables [were assigned] [arose] [wereearned by performance], and information about the as-signment was registered under this Convention, beforethe commencement of the insolvency proceeding orattachment; or(b) the assignee has priority on grounds other thanthe provisions of this Convention.”

170. As to the opening words, the Working Group de-cided that they should be deleted on the understanding thatan explicit reference to the preservation of super-priorityrights dealt with in draft article 25 (5) would be includedin draft article 2 of the annex. That matter was referred tothe drafting group. It was stated, however, that the openingwords would not be necessary if the annex were to includean explicit statement to the effect that, should a Statechoose a system of priority rules based on sections I and IIof the annex, draft articles 1 and 2 of the annex wouldoperate as the priority rule for that State. The WorkingGroup postponed discussion of that matter until it had com-pleted its review of the annex (see paras.188-191). As tosubparagraph (a), the Working Group decided to retain thefirst set of bracketed words without the square brackets andto delete the second and third sets of bracketed words. TheWorking Group also decided to delete subparagraph (b). Itwas recalled that that provision was part of a previous sub-stantive law priority rule contained in the draft Conventionthat did not belong in draft article 2 of the annex since draftarticle 2 of the annex would be the sole basis on which anassignee could assert priority. Subject to those changes, theWorking Group adopted draft article 2 of the annex andreferred it to the drafting group.


Section II. Registration

Article 3. Establishment of a registration system


“A registration system will be established for the reg-istration of data about assignments under this Conven-tion and the regulations to be promulgated by the regis-trar and the supervising authority. The regulations willprescribe the exact manner in which the registration sys-tem will operate, as well as the procedure for resolvingdisputes relating to registration.”

172. Support was expressed in favour of the policy under-lying draft article 3. A number of suggestions were made.One suggestion was that the words “the exact manner” bereplaced by the words “in detail” so as to avoid creating theimpression that the regulations might need to be more de-tailed than was practically necessary and to give sufficientflexibility to the registrar and the supervising authority inpreparing the regulations. Those suggestions received suf-ficient support. The suggestion was also made that draftarticle 3 needed to be more detailed in describing the reg-istrar and the supervising authority. The Working Grouppostponed discussion of that matter until it had completedits review of the annex (due to the lack of sufficient time,the Working Group did not discuss that matter; see, how-ever, the suggestion contained in para. 166). Subject tothose changes, the Working Group adopted draft article 3of the annex and referred it to the drafting group.

Article 4. Registration


“(1) Any person may register data with regard to anassignment at the registry in accordance with this Con-vention and the registration regulations. The data regis-tered shall include the name and address of the assignorand the assignee and a brief description of the assignedreceivables.

“(2) A single registration may cover:(a) the assignment by the assignor to the assignee ofmore than one receivable;(b) an assignment not yet made;(c) the assignment of receivables not existing at thetime of registration.

“(3) Registration, or its amendment, is effective fromthe time that the data referred to in paragraph (1) areavailable to searchers. Registration, or its amendment, iseffective for the period of time specified by the register-ing party. In the absence of such a specification, a reg-istration is effective for a period of [five] years. Regula-tions will specify the manner in which registration maybe renewed, amended or discharged.

“(4) Any defect, irregularity, omission or error with re-gard to the name of the assignor that results in data reg-istered not being found upon a search based on the nameof the assignor renders the registration ineffective.”

174. As to paragraph (1), the concern was expressed thatallowing “any person” to register data with regard to anassignment might open the possibility of abuse and fraudu-lent registration. In order to address that concern, the sug-gestion was made that the basis on which a person mightregister data should be qualified. It was stated, however,that fraudulent registration did not pose a real problem,since registration under draft article 4 did not create anysubstantive rights. It was generally felt, however, that ref-erence should be made to persons specified in the regula-tions. Language along the following lines was proposed:“any person authorized by the regulations”. In order toaccommodate electronic registration and to allow registra-tion to function in a multilingual environment, it wasagreed that the reference to “name and address” should bereplaced by a reference to identification. It was stated thatthe regulations could provide that a person could be iden-tified with a number and that more data than the identifi-cation of the parties and the assigned receivables might berequired. It was also agreed that paragraph (1) should pro-vide also for registration of any amendments.

175. With regard to paragraph (2) (b), the suggestion wasmade that it should be deleted. In support, it was stated thatallowing registration of an assignment before it was made(“advance booking”) could lead to abuses. That suggestionwas objected to. It was widely felt that the ability to registera future assignment was at the heart of significant transac-tions. In the absence of certainty as to priority, it was ob-served, financiers would not enter into such transactions. Itwas also said that the risk of abusive registration practicesdeveloping was not real, since registration did not vest anyrights in the registering party, unless such rights existedunder a valid contract.

176. As to paragraph (3), it was agreed that it shouldpermit a choice of the length of time of effectiveness froma range of options to be set out in the regulations. It wasalso agreed that at the end of paragraph (3) language alongthe following lines should be included: “and, consistentwith this annex, such other matters as are necessary for theoperation of the registration system”.

177. Support was expressed in favour of the policy under-lying paragraph (4) that an error with regard to the identi-fication of the assignor was so essential that it would renderthe registration ineffective. It was stated that paragraph (4)was based on the assumption that: if the error was made bythe registering party, the registering party would suffer theconsequences of the registration being ineffective; and that,if the error was made by the registrar, the regulationswould address the issue of liability. It was also suggestedthat in the first line of paragraph (4), the word “result”should be replaced by the words “would result” to indicatethat, even if no one was actually misled, the registrationwould be ineffective.

178. Subject to the changes mentioned above, the Work-ing Group adopted draft article 4 of the annex and referredit to the drafting group.


Article 5. Registry searches


“(1) Any person may search the records of the registryaccording to the name of the assignor and obtain asearch result in writing.

“(2) A search result in writing that purports to be is-sued from the registry is admissible as evidence and is,in the absence of evidence to the contrary, proof of thedata to which the search relates, including:

(a) the date and time of registration; and(b) the order of registration.”

180. It was generally agreed that draft article 5 shouldmake it clear that a public registry was meant and, for thatreason, the use of the term “any person” in draft article 5(1) was appropriate as reflecting the principle of publicaccess to the registry for searching as opposed to registra-tion purposes. In response to a concern expressed that theterm “any person” might be too broad and undermine theconfidentiality necessary in financing transactions, it wasstated that that problem would not arise in view of the factthat registration would involve only a limited amount ofdata specified in draft article 4 of the annex and in theregulations and would not include information relating tothe financial details of the transaction.

Section III. Priority rules based on the timeof the contract of assignment



“(1) If a receivable is assigned several times, the rightthereto is acquired by the assignee whose contract ofassignment is of the earliest date.

“(2) The earliest assignee may not assert priority if itacted in bad faith at the time of the conclusion of thecontract of assignment.

“(3) If a receivable is transferred by operation of law,the beneficiary of that transfer has priority over an as-signee asserting a contract of assignment of an earlierdate.

“(4) In the event of a dispute, it is for the assigneeasserting a contract of assignment of an earlier date tofurnish proof of such an earlier date.”

182. There was sufficient support in the Working Groupfor the rule reflected in paragraph (1). As a matter of draft-ing, it was suggested that paragraph (1) should refer toseveral assignments of the same receivables by the sameassignor.

183. With regard to paragraph (2), differing views wereexpressed as to whether the reference to “bad faith” wouldcover knowledge or notice of a previous assignment. Oneview was that, in line with current law in many legal sys-tems, paragraph (2) would apply to cases in which the as-

signee had knowledge or notice of a previous assignment.Another view was that, in line with the decision of theWorking Group that mere knowledge or notice should notaffect the debtor’s discharge, it should not affect the prior-ity position of the assignee either. It was stated that thescope of paragraph (2) should be limited to cases of fraudor collusion. A related view was that, in its current formu-lation, paragraph (2) could not apply in the case of a sec-ond-in-time assignee who might lose its priority position onthe grounds that it had knowledge or notice of a previousassignment because it referred to the earliest assignee los-ing its priority if it were in bad faith and because knowl-edge or notice of a previous assignment was not relevant topriority in the case of a first-in-time of assignment priorityrule. It was, therefore, pointed out that, if the scope ofparagraph (2) was limited to cases involving fraud, it mightnot be necessary, since such matters were likely to be cov-ered sufficiently in most legal systems. It was also statedthat, in the case of fraud, there might be no conflict ofpriority to which paragraph (2) could apply, since the as-signment would be set aside as a fraudulent conveyance.After discussion, the Working Group decided to deleteparagraph (2) on the understanding that questions of goodfaith were left to law applicable outside the draft Conven-tion (as to the application of the principle of good faithunder the draft Convention, see A/CN.9/WG.II/WP.105,para. 62).

184. As to paragraph (3), there was agreement that it re-flected an inappropriate rule and should be deleted. TheWorking Group also decided to delete paragraph (4) on theunderstanding that the commentary would explain that theimportant question of who had the burden of proof was leftto other law applicable outside the draft Convention.

185. After discussion, subject to the changes mentionedabove, the Working Group adopted draft article 6 of theannex and referred it to the drafting group.

Article 7. Priority between the assignee and theinsolvency administrator or the creditors of the assignor


“[Subject to articles 25 (3) and (4) of this Conven-tion,] an assignee has priority over an insolvency admin-istrator and creditors of the assignor, including creditorsattaching the assigned receivables, if:

(a) the receivables were assigned before the com-mencement of the insolvency proceeding or attach-ment; or(b) the assignee has priority on grounds other thanthe provisions of this Convention.”

187. As to the opening words, the Working Group de-cided that they should be deleted on the understanding thata reference should be included to the preservation of super-priority rights dealt with in draft article 25 (5). That matterwas referred to the drafting group (as to the need for theaddition of a reference to draft article 25 (5), see paras. 170and 188-191). The question was raised whether referenceshould be added to the rights of the insolvency administra-tor or the assignor’s creditors that should be preserved on


the grounds that they were based on mandatory law. Inresponse, it was stated that draft article 25 (4) had beendeleted on the understanding that priority did not coverthose matters and that they were left to the law applicableoutside the draft Convention. It was agreed that that mattershould be clarified in the commentary. In line with its de-cision on draft article 2 of the annex (see para. 170 ), theWorking Group decided that subparagraph (b) should bedeleted.

C. Proposal as to the application of the annex

188. It was pointed out that, under the current formulationof draft article 36, it was contemplated that a State couldchoose the priority rules of section I and the registrationsystem of section II. The view was expressed that thereshould be two additional alternatives: a State should be ableto choose the priority rules of section I and a registrationsystem other than that proposed in section II, or, alterna-tively, the registration system of section II and priorityrules other than those proposed in section I. It was sug-gested that those three alternatives should be set out in anew draft article.

189. It was also suggested that an explicit statementshould be included in a new draft article to the effect that,should a State choose a system of priority rules based onsections I and II of the annex, the priority rules under draftarticle 1 of the annex would operate as the priority rules forthat State under draft article 24 of the draft Convention.

190. On the basis of those suggestions, language alongthe following lines was proposed for a new article:

“(1) A Contracting State may:(a) (i) accept the priority rules based on registra-

tion set out in section I of this annex and (ii)choose to participate in the registration systemestablished pursuant to section II of this annex;or

(b) (i) accept the priority rules based on registra-tion set out in section I of this annex and (ii)agree to effectuate such rules by use of a regis-tration system that fulfils the purposes of suchrules [as set forth in regulations promulgatedpursuant to section II]. For purposes of section I,registration pursuant to such system shall havethe same effect as registration pursuant tosection II.

“(2) For purposes of article 24, the law of a Contract-ing State that has acted pursuant to paragraph (1) (a) or(1) (b) is the set of rules set forth in section I of thisannex. The Contracting State is entitled to apply thoserules for all assignments made more than six monthsafter the Contracting State notifies the depositary that itis has so acted. The Contracting State may establish rulespursuant to which assignments made before the effectivedate shall, within a reasonable time, become subject tothe priority rules set forth in section I of this annex.

“(3) A Contracting State that does not act pursuant toparagraph (1) (a) or (1) (b) may, pursuant to its domesticpriority rules, utilize the registration system establishedpursuant to section II of this annex.”

191. Due to the lack of time, the Working Group was notable to discuss the proposed new article. It was stated,however, that the rule in paragraph (2) should apply also inthe case where a State chose the priority rules set forth insection III of the annex. Subject to that change, the Work-ing Group decided that the proposed new article should beintroduced in the text of the draft Convention within squarebrackets. The specific formulation and the placement of theproposed new article in the text of the draft Conventionwere referred to the drafting group.

V. FINAL PROVISIONSOF THE DRAFT CONVENTION

Article 33. Conflicts with international agreements


“(1) Except as provided in paragraph (2) of this article,this Convention prevails over any international conven-tion or other multilateral or bilateral agreement whichhas been or may be entered into by a Contracting Stateand which contains provisions concerning the mattersgoverned by this Convention.

“(2) A State may declare at any time that the Conven-tion will not prevail over international conventions orother multilateral or bilateral agreements listed in thedeclaration, which it has entered or will enter into andwhich contain provisions concerning the matters gov-erned by this Convention.”

193. It was noted that, at its twenty-ninth session, theWorking Group had adopted draft article 33 in order todeal with situations in which various texts gave precedenceto each other and, as a result, uncertainty arose as to whichone was applicable (“negative conflicts”, e.g. with the Ot-tawa Convention; see A/CN.9/455, paras. 126-129). It wasalso noted, however, that potential conflicts with the Ot-tawa Convention were minimal, since the scope of theOttawa Convention was narrower than the scope of thedraft Convention and, in any case, the provisions of thedraft Convention were, to a large extent, similar to those ofthe Ottawa Convention (with the exception, e.g. of the res-ervation to the rule on contractual limitations to assignmentand the rule on recovery from the assignee of paymentsmade by the debtor). Furthermore, it was noted that poten-tial conflicts with the Rome Convention were also minimalsince draft articles 27 and 28 were almost identical witharticle 12 of the Rome Convention or the relevant provi-sions of other texts, such as the Inter-American Conventionon the Law Applicable to Contractual Obligations (“theInter-American Convention”). As to the law governing pri-ority, it was noted that, according to the prevailing view,article 12 of the Rome Convention did not address thatmatter. However, it was noted, even if draft article 12 ofthe Rome Convention addressed issues of priority, neitherof the laws applicable under article 12 (i.e. the law chosenby the parties or the law governing the receivable) wasappropriate. It was also noted that no conflicts arose withthe draft EU Insolvency Convention (which was likely tobe issued as an EU regulation). The notion of central ad-ministration was almost identical with the centre of main


interests used in the draft EU Insolvency Convention andthat draft Convention did not affect rights in rem in a maininsolvency proceeding. While it was noted that the draftEU Insolvency Convention might affect rights in rem in asecondary insolvency proceeding (articles 2 (g), 4, and 28),draft article 25 would be sufficient to preserve, for exam-ple, super-priority rights, and priority under the draft Con-vention was not intended to affect the rights of theassignor’s creditors and the insolvency administrator to in-validate the assignment as a fraudulent or preferentialtransfer.

194. It was stated that, according to general principles oftreaty law, the draft Convention would not prevail over theOttawa Convention on the grounds that the Ottawa Conven-tion was a more specific convention. It was also observedthat, according to the same principles, the draft Conventionwould not prevail over the draft EU Insolvency Convention,the draft Convention on International Interests in MobileEquipment, the United Nations Convention on IndependentGuarantees and Stand-By Letters of Credit or the Conven-tion on the International Recognition of Rights in Aircraft.On the other hand, it was stated that the draft Conventionwould prevail over the Rome Convention or the Inter-American Convention, since substantive law conventionsprevailed over private international law conventions.

195. It was widely felt, however, that draft article 33 de-parted from generally acceptable principles as to conflictsamong international texts, in particular in that it wouldresult in the draft Convention superseding even future con-ventions. It was, therefore, agreed that a provision alongthe lines of article 90 of the United Nations Convention onContracts for the International Sale of Goods (Vienna,1980; “the United Nations Sales Convention”) which gaveprecedence to other texts, properly adjusted as to territorialconnection, would be more appropriate. As a result of thatdecision, the Working Group agreed that paragraph (2) andnew paragraph (3) (see paras. 88-91) were unnecessary andshould be deleted.

Article 34. Application of chapter V


“A State may declare at any time that it will not bebound by chapter V.”

197. It was noted that the Working Group, at its twenty-ninth session, had adopted the working assumption thatchapter V would be subject to a reservation by States (A/CN.9/455, paras. 72 and 148). The Working Group recalledthe suggestions made at the current session that chapter Vshould be rather subject to an opt-in clause and decided thatthat matter should be left to the Commission.

Article 35. Other exclusions


“[A State may declare at any time that it will not applythe Convention to certain practices listed in a declara-tion.]”

199. It was stated that allowing States to exclude furtherpractices would make the draft Convention more accept-able to States that might be concerned with the applicationof the draft Convention to certain practices. It was alsoobserved that the Working Group made significantprogress in addressing such concerns by allowing States tomake a reservation with regard to Government receivables.However, it was pointed out that the question whether draftarticle 35 would be necessary could not be answered beforethe final determination of the scope of the draft Conventionand in particular before a final decision had been reachedon the treatment of the assignment of financial receivables.On the other hand, it was observed that an approach basedon declarations would detract from the certainty achievedby the draft Convention, since its scope of applicationcould be different from State to State, a matter that mightnot be easy to determine in each particular case.

200. In the discussion, a number of suggestions weremade. One suggestion was made that the term “specific”should be substituted for the term “certain” practices. An-other suggestion was that reference should be made to thedebtor’s location with respect to the application of thoseprovisions of the draft Convention that affected the debt-or’s rights and obligations. Yet another suggestion was thatthe exception as to sovereign receivables should be placedright after draft article 35.

201. After discussion, the Working Group decided thatdraft article 35 should be retained within square bracketsand referred it to the drafting group.

Article 36. Application of the annex


“A State may declare at any time that it will be boundeither by [sections I and II or by section III] of the annexto this Convention.”

203. It was agreed that draft article 36 should be alignedwith the new article proposed to describe the options thatStates would have in making a declaration with respect tothe annex and the effect of such declarations (see paras.188-191). In view of the fact that the Working Group didnot have the time to discuss the proposed new article deal-ing with that matter, it was also agreed that the optionsshould be retained within square brackets. With that under-standing, the Working Group referred draft article 36 to thedrafting group.

Article 37. Insolvency rules or proceduresnot affected by this Convention


“[A State may declare at any time that other rules orprocedures governing the insolvency of the assignorshall not be affected by this Convention.]”

205. It was noted that draft article 37 related to mattersaddressed in draft article 25 (4). The Working Group re-called its decision to delete that provision and decided thatdraft article 37 also should be deleted.


Provisions for the transitional applicationof the draft Convention

206. The Working Group agreed that draft articles 40 (5),42 (3) and 43 (3), which dealt with the effects of declara-tions, of the entry into force and of the denunciation of thedraft Convention on rights of third parties, on transactionsexisting before the entry into force of the draft Conventionand on transactions existing before denunciation respec-tively should be retained within square brackets for Statesto consider in their preparation for the next Commissionsession. As to draft article 42 (3), the concern was ex-pressed that it might inappropriately restrict the sovereignright of States to denounce the draft Convention. In re-sponse, it was stated that draft article 42 (3) stated an im-portant principle and, in the absence of a provision alongthe lines of draft article 42 (3), parties would be reluctantto enter into such transactions, a result that was said to beinconsistent with the main goal of the draft Convention.

Revision and amendment

207. The Working Group considered a provision dealingwith revision and amendment of the draft Convention,which had been prepared by the secretariat and was asfollows:


“1. At the request of not less than one third of theContracting States to this Convention, the depositaryshall convene a conference of the Contracting States forrevising or amending it.

“2. Any instrument of ratification, acceptance, ap-proval or accession deposited after the entry into force ofan amendment to this Convention is deemed to apply tothe Convention as amended.”

208. It was noted that the provision was based on article32 of the United Nations Convention on the Carriage ofGoods by Sea, 1978 (Hamburg Rules). It was stated, how-ever, that, in view of the budgetary restrictions under whichthe secretariat had to operate, the holding of a diplomaticconference should be left to the discretion of the deposi-tary. It was, therefore, suggested that the words “maywithin existing resources” should be substituted for theword “shall”. That suggestion was objected to on thegrounds that, in its current formulation, draft article X re-flected normal practice. In view of the lack of sufficienttime to discuss that matter, the Working Group decided thatdraft article X should not be included in the text of the draftConvention, leaving that matter to the Commission.

VI. REPORT OF THE DRAFTING GROUP

209. The Working Group requested a drafting group es-tablished by the secretariat to review draft articles 1 (3), 2to 5, 8, 10 to 12, 16, 19 to 29 and 33 to 42 of the draftConvention, as well as draft articles 1 to 7 of the annex tothe draft Convention, with a view to ensuring consistencybetween the various language versions.

210. At the close of its deliberations, the Working Groupconsidered the report of the drafting group and adopteddraft articles 1(3), 2 to 5, 8, 10 to 12, 16, 19 to 29, 33 to42 of the draft Convention and draft articles 1 to 7 of theannex to the draft Convention, as revised by the draftinggroup, as well as the rest of the draft articles of the draftConvention. The consolidated text of the draft Convention,as adopted by the Working Group, is reproduced in theannex to the present report.

211. Given that the new provision dealing with conflictswith other international agreements remained in brackets, itwas agreed that paragraph (2) of draft article 4 also shouldremain in brackets. It was suggested that the title to draftarticle 5 should be revised to read only “definitions” asprinciples of interpretation were to be found elsewhere inthe draft Convention. In response, it was noted that the titleof draft article 5 had been adopted at the previous sessionof the Working Group and had not been considered by thedrafting group at the current session. It was agreed that thebracketed text in variant B of subparagraph (j) (ii) of draftarticle 5 (see paras. 96-97) should be deleted. It was alsoagreed that, throughout subparagraphs (a) to (c) of draftarticle 16 (1), the appropriate term should be “in respectof”. Furthermore, it was agreed that in draft article 19 theterm “receivables” should be changed to “receivable” in thesingular, for the sake of consistency. Concerning draft ar-ticle 20, it was agreed that in paragraph (1) the referenceshould be to any other contract that “was” part of the sametransaction, and that paragraph (3) should refer to defencesand rights of set-off that the debtor “may raise”. As to draftarticle 21, the reference in paragraph (1) was changed to “awriting signed by the debtor” for consistency with para-graph (3).

212. The concern was expressed that draft article 24 wentbeyond covering priority in receivables and proceeds andwas, therefore, inconsistent with the policy decision of theWorking Group. In response, it was noted that, while it wastrue that the issue of the extent and existence of an assign-ee’s, as well as an inventory financier’s, right in receivablesand proceeds had not been discussed in any detail, it hadbeen mentioned in the discussion. It was also noted that,responding to a query by the secretariat, the WorkingGroup had confirmed that those matters should be covered,although they had not been discussed. As to draft article 24,it was suggested that the title should read “Law applicableto competing rights of other parties”.

213. With regard to paragraph (2) of new draft article 26,it was agreed that it was necessary to specify that the as-signee’s “right” had priority over the right in the assignedreceivable. The view was expressed that the whole of chap-ter V of the draft Convention should be retained in brack-ets. It was felt, however, that the report of the WorkingGroup would adequately reflect the discussions that hadbeen held concerning this chapter. As to draft article 27, thereference in paragraph (2) was changed to the habitual resi-dence “of the assignor”, and the language in paragraph (3)was changed to refer “to the extent” that law cannot bederogated from by contract. In line with its decision madeafter the preparation of the report of the drafting group (seepara. 195), the Working Group agreed that new paragraph(3) of draft article 33 (see paras. 88-91) should be deleted


and paragraphs (1) and (2) should be revised to conformwith the standard provisions for resolving conflicts withother international agreements that would be found in otherinternational conventions, such as the United Nations SalesConvention. In response to a question raised, it was notedthat the matter of the use of the term “data” or some otherterm in draft article 1 of the annex had been left to thedrafting group, on the understanding that any term usedshould reflect the policy decision of the Working Group infavour of a notice-filing rather than a document-filing sys-tem. In respect of draft article 4 of the annex, it was sug-gested that: in paragraph (1), the term “assigned” should bereplaced with “covered” to ensure that the description re-ferred also to future receivables; in subparagraph (2) (b),reference should be to an assignment “not yet concluded”;in paragraph (3), reference should be to a registration hav-ing been “extended”, rather than “renewed”; and in para-graph (4), reference should be to the “correct” identifica-tion of the assignor. Those suggestions were objected to. Itwas widely felt that the language as prepared by the draft-ing group was satisfactory.

214. It was agreed that the latter part of new draft article36 (see annex to this report), starting with the word “pro-vided”, should be placed within square brackets, so as toindicate that the matter addressed therein would need to bediscussed further. It was also agreed that new draft articles40 (3), 41 (5) and 43 (3) (see annex to this report) should

be placed within square brackets so as to indicate that theissues addressed therein would need to be examined care-fully and discussed further.

VII. FUTURE WORK

215. The Working Group noted that issues, such as themeaning of “location”, the special regime with regard tofinancial receivables and the scope of the private interna-tional law provisions of the draft Convention, remainedpending. However, on the understanding that such issuescould only be resolved by the Commission, the WorkingGroup decided to complete its work with the adoption ofthe draft Convention as a whole and to submit it to theCommission at its next session for final review and adop-tion (New York, 12 June to 7 July 2000). It was noted thatthe text of the draft Convention, as adopted by the WorkingGroup, would be distributed to all States and interestedinternational organizations for comments and that the sec-retariat would prepare an analytical compilation of thosecomments. It was also noted that the secretariat would fi-nalize and distribute the commentary to the draft Conven-tion. It was expected that the compilation of comments andthe commentary would assist delegates at the Commissionsession in their deliberations and allow the Commission tofinalize and adopt the draft Convention.

ANNEX I

Consolidated text of the draft Convention:

DRAFT CONVENTION ON ASSIGNMENT[IN RECEIVABLES FINANCING]

[OF RECEIVABLES IN INTERNATIONAL TRADE]

PREAMBLE


Reaffirming their conviction that international trade on the basis of equality and mutual benefitis an important element in the promotion of friendly relations among States,

Considering [that] problems created by [the] uncertainties as to the content and choice of legalregime applicable to assignments [of receivables] in international trade [constitute an obstacle tofinancing transactions],

Desiring to establish principles and adopt rules [relating to the assignment of receivables] thatwould create certainty and transparency and promote modernization of law relating to [assignmentsof receivables] [receivables financing] [including but not limited to assignments used in factoring,forfaiting, securitization, project financing, and refinancing,] while protecting existing [financing][assignment] practices and facilitating the development of new practices,

Also desiring to ensure the adequate protection of the interests of the debtor in the case of anassignment of receivables,

Being of the opinion that the adoption of uniform rules governing assignments [in] [of] receiva-bles [financing] would facilitate the development of international trade and promote the availabilityof [capital and] credit at more affordable rates,





(1) This Convention applies to:

(a) assignments of international receivables and to interna-tional assignments of receivables as defined in this chapter, if,at the time of the conclusion of the contract of assignment, theassignor is located in a Contracting State;

(b) subsequent assignments provided that any prior assign-ment is governed by this Convention; and

(c) subsequent assignments that are governed by this Conven-tion under subparagraph (a) of this paragraph, notwithstandingthat any prior assignment is not governed by this Convention.

(2) This Convention does not affect the rights and obligations ofthe debtor unless the debtor is located in a Contracting State or thelaw governing the receivable is the law of a Contracting State.

[(3) The provisions of chapter V apply to assignments of inter-national receivables and to international assignments of receiva-bles as defined in this chapter independently of paragraphs (1) and(2) of this article. However, those provisions do not apply if aState makes a declaration under article 37.]

(4) The annex to this Convention applies in a Contracting Statewhich has made a declaration under article 36.



(a) “assignment” means the transfer by agreement from oneperson (“assignor”) to another person (“assignee”) of theassignor’s contractual right to payment of a monetary sum (“re-ceivable”) from a third person (“the debtor”). The creation ofrights in receivables as security for indebtedness or other obli-gation is deemed to be a transfer;

(b) in the case of an assignment by the initial or any otherassignee (“subsequent assignment”), the person who makes thatassignment is the assignor and the person to whom that assign-ment is made is the assignee.


A receivable is international if, at the time of the conclusion ofthe original contract, the assignor and the debtor are located indifferent States. An assignment is international if, at the time ofthe conclusion of the contract of assignment, the assignor and theassignee are located in different States.


(1) This Convention does not apply to assignments:

(a) made to an individual for his or her personal, family orhousehold purposes;

(b) to the extent made by the delivery of a negotiable instru-ment, with any necessary endorsement;

(c) made as part of the sale, or change in the ownership or thelegal status, of the business out of which the assigned receiva-bles arose.

[(2) This Convention does not apply to assignments listed in adeclaration made under article 39 by the State in which theassignor is located, or with respect to the provisions of this Con-vention which deal with the rights and obligations of the debtor,by the State in which the debtor is located.]

[Article 5. Limitations on receivables other than trade receivables

Variant A

(1) Articles 17, 18, 19, 20 and 22 do not affect the rights andobligations of the debtor in respect of a receivable other than atrade receivable except to the extent the debtor consents.

(2) Notwithstanding articles 11 (2) and 12 (3), an assignor whoassigns a receivable other than a trade receivable is not liable tothe debtor for breach of a limitation on assignment described inarticles 11 (1) and 12 (2), and the breach shall have no effect.

Variant B

Articles 11 and 12 and section II of chapter IV apply only toassignments of trade receivables. With respect to assignments ofreceivables other than trade receivables, the matters addressed bythese articles are to be settled in conformity with the law applica-ble by virtue of the rules of private international law.]




(a) “original contract” means the contract between the assignorand the debtor from which the assigned receivable arises;

(b) “existing receivable” means a receivable that arises uponor before the conclusion of the contract of assignment; “futurereceivable” means a receivable that arises after the conclusionof the contract of assignment;

[(c) “receivables financing” means any transaction in whichvalue, credit or related services are provided for value in theform of receivables. Receivables financing includes factoring,forfaiting, securitization, project financing and refinancing;]

(d) “writing” means any form of information that is accessibleso as to be usable for subsequent reference. Where this Conven-tion requires a writing to be signed, that requirement is met if,by generally accepted means or a procedure agreed to by theperson whose signature is required, the writing identifies thatperson and indicates that person’s approval of the informationcontained in the writing;

(e) “notification of the assignment” means a communicationin writing which reasonably identifies the assigned receivablesand the assignee;

(f) “insolvency administrator” means a person or body, in-cluding one appointed on an interim basis, authorized in aninsolvency proceeding to administer the reorganization or liqui-dation of the assignor’s assets or affairs;

(g) “insolvency proceeding” means a collective judicial oradministrative proceeding, including an interim proceeding, inwhich the assets and affairs of the assignor are subject to con-trol or supervision by a court or other competent authority forthe purpose of reorganization or liquidation;

(h) “priority” means the right of a party in preference to an-other party;

(i) (i) a person is located in the State in which it has its placeof business;

(ii) if the assignor or the assignee has more than one placeof business, the place of business is that place whereits central administration is exercised;

(iii) if the debtor has more than one place of business, theplace of business is that which has the closest relation-ship to the original contract;


(iv) if a person does not have a place of business, referenceis to be made to the habitual residence of that person;

(j) “law” means the law in force in a State other than its rulesof private international law;

(k) “proceeds” means whatever is received in respect of anassigned receivable, whether in total or partial payment or othersatisfaction of the receivable. The term includes whatever isreceived in respect of proceeds. The term does not include re-turned goods;

[(l) “trade receivable” means a receivable arising under anoriginal contract for the sale or lease of goods or the provisionof services other than financial services.]


The assignor, the assignee and the debtor may derogate from orvary by agreement provisions of this Convention relating to theirrespective rights and obligations. Such an agreement does notaffect the rights of any person who is not a party to the agreement.


(1) In the interpretation of this Convention, regard is to be had toits international character and to the need to promote uniformity inits application and the observance of good faith in international trade.

(2) Questions concerning matters governed by this Conventionwhich are not expressly settled in it are to be settled in conformitywith the general principles on which it is based or, in the absenceof such principles, in conformity with the law applicable by virtueof the rules of private international law.


Article 9. Effectiveness of bulk assignments, assignmentsof future receivables, and partial assignments

(1) An assignment of existing or future, one or more, receiva-bles, and parts of, or undivided interests in, receivables is effec-tive, whether the receivables are described:

(a) individually as receivables to which the assignment re-lates; or

(b) in any other manner, provided that they can, at the time ofthe assignment or, in the case of future receivables, at the timeof the conclusion of the original contract, be identified as re-ceivables to which the assignment relates.

(2) Unless otherwise agreed, an assignment of one or more fu-ture receivables is effective at the time of the conclusion of theoriginal contract without a new act of transfer being required toassign each receivable.


An existing receivable is transferred, and a future receivable isdeemed to be transferred, at the time of the conclusion of thecontract of assignment, unless the assignor and the assignee havespecified a later time.


(1) An assignment of a receivable is effective notwithstandingany agreement between the initial or any subsequent assignor andthe debtor or any subsequent assignee, limiting in any way theassignor’s right to assign its receivables.

(2) Nothing in this article affects any obligation or liability ofthe assignor for breach of such an agreement. A person who is notparty to such an agreement is not liable on the sole ground that ithad knowledge of the agreement.


(1) A personal or property right securing payment of the assignedreceivable is transferred to the assignee without a new act of trans-fer, unless, under the law governing the right, it is transferable onlywith a new act of transfer. If such a right, under the law governingit, is transferable only with a new act of transfer, the assignor isobliged to transfer this right and any proceeds to the assignee.

(2) A right securing payment of the assigned receivable is trans-ferred under paragraph (1) of this article notwithstanding an agree-ment between the assignor and the debtor or other person grantingthe right, limiting in any way the assignor’s right to assign thereceivable or the right securing payment of the assigned receivable.

(3) Nothing in this article affects any obligation or liability ofthe assignor for breach of an agreement under paragraph (2) of thisarticle. A person who is not a party to such an agreement is notliable on the sole ground that it had knowledge of the agreement.

(4) The transfer of a possessory property right under paragraph(1) of this article does not affect any obligations of the assignor tothe debtor or the person granting the property right with respect tothe property transferred existing under the law governing thatproperty right.

(5) Paragraph (1) of this article does not affect any requirementunder rules of law other than this Convention relating to the formor registration of the transfer of any rights securing payment of theassigned receivable.

CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES



(1) The rights and obligations of the assignor and the assigneeas between them arising from their agreement are determined bythe terms and conditions set forth in that agreement, including anyrules or general conditions referred to therein.

(2) The assignor and the assignee are bound by any usage towhich they have agreed and, unless otherwise agreed, by any prac-tices which they have established between themselves.

(3) In an international assignment, the assignor and the assigneeare considered, unless otherwise agreed, to have impliedly madeapplicable to the assignment a usage which in international tradeis widely known to, and regularly observed by, parties to theparticular [receivables financing] practice.


(1) Unless otherwise agreed between the assignor and the as-signee, the assignor represents at the time of the conclusion of thecontract of assignment that:

(a) the assignor has the right to assign the receivable;(b) the assignor has not previously assigned the receivable toanother assignee; and(c) the debtor does not and will not have any defences orrights of set-off.

(2) Unless otherwise agreed between the assignor and the as-signee, the assignor does not represent that the debtor has, or willhave, the financial ability to pay.


(1) Unless otherwise agreed between the assignor and the as-signee, the assignor or the assignee or both may send the debtor


a notification of the assignment and a payment instruction, butafter notification is sent only the assignee may send a paymentinstruction.

(2) A notification of the assignment or payment instruction sentin breach of any agreement referred to in paragraph (1) of thisarticle is not ineffective for the purposes of article 19 by reason ofsuch breach. However, nothing in this article affects any obliga-tion or liability of the party in breach of such an agreement for anydamages arising as a result of the breach.


(1) As between the assignor and the assignee, unless otherwiseagreed, and whether or not a notification of the assignment hasbeen sent:

(a) if payment in respect of the assigned receivable is made tothe assignee, the assignee is entitled to retain the proceeds andgoods returned in respect of the assigned receivable;

(b) if payment in respect of the assigned receivable is made tothe assignor, the assignee is entitled to payment of the proceedsand is also entitled to goods returned to the assignor in respectof the assigned receivable; and

(c) if payment in respect of the assigned receivable is made toanother person over whom the assignee has priority, the as-signee is entitled to payment of the proceeds and is also entitledto goods returned to such person in respect of the assignedreceivable.

(2) The assignee may not retain more than the value of its rightin the receivable.

Section II. Debtor

Article 17. Principle of debtor-protection

(1) Except as otherwise provided in this Convention, an assign-ment does not, without the consent of the debtor, affect the rightsand obligations of the debtor, including the payment terms con-tained in the original contract.

(2) A payment instruction may change the person, address oraccount to which the debtor is required to make payment, but maynot:

(a) change the currency of payment specified in the originalcontract, or

(b) change the State specified in the original contract, inwhich payment is to be made, to a State other than that in whichthe debtor is located.

Article 18. Notification of the debtor

(1) A notification of the assignment and a payment instructionare effective when received by the debtor, if they are in a languagethat is reasonably expected to inform the debtor about their con-tents. It shall be sufficient if a notification of the assignment or apayment instruction is in the language of the original contract.

(2) A notification of the assignment or a payment instructionmay relate to receivables arising after notification.

(3) Notification of a subsequent assignment constitutes notifica-tion of any prior assignment.


(1) Until the debtor receives notification of the assignment, thedebtor is entitled to be discharged by paying in accordance with

the original contract. After the debtor receives notification of theassignment, subject to paragraphs (2) to (6) of this article, thedebtor is discharged only by paying the assignee or, if otherwiseinstructed in the notification of the assignment or subsequently bythe assignee in a writing received by the debtor, in accordancewith such instructions.

(2) If the debtor receives notification of more than one assign-ment of the same receivable made by the same assignor, the debtoris discharged by paying in accordance with the first notificationreceived.

(3) If the debtor receives more than one payment instructionrelating to a single assignment of the same receivable by the sameassignor, the debtor is discharged by paying in accordance withthe last payment instruction received from the assignee beforepayment.

(4) If the debtor receives notification of one or more subsequentassignments, the debtor is discharged by paying in accordancewith the notification of the last of such subsequent assignments.

(5) If the debtor receives notification of the assignment from theassignee, the debtor is entitled to request the assignee to providewithin a reasonable period of time adequate proof that the assign-ment has been made and, unless the assignee does so, the debtoris discharged by paying the assignor. Adequate proof includes, butis not limited to, any writing emanating from the assignor andindicating that the assignment has taken place.

(6) This article does not affect any other ground on which pay-ment by the debtor to the person entitled to payment, to a compe-tent judicial or other authority, or to a public deposit fund dis-charges the debtor.


(1) In a claim by the assignee against the debtor for payment ofthe assigned receivables, the debtor may raise against the assigneeall defences or rights of set-off arising from the original contract,or any other contract that was part of the same transaction, ofwhich the debtor could avail itself if such claim were made by theassignor.

(2) The debtor may raise against the assignee any other right ofset-off, provided that it was available to the debtor at the timenotification of the assignment was received.

(3) Notwithstanding paragraphs (1) and (2) of this article, de-fences and rights of set-off that the debtor may raise pursuant toarticle 11 against the assignor for breach of agreements limiting inany way the assignor’s right to assign its receivables are not avail-able to the debtor against the assignee.

Article 21. Agreement not to raise defences or rights of set-off

(1) Without prejudice to the law governing the protection of thedebtor in transactions made for personal, family or householdpurposes in the State in which the debtor is located, the debtormay agree with the assignor in a writing signed by the debtor notto raise against the assignee the defences and rights of set-off thatit could raise pursuant to article 20. Such an agreement precludesthe debtor from raising against the assignee those defences andrights of set-off.

(2) The debtor may not exclude:

(a) defences arising from fraudulent acts on the part of theassignee;

(b) defences based on the debtor’s incapacity.

(3) Such an agreement may be modified only by an agreementin a writing signed by the debtor. The effect of such a modifica-tion as against the assignee is determined by article 22 (2).



(1) An agreement concluded before notification of the assign-ment between the assignor and the debtor that affects the assign-ee’s rights is effective as against the assignee and the assigneeacquires corresponding rights.

(2) After notification of the assignment, an agreement betweenthe assignor and the debtor that affects the assignee’s rights isineffective as against the assignee unless:

(a) the assignee consents to it; or

(b) the receivable is not fully earned by performance and ei-ther modification is provided for in the original contract or, inthe context of the original contract, a reasonable assignee wouldconsent to the modification.

(3) Paragraphs (1) and (2) of this article do not affect any rightof the assignor or the assignee for breach of an agreement betweenthem.


Without prejudice to the law governing the protection of thedebtor in transactions made for personal, family or householdpurposes in the State in which the debtor is located and the debt-or’s rights under article 20, failure of the assignor to perform theoriginal contract does not entitle the debtor to recover from theassignee a sum paid by the debtor to the assignor or the assignee.

Section III. Other parties

Article 24. Law applicable to competing rightsof other parties

With the exception of matters which are settled elsewhere inthis Convention, and subject to articles 25 and 26, the law of theState in which the assignor is located governs:

(a) the extent of the right of an assignee in the assigned re-ceivable and the priority of the right of the assignee with re-spect to competing rights in the assigned receivable of:

(i) another assignee of the same receivable from the sameassignor, even if that receivable is not an internationalreceivable and the assignment to that assignee is not aninternational assignment;

(ii) a creditor of the assignor; and(iii) the insolvency administrator;

(b) the existence and extent of the right of the persons listedin paragraph (1) (a) (i) to (iii) in proceeds of the assignedreceivable, and the priority of the right of the assignee in thoseproceeds with respect to competing rights of such persons; and

(c) whether, by operation of law, a creditor has a right in theassigned receivable as a result of its right in other property ofthe assignor, and the extent of any such right in the assignedreceivable.

Article 25. Public policy and preferential rights

(1) The application of a provision of the law of the State inwhich the assignor is located may be refused by a court or othercompetent authority only if that provision is manifestly contrary tothe public policy of the forum State.

(2) In an insolvency proceeding commenced in a State otherthan the State in which the assignor is located, any preferentialright which arises under the law of the forum State and is givenpriority status over the rights of an assignee in insolvency pro-ceedings under the law of that State has such priority notwith-standing article 24. A State may deposit at any time a declarationidentifying those preferential rights.

Article 26. Special proceeds rules

(1) If proceeds of the assigned receivable are received by theassignee, the assignee is entitled to retain those proceeds to theextent that the assignee’s right in the assigned receivable had pri-ority over competing rights in the assigned receivable of the per-sons described in subparagraph (a) (i) to (iii) of article 24.

(2) If proceeds of the assigned receivable are received by theassignor, the right of the assignee in those proceeds has priorityover competing rights in those proceeds of the persons describedin subparagraph (a) (i) to (iii) of article 24 to the same extent asthe assignee’s right had priority over the right in the assignedreceivable of those persons if:

(a) the assignor has received the proceeds under instructionsfrom the assignee to hold the proceeds for the benefit of theassignee; and

(b) the proceeds are held by the assignor for the benefit of theassignee separately and are reasonably identifiable from theassets of the assignor, such as in the case of a separate depositaccount containing only cash receipts from receivables assignedto the assignee.

Article 27. Subordination

An assignee entitled to priority may at any time subordinateunilaterally or by agreement its priority in favour of any existingor future assignees.


Article 28. Law applicable to the rights and obligationsof the assignor and the assignee

(1) [With the exception of matters which are settled in thisConvention,] the rights and obligations of the assignor and theassignee under the contract of assignment are governed by the lawexpressly chosen by the assignor and the assignee.

(2) In the absence of a choice of law by the assignor and theassignee, their rights and obligations under the contract of assign-ment are governed by the law of the State with which the contractof assignment is most closely connected. In the absence of proofto the contrary, the contract of assignment is presumed to be mostclosely connected with the State in which the assignor has itsplace of business. If the assignor has more than one place ofbusiness, reference is to be made to the place of business mostclosely connected to the contract. If the assignor does not have aplace of business, reference is to be made to the habitual residenceof the assignor.

(3) If the contract of assignment is connected with one Stateonly, the fact that the assignor and the assignee have chosen thelaw of another State does not prejudice the application of the lawof the State with which the assignment is connected to the extentthat law cannot be derogated from by contract.


[With the exception of matters which are settled in this Conven-tion,] the law governing the receivable to which the assignmentrelates determines the enforceability of contractual limitations onassignment, the relationship between the assignee and the debtor,the conditions under which the assignment can be invoked againstthe debtor and any question whether the debtor’s obligations havebeen discharged.


[Article 30. Law applicable to competing rightsof other parties

(1) The law of the State in which the assignor is located gov-erns:

(a) the extent of the right of an assignee in the assigned re-ceivable and the priority of the right of the assignee with re-spect to competing rights in the assigned receivable of:

(i) another assignee of the same receivable from the sameassignor, even if that receivable is not an internationalreceivable and the assignment to that assignee is not aninternational assignment;

(ii) a creditor of the assignor; and(iii) the insolvency administrator;

(b) the existence and extent of the right of the persons listedin paragraph (1) (a) (i) to (iii) in proceeds of the assignedreceivable, and the priority of the right of the assignee in thoseproceeds with respect to competing rights of such persons; and

(c) whether, by operation of law, a creditor has a right in theassigned receivable as a result of its right in other property ofthe assignor, and the extent of any such right in the assignedreceivable.

(2) The application of a provision of the law of the State inwhich the assignor is located may be refused by a court or othercompetent authority only if that provision is manifestly contrary tothe public policy of the forum State.

(3) In an insolvency proceeding commenced in a State otherthan the State in which the assignor is located, any preferentialright which arises under the law of the forum State and is givenpriority status over the rights of an assignee in insolvency pro-ceedings under the law of that State has such priority notwith-standing paragraph (1) of this article. A State may deposit at anytime a declaration identifying those preferential rights.


(1) Nothing in articles 28 and 29 restricts the application of therules of the law of the forum State in a situation where they aremandatory irrespective of the law otherwise applicable.

(2) Nothing in articles 28 and 29 restricts the application of themandatory rules of the law of another State with which the matterssettled in those articles have a close connection if and in so far as,under the law of that other State, those rules must be appliedirrespective of the law otherwise applicable.


With regard to matters settled in this chapter, the application ofa provision of the law specified in this chapter may be refused bya court or other competent authority only if that provision ismanifestly contrary to the public policy of the forum State.]

CHAPTER VI. FINAL PROVISIONS

Article 33. Depositary

The Secretary-General of the United Nations is the depositaryof this Convention.

Article 34. Signature, ratification, acceptance, approval,accession

(1) This Convention is open for signature by all States at theHeadquarters of the United Nations, New York, until ... .

(2) This Convention is subject to ratification, acceptance orapproval by the signatory States.

(3) This Convention is open to accession by all States which arenot signatory States as from the date it is open for signature.

(4) Instruments of ratification, acceptance, approval and acces-sion are to be deposited with the Secretary-General of the UnitedNations.

Article 35. Application to territorial units

(1) If a State has two or more territorial units in which differentsystems of law are applicable in relation to the matters dealt within this Convention, it may, at any time, declare that this Conven-tion is to extend to all its territorial units or only one or more ofthem, and may at any time substitute another declaration for itsearlier declaration.

(2) These declarations are to state expressly the territorial unitsto which the Convention extends.

(3) If, by virtue of a declaration under this article, this Conven-tion does not extend to all territorial units of a State and theassignor or the debtor is located in a territorial unit to which theConvention does not extend, this location is considered not to bein a Contracting State.

(4) If a State makes no declaration under paragraph (1) of thisarticle, the Convention is to extend to all territorial units of thatState.

Article 36. Conflicts with other international agreements

This Convention does not prevail over any international agree-ment which has already been or may be entered into and whichcontains provisions concerning the matters governed by this Con-vention[, provided that the assignor is located in a State party tosuch agreement or, with respect to the provisions of this Conven-tion which deal with the rights and obligations of the debtor, thedebtor is located in a State party to such agreement].

Article 37. Application of chapter V

A State may declare at any time that it will not be bound bychapter V.


A State may declare at any time that it will not be bound byarticles 11 and 12 if the debtor or any person granting a personalor property right securing payment of the assigned receivable islocated in that State at the time of the conclusion of the originalcontract and is a Government, central or local, any subdivisionthereof, or any public entity. If a State has made such a declara-tion, articles 11 and 12 do not affect the rights and obligations ofthat debtor or person.

[Article 39. Other exclusions

A State may declare at any time that it will not apply theConvention to specific practices listed in a declaration. In such acase, the Convention does not apply to such practices if theassignor is located in such a State or, with respect to the provi-sions of this Convention which deal with the rights and obligationsof the debtor, the debtor is located in such a State.]


Article 40. Application of the annex

(1) A Contracting State may at any time declare that [it will bebound either by sections I and/or II or by section III of the annexto this Convention.] [it:

(a) will be bound by the priority rules based on registrationset out in section I of the annex and will participate in theinternational registration system established pursuant to sectionII of the annex;

(b) will be bound by the priority rules based on registrationset out in section I of the annex and will effectuate such rulesby use of a registration system that fulfils the purposes of suchrules [as set forth in regulations promulgated pursuant to sec-tion II of the annex], in which case, for the purposes of sectionI of the annex, registration pursuant to such a system shall havethe same effect as registration pursuant to section II of theannex; or

(c) will be bound by the priority rules based on the time of thecontract of assignment set out in section III of the annex.

(2) For the purposes of article 24, the law of a Contracting Statethat has made a declaration pursuant to paragraph (1) (a) or (1) (b)of this article is the set of rules set forth in section I of the annex,and the law of a Contracting State that has made a declarationpursuant to paragraph (1) (c) of this article is the set of rules setforth in section III of the annex. The Contracting State may estab-lish rules pursuant to which assignments made before the declara-tion takes effect shall, within a reasonable time, become subject tothose rules.

(3) A Contracting State that has not made a declaration pursuantto paragraph (1) of this article may, pursuant to its domestic pri-ority rules, utilize the registration system established pursuant tosection II of the annex.]

Article 41. Effect of declaration

(1) Declarations made under articles 35 (1) and 37 to 40 at thetime of signature are subject to confirmation upon ratification,acceptance or approval.

(2) Declarations and confirmations of declarations are to be inwriting and to be formally notified to the depositary.

(3) A declaration takes effect simultaneously with the entry intoforce of this Convention in respect of the State concerned. How-ever, a declaration of which the depositary receives formal notifi-cation after such entry into force takes effect on the first day of themonth following the expiration of six months after the date of itsreceipt by the depositary.

(4) Any State which makes a declaration under articles 35 (1) and37 to 40 may withdraw it at any time by a formal notification inwriting addressed to the depositary. Such withdrawal takes effect onthe first day of the month following the expiration of six monthsafter the date of the receipt of the notification of the depositary.

[(5) A declaration or its withdrawal does not affect the rights ofparties arising from assignments made before the date on whichthe declaration or its withdrawal takes effect.]

Article 42. Reservations

No reservations are permitted except those expressly authorizedin this Convention.

Article 43. Entry into force

(1) This Convention enters into force on the first day of themonth following the expiration of six months from the date of thedeposit of the fifth instrument of ratification, acceptance, approvalor accession.

(2) For each State which becomes a Contracting State to thisConvention after the date of the deposit of the fifth instrument ofratification, acceptance, approval or accession, this Conventionenters into force on the first day of the month following the ex-piration of six months after the date of the deposit of the appro-priate instrument on behalf of that State.

[(3) This Convention applies only to assignments made on orafter the date when the Convention enters into force in respect ofthe Contracting State referred to in article 1 (1).]

Article 44. Denunciation

(1) A Contracting State may denounce this Convention at anytime by means of a notification in writing addressed to the deposi-tary.

(2) The denunciation takes effect on the first day of the monthfollowing the expiration of one year after the notification is receivedby the depositary. Where a longer period is specified in the notifi-cation, the denunciation takes effect upon the expiration of suchlonger period after the notification is received by the depositary.

[(3) The Convention remains applicable to assignments madebefore the date on which the denunciation takes effect.]

ANNEX TO THE DRAFT CONVENTION



As between assignees of the same receivable from the sameassignor, priority is determined by the order in which data aboutthe assignment are registered under section II of this annex, re-gardless of the time of transfer of the receivable. If no such dataare registered, priority is determined on the basis of the time of theassignment.

Article 2. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor

[Subject to article 25 of this Convention,] an assignee has pri-ority over an insolvency administrator and creditors of theassignor, including creditors attaching the assigned receivables, ifthe receivables were assigned, and data about the assignment wereregistered under section II of this annex, before the commence-ment of the insolvency proceeding or attachment.


Article 3. Establishment of a registration system

A registration system will be established for the registration ofdata about assignments under this Convention and the regulationsto be promulgated by the registrar and the supervising authority.The regulations will prescribe in detail the manner in which theregistration system will operate, as well as the procedure for re-solving disputes relating to that operation.

Article 4. Registration

(1) Any person authorized by the regulations may register datawith regard to an assignment at the registry in accordance withthis Convention and the registration regulations. The data regis-tered shall be identification of the assignor and the assignee, asprovided in the regulations, and a brief description of the assignedreceivables.


(2) A single registration may cover:

(a) the assignment by the assignor to the assignee of morethan one receivable;

(b) an assignment not yet made;

(c) the assignment of receivables not existing at the time ofregistration.

(3) Registration, or its amendment, is effective from the timethat the data referred to in paragraph (1) are available to searchers.The registering party may specify, from options provided in theregulations, a period of effectiveness for the registration. In theabsence of such a specification, a registration is effective for aperiod of five years. Regulations will specify the manner in whichregistration may be renewed, amended or discharged, and, consist-ent with this annex, such other matters as are necessary for theoperation of the registration system.

(4) Any defect, irregularity, omission or error with regard to theidentification of the assignor that would result in data registerednot being found upon a search based on the identification of theassignor renders the registration ineffective.

Article 5. Registry searches

(1) Any person may search the records of the registry accordingto identification of the assignor, as provided in the regulations, andobtain a search result in writing.

(2) A search result in writing that purports to be issued from theregistry is admissible as evidence and is, in the absence of evi-dence to the contrary, proof of the data to which the search relates,including:

(a) the date and time of registration; and

(b) the order of registration.

Section III. Priority rules based on the time of the contractof assignment


As between assignees of the same receivable from the sameassignor, the right to the receivable is acquired by the assigneewhose contract of assignment is of the earliest date.

Article 7. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor

[Subject to article 25 of this Convention,] an assignee has pri-ority over an insolvency administrator and creditors of theassignor, including creditors attaching the assigned receivables, ifthe receivables were assigned before the commencement of theinsolvency proceeding or attachment.

ANNEX II

RENUMBERING OF ARTICLES OF THE DRAFT CONVENTION*

Current article number(annex I to the Former article numberpresent document) (A/CN.9/WG.II/WP.104)

1 12 23 34 45 New article6 57 68 79 8

10 911 1012 1113 1314 1415 1516 1617 1718 1819 1920 20

Current article number(annex I to the Former article numberpresent document) (A/CN.9/WG.II/WP.104)

21 2122 2223 2324 24 (1), 25 (1) and (2) and 26 (3)and (4)25 25 (3) and (5) and 26 (5)26 26 (1) and (2)27 24 (2)28 2729 2830 2931 3032 3133 3234 3835 3936 3337 3438 1239 3540 3641 4042 4143 4244 43*The articles of the annex were not renumbered.


B. Working paper submitted to the Working Group on InternationalContract Practices at its thirty-first session:

draft Convention on Assignment in Receivables Financing:text with remarks and suggestions: note by the secretariat

(A/CN.9/WG.II/WP.104) [Original: English]

CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

[DRAFT CONVENTION ON ASSIGNMENT [IN RECEIVABLES FINANCING][OF RECEIVABLES [IN INTERNATIONAL TRADE]] . . . . . . . . . . . . . . . . . . . . . 233

PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

CHAPTER I. SCOPE OF APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Article 1. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Article 2. Assignment of receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Article 3. Internationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Article 4. Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

CHAPTER II. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

Article 5. Definitions and rules of interpretation . . . . . . . . . . . . . . . . . . . . . . 238

Article 6. Party autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

Article 7. Principles of interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

CHAPTER III. EFFECTS OF ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

Article 8. Effectiveness of bulk assignments, assignmentsof future receivables and partial assignments . . . . . . . . . . . . . . . . 240

Article 9. Time of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

Article 10. Contractual limitations on assignments . . . . . . . . . . . . . . . . . . . . . 240

Article 11. Transfer of security rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Article 12. Limitations relating to Governments and other publicentities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES . . . . . . . . . . . . . . . . . . . . . 242

Section I. Assignor and assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Article 13. Rights and obligations of the assignor and the assignee . . . . . . . 242

Article 14. Representations of the assignor . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Article 15. Right to notify the debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Article 16. Right to payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Section II. Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Article 17. Principle of debtor-protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Article 18. Notification of the debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Article 19. Debtor’s discharge by payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Article 20. Defences and rights of set-off of the debtor . . . . . . . . . . . . . . . . 245

Article 21. Agreement not to raise defences or rights of set-off . . . . . . . . . . 245

Article 22. Modification of the original contract . . . . . . . . . . . . . . . . . . . . . . . 245

Article 23. Recovery of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Section III. Other parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Article 24. Competing rights of several assignees . . . . . . . . . . . . . . . . . . . . . 245

Article 25. Competing rights of assignee and creditors of the assignoror insolvency administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Article 26. Competing rights with respect to payments . . . . . . . . . . . . . . . . . 246


Page

CHAPTER V. CONFLICT OF LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

Article 27[29]. Law applicable to the contract of assignment . . . . . . . . . . . . 248

Article 28[30]. Law applicable to the rights and obligationsof the assignee and the debtor . . . . . . . . . . . . . . . . . . . . . . . . 249

Article 29[31]. Law applicable to conflicts of priority . . . . . . . . . . . . . . . . . . 249

Article 30[32]. Mandatory rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Article 31[33]. Public policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

CHAPTER VI. FINAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Article 32[41]. Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Article 33[42]. Conflicts with international agreements . . . . . . . . . . . . 250

Article 34[42bis]. Application of chapter V . . . . . . . . . . . . . . . . . . . . . . . 250

Article 35[42quater]. Other exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Article 36[43]. Application of the annex . . . . . . . . . . . . . . . . . . . . . . . 250

Article 37[44]. Insolvency rules or procedures not affectedby this Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Article 38[45]. Signature, ratification, acceptance, approval,accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Article 39[46]. Application to territorial units . . . . . . . . . . . . . . . . . . . 251

Article 40[47]. Effect of declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Article 41[48]. Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Article 42[49]. Entry into force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Article 43[50]. Denunciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Annex

Section I. Priority rules based on registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

Article 1[34]. Priority among several assignees . . . . . . . . . . . . . . . . . . . . . . . 252

Article 2[35]. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . . . . . . . . . 252

Section II. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

Article 3[36]. Establishment of a registration system . . . . . . . . . . . . . . . . . . 252

Article 4[37]. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

Article 5[38]. Registry searches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

Section III. Priority rules based on the time of the contractof assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

Article 6[39]. Priority among several assignees . . . . . . . . . . . . . . . . . . . . . . . 253

Article 7[40]. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . . . . . . . . . 253

INTRODUCTION

1. At the present session, the Working Group on Interna-tional Contract Practices continued its work on the prepa-ration of a uniform law on assignment in receivables fi-nancing, pursuant to a decision taken by the Commission atits twenty-eighth session (Vienna, 2-26 May 1995).1 Thiswas the eighth session devoted to the preparation of thisuniform law, tentatively entitled the draft Convention onAssignment in Receivables Financing.

2. The Commission’s decision to undertake work on as-signment in receivables financing was taken in response tosuggestions made to it in particular at the UNCITRAL Con-gress, “Uniform Commercial Law in the 21st Century” (heldin New York in conjunction with the twenty-fifth session,17-21 May 1992). A related suggestion made at the Con-gress was for the Commission to resume its work on securityinterests in general, which the Commission at its thirteenthsession (1980) had decided to defer for a later stage.

3. At its twenty-sixth to twenty-eighth sessions (1993 to1995), the Commission discussed three reports prepared by



the secretariat concerning certain legal problems in the areaof assignment of receivables (A/CN.9/378/Add.3, A/CN.9/397 and A/CN.9/412). Having considered those reports, theCommission concluded that it would be both desirable andfeasible to prepare a set of uniform rules, the purpose ofwhich would be to remove obstacles to receivables financ-ing arising from the uncertaknty existing in various legalsystems as to the validity of cross-border assignments (inwhich the assignor, the assignee and the debtor would notbe in the same country) and as to the effects of such assign-ments on the debtor and other third parties.2

4. At its twenty-fourth session (Vienna, 8-19 November1995), the Working Group commenced its work by consid-ering a number of preliminary draft uniform rules con-tained in a report of the Secretary-General entitled “Discus-sion and preliminary draft of uniform rules” (A/CN.9/412).At that session, the Working Group was urged to strive fora legal text aimed at increasing the availability of lower-cost credit (A/CN.9/420, para. 16).

5. At its twenty-ninth session (1996), the Commissionhad before it the report of the twenty-fourth session of theWorking Group (A/CN.9/420). The Commission expressedappreciation for the work accomplished and requested theWorking Group to proceed with its work expeditiously.3

6. At its twenty-fifth and twenty-sixth sessions (NewYork, 8-19 July and Vienna, 11-22 November 1996 respec-tively), the Working Group continued its work by consid-ering different versions of the draft uniform rules containedin two notes prepared by the secretariat (A/CN.9/WG.II/WP.87 and A/CN.9/WG.II/WP.89 respectively). At thosesessions, the Working Group adopted the working assump-tions that the text being prepared would take the form of aconvention (A/CN.9/432, para. 28) and would include con-flict-of-laws provisions (A/CN.9/434, para. 262).

7. At its thirtieth session (1997), the Commission hadbefore it the reports of the twenty-fifth and twenty-sixthsessions of the Working Group (A/CN.9/432 and A/CN.9/434). The Commission noted that the Working Group hadreached agreement on a number of issues and that the mainoutstanding issues included the effects of the assignment onthird parties, such as the creditors of the assignor and theadministrator in the insolvency of the assignor.4 In addi-tion, the Commission noted that the draft Convention hadaroused the interest of the receivables financing communityand Governments, since it had the potential of increasingthe availability of credit at more affordable rates.5

8. At its twenty-seventh and twenty-eighth sessions (Vi-enna, 20-31 October 1997 and New York, 2-13 March1998 respectively), the Working Group considered twonotes prepared by the secretariat (A/CN.9/WG.II/WP.93and A/CN.9/WG.II/WP.96 respectively). At its twenty-

eighth session, the Working Group adopted the substanceof draft articles 14 to 16 and 18 to 22 and requested thesecretariat to revise draft article 17 (A/CN.9/447, paras.161-164 and 68 respectively).

9. At its thirty-first session (1998), the Commission hadbefore it the reports of the twenty-seventh and twenty-eighth sessions of the Working Group (A/CN.9/445 and A/CN.9/447). The Commission expressed appreciation for thework accomplished and requested the Working Group toproceed with its work expeditiously so as to complete itswork in 1999 and submit the draft Convention for adoptionby the Commission at its thirty-third session (2000).6

10. At its twenty-ninth and thirtieth sessions (Vienna, 5-16 October 1998 and New York, 1-12 March 1999 respec-tively), the Working Group considered three notes preparedby the secretariat (A/CN.9/WG.II/WP.96, A/CN.9/WG.II/WP.98 and A/CN.9/WG.II/WP.102), as well as a note con-taining the report of a group of experts prepared by thePermanent Bureau of the Hague Conference on PrivateInternational Law (A/CN.9/WG.II/WP.99) and a proposalby the United States of America (A/CN.9/WG.II/WP.100).At those sessions, the Working Group adopted respectivelythe substance of the preamble and draft articles 1 (1) and(2), 5 (g) to (j), 18 (5bis), 23 to 33 and 41 to 50 (A/CN.9/455, para. 17) and, with the exception of the bracketedlanguage, the title, the preamble and draft articles 1 to 24(A/CN.9/456, para. 18).

11. At its thirty-second session (1999), the Commissionhad before it the reports of the twenty-ninth and thirtiethsessions of the Working Group (A/CN.9/455 and A/CN.9/456). The Commission expressed appreciation for the workaccomplished by the Working Group and requested theWorking Group to proceed with its work expeditiously soas to make it possible for the draft Convention, along withthe report of the next session of the Working Group, to becirculated to Governments for comments in good time andfor the draft Convention to be considered by the Commis-sion for adoption at its thirty-third session (2000). As re-gards the subsequent procedure for adopting the draft Con-vention, the Commission noted that it would have to decideat its next session whether it should recommend adoptionby the General Assembly or by a diplomatic conference tobe specially convened by the General Assembly for thatpurpose.7

12. In order to facilitate the considerations of the WorkingGroup, this note reproduces the text adopted by the Work-ing Group at its thirtieth session (A/CN.9/456, Annex), aswell the private international law provisions and the finalprovisions adopted by the Working Group at its twenty-ninth session (A/CN.9/455, Annex, draft articles 29-33 and41-50) and text not yet adopted by the Working Group (A/CN.9/WG.II/WP.96, draft articles 34-40; the underlinedwording comes from A/CN.9/WG.II/WP.102). The notealso sets forth remarks on a number of draft articles and,where necessary, suggestions for alternative or additionalprovisions for consideration by the Working Group.

2Official Records of the General Assembly, Forty-eighth Session, Supple-ment No. 17 (A/48/17), paras. 297-301; Official Records of the GeneralAssembly, Forty-ninth Session, Supplement No. 17 (A/49/17), paras. 208-214; and Official Records of the General Assembly, Fiftieth Session, Sup-plement No. 17 (A/50/17), paras. 374-381.

3Ibid., Fifty-first Session, Supplement No. 17 (A/51/17), para. 234.4Ibid., Fifty-second Session, Supplement No. 17 (A/52/17), para. 254.5Ibid., para. 256.

6Ibid., Fifty-third Session, Supplement No. 17 (A/53/17), para. 231.7Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 330.


[DRAFT CONVENTION ON ASSIGNMENTIN RECEIVABLES FINANCING]

[DRAFT CONVENTION ON ASSIGNMENT OFRECEIVABLES [IN INTERNATIONAL TRADE]]

PREAMBLE


Reaffirming their conviction that international trade onthe basis of equality and mutual benefit is an importantelement in the promotion of friendly relations amongStates,

Considering [that] problems created by [the] uncertain-ties as to the content and choice of legal regime applicableto assignments [of receivables] in international trade [con-stitute an obstacle to financing transactions],

Desiring to establish principles and adopt rules [relatingto the assignment of receivables] that would create cer-tainty and transparency and promote modernization of lawrelating to [assignments of receivables] [receivables financ-ing] [including but not limited to assignments used infactoring, forfaiting, securitization, project financing, andrefinancing,] while protecting existing [financing] [assign-ment] practices and facilitating the development of newpractices,

Also desiring to ensure the adequate protection of theinterests of the debtor in the case of an assignment of re-ceivables,

Being of the opinion that the adoption of uniform rulesgoverning assignments [in] [of] receivables [financing]would facilitate the development of international trade andpromote the availability of [capital and] credit at more af-fordable rates,


Remarks

1. At its previous session, the Working Group noted thatthe title and the preamble of the draft Convention appearedto be inconsistent with the scope provisions, according towhich the draft Convention could apply to assignmentsoutside a strictly financing context (A/CN.9/456, para. 60).In an attempt to align the title and the preamble with thescope provisions and to avoid raising questions of interpre-tation as to the exact scope of the draft Convention, thedeletion from the title and the preamble of any reference tofinancing was proposed (A/CN.9/456, para. 61).

2. At the same session, the Working Group noted that theapproach taken by the Working Group at previous sessionsthat, while the main focus of the draft Convention would beon financing transactions, other related transactions shouldnot be excluded, was consistent with the mandate given bythe Commission to the Working Group (A/CN.9/456, para.63). At its thirty-second session, in response to a questionraised, the Commission reaffirmed the flexible mandategiven to the Working Group to determine how broad ornarrow the scope of application of the draft Conventionshould be.8

3. It will be recalled that the Working Group decided notto limit the scope of the draft Convention to transactionswith a “financing” or “commercial” nature or context, sincesuch a limitation: would inappropriately create yet anotherspecial regime on assignment, where one was in principlenot justified, and thus inadvertently result in furtherdisunification of the law on assignment; would raise uncer-tainty since the terms “financing” and “commercial” werenot universally understood in the same way, nor was itfeasible or desirable to attempt to define them in a uniformway in an international convention; and would unnecessar-ily exclude from the scope of the draft Convention impor-tant transactions such as, e.g. assignments in internationalfactoring transactions in which insurance against debtor-default or book-keeping and collection services are pro-vided. The Working Group rather preferred to start from abroad scope of application and to exclude transactions thatwere of a consumer nature or were already well regulated(A/CN.9/420, paras. 41-43; A/CN.9/432, paras. 14-18 and66; A/CN.9/434, paras. 18 and 42-61).

4. Should the Working Group confirm its decision not tolimit the scope of application of the draft Convention toassignments made for “financing” purposes, it might wishto delete the reference to “receivables financing” from thetitle and the preamble of the draft Convention and to in-clude an explanation of the matter in the commentary to thedraft Convention. Alternatively, a reference to receivablesfinancing could be retained in the preamble, but not in thetitle, of the draft Convention, and explained in the com-mentary (see also remark 1 to draft article 5). Such a ref-erence in the preamble could operate as a guidance withregard to the main objectives of the draft Convention, with-out limiting the scope of the draft Convention, a matter thatcould be usefully clarified in the commentary.

5. If the Working Group follows this approach, it maywish to consider the question whether the reference to inter-national trade in the title of the draft Convention, whichappears within square brackets, should be retained. Theretention of a reference to international trade in the titlepresents a number of advantages, including that: it suffi-ciently reflects the overall objective of the draft Conventionto facilitate the movement of goods and services acrossborders; and appropriately clarifies that the draft Conventionapplies to assignments with an international and commercialelement, without attempting to regulate consumer assign-ments or domestic assignments of domestic receivables.

6. On the other hand, such a reference to internationaltrade may inadvertently give the impression that the draftConvention applies only to assignments of receivables gen-erated in international trade and not to: the assignment ofconsumer receivables; the international assignment of do-mestic receivables; or the assignment of receivables arisingfrom loan or other transactions that may not involve thesale of goods or the provision of services. In addition, sucha reference might fail to reflect the fact that the draft Con-vention might affect domestic assignments of domestic re-ceivables in that it is intended to provide which law appliesto a conflict between a domestic and a foreign assignee ofdomestic receivables (see remarks 3-5 to draft article 1).On balance, however, it would seem that, in line with prac-tice followed in other UNCITRAL texts, a reference to8Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17, para. 326).


international trade (or commerce) would be appropriate. Asto the problems identified above, the Working Group maywish to address them in the commentary to the draft Con-vention, explaining that the term “international trade” isused in a broad sense and is intended to cover all the ac-tivities defined as “commercial” in the footnote to article 1(1) of the UNCITRAL Model Law on International Com-mercial Arbitration.




(a) assignments of international receivables and to in-ternational assignments of receivables as defined in thischapter, if, at the time of the conclusion of the contractof assignment, the assignor is located in a ContractingState;

(b) subsequent assignments provided that any prior as-signment is governed by this Convention; and

(c) subsequent assignments that are governed by thisConvention under subparagraph (a) of this paragraph,notwithstanding that any prior assignment is not gov-erned by this Convention.

(2) This Convention does not affect the rights and obliga-tions of the debtor unless the debtor is located in a Con-tracting State or the law governing the receivable is the lawof a Contracting State.

[(3) The provisions of chapter V apply [to assignments ofinternational receivables and to international assignmentsof receivables as defined in this chapter independently ofparagraphs (1) and (2) of this article] [independently of theprovisions of this chapter]. However, those provisions donot apply if a State makes a declaration under article 34.]

(4) The annex to this Convention applies in a ContractingState which has made a declaration under article 36.

Remarks

1. Paragraph (3) appears within square brackets since ithas not been adopted by the Working Group yet (A/CN.9/456, para. 26). The wording proposed by the secretariat ina previous paper (A/CN.9/WG.II/WP.102, remark 23 todraft article 1) has been slightly modified to allow States toopt out of chapter V as a whole, including draft articles 30and 31 dealing with reservations as to the application ofmandatory law and public policy. The secretariat had origi-nally suggested that those provisions could be excludedfrom an opt-out, in order for them to apply to private lawprovisions outside chapter V (A/CN.9/WG.II/WP.102, re-mark 20 to draft article 1).

2. The modification is intended to avoid inadvertentlysubjecting the application of the substantive law provisionsof the draft Convention to mandatory law or public policy,which could make it impossible to predict whether the draftConvention would apply or be set aside by a judge on thebasis of not widely known or possibly surprising notions ofmandatory law or public policy. However, the issuewhether the law applicable by virtue of the private interna-

tional law provisions of the draft Convention may be setaside if it is manifestly contrary to super-mandatory law(loi de police) and public policy remains to be resolved (seeremarks to draft article 24).

3. So far, the Working Group has worked on the assump-tion that draft article 24 will apply to a conflict between adomestic and a foreign assignee of domestic receivables.One of the reasons for which the Working Group decidedto turn the priority rules of the draft Convention into pri-vate international law rules was that such rules would notnegatively affect the rights of domestic assignees of domes-tic receivables, since issues of priority would be left tosubstantive law applicable outside the draft Convention (A/CN.9/445, para. 22).

4. Should the Working Group confirm its assumption thatconflicts of priority between a domestic and a foreign as-signee of domestic receivables would be covered in draftarticle 24, the domestic assignee would have to meet therequirements of the same law it would probably expect tobe applied anyway (since, by definition, in a domestic as-signment of domestic receivables, the law of the assignor’s,the assignee’s and the debtor’s jurisdiction would be thesame, while in an international assignment only the as-signee would be in a different State). If the Working Groupdefines “location” of the assignor for the purposes of thepriority rules by reference to its central administration (butnot for the purpose of the scope rules; see remark 4 to draftarticle 5), a different law might apply to a conflict betweenan assignment by a branch of an entity in the debtor’sjurisdiction and a second assignment by the head office ofthe same entity in another jurisdiction (if one of those twoStates is not a Contracting State). However, even in such acase the domestic assignee could predict that the draftConvention could apply, since the domestic assignee:would be located in a Contracting State (i.e. the same Statein which the assignor and the debtor would have theirplaces of business); and would know that the assignor is abranch of a foreign entity. On the other hand, if draft article24 did not apply to such a conflict, the foreign assigneemay have no way to determine that a law other than the lawof the assignor’s central administration might apply. De-pending on the frequency of such assignments by head andbranch offices, the problem may be left to other law. In itsconsideration of this matter, the Working Group may alsowish to take into account the need to avoid inadvertentlyinterfering with domestic practices, a result which couldreduce the acceptability of the draft Convention.

5. The Working Group may wish to consider for inclu-sion in draft article 1 or in draft article 24 wording alongthe following lines: “Article 24 of this Convention appliesto a conflict of priority between an assignee in a domesticassignment of domestic receivables and an assignee in aninternational assignment of the same domestic receivablesfrom the same assignor.”



(a) “Assignment” means the transfer by agreementfrom one person (“assignor”) to another person (“as-


signee”) of the assignor’s contractual right to payment ofa monetary sum (“receivable”) from a third person (“thedebtor”). The creation of rights in receivables as securityfor indebtedness or other obligation is deemed to be atransfer;

(b) In the case of an assignment by the initial or anyother assignee (“subsequent assignment”), the personwho makes that assignment is the assignor and the per-son to whom that assignment is made is the assignee.

Remarks

1. The reference to “contractual” receivables is intendedto ensure that the draft Convention applies, for example, tothe assignment of receivables arising under contracts forthe sale of goods or the provision of services, whetherthose contracts are commercial or consumer transactions,as well as to the assignment of receivables in the form ofroyalties arising from the licensing of intellectual propertyand of receivables in the form of credit balances in depositaccounts or securities transactions. The assignment of tortand tax receivables or receivables determined in courtjudgements is not covered, unless those receivables areconfirmed in a settlement agreement.

2. The Working Group may wish to consider whether theassignment of receivables under the draft Conventionwould include: damages for breach of contract (liquidatedor not); interest for late payment (contractual interest, statu-tory interest or interest liquidated in a court judgement);sums payable as dividends (present or future) arising fromshares; and receivables based on arbitral awards.

3. Under subparagraph (a), what constitutes a “contrac-tual” right is left to law applicable outside the draft Con-vention. In view of the divergences existing between legalsystems in this context, such an approach may, in somecases in which it may not be easy to distinguish between acontractual and an extra-contractual relationship, create un-certainty. In order to avoid this result, the Working Groupmay wish to consider defining the term “contractual” rightin a negative way (e.g. “a right to payment of a monetarysum other than one arising by operation of law or deter-mined in a court judgement”). Alternatively, the mattercould be explained in the commentary.


A receivable is international if, at the time it arises, theassignor and the debtor are located in different States. Anassignment is international if, at the time of the conclusionof the contract of assignment, the assignor and the assigneeare located in different States.

Remarks

Under draft article 3, once a receivable is international,its assignment is always covered by the draft Convention(whether it is domestic or international). However, once areceivable is domestic, its assignment may be covered bythe draft Convention, if: it is international; or it is domesticbut is also part of a chain of assignments which includes aninternational assignment (for an additional situation in

which a domestic assignment of domestic receivables maybe affected, see remarks 3-5 to draft article 1). In order tolimit the references in the text to the time when a receivablearises (term defined in draft article 5 (b)) and to align thewording of the first sentence with that of the second sen-tence, the words “at the time of the conclusion of the origi-nal contract” may be substituted for the words “at the timeit arises” (see remark 1 to draft article 5).


[(1)] This Convention does not apply to assignments:

(a) made for personal, family or household purposes;

(b) to the extent made by the delivery of a negotiableinstrument, with any necessary endorsement;

(c) made as part of the sale, or change in the ownershipor the legal status, of the business out of which the as-signed receivables arose.

[(2) This Convention does not apply to assignments listedin a declaration made under draft article 35 by the State inwhich the assignor is located, or with respect to the provi-sions of this Convention which deal with the rights andobligations of the debtor, by the State in which the debtoris located.]

Remarks

1. In view of the broad scope of application of the draftConvention, the Working Group decided to list assign-ments that should not be covered. In particular, the exclu-sion of assignments for consumer purposes is intended toemphasize that only assignments for commercial purposesare to be covered (without referring to the commercialpurposes in order to avoid creating uncertainty). However,it would seem that assignments made from an individual toa financing institution, i.e. for mixed, consumer and com-mercial purposes, should not be excluded. In addition,subparagraph (a) may need to be revised in order to avoidinadvertently giving the impression that it is intended toexclude the assignment of consumer receivables. Thus, theWorking Group may wish to reformulate subparagraph (a)along the following lines “made from one individual toanother for personal, family or household purposes com-mon to both” (in draft articles 21 (1) and 23, the use of theterm “primarily” for personal, family or household pur-poses is made, but in that context the term “purposes” re-lates to one party, the debtor). The commentary will ex-plain that only assignments from one consumer to anotherconsumer are excluded and that in all other cases the as-signment of consumer receivables is covered. The WorkingGroup may wish to consider that such consumer assign-ments are extremely rare in practice and that, in the ab-sence of an explanation in the commentary, such an exclu-sion may be inadvertently misunderstood as relating to theassignment of consumer receivables. In such a case,subparagraph (a) may be deleted altogether, while the com-mentary could explain that assignments from one consumerto another are not covered.

2. As to assignments of receivables in the context of asale of a business as a going concern, the commentary mayexplain that, while the assignment from the seller to the


buyer of the business is excluded, the assignment to aninstitution financing the sale is not excluded (A/CN.9/432,para. 66; and A/CN.9/434, paras. 42-61).

3. At the previous session of the Working Group, addi-tional assignments were identified for possible exclusion,i.e. assignments of receivables arising in clearing-house,swaps and derivatives transactions and assignments of re-ceivables arising from the sale or lease of high-value,highly mobile equipment (A/CN.9/456, paras. 48 and 49and 232-239).

4. As to clearing-house, swaps and derivatives transac-tions, in order to avoid unsettling existing and well-func-tioning practices, the Working Group may wish to considerwhether they should be excluded altogether or be dealtwith differently. While it is a matter of discussion whetherall of those transactions would create receivables the as-signment of which would be covered by the draft Conven-tion, it appears that the main concern in such transactionsis that an assignment made without the consent of thedebtor may inappropriately oblige the debtor to pay a thirdparty, freeze the debtor’s defences and rights of set-off andintroduce an inappropriate priority regime.

5. Before deciding in favour of a blank exclusion of allthose practices which may deprive parties thereto of thebenefits to be derived from the draft Convention, theWorking Group may wish to consider whether it can pos-sibly address the relevant concerns in another way. Forexample, the Working Group may wish to include in thedraft Convention a rule under which the debtor in suchtransactions (and possibly in insurance policies, which es-tablish a strictly personal relationship between the insurerand the insured, and in loan syndications andparticipations, which normally involve the assignment ofsingle, large-value receivables) will not be bound or af-fected in any way by an assignment. Such a rule would notprevent assignments, except that the assignee would not beable to collect from the debtor. The assignee would havepriority over other claimants, but, as long as the debtor isnot bound against its will and does not lose its defencesand rights of set-off, the priority regime of the draft Con-vention would not affect the debtor. This result may beachieved by a general principle along the following lines:“Nothing in this Convention affects the rights and obliga-tions of an intermediary in clearing house, swaps and de-rivatives transactions [, insurance policies and loansyndications and participations] without the intermediary’s[, the insurer’s or any lender’s] consent.” The same resultmay also be achieved by inserting in draft article 10 lan-guage along the following lines: “An assignment of re-ceivables arising under clearing-house, swaps or deriva-tives transactions [, insurance policies or loan syndicationsand participations] is ineffective as against the debtor un-less it is consented to by the debtor, whether or not thereis a contractual limitation to such an assignment.” Alterna-tively, the two provisions proposed above may be com-bined in one new provision.

6. In addition, the Working Group may wish to considermodifying draft article 20 to ensure that, in clearing-house,swaps and derivatives transactions, insurance policies andloan syndications and participations, notification does not

freeze the defences and rights of set-off of the debtor,whether they arise from the original or any other contract.Such a modification of draft article 20 may not be neces-sary, since parties would have an opportunity to considerwhether they wish to continue the transaction in view of thefact that the debtor would not be able to raise certain de-fences and rights of set-off arising after notification of anassignment. However, the application of draft article 20may be problematic, since in some of those transactions itmay not always be clear which is the original contract andwhich party is creditor or debtor, since any party may bedebtor or creditor depending on the time one examines thetransaction. Moreover, the Working Group may wish toconsider a different priority regime from that embodied indraft articles 25 to 26, at least with regard to some of thosepractices. For example, in transactions involving invest-ment property or deposit accounts, priority may need to beleft to the law of the location of the securities intermediaryor of the depositary institution, rather than to the law of theassignor’s location.

7. If there is no agreement on the above-mentioned ap-proach or if it is considered that it does not sufficientlyaddress the relevant concerns, the Working Group maywish to consider excluding those practices altogether indraft article 4 (1) or leaving the matter to each State tosettle by way of a declaration under draft articles 4 (2) and35. The advantage of a draft article 4 (1) exclusion wouldlie in the certainty that may be achieved by a uniform ruleapplicable to all Contracting States. The disadvantage ofsuch an approach would be that certain practices may haveto be excluded for all Contracting States, even though theircoverage in the draft Convention would raise concerns onlyin one or more Contracting States. Another possible disad-vantage of such an approach is that it would not allow aState the flexibility to exclude practices if a concern withcovering those practices in the draft Convention arises inthe future. On the other hand, allowing each State to ex-clude practices by way of a declaration under draft articles4 (2) and 35 may introduce an undesirable degree of uncer-tainty. If such an approach were to be followed, the scopeof application of the draft Convention may differ fromState to State and from time to time. As a result, parties tothe relevant transactions may have to determine in eachcase the scope of application of the draft Convention.

8. As to transactions relating to mobile equipment, inorder to avoid any conflicts with the draft convention andthe equipment-specific protocols being prepared by theInternational Institute for the Unification of Private Law(Unidroit) in cooperation with the International Civil Avia-tion Organization (ICAO) and other organizations (herein-after referred to as “the Unidroit draft Convention”), theWorking Group may wish to consider whether the assign-ment of receivables arising from the sale or lease of andsecured by mobile equipment should be excluded alto-gether (in the draft Convention or in the Unidroit draftConvention or relevant protocol) or be dealt with by way ofa provision settling any conflicts that might arise betweenthose texts (either in a uniform way for all ContractingStates or by leaving it to each State to decide to which textit wishes to give precedence). Such conflicts may arise,since the Unidroit draft Convention, for example: requiresconsent of the debtor for an assignment to be effective;


subjects priority with respect to mobile equipment and re-ceivables inextricably linked thereto to an equipment-spe-cific system of international registration; and vests theequipment financier with wide self-help powers, in particu-lar in the case of insolvency in which the financier has thepower to repossess the equipment after the opening of theinsolvency proceeding if the insolvent debtor does not curethe default within a certain period of time.

9. If it is agreed that the regime introduced by the draftConvention is not appropriate for the assignment of re-ceivables arising, for example, from the sale or lease ofaircraft, as it is practised under current law, and that theparticular needs of the relevant practices cannot be ad-dressed by introducing additional rules in the draft Conven-tion, the Working Group may wish to consider excluding indraft article 4 (1) the assignment of receivables secured bysuch equipment (it should be noted though that, while aparallel may be drawn, in some legal systems, betweenhigh-value equipment and real estate, the assignment ofreceivables arising from the sale or lease of real estatecannot be excluded, since receivables secured with a mort-gage in real estate are often part of securitization schemes).Certainty in the application of the draft Convention andavoidance of any undue interference with well-regulatedpractices would be the main advantages of such an ap-proach. For the same reasons, article 2 of the United Na-tions Convention on Contracts for the International Sale ofGoods (Vienna, 1980; hereinafter referred to as the “SalesConvention”) excludes the sale of certain types of goods(e.g. electricity, negotiable instruments, ships and aircraft).

10. As to the question of which types of practices shouldbe excluded, the Working Group may wish to take intoaccount, for example, that receivables arising from the saleor lease of and secured by aircraft are normally part ofequipment, rather than receivables, financing transactions,at least to the extent that they are secured by the aircraftand the security interest is registered in the aircraft registry.In such situations, potential financiers of receivables se-cured by aircraft would know that they should have to lookto the aircraft registry to determine their priority positionand to decide on that basis whether to provide credit and atwhat cost. It should be noted, however, that receivablesarising from ticket sales are normally part of securitizationschemes, rather than equipment financing, and thus theirassignments should not be excluded from the scope of thedraft Convention.

11. While it may be appropriate to follow the same ap-proach with regard to satellites, it remains to be establishedthat it should be followed with regard to other types of spaceequipment (e.g. control panels located on earth), railwayrolling stock, oil rigs, containers or similar types of equip-ment. Caution would need to be exercised, since this ap-proach could inadvertently result in limiting excessively thescope of the draft Convention, if mobile equipment weredefined in the Unidroit draft Convention, as is presently thecase (art. 3), as including “any uniquely identifiable object”,i.e. cars, trucks, computers, television sets and the like.

12. Should the Working Group decide to follow this ap-proach, a new subparagraph (d) may be inserted in draftarticle 4 (1) along the following lines: “made as part of

transactions relating to security interests, conditional salesunder reservations of title or leasing agreements with re-spect to [aircraft] and receivables arising from the sale orlease secured by [or associated with] such equipment.” Theterm “aircraft” is within square brackets pending determi-nation by the Working Group of the exact formulation ofthe exception and of other practices in which receivablesmay be part of equipment, rather than receivables, financ-ing. The words “or associated with”, which come from thedefinition of “associated rights” contained in draft article 1of the Unidroit draft Convention, are within square brack-ets since they appear to be vague and may inadvertentlybroaden excessively the scope of the exclusion.

13. If, on the other hand, the problem with covering suchpractices in the draft Convention does not lie in the riskthat the draft Convention may unsettle current practices butin the risk of creating conflicts with a future text, such asthe Unidroit draft Convention, or of unsettling practicesthat may develop in the future, it may be preferable toaddress this problem by way of a provision settling anyconflicts between the two texts, preferably in a uniformway for all States. Such an approach would present certainadvantages, including that: it would settle the matter ofpotential conflicts with an acceptable degree of certainty;and it would avoid leaving a gap in case one or the othertext is not widely adopted in a timely fashion (the Unidroitdraft Convention will enter into force in stages as soon asan equipment-specific protocol enters into force and anequipment-specific registration system is in place). Thequestion as to which text should have precedence may needto be answered differently depending on the type of equip-ment involved. For example, precedence may be given tothe aircraft protocol but not to any other protocol.

14. Should the Working Group decide to follow this ap-proach, language along the following lines may be insertedin draft article 33 as a new paragraph (2): “This Conventiondoes not prevail over any international convention or othermultilateral or bilateral agreement which has been or maybe entered into by a Contracting State and which containsprovisions concerning security interests, conditional salesunder reservations of title and leasing agreements with re-spect to [aircraft] and receivables arising from the sale orlease secured by [or associated with] such equipment.”

15. Alternatively, the extent to which any other text deal-ing with similar matters may prevail over the draft Conven-tion may be left to that other text. Under such an approach,in the preparation of each protocol, it would have to bedetermined whether receivables secured by the relevanttype of equipment are part of equipment, rather than re-ceivables, financing. The matter of the assignment of rightssecured by mobile equipment, which is currently addressedin the base draft Unidroit Convention, would need to be leftto each protocol to that draft Convention. In addition, thenotion of “equipment” would have to be limited to certainhigh-value types of equipment and could not relate to “anyuniquely identifiable object” since such a broad approachcould inadvertently encompass consumer goods, such ascars and personal computers, and interfere with receivablesfinancing practices, such as the securitization of consumerreceivables. As a matter of drafting, if the Working Groupagrees to insert a new provision in draft article 33, a refer-


ence to paragraphs (2) and (3) would need to be added inparagraph (1) of draft article 33 and the current paragraph(2) would need to be renumbered.

16. Paragraph (2) and draft article 35 foresee an addi-tional way in dealing with the exclusion of practices, leav-ing the matter to each State. However, allowing each Stateto, in essence, define the scope of application of the draftConvention by excluding (or including) practices at anytime would introduce an undesirable degree of uncertainty.If such an approach were to be followed, in view of themultiplicity of parties involved in assignment-related trans-actions, it may be very difficult to determine in each casewhich law applies. Thus, the Working Group may wish toconsider deleting paragraph (2) and draft article 35.




(a) “original contract” means the contract between theassignor and the debtor from which the assigned receiv-able arises;

(b) a receivable is deemed to arise at the time when theoriginal contract is concluded;

(c) “existing receivable” means a receivable that arisesupon or before the conclusion of the contract of assign-ment; “future receivable” means a receivable that arisesafter the conclusion of the contract of assignment;

[(d) “receivables financing” means any transaction inwhich value, credit or related services are provided forvalue in the form of receivables. Receivables financingincludes factoring, forfaiting, securitization, project fi-nancing and refinancing;]

(e) “writing” means any form of information that isaccessible 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 meansor a procedure agreed to by the person whose signatureis required, the writing identifies that person and indi-cates that person’s approval of the information containedin the writing;

(f) “notification of the assignment” means a communi-cation in writing which reasonably identifies the as-signed receivables and the assignee;

(g) “insolvency administrator” means a person orbody, including one appointed on an interim basis, au-thorized in an insolvency proceeding to administer thereorganization or liquidation of the assignor’s assets oraffairs;

(h) “insolvency proceeding” means a collective judi-cial or administrative proceeding, including an interimproceeding, in which the assets and affairs of theassignor are subject to control or supervision by a courtor other competent authority for the purpose of reorgani-zation or liquidation;

(i) “priority” means the right of a party in preference toanother party;

[(j) [For the purposes of articles 24 and 25,] an indi-vidual is located in the State in which it has its habitualresidence; a corporation is located in the State in whichit is incorporated; a legal person other than a corporationis located in the State in which its constitutive documentis filed and, in the absence of a filed document, in theState in which it has its chief executive office.]

[(k) [For the purposes of articles 1 and 3:](i) the assignor is located in the State in which it has

that place of business which has the closest rela-tionship to the assignment;

(ii) the assignee is located in the State in which it hasthat place of business which has the closest rela-tionship to the assignment;

(iii) the debtor is located in the State in which it hasthat place of business which has the closest rela-tionship to the original contract;

(iv) in the absence of proof to the contrary, the placeof central administration of a party is presumedto be the place of business which has the closestrelationship to the relevant contract. If a partydoes not have a place of business, reference is tobe made to its habitual residence[;

(v) several assignors or assignees are located at theplace in which their authorized agent or trustee islocated]].

Remarks

1. The Working Group may wish to consider whethersubparagraph (b) is necessary. Currently, reference to thetime at which a receivable arises is made in draft articles 3and 8 (2) (in both provisions, a direct reference to the timeof the conclusion of the original contract may be made).A reference to the fact of a receivable “arising” (withouta reference to time) is made in draft articles 5 (a) and (c)and 12.

2. The Working Group may also wish to deletesubparagraph (d) and to include a description of the prac-tices to be covered by the draft Convention in the commen-tary (the reference to receivables financing could be re-tained in the preamble, if necessary; see remarks to the titleand the preamble).

3. The Working Group may wish to insert at the end ofthe definition of “priority”in draft article 5 (i) wordingalong the following lines: “and includes the issue whetherthat party has a right in rem or ad personam” (see re-mark 1 to draft article 26).

4. Subparagraphs (j) and (k) reflect the divergence ofviews in the Working Group as to the issue of location ofa legal person. The reference to draft articles 1, 3, 24 and25 appears in square brackets, since the Working Grouphas not reached agreement on the question whether a dif-ferent location rule should be adopted for the purpose ofsome of the provisions of the draft Convention in which theterm “location” appears (i.e. draft articles 1, 3, 21 (1),23-26, 27-29 and 39 (3)). However, at the previous sessionof the Working Group, there appeared to be agreement, atleast: that the need for certainty was much stronger in the


priority provisions than in the scope provisions; that thescope of application of the draft Convention should be asbroad as possible; that, in order to achieve a sufficientdegree of debtor-protection, at least, with regard to thedebtor’s location, reference should be made to the relevantplace of business; and that a solution with regard to thepriority provisions could be built around the concept ofcentral administration/chief executive office of an entity(A/CN.9/456, paras. 35-37). In view of the above, theWorking Group may wish to consider a provision along thefollowing lines:

“(i) a party is located in the State in which it has itsplace of business;

“(ii) if the assignor or the assignee have more than oneplace of business, the place of business is that which hasthe closest relationship to the contract of assignment. Ifthe debtor has more than one place of business, the placeof business is that which has the closest relationship tothe original contract. If a party does not have a place ofbusiness, reference is to be made to the habitual resi-dence of that party;

“(iii) for the purposes of articles 24 to 26, the placewhere the central administration of an entity is exercisedde facto is deemed to be the place of business with theclosest relationship to the contract of assignment[;

“(iv) several assignors or assignees are located at theplace in which their authorized agent or trustee is lo-cated].”

5. The main difference between the proposed text and thecurrent formulation of subparagraph (k) is that, with regardto the priority provisions of the draft Convention, the pro-posed text does not create a presumption that would almostcertainly be rebutted in the case of branch offices, but alegal fiction that could not be rebutted. Such an approachwould have the advantage of maintaining a balance be-tween flexibility and certainty with regard to the applica-tion of the draft Convention, while giving precedence tocertainty with regard to the priority provisions of the draftConvention.

6. Under such an approach, in the case of subsequentassignments under draft article 1 (b), reference would bemade to the place with which any prior assignment is mostclosely connected, and in the case of subsequent assign-ments under draft article 1 (c), reference would be made tothe place with which a subsequent assignment is mostclosely connected (similarly, internationality would have tobe determined by reference to the place with the closestconnection with the subsequent assignment).

7. As a matter of drafting, the Working Group may wishto avoid referring to “location” in draft articles 24 to 26 andto refer directly to the law of the State in which theassignor has its central administration. The need to subjectpriority issues in the case of an insolvency or other pro-ceeding to the law of the assignor’s main jurisdictionshould be sufficient to justify referring to the place of theassignor’s central administration as a connecting factor forthe determination of the law governing such priority issues.As to conflicts among several assignees of the same re-ceivables, while a place-of-business approach would be

appropriate in the case of an assignor with a single place ofbusiness, it would be entirely unworkable if the assignorhas more than one place of business (if, e.g. the same re-ceivables are assigned by the head office and by a branchoffice, or by different branch offices, or by partners in alimited partnership located in different States, not all ofwhich have adopted the draft Convention). In such a case,the application of a place-of-business approach could resultin priority issues being governed by different laws and anassignee would have no way to know the circumstancesunder which the assignor assigned the same receivablesseveral times.

8. A possible disadvantage of a bifurcated approach tothe issue of location is that, if the place of business and theplace of central administration do not coincide, assigneeswould have to check two different laws, the law of theplace of business of the assignor for determining whetherthe draft Convention would apply and the law of the placeof central administration of the assignor for determining therisk involved in the case of a double assignment or insol-vency of the assignor (for another possible disadvantage,see remark 4 to draft article 1). However, this may beunavoidable, since a uniform approach appropriate in allcircumstances does not seem to exist (as confirmed by thediscussions in the Working Group and the UNCITRAL/Hague Conference group of experts; for the views of thelatter group, see A/CN.9/WG.II/WP.99, part 3, definitionof the concept of “location”).

9. Compared with the place of incorporation, the place ofcentral administration presents the advantage that it is anotion known in most legal systems and its applicationwould not raise the possible problem of the application ofan artificial jurisdiction without any developed laws ascould be the case if reference were to be made to the placeof incorporation. However, the place of central administra-tion may not be as transparent as the place of incorporation,in particular: where the place of exercise of central author-ity is so evenly divided between two or more countries asto make the choice of one over the other impossible; and inthe case of subsidiary companies where the real administra-tive control resides in the parent company. While revisingnew subparagraph (j) (iii) to create a rebuttable presump-tion (“in the absence of proof to the contrary”) could pro-vide a solution to this problem, it would seem that such anapproach would not be appropriate, since it would inadvert-ently result in reducing the level of certainty achieved bythis rule. In an effort to address this problem, the WorkingGroup may wish to refer in new subparagraph (j) (iii) firstto the place designated in the constitutive documents of anentity and, only in the absence of such a designation, to thede facto place of central administration (article 21 of theSwiss Private International Law Code).

10. As to the question whether the centre of main interestsshould be preferred for reasons of consistency with theEuropean Union Convention on Insolvency Proceedings(hereinafter referred to as “the EU Insolvency Conven-tion”) and the UNCITRAL Model Law on Cross-BorderInsolvency, it may be noted that the centre of main interestsis akin to central administration, chief executive office orprincipal place of business. All those terms are understoodas denoting the centre of management and control, the real


business centre from which the important activities of anentity are controlled, rather than the day-to-day manage-ment of the affairs and operations of such an entity. How-ever, the rebuttable presumption established in those textsthat the centre of main interests is the place of registrationor, in the case of individuals, of the habitual residence ofa party, may reduce the level of certainty necessary in atext, whose main focus is on the advance planning in thefinancing of a solvent debtor (A/CN.9/455, para. 27).


The assignor, the assignee and the debtor may derogatefrom or vary by agreement provisions of this Conventionrelating to their respective rights and obligations. Such anagreement does not affect the rights of any person who isnot a party to the agreement.


(1) In the interpretation of this Convention, regard is to behad to its international character and to the need to promoteuniformity in its application and the observance of goodfaith in international trade.

(2) Questions concerning matters governed by this Con-vention which are not expressly settled in it are to be settledin conformity with the general principles on which it isbased or, in the absence of such principles, in conformitywith the law applicable by virtue of the rules of privateinternational law.


Remarks

1. The provisions in chapter III deal with the substantivevalidity (more accurately, effectiveness erga omnes) of anassignment. They do not deal, however, with formal valid-ity. After the deletion of the provision dealing with form(A/CN.9/WG.II/WP.102, draft article 9), formal validity isleft to the law applicable outside the draft Convention (A/CN.9/456, para. 91). This law would presumably be thelaw of the contract of assignment (which could be the lawof the assignor’s or the assignee’s place of business or, ifthe assignor or the assignee have more than one place ofbusiness, the place of business with the closest connectionto the contract) or the law of the place in which the contractwas concluded (which could be a place other than the placeof business of the assignor or the assignee). As a result, inview of the fact that priority presupposes both substantiveand formal validity, an assignee would have to ensure thatit has a valid assignment under the provisions of chapter IIIand under the law governing formal validity, as well aspriority under the law of the assignor’s location. This resultcould reduce certainty and thus have a negative impact onthe cost of credit.

2. In order to address this problem, the term “priority”could be defined as including formal validity so that prior-ity and formal validity are made subject to the same law.Alternatively, a rule may be included, preferably, at thebeginning of chapter III or, alternatively, in chapter V

along the following lines: “The form of the assignment andthe effect of any non-compliance with such form is gov-erned by the law of the State in which the assignor is lo-cated.” (A/CN.9/WG.II/WP.96, draft article 9, variant C).

3. In line with the approach of the Working Group tofocus on the assignment, rather than on the contract ofassignment, the above-mentioned provision makes refer-ence to the assignment. Formal validity is subjected to thelaw of the assignor’s location, in order to ensure: that thelaw of single jurisdiction would govern; and that law wouldbe the same as the law governing priority (in order toachieve this result, the meaning of “location” in this con-text would have to be the same as in draft articles 24 to 26).

Article 8. Effectiveness of bulk assignments,assignments of future receivables, and partial

assignments

(1) An assignment of existing or future, one or more,receivables, and parts of, or undivided interests in, receiva-bles is effective, whether the receivables are described:

(a) individually as receivables to which the assignmentrelates; or

(b) in any other manner, provided that they can, at thetime when the receivables arise, be identified as receiva-bles to which the assignment relates.

(2) Unless otherwise agreed, an assignment of one ormore future receivables is effective without a new act oftransfer being required to assign each receivable when itarises.


An existing receivable is transferred, and a future receiv-able is deemed to be transferred, at the time of the conclu-sion of the contract of assignment, unless the assignor andthe assignee have specified a later time.


(1) An assignment of a receivable is effective notwith-standing any agreement between the initial or any subse-quent assignor and the debtor or any subsequent assignee,limiting in any way the assignor’s right to assign its re-ceivables.

(2) Nothing in this article affects any obligation or liabil-ity of the assignor for breach of such an agreement. Aperson who is not party to such an agreement is not liableunder that agreement for its breach.

Remarks

1. As already mentioned (see remark 5 to draft article 4),if practices, such as those involving clearing-house, swapsand derivatives transactions, insurance policies or loansyndications and participations, are to be covered by thedraft Convention, a different rule may need to be includedin draft article 10 with regard to those practices. Such a rulecould provide that, in the absence of a consent by thedebtor in those transactions, an assignment is not effective


as against the debtor (for potential additional changes in thedraft Convention to address the particular needs of thosepractices, see remark 6 to draft article 4).

2. The second sentence of paragraph (2), stating that theassignee has no contractual liability for breach of an anti-assignment clause by the assignor, appears to be stating theobvious (the assignee cannot have contractual liability forbreach of a contract to which the assignee is not a party).The original intention of the Working Group was that,while, obviously, the assignee would have no contractualliability, the issue of tort liability would be left to law appli-cable outside the draft Convention (A/CN.9/455, para. 51).The Working Group envisaged situations in which the as-signee engages in manifestly improper behaviour (for ex-ample, induces the assignor to assign receivables in viola-tion of an anti-assignment clause with the intent to harmthe interests of the debtor). However, mere knowledge bythe assignee of the existence of an anti-assignment clauseshould not give rise to liability of the assignee, since sucha possibility might deter potential assignees from enteringinto receivables financing transactions (A/CN.9/455,para. 50).

3. While the matter can be explained in the commentary,the Working Group may wish to settle it explicitly by de-leting the words “under that agreement for its breach”andinserting instead language along the following lines: “evenif it had knowledge of such an agreement” or “on the soleground that it had knowledge of such an agreement” or“unless that person acts with the specific intent to causeloss or recklessly and with actual knowledge that the losswould be likely to result” (in any of those cases, mereknowledge would not be sufficient to establish liability; seearticle 18 of the UNCITRAL Model Law on InternationalCredit Transfers and article 8 of the United Nations Con-vention on the Carriage of Goods by Sea, 1978 (HamburgRules)).


(1) A personal or property right securing payment of theassigned receivable is transferred to the assignee without anew act of transfer, unless, under the law governing theright, it is transferable only with a new act of transfer. Ifsuch a right, under the law governing it, is transferable onlywith a new act of transfer, the assignor is obliged to trans-fer this right and any proceeds to the assignee.

(2) A right securing payment of the assigned receivable istransferred under paragraph (1) notwithstanding an agree-ment between the assignor and the debtor or other persongranting the right, limiting in any way the assignor’s rightto assign the receivable or the right securing payment of theassigned receivable.

(3) Nothing in this article affects any obligation or liabil-ity of the assignor for breach of an agreement under para-graph (2). A person who is not a party to such an agree-ment is not liable under that agreement for its breach.

(4) The transfer of a possessory property right under para-graph (1) of this article does not affect any obligations ofthe assignor to the debtor or the person granting the prop-erty right with respect to the property transferred existingunder the law governing that property right.

(5) Paragraph (1) of this article does not affect any re-quirement under rules of law other than this Conventionrelating to the form or registration of the transfer of anyrights securing payment of the assigned receivable.


Articles 10 and 11 do not affect the rights and obliga-tions of a debtor, or of any person granting a personal orproperty right securing payment of the assigned receivable,if that debtor or person is a governmental department[,agency, organ, or other unit, or any subdivision thereof,unless:

(a) the debtor or person is a commercial entity; or

(b) the receivable or the granting of the right arisesfrom commercial activities of that debtor or person.]

Remarks

1. Draft article 12 is the result of a decision made at theprevious session of the Working Group to ensure that sov-ereign debtors are not affected by assignments made inviolation of anti-assignment clauses included in public pro-curement and other similar contracts. The Working Groupthought that any interference with the legal regime of suchcontracts should be avoided, since it could seriously affectthe acceptability of the draft Convention (A/CN.9/456,para. 115).

2. However, draft article 12 might go beyond its intendedpurpose of protecting sovereign debtors who do not needsuch protection or who can be protected by other means(e.g. by a statutory anti-assignment limitation to the extentit is not affected by the draft Convention; on this matter,see remark 4 below and remarks 3 and 4 to draft article 28;for a suggestion as to how to deal in draft article 10 withstatutory limitations to the assignment, see A/CN.9/WG.II/WP.102, remark 7 to draft article 12). In addition, the pos-sibility of a contractual limitation to assignment invalidat-ing the assignment as against a sovereign debtor mightinadvertently raise the risk of non-collection from a sover-eign debtor and thus raise the cost of credit to all sovereigndebtors, irrespective of whether they need the protectionprovided under draft article 12. Moreover, allowing anti-assignment clauses in public procurement contracts to in-validate assignments as against a sovereign debtor couldinadvertently raise the cost of credit to small- and medium-size suppliers of goods and services, which would make iteven harder for them to compete for public procurementcontracts with large suppliers who normally have alterna-tive sources of credit. The Working Group may, therefore,wish to consider revising draft article 12 in order to allowStates to enter a reservation with regard to draft articles 10and 11, if they so wish.

3. Should the Working Group prefer to take this ap-proach, draft article 12 could be revised to read as follows:“If the State in which the debtor or any person granting apersonal or property right securing payment of the assignedreceivable is located at the time of the conclusion of theoriginal contract has entered a reservation under draft arti-cle [...], articles 10 and 11 do not affect the rights and


obligations of that debtor or person.” In addition, a newdraft article could be added to the final provisions to readalong the following lines: “A State may declare at any timethat it will not be bound by draft articles 10 and 11 if thedebtor or any person granting a personal or property rightsecuring payment of the assigned receivable is located inthat State at the time of the conclusion of the original con-tract and is a Government[, central or local, any subdivi-sion thereof, or any public entity, unless: [insertsubparagraphs (a) and (b)]].”

4. The title of the provision may need to be slightly revisedso as to reflect more clearly the fact that it deals with con-tractual, and not statutory, assignability. The commentarywill clarify that, while draft articles 10 and 11 do not dealwith statutory limitations to assignment, the substantive lawpart of the draft Convention is not subject to any mandatoryrules of the law applicable outside the draft Conventionlimiting assignments, since such a result would underminethe certainty achieved by the draft Convention. For example,draft article 8 overrides any rule of law applicable outsidethe draft Convention, under which an assignment of futurereceivables is invalid (on mandatory rules and rules reflect-ing public policy, see also remarks to draft articles 1 and 24).The wording used to reflect sovereign debtors has beenmodified so that sovereign loans, as well as transactionsinvolving central and local Governments, any subdivisionsthereof and public entities would be covered.

5. It may be noted that the Unidroit Convention on Inter-national Factoring (Ottawa, 1988; hereinafter referred to as“the Ottawa Convention”) allows States to enter a reserva-tion with regard to a rule very similar to draft article 10, butin relation to all types of debtors. Of the six States partiesto the Ottawa Convention two have entered such a reserva-tion. In one State party, the rule in the Ottawa Conventionis said to have led to a change in the domestic law in thedirection of validating assignments in a commercial contextdespite the existence of anti-assignment clauses in the rel-evant contracts.



Remarks

Unlike the other provisions of the draft Conventionwhich deal with assignment as a transfer of property rights(whether full property or security rights) in receivables, theprovisions contained in this section deal with issues that aresubject to party autonomy and are normally addressed inthe contract of assignment. The usefulness of these provi-sions lies in the fact that they allocate risks and responsi-bilities in the absence of an agreement between the partiesto the contract of assignment.


(1) The rights and obligations of the assignor and theassignee as between them arising from their agreement are

determined by the terms and conditions set forth in thatagreement, including any rules or general conditions re-ferred to therein.

(2) The assignor and the assignee are bound by any usageto which they have agreed and, unless otherwise agreed, byany practices which they have established between them-selves.

(3) In an international assignment, the assignor and theassignee are considered, unless otherwise agreed, to haveimpliedly made applicable to the assignment a usage whichin international trade is widely known to, and regularlyobserved by, parties to the particular [receivables financ-ing] practice.


(1) Unless otherwise agreed between the assignor and theassignee, the assignor represents at the time of the conclu-sion of the contract of assignment that:

(a) the assignor has the right to assign the receivable;

(b) the assignor has not previously assigned the receiv-able to another assignee; and

(c) the debtor does not and will not have any defencesor rights of set-off.

(2) Unless otherwise agreed between the assignor and theassignee, the assignor does not represent that the debtorhas, or will have, the financial ability to pay.


(1) Unless otherwise agreed between the assignor and theassignee, the assignor or the assignee or both may send thedebtor a notification of the assignment and a payment in-struction, but after notification is sent only the assigneemay send a payment instruction.

(2) A notification of the assignment or payment instruc-tion sent in breach of any agreement referred to in para-graph (1) of this article is not ineffective for the purposesof article 19 by reason of such breach. However, nothing inthis article affects any obligation or liability of the party inbreach of such an agreement for any damages arising as aresult of the breach.

Remarks

The Working Group may wish to consider moving thefirst sentence of 15 (2) to draft article 19, since this sen-tence deals with the debtor’s discharge in the case of anotification sent in breach of an agreement between theassignor and the assignee.


(1) Unless otherwise agreed between the assignor and theassignee and whether or not a notification of the assign-ment has been sent:

(a) if payment with respect to the assigned receivableis made to the assignee, the assignee is entitled to retainwhatever is received in respect of the assigned receiva-bles;


(b) if payment with respect to the assigned receivableis made to the assignor, the assignee is entitled to pay-ment of whatever has been received by the assignor.

(2) If payment with respect to the assigned receivable ismade to another person over whom the assignee has prior-ity, the assignee is entitled to payment of whatever hasbeen received by such person.

(3) The assignee may not retain more than the value of itsright in the receivable.

Remarks

1. The commentary will explain that “payment” includesboth payment in cash and in kind (e.g. returned goods).However, the Working Group may wish to consider thequestion whether this matter needs to be explicitly clarifiedin the text of draft articles 16 and 26 by referring to pay-ment “or other discharge” with respect to the assigned re-ceivable. In addition, the Working Group may wish todefine proceeds by reference to whatever is received inpayment or other discharge of the assigned receivables(which includes proceeds of receivables and proceeds ofproceeds). The drafting of draft articles 16 and 26 may besubstantially simplified if a definition of proceeds were tobe adopted.

2. In order to align paragraph (2) with paragraph (1), theWorking Group may also wish to consider reformulatingparagraph (2) so as to state clearly that it deals with theright to payment as between the assignor and the assigneeand is subject to contrary agreement between those parties.In its current formulation, it would appear that paragraph(2) does not belong in section I of chapter IV or draftarticle 16, dealing with the relationship between theassignor and the assignee (see remark 3 to draft article 26).

3. In order to ensure that the assignee has a right in anyinterest for late payment, and not the assignor (a matter thatmay not be clear in all legal systems), after the word“value” in paragraph (3) words along the following linesmay be inserted: “including interest” (see remark 2 to draftarticle 2 and draft article 26bis (2) and (3)).

Section II. Debtor

Article 17. Principle of debtor-protection

(1) Except as otherwise provided in this Convention, anassignment does not, without the consent of the debtor,affect the rights and obligations of the debtor, including thepayment terms contained in the original contract.

(2) A payment instruction may change the person, ad-dress or account to which the debtor is required to makepayment, but may not:

(a) change the currency of payment specified in theoriginal contract, or

(b) change the State specified in the original contract,in which payment is to be made, to a State other than thatin which the debtor is located.


(1) A notification of the assignment and a payment in-struction are effective when received by the debtor, if theyare in a language that is reasonably expected to inform thedebtor about their contents. It shall be sufficient if a noti-fication of the assignment or a payment instruction is in thelanguage of the original contract.

(2) A notification of the assignment or a payment instruc-tion may relate to receivables arising after notification.

(3) Notification of a subsequent assignment constitutesnotification of any prior assignment.


(1) Until the debtor receives notification of the assign-ment, the debtor is entitled to discharge its obligation bypaying in accordance with the original contract.

(2) After the debtor receives notification of the assign-ment, subject to paragraphs (3) to (8) of this article, thedebtor is discharged only by paying the assignee or as oth-erwise instructed.

(3) If the debtor receives notification of more than oneassignment of the same receivables made by the sameassignor, the debtor is discharged by paying in accordancewith the first notification received.

(4) If the debtor receives more than one payment instruc-tion relating to a single assignment of the same receivablesby the same assignor, the debtor is discharged by paying inaccordance with the last payment instruction received fromthe assignee before payment.

(5) If the debtor receives notification of one or more sub-sequent assignments, the debtor is discharged by paying inaccordance with the notification of the last of such subse-quent assignments.

(6) If the debtor receives notification of the assignmentfrom the assignee, the debtor is entitled to request the as-signee to provide within a reasonable period of time ad-equate proof that the assignment has been made and, unlessthe assignee does so, the debtor is discharged by paying theassignor. Adequate proof includes, but is not limited to, anywriting emanating from the assignor and indicating that theassignment has taken place.

(7) This article does not affect any other ground on whichpayment by the debtor to the person entitled to payment, toa competent judicial or other authority, or to a public de-posit fund discharges the debtor.

[(8) This article does not affect any ground on which thedebtor may be discharged by paying a person to whom aninvalid assignment has been made.]

Remarks

1. Paragraph (1) implies that the debtor may discharge itsdebt by paying the assignee before notification (the debtor“is entitled to”). This result is also obtained under draftarticles 8 (1), 9 and 16 (1), according to which the assign-ment is effective as against the debtor as of the time of theconclusion of the contract of assignment (although formalvalidity is left to law outside the draft Convention; see


remarks to chapter III). While such a rule may be appropri-ate in principle, it may negatively affect practices, such asundisclosed invoice discounting or securitization, in whichthe debtor is expected to continue paying the assignor (A/CN.9/420, paras. 106-108). Thus, the Working Group maywish: to consider introducing an exception to the rule em-bodied in paragraph (1) as to the practices mentioned; or torevise the basic rule to the effect that before notification thedebtor would be discharged only by paying the assignor; orto leave the matter to other law applicable outside the draftConvention. With a view to achieving certainty, the lastalternative should be avoided, if possible.

2. The Working Group may wish to provide in paragraph(6) that until the debtor receives the proof requested, it candischarge its debt by paying the assignor. Otherwise, if thedebtor’s obligation to pay becomes due shortly after notifi-cation, the payment obligation would need to be suspendedor the debtor would be in default (and be liable to paydamages and interest). The effect of such a rule would bethat the assignee would have to provide with the notificationadequate proof to the debtor that an assignment took place(which includes a written confirmation from the assignor).

3. In addition, the Working Group may wish to recon-sider paragraphs (7) and (8). Paragraph (7) seems to inad-vertently allow a debtor who receives notification from anassignee under the draft Convention to pay the person en-titled to payment under the law applicable outside the draftConvention (e.g. the assignor, who may be entitled to pay-ment, since the assignment of future receivables or theassignment in violation of an anti-assignment clause maybe invalid under that law). Such an approach may have theunintended effect of increasing the risk that the assigneemay not be able to collect from the debtor and thus have anegative impact on the cost of credit.

4. The relevant provision of the Ottawa Convention, fromwhich paragraph (7) originates, provides that the OttawaConvention does not affect “other grounds” based onwhich the debtor is discharged by paying the factor (i.e. theperson entitled to payment under the Ottawa Convention, ifthe notification does not meet the requirements of the Ot-tawa Convention; however, in factoring, notification isnormally given by the assignor and the Ottawa Conventionprovides that the assignee may notify the debtor only ifauthorized by the assignor).

5. Thus, the Working Group may wish to revise para-graph (7) so as to ensure that, after notification under thedraft Convention from the assignee and possibly subject tothe provision of adequate proof, the debtor is dischargedonly by paying the person entitled to payment under thedraft Convention. As to discharge by payment into courtand the like, the Working Group may wish to retain it onlyif several notifications are involved. Such a provisionwould ensure that, if law outside the draft Convention pro-vides this alternative and the debtor is faced with severalnotifications, the debtor would not be precluded from beingdischarged by paying into court or a deposit fund. In sucha case, conflicts among several claimants would be settledin accordance with the law applicable to priority by virtueof draft articles 24 to 26.

6. As to paragraph (8), it may be noted that it either statesthe obvious or inappropriately places on the debtor the riskof the assignment being non-existent or null and void. Ifparagraph (8) is meant to state the rule that the debtor doesnot obtain a discharge if the debtor pays an assignee, theassignment to whom was null and void (e.g. because theassignor did not have the capacity to act or was underduress or was defrauded), it is not necessary. If no assign-ment exists, draft article 19 or the draft Convention as awhole does not apply and it is rather unlikely that any lawwould allow the debtor to be discharged if the assignmentwas non-existent or null and void and the draft Conventiondoes not change anything in this regard. This matter maybe explained in the commentary. In any case, with thesuggested revision of paragraph (6) (see remark 2 above),the risk of the debtor paying an assignee, to whom theassignment was null and void would be substantially re-duced. The exceptional cases where nullity of the assign-ment could result in the debtor having to pay twice may beleft to other law (in particular the case of fraud which is noteasily addressed in any trade law text). In the case of sub-sequent assignments, in which nullity would be particularlydifficult to discover, the debtor should be able to recoverthe payment wrongfully made on the basis of breach ofimplied representations or unjust enrichment principles.

7. If, on the other hand, paragraph (8) is intended to in-troduce an additional, good faith requirement for the debtorto be discharged, it is inconsistent with the WorkingGroup’s decision not to make the debtor’s discharge con-ditional upon the debtor’s good faith or the debtor’s knowl-edge of the validity of the assignment (A/CN.9/434, para.180; for the various arguments, see also A/CN.9/432, paras.167-172 and A/CN.9/420, paras. 99-104).

8. Thus, the Working Group may wish to delete para-graph (8) and to include in the commentary the explanationthat the debtor is not discharged by way of payment to anassignee, the assignment to whom was null and void (onthe understanding that this is a very rare case which can beleft to other law). Wording along the following lines maybe considered:

“(1) Until the debtor receives notification of the assign-ment, the debtor is entitled to be discharged by paying inaccordance with the original contract. After the debtorreceives notification of the assignment, subject to para-graphs (2) to (6) of this article, the debtor is dischargedonly by paying the assignee or, if otherwise instructed inthe notification of the assignment or subsequently by theassignee in a writing received by the debtor, in accord-ance with such instructions.

[insert paragraphs (3) to (5) renumbering them (2) to(4)].

“(5) If the debtor receives notification of the assignmentfrom a person who purports to be an assignee (“purportedassignee”), the debtor is entitled to request the purportedassignee to provide within a reasonable period of timeadequate proof that an assignment has been made and,until such proof is received by the debtor, the debtor isdischarged by paying in accordance with the originalcontract. Adequate proof includes, but is not limited to,any writing emanating from the assignor and indicatingthat the assignment has taken place.


“(6) Notwithstanding paragraphs (1) to (5), this articledoes not affect any other ground on which payment bythe debtor to:

(a) the person entitled to payment under this Con-vention; or

(b) in the case of several notifications or paymentinstructions, to a competent judicial or other au-thority, or to a public deposit fund discharges thedebtor.”


(1) In a claim by the assignee against the debtor for pay-ment of the assigned receivables, the debtor may raiseagainst the assignee all defences or rights of set-off arisingfrom the original contract of which the debtor could availitself if such claim were made by the assignor.

(2) The debtor may raise against the assignee any otherright of set-off, provided that it was available to the debtorat the time notification of the assignment was received.

(3) Notwithstanding paragraphs (1) and (2), defences andrights of set-off that the debtor could raise pursuant to ar-ticle 10 against the assignor for breach of agreements lim-iting in any way the assignor’s right to assign its receiva-bles are not available to the debtor against the assignee.

Article 21. Agreement not to raise defences or rightsof set-off

(1) Without prejudice to the law governing the protectionof the debtor in transactions made primarily for personal,family or household purposes in the State in which thedebtor is located, the debtor may agree with the assignor ina signed writing not to raise against the assignee the de-fences and rights of set-off that it could raise pursuant toarticle 20. Such an agreement precludes the debtor fromraising against the assignee those defences and rights ofset-off.


(a) defences arising from fraudulent acts on the part ofthe assignee;

(b) defences based on the debtor’s incapacity.

(3) Such an agreement may only be modified by anagreement in a signed writing. The effect of such a modi-fication as against the assignee is determined by article 22(2).

Remarks

The Working Group may wish to clarify whether thewriting referred to in paragraph (3) needs to be signed byboth the assignor and the debtor or only by the debtor.


(1) An agreement concluded before notification of theassignment between the assignor and the debtor that affectsthe assignee’s rights is effective as against the assignee andthe assignee acquires corresponding rights.

(2) After notification of the assignment, an agreementbetween the assignor and the debtor that affects the assign-ee’s rights is ineffective as against the assignee unless:

(a) the assignee consents to it; or

(b) the receivable is not fully earned by performanceand either modification is provided for in the originalcontract or, in the context of the original contract, a rea-sonable assignee would consent to the modification.

(3) Paragraphs (1) and (2) of this article do not affect anyright of the assignor or the assignee for breach of an agree-ment between them.


Without prejudice to the law governing the protection ofthe debtor in transactions made primarily for personal, fam-ily or household purposes in the State in which the debtoris located and the debtor’s rights under article 20, failure ofthe assignor to perform the original contract does not enti-tle the debtor to recover from the assignee a sum paid bythe debtor to the assignor or the assignee.



(1) Priority among several assignees of the same receiva-bles from the same assignor is governed by the law of theState in which the assignor is located.

(2) An assignee entitled to priority may at any time sub-ordinate unilaterally or by agreement its priority in favourof any existing or future assignees.

Remarks

1. In order to avoid the risk of renvoi, the WorkingGroup may wish to include in the text of the draft Conven-tion (possibly in draft article 5) a provision along the fol-lowing lines: “For the purposes of this Convention, “law”means the law in force in a State other than its rules ofprivate international law” (see article 15 of the EuropeanUnion Convention on the Law Applicable to ContractualObligations, Rome, 1980; hereinafter referred to as “theRome Convention”). Alternatively, the matter may be ex-plained in the commentary.

2. The Working Group may wish to consider the questionwhether the forum should be able to set aside the rulesapplicable under draft article 24 if they are manifestly con-trary to its mandatory law (“loi de police”) or to publicpolicy. Such an approach is consistent with normal practicein private international law texts. While it may be ratherunlikely that an issue of mandatory law or public policywill arise in relation to a conflict of priority between sev-eral assignees receiving the same receivables from thesame assignor, the possibility of such an issue arising can-not be excluded. If the Working Group approves this ap-proach, draft articles 30 and 31 should be made applicableto draft article 24, as well as to all the private internationallaw provisions of the draft Convention (which may be


placed in one chapter), draft articles 25 (3) and (4) and 26(5) could be deleted. Draft article 25 (5) may also be de-leted on the understanding that, while draft article 31 mayoperate only to set aside the applicable law, draft article 30may have both a negative and a positive function in that itmay result both in setting aside the applicable law and inthe application of domestic rules as to preferential non-consensual rights.


(1) Priority between an assignee and the assignor’s credi-tors is governed by the law of the State in which theassignor is located.

(2) In an insolvency proceeding, priority between the as-signee and the assignor’s creditors is governed by the lawof the State in which the assignor is located.

(3) Notwithstanding paragraphs (1) and (2), the applica-tion of a provision of the law of the State in which theassignor is located may be refused by a court or othercompetent authority only if that provision is manifestlycontrary to the public policy of the forum State.

(4) If an insolvency proceeding is commenced in a Stateother than the State in which the assignor is located, exceptas provided in this article, this Convention does not affectthe rights of the insolvency administrator or the rights ofthe assignor’s creditors.

(5) If an insolvency proceeding is commenced in a Stateother than the State in which the assignor is located, any[non-consensual] [preferential] right or interest which un-der the law of the forum State would have priority over theinterest of an assignee has such priority notwithstandingparagraph (2). [A State may deposit at any time a declara-tion identifying those [non-consensual] [preferential] rightsor interests which have priority over the interests of anassignee notwithstanding application of the priority rule setout in paragraph (2).]

(6) An assignee asserting rights under this article has noless rights than an assignee asserting rights under other law.

Remarks

1. In paragraph (2), the term “assignor’s creditors” hasbeen substituted for the term “insolvency administrator”,since: in some legal systems, the insolvency administratordoes not become the holder of the rights of the creditors;and, in some reorganization proceedings, there may be noinsolvency administrator (A/CN.9/WG.II/WP.102, remark1 to draft article 24). However, in view of the fact that,in other legal systems, the insolvency administrator doesbecome the holder of the creditors’ rights, a reference tothe insolvency administrator should be inserted in para-graph (2).

2. If paragraphs (3) to (5) are retained (see remark 2 todraft article 24), they may need to be reformulated. Theapplication of paragraph (3) should be limited to cases inwhich an insolvency or other proceeding is commenced ina jurisdiction other than the main jurisdiction of theassignor. If such a proceeding is commenced in the

assignor’s main jurisdiction, any conflict with the lex lociconcursus or the lex fori will be resolved by the rules ofthat jurisdiction. In paragraph (4), it may need to be furtherclarified that the assignee with priority retains its priority,but the assignment may be challenged by the insolvencyadministrator, e.g. as a preferential or a fraudulent transfer(the words “except as provided in this article” may notreflect the intended effect of paragraph (4)). In para-graph (5), the second sentence may be deleted. It is ratherunlikely that any State would make a declaration limitingthe non-consensual preferential rights that it would wish topreserve.

3. Paragraph (6) may also be deleted. It appears suggest-ing that, although a conflict of priority is covered by thedraft Convention, a law other than the law of the assignor’slocation may be applicable. Paragraph (6) was originallyintended to ensure that an assignee asserting priority underthe substantive law provisions of the draft Conventionwould not have less rights than if it asserted priority undersubstantive law outside the draft Convention (A/CN.9/455,para. 40; and A/CN.9/445, para. 44). Once the WorkingGroup decided to turn the priority rules of the draft Con-vention into private international law rules (A/CN.9/445,para. 22), paragraph (6) does not appear to be appropriate.

[Article 26. Competing rights with respect to payments

(1) If payment with respect to the assigned receivable ismade to the assignee, the assignee has a property right inwhatever is received in respect of the assigned receivable.

(2) If payment with respect to the assigned receivable ismade to the assignor, the assignee has a property right inwhatever is received in respect of the assigned receivableif:

(a) what is received is money, cheques, wire trans-fers, credit balances in deposit accounts or similar assets(“cash receipts”);

(b) the assignor has collected the cash receipts underinstructions from the assignee to hold the cash receiptsfor the benefit of the assignee; and

(c) the cash receipts are held by the assignor for thebenefit of the assignee separately from assets of theassignor, such as in the case of a separate deposit ac-count containing only cash receipts from receivablesassigned to the assignee.

(3) With respect to the property rights referred to in para-graphs (1) and (2) of this article, the assignee has the samepriority as it had in the assigned receivables.

(4) If payment with respect to the assigned receivable ismade to the assignor and the requirements of paragraph (2)are not met, priority with respect to whatever is received isdetermined as follows:

(a) if what is received is a receivable, priority isgoverned by the law of the State in which the assignoris located;

(b) if what is received is an asset other than a receiv-able, priority is governed by the law of the State inwhich it is located.


(5) Paragraphs (3) to (5) of article 25 apply to a conflictof priority arising between an assignee and the insolvencyadministrator or the assignor’s creditors with respect towhatever is received.]

Remarks

1. Unlike draft articles 24 and 25, according to which theissue of priority in receivables and the remedies availableto an assignee are left to the law of the assignor’s location,paragraphs (1) and (2) are intended to give to the assignee,in certain cases, a proprietary right (right in rem) in pro-ceeds. They are not meant, however, to change the order ofpriority, which is established in paragraphs (3) and (4). Theoperation of draft article 26 may be better illustrated withthe following examples. In a conflict with respect to pro-ceeds among several assignees of the same receivables, theorder of priority will be established according to the lawapplicable by virtue of paragraphs (3) and (4). In such acase, priority does not depend upon whether any assigneehas a right in rem or ad personam (i.e. the senior assigneewith a personal claim prevails over a junior assignee witha proprietary claim). In a conflict with respect to proceedsbetween an assignee and the assignor’s creditors or theadministrator of the insolvency of the assignor, the order ofpriority will still be determined by the law applicable byvirtue of paragraphs (3) and (4). Whether the assignee withpriority in proceeds has a proprietary or a personal claim insuch proceeds is also subject to the law governing priorityin proceeds under paragraphs (3) and (4), with the excep-tion of the situations addressed in paragraphs (1) and (2),in which the assignee with priority in proceeds is given aproprietary claim in such proceeds.

2. In order to better reflect this understanding, the Work-ing Group may wish to separate issues of priority in pro-ceeds from the question of the remedies available to anassignee with priority and to address the former in a pro-vision containing paragraphs (3), (4) and (5) and the latterin another provision containing paragraphs (1) and (2). TheWorking Group may also wish to consider the questionwhether the rule embodied in paragraph (2) could be ex-tended to proceeds other than cash proceeds provided thatthey meet the requirements of paragraph (2). If such anapproach were to be adopted, subparagraph (a) could bedeleted along with any reference to cash proceeds insubparagraphs (b) and (c). In subparagraph (c), the re-quirement that the proceeds need to be “reasonably identi-fiable”, which is already implied, may need to be statedexplicitly.

3. In addition, the Working Group may wish to alignparagraphs (1) and (2) with draft article 16 to ensure thatthe assignee’s right to the proceeds will not exceed thevalue of its right in the receivable. However, completeconsistency with draft article 16 (2) may not be feasible,since so far the Working Group has not agreed to give theassignee in the case of payment to a person other than theassignee or the assignor (e.g. a competing assignee or acreditor of the assignor) a right in rem in the proceeds(thus, introducing in draft article 26 a rule along the linesof draft article 16 (2) would not be appropriate). Wordingalong the following lines may be considered:

“Article 26. Priority in proceeds

“(1) Priority among several assignees of the same re-ceivables from the same assignor and between the as-signee and the assignor’s creditors or the insolvencyadministrator with respect to whatever is received inpayment [, or other discharge,] of the assigned receivableis determined as follows:

(a) if what is received is a receivable, priority isgoverned by the law of the State in which theassignor is located;

(b) if what is received is an asset other than a receiv-able, priority is governed by the law of the Statein which it is located.

“(2) Paragraphs (3) to (5) of article 25 apply to a con-flict of priority arising between an assignee and theassignor’s creditors or the insolvency administrator withrespect to whatever is received in payment [, or otherdischarge,] of the assigned receivable.

“Article 26bis. Rights in rem in proceeds

“(1) With the exception of the cases foreseen in para-graphs (2) to (4) of this article, whether an assignee [hasa right in rem or ad personam in] [is entitled to claim andretain] whatever is received in payment [, or other dis-charge,] of the assigned receivable is subject to the lawgoverning priority under article 26 of this Convention.

“(2) If payment [, or other discharge,] with respect tothe assigned receivable is made to the assignee, the as-signee with priority over the assignor’s creditors or theinsolvency administrator under article 26 of this Conven-tion has [a right in rem in] [the right to retain] whateveris received up to the value of its right in the receivable[,including interest].

“(3) If payment [, or other discharge,] with respect tothe assigned receivable is made to the assignor, the as-signee with priority over the assignor’s creditors or theinsolvency administrator under article 26 of this Conven-tion has [a right in rem] [the right to retain] whatever isreceived up to the value of its right in the receivable[,including interest,] if:

(a) the assignor has received payment [, or otherdischarge,] under instructions from the assigneeto hold whatever it received for the benefit of theassignee; and

(b) whatever the assignor received is held by theassignor for the benefit of the assignee separatelyand is reasonably identifiable from assets of theassignor, such as in the case of a separate depositaccount containing only cash receipts from re-ceivables assigned to the assignee.”


Remarks

1. The Working Group may wish to consider the scope orthe purpose of the private international law rules of the draftConvention (on this matter, see A/CN.9/WG.II/WP.102,remarks 18-20 to draft article 1). In principle, it would not be


appropriate to limit the application of private internationallaw rules on the basis of the substantive law notions con-tained in chapter I (i.e. only to assignments as defined indraft article 2, or only to international transactions as definedin draft article 3 or only if the assignor is located in aContracting State). If the forum State is a Contracting State,it should be allowed to apply chapter V if the transaction athand has any international element and irrespective ofwhether the assignor or the debtor are located in ContractingStates or whether the transaction involves an assignment ofcontractual or non-contractual receivables.

2. Such an approach would allow States that do not haveadequate private international law rules on assignments orno rules at all to benefit from the rules contained in chapterV. Admittedly, those rules reflect general principles whichwould need to be supplemented by other principles of pri-vate international law. However, in their generality theprovisions of chapter V introduce rules that may be usefulfor many States and clarify matters (e.g. priority issues)over which a great degree of uncertainty prevails in privateinternational law. Those States that have adequate rules onassignment may always opt out of chapter V.

3. As to the question of whether it is a correct legislativepolicy to include private international law provisions in asubstantive law text, the Working Group may wish to notethat complex financing transactions, such as those involv-ing assignments, can only be regulated in a meaningful wayif they are regulated in a text that addresses in an as con-sistent and comprehensive way as possible both substantiveand private international law aspects. Unless private inter-national law issues are addressed in chapter V, a greatdegree of uncertainty will remain with regard to all thoseissues that the draft Convention has, by necessity, left tolaw outside the draft Convention (for a list of those issues,see A/CN.9/WG.II/WP.98, remark 2 to draft article 8). Inaddition, once the priority rules in draft articles 24 to 26have become generally acceptable, there is no reason tolimit their application on the basis of the substantive lawnotions contained in chapter I, thus missing the opportunityto clarify a matter on which great uncertainty prevails incurrent private international law texts.

4. Should the Working Group decide to follow this ap-proach, the opening words in draft articles 27 to 29 shouldbe deleted and draft article 1 (3) (which may be placed atthe beginning of chapter V) should be revised to read alongthe following lines: “The provisions of chapter V applyindependently of the provisions of chapter I. However,those provisions do not apply if a State makes a declarationunder article 34.”

5. The hierarchy between the substantive and the privateinternational law rules of the draft Convention, namely thata Contracting State would apply first the substantive lawprovisions and, only if the matter is not settled by the sub-stantive law provisions, the private international law provi-sions, may also need to be addressed. Wording along thefollowing lines may be considered for inclusion at the be-ginning of chapter V: “If the provisions of this Conventionoutside chapter V do not apply to an assignment, the pro-visions of chapter V apply”. Thus, if the forum is a Con-tracting State, it would apply chapter V instead of its ownprivate international law rules.

6. Alternatively, the Working Group may wish to con-sider retaining chapter V, without draft article 27. Draftarticle 27 addresses the contractual aspects of assignment,which is not the main focus of the draft Convention andmay already be sufficiently regulated (even though theprinciple of freedom of choice of applicable law may notbe common to all systems). The Working Group may wishto consider other alternatives, including: to limit the appli-cation of chapter V to international transactions as definedin chapter I, without the other limitations of chapter I (fora precedence, see articles 21 and 22 of the United NationsConvention on Independent Guarantees and Stand-by Let-ters of Credit), or only to international transactions with allthe limitations as to substantive and territorial applicationset forth in chapter I. In the latter case: for the reasonsmentioned, draft article 27 may be deleted; draft article 29may also be deleted, since the matter of priority would besufficiently covered in draft articles 24 to 26; and draftarticles 30 and 31 may be cast in the context of draft arti-cles 24 to 26. In such a case, the Working Group may wishto consider whether draft article 28 should be placed in thecontext of section II of chapter IV, without being subject toan opt-out, since it reflects generally acceptable principles.

Article 27[29].9 Law applicable to the contractof assignment

(1) [With the exception of matters which are settled inthis Convention,] the contract of assignment is governed bythe law expressly chosen by the assignor and the assignee.

(2) In the absence of a choice of law by the assignor andthe assignee, the contract of assignment is governed by thelaw of the State with which the contract of assignment ismost closely connected. In the absence of proof to thecontrary, the contract of assignment is presumed to be mostclosely connected with the State in which the assignor hasits place of business. If the assignor has more than oneplace of business, reference is to be made to the place ofbusiness most closely connected to the contract. If theassignor does not have a place of business, reference is tobe made to its habitual residence.

(3) If the contract of assignment is connected with oneState only, the fact that the assignor and the assignee havechosen the law of another State does not prejudice theapplication of the law of the State with which the assign-ment is connected if that law cannot be derogated from bycontract.

Remarks

In order to more clearly reflect the matters that should besubject to party autonomy, the Working Group may wish toconsider substituting for “the contract of assignment” theterms “the conclusion, validity and the rights and obliga-tions of the assignor and the assignee arising under thecontract of assignment”. In addition, the Working Groupmay wish to consider whether paragraph (2) is necessary.

9The number in square brackets indicates the number of this provisionin the annex to document A/CN.9/455, from which the provisions inchapter V and chapter VI, with the exception of the underlined wording inchapter VI, originate.


If the thrust of draft article 27 is to recognize party au-tonomy without going into any detail, paragraph (2) maynot be absolutely necessary, in particular in view of the factthat the transactions intended to be covered are highlynegotiated by highly sophisticated parties who normallyinclude a choice of law clause in their contracts. If para-graph (2) is retained and a definition of location is adoptedalong the lines suggested above (see remark 4 to draft ar-ticle 5), the third and the fourth sentence of paragraph (2)could be deleted. As to paragraph (3), the Working Groupmay wish to consider whether it is useful without any de-tailed rules as to the relevant connecting factors (e.g. char-acteristic performance under article 4 (2) of the RomeConvention with the fall-back position of article 4 (5) ofthe Rome Convention if the characteristic performancecannot be determined). Moreover, the Working Group maywish to consider dealing in chapter V with the issue of theform of the assignment (paragraph (1) is intended to dealwith substantive validity only; see remarks to chapter III).

Article 28[30]. Law applicable to the rightsand obligations of the assignee and the debtor

[With the exception of matters which are settled in thisConvention,] the law governing the receivable to which theassignment relates determines its assignability, the relation-ship between the assignee and the debtor, the conditionsunder which the assignment can be invoked against thedebtor and any question whether the debtor’s obligationshave been discharged.

Remarks

1. The Working Group may wish to reconsider its deci-sion not to deal with the issue of the law applicable torights of set-off (A/CN.9/456, 197). Rights of set-off of thedebtor against the assignee arise often and are bound toaffect the availability and the cost of credit.

2. The general principle as to contractual rights of set-offis that they are governed by the law of the contract fromwhich they arise. This means that the law governing theright of set-off will be the same as the law governing thereceivable, if the right of set-off arises from the originalcontract, and different, if the right of set-off arises fromanother contract. A rule along those lines would enhancecertainty and may have a beneficial impact on the cost ofcredit. Wording along the following lines may be consid-ered: “Rights of set-off arising from the original contractare governed by the law governing the receivable. Rightsof set-off arising from any other contract are governed bythe law governing that contract.”

3. As to the statutory assignability, it should be noted thatthe application of the law governing the receivable wouldnot be appropriate in the case of statutory assignability.Such an approach could inadvertently result in allowing theassignor and the debtor to evade possible statutory limita-tions, which involves matters of mandatory law or publicpolicy, by choosing a convenient law to govern the receiv-able. Statutory limitations may be aimed at protecting theassignor (as, e.g. in the case of a statutory limitation as tothe assignability of wages and pensions) or the debtor (as,

e.g. in the case of a limitation as to the assignment ofreceivables owed by a sovereign debtor). The WorkingGroup will recall that it decided not to include any addi-tional provisions in draft article 28 on the understandingthat statutory limitations to assignability, which would nor-mally flow from mandatory law, would be preserved underdraft article 30 (A/CN.9/456, para. 117).

4. Whether or not the opening words are retained, ifchapter V has a scope beyond chapter I, draft article 28would cover statutory assignability and contractual assign-ability for transactions beyond those covered in the draftConvention, while draft article 10 would cover contractualassignability with regard to the transactions falling underthe draft Convention. If the opening words are retained andchapter V is subject to chapter I, draft article 10 wouldcover contractual assignability and draft article 28 wouldcover statutory assignability (A/CN.9/456, para. 95).

[Article 29[31]. Law applicable to conflicts of priority

[With the exception of matters which are settled in chapterIV:]

(a) priority among several assignees of the same re-ceivables from the same assignor is governed by the lawof the State in which the assignor is located;

(b) priority between an assignee and the assignor’screditors is governed by the law of the State in which theassignor is located;

(c) priority between an assignee and the insolvencyadministrator is governed by the law of the State inwhich the assignor is located;

[(d) if an insolvency proceeding is commenced in aState other than the State in which the assignor is lo-cated, any non-consensual right or interest which underthe law of the forum would have priority over the inter-est of an assignee has such priority notwithstandingsubparagraph (c), but only to the extent that such prioritywas specified by the forum State in an instrument depos-ited with the depositary prior to the time when the as-signment was made;]

(e) an assignee asserting rights under this article hasno less rights than an assignee asserting rights underother law.]

Remarks

If chapter V, including draft article 29, is retained, sub-paragraph (d) has to be aligned with draft article 25 (5)(provided also that that provision is retained). As was sug-gested with regard to draft article 25 (5), subparagraph (e)may need to be deleted (see remark 3 to draft article 25).

Article 30[32]. Mandatory rules

(1) Nothing in articles 27 and 28 restricts the applicationof the rules of the law of the forum State in a situationwhere they are mandatory irrespective of the law otherwiseapplicable.


(2) Nothing in articles 27 and 28 restricts the applicationof the mandatory rules of the law of another State withwhich the matters settled in those articles have a closeconnection if and in so far as, under the law of that otherState, those rules must be applied irrespective of the lawotherwise applicable.

Article 31[33]. Public policy

With regard to matters settled in this chapter, the appli-cation of a provision of the law specified in this chaptermay be refused by a court or other competent authorityonly if that provision is manifestly contrary to the publicpolicy of the forum State.

CHAPTER VI. FINAL PROVISIONS

Article 32[41]. Depositary

The Secretary-General of the United Nations is the de-positary of this Convention.

Article 33[42]. Conflicts with international agreements

(1) Except as provided in paragraph (2) of this article, thisConvention prevails over any international convention orother multilateral or bilateral agreement which has been ormay be entered into by a Contracting State and which con-tains provisions concerning the matters governed by thisConvention.

(2) A State may declare at any time that the Conventionwill not prevail over international conventions or othermultilateral or bilateral agreements listed in the declaration,which it has entered or will enter into and which containprovisions concerning the matters governed by this Con-vention.

Remarks

Conflicts may arise with the Ottawa Convention, theRome Convention and the EU Insolvency Convention (asto potential conflicts with the Unidroit draft Convention,see remarks 8 to 16 to draft article 4). The potential con-flicts with the Ottawa Convention are minimal, since thescope of the Ottawa Convention is narrower than the scopeof the draft Convention and, in any case, the provisions ofthe draft Convention are, to a large extent, similar to thoseof the Ottawa Convention (with the exception, e.g. of thereservation to the rule on contractual limitations to assign-ment and the rule on recovery from the assignee of pay-ments made by the debtor). Potential conflicts with theRome Convention are also minimal since draft articles 27and 28 are almost identical with article 12 of the RomeConvention. As to the law governing priority, the prevail-ing view is that article 12 does not address this matter.However, even if draft article 12 addresses issues of prior-ity, neither of the laws applicable under article 12 (i.e. thelaw chosen by the parties or the law governing the receiv-able) is appropriate (perhaps with the exception of the as-signment of single, present receivables). No significantconflicts appear to arise with the EU Insolvency Conven-

tion. The notion of central administration is almost identi-cal with the centre of main interests used in the EU Insol-vency Convention (see remark 10 to draft article 5) andthat Convention does not affect rights in rem in a maininsolvency proceeding (article 5). While the EU InsolvencyConvention may affect rights in rem in a secondary insol-vency proceeding (articles 2 (g), 4, and 28), draft article 25(4) would be sufficient to preserve, for example, the rightof the assignor’s creditors and the insolvency administratorto invalidate the assignment as a fraudulent or preferentialtransfer. In any case, the rights of the assignor’s creditorsand the insolvency administrator would be preserved ifdraft articles 30 and 31 were to replace draft articles 25 (3)and (4). In such a case, the law of the assignor’s locationcould be displaced by the lex concursus or the lex fori (seeremark 2 to draft article 24).

Article 34[42bis]. Application of chapter V

A State may declare at any time that it will not be boundby chapter V.

Remarks

If the Working Group decides to delete draft articles 27and 29-31, and to move draft article 28 to section II ofchapter IV, draft article 34 may be deleted (a new articleproviding for a reservation to draft articles 10 and 11 withregard to sovereign debtors may be inserted here; see re-marks to draft article 12).

[Article 35[42quater]. Other exclusions

A State may declare at any time that it will not apply theConvention to certain practices listed in a declaration.]10

Article 36[43]. Application of the annex

A State may declare at any time that it will be boundeither by [sections I and II or by section III] of the annexto this Convention.

Remarks

If the Working Group substitutes the provisions on therevision and amendment of the draft Convention for theannex (see remarks to the annex below), draft article 36may be deleted. If the annex is retained, draft article 36may need to be revised to ensure that a State may opt intothe registration-based priority rules (section I), or into theregistration rules (section II) or into both (A/CN.9/455,paras. 122 and 131).

[Article 37[44]. Insolvency rules or proceduresnot affected by this Convention

A State may declare at any time that other rules or pro-cedures governing the insolvency of the assignor shall notbe affected by this Convention.]

10The text underlined in the provisions of chapter VI reflects suggestionsmade by the secretariat in document A/CN.9/WG.II/WP.102.


Remarks

In view of the general formulation of draft article 25 (4),the Working Group may wish to consider that draft article37 is not necessary and may be deleted.

Article 38[45]. Signature, ratification, acceptance,approval, accession

(1) This Convention is open for signature by all States atthe Headquarters of the United Nations, New York, until ... .

(2) This Convention is subject to ratification, acceptanceor approval by the signatory States.

(3) This Convention is open to accession by all Stateswhich are not signatory States as from the date it is openfor signature.

(4) Instruments of ratification, acceptance, approval andaccession are to be deposited with the Secretary-General ofthe United Nations.

Remarks

The Working Group may wish to consider the length ofthe period during which the draft Convention should beopen for signature by States. It may be noted that in con-ventions prepared by UNCITRAL this period ranges be-tween one and two years. In its considerations, the Work-ing Group may take into account: the need to allowsufficient time for States to consider signing the draft Con-vention, indicating their intention to ratify; and the need notto have a very long period of time which may inadvertentlygive the impression that there is no urgency in the draftConvention being promptly ratified and entering into force.

Article 39[46]. Application to territorial units

(1) If a State has two or more territorial units in whichdifferent systems of law are applicable in relation to thematters dealt with in this Convention, it may, at any time,declare that this Convention is to extend to all its territorialunits or only one or more of them, and may at any timesubstitute another declaration for its earlier declaration.

(2) These declarations are to state expressly the territorialunits to which the Convention extends.

(3) If, by virtue of a declaration under this article, thisConvention does not extend to all territorial units of a Stateand the assignor or the debtor is located in a territorial unitto which the Convention does not extend, this location isconsidered not to be in a Contracting State.

(4) If a State makes no declaration under paragraph (1) ofthis article, the Convention is to extend to all territorialunits of that State.

Article 40[47]. Effect of declaration

(1) Declarations made under articles 34 to 37 and 39 (1)at the time of signature are subject to confirmation uponratification, acceptance or approval.

(2) Declarations and confirmations of declarations are tobe in writing and to be formally notified to the depositary.

(3) A declaration takes effect simultaneously with theentry into force of this Convention in respect of the Stateconcerned. However, a declaration of which the depositaryreceives formal notification after such entry into force takeseffect on the first day of the month following the expirationof six months after the date of its receipt by the depositary.

(4) Any State which makes a declaration under articles 34to 37 and 39 (1) may withdraw it at any time by a formalnotification in writing addressed to the depositary. Suchwithdrawal takes effect on the first day of the month fol-lowing the expiration of six months after the date of thereceipt of the notification of the depositary.

[(5) A declaration or its withdrawal does not affect therights of parties arising from assignments made before thedate on which the declaration or its withdrawal takes ef-fect.]

Article 41[48]. Reservations

No reservations are permitted except those expresslyauthorized in this Convention.

Article 42[49]. Entry into force

(1) This Convention enters into force on the first day ofthe month following the expiration of six months from thedate of the deposit of the fifth instrument of ratification,acceptance, approval or accession.

(2) For each State which becomes a Contracting State tothis Convention after the date of the deposit of the fifthinstrument of ratification, acceptance, approval or acces-sion, this Convention enters into force on the first day ofthe month following the expiration of six months after thedate of the deposit of the appropriate instrument on behalfof that State.

(3) This Convention applies only to assignments made onor after the date when the Convention enters into force inrespect of the Contracting State referred to in paragraph (1)of article 1.

Article 43[50]. Denunciation

(1) A Contracting State may denounce this Convention atany time by means of a notification in writing addressed tothe depositary.

(2) The denunciation takes effect on the first day of themonth following the expiration of one year after the noti-fication is received by the depositary. Where a longer pe-riod is specified in the notification, the denunciation takeseffect upon the expiration of such longer period after thenotification is received by the depositary.

[(3) The Convention remains applicable to assignmentsmade before the date on which the denunciation takes ef-fect.]


ANNEX

Remarks

1. The Working Group may wish to consider whether the annexserves its intended purpose to provide States with some guidanceas to a substantive law priority regime. It would appear that, inview of the fact that the annex does not contain one but tworecommended priority regimes, both of which need to be supple-mented by a substantial number of additional provisions, the annexmay not achieve its stated purpose.

2. The Working Group may, therefore, wish to further expandthe annex into a more comprehensive set of model legislative rulesor, alternatively, if expanding the annex appears to be an exercisebeyond the current project, to reformulate it into one or moreprovisions which would leave the development of an internationalregistration system to a procedure normally foreseen for the revi-sion and amendment of an international convention.

3. Such provisions, which could be added to the final provi-sions, could read along the lines of articles 32 and 33 of the UnitedNations Convention on the Carriage of Goods by Sea, 1978 (Ham-burg Rules) as follows (changes to the articles mentioned are initalic):


“1. At the request of not less than one third of the ContractingStates to this Convention, the depositary shall convene a con-ference of the Contracting States for revising or amending it.

“2. Any instrument of ratification, acceptance, approval oraccession deposited after the entry into force of an amendmentto this Convention is deemed to apply to the Convention asamended.

“Article Y. Revision of the priority regime

“1. Notwithstanding the provisions of article X, a conferenceof Contracting States only for the purpose of establishing aninternational regime for the public filing of notices to addressissues of priority arising in the context of assignment of re-ceivables under this Convention is to be convened by the de-positary in accordance with paragraph 2 of this article.

“2. A revision conference is to be convened by the depositarywhen not less than one fourth of the Contracting States sorequest. The depositary shall request all Contracting States in-vited to the conference to submit such proposals as they maywish the conference to examine and shall notify all ContractingStates invited of the provisional agenda and of all the proposalssubmitted.

“3. Any decision by the conference must be taken by atwo-thirds majority of the participating States. The conferencemay adopt all measures necessary to establish an effective in-ternational regime for the public filing of notices to addresspriority issues arising in the context of the assignment of re-ceivables under this Convention. No State shall be bound toparticipate directly or indirectly in the international regime soestablished.

“4. Any amendment adopted is communicated by the deposi-tary to all the Contracting States for acceptance and to all theStates signatories of the Convention for information. Suchamendment enters into force on the first day of the month fol-lowing one year after its acceptance by two thirds of the Con-tracting States. Acceptance is to be effected by the deposit ofa formal instrument to that effect with the depositary.

“5. After entry into force of an amendment a ContractingState which has accepted the amendment is entitled to apply theConvention as amended in its relations with Contracting Stateswhich have not within six months after the adoption of theamendment notified the depositary that they are not bound bythe amendment.

“6. Any instrument of ratification, acceptance, approval oraccession deposited after the entry into force of an amendmentto this Convention is deemed to apply to the Convention asamended.”


Article 1[34].11 Priority among several assignees

As between assignees of the same receivables from the sameassignor, priority is determined by the order in which certaininformation about the assignment is registered under this Conven-tion, regardless of the time of transfer of the receivables. If noassignment is registered, priority is determined on the basis of thetime of the assignment.

Article 2[35]. Priority between the assignee and theinsolvency administrator or the creditors of the assignor

[Subject to articles 25(3) and (4) of this Convention and 4 ofthis annex an assignee has priority over an insolvency administra-tor and creditors of the assignor, including creditors attaching theassigned receivables, if:

(a) the receivables [were assigned] [arose] [were earned byperformance], and information about the assignment was regis-tered under this Convention, before the commencement of theinsolvency proceeding or attachment; or

(b) the assignee has priority on grounds other than the pro-visions of this Convention.


Article 3[36]. Establishment of a registration system

A registration system will be established for the registration ofdata about assignments under this Convention and the regulationsto be promulgated by the registrar and the supervising authority.The regulations will prescribe the exact manner in which the reg-istration system will operate, as well as the procedure for resolv-ing disputes relating to registration.

Article 4[37]. Registration

(1) Any person may register data with regard to an assignmentat the registry in accordance with this Convention and the regis-tration regulations. The data registered shall include the name andaddress of the assignor and the assignee and a brief description ofthe assigned receivables.

11The numbers in square brackets indicate the numbers of the relevantprovisions in document A/CN.9/WG.II/WP.96, from which the provisionsof the annex originate. The underlined part of the text reflects suggestionsby the secretariat explained in that document.


(2) A single registration may cover:

(a) the assignment by the assignor to the assignee of morethan one receivable;

(b) an assignment not yet made;(c) the assignment of receivables not existing at the time of

registration.

(3) Registration, or its amendment, is effective from the timethat the data referred to in paragraph (1) are available to searchers.Registration, or its amendment, is effective for the period of timespecified by the registering party. In the absence of such a speci-fication, a registration is effective for a period of [five] years.Regulations will specify the manner in which registration may berenewed, amended or discharged.

(4) Any defect, irregularity, omission or error with regard to thename of the assignor that results in data registered not being foundupon a search based on the name of the assignor renders the reg-istration ineffective.

Article 5[38]. Registry searches

(1) Any person may search the records of the registry accordingto the name of the assignor and obtain a search result in writing.

(2) A search result in writing that purports to be issued from theregistry is admissible as evidence and is, in the absence of evi-dence to the contrary, proof of the data to which the search relates,including:

(a) the date and time of registration; and

(b) the order of registration.

Section III. Priority rules based on the time of the contractof assignment

Article 6[39]. Priority among several assignees

(1) If a receivable is assigned several times, the right thereto isacquired by the assignee whose contract of assignment is of theearliest date.

(2) The earliest assignee may not assert priority if it acted inbad faith at the time of the conclusion of the contract of assign-ment.

(3) If a receivable is transferred by operation of law, the ben-eficiary of that transfer has priority over an assignee asserting acontract of assignment of an earlier date.

(4) In the event of a dispute, it is for the assignee asserting acontract of assignment of an earlier date to furnish proof of suchan earlier date.

Article 7[40]. Priority between the assignee and theinsolvency administrator or the creditors of the assignor

[Subject to articles 25(3) and (4) of this Convention and 4 ofthis annex,] an assignee has priority over an insolvency adminis-trator and creditors of the assignor, including creditors attachingthe assigned receivables, if:

(a) the receivables were assigned before the commence-ment of the insolvency proceeding or attachment; or

(b) the assignee has priority on grounds other than theprovisions of this Convention.

C. Working paper submitted to the Working Groupon International Contract Practices at its thirty-first session:

Commentary to the draft Convention on Assignment in ReceivablesFinancing (Part I): note by the secretariat


CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

TITLE AND PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

CHAPTER I. SCOPE OF APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Article 1. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Article 2. Assignment of receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

Article 3. Internationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

Article 4. Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

CHAPTER II. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

Article 5. Definitions and rules of interpretation . . . . . . . . . . . . . . . . . . . . . . 261

Article 6. Party autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

Article 7. Principles of interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263


Page

CHAPTER III. EFFECTS OF ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

Form of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

Article 8. Effectiveness of bulk assignments, assignmentsof future receivables and partial assignments . . . . . . . . . . . . . . . . 265

Article 9. Time of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

Article 10. Contractual limitations on assignments . . . . . . . . . . . . . . . . . . . . . 266

Article 11. Transfer of security rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

Article 12. Limitations relating to Governmentsand other public entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

INTRODUCTION

1. The United Nations Commission on InternationalTrade Law, at its twenty-eighth session (1995), decided toentrust the Working Group on International Contract Prac-tices with the task of preparing a uniform law on assign-ment in receivables financing.1 The Commission, at thatsession, had before it a report of the Secretary-Generalentitled “Assignment in receivables financing: Discussionand preliminary draft of uniform rules” (A/CN.9/412). Itwas agreed that this report, setting forth the concerns andthe purposes underlying this project and the possible con-tents of the uniform law, would provide a useful basis forthe deliberations of the Working Group.2

2. The Working Group commenced its work at itstwenty-fourth session (November 1995) by considering thisreport of the Secretary-General.3 At its twenty-fifth throughthirty-first sessions, the Working Group considered reviseddraft articles prepared by the secretariat,4 and, at its twenty-ninth through thirty-first sessions, it adopted the draft Con-vention on Assignment of Receivables in InternationalTrade (exact title remains to be determined).5

3. The Commission, at its thirty-second session (1999),expressed appreciation for the work accomplished by theWorking Group and requested the Working Group to pro-ceed with its work expeditiously so as to make it possiblefor the draft Convention, along with the report of the nextsession of the Working Group, to be circulated to Govern-ments for comments in good time and for the draft Conven-

tion to be considered by the Commission for adoption at itsthirty-third session (2000). As regards the subsequent pro-cedure for adopting the draft Convention, the Commissionnoted that it would have to decide at that session whetherit should recommend adoption by the General Assembly orby a diplomatic conference to be specially convened by theGeneral Assembly for that purpose.6

4. The Working Group proceeded with its work on theunderstanding that the secretariat would prepare a com-mentary on the draft Convention which would assist Gov-ernments in preparing their comments on the draft text andlater in their consideration of the draft Convention foradoption.7

5. The present note, which for reasons relating to thetimely translation and distribution contains only the firstpart of the commentary, has been prepared pursuant to thatunderstanding (the second part will be prepared soon afterthe first part). It provides a summary as to the reasons forthe adoption of a certain provision, its main objectives,along with explanations and interpretations of particularterms. It does not give a complete account of the travauxpréparatoires, including the various proposals and draftprovisions that were not retained. For the benefit of thoseseeking fuller information on the history of a given provi-sion, the commentary lists the references to the relevantportions of the eight session reports of the WorkingGroup.8

6. In preparing the commentary, the secretariat has takeninto account the fact that it is not a commentary on a finaltext but that its foremost and immediate purpose is to assistthe Working Group in reviewing and finalizing the text.After finalization of the text, the secretariat will prepare arevised commentary to assist Governments in preparingtheir comments on the draft Convention and later in theirconsideration of the draft Convention for adoption. In linewith the applicable instructions relating to stricter controland limitation of United Nations documents, the text of the


2Ibid., para. 379. At its twenty-sixth and twenty-seventh sessions, theCommission had considered two other reports of the Secretary-General(A/CN.9/378/Add.3 and A/CN.9/397). For the Commission’s discussion ofthose reports, see ibid. Forty-eighth Session, Supplement No. 17 (A/48/17),paras. 297-301 and Forty-ninth Session, Supplement No. 17 (A/49/17),paras. 208-214 respectively.

3Report of the Working Group on International Contract Practices on thework of its twenty-fourth session (A/CN.9/420).

4The draft articles prepared by the Secretariat are contained in documentsA/CN.9/WG.II/WP.87, A/CN.9/WG.II/WP.89, A/CN.9/WG.II/WP.93,A/CN.9/WG.II/WP.96, A/CN.9/WG.II/WP.98, A/CN.9/WG.II/WP.102and A/CN.9/WG.II/WP.104. The reports of the Working Group are con-tained in documents A/CN.9/420, A/CN.9/432, A/CN.9/434, A/CN.9/445,A/CN.9/447, A/CN.9/455, A/CN.9/456 and A/CN.9/466.

5A/CN.9/455, para. 17; A/CN.9/456, para. 18; and A/CN.9/466,para. [...].

6Ibid., Fifty-fourth Session, Supplement No. 17 (A/54/17), para. 330.7See, e.g. A/CN.9/456, paras. 40, 58-59, 143, 150 and 215; and A/CN.9/

455, paras. 80, 84, 87 and 103.8In order to avoid confusion, no special reference is made to previous

article numbers which, in the course of the preparation of the draft Conven-tion, were altered several times. However, any earlier number will beapparent from the relevant discussion in the session report.


draft Convention, commented upon, is not reproduced here.It is reproduced in document A/CN.9/WG.II/WP.104,along with the secretariat’s remarks and suggestions as tohow pending issues could be addressed. Such issues aremarked in the text of the draft Convention by square brack-ets around the relevant provisions. The secretariat has takenthe liberty of noting in the commentary additional issuesand of making additional suggestions as to how those is-sues might be addressed.

TITLE AND PREAMBLE

References:

A/CN.9/420, paras. 14-18A/CN.9/434, paras. 14-16A/CN.9/445, paras. 120-124A/CN.9/455, paras. 157-159A/CN.9/456, paras. 19-21 and 60-65

Commentary

7. The title and the preamble of the draft Conventionhave not been adopted yet. The main question is whetherthe reference to financing will be retained (for arguments infavour of one or the other solution, see A/CN.9/WG.II/WP.104, remarks to the title and the preamble).

8. The preamble is intended to serve as a statement of thegeneral principles on which the draft Convention is basedand which, under draft article 7, may be used to fill gapsleft in the draft Convention. These principles include: thefacilitation of both commercial and consumer credit atmore affordable rates, which is in the interest of all partiesinvolved, assignors, assignees and debtors; the principle ofdebtor-protection, according to which the debtor’s legalposition is not affected unless expressly stated otherwise inthe draft Convention; the promotion of the movement ofgoods and services across borders; the enhancement ofcertainty and predictability as to the rights of parties in-volved in assignment-related transactions; the moderniza-tion and harmonization of domestic and international lawson assignment, both at the substantive and the private inter-national law level; the facilitation of new practices and theavoidance of interference with current practices; the avoid-ance of interference with competition.



References:

A/CN.9/420, paras. 19-32A/CN.9/432, paras. 13-38A/CN.9/434, paras. 17-41A/CN.9/445, paras. 45-48 and 125-145A/CN.9/447, paras. 143-146A/CN.9/455, paras. 41-46 and 160-173A/CN.9/456, paras. 22-37

Commentary

Structure of chapter I

9. In chapter I, scope-related issues are dealt with in dif-ferent provisions for the sake of clarity and simplicity inthe text; a single provision on scope would be very longand complicated. Draft article 1 defines the substantivescope, only in general terms, as well as the territorial scopeof application of the draft Convention. Draft articles 2 and3 define the substantive scope in more detailed terms (defi-nitions of assignment and internationality respectively).Draft article 5 is not part of chapter I, since the terms de-fined in this article do not raise scope-related issues butmatters of interpretation of various provisions of the draftConvention.

Substantive scope of application

10. Under draft article 1, assignments of international re-ceivables are covered, whether or not the assignments areinternational or domestic, while assignments of domesticreceivables are covered only if the assignments are interna-tional. In other words, the assignment of receivables iscovered whether or not those receivables arise in the con-text of international or domestic trade, as long as the as-signment itself is international (for comments on interna-tionality, see paras. 40 and 41). Thus, transactions such asfactoring and forfaiting of international receivables, as wellas securitization of domestic receivables, would be covered(for a non-exhaustive list and a brief description of thepractices covered, see paras. 31-39).

11. The draft Convention applies also to subsequent as-signments made, for example, in the context of interna-tional factoring, securitization and refinancing transactions,provided that any prior assignment is governed by the draftConvention (principle of continuatio juris). Under the prin-ciple of continuatio juris, even a domestic assignment ofdomestic receivables may be brought into the ambit of thedraft Convention if it is subsequent to an international as-signment. However, unless all assignments in a chain ofassignments were made subject to one and the same legalregime, it would be very difficult indeed to address assign-ment-related issues in a consistent manner. The draft Con-vention also applies to subsequent assignments that inthemselves fall under draft article 1 (a), whether or not anyprior assignment is governed by the draft Convention. Asa result, the draft Convention may apply only to some ofthe assignments in a chain of assignments. This result is adeparture from the principle of continuatio juris. However,the Working Group considered it necessary to follow thisapproach since parties to assignments in securitizationtransactions, in which the first assignment may be a domes-tic one, should not be deprived of the benefits that may bederived from the application of the draft Convention. Thisapproach is based on the assumption that it would notunduly interfere with domestic practices (on this matter, seeparas. 12, 18, 20 and 30). The Working Group did notadopt a suggestion to limit the principle of continuatio juristo those cases in which the internationality would be appar-ent, since such an approach could introduce an unaccept-able degree of uncertainty as to the application of the draftConvention.


12. As a result of covering in the draft Convention inter-national assignments of domestic receivables or even do-mestic assignments of domestic receivables made in thecontext of subsequent assignments, business parties in do-mestic transactions could benefit from increased access tointernational financial markets and thus to potentiallylower-cost credit. At the same time, the interests of domes-tic assignees would not be interfered with, since, for aconflict between a domestic and a foreign assignee to becovered by the draft Convention, the assignor would needto be located in a Contracting State (draft article 1 (a)) andthat State, by definition in a domestic assignment of adomestic receivable (draft article 3) would be the State inwhich both the domestic debtor and the domestic assigneewould be located (for a problem that might arise if refer-ence is made in draft article 24 to the place of centraladministration rather than to the place of business, see A/CN.9/WG.II/WP.104, remarks 3-5 to draft article 1). Inaddition, the fact that the assignor chose to assign the re-ceivables to a foreign assignee would not bring the debtorunder a new and potentially unknown legal regime, sincethe draft Convention could apply to the debtor’s rights andobligations only if the debtor has its place of business in aContracting State (draft article 1 (3); for the meaning oflocation of a debtor, see A/CN.9/WG.II/WP.104, remark 4to draft article 5). In any case, the debtor’s rights would notbe prejudiced since the draft Convention establishes a suf-ficiently high standard of debtor protection (i.e. draft arti-cles 17-23).

Territorial scope of application

13. The territorial scope of application of the draft Conven-tion is defined by reference to the assignor’s location(whether place of business, place of incorporation or placeof central administration has not been decided yet; for thesecretariat’s suggestions on this matter, see A/CN.9/WG.II/WP.104, remarks 4-19 to draft article 5). The provisionsdealing with the rights and obligations of the debtor (i.e.chapter IV, section II) have a different territorial scope to theextent that, for those provisions to apply, the debtor tooneeds to be located in a Contracting State. In order to ensuresufficient predictability with regard to the application of thedraft Convention as far as the debtor is concerned, theWorking Group has agreed that the debtor’s location needsto be defined by reference to the debtor’s place of business(A/CN.9/WG.II/WP.104, remark 4 to draft article 5).

14. This approach to the issue of the territorial scope ofthe draft Convention is based on the assumption that themain disputes that the draft Convention would be calledupon to resolve would be addressed if the assignor (and,only for the application of the debtor-related provisions, thedebtor too), is located in a Contracting State. Such disputescould arise with regard to: rights of the assignee against theassignor flowing from the breach of a warranty; enforce-ment of the receivables by the assignee against the debtor;discharge of the debtor; defences of the debtor towards theassignee; relative rights of the assignee and the administra-tor in the insolvency of the assignor; relative priority rightsof the assignee and a competing assignee; and the effec-tiveness of subsequent assignments. Additional reasonsjustifying this approach include: that enforcement wouldnormally be sought in the place of the assignor’s or the

debtor’s location and thus there is no need to make refer-ence to the assignee’s location; and that application of theprovisions of the draft Convention other than those con-tained in section II of chapter IV would not affect thedebtor and thus there is no need to preclude the applicationof all the provisions of the draft Convention if the debtoris not located in a Contracting State.

15. As a result of this approach, the territorial scope ofapplication of the draft Convention is sufficiently broadand thus it is not necessary to extend it to cases in whichno party may be located in a Contractting State. Such anextension of the territorial scope may be achieved if it is thelaw of a Contracting State applicable by virtue of the pri-vate international law rules of the forum. The WorkingGroup thought that extending the territorial scope in such away might create uncertainty to the extent that private in-ternational law on assignment is not uniform. The WorkingGroup also felt that, in any case, certainty would not beserved by such a reference to private international lawrules, since parties would not know at the time of the con-clusion of a transaction where a dispute might arise and, asa result, which private international law rules might apply.However, the situation is different with regard to the lawgoverning debtor-related issues, since there is a sufficientdegree of consensus that those issues should be governedby the law governing the receivable (i.e. the law governingthe contract from which the receivable arises). Thus, draftarticle 1 (3) includes a reference to that law, extending theterritorial scope of the debtor-protection provisions of thedraft Convention to cover situations in which the debtormight not be located in a Contracting State.

16. Draft article 1 (4) and (5) has not been adopted yet(for the secretariat’s comments on these provisions, see A/CN.9/WG.II/WP.104, remarks 1-6 to chapter V and 1-3 tothe annex of the draft Convention).

Form of the instrument being prepared

17. The Working Group agreed that a convention wouldbe preferable to a model law since it would result in greatercertainty. It was generally felt that such certainty was nec-essary in achieving the draft Convention’s main objective,namely increased access to lower-cost credit. In addition, itwas agreed that a convention could better achieve the goalof establishing, along with the Convention on InternationalFactoring (which was prepared by the International Insti-tute for the Unification of Private Law—hereinafter re-ferred to as “Unidroit”—and adopted at a diplomatic con-ference called by the Government of Canada, Ottawa,1988—hereinafter referred to as “the Ottawa Convention”),a more comprehensive legal regime with regard to assign-ment-related transactions.

“Opting-in”/“opting-out”

18. The Working Group decided not to limit the applica-tion of the draft Convention to cases in which the assignorand the assignee chose to subject their relationship to thedraft Convention. It was generally felt that such a limitationof the scope of the draft Convention was unnecessary. Thedraft Convention is not aimed at replacing national assign-ment-related rules but rather at facilitating international


practices, which are currently not sufficiently developed inview of the uncertainty prevailing under national laws (asto the potential effect of the draft Convention on nationalpractices, see paras. 11, 12, 20 and 30). The WorkingGroup may wish to consider the question whether the par-ties to an assignment, not falling under the ambit of thedraft Convention, may choose to apply the draft Conven-tion. Such an opting-in right may or may not exist underprivate international law rules applicable to the draft Con-vention, at least to the extent that such a choice of lawmight affect third parties, a situation that might create un-certainty (for a precedence of an express opting-in provi-sion, see article 1 (2) of the United Nations Convention onIndependent Guarantees and Stand-by Letters of Credit).

19. Draft article 6 recognizes the right of the parties to theassignment or to the contract giving rise to a receivable toexclude the application of the draft Convention or derogatefrom or vary the effect of any of its provisions, as long asthe rights of third parties are not affected. This approach isbased on the assumption that the effects of assignment-related transactions on third parties would normally begoverned by national rules of mandatory law that could notbe derogated from or varied by agreement of the parties (asto the issue of party autonomy, see paras. 59-60).


References:

A/CN.9/420, paras. 33-44A/CN.9/432, paras. 39-69 and 257A/CN.9/434, paras. 62-77A/CN.9/445, paras. 146-153A/CN.9/456, paras. 38-43

Commentary

“Transfer by agreement”

20. Assignment is defined as a “transfer by agreement”.This means that the main focus of the draft Convention ison assignment as a way of transfer of property rights inreceivables. The contract of assignment or the financingcontract is not covered, except where expressly otherwiseprovided (e.g. draft articles 13-16 and 27; the WorkingGroup may wish to confirm that chapter III addresses theeffectiveness of the assignment as a transfer of propertyrights but not of the contract of assignment). However,other practices involving the transfer of property rights inreceivables, such as contractual subrogation or pledge, arecovered. Such an approach is appropriate in particular inview of the fact that, in certain legal systems, significantreceivables financing transactions, such as factoring, in-volve a contractual subrogation or pledge rather than theassignment of receivables. An explicit reference to suchtransactions, contained in an earlier version of draft article 2(A/CN.9/WG.II/WP.93), was deleted on the understandingthat listing such related practices might inadvertently resultin excluding some of them (A/CN.9/445, para. 151). Asalready mentioned above (see paras. 11, 12 and 18), thedraft Convention, rather than creating a new type of assign-ment, is aimed at providing uniform rules on assignment

and assignment-related practices with an international ele-ment, which, although covered in theory by currently exist-ing national law, could not be sufficiently developed inview of the uncertainty prevailing in national laws. Thereference to agreement is intended to exclude assignmentsby operation of law (e.g. statutory subrogation).

21. In order to avoid any ambiguity as to whether the term“transfer” includes assignments by way of security, thematter is expressly clarified in the second sentence of draftarticle 2 (a), which creates the legal fiction that, for thepurposes of the draft Convention, the creation of securityrights in receivables is deemed to be a transfer. However,the draft Convention does not define outright assignmentsand assignments by way of security. This matter is left toother law applicable outside the draft Convention, since, inview of the wide divergences existing among legal systemsas to the classification of transfers, an assignment by wayof security could in fact possess attributes of a sale, whilea sale might be used as a security device (for a list of issuesleft to other law, see para. 64).

“From one person to another person”

22. Both the assignor and the assignee can be legal enti-ties or individuals, whether merchants or consumers. Thus,the assignment between individuals is covered, unless theyare both consumers and the assignment is made for con-sumer purposes common to both (draft article 4 (a)). As aresult, the assignment of credit card receivables insecuritization transactions, which has the potential of mak-ing lower-cost credit available to manufacturers, retailersand consumers, is covered. The assignment of loans se-cured by real estate in securitization of mortgages is alsocovered. In view of the fact that in the draft Convention thesingular includes the plural and vice versa, an assignmentmade by many persons (e.g. joint owners of receivables) tomany persons (e.g. a syndicate of financiers) is also cov-ered. In the determination, however, of the territorial scopeof application or internationality, the multiplicity ofassignors or assignees should be ignored and the assign-ment by each assignor or to each assignee should be exam-ined independently from assignments by or to another per-son (the question whether the location of several assignorsor assignees could be defined by reference to the locationof an authorized agent remains to be considered by theWorking Group, see A/CN.9/WG.II/WP.102, remark 14 todraft article 1; as to cases involving multiple debtors, seepara. 26).

“Contractual right to payment of a monetary sum”

23. The term “contractual” is intended to ensure that re-ceivables arising from any type of contract are covered,while receivables arising by operation of law, such as tortreceivables, tax receivables, or receivables determined incourt judgements, are excluded, unless they are confirmedin a settlement agreement. Contractual receivables, the as-signment of which is covered by the draft Convention,include receivables arising under contracts for the sale ofgoods or the provision of services, whether those contractsare commercial or consumer transactions, as well as re-ceivables in the form of royalties arising from the licensingof intellectual property and receivables in the form of credit


balances in deposit accounts or securities transactions (fora brief description of practices, see paras. 31-39).

24. The assignment of other, non-monetary, contractualrights is not covered (e.g. the assignment of the right toperformance or the right to declare the contract avoided; asto the right of the assignor to claim damages for breach ofcontract or interest for late payment, see A/CN.9/WG.II/WP.104, remarks 2 and 3). While the right to performance,e.g. the right of the seller to any goods returned, is not areceivable, the assignee obtains it to the extent that anygoods returned by the buyer take the place of the assignedreceivable. The matter is addressed in draft articles 16 and26, according to which payment includes payment both incash and in kind. However, in order to make this pointclearer, the Working Group may wish to insert a referencein draft articles 16 and 26 to a right of the assignee inwhatever is received in payment “or other discharge” of theassigned receivable (see A/CN.9/WG.II/WP.104, remark 1to draft article 16). Assignments of contracts, which in-volve an assignment of contractual rights and a delegationof obligations, are not covered either. While such transac-tions may form part of financial arrangements, the financierwould normally rely mainly on the receivables. As tothe delegation of obligations, the Working Group thoughtthat it goes far beyond the desirable scope of the draftConvention.

“[Owed by] a third person”

25. Apart from the assignor and the assignee, the debtortoo could be a legal entity or an individual, a merchant ora consumer. To the extent they are contractual, consumerreceivables are covered by the draft Convention, unlessthey are assigned from one consumer to another and theyare thus intended to serve only personal, family or house-hold purposes (draft articles 2 and 4 (a); on this matter, seealso paras. 35 and 43).

26. The assignment of receivables, whether whole re-ceivables or parts of receivables, owed jointly (i.e. fully)and severally (i.e. independently) by multiple debtors isalso covered, provided that the contract from which theassigned receivables arise (hereinafter referred to as “theoriginal contract”) is governed by the law of a ContractingState. If, however, the original contract is not governed bythe law of a Contracting State and one or more, but not all,debtors are located in a Contracting State, each transactionshould be viewed as an independent transaction and thusdebtors who are not located in a Contracting State shouldnot be affected by the draft Convention. Otherwise, thepredictability as regards the application of the draft Con-vention to rights and obligations of debtors, which is one ofthe main objectives of the draft Convention, could be com-promised.

Contract of assignment, financing or other servicecontract, original contract

27. The draft Convention recognizes the right of the par-ties to structure their contractual relationship freely so as tomeet their various financing needs with a view to remain-ing competitive in a rapidly changing global marketplace

(draft article 6). Thus, the draft Convention does not affect:the contract of assignment, unless it expressly states other-wise (e.g. draft articles 13-16 and 27); the financing orother service contract (which may be the same as the con-tract of assignment, as, e.g. in factoring transactions, or aseparate contract, as, e.g. in securitization transactions);or the original contract between the assignor and thedebtor, from which the assigned receivables arise, unlessthe draft Convention expressly provides otherwise (e.g.draft article 19).

28. The reference to “value, credit or services being givenor promised” in return for the receivables assigned, whichwas contained in an earlier version of the definition of“assignment” (A/CN.9/WG.II/WP.96, draft article 2), hasbeen deleted, since “value, credit or services” are part ofthe financing contract rather than the assignment. However,the deletion of those words does not change the fact thatassignments are covered whether they are outright assign-ments in which value is given or promised by the assigneeto the assignor or to another person affiliated with theassignor or to whom the assignor owed a debt, or assign-ments by way of security in which credit is given or prom-ised, or assignments in which no financing is offered butservices (e.g. book-keeping, collection or insurance againstdebtor-default, which is often the main or the only elementin international factoring transactions). Assignments of re-ceivables would be covered, whether such “value, credit orservices” is given or promised not only at the time of theassignment but also at an earlier time. As a result, assign-ment-related transactions which involve the restructuring ofdebts of a debtor, being in financial difficulties short ofinsolvency, would also be covered by the draft Convention.

29. At an early stage in its work, the Working Groupconsidered the question whether the application of the draftConvention should be limited to assignments with a com-mercial or financing nature or context. The Working Groupdecided that such a limitation would not be appropriate,since such a limitation: would inappropriately create yetanother special regime on assignment, even though onewas not needed, and thus inadvertently result in furtherdisunification of the law on assignment; would raise uncer-tainty since the terms “financing” and “commercial” werenot universally understood in the same way, nor was itfeasible or desirable to attempt to define them in a uniformway in an international convention; and would unnecessar-ily exclude from the scope of the draft Convention impor-tant transactions such as assignments in internationalfactoring transactions in which only service may be pro-vided (e.g. book-keeping, collection services or insuranceagainst debtor-default). The Working Group preferred tostart from a broad scope of application and to excludetransactions that were already well regulated.

30. With regard to the possible impact of such an ap-proach on national law, as already mentioned (see paras.11, 12, 18 and 20), the draft Convention is intended tocover assignments with an international element and doesnot adversely affect domestic assignments of domestic re-ceivables (on this matter, see also A/CN.9/WG.II/WP.104,remarks 3-5 to draft article 1; on potential conflicts with theOttawa Convention, see A/CN.9/WG.II/WP.104, remarksto draft article 33).


Transactions covered

31. The draft Convention covers a wide array of financialtransactions. First of all, included are such traditional fi-nancing techniques such as factoring, forfaiting and invoicediscounting. In these types of transactions, assignors assignto a financier their rights in receivables arising from thesale of the assignors’ goods or services. The assignment insuch transactions may either be for security or by way ofoutright transfer with an adjustment in the purchase pricedepending on the risk and the time involved in the collec-tion of the underlying receivable. Beyond their traditionalforms, those transactions have developed a number of vari-ants tailored to meet the various needs of parties to inter-national trade transactions. For example, in addition, or inthe place of financing, a number of services may be pro-vided, including collection, book-keeping and insuranceagainst debtor-default. Insurance services are often pro-vided in international factoring, where receivables are as-signed to a factor in the country of the assignor (“exportfactor”) and then from the export factor to another factor inthe country of the debtor (“import factor”) for collectionpurposes, while the factors do not have recourse against theassignor in the case of debtor-default (non-recoursefactoring). All those transactions are covered in the draftConvention regardless of their form.

32. In view of the broad definition of a “receivable” indraft article 2 (a) (“contractual right to payment of a mon-etary sum”), the Convention also covers many other formsof financial transactions used in modern international com-merce. These include innovative financing techniques suchas securitization, project finance and swaps, as well astransactions involving the financed sale of high-value mo-bile equipment (on whether some of those practices shouldbe treated differently or excluded altogether from the scopeof the draft Convention, see A/CN.9/WG.II/WP.104, re-marks 3-16 to draft article 4).

33. In a securitization transaction, an assignor creates re-ceivables through its own efforts. The assignor could be amanufacturing concern selling goods; it could also be abank extending loans. The assignor assigns, usually by wayof an outright transfer, these receivables to an entity spe-cially created for the purpose of buying the receivables andpaying their price with the money received from investorsto whom it sells the receivables or securities backed by thereceivables. This “special purpose vehicle” (“SPV”) thushas as its only assets those receivables transferred to it. Thesegregation of the receivables from the assignor’s otherassets allows the credit given for the transfer from theassignor to the SPV to be priced solely on the credit of thereceivables assigned, and without regard for the assignor’sother assets. Immediately after, or concurrently with, suchtransfer, the SPV assigns an undivided interest in the re-ceivables to investors or issues securities backed by thereceivables. As indicated above, the price paid by investorsfor this interest (or the money lent, which is used to payback the initial assignor) is linked to the financial strengthof the receivables assigned, and not to the creditworthinessof the assignor. Thus, the assignor may be able to obtainmore credit than would be warranted on the basis of itsown credit-rating. In addition, by gaining access to interna-tional securities markets, the assignor may be able to obtain

credit at a cost that would be lower than the average costof commercial bank-based credit. Moreover, the assign-ment of the receivables by the initial assignor to an entityestablished for the sole purpose of issuing securities backedby the receivables reduces the risk of insolvency and thusthe cost of credit.

34. The draft Convention will similarly apply to an as-signment of a project’s future cash-flow. In large-scale,revenue-generating infrastructure projects, sponsors raisethe initial capital costs by borrowing against the futurerevenue stream of the project. Thus, hydroelectric dams arefinanced by the future obligation of payers to pay for elec-tricity, telephone systems are paid for by the future rev-enues from telecommunications charges and highways areconstructed with funds raised through the assignment offuture toll-road receipts. Given the draft Convention’s ap-plicability to future receivables, these types of project fi-nance may be reduced to transfers, usually for purposes ofsecurity, of the future receivables to be generated by theproject being financed.

35. In this context, it should be emphasized that the draftConvention’s exclusion of assignments made for personal,family or household purposes will not act to exclude con-sumer receivables (the transaction by which the receivablearises, e.g. the creation of an obligation by a consumer suchas that represented by a utility bill, is not an assignment).Only the transfer of the right to receive that payment is anassignment, and the transfer by the utility company to afinancier or SPV would not be for personal, family orhousehold purposes (on this matter, see paras. 25 and 43).In addition, it should be noted that toll-road receipts wouldbe contractual receivables falling under the ambit of thedraft Convention since they arise from contracts concludedde facto between operators and users of highways.

36. Swaps and derivatives transactions will also comewithin the draft Convention’s ambit. A “swap” is basicallya two-party transaction in which different parties’ credit-worthiness and willingness to take financial risks are ex-ploited. In the traditional case, a creditworthy entity bor-rows money at a fixed rate. A less-secure entity borrows asimilar sum, but its financial standing only permits it toborrow in credit markets at a variable rate. Through a fi-nancial intermediary, the two entities “swap” their respec-tive obligations, and agree to indemnify and hold eachother harmless, should either party default. There is a feepaid for the swap, with the end result that theless-creditworthy entity, for a fee, can obtain credit at afixed rate. In view of the fact that the financiers lending themoney are invariably part of these transactions (otherwisethe swapping would likely be an event of default), theirtransfer of these rights to receive money brings these typesof transactions within the ambit of the draft Convention.

37. Derivatives are similar to swaps in that obligations ofdebtors are divided and sold among financial and otherentities. For example, the first five years of interest pay-ments on a 30-year bond might be packaged and sold toinvestors, as might be the last five years of such payments.Given the different periods of time, these payment streamspresent different risks which attract investors, creating amarket for such instruments. The trading of such rights tomoney is directly within the ambit of the draft Convention.


38. Even less traditional transactions are covered by thedraft Convention. Loan syndications and participations, forexample, are complex forms of assigning the debtor’s con-tractual obligation to pay the debt. All forms of loansyndications, in which the participant receives some rightto the debtor’s contractual obligation to pay, come withinthe scope of the draft Convention. The transaction maytake the common form of a bank loan, or it may take theform of public financing of some project or equipment ac-quisition. Thus, transfers of certificates of indebtedness(being contractual obligations to pay) secured by aircraftwould be covered by the draft Convention, as wouldparticipations in equipment trusts. Indeed, if the initial fi-nancing of mobile equipment, such as aircraft, is securedby future revenues, the draft Convention will also applysince the transfer of those receivables by way of securitywill effectively be a transfer of the customer’s contractualobligation to pay. In this context, it should be noted that, ifnegotiable bonds represent the obligation to pay, theirtransfer is not covered by the draft Convention by virtue ofthe exclusion of the transfer of negotiable instruments con-tained in draft article 5.

39. Similarly, assignments of bank accounts (representingthe depository bank’s obligation to pay out on such ac-counts) or assignments of insurance policies (representingthe insurance company’s contingent obligation to pay uponloss) will also be covered. Again, such transfers may beoutright transfers, such as when portfolios of bank accountsor insurance policies are transferred between firms orwithin a corporate structure. They may also be transfers byway of security, such as insurance premium loans or loanssecured by a deposit in a commercial bank.


References:

A/CN.9/420, paras. 26-29A/CN.9/432, paras. 19-25A/CN.9/445, paras. 154-167A/CN.9/456, paras. 44 and 45 and 226-227

Commentary

40. Under the draft Convention, once a receivable is in-ternational, its assignment is always covered by the draftConvention. However, even if a receivable is domestic, itsassignment may be covered by the draft Convention, if itis international or it is part of a chain of assignments whichincludes an earlier international assignment (on this matter,see para. 10, as well as A/CN.9/WG.II/WP.104, remarks todraft article 3). The meaning of the term “location” and theissue of location of multiple assignors and assignees havenot been decided yet (for the secretariat’s suggestions withregard to this matter, see A/CN.9/WG.II/WP.104, remarks3-10 to draft article 5).

41. Internationality of a receivable is determined at thetime of the conclusion of the original contract. This ap-proach is based on the assumption that at that time thecreditor (potential assignor) would need to know which law

might apply in order to be able to assess the risks involvedin a transaction and to determine whether to extend creditto the debtor and on what terms. However, as a result ofthis approach, parties to an assignment may not be able todetermine at the time of the assignment whether the draftConvention will apply if future receivables are involved(i.e. receivables arising from contracts not in existence atthe time of assignment). On the other hand, internationalityof an assignment is determined at the time it is made. Thus,the parties will always be able to predict at the time of theassignment whether the draft Convention will apply or not.


References:

A/CN.9/432, paras. 18, 47-52, 106 and 234-238A/CN.9/434, paras. 42-61A/CN.9/445, paras. 168-179A/CN.9/456, paras. 46-52

Commentary

42. In view of its decision that the scope of application ofthe draft Convention should be as broad as possible, theWorking Group agreed that certain practices that did notneed to be regulated should be excluded.


43. Subparagraph (a) is intended to exclude from thescope of the draft Convention assignments from a con-sumer to a consumer, since such assignments are of nopractical significance (as to a secretariat suggestion to re-phrase subparagraph (a) or even to delete it, see A/CN.9/WG.II/WP.104, remark 1 to draft article 4). However,subparagraph (a) does not exclude assignments from aconsumer to a merchant. Such assignments of consumerreceivables form part of significant practices, such assecuritization of credit card receivables, the facilitation ofwhich has the potential of increasing access to lower-costcredit by manufacturers, retailers and consumers and, as aresult, could facilitate international trade in consumergoods. While covering the assignment of consumer re-ceivables, the draft Convention is not intended to overrideconsumer-protection law. Where necessary, the draft Con-vention makes explicit reference to this principle. For ex-ample, under draft articles 21 (1) and 23, a consumer-debtor cannot waive any defences and rights of set-off andhas a right to recover payments from the assignee, if theconsumer-protection law applicable in the country of thedebtor so provides (for anti-assignment clauses in a con-sumer context, see paras. 83 and 86).

Assignments of negotiable instruments

44. Subparagraph (b) excludes assignments made by en-dorsement and delivery of a negotiable instrument, such asa bill of exchange or a promissory note or a cheque, or bymere delivery of an instrument, such as a bearer document.The underlying reason for this exclusion is the need toavoid interfering with practices well regulated in national


law and international texts. The draft Convention refers tothe form of transfer rather than to the documentary natureof the receivable since: such a reference is adequate inprotecting the negotiability of an instrument and the inter-ests of a protected holder; it would be very difficult toreach agreement on a uniform definition of the term “docu-mentary receivable”; and there is no need to exclude theassignment of contractual receivables on the sole groundthat they have been incorporated in a negotiable instrumentfor the purpose of obtaining payment by way of summaryproceedings in court, if necessary.

Assignments of receivables in corporate buyouts

45. Subparagraph (c) is aimed at excluding assignmentsmade in the context of the sale of a business as a goingconcern, if they are made from the seller to the buyer. Suchassignments are excluded as they are normally regulateddifferently by national laws dealing with corporate buyoutsand are not of a financing nature. However, assignmentsmade to an institution financing the sale are not excluded.

Other assignments

46. In the course of its work, the Working Group consid-ered for exclusion other types of assignments such as as-signments by operation of law, assignments as gifts, assign-ments of wages, assignments of contractual rights ingeneral, assignments of insurance premiums, assignmentsof rents from real estate and equipment and assignments ofbalances in deposit accounts. As to assignments by opera-tion of law, it should be noted that they are excluded inview of the definition of “assignment” by reference to a“transfer by agreement”. In view of the fact that considera-tion was thought to be part of the contract of assignment,which, with the exception of draft articles 13 to 16 and 27,is not addressed in the draft Convention, the WorkingGroup decided not to address assignments as gifts. As tothe assignment of wages, the Working Group decided toleave the matter to other law. If such assignments are pro-hibited under national law, the draft Convention does notaffect such a prohibition. If, however, such assignments arenot prohibited under national law, with a view to preserv-ing significant practices, such as the financing of temporaryemployment services, the draft Convention does not doanything to invalidate them (as to the law applicable tostatutory assignability, see A/CN.9/WG.II/WP.104, re-marks 3-4 to draft article 28). The Working Group decidedto cover assignments of insurance premiums and of rentsarising from leases of real estate and equipment, as well asassignments of credit balances in deposit accounts (how-ever, as to the exact treatment of some of those transactionsand possible exceptions, see A/CN.9/WG.II/WP.104, re-marks 3-16 to draft article 4).

47. In the interest of enhancing the acceptability of thedraft Convention, paragraph (2), which appears withinsquare brackets since it has not been adopted yet by theWorking Group, is intended to ensure that States are givena possibility to exclude further practices. Such an approachmay be necessary if no agreement is reached on the practicesto be excluded in paragraph (1) or in order to address con-cerns that might arise in the future. However, a possibledisadvantage of such an approach would be that the scope of

the draft Convention could vary from State to State, with theresult that, in view of the multiplicity of parties involved andthe possibility that one or more but not all possibly relevantStates might have made a declaration, the exact scope of thedraft Convention would not be easy to ascertain. This resultin itself could increase the legal cost and thus the final costof a transaction (on this matter, see A/CN.9/WG.II/WP.104,remarks 7 and 16 to draft article 4).



References:

A/CN.9/420, paras. 52-60A/CN.9/432, paras. 70-72, 94-105A/CN.9/434, paras. 78-85, 109-114, 167 and 244A/CN.9/445, paras. 180-190A/CN.9/456, paras. 53-78

Commentary

“original contract”

48. The term is defined since it is referred to in draftarticles 5 (b), 5 (k) (iii), 17 (1), 17 (2) (a) and (b), 18 (1),19 (1), 20 (2), 22 (2) (b) and (23). With the contract ofassignment and the financing or other service contract,which may be the same or a different contract, the originalcontract is part of the basic chain of contractual relation-ships involved in an assignment-related transaction. Withthe exception of those provisions which expressly stateotherwise (e.g. draft article 19), the draft Convention doesnot affect the rights and obligations of the debtor as theyare stipulated in the original contract (draft article 17).

“deemed to arise when the original contract isconcluded”

49. With a view to enhancing certainty, the draft Conven-tion provides a uniform rule on the time when a receivableis deemed to arise. Such a rule is essential in order to de-termine the internationality of a receivable and the effec-tiveness of a bulk assignment. The time when the originalcontract is concluded is the most appropriate point of timebecause at that point the identity of the creditor and thedebtor, as well as the legal source of the receivable and itsamount, are known. The time at which a receivable be-comes due or the original contract becomes enforceablewere thought to be inappropriate in this regard, since delay-ing the time at which a receivable arose and could be usedfor obtaining credit could have an adverse impact on theavailability of credit. The term “concluded” refers to theconclusion of the contract, the exact meaning of which isleft to law applicable outside the draft Convention. In anycase, “conclusion” does not refer to the performance of thecontract (for a secretariat drafting suggestion to deletesubparagraph (b) and to refer in draft articles 3 and 8 (1)(b) and (2) directly to the time of the conclusion of theoriginal contract, see A/CN.9/WG.II/WP.104, remark 1 todraft article 5).


“existing” and “future” receivable

50. The terms “existing” and “future” receivable are re-ferred to in draft articles 8 (effectiveness of an assignment)and 9 (time of assignment). The draft Convention does notintroduce any limitation with regard to the types of futurereceivables the assignment of which is covered. Thus, theentire range of future receivables is covered in the defini-tion, including conditional (i.e. receivables that might arisesubject to a future event that might take place or not) andpurely hypothetical receivables (i.e. receivables that mightarise from an activity not initiated by the assignor at thetime of the assignment). However, draft article 8 introducesa limitation as to the effectiveness of the assignment of afuture receivable, by requiring that the future receivableshould be identifiable, at the time of the conclusion of theoriginal contract, as a receivable to which the assignmentrelates. Once this requirement is met, the future receivableis considered as transferred at the time of the conclusion ofthe contract of assignment. However, this result should notprejudice the rights of third parties (see para. 70).

“receivables financing”

51. This definition, which appears in square brackets, hasnot been adopted by the Working Group (for a secretariatsuggestion to delete this definition and to, possibly, refer toreceivables financing in the preamble, see A/CN.9/WG.II/WP.104, remark 1 to draft article 5).

“writing”

52. The definition is intended to include other than paper-based means of communications which can perform thesame functions as a paper communication (e.g. providetangible evidence, serve as a warning to the parties withregard to the consequences, provide a legible communica-tion, authentication and sufficient assurances as to its integ-rity). It is inspired by articles 6 and 7 of the UNCITRALModel Law on Electronic Commerce and reflects the twodistinct notions of “writing” and “signature” (or “signedwriting”).

53. The draft Convention requires a writing for the noti-fication of the assignment and a signed writing for thewaiver of the debtor’s defences (draft article 21 (3), how-ever, may need to clarify whether the signature of both theassignor and the debtor is required or only that of thedebtor; see A/CN.9/WG.II/WP.104, remark to draft article21). Writing is also required for declarations by States andfor certain registration-related acts. This approach is basedon the assumption that the need for higher assurances as tothe authenticity of communications should be assessed dif-ferently depending on the context in which the communi-cation is made.

54. “Accessible” is meant to imply that the communica-tion is readable and interpretable; “usable” refers not onlyto use by a physical person but also by a computer; and“subsequent reference” establishes a standard which is akinto that implied by a notion such as durability (while notreferring to the strict interpretation given to the notion ofdurability in certain legal systems as equivalent to non-alterability) but more objective than that implied by notions

such as readability or intelligibility (see Guide to Enact-ment of the Model Law, para. 50). Signature is defined byreference to the identification of the signer and indicationof the signer’s approval of the content of the communica-tion.

“notification of the assignment”

55. Under subparagraph (f), a notification meets the re-quirements of the draft Convention if it is in writing andprovides a reasonable description of the assigned receiva-bles. What is a reasonable description is a matter to bedetermined in view of the circumstances. However, reason-able would include descriptions along the following lines:“all my receivables from my car business” and “all myreceivables as against my clients in countries A, B and C”.There is no requirement that the notification identify theperson to whom or for whose account or the address towhich the debtor is to pay. As a result, a notification con-taining no payment instruction is effective under the draftConvention. However, in view of the fact that, under thedraft Convention, a notification changes the way in whichthe debtor may discharge its debt, parties notifying thedebtor would be encouraged to include in their notificationsuch a payment instruction. The Working Group based thedischarge of the debtor on the notification rather than onthe payment instructions in order to avoid confusing thedebtor in cases in which the two communications might besent separately or in which several communications mightbe sent to the debtor by several persons.

“insolvency administrator” and “insolvencyproceeding”

56. Subparagraphs (g) and (h) have been inspired by thedefinitions of “foreign proceeding” and “foreign adminis-trator” contained in article 2 (a) and (d) of the UNCITRALModel Law on Cross-Border Insolvency. They are alsoconsistent with articles 1 (1), 2 (a) and (b) of the EuropeanConvention on Insolvency Proceedings. By referring to thepurpose of a proceeding or to the function of a person,rather than using technical expressions that may have dif-ferent meanings in legal systems, the definitions are suffi-ciently broad to encompass a wide range of insolvencyproceedings, including interim proceedings. This approachis intended to avoid that a Contracting State recognizes asan insolvency proceeding or administrator a proceeding orperson which does not have that character under the lexloci concursus, or is unable to recognize as an insolvencyproceeding or administrator a proceeding or person whichhas that character under the lex loci concursus.

“priority”

57. Priority under the draft Convention means that a partymay satisfy its claim in preference to other claimants, underthe implicit conditions that there is a valid assignment asbetween the assignor and the assignee and that the assigneehas extended credit to the assignor (as to whether “priority”covers the question whether an assignee has a claim in remor ad personam, see A/CN.9/WG.II/WP.104, remark 3 todraft article 5). Whether the person with priority may retainall the proceeds of payment or turn over any remainingbalance after payment of its claim to the next person in the


line of priority or to the assignor depends on whether anoutright assignment or an assignment by way of security isinvolved; this matter is left to law applicable outside thedraft Convention. The definition does not refer to the rightto payment since, while this expression might be appropri-ate for assignments by way of security, it might be restric-tive in outright assignments in which the assignee may, forexample, have a right to receive any goods returned by thedebtor to the assignor. However, the Working Group maywish to consider whether this matter might be better ad-dressed if wording along the following lines is inserted insubparagraph (i): “the right to payment or other discharge”.

“location”

58. The Working Group has not reached a decision yet asto the meaning of the notion of “location” (for the secretari-at’s suggestions, see A/CN.9/WG.II/WP.104, remarks 4-10to draft article 5).


References:

A/CN.9/432, paras. 33-38A/CN.9/434, paras. 35-41A/CN.9/445, paras. 191-194A/CN.9/456, paras. 79 and 80

Commentary

59. Article 6, which is modelled on article 6 of the UnitedNations Convention on Contracts for the International Saleof Goods (Vienna, 1980; hereinafter referred to as “theUnited Nations Sales Convention”) provides broad recogni-tion of the principle of party autonomy. Unlike article 6 ofthe United Nations Sales Convention, however, draft article6 does not allow the assignor and the assignee to excludethe draft Convention as a whole. The reason for this ap-proach is that, as the draft Convention deals with the rightsof parties other than the assignor and the debtor, an exclu-sion of the application of the draft Convention would affectthe rights of third parties (i.e. in the context of an agree-ment between the assignor and the assignee, the debtor, theassignor’s creditors and the insolvency administrator and,in the context of an agreement between the assignor and thedebtor, the assignee, the assignor’s creditors and the insol-vency administrator). Such a result would not only go be-yond any acceptable notion of party autonomy but wouldalso introduce an undesirable degree of uncertainty andcould thus frustrate the main objective of the draft Conven-tion to facilitate increased access to lower-cost credit and toprovide, at the same time, an adequate debtor-protectionsystem. Thus, the assignor and the assignee may only varyor derogate from draft articles 13 to 16 and 27, while theassignor and the debtor are free to vary or derogate fromdraft articles 17 to 23, as long as the rights of the assigneeor other third parties are not prejudiced.

60. Like article 6 of the United Nations Sales Convention,draft article 6 requires an agreement, i.e. two correspondingdeclarations of intent, for the effective derogation from the

draft Convention. Such an agreement may be explicit orimplicit. A typical example of an implicit derogation iswhere the parties refer to the law of a non-ContractingState or to the national law of a Contracting State. Thederogation is effective, if the choice of law by the partiesis valid under the private international law rules of theforum. If the choice of law is invalid, in the absence of anyindications, it cannot be generally assumed that the partiesintended to derogate from the Convention, regardless ofwhether or not their choice of law was valid. It cannot begenerally assumed either that, had the parties known thattheir choice of law would be invalid, they would wish thatthe proper law of the contract would apply to their contract.An effective derogation does not require that the partiesreach an agreement on the law applicable to the matters onwhich they derogated from the provisions of the draft Con-vention. In such a case, it should be assumed that the par-ties do not wish to have recourse to national law but wishany gaps to be filled in accordance with draft article 7 (2).If parties have agreed on the law applicable to the issues onwhich they derogated from the draft Convention, that lawshould be applied in a way consistent with the draft Con-vention, unless the derogation is so great that a particularmatter can no longer be regarded as falling under the draftConvention.


References:

A/CN.9/432, paras. 76-81A/CN.9/434, paras. 100 and 101A/CN.9/445, paras. 199 and 200A/CN.9/456, paras. 82-85

Commentary

61. This article, inspired by article 7 of the United NationsSales Convention, deals with the interpretation of and thefilling of gaps in the draft Convention. With regard to theinterpretation of the draft Convention, draft article 7 (1)refers to three principles, i.e. the international character ofthe text, uniformity and good faith in international trade.These principles are common to most UNCITRAL texts.The reference to the international character or source of thetext should lead a court to avoiding to interpret the draftConvention on the basis of notions of national law, unlessthe meaning of a term used in the draft Convention isclearly identical with its meaning under a particular na-tional law. The need to preserve uniformity can be servedonly if courts or arbitral tribunals apply the general princi-ples underlying the draft Convention and have regard todecisions of courts or tribunals in other countries. The CaseLaw on UNCITRAL Texts (CLOUT), a system of report-ing case law on UNCITRAL texts, has been established byUNCITRAL exactly with the need to preserve uniformityin mind (CLOUT is available in paper form in the six of-ficial languages of the United Nations and through theUNCITRAL website, http:\\www.uncitral.org, in English,Spanish and French; depending on the resources available,the other language versions will also be made available inthe future).


62. The reference to good faith may apply not only to theinterpretation of the draft Convention but also to the con-duct of the parties. However, while the principle of goodfaith would appropriately be applied to the contractual re-lationship between the assignor and the assignee or theassignor and the debtor, it could undermine the certainty ofthe draft Convention if applied to the relationship betweenthe assignee and the debtor or the assignee and any otherclaimant. For example, if the principle of good faith pre-vailing in the forum State were to apply to the assignee-debtor or the assignee-third party relationship: the debtor,who might have paid the assignee after notification, mayhave to pay again if, e.g. the debtor knew about a previousassignment; and the law applicable under draft article 24might be disregarded if it does not respect the principle ofgood faith as it may be understood in the forum State.

63. As to gap-filling, the rule is that, if matters are gov-erned by the draft Convention (chapter I) but not expresslysettled in it, they are to be decided in accordance with thegeneral principles on which the draft Convention is based.Such principles include notably the principles expresslymentioned in the preamble or enshrined in a number ofprovisions of the draft Convention (e.g. the principle offacilitation of increased access to lower-cost credit and theprinciple of debtor protection). Recourse to private interna-tional law rules is permitted only if: there is no principle onthe basis of which a particular matter could be resolved; orthe matter is not governed by the draft Convention at all.

64. Matters not governed by the draft Convention and leftto other law include: the meaning of an outright assignmentand an assignment by way of security; the question of theform of the contract of assignment; the accessory or inde-pendent character of a security right, which is the basis fordetermining whether it is transferred automatically with thereceivables the payment of which it secures, or whether anew act of transfer is needed; the consequences of a breachof representations by the assignor; to a large extent, theassignability of a receivable (the draft Convention covers itto some extent in that it specifies a number of receivablesthat are assignable, including future receivables and re-ceivables not identified individually, and in that it dealswith contractual limitations to assignment, but leaves othertypes of receivables and other statutory limitations to as-signment unaddressed); the question whether the assignoris liable towards the debtor for assigning its receivables inviolation of an anti-assignment clause; the debtor’s obliga-tion to pay (the draft Convention deals with the debtor’sdischarge only); the discharge of the debtor on groundsother than those specified in the draft Convention (e.g. bypaying the rightful claimant if the notification receiveddoes not meet the requirements of the draft Convention);the defences and rights of set-off that the debtor may raiseagainst the assignee (the draft Convention provides that thedebtor has against the assignee the same defences andrights of set-off that it would have against the assignor,without, however, specifying them); agreements betweenthe debtor and the assignee by which the debtor waives itsdefences and rights of set-off towards the assignee; ques-tions of priority among several assignees of the same re-ceivables, between the assignee and the insolvency admin-istrator and between the assignee and the assignor’screditors; and the question whether the right of the assigneein proceeds is a right ad personam or in rem.

65. In view of the possibility that it may be difficult todetermine whether a matter is governed but not expresslysettled in the draft Convention or not governed at all, theWorking Group may wish to consider the question whethera provision along the lines of article 4 of the United Na-tions Sales Convention, listing expressly the matters cov-ered therein, would be appropriate for inclusion in the draftConvention.

66. The Working Group may also wish to clarify whethergaps left in the private international law provisions of thedraft Convention are to be filled in accordance with thesubstantive or the private international law principles un-derlying the draft Convention. In the absence of such prin-ciples, such gaps would be filled in accordance with theprivate international law of the forum.


Form of assignment

References:

A/CN.9/420, paras. 75-79A/CN.9/432, paras. 82-86A/CN.9/434, paras. 102-106A/CN.9/445, paras. 204-210A/CN.9/456, paras. 86-92

Commentary

67. The Working Group considered a wide variety ofform requirements, ranging from written form (with orwithout any signature requirements) to the absence of anyform (the possibility of leaving the matter to law applicableoutside the draft Convention was also considered). Whilethe widely prevailing view was that purely oral assign-ments should be invalidated, at least as against third parties,the Working Group was not able to reach agreement on thismatter and decided to delete the provision dealing withform. The Working Group took this decision on the under-standing that the matter is addressed: with respect to themutual interests of the assignor and the assignee, in draftarticle 6, which enshrines party autonomy; with respect tothe interests of the debtor, in draft article 19 (in the absenceof written notification of the assignment, the debtor’s rightto discharge its obligation in accordance with the originalcontract is not affected) and in draft article 19 (generalprinciple of debtor-protection); and with respect to the in-terests of third parties, in draft articles 24 to 26 (priorityrules).

68. However, in draft articles 24 to 26 it is not clear thatthe law of the assignor’s location governs form. As a resultand in view of the fact that formal validity is a prerequisitefor priority, the assignee, in order to ensure priority, wouldhave to meet the requirements of the law of the assignor’slocation and the law governing formal validity, which maybe difficult to determine (for a secretariat suggestion toinclude in the text a private international law provision onform, see A/CN.9/WG.II/WP.104, remarks to chapter III).


Specifying the law applicable to formal validity would pro-vide a degree of certainty. However, it would leave to thelaw applicable: the question whether purely oral assign-ments would be valid, thus allowing possible abuse orfraudulent collusion between an assignee and the assignor,particularly in situations where the assignor might becomeinsolvent; the question whether stamp duties are payablefor the contract of assignment to be valid, which wouldaffect the overall cost of the transaction; and the questionof form of an assignment of receivables backed by a secu-rity right, which might be subject to the law governing thesecurity right (on this matter, see para. 93).

Article 8. Effectiveness of bulk assignments,assignments of future receivables and partial assignments

References:

A/CN.9/420, paras. 45-60A/CN.9/432, paras. 93-112 and 254-258A/CN.9/434, paras. 122 and 124-127A/CN.9/445, paras. 211-214A/CN.9/456, paras. 93-97

Commentary

Paragraph (1)

69. As a matter of principle, draft article 8 validates as-signments (i.e. transfers, not contracts of assignment) offuture receivables, bulk assignments and assignments ofparts of or undivided interests in receivables. There arecertain qualifications to this principle. While the assign-ment is effective as against the debtor as of the time it ismade, before receiving notification in writing, the debtormay refuse to pay the assignee and discharge its debt bypaying in accordance with the original contract (the debtormay discharge its debt by paying the assignee, even beforereceiving written notification; in such a case, however, thedebtor takes the risk of having to pay twice, if it is laterproven that no assignment took place).

70. A second qualification to the above-mentioned princi-ple is that the effectiveness of an assignment as againstthird parties is left to the law applicable to priority underdraft articles 24 to 26. Thus, draft article 8 is not intendedto: validate the first assignment in time while invalidatingany further assignment of the same receivables by the sameassignor; or to ensure that the assignee will prevail over aninsolvency administrator on the sole ground that the assign-ment took place before the effective date of the insolvencyproceeding. In order to avoid inadvertently leaving the ef-fectiveness of future assignments altogether to the law ap-plicable to priority, the Working Group decided to deletelanguage in draft article 8 that would have made draft ar-ticle 8, as well as draft article 9, subject to draft articles 24to 26. This decision was taken on the understanding thatthe combined application of draft articles 8 to 12 and 24to 26 would lead to the same result, namely that the pro-visions of chapter III are not intended to affect priorityissues, since those issues are dealt with in draft articles 24to 26.

“existing or future receivables”

71. The assignment of future receivables in bulk is at theheart of modern receivables financing practices. Yet greatuncertainty exists as to the validity of such assignments. Thedraft Convention, therefore, places significant emphasis onthe effectiveness of the assignment of future receivables andof bulk assignments in particular. At an early stage in itswork, the Working Group noted that the validation of theassignment of conditional receivables and of purely hypo-thetical receivables might result in a business entity assign-ing all its claims for the entire duration of its existence, apractice that might run counter to public policy in certaincountries (as to the range of future receivables covered, seepara. 49). However, the Working Group considered that ablanket exclusion of conditional or hypothetical receivablesfrom the scope of the draft Convention could hamper signifi-cant practices, such as those involving the assignment of thecash-flow of a public-infrastructure project for financingpurposes. Having carefully considered the matter, the Work-ing Group decided to introduce the requirement, containedin draft article 8 (1), that the receivables should be identifi-able when they arise (i.e. when the original contract is con-cluded) as receivables to which the assignment relates. Thisrequirement is intended to provide appropriate recognition,on the one hand, of the economic need to allow bulk assign-ments of various types of future receivables and, on the otherhand, of the need to protect assignors against the risks thatmight result from unlimited freedom to assign all conceiv-able future receivables.

“one or more”

72. While the focus of the draft Convention is on theassignment of a large volume of low-value receivables (in-volved, e.g. in factoring of trade receivables or insecuritization of credit card receivables), the assignment ofsingle, large-value receivables (involved, e.g. in loan syndi-cation) is also validated (as to the question whether anti-assignment clauses and priority issues should be treateddifferently in the case of an assignment of single receivables,see A/CN.9/WG.II/WP.104, remarks 3-7 to draft article 4).

“is effective”

73. The result of the effectiveness of an assignment de-pends on whether an outright assignment or an assignmentby way of security is involved, which is a matter left to lawapplicable outside the draft Convention. In the case of anoutright assignment, “is effective” means that the assign-ment transfers full property in the receivable. This means:that the assignee is entitled to retain any surplus remainingafter the satisfaction of its claim against the assignor; andthat, in the case of debtor-default, the assignee has no re-course against the assignor. In the case of an assignment byway of security, “is effective” means: that the assignee hasto turn over to the next claimant in line of priority or to theassignor any remaining surplus; and that, if the debtor failsto pay, the assignee can turn against the assignor and de-mand payment for the credit or the services extended to theassignor in return for the assigned receivables.

74. As a matter of expression, the term “effective” wasthought to be preferable to the term “valid”, since: “effec-tive” more accurately reflects the idea of effectiveness erga


omnes; and “valid” is not universally understood in thesame way.

“described”

75. The term “described” is intended to establish a stand-ard lower than that which would be established by the term“specified”. Under this standard, a generic description ofthe receivable, without any specification of the identity ofthe debtor or the amount of the receivable, would be suf-ficient (e.g. “all my receivables from my car business”).

“individually”/“in any other manner”

76. These words are intended to ensure that an assignmentof existing and future receivables is effective, whether thereceivables are described one by one or in any other mannerthat is sufficient to relate the receivables to the assignment.

Paragraph (2)

77. With a view to expediting the lending process andreducing the cost of the transaction, paragraph (2), in ef-fect, provides that a master agreement is sufficient to trans-fer rights in a pool of future receivables. If a new documentwere to be required each time a new receivable wouldarise, the costs of administering a lending programmewould increase considerably and the time needed to obtainproperly executed documents and to review those docu-ments would slow down the lending process to the detri-ment of the assignor.

78. Under paragraph (2), which provides that the masteragreement is sufficient to transfer a pool of future receiva-bles, and draft article 9, which provides that a future receiv-able is transferred at the time of the conclusion of the con-tract of assignment, rights in future receivables aretransferred directly to the assignee without passing throughthe estate of the assignor. However, the question whetherthe assignment is effective as against the assignor’s credi-tors or the insolvency administrator is a matter to be settledin accordance with the law governing priority under draftarticles 24 to 26.


References:

A/CN.9/420, paras. 51 and 57A/CN.9/432, paras. 109-112 and 254-258A/CN.9/434, paras. 107 and 108 and 115-121A/CN.9/445, paras. 221-226A/CN.9/456, paras. 76-78 and 98-103

Commentary

79. Draft article 9 is intended: to recognize the right of theassignor and the assignee to agree on the time at which areceivable is transferred, as long as their agreement does notnegatively affect the rights of third parties; to set a defaultrule that, in the absence of contrary agreement between theassignor and the assignee, the time at which a receivable istransferred is the time of the conclusion of the contract of

assignment; and to clarify the meaning of other relevantprovisions, such as draft articles 6, 8, 19 and 24 to 26.

80. Draft article 9 recognizes and, at the same time, limitsparty autonomy. The time specified by the assignor and theassignee binds third parties, a matter that may not be suf-ficiently clear in draft article 6. However, for such anagreement to be binding on third parties, it has to set a timeof transfer which is not earlier than the time of the conclu-sion of the contract of assignment. This approach is in linewith the principle, enshrined in draft article 6, since anagreement setting an earlier time could affect the order ofpriority between several claimants.

81. In the absence of an agreement between the assignorand the assignee setting the time of transfer of rights in theassigned receivables, the time of such transfer is the time ofthe conclusion of the contract of assignment, which is afact that cannot be changed. While this approach is obviouswith regard to receivables existing at the time they areassigned, a legal fiction is created with regard to futurereceivables (i.e. receivables arising from contracts not inexistence at the time of the assignment). In practice, theassignee would acquire rights in future receivables only ifthey would in fact be created, but, in legal terms, the timeof transfer would go back to the time of the conclusion ofthe contract of assignment. Such an approach is intended tofacilitate the mobilization of future receivables by theassignor for the purpose of obtaining lower-cost credit orrelated services.

82. While draft article 9 sets the time of transfer of areceivable, it is not intended to set forth a priority rule,stating that an assignment is effective as against third par-ties as of the time it is made, since such a rule would beinconsistent with draft articles 24 to 26. If future receiva-bles were transferred effectively as against third parties asof the time they were assigned, they would be removedfrom the insolvency estate or become subject to a securityright irrespective of any publicity act required by the lawgoverning priority.


References:

A/CN.9/420, paras. 61-68A/CN.9/432, paras. 113-126A/CN.9/434, paras. 128-137A/CN.9/445, paras. 49-51 and 227-231A/CN.9/447, paras. 148-152A/CN.9/455, paras. 47-51A/CN.9/456, paras. 104-116

Commentary

83. The main objective of draft article 10 is to validateassignments made despite the existence of an anti-assign-ment clause in the original contract, in the assignment con-tract or in any subsequent assignment contract. The under-lying policy is that it is more beneficial for everyone tofacilitate the assignment of receivables and to reduce thetransaction cost rather than to ensure that the debtor would


not have to pay a person other than the original creditor(assignor). Anti-assignment clauses may either defeat thepurpose of a financing or service-related transaction alto-gether since they may invalidate assignments, or, at least,raise the cost of a transaction to the extent that financierswould need to check a potentially large number of con-tracts in order to ensure that no anti-assignment clauses arecontained therein. In its considerations, the Working Grouptook into account that small debtors, such as consumers,would not be adversely affected by such a rule, since nor-mally they do not have the bargaining power to insert anti-assignment clauses in their contracts and, in any case, theywould often continue paying to the same bank account orpost-office box, the control of which would switch from theassignor to the assignee without the debtors’ knowledge.The Working Group also considered that, in any case, draftarticle 10 would not affect the interests of consumer-debt-ors to the extent that they were addressed by statutory limi-tations contained in consumer-protection law, since draftarticle 10 did not deal with statutory limitations. With re-gard to large debtors, the Working Group considered thatthey would not be adversely affected by the rule containedin draft article 10, since they have sufficient bargainingpower and could take care of their own interests. TheWorking Group also thought that draft article 10 estab-lished an appropriate rule by not allowing such large debt-ors to preclude small- and medium-size enterprises fromobtaining lower-cost credit or services on the basis oftheir receivables. Draft article 12 introduces an exceptionwith regard to sovereign debtors (see paras. 94-96; forpossible additional exceptions, see A/CN.9/WG.II/WP.104,remarks 3-7 to draft article 4).

84. Draft article 10 is thus intended to give the assignee apriority position as against the assignor’s creditors in thecase of default by the assignor and to enable the assigneeto collect directly from the debtor, without, however, de-priving the debtor of its rights and defences or of any causeof action the debtor may have against the assignor forbreach of contract or even against the assignee based ontort. This approach constitutes a compromise between legalsystems which invalidate assignments made in violation ofanti-assignment clauses and legal systems which invalidateanti-assignment clauses. It thus attempts to counterbalancethe need to preserve party autonomy and the need to facili-tate financing and service-related transactions in the inter-est of trade in general. The Working Group recognized thatinvalidating anti-assignment clauses would preserve theinterests of the assignee more effectively in that the as-signee would be protected from the risk of accruing anyliability and from the risk that the original contract mightbe declared avoided by the debtor for breach of an anti-assignment clause. However, it was widely felt that anapproach based on the invalidation of anti-assignmentclauses would excessively interfere with party autonomyand tilt the balance of interests in favour of the assignee toan inappropriate degree. On other hand, in an effort tomake a step further in the direction of the protection of thedebtor, the Working Group considered also the possibilityof allowing the debtor to continue making payments inaccordance with the original contract. Such an approachwould allow the assignee to prevail in a conflict of prioritywith creditors of the assignor, but would deprive the as-signee of the right to demand payment from the debtor. The

Working Group noted that, under article 16 of the Interna-tional Factoring Customs promulgated by Factors ChainInternational, in the case of an anti-assignment clause, theassignor is allowed to receive payments as an agent of theassignee. While recognizing that such a rule could be ac-ceptable within groups of institutions subscribing to thesame code of conduct, the Working Group decided not toextend its application to other practices, since depriving theassignee of the right to claim payment from the debtorwould increase the risk of non-payment and thus the cost ofcredit.

85. Any contractual liability the assignor may have asagainst the debtor, under law applicable outside the draftConvention, for making an assignment in violation of ananti-assignment clause is not interfered with. By definition,the assignee cannot have contractual liability for breach of acontract to which the assignee is not a party. Any tortiousliability that the assignee may have as against the debtor,under other law, is not interfered with either. In this context,the Working Group agreed that it should sanction maliciousbehaviour on the part of the assignee and that mere knowl-edge of the existence of an anti-assignment clause should notbe sufficient to establish the assignee’s liability. Penalizingthe assignee for accepting an assignment while havingknowledge of the anti-assignment clause would inadvert-ently result in encouraging the assignee to avoid a due-diligence test. If the assignee were diligent, it would find outabout the anti-assignment clause and would not accept thereceivables or would accept them at a substantially reducedvalue in view of the high risk of non-payment (for a secre-tariat suggestion as to ways in which this idea could beexpressly stated in draft article 10, see A/CN.9/WG.II/WP.104, remarks 2-3 to draft article 10).

86. Draft article 10 is supplemented by a legal regimeintroducing sufficiently high standards for the debtor pro-tection in the draft Convention. Other than having to paythe assignee (in the country and currency stipulated in theoriginal contract), the legal position of the debtor is notaffected by the draft Convention (draft article 17). Notifi-cation of the assignment may cut off only those rights ofset-off of the debtor that arise from contracts other than theoriginal contract. This result would be acceptable, since thedebtor would be aware of this consequence of a notificationand may plan accordingly. For example, the debtor mayavoid incurring further obligations. In exceptional situa-tions, in which, for example, an assignment in violation ofan anti-assignment clause is a fundamental breach of theoriginal contract, the debtor may even declare the originalcontract avoided. Such avoidance of the contract, however,which would deprive the assignee of the right to demandpayment from the debtor, should be available only in ex-ceptional circumstances. Otherwise, the risk of the contractbeing avoided might in itself have a negative impact on thecost of credit. In such situations, the debtor would be ableto recover payments from the assignor but not from theassignee (draft article 23). This result is appropriate since,even in the absence of an assignment, the debtor wouldbear the risk of insolvency of its contractual partner. Fur-thermore, any goods returned by the debtor subsequent tothe avoidance of the original contract would go to the as-signee who would have offered value to the assignor inreturn for the receivables which were cancelled. On the


basis of the understanding that the draft Convention intro-duced a legal regime with sufficiently high debtor-protec-tion standards, the Working Group decided that no reserva-tion should be allowed to be made by States with regard todraft article 10 (for an exception with regard to sovereigndebtors, see a secretariat suggestion with regard to draftarticle 12 in A/CN.9/WG.II/WP.104, remarks to draft arti-cle 12). In reaching this conclusion, the Working Grouptook into account that States considering the adoption ofthe draft Convention would need to weigh the potentialinconvenience to the debtor of having to pay a differentperson against the advantage of increased availability oflower-cost credit to debtors and assignors, which couldstimulate the economy at large.

87. Draft article 10 applies to any contractual clauses lim-iting the assignment in any way (and not only to clausesprohibiting assignment) but does not apply to statutorylimitations to assignment or to limitations relating to theassignment of rights other than receivables (e.g. confiden-tiality clauses). As to statutory limitations, the WorkingGroup considered the possibility of addressing them byvalidating the assignment, while allowing the debtor todischarge by paying in accordance with the original con-tract. Such an approach would allow the assignee to prevailover other creditors of the assignor in the case of assignor-default, while protecting the interests of the debtor. How-ever, the Working Group was unable to reach agreement,since it could not find a way to distinguish between statu-tory limitations aimed at protecting the debtor (e.g. prohib-iting the assignment of receivables owed by sovereigndebtors) and statutory limitations aimed at protecting theassignor (e.g. prohibiting the assignment of wages).

88. The draft Convention, however, has already set asidestatutory limitations to assignment to the extent that theyrefer to future receivables or to bulk assignments. Thus, theWorking Group may wish to ensure, for example, that draftarticle 8 does not refer to future wages. In addition, theWorking Group may wish to consider a limited rule dealingwith statutory limitations aimed at protecting the debtor.Such a rule could, for example, validate an assignment asbetween the assignor and the assignee and as against thirdparties, but not as against the debtor. Moreover, the Work-ing Group may wish to consider introducing the same rulefor assignments of single receivables (which would nor-mally be large-value receivables), in which a due-diligencetest might not risk to increase the cost of credit. Such anapproach might address the need to make, for example,assignments in loan syndications and participations subjectto the consent of the debtor (for an analysis of possibleapproaches with regard to such practices, see A/CN.9/WG.II/WP.104, remarks 3-7 to draft article 4 and remark 1to draft article 10).


References:


Commentary

89. Draft article 11 reflects the generally accepted princi-ple that accessory security rights are transferred automati-cally with the receivables which they secure. The questionof the accessory or independent character of the securityright and the substantive or procedural requirements to bemet for the creation of such a security right are left to thelaw governing that right. Draft article 11 does not attemptto specify the law applicable to security rights, in view ofthe wide range of rights it is intended to cover (including,e.g. guarantees, pledges and mortgages) and of the widedivergences existing among the various legal systems inthis regard.

90. The provision also recognizes the right of the assignorand the assignee to agree that an accessory right is nottransferred to the assignee and is thus extinguished. Suchan agreement may reflect the lack of willingness on the partof the assignee to accept the responsibility and the costinvolved in the maintenance and safekeeping of collateral(e.g. taxation and insurance costs in the case of real estateor storage and insurance costs in the case of equipment).Draft article 11 also creates an obligation for the assignorto transfer to the assignee any independent right securingpayment of the assigned receivables as well as the proceedsof such a right. With regard to independent guarantees orstand-by letters of credit, this provision is based on theunderstanding that the right to demand payment from theguarantor/issuer is not a receivable. As a result, the rightsof the guarantor/issuer are not affected by the assignmentof the independent undertaking, while the assignee has aright in the proceeds, which is of particular importance inthe case of insolvency of the assignor.

91. Paragraph (2) is intended to ensure that any anti-as-signment clause agreed upon between the assignor and thedebtor or other person granting a security right does notinvalidate the assignment. Under paragraph (3), any liabil-ity that the assignor may have for breach of contract, underlaw applicable outside the draft Convention, is not affectedbut is not extended to the assignee (this approach is consist-ent with the approach taken in draft article 10). The under-lying policy is that security rights should be treated withregard to anti-assignment clauses in the same way as re-ceivables, since often the value relied upon by the assigneelies in the security right and not in the receivable itself. Forexample, in securitization in which receivables are assignedfrom the original creditor to a special purpose vehicle(“SPV”) fully owned by the original creditor, the valuerelied upon by investors buying securities issued by theSPV and backed by the receivables might be in the guar-antee of the assignor. However, in the case of sovereignthird-party guarantors, in line with draft article 12, the anti-assignment clause renders the assignment ineffective butonly as against the sovereign third-party guarantor.

92. Whether or not the transfer of a security right is pro-hibited by agreement, if the transfer involves transfer ofpossession of the collateral and such transfer causes dam-age to the debtor or the person granting the right, any li-ability that may exist under law applicable outside the draftConvention is not affected. Paragraph (4) envisages, forexample, a transfer of pledged shares which might em-


power a foreign assignee to exercise the rights of a share-holder to the detriment of the debtor or any other personwho might have pledged the shares.

93. Under paragraph (5), the requirements of the law ap-plicable outside the draft Convention to the form of transferof security rights are not affected. As a result, a notarizeddocument and registration may be necessary for the effec-tive transfer of a mortgage, while delivery of possession orregistration may be required for the transfer of a pledge.The draft Convention is not intended to affect either anyrequirements as to the form of an assignment of receivablessecured by a certain asset (e.g. registration of an assign-ment secured by real estate). However, if the WorkingGroup includes a rule on the form of assignment, subject-ing the form of the assignment to the law of the assignor’slocation (see secretariat suggestion in A/CN.9/WG.II/WP.104, remarks to chapter III), that rule would need to bealigned with paragraph (5) (e.g. by providing that the lawof the assignor’s location would govern form, unless thereceivables are backed by a security right in which case thelaw governing that right would govern form).

Article 12. Limitations relating to Governments andother public entities

References:

A/CN.9/432, para. 117A/CN.9/455, para. 48A/CN.9/456, paras. 115 and 116

Commentary

94. Draft article 12 is intended to ensure that sovereigndebtors are not affected by assignments made in violationof anti-assignment clauses contained in public procurementor other similar contracts. The Working Group decided totake this approach so as not to reduce the acceptability ofthe draft Convention to States that may not be able to pro-tect their interests by way of a statutory limitation.

95. As a result of draft article 12, an assignment of re-ceivables owed by a sovereign debtor is not effective asagainst the sovereign debtor who can continue paying inaccordance with the original contract. In addition, the de-fences and rights of set-off of the sovereign debtor are notaffected, whether they arise from the original contract orany other contract. However, the assignment remains effec-tive as against the assignor and the assignor’s creditors,which is of particular importance in the case of the insol-vency of the assignor.

96. The exact scope of draft article 12, namely whether itis going to apply to assignments of receivables arising fromcontracts concluded by the central Government, the localauthorities, publicly owned commercial entities or govern-mental authorities acting in a commercial capacity, remainsto be determined by the Working Group (on this matter, aswell as on the question of turning draft article 12 into areservation, see the secretariat’s suggestions in A/CN.9/WG.II/WP.104, remarks to draft article 12).

D. Working paper submitted to the Working Group on InternationalContract Practices at its thirty-first session: Commentary to the draft

Convention on Assignment in Receivables Financing (Part II): note by thesecretariat


CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES . . . . . . . . . . . . . . . . . . . . . 270

Section I. Assignor and assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

Article 13. Rights and obligations of the assignor and the assignee . . . . . . . 270

Article 14. Representations of the assignor . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Article 15. Right to notify the debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

Article 16. Right to payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

Section II. Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

Article 17. Principle of debtor protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274

Article 18. Notification of the debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

Article 19. Debtor’s discharge by payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

Article 20. Defences and rights of set-off of the debtor . . . . . . . . . . . . . . . . 278

Article 21. Agreement not to raise defences or rights of set-off . . . . . . . . . . 279

Article 22. Modification of the original contract . . . . . . . . . . . . . . . . . . . . . . . 280

Article 23. Recovery of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282


Page

Section III. Other parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282

Article 24. Competing rights of several assignees . . . . . . . . . . . . . . . . . . . . . 282

Article 25. Competing rights of assignee and creditorsof the assignor or insolvency administrator . . . . . . . . . . . . . . . . . 285

Article 26. Competing rights with respect to payments . . . . . . . . . . . . . . . . . 286

CHAPTER V. CONFLICT OF LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

Article 27. Law applicable to the contract of assignment . . . . . . . . . . . . . . . 287

Article 28. Law applicable to the rights and obligationsof the assignee and the debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

Article 29. Law applicable to conflicts of priority . . . . . . . . . . . . . . . . . . . . . 289

Article 30. Mandatory rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

Article 31. Public policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

INTRODUCTION

This document contains the second part of the commen-tary to the draft Convention on Assignment in ReceivablesFinancing (the title of the draft Convention has not beenadopted yet by the Working Group; see A/CN.9/WG.II/WP.104, remarks to the title and the preamble). The secondpart of the commentary begins where the first part ended,i.e. with draft article 13, and goes up to draft article 31 (thefirst part of the commentary is contained in document A/CN.9/WG.II/WP.105). The commentary on the final provi-sions and the annex, if retained (see A/CN.9/WG.II/WP.104, remarks to the annex), will be prepared after theadoption of the draft Convention as a whole by the Work-ing Group.



Commentary

1. Unlike the other provisions of the draft Conventionwhich deal with assignment as a transfer of property rightsin receivables, the provisions contained in this section dealwith issues that are normally addressed in the contract ofassignment or other agreement between the assignor andthe assignee. The usefulness of these provisions lies in thefact that they recognize party autonomy and allocate risksin the absence of an agreement between the assignor andthe assignee.


References:


Commentary

2. The primary purpose of draft article 13 is to restate inthe context of the relationship between the assignor and theassignee the principle of party autonomy, a principle al-ready enshrined in general terms in draft article 6. Theassignor and the assignee are free to structure their mutualrights and obligations so as to meet their particular needs.They are also free to incorporate into their agreement anyrules or conditions by referring to them in a general man-ner, rather than reproducing them in their agreement. Theconditions under which the parties may exercise their free-dom and the relevant legal consequences are left to the lawgoverning their agreement.

3. Inspired by article 9 of the United Nations Conventionon Contracts for the International Sales of Goods (herein-after referred to as “the United Nations Sales Convention”),draft article 13 also states in paragraphs (2) and (3) a prin-ciple that may not be recognized in all legal systems,namely that, in the interpretation of assignment contracts,trade usages and practices must be taken into account.Paragraph (2) draws a clear distinction between trade us-ages and practices to the extent that the former need to beagreed upon so as to bind the parties, while the latter arebinding without a specific agreement unless parties agreenot to be bound. Such usages and practices produce rightsand obligations for the assignor and the assignee. Theycannot bind, however, third parties, such as the debtor orcreditors of the assignor. They cannot bind subsequentassignors or assignees either. All those parties would not benecessarily aware of usages and practices agreed upon bythe initial assignor and the initial assignee.

4. In view of the fact that paragraph (1) recognizes partyautonomy, parties would always have the right to agreeotherwise as to the binding nature of practices establishedbetween themselves. The words “unless otherwise agreed”,contained in paragraph (2), may, therefore, not be neces-sary. These words, which do not appear in article 9 (1) ofthe United Nations Sales Convention, had been initiallyincluded in paragraph (2), since, as opposed to the hierar-chy of legal rules established in the United Nations Sales


Convention, the draft Convention prevails over the parties’agreement. After the limitation of paragraph (1) to themutual rights and obligations of the assignor and the as-signee, the rule about the prevalence of the draft Conven-tion has been deleted and the reason for deviating from thewording of article 9 (1) of the United Nations Sales Con-vention has been eliminated.

5. Paragraph (3) defines the scope of the matters coveredby an international usage. Under paragraph (3), interna-tional usages bind only the parties to international assign-ments. Such a limitation was not thought to be necessary inarticle 9 since the United Nations Sales Convention appliesonly to international sales. It was thought, however, to benecessary in draft article 13 in view of the fact that the draftConvention may apply to domestic assignments of interna-tional receivables. In addition, under paragraph (3), as un-der article 9 (2) of the United Nations Sales Convention,usages are applicable only to the relevant practice. Thismeans that an international factoring usage cannot apply toan assignment in a securitization transaction. However,unlike draft article 9 (2) of the United Nations Sales Con-vention, paragraph (3) does not refer to the subjective,actual or constructive, knowledge of the parties but only tothe objective requirements that the usages must be widelyknown and regularly observed. The Working Group feltthat, while such a reference to the subjective knowledge ofthe parties might be useful in a two-party relationship, itwould be inappropriate in a tripartite relationship, since itwould be extremely difficult for third parties to determinewhat the assignor and the assignee knew or ought to haveknown.


References:

A/CN.9/420, paras. 80-88A/CN.9/432, paras. 145-158A/CN.9/434, paras. 152-161A/CN.9/447, paras. 25-40A/CN.9/456, paras. 129 and 130

Commentary

6. Representations undertaken by the assignor are in-tended to reduce the risk involved in a transaction as towhether the assignee will be able to collect the receivablesfrom the debtor, if necessary (in an assignment by way ofsecurity, the assignee does not need to collect unless theassignor defaults and in securitization or undisclosed in-voice discounting the assignor continues to collect from thedebtor as an agent of the assignee). As a result, represen-tations constitute a significant factor for the assignee todetermine the amount of credit to be made available to theassignor and the cost of credit.

7. In view of their importance for the pricing of a trans-action, representations are highly negotiated and explicitlysettled between the assignor and the assignee. Recognizingthis reality, draft article 14 enshrines the principle of partyautonomy with regard to representations of the assignor.

Such representations may stem from the financing contract,the contract of assignment (if it is a separate contract), orfrom any other contract between the assignor and the as-signee. In accordance with draft article 13 (2) and (3), theymay also stem from trade usages and practices.

8. In addition to recognizing the principle of party au-tonomy, draft article 14 is intended to set forth a defaultrule allocating risks between the assignor and the assigneein the absence of an agreement of the parties as to thismatter. In the allocation of risks, the overall aim of draftarticle 14 is to counterbalance the need for fairness and theneed to facilitate increased access to lower-cost credit.Fairness is served to the extent that draft article 14 reflectsa balance often established by the agreement of the parties.Normally, in financing agreements the assignor guaranteesthe existence of the assigned receivable but not the sol-vency of the assignor. On the other hand, increased accessto lower-cost credit is served in so far as, if the parties havenot agreed on representations, in the absence of a rulealong the lines of draft article 14, the risk of non-paymentwould be higher. This situation could defeat a transaction(if the risk is too high) or, at least, reduce the amount ofcredit offered and raise the cost of credit. To the extent thatthe assignor is able to pass the cost to the debtor, theassignor’s goods or services would be more expensive oreven inaccessible to the debtor.

9. Under paragraph (1), the assignor represents that it hasthe right to assign the receivable, it has not assigned italready and that the debtor does and will not have anydefences. In view of the need for the assignee to be able toestimate the risk involved in a transaction before extendingcredit, paragraph (1) provides that the representations haveto be made, and take effect, at the time of the conclusionof the contract of assignment. Such representations areconsidered as being given not only to the immediate as-signee but also to any subsequent assignee. As a result, anysubsequent assignee may turn against the assignor forbreach of representations. If representations were consid-ered as being undertaken only as against the immediateassignee, any subsequent assignee would have recourseonly against its immediate assignor, a process that wouldincrease the risk and thus the cost of transactions involvingsubsequent assignments.

10. Subparagraphs (a) to (c) introduce representations thatcould be broadly described as representations relating to“the existence” of the receivable (or its assignability). If theassignor does not have the power to assign, has alreadyassigned, or has deprived the receivables of any value byimproperly performing the contract with the debtor, thereceivable does not “exist”. In this regard, during the delib-erations of the Working Group, the concern was expressedthat, by allowing the parties to modify representations re-lating to the very existence of the assigned receivables,draft article 14 might run counter to good faith standards.In order to address that concern, the suggestion was madethat draft article 14 should be deleted altogether, or shouldnot be subject to party autonomy or, at least, should bemade subject to modification only by way of an explicitagreement of the parties. However, the Working Groupagreed to retain draft article 14 unchanged. It was widelyfelt that, while making business practice conform to good


faith standards is an important goal, this should not be atthe expense of the parties’ ability to agree on risk- and thuscost-allocation in financing transactions. As a result, it wasagreed that party autonomy should not be restricted, whilecontract interpretation in the case of an implicit agreementshould be left to the law governing the contract.

11. The assignor is in violation of the representation as toits right to assign, introduced in subparagraph (a), if theassignor does not have the capacity or the authority to act,or if there is any statutory limitation on assignment. Thisapproach is justified by the fact that the assignor is in abetter position to know whether the assignor has the rightto assign. However, the assignor is not liable for breach ofrepresentations if the original contract contains an anti-as-signment clause. The Working Group decided that no ex-plicit reference to that rule was necessary in subparagraph(a), since it is implicit in draft article 10, under which theassignment is effective even if it is in breach of an anti-assignment clause.

12. The representation, contained in subparagraph (b),that the assignor has not already assigned the receivable isaimed at holding the assignor accountable to the assigneeif, as a result of a previous assignment by the assignor, theassignee does not have priority. This result may occur if theassignee has no objective way to determine whether a pre-vious assignment has occurred. Subparagraph (b), however,does not require the assignor to represent that it will notassign the receivables to another assignee after the firstassignment. Such a representation would run counter tomodern financing practice in which the right of theassignor to offer to different lenders parts of the same re-ceivables as security for obtaining credit is absolutely es-sential. Such negative-pledge type of representation is nor-mally part of certain exceptional transactions, such assubordination agreements by way of which claimants of thesame receivables settle conflicts of priority.

13. Subparagraph (c) places on the assignor the risk ofhidden defences or rights of set-off of the debtor that maydefeat in whole or in part the assignee’s claim. This provi-sion is premised on the fact that, by performing its contractwith the debtor properly, the assignor will be able to pre-clude such defences from arising. In particular in the con-text of the sale of goods in which service and maintenanceelements are included, such an approach would result in agreater degree of accountability of the assignor for per-forming properly its contract with the debtor. The provisionis also based on the assumption that, in any case, theassignor will be in a better position to know whether thecontract will be properly performed, even if the assignor isjust the seller of goods manufactured by a third person. Inall those cases, there is no need that the assignor has actualknowledge of any defences.

14. Subparagraph (c) has a wide scope, encompassingdefences and rights of set-off whether they have a contrac-tual or non-contractual source and whether they relate toexisting or to future receivables. It also covers rights of set-off arising from contracts unrelated to the original contract.With regard to representations relating to the absence ofdefences against future receivables assigned in bulk by wayof security, the Working Group thought that the represen-

tation contained in subparagraph (c) properly reflects cur-rent practice. According to such practice, in bulk assign-ments of defence-free and defence-ridden receivablesassignors normally receive credit only in the amount ofthose receivables that are not likely to be subject to de-fences, while they have to repay a higher amount. In addi-tion, in the case of non-payment by the debtor, the assignorhas to take back the receivables for which the assignee isnot able to obtain payment from the debtor and replacethem with other receivables or to pay back the price of theunpaid receivables (“recourse financing”).

15. The legal consequences of a breach of representationsby the assignor are left to law applicable outside the draftConvention. The Working Group considered, in particular,the question whether, in the case of breach of representa-tions by the assignor, the receivables are automaticallyretransferred to the assignor or whether, in such a case, anact of retransfer is necessary. The practical importance ofthis question lies in the fact that, if the receivables that theassignee is not able to collect are automaticallyretransferred and the assignor has in the meantime becomeinsolvent, the assignee may have a better chance of separat-ing the price paid for the receivables from the insolvencyestate or, at least, of being paid from the proceeds of thereceivables before unsecured creditors. If, on the otherhand, an act of transfer is needed and the assignor hasbecome insolvent, the retransfer will not be accepted by theinsolvency administrator. The Working Group decided notto deal with the legal consequences of a breach of represen-tations, holding that this matter involves a breach of thefinancing contract or the contract of assignment (if it is adifferent contract) and should be left to the law governingthat contract. Reasons cited by the Working Group in sup-port of this approach include that: matters relating to theunderlying financing contract are beyond the scope of thedraft Convention; and, in any case, it would be very diffi-cult for the Working Group to reach agreement on issuessuch as liability for breach of representations.

16. Paragraph (2) reflects the generally accepted principlethat the assignor does not guarantee the solvency of thedebtor. As a result, the risk of debtor-default is on the as-signee, a fact that the assignee takes into account in deter-mining whether to extend credit and on what conditions.Recognizing the right of the parties to financing transac-tions to agree on a different risk-allocation, with a view topricing the transaction in a different way, paragraph (2)allows the assignor and the assignee to agree otherwise.Paragraph (2) also provides that such an agreement may beimplicit or explicit. The question of what constitutes animplicit agreement is left to the contract interpretation rulesof the law governing the contract.


References:

A/CN.9/420, paras. 89-94 and 119-122A/CN.9/432, paras. 159-164 and 175A/CN.9/434, paras. 162-165A/CN.9/447, paras. 41-47A/CN.9/456, paras. 131-144 and 193


Commentary

17. Draft article 15 deals with the question of who asbetween the assignor and the assignee has the right to no-tify the debtor and to request payment. It is not intended toaddress the conditions for a notification to be effective asagainst the debtor, which is dealt with in draft article 18, orthe question of whom the debtor has to pay in order toobtain a valid discharge, which is dealt with in draft article19, or other legal consequences of notification, dealt within draft articles 20 and 22 (as to those matters, see para.33).

18. The main objective of draft article 15 is to recognizethe right of the assignee to notify the debtor and to requestpayment, without the cooperation or the authorization ofthe assignor. The Working Group recognized that, in somepractices, it is normal for the assignor to notify the debtorat the time an assignment is made and to request that pay-ment be made to the assignee (e.g. in factoring). At thesame time, however, the Working Group was mindful ofthe fact that, in other practices, it was important for theassignee to be able to notify independently of the assignor,whether in the event of default or not. It was widely feltthat, as a matter of principle, the assignee as the new credi-tor should have, as against the assignor, the right to notifythe debtor and to request payment. The protection of thedebtor against the risk of being notified and being asked topay a potentially unknown person was thought to be a dif-ferent matter which could be addressed by allowing thedebtor in the case of notification by the assignee to requestadequate proof (see paras. 47).

19. Granting the assignee an autonomous right to notifythe debtor was considered to be practically important, inparticular since the assignor might be unwilling or, in thecase of insolvency, unable to cooperate with the assignee.Furthermore, it was thought that, at least in those legalsystems in which priority was determined on the basis ofthe time of notification of the debtor, the assignor, acting incollusion with one claimant against the interests of anotherclaimant, could determine the order of priority, unless eachclaimant had the right to notify the debtor independently ofthe assignor. The Working Group confirmed that theassignor may always notify the debtor independently ofany assignee, even if such notification would constitute abreach of an agreement between the assignor and the as-signee. It was widely felt that the debtor should be able todischarge its obligation as directed by the assignor in thenotification and should not concern itself with the privatearrangements existing between the assignor and the as-signee (however, after notification of the assignment, thedebtor is discharged by paying the assignee or as instructedby the assignee; see change to draft article 19 (2) suggestedby the secretariat in A/CN.9/WG.II/WP.104, remark 8 todraft article 19).

20. With a view to accommodating non-notification prac-tices, notification is formulated in paragraph (1) as a rightand not as an obligation. In such practices, normally thedebtor is not notified of the assignment and the assignorreceives payment on behalf of the assignee. Draft article 15is also intended to recognize practices in which the debtorkeeps paying as before the assignment, while the assignorand the assignee agree on the control of the account or

address (e.g. a post office box) to which payment is made.In those practices, in order to avoid any inconvenience tothe debtor that might result in an interruption to the normalflow of payments, the debtor is either not notified at all oris notified and instructed to continue paying the assignor(such a notification is normally intended to preclude thedebtor from acquiring rights of set-off after notificationfrom contracts unrelated to the original contract). Only inexceptional situations (e.g. in the case of default), thedebtor is notified and given different payment instructions(i.e. to pay the assignee or another person or to a differentaccount or address).

21. While draft article 15 grants the assignee an autono-mous right to notify the debtor and to request payment, italso recognizes the right of the assignor and the assignee tonegotiate and agree on the matter of notification of thedebtor so as to meet their particular needs. For example, theassignor and the assignee may agree that no notificationwould be given to the debtor as long as the flow of pay-ments is not interrupted (as, e.g. in undisclosed invoicediscounting). In order to ensure that there is no need for aspecific agreement, the opening words of paragraph (1) areformulated in a negative way (“unless otherwise agreed”).

22. The definition of “notification” contained in draft ar-ticle 5 does not include any reference to the identificationof the payee and draft article 15 makes separate referenceto notification and request of payment. This approach isintended to recognize the difference, both in purpose and intime, between a notification and a payment instruction andto validate practices in which notification is given withoutany payment instructions. Under this approach, a merenotification of an assignment is valid for the purpose ofcutting off the debtor’s rights of set-off arising from con-tracts unrelated to the original contract, as well as for thepurpose of changing the way in which the assignor and thedebtor may amend the original contract. However, in orderto avoid complicating the debtor’s discharge, the WorkingGroup decided not to define “payment instruction” nor tobase the debtor’s discharge on the receipt of a paymentinstruction. Under paragraph (1), a payment instructionmay be sent either by the assignor with the notification or,subsequent to a notification, by the assignee. Paragraph (1),unlike draft article 19, refers to the time notification is“sent” (and not “received”), since neither the assignor northe assignee has a way to assess the time of receipt. Thatmatter may be important for the discharge of the debtor,dealt with in draft article 19, but not for the determinationof who as between the assignor and the assignee has theright to give a payment instruction.

23. Paragraph (2) deals with the effectiveness of a notifi-cation given in breach of an agreement between theassignor and the assignee. The rule, introduced in the firstsentence of paragraph (2), is that, if notification is given inviolation of such an agreement and the debtor pays, thedebtor is discharged (as this is a matter of the debtor’sdischarge, the Working Group may wish to consider mov-ing the first sentence of paragraph (2) to draft article 19;see A/CN.9/WG.II/WP.104, remarks to draft article 15).Whether the person violating such an agreement is liablefor breach of contract, under law applicable outside thedraft Convention, is a separate matter and should not affectthe discharge of the debtor, who is not a party to that agree-


ment. A notification given in violation of an agreementbetween the assignor and the assignee, however, does not:cut off any rights of set-off of the debtor from contractsunrelated to the original contract (draft article 20); triggera change in the way the assignor and the debtor may amendthe original contract (draft article 22); or create a basis forthe determination of priority under the law applicable topriority issues (draft articles 24-26). The Working Groupthought that such results would give an undue advantage tothe assignee who wrongfully notified the debtor. The nega-tive formulation in paragraph (2) “is not ineffective” isintended to ensure that the mere violation of an agreementbetween the assignor and the assignee, on the one hand,does not invalidate the notification for the purpose ofdebtor-discharge, but, on the other hand, does not interferewith contract law as to the conditions required for such anagreement to be effective.


References:

A/CN.9/447, paras. 48-68A/CN.9/456, paras. 145-159

Commentary

24. Draft articles 2, 8 and 15 establish, as between theassignor and the assignee, the assignee’s right to requestpayment. It is, therefore, subject to the general principle ofparty autonomy embodied in draft article 6 and is formu-lated as a default rule applicable in the absence of an agree-ment between the assignor and the assignee. It is also sub-ject to the debtor-protection and the priority provisions ofthe draft Convention. While draft article 16 does not defineproceeds, it is formulated in a broad way so as to encom-pass both proceeds of receivables and proceeds of pro-ceeds, as well as payment both in cash and in kind, e.g.returned goods (for a suggestion to define “proceeds” andto refer to “payment or other discharge”, see A/CN.9/WG.II/WP.104, remark 1 to draft article 16).

25. The assignee’s right in proceeds is independent of anynotification of the assignment. The reason for this approachis the need to ensure that: if payment is made to the assigneebefore notification, the assignee may retain the proceeds ofpayment; and if payment is made to the assignor after noti-fication (which does not discharge the debtor’s debt), theassignee would have a right in such payments. Such a rightis of particular importance, if the assignor or the debtorbecomes insolvent. If payment is made to the assignor afternotification, in principle, the assignee could claim paymentfrom the assignor, under draft article 16 (1) (b), or from thedebtor, under draft article 19 (2). In practice, however, theassignee would not claim a second payment from the debtor,unless the assignor has become insolvent. In such a case, anyclaim that the debtor might have against the estate of theinsolvent assignor (e.g. on the basis of the principles ofunjust enrichment) would normally be meaningless, since itis unlikely that claimants with personal claims would be ableto obtain payment. However, this result is appropriate in thatthe debtor, who pays the assignor after notification, takes therisk of having to pay twice.

26. Draft article 16 covers the situations in which pay-ment has been made to the assignee, the assignor or anotherperson. In the latter case, the assignee’s right is subject topriority. In this context, the Working Group decided not tomake a broad reference to any “superior right under appli-cable law” which would encompass the right of a deposi-tary institution in payments received in good faith. TheWorking Group thought that the assignee should not beable to claim from the depositary institution such paymentsreceived in good faith and commingled with other assets(for a suggestion to clarify in paragraph (2) that the right toclaim payment from a third person is a right as between theassignor and the assignee which is subject to party au-tonomy, see A/CN.9/WG.II/WP.104, remark 2 to draft ar-ticle 16).

27. Under paragraph (2), while the assignee may claim allthe proceeds of payment, it may only retain an amountequal to the amount owed plus any interest (the assignor’sright to interest may need to be addressed explicitly; see A/CN.9/WG.II/WP.104, remark 3 to draft article 16). Thisapproach is intended to reflect normal practice in assign-ments by way of security, under which the assignee mayhave the right to collect the full amount of the receivablebut has to account for and return to the assignor or itscreditors any balance remaining after payment of the as-signee’s claim. The Working Group may wish to recon-sider whether the expression “value of its right” adequatelyreflects the intent of paragraph (2).

28. As to the interplay between draft articles 12 and 16, itshould be noted that the sovereign debtor could dischargeits debt by paying the assignor, while the assignee wouldhave a right to claim the proceeds of payment from theassignor. The question whether that right is a right in remor ad personam is left to the law applicable to priority.

Section II. Debtor


References:

A/CN.9/420, para. 101A/CN.9/432, paras. 33-38, 89 and 90, 206 and 244A/CN.9/434, paras. 86-95A/CN.9/445, paras. 195-198A/CN.9/456, paras. 21, 81 and 168-176

Commentary

29. The primary goal of any assignment-related law maybe to strike an appropriate balance between, on the onehand, the need to allow parties to mobilize their receivablesfor the purpose of obtaining credit and services and, on theother hand, to ensure that the legal position of the debtor isnot adversely affected. In order to highlight the importanceof the need to protect the debtor in a prominent manner, theWorking Group decided to include a reference in the pre-amble and a general statement of this principle of para-


mount importance for the draft Convention in draft article17. The debtor-protection principle finds more specific ap-plication in the provisions of section II of chapter IV. It isalso the reason for the requirement contained in draft arti-cle 1 (3) that, for the provisions of the draft Conventionthat affect the debtor’s rights and obligations to apply (i.e.chapter III and section II of chapter IV), the debtor needsto be in a Contracting State. The same principle is the rea-son for the limitation of the right of the assignor and theassignee to opt out of the draft Convention as a whole(draft article 6). Such an opting out could set aside thedebtor-protection system introduced by the draft Conven-tion. The need to introduce a special protection for sover-eign debtors is also the underlying policy in draft article 12.Draft article 28, subjecting a number of debtor-related is-sues to the law governing the receivable is also a specialapplication of the general principle enshrined in draft arti-cle 17. This law will be the law governing the originalcontract, which is likely to be the law chosen by theassignor and the debtor at the time they undertook theiroriginal obligations.

30. The basic rule of paragraph (1) is that the draft Con-vention is not intended to adversely affect the debtor’srights and obligations. The draft Convention is, in particu-lar, not designed to change the payment terms stipulated inthe original contract (e.g. the amount owed, the time andthe place of payment). There are three exceptions to thisbasic rule. First, the debtor may negotiate with the assignoror the assignee and agree to waive its defences or rights ofset-off. Such an agreement may allow the debtor to obtaina benefit, such as a higher amount of credit, a longer repay-ment period or a lower interest rate. Draft article 21 dealswith such an agreement between the assignor and thedebtor and introduces certain limitations. It does not deal,however, with waivers of defences agreed upon by theassignee and the debtor, which are left to other law.Whether a waiver of defences is to be construed as a con-sent or confirmation of the debtor’s consent to the assign-ment is also left to other law (see para. 56).

31. The second exception lies in those provisions of thedraft Convention that do affect the debtor’s legal position.Those provisions include: draft article 10 (an assignment iseffective even if it is made despite the existence of an anti-assignment clause); draft article 19 (after notification, thedebtor may discharge its obligation by paying as instructedin the notification or in a subsequent payment instructiongiven by the assignee); draft article 20 (2) (after notifica-tion, the debtor may not raise against the assignee any rightof set-off arising from contracts unrelated to the originalcontract); draft article 20 (3) (the debtor may not raiseagainst the assignee any claim for breach of an anti-assign-ment clause by the assignor); draft article 22 (after notifi-cation, the debtor’s right to modify the original contractwithout the consent of the assignee is limited); and draftarticle 23 (the debtor cannot recover from the assignee anypayments despite the fact that the assignor may have failedto perform; the debtor will have to recover such paymentsfrom the assignor and thus bear the risk of insolvency of itscontractual partner).

32. The third exception to the rule established in paragraph(1) is contained in paragraph (2). Under paragraph (2), a

payment instruction, whether given with the notification orsubsequently, may change the person, address or account towhich payment is to be made. However, a payment instruc-tion may not change the currency of payment. It may notchange the country of payment either, unless the change isbeneficial to the debtor and results in payment being allowedin the country in which the debtor is located. Such a changeof the country of payment is often allowed in factoringcontracts with a view to facilitating payment by debtors.


References:

A/CN.9/420, paras. 124 and 125A/CN.9/432, paras. 176 and 177 and 187A/CN.9/434, paras. 172-175A/CN.9/447, paras. 45-47 and 158 and 159A/CN.9/455, paras. 59-66A/CN.9/456, paras. 177-180

Commentary

33. As already mentioned (para. 17), the draft Conventiondeals with the various aspects of notification of assignmentin several articles. Draft article 5 (f) defines notification forthe purposes of the draft Convention. Draft article 15 dealswith notification as a right of the assignor and the assignee.Draft article 18 addresses notification issues that are rel-evant to the legal position of the debtor in general. It alsorefers to a payment instruction, which, while not defined inthe draft Convention, is generally described in draft article17 (2). Draft articles 19, 20 and 22 deal with the legalconsequences of notification.

34. The primary purpose of draft article 18 is to restatethe “receipt rule”, i.e. that a notification and a paymentinstruction become effective when received by the debtor.The main reason for the adoption of this rule by the Work-ing Group is that a notification, whether accompanied by apayment instruction or not, has significant consequencesfor the legal position of the debtor (it triggers a change inthe way in which the debtor may discharge its debt, it cutsoff rights of set-off arising from contracts unrelated to theoriginal contract and it changes the way in which the debtormay amend the original contract in agreement with theassignor). Such consequences may occur only when a no-tification or a payment instruction is in a language that is“reasonably expected to inform the debtor about its con-tents”. For example, when the notification is in electronicform and is not readily readable, the debtor should be ableto decode it easily. In order to avoid creating uncertainty,paragraph (1) introduces a “ safe harbour” rule, accordingto which the language of the original contract meets therequired standard.

35. Upon receipt of a notification, if the debtor is notprepared to accept any change that may result from anassignment, the debtor, knowing that it will not be able toaccrue additional rights of set-off, may avoid to enter intofurther contractual relationships with the assignor. In ex-


38. Paragraph (3) is one of the most important provisionsof the draft Convention, in particular for internationalfactoring transactions. In such transactions, the assignornormally assigns the receivables to an assignee in its owncountry (export factor) and the export factor subsequentlyassigns the receivables to an assignee in the debtor’s coun-try (import factor). Under such an arrangement, collectionfrom the debtor is facilitated to the extent that the importfactor is able to take all the necessary measures for thesecond assignment to be effective as against the debtor.The efficient operation of such transactions is based on theassumption that the first assignment is also effective asagainst the debtor. In view of the fact that the debtor isnormally notified only of the second assignment, it is es-sential to ensure that that notification of the second assign-ment covers the first assignment as well. Otherwise, thefirst assignment might be rendered ineffective as againstthe debtor, a situation which might affect the effectivenessof the second assignment as well. In order to address situ-ations in which more than one subsequent assignment ismade, paragraph (3) provides that a notification covers anyprior, and not only the immediately preceding, assignment(as to the issue of discharge of the debtor in the case ofseveral notifications relating to subsequent assignments,see para. 45).


References:

A/CN.9/420, paras. 98-117, 127-131, 169-173 and 179A/CN.9/432, paras. 165-174 and 178-204A/CN.9/434, paras. 176-191A/CN.9/447, paras. 69-93 and 153-157A/CN.9/455, paras. 52-58A/CN.9/456, paras. 181-193

Commentary

39. Draft article 19 has a twin goal, to provide a clearmechanism for the discharge of the debtor’s obligation bypayment and to ensure payment of the debt. It is not in-tended to deal with the discharge of the debtor in generalor with the payment obligation as such, since that obliga-tion is subject to the original contract and to the law gov-erning that contract. The basic rule is that, until the debtorreceives notification of an assignment, it may be dis-charged by paying in accordance with the original contract,while, after notification, discharge is obtained only by pay-ment in accordance with the instructions given by theassignor or by the assignee with the notification, or subse-quently by the assignee. Draft article 19 deals also with anumber of particular situations in which: several notifica-tions are involved; the debtor is notified by the assigneeand is in doubt as to whether the assignee is the rightfulclaimant; discharge by payment under law applicable out-side the draft Convention; and discharge by payment in thecase of an assignment that is null and void.

40. Under paragraph (1), until the time of receipt of anotification, the debtor is entitled, not obliged, to dischargeby paying in accordance with the original contract (i.e. bypaying the assignor or another person or to an account or

ceptional cases, in which the assignment is a fundamentalbreach of an anti-assignment agreement, the debtor mayeven be able to avoid the original contract. However, sucha radical remedy should be exercised only when an assign-ment results in extreme hardship to the debtor. Otherwise,the risk of the contract being avoided might in itself havea negative impact on the cost and the availability of credit(see para. 50; see also A/CN.9/WG.II/WP.105, para. 86). Inorder to avoid this result, the Working Group may wish toconsider clarifying in draft article 10 that any relief avail-able to the debtor against the assignor for breach of an anti-assignment clause would be limited to a claim for compen-satory damages (or that the debtor may not declare theoriginal contract avoided on the sole ground that theassignor violated an anti-assignment clause). This resultcould be obtained anyway, since draft articles 10, 20 (3)and 22 could be construed as precluding such a radicalremedy, at least after notification of the assignment. Allow-ing the debtor to declare the contract avoided on the soleground of the violation of an anti-assignment clause wouldrun counter to the principle that the assignment is effectiveeven if it is made in violation of an anti-assignment clauseand to the principle that, in such a case, the debtor may notraise against the assignee any claim it might have againstthe assignor for breach of contract. In addition, if the mini-mum, i.e. a modification of the original contract, is notallowed after notification of the debtor without the consentof the assignee, the maximum, i.e. the cancellation of thecontract, could not be allowed either.

36. Under paragraph (2), a notification may relate to fu-ture receivables. This rule is of paramount importance. If anotification or a payment instruction relating to future re-ceivables could not be effectively given, the debtor couldrefuse to pay the assignee despite a notification or a pay-ment instruction. Furthermore, if the law applicable to pri-ority issues under draft articles 24 to 26 settles priorityconflicts on the basis of the time of notification, assigneeswould not be able to effectively notify the debtor and thusto establish priority as to future receivables (see para. 78).Such a result could virtually defeat the availability of crediton the basis of future receivables.

37. The Working Group considered the question whether,in order to protect the assignor against the risk of beingdeprived of all its receivables, the effectiveness of a noti-fication relating to future receivables should be limited toa fixed period of time, which could possibly be extendedby way of a second notification. The Working Group de-cided not to introduce such a limitation. It was thought thatsuch restrictions were a matter for the financing contract,with which the draft Convention should avoid any interfer-ence. It was also considered that any fixed time periodwould be arbitrary and disruptive of commercial practicesbased on long-term relationships. In particular in long-termcontracts, a requirement for the renewal of a notification atthe expiry of a fixed period could be overly burdensomeboth for the assignee and the debtor. The assignee wouldfind it difficult to establish the date of receipt of the noti-fication by the debtor, when the fixed time period wouldstart running. The debtor would be overly burdened withthe obligation to verify the date in the past when notifica-tion had been received in order to assess whether it couldobtain a discharge by paying the assignee.


address indicated in the original contract). In view of thefact that the assignment is effective as of the time of theconclusion of the contract of assignment, the debtor, hav-ing knowledge of the assignment, may choose to dischargeits debt by paying the assignee. However, in such a case thedebtor takes the risk of having to pay twice, if it is laterproven that no assignment took place. The Working Groupdecided not to refer explicitly to the possibility of thedebtor being able to pay either the assignor or the assigneein order to avoid undermining practices, such assecuritization, in which the debtor is normally expected tocontinue paying the assignor (however, the problem maynot be resolved in this way; for the secretariat’s suggestionin this regard, see A/CN.9/WG.II/WP.104, remark 1 todraft article 19). The reference to payment “in accordancewith the original contract”, rather than to payment to theassignor, is intended to preserve the right of the assignorand the debtor to agree to any type of payment suitable tomeet their needs (e.g. payment to a bank account withoutidentification of the account owner, or payment to a thirdperson).

41. The Working Group considered at some length thequestion whether knowledge of an assignment should betreated as a notification and trigger a change in the way inwhich the debtor could discharge its obligation. It was ar-gued that it would run counter to good faith to allow thedebtor to discharge its debt by paying the assignor, in par-ticular if the debtor had actual knowledge of the assign-ment, or by paying the assignee, in particular if the debtorknew that someone else had a superior right. The WorkingGroup decided that knowledge of an assignment should notaffect the discharge of the debtor. It was widely felt that,while making business practice conform to good faithstandards is an important goal, this should not be at theexpense of certainty. Certainty would be reduced if knowl-edge of the assignment were to trigger a change in the wayin which the debtor could discharge its obligation. In sucha case, the assignor or the person with a superior right, whowould not be in control of the relevant evidence, wouldneed to establish what the debtor knew. If the burden ofproof were to be placed on the debtor, the debtor would notbe able to obtain a valid discharge unless it was able toestablish that it had no knowledge of the assignment. Insuch a case, it would need to be determined what consti-tutes knowledge (e.g. general knowledge of the fact that anassignment took place or knowledge of the details of theassignment, such as the exact amount of the receivablesassigned and, in the case of an assignment by way of secu-rity, of the debt secured). This process would be particu-larly cumbersome in the case of several conflicting assign-ments. As a result, the certainty necessary in adebtor-discharge rule would be seriously compromised.The Working Group also took into account that in certaincases (e.g. in securitization and undisclosed invoice dis-counting) it is normal business practice for the debtor tocontinue paying the assignor even though the debtor knowsof the assignment, since the assignee does not have thebusiness structure necessary to receive payments.

42. The Working Group also considered the questionwhether the nullity (e.g. for fraud or duress or lack of ca-pacity to act) or the knowledge of the nullity of an assign-ment should be taken into account in the debtor’s dis-

charge. At an early stage in its work, the Working Groupconsidered a provision, according to which the debtorshould be able to discharge its obligation even if any of theassignments in a chain of assignments was null and void(A/CN.9/WG.II/WP.96, draft article 27). It was thoughtthat the debtor should not be exposed to the risk of havingto pay twice merely because parties unknown to the debtorchose to engage in subsequent assignments. Ultimately, theWorking Group decided that the issue of payment to aperson the assignment to whom was null and void aroseonly in exceptional situations and could be left to law ap-plicable outside the draft Convention (this is the thrust ofdraft article 19 (8); for the secretariat suggestions with re-gard to this matter, see A/CN.9/WG.II/WP.104, remarks 6-8 to draft article 19).

43. Unlike paragraph (1), paragraph (2) does not allowthe debtor a choice as to how to discharge its debt. Afternotification, the debtor can only discharge its obligation bypaying the assignee or as instructed by the assignee. Thereference to payment instructions is intended to address theneeds of various practices. The assignee may, for example,notify the debtor, so as to freeze the debtor’s rights of set-off, without requesting payment or requesting the debtor tocontinue paying the assignor (this is the case, e.g. withundisclosed invoice discounting or securitization). TheWorking Group may wish to explicitly state in paragraph(2) what is already stated in draft article 15 (1), namely thatsuch instructions may be given by the assignor or the as-signee with the notification or only by the assignee subse-quent to a notification (see A/CN.9/WG.II/WP.104, remark8 to draft article 19).

44. Paragraphs (3) and (5) are intended to provide simpleand clear discharge rules in the case of several notifica-tions. Paragraph (3) deals with situations in which thedebtor receives several notifications relating to more thanone assignment of the same receivables by the sameassignor (“duplicate assignments”). Such situations do notnecessarily involve fraud. They may, for example, involveseveral assignments of different parts of the receivables byway of security, in which the main issue is who will obtainpayment first (i.e. who has priority). Having agreed that theassignment should not adversely affect the legal position ofthe debtor, the Working Group drew a clear distinctionbetween the issue of the debtor’s discharge and the issue ofpriority. Thus, payment under paragraph (3) in accordancewith the first notification discharges the debtor, even if theperson receiving payment does not have priority. The un-derlying rationale is that it would be unfair and inconsistentwith the policy of debtor protection to require the debtor todetermine who among several claimants has priority andthat the debtor pays a second time if it pays the wrongperson. The debtor would most likely have a cause of ac-tion against that person, but the debtor’s rights may befrustrated if that person becomes insolvent. The risk ofinsolvency of the debtor receiving payment should be onthe various claimants of the receivables and not on thedebtor. Such claimants would have to settle among them-selves their rights in the proceeds of payment in accordancewith the law governing priority under the draft Convention.

45. Paragraph (5) deals with notifications relating to morethan one subsequent assignment. Such situations are rare in


practice, since normally only the last in a chain of assigneesnotifies the debtor and requests payment. In any case, inorder to avoid any uncertainty as to how the debtor maydischarge its debt, paragraph (5) provides that the debtorhas to follow the instructions contained in the notificationof the last assignment in a chain of assignments. For thatrule to apply, the notifications received by the debtor haveto be readily identifiable as notifications relating to subse-quent assignments. Otherwise, the rule contained in para-graph (3) would apply and the debtor would be dischargedby payment in accordance with the first notification re-ceived. In any case, under paragraph (6), the debtor, if indoubt, could request adequate proof from the assigneesnotifying (for a secretariat suggestion that, until such proofis offered, the debtor could discharge its debt by paying theassignor, see A/CN.9/WG.II/WP.104, remark 2 to draftarticle 19). If the debtor receives several notifications relat-ing to several assignments of the same receivables by thesame assignor and to subsequent assignments, under acombined application of paragraphs (3) and (5), the debtoris discharged by paying in accordance with the first notifi-cation of the last assignment.

46. Paragraph (4) is intended to ensure that the assigneemay change or correct its payment instructions. Whetherthe debtor is notified by the assignor or the assignee, if anew payment instruction is sent with regard to one and thesame assignment, the debtor may discharge its debt only inaccordance with that instruction. The only condition is that,in line with the policy underlying draft article 15 (1), thatpayment instruction, which is given subsequent to the no-tification, has to be given by the assignee, who is the onlyperson entitled to dispose of the receivables. In order toprotect the debtor against the risk of having to pay twice,paragraph (4) expressly provides that a payment instructionreceived by the debtor after payment is to be disregarded.

47. Under draft article 15, notification may be given bythe assignor or by the assignee independently of theassignor. As a result, the debtor receiving notification ofthe assignment from a possibly unknown person may be indoubt as to whether that person is a legitimate claimant,payment to whom would discharge the debtor. In order toprotect the debtor from uncertainty as to how to dischargeits debt in such cases, paragraph (6) gives the debtor a rightto request the assignee to provide adequate proof of theassignment within a reasonable period of time. Paragraph(6) does not introduce an obligation of the debtor, sincerequesting additional proof in all cases would unnecessarilydelay payment and add to the cost of the notification. Thedetermination of what constitutes “adequate” proof and“reasonable” period of time is a matter of interpretation forthe courts or arbitral tribunals taking into account the par-ticular circumstances. The Working Group thought that theflexibility introduced with these terms was necessary, sinceno rule could be found which would be suitable for allpossible cases. In addition, in order to avoid any uncer-tainty that might ensue as a result of the use of these terms,the Working Group decided to include a “safe harbour”rule, according to which a written confirmation from theassignor constitutes adequate proof.

48. The notification does not trigger the obligation to pay,which remains subject to the original contract and the law

applicable thereto. This means that the debtor does nothave to pay upon notification and does not owe interest forlate payment while it awaits the adequate proof requested.If, however, the debt becomes payable within that period inaccordance with the original contract, the question ariseswhether the payment obligation is suspended until thedebtor receives such proof and has a reasonable time toassess it and act thereon. If the payment obligation is notsuspended, the significance of the protection afforded tothe debtor by paragraph (6) may be reduced to the extentthat the debtor delaying payment, even for good reasons,would have to pay interest. The Working Group proceededon the understanding that the payment obligation would besuspended in such cases, but chose not to include any ex-plicit wording in paragraph (6), since that result could bereached without any explicit wording anyway and any ad-ditional wording could inadvertently interfere with nationallaw on interest. The Working Group may wish to recon-sider this approach. Any uncertainty as to this matter mightreduce the usefulness of paragraph (6). It may be preferableto explicitly state that the payment obligation is suspended.In order to avoid suspension of payment which could dis-advantage both the assignor and the assignee, the WorkingGroup may wish to consider that, if the debt becomes pay-able during the period when the debtor awaits proof of theassignee from the assignee, the debtor should discharge itsdebt by paying the assignor (see A/CN.9/WG.II/WP.104,remark 2 to draft article 19).

49. Paragraph (7) is intended to ensure that draft article 19does not exclude other ways of discharge of the debtor’sobligation that may exist under national law applicable out-side the draft Convention. However, paragraph (7) mayinadvertently result in a debtor ignoring a notification givenunder the draft Convention (e.g. because it relates to futurereceivables, which may not be allowed under other law) andpaying someone else in accordance with other law. For thatreason, the Working Group may wish to consider validatingpayment under other law only if it is made to a legitimateassignee under the draft Convention, while limiting recourseto payment into court and the like to cases involving severalnotifications (see A/CN.9/WG.II/WP.104, remarks 3-5 todraft article 19) and, possibly, notification by the assignee.If such an approach were to be followed, paragraph (8) maynot be necessary, since, if the debtor, being notified by theassignee, is in doubt as to the validity of an assignment, itcould discharge its debt by paying into court.


References:

A/CN.9/420, paras. 66-68 and 132-135A/CN.9/432, paras. 205-209A/CN.9/434, paras. 194-197A/CN.9/447, paras. 94-102A/CN.9/456, paras. 194-199

Commentary

50. Draft article 20 is another particular application of thegeneral principle that the debtor’s legal position should not


be unduly affected as a result of the assignment. The debtorhas against the assignee all the defences and rights of set-off that the debtor could raise against the assignor. Whatthose defences and rights of set-off are is a matter notaddressed in the draft Convention but left to other law.

51. Under paragraph (1), the debtor may raise against theassignee all the defences that arise from the original con-tract, without any limitation, including: contractual claims,which, in some legal systems, might not be considered“defences”; rights for contract avoidance, e.g. for mistake,fraud or duress; exemption from liability for non-perform-ance, e.g. because of an unforeseen impediment beyond thecontrol of the parties; and counter-claims under the originalcontract. Such defences and rights of set-off may be raisedirrespective of whether they are available at the time ofnotification of the assignment or become available onlyafter such notification. The Working Group may wish toconsider the question whether rights of set-off arising fromcontracts between the assignor and the debtor that areclosely related to the original contract (e.g. a maintenanceor other service agreement supporting the original salescontract) should be treated in the same way as rights of set-off arising from the original contract.

52. Paragraph (2) introduces a time limitation with regardto rights of set-off arising from any source other than theoriginal contract, i.e. a separate contract between theassignor and the debtor, a rule of law (e.g. a tort rule) or ajudicial or other decision. Such rights may not be raisedagainst the assignee if they become available after notifica-tion of the assignment. The rationale underlying this rule isthat the rights of a diligent assignee who notifies the debtorshould not be made subject to rights of set-off arising atany time from separate dealings between the assignor andthe debtor or other events, of which the assignee could notbe reasonably expected to be aware. On the other hand, theinterests of the debtor are not unduly affected, since, if thefact that the debtor cannot accumulate rights of set-offconstitutes an unacceptable hardship for the debtor, thedebtor can avoid entering into new dealings with theassignor (as to the question whether the debtor could de-clare the original contract avoided, see para. 35). In view ofthe above-mentioned rationale of paragraph (2), rights ofset-off arising from separate contracts between the debtorand the assignee are not affected. Such rights can be as-serted against the assignee even after notification of theassignment, like rights of set-off arising from the originalcontract. It should also be noted that a notification resultsin freezing the debtor’s rights of set-off, whether it containsa payment instruction or not. This approach is intended toaccommodate practices in which a bare notification isgiven for the purpose of exactly precluding the debtor fromaccruing rights of set-off from acts or omissions of theassignor that are beyond the assignee’s control, while thedebtor is expected to continue paying the assignor. As aresult of draft article 12, according to which an assignmentmade despite an anti-assignment clause would be ineffec-tive as against a sovereign debtor, draft article 20 wouldnot affect the rights of a sovereign debtor.

53. The Working Group considered a suggestion to elabo-rate on the meaning of the term “available” by stating that

a defence or right of set-off cannot be excluded if at thetime of notification it is “actual and ascertained”. Thatsuggestion was not adopted since it would result in limitinginappropriately the rights of set-off available to the debtorto those that were quantified at the time of the notification.In order to avoid leaving the matter completely unresolved,the Working Group also considered various suggestions asto the law applicable to rights of set-off. Reference wasmade to the law governing the receivable and to the law ofthe assignor’s location. The Working Group may wish toconsider referring instead, at least with regard to contrac-tual rights of set-off, to the law governing the contract fromwhich the right of set-off might arise (see A/CN.9/WG.II/WP.104, remarks 1-2 to draft article 28).

54. Paragraph (3) is intended to ensure that the debtormay not raise against the assignee by way of defence orset-off the breach of an anti-assignment clause by theassignor. The debtor may have a cause of action against theassignor, if, under law applicable outside the draft Conven-tion, the assignment constitutes a breach of contract whichresults in a loss to the debtor. However, the mere existenceof an anti-assignment clause is not a violation of the rep-resentation contained in draft article 14 (1) (a). In the ab-sence of a provision along the lines of paragraph (3), draftarticle 10 (3), holding the assignee harmless for breach ofcontract by the assignor, could be deprived of any meaning.


References:


Commentary

55. In order to obtain more value for their receivables andat a lower cost, assignors normally guarantee as againstassignees the absence of defences and rights of set-off bythe debtor. Recognizing this practice, draft article 14 (1) (c)provides that such a guarantee exists even in the absence ofan agreement between the parties in this regard. In practice,if such representations cannot be given and the receivablesare likely to be subject to defences, such receivables areeither not accepted by assignees, or are accepted at a sig-nificantly reduced value or are accepted only on a recoursebasis (i.e. if the assignee cannot collect from the debtors, ithas the right to return the receivables to and collect fromthe assignor). In order to avoid those adverse effects,assignors, as a matter of practice, negotiate with debtorswaivers of the defences and rights of set-off that debtorsmay raise against any future assignee. On the basis of suchwaivers, assignees determine the credit terms offered toassignors, which in turn are likely to affect the credit termsassignors offer to debtors.


56. With a view to allowing assignors to obtain lower-cost credit, draft article 21 validates such waivers of de-fences and rights of set-off. Furthermore, in order to avoiduncertainty as to the legal consequences of a waiver andthat a court may override it as being unfair to the debtor,paragraph (1) states what may appear obvious in some le-gal systems, namely that a waiver precludes the debtorfrom raising defences and rights of set-off against the as-signee. In recognition of the fact that in practice a waivermay be agreed upon at the time of the conclusion of theoriginal contract, as well as at an earlier or later time, para-graph (1) does not make specific reference to the point oftime at which a waiver may be agreed upon. Paragraph (1)does not make explicit reference to the acceptance of anassignment by the debtor operating as a waiver or as aconfirmation of a waiver either. The matter is left to otherlaw. Paragraph (1) does not require either that the defencesare known to the debtor or are explicitly stated in the agree-ment by which the defences are waived. The WorkingGroup thought that such a requirement would introduce anelement of uncertainty, since the assignee would need toestablish what the debtor knew or could have known ineach particular case.

57. While aimed at facilitating increased access to lower-cost credit, which is in the interest of trade in general, draftarticle 21 does not neglect the protection of the debtor. Inorder to protect debtors from undue pressure by creditorsso as to waive their defences, paragraph (2) introducesreasonable limitations with respect to such waivers of de-fences. Such limitations refer to the form in which suchwaivers can be made, to certain types of debtors and tocertain types of defences. In view of the fact that the scopeof paragraph (1) is limited to waivers agreed upon by theassignor and the debtor, the limitations contained in para-graph (2) do not apply to waivers agreed upon by thedebtor and the assignee. The Working Group thought thatthe draft Convention should not limit the debtor’s ability tonegotiate with the assignee in order to obtain a benefit,such as a lower interest rate or a longer payment period. Atthe same time, the Working Group also thought that, inview of the fact that agreements between assignees anddebtors are outside the scope of the draft Convention, thedraft Convention should not empower the debtor to nego-tiate waivers with assignees, if, under the law applicable,the debtor would not have such a power.

58. Paragraph (1) introduces further limitations. A waivercannot be a unilateral act or an oral agreement; it has totake the form of a signed written agreement, so as to ensurethat both parties are well informed about the fact of thewaiver and its consequences, including the benefits offeredto the debtor in return, and to facilitate evidence. In addi-tion, a waiver cannot override the consumer-protection lawprevailing in the country in which the debtor has its loca-tion (which in this context is to be understood as the placeof business). In order to avoid terminological and otherdifferences existing among the various legal systems, para-graph (1) refers to debtors in transactions for “personal,family or household purposes”. Such reference is qualifiedby the term “primarily”, so as to ensure that the limitationwould apply only to transactions for purely consumer pur-poses (i.e. transactions between consumers) and not totransactions for both consumer and commercial purposes

(i.e. transactions between a consumer and a business en-tity). The Working Group may wish to reconsider this ap-proach. It would appear to be consistent with the purposeof protecting consumer debtors to apply this provision to atransaction serving consumer purposes with respect to oneparty and commercial purposes from the perspective of theother party (the same would be true in the context of draftarticle 23 but not in the context of draft article 4; see para.70 and A/CN.9/WG.II/WP.105, para. 43).

59. Moreover, under paragraph (2), a waiver cannot relateto defences arising from fraudulent acts committed by theassignee. Such a result would run counter to basic goodfaith standards. With a view to protecting an assignee whoaccepts an assignment in good faith, the Working Groupdecided not to apply the same limitation to defences relat-ing to fraud by the assignor. If the debtor could not waivesuch defences, the assignee would have to investigate inorder to ensure that no fraud was committed by theassignor in the context of the original contract. The limita-tion under paragraph (2), however, applies not only todefences relating to fraud by the assignee alone but also todefences relating to fraud by the assignee in collusion withthe assignor. In this context, the Working Group consid-ered other defences that should not be waived. In order toaccommodate certain export transactions, the WorkingGroup decided that the defence relating to the invalidity ofthe original contract should be made subject to a waiver.As to defences against the protected holder of a negotiableinstrument, relating to signature requirements and agency(article 30 (1) (c) of the United Nations Convention onInternational Bills of Exchange and International Promis-sory Notes), the Working Group thought that no parallelshould be drawn between a receivable and a negotiableinstrument. Such a parallelism would not be in line withdraft article 4 (1) (b) which excluded the transfer of instru-ments by endorsement and delivery or by mere delivery. Itwould also be inconsistent with the will of the parties whochose not to incorporate their receivables into a negotiableinstrument.

60. In line with paragraph (1), paragraph (3) requires forthe modification of a waiver the form of a signed writtenagreement. Parties need to be warned of the legal conse-quences of such a modification, which should be easilyproven, if necessary. With a view to ensuring that a modi-fication, which may be agreed upon by the assignor and thedebtor, does not affect the rights of the assignee, paragraph(3) subjects a modification to the procedure foreseen indraft article 22 (2) for the modification of the original con-tract after notification of the assignment (i.e. to actual orconstructive consent by the assignee; see para. 65).


References:

A/CN.9/420, para. 109A/CN.9/432, paras. 210-217A/CN.9/434, paras. 198-204A/CN.9/447, paras. 122-135A/CN.9/456, paras. 205 and 206


Commentary

61. The modification of the original contract is an issuethat arises frequently in practice. A modification may benecessary for various reasons. For example: a substantialchange in the main circumstances under which the contractwas concluded may make it unfair for the assignor to de-liver the goods as promised; equipment or materials differ-ent from the ones agreed may be necessary in the construc-tion of a project; or a change in the general circumstancesmay require an extension of the deadline for paymentagreed upon in the original contract. To the extent that suchcontract modifications raise issues relating to rights andobligations as between the assignor and the debtor or asbetween the assignor and the assignee, they are generallyaddressed in the relevant contract or in legislation. How-ever, to the extent that such contract modifications raise thequestion of the rights and obligations as between the as-signee and the debtor, the relevant issues may not be fullyaddressed either in the contract or in legislation.

62. The primary goal of draft article 22, therefore, is toensure that the debtor has as against the assignee the right tomodify the original contract in the sense that, in the case ofreduction in the price, the debtor is discharged by paying thereduced price and does not owe the price of the originalreceivable. However, draft article 22 is not intended to inter-fere with the relationship between the assignor and thedebtor. For this reason, the requirements and the legal con-sequences of an effective modification agreement as be-tween the assignor and the debtor remain subject to the lawgoverning that agreement. A secondary goal of draft article22 is to protect the assignee by ensuring that the assigneeacquires rights under the modified original contract. Thismeans that, if the price of the goods or services offered underthe original contract is modified, the debtor may not raise themodification of the contract as a defence, asserting that theassignee has no rights under the new modified contract, andrefuse to pay even the reduced price (any rights that theassignee might have against the assignor, however, forbreach of contract are not affected; see para. 67).

63. The basic rule introduced by draft article 22 is that,before notification, the assignor and the debtor may freelymodify their contract. They do not need to obtain the con-sent of the assignee, even though the assignor may haveundertaken in the assignment contract to abstain from anycontract modifications without the consent of the assigneeor may be under the good faith obligation to inform theassignee about a contract modification. The breach of suchan undertaking may give rise to liability of the assignor asagainst the assignee. It does not, however, invalidate anagreement modifying the original contract, since such anapproach would inappropriately affect the rights of thedebtor. After notification, a modification of the originalcontract becomes effective as against the assignee onlysubject to the actual or constructive consent of the assignee.The underlying rationale is that, after notification, the as-signee becomes a party to a triangular relationship and anychange in that relationship which affects the assignee’srights should not bind the assignee against its will. Thisapproach is in line with draft article 19, according to which,before notification, the debtor may discharge its obligationin accordance with the original contract.

64. Paragraph (1) requires an agreement between theassignor and the debtor, which is concluded before notifi-cation of the assignment and affects the assignee’s rights. Ifthe agreement does not affect the rights of the assignee,paragraph (1) does not apply. If the agreement is concludedafter notification, paragraph (2) applies. The WorkingGroup may wish to specify that the relevant point of timeis the time when notification is received by the debtor,since as of that time the debtor may discharge its obligationonly in accordance with the assignee’s payment instruc-tions.

65. Paragraph (2) is formulated in a negative way, sincethe rule is that, after notification, a modification is ineffec-tive as against the assignee, unless an additional require-ment is met. “Ineffective” means that the assignee mayclaim the original receivable and the debtor is not fullydischarged by paying less than the value of the originalreceivable. Paragraph (2) requires actual or constructiveconsent of the assignee. Actual consent is required if thereceivable has been fully earned by performance and theassignee has thus the reasonable expectation that it willreceive payment of the original receivable. For the pur-poses of the draft Convention, a receivable is considered asbeing fully earned when an invoice is issued, even if therelevant contract has only partially been performed. As aresult, for such partially performed contracts to be modi-fied, the actual consent of the assignee is required. Con-structive consent exists if the original contract allows modi-fications or a reasonable assignee would have given itsconsent. Such a consent is sufficient if the receivable is notfully earned and the modification is foreseen in the originalcontract or a reasonable assignee would have consented tosuch a modification. In requiring actual or constructiveconsent, the Working Group intended to combine certaintywith flexibility. If a receivable is fully earned, its modifica-tion affects the reasonable expectations of the assignee andhas thus to be subject to the consent of the assignee. If, onthe other hand, a receivable is not fully earned, there is noneed to overburden the parties with requirements that mayaffect the efficient operation of a contract. In particular, inlong-term contracts, such as project financing or debt-re-structuring arrangements (in which receivables are offeredas security in return for a reduction in the interest rate or anextension of the maturity date), a requirement that theassignor would have to obtain the assignee’s consent toevery little contract modification could slow down the op-erations while creating an unwelcome burden for the as-signee. This problem, however, would normally not arise,since in practice parties tend to resolve such issues throughan agreement as to which types of modifications require theassignee’s consent. In the absence of such an agreement orin the case of breach of such an agreement by the assignor,paragraph (2) would provide an adequate degree of protec-tion to the debtor.

66. The Working Group chose not to refer to general prin-ciples, such as good faith or reasonable commercial stand-ards, in order to justify a modification. Those standardswere thought to be introducing an undesirable degree ofuncertainty, since there is no uniform understanding as totheir meaning. The Working Group was not favourableeither to limiting the situations in which the assignee’sconsent would be necessary to those in which a modifica-


tion of the original contract would result in “material ad-verse effects” to the assignee.

67. Paragraph (3) is intended to preserve any right of theassignee as against the assignor if a modification of theoriginal contract violates an agreement between theassignor and the assignee. This means that, if a modifica-tion is effective as against the assignee, without the assign-ee’s consent, the debtor is discharged by paying in accord-ance with the contract as modified. The assignee, however,may turn against the assignor and claim the balance of theoriginal receivable and compensation for any additionaldamage suffered, if the modification is in breach of anagreement between the assignor and the assignee.


References:

A/CN.9/420, paras. 145-148A/CN.9/432, paras. 239-244A/CN.9/434, paras. 94 and 213-215A/CN.9/447, paras. 136-139A/CN.9/456, paras. 207 and 208

Commentary

68. In practice, the debtor may pay the assignee before theassignor performs its obligations under the original con-tract. If the assignee does not perform, the question ariseswhether the debtor may recover from the assignee the sumspaid. This question is of particular importance if theassignor becomes insolvent and thus recovery of paymentsfrom the assignor is impossible.

69. As a complement to the principle that the debtor’slegal position should not be worsened as a result of theassignment, draft article 23 provides that the debtor’s posi-tion should not be improved either. If the debtor pays theassignee and the assignor does not properly perform theoriginal contract, the debtor has recourse against theassignor under the original contract and the law governingthat contract, but not against the assignee. This means thatthe debtor bears the risk of insolvency of its contractualpartner, which would be the case anyway in the absence ofan assignment. Noting that a different approach is followedin the Ottawa Convention, the Working Group thought thatthe difference was justified. A guarantee of performance ofthe original contract by the assignee may be appropriate inthe specific factoring situations addressed in the OttawaConvention, but was thought to be inappropriate in thecontext of other financing or service transactions, includingfactoring transactions which had a predominant service el-ement.

70. There are certain limitations to the rule contained indraft article 23. Under consumer-protection law, the con-sumer debtor might have the right to declare the originalcontract avoided and to recover from the assignee any pay-ments made to the assignee. The Working Group thoughtthat the draft Convention should not override the con-sumer-protection law prevailing in the country in which the

debtor is located (i.e. has its place of business; as to themeaning of the term “primarily” and the problem arising inthis context, see para. 58). The Working Group alsothought that a general reference to public policy in thiscontext would not be necessary. The notions of publicpolicy and mandatory law would apply under draft articles30 and 31 through the mechanism of private internationallaw rules, providing wide recognition of law applicableoutside the draft Convention. The Working Group alsothought that multiple references to public policy and man-datory law could inappropriately widen the scope of thelimitation and detract from the certainty achieved in thedraft Convention.

71. A second limitation is introduced to the rule containedin draft article 23 through the reference to draft article 20.This reference is intended to ensure that the debtor’s de-fences and rights of set-off are preserved with regard topayment in installments, where some installments havebeen made while other installments are outstanding. Suchrights would only apply where the debtor would need toreduce or avoid payment of outstanding installments.



References:

A/CN.9/420, paras. 149-164A/CN.9/432, paras. 245-260A/CN.9/434, paras. 238-254A/CN.9/445, paras. 18-29A/CN.9/455, paras. 18-31A/CN.9/456, paras. 209 and 210

Commentary

72. In practice, receivables may be assigned several times.Such “duplicate assignments” are normal practice in thecase of assignments by way of security in which differentparts of the same receivables are offered as security forcredit. In such a case, the question arises what is the orderof priority in payment among the various claimants. Prior-ity does not mean validity. It presupposes a valid assign-ment (substantive or material validity is dealt with in chap-ter III, while formal validity is left to law applicable outsidethe draft Convention; for a secretariat suggestion to deal inthe draft Convention with formal validity as well, see A/CN.9/WG.II/WP.104, remarks to chapter III). Priority doesnot prejudge either the issue whether the assignee withpriority will retain all the proceeds of payment or turn overany remaining balance to the assignor or to the next claim-ant in the order of priority. This matter depends on whetheran outright assignment or an assignment by way of securityis involved, a matter left to law applicable outside the draftConvention. Priority does not affect the discharge of thedebtor either. The debtor paying in accordance with draftarticle 19 (or, if draft article 19 is not applicable, in accord-ance with the law applicable under draft article 28) is dis-


charged, even if payment is made to an assignee who doesnot have priority (under draft article 24 or, if draft article24 is not applicable, under draft article 29). Whether thatassignee will retain the proceeds of payment is a matter ofpriority to be resolved among the various claimants in ac-cordance with the law applicable under draft article 24 (ordraft article 29).

73. However, several outright assignments of the samereceivables made by the same assignor may be a fraudulentor an unconscionable act. While fraud is a rare occurrence,simple inadvertence on the part of the assignor, or igno-rance of the legal effects of a previous assignment, occursfrequently. A typical example is the assignment to a re-ceivables financier in return for working capital and to aninventory financier or to a supplier of materials on creditwith a retention of title or other security interest until fullpayment of the price of the inventory or of the materials. Insuch a case, the conflict may be between a global assign-ment (an assignment of all present and future receivables)to the receivables financier and an assignment to the inven-tory financier or the supplier of the proceeds from the saleof the inventory or materials. With a view to achievingcertainty with regard to the rights of the various creditorsof the assignor and thus facilitating the assignor’s access tocredit, the Working Group proceeded with its work on theassumption that such conflicts would be addressed. If theassignment to the inventory financier or to the supplier iscontractual, such conflicts are clearly within the scope ofthe draft Convention. However, this may not be the case, ifthe assignment occurs by operation of law, since, underdraft article 2 (1), the draft Convention covers only assign-ments by way of agreement and not by operation of law.The Working Group may, therefore, wish to clarify thatany conflicts of priority between an inventory financier ora supplier with a statutory right in any proceeds and anassignee come under the ambit of the draft Convention. Inthis context, the Working Group may wish to considerwhether the priority rules in the draft Convention would beappropriate, since the inventory financier or the suppliermight expect that priority issues would be governed by thelaw of the location of the inventory or the materials sup-plied.

74. Draft article 24 is intended to apply to a conflict be-tween a Convention and a non-Convention assignee (e.g.between a domestic and a foreign assignee of domesticreceivables). Such an approach would not affect domesticpractices. In fact, one of the reasons for which the WorkingGroup decided to turn the priority rules into private inter-national law rules was that such rules would not negativelyaffect domestic practices. The domestic assignee wouldhave to meet the requirements of the same law, since bydefinition, in a conflict with a foreign assignee, the domes-tic assignee, the assignor and the debtor would be locatedin the same jurisdiction. Assuming that the draft Conven-tion defines “location” of a legal entity by reference to itsplace of incorporation or place of central administrationand that that place is different from the place of business,the applicable law may be different. However, even in sucha case the domestic assignee could predict that the draftConvention could apply, since: the domestic assigneewould be located in a Contracting State (the same State inwhich the assignor is located; otherwise the draft Conven-

tion would not apply); and the domestic assignee wouldknow that the assignor is, for example, a branch of a for-eign entity. The Working Group may wish to confirm thisunderstanding (see also A/CN.9/WG.II/WP.104, remarks3-5 to draft article 1).

75. In the case of several outright assignments of the samereceivables by the same assignor the issue may not be whowill receive payment first (i.e. an issue of priority) but whowill receive payment at all (i.e. an issue of effectiveness).In such assignments, the assignee with “priority” takes allthe proceeds (provided that it has a valid claim) and noother assignee can obtain payment. However, the draftConvention does not differentiate between outright assign-ments and assignments by way of security, since: thirdparties may have no way of knowing whether an assign-ment by way of security or an outright assignment is in-volved in a particular case; and, in any case, such differen-tiation would be very difficult in view of the widedivergences existing among the various legal systems withregard to security rights.

76. Draft article 24 contains a private international lawrule subjecting priority issues to the law of the assignor’slocation (the meaning of the term “location” has not beendecided yet by the Working Group; for the secretariat’ssuggestions, see A/CN.9/WG.II/WP.104, remarks 4-10 todraft article 5). The Working Group recognized that a pri-vate international law rule cannot lead to uniformity interms of commercial results, since one law may give prior-ity to the first assignee in time, while another law may givepriority to the first assignee to notify the debtor or to reg-ister certain data about the assignment. However, theWorking Group also recognized that there is clear commer-cial value in a private international law rule that wouldsubject priority issues to the law of a single and easilydeterminable jurisdiction. Such a rule would constitute asignificant improvement of the present situation in whichassignees tend to either reject international receivables assecurity for credit or to accept them at a low value, sincethey either cannot determine which law may govern prior-ity or they have to meet the requirements of several juris-dictions in order to ensure that they will have priority.

77. If, under the applicable law, priority is based on thetime of assignment, an assignee considering whether to fi-nance certain receivables has to rely on the assignor’s rep-resentations and possibly on representations made by otherparties or on information available in a certain market. Ifthe applicable law determines priority based on priority innotification of the debtor, again a prospective assignee hasto rely on representations by the assignor and by the debtor,as well as on information available from other sources. Insuch jurisdictions: priority with regard to future receivableswill not be obtainable at all at the time of assignment (atthat time the identity of the debtors is not known); andpriority with regard to receivables assigned in bulk willonly be obtainable at the additional cost of notifying all thedebtors. If, on the other hand, under the law applicable,priority is obtained by way of making certain data part ofa public record, beyond representations by the assignor orother parties, prospective assignees would have that publicrecord to rely on. In addition, assignees filing the requireddata would have an objective way of acquiring priority.


78. In this context, the Working Group may wish toclarify that, if, under the law of the assignor’s location(which must be in a Contracting State for the draft Conven-tion to apply), priority is determined on the basis of thetime of notification of the debtor, the notification needs tobe given in accordance with the draft Convention. If noti-fication were to be given in accordance with the domesticlaw of the assignor’s location and that law invalidates no-tifications relating to future receivables, assignees would beunable to establish priority with regard to future receiva-bles, a result that would have a negative impact on theavailability and the cost of credit (see para. 36).

79. Departing from the approach traditionally followed inmany legal systems, subjecting priority issues to the lexsitus of the receivable (the law of the country where pay-ment is due or the debtor is located), the Working Groupdecided to subject priority issues to the law of theassignor’s location. The Working Group took this ap-proach, considering that the traditional rule is no longerregarded as a workable or efficient rule. In the increasinglycommon case of a global assignment of present and futurereceivables (e.g. under factoring, invoice discounting orsecuritization agreements) application of the law of the lexsitus of the receivable fails to yield a single governing law.It also exposes prospective assignees to the burden of hav-ing to determine the notional situs of each receivable sepa-rately. Application of the law governing the receivable orof the law chosen by the parties produces similar results.Different priority rules would govern priority with regardto the various receivables in a pool of receivables and, inthe case of future receivables, the parties would not be ableto determine with any certainty the law applicable to prior-ity, a factor that may defeat a transaction or, at least, raisethe cost of credit. Application of the law chosen by theassignor and the assignee in particular could allow theassignor, acting in collusion with a claimant in order toobtain a special benefit, to determine the priority amongseveral claimants. In addition, the law chosen by the partieswould be completely unworkable in the case of severalassignments of the same receivables either by the same orby different assignees, since different laws could apply tothe same priority conflicts.

80. Whether location is defined by reference to the placeof incorporation or of the place of central administration ofa legal entity, application of the law of the assignor’s loca-tion will result in the application of the law of a singlejurisdiction and one that can be easily determined at thetime of assignment. It will thus eliminate the difficultiesmentioned above. Furthermore, application of the law ofthe assignor’s location will be particularly compatible withthe law of jurisdictions with public registration require-ments in which third parties would normally look at the lawof the assignor’s location to determine the manner in whichthey could establish priority.

81. The Working Group considered the question of thepoint of time which should be taken into account in thedetermination of the location of the assignor. If the assignorrelocated after one and before another assignment, the as-signee with priority under the law of the initial locationshould not lose its priority. On the other hand, the right ofclaimants in the new location should not be forever subject

to the rights of claimants from other jurisdictions. How-ever, it was widely felt that relocation of the assignor be-tween duplicate assignments occurred rarely in practice anda rule aimed at addressing the issue would make draft ar-ticle 24 unnecessarily complex. The Working Group, there-fore, decided to leave the matter to other law applicableoutside the draft Convention.

82. As mentioned above, the Working Group decided todepart from the traditional approach in order to accommo-date the most common practices that involve bulk assign-ments of all present and future receivables. The WorkingGroup decided that no exception should be made for as-signments of single, high-value, existing receivables. Intro-ducing a different priority rule with regard to the assign-ment of such receivables would detract from the certaintyachieved in draft article 24. It would be very difficult toclearly define “high-value receivables”. In addition, in abulk assignment containing both “high-value”and “low-value” receivables, priority would be subject to differentlaws.

83. In the context of its discussion of the law applicableto priority issues, the Working Group considered the ques-tion of potential conflicts with the Convention on the LawApplicable to Contractual Obligations (Rome, 1980; here-inafter referred to as “the Rome Convention”), whose arti-cle 12 deals with the law applicable to assignment. TheWorking Group thought that the reference to a regionalinstrument applicable to contractual obligations should notprevent the preparation of a specialized legal regime foruniversal application to financing and service transactions.The Working Group also took note of the fact that greatuncertainty exists as to whether article 12 of the RomeConvention addresses priority issues and, if so, whether thelaw applicable is the law chosen by the parties or the lawgoverning the receivable. The Working Group thought thatit would be useful to resolve this uncertainty and that, inany case, priority issues (i.e. the proprietary effects of anassignment) should not be made subject to the law govern-ing the receivable or to the law chosen by the parties (seeparas. 79 and 80 and 88). It was agreed, however, thatStates should have the right to opt out of chapter V (draftarticle 34) and that, in any case, they could settle any con-flict between the draft Convention and the Rome Conven-tion by determining which text they wish to give prec-edence to (draft article 33).

84. While draft article 24 subjects priority conflicts be-tween several assignees who obtain the same receivablesfrom the same assignor to the law of the assignor’s loca-tion, it recognizes the interest of the parties involved in aconflict to negotiate and to relinquish priority in favour ofa subordinate claimant where commercial considerations sowarrant. In order to afford maximum flexibility and to re-flect prevailing business practices, paragraph (2) wasdrafted to make it clear that a valid subordination need nottake the form of a direct subordination agreement betweenthe assignee with priority and the beneficiary of the subor-dination agreement. It can also be effected unilaterally, e.g.by way of an undertaking of the first ranking assignee tothe assignor (whether in the contract of assignment or anindependent, written or oral, agreement), empowering theassignor to make a second assignment ranking first in pri-


ority. The term “unilaterally” is further intended to clarifythat the beneficiary of the subordination (the second as-signee) need not offer consideration in exchange for thepriority granted by the unilateral subordination. Further-more, paragraph (2) clarifies that an effective subordinationneed not specifically identify the intended beneficiary orbeneficiaries (“any existing or future assignees”) and caninstead employ generic language.

85. The Working Group also considered several alterna-tives of a substantive law priority rule but failed to reachagreement. For this reason, two alternative substantive lawpriority rules are offered in the annex to the draft Conven-tion for States to choose from. As a result, States might beconfused as to what is the recommended approach. In ad-dition, if a State does not choose any of those two alterna-tives (e.g. because its priority regime is based on priority intime of notification of the debtor), the full range of alterna-tives will, in effect, be reproduced. Moreover, the annexwould need further development so as to be workable. Inview of the above, the Working Group may wish to con-sider replacing the annex with a few general principlesreferring the matter of preparing model priority provisionsto the procedure for the revision and amendment of thedraft Convention (see A/CN.9/WG.II/WP.104, remarks tothe annex).


References:

A/CN.9/420, paras. 149-164A/CN.9/434, paras. 216-237 and 255-258A/CN.9/445, paras. 30-44A/CN.9/455, paras. 32-40A/CN.9/456, paras. 211-222

Commentary

86. Draft article 25 is intended to settle conflicts of prior-ity between an assignee and creditors of the assignor or theadministrator in the insolvency of the assignor. The draftConvention is not intended to address issues arising in thecase of insolvency of the assignee, unless the assigneemakes a subsequent assignment and becomes an assignor.The Working Group thought that such issues are beyondthe scope of the draft Convention. The draft Convention isnot intended to address issues arising in the context of thedebtor’s insolvency either. It is assumed that the assigneewould have in the receivables the same rights that theassignor would have in the case of insolvency of thedebtor. As already mentioned, priority is defined as a pref-erence (in payment or other discharge; see A/CN.9/WG.II/WP.105, para. 57). The exact legal consequences of suchpreference depend on whether an assignment by way ofsecurity or an outright assignment is involved, a matter leftto law applicable outside the draft Convention. In any case,preference established under the draft Convention is notintended to interfere with special preference or super-priority rights existing under national insolvency law (seepara. 93).

87. Conflicts of priority covered by draft article 25 mayarise if the assignment is made before attachment or com-mencement of an insolvency proceeding (if the assignmentis made thereafter, no conflict arises; any rights that theassignee may obtain are subordinate to the rights of theassignor’s creditors or the insolvency administrator). Ifpriority is based on the time of assignment, the fact that theassignment is made before attachment or commencementof the insolvency proceeding is sufficient to establish thatthe receivables are separated from the assignor’s estate (ifan outright assignment is involved) or that the assigneemay satisfy its claim in preference to unsecured creditors(if an assignment by way of security is involved). If, how-ever, priority is determined on the basis of notification ofthe debtor or registration of certain data about the assign-ment in a public registry, the fact that the assignment ismade before attachment or commencement of the insol-vency proceeding is not sufficient for the purpose of estab-lishing priority. Notification of the debtor or registrationneeds also to take place before attachment or commence-ment of the insolvency proceeding.

88. Draft article 25 subjects such priority conflicts to thelaw of the assignor’s location (the issue of the meaning ofthe assignor’s location has not been decided yet; see A/CN.9/WG.II/WP.104, remarks 4-10 to draft article 5). Asalready mentioned (see paras. 79 and 80), the location ofthe assignor as a connecting factor presents the advantageof simplicity and predictability for a number of reasons,including that: it provides a single point of reference; itcould be ascertained at the time of even a bulk assign-ment of future receivables; it would be suitable even forlegal systems in which registration is practised; and itwould result in the application of the law of the jurisdic-tion in which any insolvency proceeding with regard tothe assignor would be most likely to commence. This lastaspect of the application of the law of the assignor’s lo-cation is essential, since it appropriately addresses the is-sue of the relationship between the draft Convention andthe applicable insolvency law. Indeed the thrust of draftarticle 25 is to ensure that, in most cases, the law govern-ing priority under draft article 25 and the law governingthe insolvency of the assignor are the laws of one and thesame jurisdiction (the assignor’s main jurisdiction,whether place of incorporation or of central administra-tion). In such a situation, any conflict between the draftConvention and the applicable insolvency law would beresolved by the rules of law of that jurisdiction. In allother cases in which an insolvency proceeding with re-gard to the assets and affairs of the assignor is com-menced in a State other than the State of the assignor’smain jurisdiction (e.g. a jurisdiction in which the assignorhas assets), the draft Convention gives way to rules of lawthat reflect the public policy of the State in which a dis-pute is adjudicated, either before a court or an arbitraltribunal (draft article 25 (3)). In addition, in such cases,the draft Convention is intended to avoid any interferencewith certain rights of the assignor’s creditors or of the in-solvency administrator, which, although not reflective ofpublic policy, are part of mandatory law (draft article 25(4)). The Working Group may wish to extend the appli-cation of those two limitations to court proceedings out-side insolvency. In any case, non-consensual, preferentialrights would not be affected (draft article 25 (5)).


89. The public policy meant in paragraph (3) is the inter-national public policy of the forum State. Recourse to suchpublic policy has only a negative effect in the sense that itmay defeat the application of a provision of the law appli-cable under draft article 25 which is manifestly contrary tothe public policy of the forum State (e.g. a rule givingpriority to a foreign State for taxes). As a result, a certainperson may be bypassed in the determination of priority,while priority will be determined by other provisions of theapplicable law. The public policy of draft article 25, how-ever, may not have a positive effect; it may not result in thepositive application of a priority rule of the forum Statewhich reflects public policy (e.g. a rule giving priority toemployees in the forum State). For that reason, the Work-ing Group decided to include paragraph (5) in draft article25, specifically preserving non-consensual, super-priorityrights (see para. 93).

90. For a priority rule to be set aside under paragraph(3), it must be “manifestly contrary” to the public policyof the forum State. The notion of “manifestly contrary” isused in international texts (including article 6 of theUNCITRAL Model Law on Cross-Border Insolvency, ar-ticle 16 of the Rome Convention and article 18 of theInter-American Convention on the Law Applicable to In-ternational Contracts) as a qualification of public policy.The purpose of such a qualification is to emphasize thatpublic policy exceptions should be interpreted restrictivelyand paragraph (3) should be invoked only in exceptionalcircumstances concerning matters of fundamental impor-tance for the forum State. Otherwise, the certaintyachieved by draft article 25 could be seriously compro-mised, a result that would have a negative impact on theavailability and the cost of credit on the basis of receiva-bles (the term “manifestly contrary” is used also in draftarticle 31; see para. 114).

91. If the rule, with which the priority rule of the lawapplicable conflicts, falls short of being reflective of publicpolicy but is a rule of mandatory law, under paragraph (4)special rights of creditors of the assignor and of the insol-vency administrator are not affected “except as provided bythis article”. These words mean that the priority rule of thelaw applicable is not set aside; it applies to the extent thatit does not affect certain special rights. The rationale under-lying this approach is that the priority rules of the lawapplicable are themselves mandatory rules and setting themaside in favour of mandatory rules of the forum wouldresult in uncertainty and thus have a negative impact on theavailability and the cost of credit. At the same time, how-ever, the Working Group recognized that an exceptionshould be made for cases in which special rights of theassignor’s creditors or of the insolvency administrator areaffected.

92. Such special rights include, but are not limited to, anyright of creditors of the assignor to avoid or otherwiserender ineffective, or to initiate an action to avoid or oth-erwise render ineffective, an assignment as a fraudulent orpreferential transfer. They also include any right of theinsolvency administrator: to avoid or otherwise render in-effective, or to initiate an action to avoid or otherwiserender ineffective, an assignment as a fraudulent or prefer-

ential transfer; to avoid or otherwise render ineffective, orto initiate an action to avoid or otherwise render ineffec-tive, an assignment of receivables that have not arisen atthe time of the commencement of the insolvency proceed-ing; to encumber the assigned receivables with the ex-penses of the insolvency administrator in performing theoriginal contract, or to encumber the assigned receivableswith the expenses of the insolvency administrator in main-taining, preserving or enforcing the receivables at the re-quest and for the benefit of the assignee. If the assignedreceivables constitute security for indebtedness or otherobligations, the special rights protected under paragraph (4)include any rights existing under insolvency rules or proce-dures generally governing the insolvency of the assignorthat: permit the insolvency administrator to encumber theassigned receivables; provide for a stay of the right of in-dividual assignees or creditors of the assignor to collect thereceivables during the insolvency proceeding; permit thesubstitution of the assigned receivables for new receivablesof at least equal value; provide for the right of the insol-vency administrator to borrow using the assigned receiva-bles as security to the extent that their value exceeds theobligations secured. They also include other rules and pro-cedures of similar effect and of general application in theinsolvency of the assignor specifically described by a Con-tracting State in a declaration (draft article 25 (5)).

93. As already mentioned, the forum State may, underparagraph (3), refuse to give priority, for example, to aforeign State for taxes, but may not apply its own priorityrule giving priority to employees in the forum State. Para-graph (5) is intended to achieve exactly this result, namelyto allow the forum State to apply its own priority rules, inthe case where a priority rule applicable under paragraphs(1) and (2) is manifestly contrary to the forum’s publicpolicy, and to give priority to non-consensual rights reflect-ing the forum’s public policy (for paragraphs (5) and (6),see A/CN.9/WG.II/WP.104, remarks 2-3 to draft article25). Paragraph (5) goes a step further. It allows a State tolist in a declaration the non-consensual, super-priorityrights that should prevail over the rights of an assigneeunder the draft Convention. This possibility for declara-tions is intended to enhance certainty in that it provides amechanism for assignees to know which super-priorityrights would prevail over their rights. It is formulated as apossibility (not as an obligation) and it appears withinsquare brackets, since the Working Group thought that itmight reduce the acceptability of the draft Convention, inparticular to the extent that a declaration would have theeffect of limiting the national super-priority rights thatwould be preserved (for a secretariat suggestion to deletethe bracketed language in paragraph (5), see A/CN.9/WG.II/WP.104, remark 2 to draft article 25).

[Article 26. Competing rights with respectto payments

References:



Commentary1

94. Draft article 26 has a twin goal, to ensure that theassignee has with respect to proceeds the same priority asin the receivables and, at the same time, to grant the as-signee with respect to a limited type of proceeds and undercertain conditions the same in rem rights that the assigneehas in the receivables. Proceeds are described as everythingthat is given in payment of the receivables. They includeproceeds of proceeds, while payment includes both pay-ment in cash and in kind (e.g. goods returned by the debtorto the assignor).

95. The in rem nature of the right in proceeds is an issuethat is distinct from the issue of priority. A claimant withpriority in accordance with the law applicable under thedraft Convention will obtain payment first and will prevailover another claimant (other than a claimant with a super-priority, non-consensual right; see draft article 25 (5))whether that other claimant has a right in rem or ad per-sonam (for this reason the secretariat suggests to treat thoseissues in separate provisions; see A/CN.9/WG.II/WP.104,remarks to draft article 26). However, the in rem nature ofthe right of a claimant with respect to proceeds may bedecisive in the case of insolvency. If the claimant withpriority has a right in rem with respect to proceeds, thatclaimant will be able to separate the proceeds from theinsolvency estate (if an outright assignment is involved) orbe treated as a secured creditor and receive payment beforeunsecured creditors (if an assignment by way of security isinvolved). If, on the other hand, a claimant with priorityhas a right ad personam, it will receive payment propor-tionately with other unsecured creditors, if there is anybalance left after payment of any creditors with specialprivileges and security rights.

96. Under paragraph (1), the assignee with priority whoreceives payment may retain that payment. The implicitlimitation, which may need to be stated explicitly, is thatthe assignee may not retain more than the value of its re-ceivable (as to this matter and the question of interest, seeA/CN.9/WG.II/WP.104, remark 3 to draft article 26). Para-graph (2) is intended to grant the assignee an in rem rightin certain types of proceeds (i.e. cash proceeds) and onlyunder certain conditions (i.e. if the assignor receives pay-ment on behalf of the assignee and keeps those proceedsseparated from its own assets). This limited provision isaimed at facilitating practices, such as undisclosed invoicediscounting and securitization, to the extent that a right inrem with respect to proceeds will increase certainty as topayment to the assignee, in particular in the case of insol-vency. Such a provision could have a significantly positiveimpact on the availability and the cost of credit (for a sec-retariat suggestion to extend the application of this provi-sion to other types of proceeds if the conditions set forth inparagraph (2) are met, see A/CN.9/WG.II/WP.104, remark2 to draft article 26).

97. Paragraphs (3) to (5) deal with the issue of priority inproceeds. They are based on a distinction between proceedsthat are receivables and other types of proceeds (e.g.

goods). The rule embodied in those paragraphs is that pri-ority in proceeds that are receivables is governed by thelaw of the assignor’s location, while priority in other typesof assets is governed by the lex rei sitae. With regard toreceivables, the Working Group has been able to replacethe lex situs of the receivable with the law of the assignor’slocation. The main reason for this approach is that the ap-plication of the lex situs of the receivable would produceunworkable results, since: in the case of future receivables,the lex situs would not be known at the time of the assign-ment; and, in the case of bulk assignments, priority issueswith regard to the same pool of receivable would be subjectto different laws. As to proceeds in the form of tangibleassets, the Working Group has not found it possible todepart from the lex rei sitae, since such an approach couldfrustrate the expectations of third parties in the countrywhere the asset is located.


References:

A/CN.9/420, paras. 185-187A/CN.9/445, paras. 52-55A/CN.9/455, paras. 67-73

Commentary

98. Chapter V is intended to state a few general principlesthat are widely adopted but not recognized in all legal sys-tems. It is not intended to deal with all assignment-relatedissues in an exhaustive way, or to displace or to contradictany international legislative text existing in this field oflaw. In particular, draft articles 27 and 28 reflect the gen-erally accepted principles: that the assignment contract issubject to the law chosen by the assignor and the assignee;and that the relationship between the assignee and thedebtor is subject to the law governing the receivable. Draftarticles 30 and 31 also reflect generally accepted principlesthat the applicable law may be set aside if it is manifestlycontrary to mandatory law or public policy.

99. If the Working Group decides that this chapter mayapply irrespective of the scope provisions of the draft Con-vention, if the forum is in a Contracting State (see A/CN.9/WG.II/WP.104, remarks to chapter V), chapter V wouldbroaden the scope of application of the innovative priorityrules of the draft Convention. Unlike draft articles 27, 28, 30and 31, the priority rule contained in draft article 29 breaksnew ground in that it addresses an issue which is not clearlyor appropriately resolved in current law. In line with draftarticles 24 to 26, draft article 29 subjects priority issues tothe law of a single and easily determinable jurisdiction, i.e.the law of the assignor’s location (for an analysis of theadvantages of this approach, see paras. 79 and 80 and 88).

Article 27. Law applicable to the contract of assignment

References:


1In view of the tentative character of draft article 26, the commentary onthis provision is brief. The complete commentary will be written after thefinalization of this provision by the Working Group.


Commentary

100. Draft article 27 is intended to reflect the principle ofparty autonomy with the respect to the law applicable to thecontract of assignment. While being widely recognized,this principle is not known in all legal systems. Underparagraph (1), the assignor and the assignee may agree onthe law applicable to the contract of assignment. The con-clusion, the validity and the rights and obligations of theassignor and the assignee arising under the contract of as-signment are intended to be covered by the expression“contract of assignment” (for a suggestion to state this re-sult explicitly, see A/CN.9/WG.II/WP.104, remarks to draftarticle 27). However, if the assignment is just a clause inthe financing contract, this expression is not intended tocover the financing contract as a whole.

101. Paragraph (1) provides that the choice of law mustbe express. The Working Group recognized that an implicitchoice would be in line with current trends in private inter-national law. However, it was widely felt that a differentapproach is warranted in the case of financing transactions,in which certainty is of utmost importance and may deter-mine whether a transaction will take place and at what cost.

102. Paragraph (2) deals with the exceptional situations inwhich the parties have not agreed on the law applicable tothe contract of assignment or in which the parties haveagreed but their agreement is later found to be invalid. Itrefers to the closest-connection test, which may result inthe application of the law of the assignor’s location (e.g. inthe case of an assignment by way of sale) or of the law ofthe assignee’s location (e.g. in an assignment by way ofsecurity made in the context of a credit transaction). In anattempt to combine flexibility with certainty, paragraph (2)introduces a rebuttable presumption that the State with theclosest connection to the contract is the law of theassignor’s location. Location in this context means place ofbusiness. In view of the limited scope of application ofparagraph (2), the Working Group thought that such a ref-erence to the place of business would not undermine thecertainty necessary for financing transactions.

103. Paragraph (3) is intended to reflect the generallyaccepted principle that the parties to a contract may not setaside mandatory rules of the law applicable in the absenceof a choice of law by the parties, if the contract is con-nected with one other State only.


References:

A/CN.9/420, paras. 197-200A/CN.9/445, paras. 65-69A/CN.9/455, paras. 92-104 and 117

Commentary

104. In line with the principle that the draft Conventionshould not change the legal position of the debtor, draft

article 28 reflects a generally acceptable rule, providingthat the relationship between the assignee and the debtor issubject to the law governing the receivable. In the case ofcontractual receivables, that law would be the law govern-ing the original contract, which is likely to be the law cho-sen by the assignor and the debtor and, in the absence of achoice of law, the law of the country with the closest con-nection to the original contract. The Working Group de-cided to avoid including detailed rules as to the law govern-ing the receivable. It was widely felt that such elaboraterules are not necessary in a chapter which is intended to setforth some general rules, without addressing all assign-ment-related private international law issues. It was alsogenerally thought that it would be inappropriate to attemptto determine the law governing the receivable in the widevariety of contracts that might be at the origin of a receiv-able (e.g. contracts of sale, insurance contracts, contractsrelating to financial markets operations).

105. Inspired by article 12 (2) of the Rome Convention,draft article 28 refers to the relationship between the as-signee and the debtor. The assignment does not create acontractual relationship between the assignee and thedebtor. The assignor remains the contractual partner of thedebtor and the debtor retains its rights as against theassignor. However, a de facto relationship is establishedbetween the assignee and the debtor based on the fact thatthe assignee may notify the debtor and request payment. Inorder to avoid leaving any doubt, draft article 28 explicitlystates that it covers the conditions under which the assign-ment can be invoked as against the debtor and the debtor’sdischarge (as to rights of set-off, see A/CN.9/WG.II/WP.104 remarks 1-2 to draft article 28).

106. Draft article 28 also covers assignability as an issuerelating to payment by and discharge of the debtor.Whether both contractual and statutory assignability is cov-ered depends on the scope of chapter V, an issue not yetdecided by the Working Group. If chapter V applies totransactions falling within the scope of the draft Conven-tion, contractual assignability will be subject to draft article10, while statutory assignability will be governed by thelaw specified in draft article 28 under the condition that theforum is in a Contracting State. If, on the other hand, chap-ter V applies even to transactions falling outside the scopeof the draft Convention, contractual assignability with re-spect to such transactions and statutory assignability withrespect to transactions falling both within and outside thescope of the draft Convention will be subject to the lawapplicable under draft article 28 (in such a case, contractualassignability with respect to transactions falling within thescope of the draft Convention will be subject to draft article10). The Working Group considered that draft article 28would govern statutory prohibitions aimed at the protectionof the debtor (e.g. restrictions on the assignment of sover-eign receivables) or at the protection of the assignor (e.g.restrictions on the assignment of wages, pensions and pay-ments under life insurance policies). The Working Group’sconsiderations were based on the assumption that if theapplication of the law governing the receivable was con-trary to a statutory prohibition contained in a public-policyor mandatory-law rule of the forum and aimed at the pro-tection of the assignor, it could be set aside or even re-placed by the mandatory law rule of the forum or another


State (see A/CN.9/WG.II/WP.104, remark 3 to draft article28). The Working Group may wish to reconsider the mat-ter. Statutory prohibitions aimed at the protection of theassignor result in the invalidation of assignments as be-tween the parties thereto and, consequently, as against thedebtor. As a result, the issue of the relationship between theassignee and the debtor does not even arise in this context.Thus, it may be more appropriate to subject such statutoryprohibitions to the law of the assignor’s location than the tolaw governing the receivable.

[Article 29. Law applicable to conflicts of priority

References:


Commentary2

107. Draft article 29 appears within square brackets pend-ing determination by the Working Group of the scope orpurpose of chapter V. Retention of draft article 29 is mean-ingful only if chapter V is to apply to transactions beyondthose falling within the scope of the draft Convention underchapter I. If chapter V has the same scope as the other partsof the draft Convention, draft article 29 repeats rules re-flected in draft articles 24 to 26 and may thus be deleted.If retained, draft article 29 would need to be aligned withdraft articles 24 to 26 (see A/CN.9/WG.II/WP.104, remarksto draft article 29). If chapter V is to apply irrespective ofchapter I, it may need to be specified that it applies also toconflicts involving a subsequent assignment as if the sub-sequent assignee is the initial assignee (this matter is ad-dressed in chapter I, draft article 2 (b)).

108. As a private international law rule, draft article 29has the goal of providing certainty with regard to the lawapplicable to conflicts of priority. Such certainty is depend-ent upon making reference to the law of a single and easilydeterminable jurisdiction (the law of the assignor’s incor-poration or place of central administration; see A/CN.9/WG.II/WP.104, remarks 4-10 to draft article 5).

109. Priority is defined in draft article 5 (i) as a prefer-ence (in payment or other discharge) and draft article 29specifies the parties between which such conflicts mayarise. In view of the fact that the debtor is not one of thoseparties, priority does not relate to the debtor’s discharge.Therefore, the debtor being discharged under the law gov-erning the receivable cannot be asked to pay again theparty with priority under the law of the assignor’s location.


Reference:

A/CN.9/455, paras. 111-117

Commentary

110. Paragraph (1) is intended to reflect a generally ac-cepted principle in private international law, according towhich mandatory law of the forum may be applied irre-spective of the law otherwise applicable. Mandatory law inthis context does not refer to law that cannot be derogatedfrom by agreement but to law of fundamental importance,such as consumer-protection law or criminal law (loi depolice).

111. Paragraph (2) introduces a different rule, namelythat a court in a Contracting State may apply neither itsown law nor the law applicable under draft articles 27 and28, but the law of a third country on the grounds that thematters settled in those provisions have a close connectionwith that country.

112. Departing from the approach followed in privateinternational law texts, the Working Group decided to limitthe scope of draft article 30 to the application of the lawapplicable to the contract of assignment and to the relation-ship between the assignee and the debtor. It was generallythought that such an approach is warranted with regard tothe law applicable to priority issues, since priority rules areof a mandatory nature themselves and setting them aside infavour of the mandatory rules of the forum or another Statewould inadvertently result in uncertainty as to the rights ofthird parties, a result that would have a negative impact onthe availability and the cost of credit.


Reference:

A/CN.9/455, paras. 118 and 119

Commentary

113. Draft article 31 differs from draft article 30 in thatdraft article 31 has only a negative effect, i.e. that of settingaside a rule of the applicable law if it is manifestly contraryto the public policy of the forum. Unlike draft article 30,draft article 31 does not have a positive effect, i.e. does notresult in the positive application of the public policy of theforum. In other terms, public policy in the context of draftarticle 31 means international public policy and not thedomestic public policy of the forum.

114. In line with the approach followed in other interna-tional legal texts, the qualification “manifestly” has beenadded before the words “contrary to public policy” (seepara. 90). It should be noted that it is the application of theapplicable law to a particular case and not the applicablelaw itself which needs to be manifestly contrary to thepublic policy of the forum. The application of a foreignlaw, therefore, cannot be refused on the grounds that thelaw itself, in general, is considered to be inimical to thepublic order of the forum but only if the application of aparticular rule in a concrete case would be repugnant to thepublic policy of the forum.

2Depending on the decision of the Working Group as to the scope orpurpose of chapter V, draft article 29, which is intended to reproduce therules contained in draft articles 24 to 26, may be retained or deleted. For thisreason, only a brief commentary is provided at this stage.


E. Analytical Commentary to the Convention on Assignment [inReceivables Financing] [of Receivables in International Trade]:

note by the secretariat(A/CN.9/470) [Original: English]

CONTENTS

Paragraphs Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3 292

ANALYTICAL COMMENTARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-235 292

Title and preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-12 292

CHAPTER I. SCOPE OF APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-54 294

Structure of chapter I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 294

Article 1. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-23 295

Article 2. Assignment of receivables . . . . . . . . . . . . . . . . . . . . . . 24-37 297

Article 3. Internationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38-40 300

Article 4. Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-49 301

Article 5. Limitations on receivablesother than trade receivables . . . . . . . . . . . . . . . . . . . . . 50-54 302

CHAPTER II. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55-79 303

Article 6. Definitions and rules of interpretation . . . . . . . . . . . . . 55-73 303

Article 7. Party autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74-75 307

Article 8. Principles of interpretation . . . . . . . . . . . . . . . . . . . . . . 76-79 307

CHAPTER III. EFFECTS OF ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . 80-108 308

Form of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80-82 308

Article 9. Effectiveness of bulk assignments, assignmentsof future receivables and partial assignments . . . . . . . 83-95 309

Article 10. Time of assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 96-97 311

Article 11. Contractual limitations on assignments . . . . . . . . . . . . 98-104 312

Article 12. Transfer of security rights . . . . . . . . . . . . . . . . . . . . . . 105-108 314

CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES . . . . . . . . . . . . 109-186 315

Section I. Assignor and assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109-127 315

Purpose of section I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 315

Article 13. Rights and obligations of the assignorand the assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110-112 315

Article 14. Representations of the assignor . . . . . . . . . . . . . . . . . . 113-120 316

Article 15. Right to notify the debtor . . . . . . . . . . . . . . . . . . . . . . 121-124 317

Article 16. Right to payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125-127 319

Section II. Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128-160 319

Article 17. Principle of debtor protection . . . . . . . . . . . . . . . . . . . 128-129 319

Article 18. Notification of the debtor . . . . . . . . . . . . . . . . . . . . . . . 130-132 320

Article 19. Debtor’s discharge by payment . . . . . . . . . . . . . . . . . . 133-142 321

Article 20. Defences and rights of set-off of the debtor . . . . . . . 143-147 323

Article 21. Agreement not to raise defences or rightsof set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148-153 324

Article 22. Modification of the original contract . . . . . . . . . . . . . . 154-158 326

Article 23. Recovery of payments . . . . . . . . . . . . . . . . . . . . . . . . . 159-160 327


Paragraphs Page

Section III. Other parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161-186 327

Structure of section III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 327

Article 24. Law applicable to competing rightsof other parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162-178 327

Article 25. Public policy and preferential rights . . . . . . . . . . . . . . 179-182 331

Article 26. Special proceeds rules . . . . . . . . . . . . . . . . . . . . . . . . . 183-185 332

Article 27. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 332

CHAPTER V. CONFLICT OF LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187-199 333

Scope and purpose of chapter V . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187-189 333

Article 28. Law applicable to the rights and obligationsof the assignor and the assignee . . . . . . . . . . . . . . . . . 190-193 333

Article 29. Law applicable to the rights and obligationsof the assignee and the debtor . . . . . . . . . . . . . . . . . . . 194-196 335

Article 30. Law applicable to competing rightsof other parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 336

Article 31. Mandatory rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 336

Article 32. Public policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 337

CHAPTER VI. FINAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200-223 337

Article 33. Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 337

Article 34. Signature, ratification, acceptance, approval,accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 337

Article 35. Application to territorial units . . . . . . . . . . . . . . . . . . . 202 337

Article 36. Conflicts with other international agreements . . . . . . . 203-211 338

Article 37. Application of chapter V . . . . . . . . . . . . . . . . . . . . . . . 212 340

Article 38. Limitations relating to Governments and otherpublic entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213-214 340

Article 39. Other exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 341

Article 40. Application of the annex . . . . . . . . . . . . . . . . . . . . . . . 216 341

Article 41. Effect of declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . 217-219 342

Article 42. Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 342

Article 43. Entry into force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 343

Article 44. Denunciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 343

Additional final provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 343

ANNEX TO THE DRAFT CONVENTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224-235 343

Section I. Priority rules based on registration . . . . . . . . . . . . . . . . . . . . 226-228 344

Article 1. Priority among several assignees . . . . . . . . . . . . . . . . . 226-227 344

Article 2. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . . . 228 344

Section II. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229-233 344

Article 3. Establishment of a registration system . . . . . . . . . . . . 229-230 344

Article 4. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231-232 345

Article 5. Registry searches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 346

Section III. Priority rules based on the time of the contractof assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234-235 346

Article 6. Priority among several assignees . . . . . . . . . . . . . . . . . 234 346

Article 7. Priority between the assignee and the insolvencyadministrator or the creditors of the assignor . . . . . . . 235 346


INTRODUCTION

1. The United Nations Commission on InternationalTrade Law (UNCITRAL), at its twenty-eighth session, in1995, decided to entrust the Working Group on Interna-tional Contract Practices with the task of preparing a uni-form law on assignment in receivables financing.1 TheCommission, at that session, had before it a report of theSecretary-General entitled “Assignment in receivables fi-nancing: discussion and preliminary draft of uniform rules”(A/CN.9/412). It was agreed that the report, setting forththe concerns and the purposes underlying the project andthe possible contents of the uniform law, would provide auseful basis for the deliberations of the Working Group.2

2. The Working Group commenced its work at itstwenty-fourth session, in November 1995, by consideringthe report of the Secretary-General.3 At its twenty-fifth tothirty-first sessions, the Working Group considered reviseddraft articles prepared by the secretariat,4 and, at its twenty-ninth to thirty-first sessions, it adopted a draft Convention,the exact title of which remains to be determined.5 At itsthirty-first session, the Working Group had before it a pre-liminary commentary on the draft Convention prepared bythe secretariat.6 At that session, the Working Group agreedthat the secretariat would finalize and distribute the com-mentary with a view to assisting the Commission in re-viewing and finalizing the draft Convention at its thirty-third session, to be held in New York from 12 June to7 July 2000.7

3. The present note has been prepared pursuant to thatagreement of the Working Group. It is intended to providea summary of the reasons for the adoption of a certainprovision and its main objectives, along with explanationsand interpretations of particular terms, without, however,giving a complete account of the travaux préparatoires orof all proposals and provisions that were not retained. Forthe benefit of those seeking fuller information on the his-tory of a given provision, the commentary lists the refer-ences to the relevant portions of the reports of the eightsessions of the Working Group.8 After finalization of the

draft Convention, the Commission may wish to request thesecretariat to prepare the final version of the commentary,which would serve as an unofficial legislative guide and atool for interpretation.

ANALYTICAL COMMENTARY

Draft Convention on Assignment [in ReceivablesFinancing] [of Receivables in International Trade]

Preamble


Reaffirming their conviction that international trade onthe basis of equality and mutual benefit is an importantelement in the promotion of friendly relations amongStates,

Considering [that] problems created by [the] uncertain-ties as to the content and choice of legal regime applicableto assignments [of receivables] in international trade [con-stitute an obstacle to financing transactions],

Desiring to establish principles and adopt rules [relatingto the assignment of receivables] that would create cer-tainty and transparency and promote modernization of lawrelating to [assignments of receivables] [receivables financ-ing] [including but not limited to assignments used infactoring, forfaiting, securitization, project financing, andrefinancing,] while protecting existing [financing] [assign-ment] practices and facilitating the development of newpractices,

Also desiring to ensure the adequate protection of theinterests of the debtor in the case of an assignment of re-ceivables,

Being of the opinion that the adoption of uniform rulesgoverning assignments [in] [of] receivables [financing]would facilitate the development of international trade andpromote the availability of [capital and] credit at more af-fordable rates,


References:

A/CN.9/420, paras. 14-18A/CN.9/434, paras. 14-16A/CN.9/445, paras. 120-124A/CN.9/455, paras. 157-159A/CN.9/456, paras. 19-21 and 60-65

Commentary

Title

4. The Commission may wish to consider whether thereference to receivables financing or to international tradeshould be retained in the title of the draft Convention (fora non-exhaustive list and a brief description of the practicescovered by the draft Convention, see paras. 6-12). A refer-ence to financing could be misleading in that it could givethe impression that the scope of the draft Convention islimited to purely financing transactions, excluding impor-


2Ibid., para. 379. At its twenty-sixth and twenty-seventh sessions, theCommission had considered two other reports of the Secretary-General (A/CN.9/378/Add.3 and A/CN.9/397). For the Commission’s discussion ofthose reports, see ibid., Forty-eighth Session, Supplement No. 17 (A/48/17),paras. 297-30,1 and Forty-ninth Session, Supplement No. 17 (A/49/17),paras. 208-214, respectively.

3The report of the Working Group is contained in document A/CN.9/420.4The draft articles prepared by the secretariat are contained in documents

A/CN.9/WG.II/WP.87, A/CN.9/WG.II/WP.89, A/CN.9/WG.II/WP.93, A/CN.9/WG.II/WP.96, A/CN.9/WG.II/WP.98, A/CN.9/WG.II/WP.102 andA/CN.9/WG.II/WP.104. The reports of the Working Group are contained indocuments A/CN.9/420, A/CN.9/432, A/CN.9/434, A/CN.9/445, A/CN.9/447, A/CN.9/455, A/CN.9/456 and A/CN.9/466.

5A/CN.9/455, para. 17; A/CN.9/456, para. 18; and A/CN.9/466, para. 19.6A/CN.9/WG.II/WP.105 and A/CN.9/WG.II/WP.106.7A/CN.9/466, para. 215.8In order to avoid confusion, no special reference is made to previous

article numbers, which, in the course of the preparation of the draft Conven-tion, were altered several times. However, any earlier number will beapparent from the relevant discussion in the reports of the Working Group.Annex II to A/CN.9/466 contains an index to the final renumbering ofarticles.


tant service transactions (e.g. assignments in internationalfactoring transactions in which insurance against debtor-default, book-keeping or collection services is provided;chapter I does not exclude such transactions in that it doesnot refer to the financing purpose or context of the assign-ment; see para. 25). A reference to international trade maysufficiently reflect the overall objective of the draft Con-vention to facilitate the movement of goods and servicesacross borders and appropriately clarify that the draft Con-vention applies to assignments with an international andcommercial element, without attempting to regulate con-sumer assignments or domestic assignments of domesticreceivables. On the other hand, such a reference to interna-tional trade may inadvertently give the impression that thedraft Convention applies only to assignments of receivablesgenerated in international trade and not to the assignmentof consumer receivables; the international assignment ofdomestic receivables; or the assignment of receivables aris-ing from loan or other transactions that may not involve thesale of goods or the provision of services. In addition, sucha reference might fail to reflect the fact that the draft Con-vention might affect domestic assignments of domestic re-ceivables, for example, in that it is intended to providewhich law applies to a conflict between a domestic and aforeign assignee of domestic receivables (on this matter,see also paras. 21 and 169). On balance, it may be prefer-able to include a reference to international trade in the titleand to explain the matter in the commentary.

Preamble

5. The preamble is intended to serve as a statement of thegeneral principles on which the draft Convention is basedand which, under article 8, may be used to fill gaps left inthe draft Convention. These principles include the facilita-tion of both commercial and consumer credit at more af-fordable rates, which is in the interest of all parties in-volved, assignors, assignees and debtors; the principle ofdebtor protection, according to which the debtor’s legalposition is not affected unless expressly stated otherwise inthe draft Convention; the promotion of the movement ofgoods and services across borders; the enhancement ofcertainty and predictability as to the rights of parties in-volved in assignment-related transactions; the moderniza-tion and harmonization of domestic and international lawson assignment, both at the substantive and the private inter-national law level; the facilitation of new practices and theavoidance of interference with current practices; the avoid-ance of interference with competition. As to the referenceto financing, which appears in the preamble within squarebrackets, the Commission may wish to consider retainingit, since it could usefully clarify the main objectives of thedraft Convention, without limiting the scope of the draftConvention, a matter that could be further explained in thecommentary.

Transactions covered

6. In view of the broad definition of a “receivable” inarticle 2 (a) (“contractual right to payment of a monetarysum”), the draft Convention applies to a wide array oftransactions. In particular, the draft Convention covers theassignment of trade receivables (arising from the sale ofgoods or services between businesses), consumer receiva-

bles (arising from consumer transactions), financial re-ceivables (arising from financial transactions, such asloans, deposit accounts, swaps and derivatives) and sover-eign receivables (arising from transactions with a govern-mental authority). With a view to clarifying the context ofapplication of the draft Convention, those practices aredescribed briefly in the following paragraphs. The list ofpractices cannot be exhaustive, in particular in view of thefact that new practices are rapidly developing which thedraft Convention cannot ignore.

7. First of all, included are traditional financing tech-niques relating to trade receivables, such as factoring (theoutright sale of a large number of receivables with or with-out recourse) and forfaiting (the outright sale of single,large-value receivables, whether they are documentary ornot, without recourse). In these types of transactions,assignors assign to financiers their rights in receivablesarising from the sale of the assignors’ goods or services.The assignment in such transactions is normally an outrighttransfer but may also, for various reasons (e.g. stamp duty),be for security purposes. The purchase price is adjusteddepending on the risk and the time involved in the collec-tion of the underlying receivable. Beyond their traditionalforms, those transactions have developed a number of vari-ants tailored to meet the various needs of parties to inter-national trade transactions. For example, in invoice dis-counting, there is an outright sale of a large number ofreceivables without debtor-notification but with full re-course against the assignor in the case of debtor default; inmaturity factoring, there is full administration of the salesledger, collection from debtors and protection against baddebts, but without any financial facility; in internationalfactoring, receivables are assigned to a factor in the countryof the assignor (“export factor”) and then from the exportfactor to another factor in the country of the debtor (“im-port factor”) for collection purposes, while the factors donot have recourse against the assignor in the case of debtordefault (non-recourse factoring). All those transactions arecovered in the draft Convention regardless of their form.

8. The draft Convention also covers innovative financingtechniques, such as securitization and project finance,which may relate to a wide range of receivables, includingconsumer receivables. In a securitization transaction, anassignor, creating receivables through its own efforts(“originator”), assigns, usually by way of an outright trans-fer, these receivables to an entity (“special purpose vehicle”or “SPV”), fully owned by the assignor and specially cre-ated for the purpose of buying the receivables and payingtheir price with the money received from investors towhom the SPV sells the receivables or securities backed bythe receivables. The segregation of the receivables from theoriginator’s other assets allows the price paid by investors(or the money lent) to be linked to the financial strength ofthe receivables assigned and not to the creditworthiness ofthe assignor. It also insulates the receivables from the riskof the insolvency of the originator. Accordingly, the origi-nator may be able to obtain more credit than would bewarranted on the basis of its own credit rating. In addition,by gaining access to international securities markets, theoriginator may be able to obtain credit at a cost that wouldbe lower than the average cost of commercial bank-basedcredit. In large-scale, revenue-generating infrastructure


projects, sponsors raise the initial capital costs by borrow-ing against the future revenue stream of the project. Thus,hydroelectric dams are financed on the security of the fu-ture income flow from electricity fees, telephone systemsare paid for by the future revenues from telecommunica-tions charges and highways are constructed with fundsraised through the assignment of future toll-road receipts.Given the draft Convention’s applicability to future re-ceivables, these types of project finance may be reduced totransfers, usually for purposes of security, of the futurereceivables to be generated by the project being financed.In this context, it should be emphasized that the draft Con-vention’s exclusion of assignments made for personal, fam-ily or household purposes will not act to exclude consumerreceivables.

9. Many other forms of traditional transactions relating tothe assignment of a receivable generated in the context ofa financial transaction will also be covered. These includethe opening of a credit line on the security of the balancein a deposit account; the refinancing of loans for improvingcapital to obligations ratio or for portfolio diversificationpurposes; the assignment of the insurance company’s con-tingent obligation to pay upon loss; and the assignment ofrights arising under a letter of credit. Also covered are lesstraditional transactions, such as loan syndications andparticipations, swaps and other derivatives, repurchaseagreements (“repos”) and interbank payments.

10. A “swap” is a transaction in which two parties agreeto exchange one stream of obligations for another. The firstswaps related to interest payments involved currencies,commodities, energy and credit obligations, and the rangecontinues to expand. The underlying rationale for enteringinto a swap is to transfer the risks involved with a particularobligation to another party better able or willing to managethem. In a traditional interest swap, a creditworthy entityborrowing money at a fixed interest rate exchanges thatinterest with a variable interest rate at which a less secureentity borrows a similar sum. As a result, a less creditwor-thy entity, for a fee, in effect borrows money at a fixed rate.No payment of capital occurs between the parties to theswap (that comes from the underlying loan transactions).Between such parties, only interest payments take place. Inpractice, the interest payments are offset against each otherand only a net payment is made by the party with the largerpayment due. This residual payment is a contractual rightto a monetary sum and is, therefore, within the broad defi-nition of article 2. There are several variations of a simpleinterest rate swap. For example, an investor may buy afixed rate bond and swap the fixed rate for a floating ratefrom a bank; the bank may take security over the bond tosecure the investor’s obligations to pay amounts equal tothe fixed rate.

11. Derivatives are a more general class of transaction ofwhich swaps are a specific instance. They share the commoncharacteristic of creating payment obligations that are deter-mined by the price of an underlying transaction (this is whythey are described as being “derived” from those transac-tions). With the exception of interest swaps, most derivativecontracts relate to the difference between the agreed futureprice of an asset on a future date and the actual market priceon that date. For example, in a futures contract, one party

agrees to deliver to the other party on a specified future date(“the maturity date”) a specified asset ( e.g. a commodity,currency, a debt, equity security or basket of securities, abank deposit or any other category of property) at a priceagreed at the time of the contract and payable on the maturitydate. Futures are usually performed by the payment of thedifference between the price agreed upon at the time of thecontract and the market price on the maturity date, and notby physical delivery and payment in full on that date (theyare called derivatives because settlement is not by actualperformance of the sale or deposit contract but by a differ-ence payment derived from an actual asset and an actualprice; the contract is derived from an ordinary commercialcontract). In options, the buyer has the right (but not theobligation) to acquire (“call option”) or to sell (“put option”)an asset in the future at a price fixed when the option isentered into. Repurchase agreements (or repos) are contractsunder which one party sells a (usually fixed interest) securityto another and simultaneously agrees to repurchase the secu-rity at a future date at an agreed price that includes allowancefor the interest on the cash consideration and the accruedinterest on the security. The payments are contingent uponthe delivery or return of security. Within inter-bank paymentsystems and securities settlement systems, participants haveobligations to make a large number of individual paymentsand also rights to receive similar numbers of payments fromother participants. These obligations and rights are resolvedinto payments due to or from the system as a whole (typi-cally using a central counter-party) or due between each pairof participants.

12. Derivatives, including swaps and repos, are usuallytransacted within a master netting agreement (e.g. theMaster Netting Agreement prepared by the InternationalSwaps and Derivatives Association (“ISDA”)), which pro-vides for the net settlement of payments due in the samecurrency on the same date. The agreement may also makeprovision, upon the default by a party, for the terminationof all outstanding transactions at their replacement or fairmarket cost, conversion of such sums into a single currencyand netting into a single payment by one party to the other(issues relating to netting are addressed in the ISDA ModelNetting Act, adopted by 21 States). Set off (the dischargeof reciprocal claims to the extent of the smaller claim) andnetting (at its simplest, the ability to set off reciprocalclaims on the insolvency of a counter-party) may comewithin the ambit of the draft Convention to the extent thatthe net obligation arising under a derivatives contract maybe assigned.


Commentary

Structure of chapter I

13. In chapter I, scope-related issues are dealt with indifferent provisions for the sake of clarity and simplicity inthe text. Article 1 defines the substantive scope in generalterms, as well as the territorial scope of application of thedraft Convention. Articles 2 and 3 define the substantivescope in more detailed terms (definitions of assignment,receivable and internationality of an assignment or a re-


ceivable). Articles 4 and 5 deal with excluded transactionsand transactions treated differently. Article 6 appears inchapter II of the draft Convention since the terms definedtherein do not raise mainly or only scope-related issues.The Commission may wish, however, to consider whether,in view of the importance of the term “location”, its defi-nition in article 6 (i) should be moved to article 2 or 3 orto a new article in chapter I.



(a) Assignments of international receivables and to in-ternational assignments of receivables as defined in thischapter, if, at the time of the conclusion of the contractof assignment, the assignor is located in a ContractingState;

(b) Subsequent assignments provided that any prior as-signment is governed by this Convention; and

(c) Subsequent assignments that are governed by thisConvention under subparagraph (a) of this paragraph,notwithstanding that any prior assignment is not gov-erned by this Convention.

(2) This Convention does not affect the rights and ob-ligations of the debtor unless the debtor is located in aContracting State or the law governing the receivable is thelaw of a Contracting State.

[(3) The provisions of chapter V apply to assignmentsof international receivables and to international assign-ments of receivables as defined in this chapter independ-ently of paragraphs (1) and (2) of this article. However,those provisions do not apply if a State makes a declarationunder article 37.]

(4) The annex to this Convention applies in a Contract-ing State which has made a declaration under article 40.

References:

A/CN.9/420, paras. 19-32A/CN.9/432, paras. 13-38A/CN.9/434, paras. 17-41A/CN.9/445, paras. 45-48 and 125-145A/CN.9/447, paras. 143-146A/CN.9/455, paras. 41-46 and 160-173A/CN.9/456, paras. 22-37A/CN.9/466, paras. 145-149

Commentary

Substantive and territorial scope of application

14. Under article 1, the draft Convention applies to assign-ments of receivables (for a definition of the terms “assign-ment” and “receivable”, see paras. 26, 27, 29 and 30). Thereare two conditions for the draft Convention to apply. Thereneeds to be an element of internationality (for an exception,see para. 18) and an element of a territorial connectionbetween certain parties and a Contracting State. The elementof internationality may relate to the assignment or to the

receivable. Accordingly, the draft Convention applies toassignments of international receivables, whether or not theassignments are international or domestic, and to interna-tional assignments of receivables, even if the receivables aredomestic. As a result, the assignment of receivables is cov-ered whether or not those receivables arise in the context ofinternational or domestic trade, as long as the assignmentitself is international (for comments on internationality, seeparas. 38-40). The element of territorial connection mayrelate to the assignor only or to the assignor and the debtor.For the application of the provisions of the draft Conventionother than the debtor-related provisions (e.g. chapter IV,section II), only the assignor needs to be located in a Con-tracting State. For the application of the draft Convention asa whole, the debtor too needs to be located in a ContractingState (or the law governing the receivable needs to be thelaw of a Contracting State; for a discussion of the term“location”, see paras. 66-70).

15. This approach to the issue of the territorial scope ofthe draft Convention is based on the assumption that themain disputes that the draft Convention would be calledupon to resolve would be addressed if the assignor (and,only for the application of the debtor-related provisions, thedebtor too) is located in a Contracting State. Such disputescould arise with regard to rights of the assignee against theassignor flowing from the breach of a warranty; enforce-ment of the receivables by the assignee against the debtor;discharge of the debtor; defences of the debtor towards theassignee; relative rights of the assignee and the administra-tor in the insolvency of the assignor; relative priority rightsof the assignee and a competing assignee; and the effec-tiveness of subsequent assignments. The Working Groupalso considered that enforcement would normally be soughtin the place of the assignor’s or the debtor’s location andthere is thus no need to make reference to the assignee’slocation; and that application of the provisions of the draftConvention other than those contained in section II ofchapter IV would not affect the debtor and there is thus noneed to preclude the application of all the provisions of thedraft Convention if the debtor is not located in a Contract-ing State.

16. As a result of this approach, the territorial scope ofapplication of the draft Convention is sufficiently broadand thus it is not necessary to extend it to cases in whichno party may be located in a Contracting State but the lawof a Contracting State is applicable by virtue of the privateinternational law rules of the forum. The Working Groupthought that such an approach might introduce uncertainty,at least, to the extent that private international law on as-signment is not uniform and, in any case, parties would notknow at the time of the conclusion of a transaction wherea dispute might arise and, as a result, which private inter-national law rules might apply. However, if the forum islocated in a non-Contracting State, the courts are not boundby the draft Convention. Therefore, despite the fact thatarticle 1 does not refer to the application of the draft Con-vention by virtue of private international law rules, thecourts of a non-Contracting State may not be precludedfrom applying the draft Convention as part of the law des-ignated by their private international law rules. In this con-nection, the particular question arises as to whether thecourts of a non-Contracting State would apply the draft


Convention only if the courts of a Contracting State wouldapply it (i.e. if the substantive and territorial requirementsof the draft Convention are met) or even if the courts of aContracting State would not apply it (i.e. if the require-ments of chapter I are not met). The Commission may wishto address this question.

17. Under article 1 (2), the debtor-related provisions ofthe draft Convention may apply to situations in which thedebtor might not be located in a Contracting State but thelaw of a Contracting State governs the assigned receivable.In this context, a different approach to the territorial scopeof application of the draft Convention is followed, since theWorking Group felt that certainty as to the application ofthe draft Convention would not be unduly compromised.Furthermore, unlike paragraph (1), paragraph (2) of article1 does not specify the time at which the debtor needs to belocated in a Contracting State or the receivable needs to begoverned by the law of a Contracting State (on this matter,see also paras. 202 and 219). The Commission may wish tospecify that time. The time of the conclusion of the originalcontract may be preferable from a debtor protection pointof view, since it would enhance predictability of the appli-cation of the draft Convention to the debtor-related issues.Such an approach would also be consistent with article 39,which refers to the location of the debtor in a State makinga declaration at the time of the original contract. However,such an approach would result in the assignor, the assigneeand third parties not being able to determine, in the case offuture receivables, whether the draft Convention wouldapply to the rights and obligations of the debtor (for arelated problem with regard to future receivables assigneddomestically, see paras. 39 and 40).

Subsequent assignments

18. In line with the principle of continuatio juris, the draftConvention applies also to subsequent assignments made,for example, in the context of international factoring,securitization and refinancing transactions, provided thatany prior assignment is governed by the draft Convention(and irrespective of whether there is an element of interna-tionality). Accordingly, even a domestic assignment ofdomestic receivables may be brought into the ambit of thedraft Convention if it is subsequent to an international as-signment. The reason for such an approach is that, unlessall assignments in a chain of assignments were made sub-ject to one and the same legal regime, it would be verydifficult to address assignment-related issues in a consistentmanner. The Commission may wish to consider whetherthe draft Convention should apply to subsequent assign-ments only if the assignor is located in a Contracting State.

19. The draft Convention also applies to subsequent as-signments that in themselves fall under article 1 (a),whether or not any prior assignment is governed by thedraft Convention (as this is not a separate type of assign-ment, the Commission may wish to reconsider the place-ment of article 1 (1) (c)). As a result, the draft Conventionmay apply only to some of the assignments in a chain ofassignments. This result is a departure from the principle ofcontinuatio juris. However, the Working Group consideredit necessary to follow this approach since parties to assign-ments in securitization transactions, in which the first as-

signment is a domestic one and relates to domestic receiva-bles, should not be deprived of the benefits that may bederived from the application of the draft Convention. Thisapproach is based on the assumption that it would notunduly interfere with domestic practices (on this matter, seepara. 20).

Relationship with national law

20. As a result of covering in the draft Convention inter-national assignments of domestic receivables or even do-mestic assignments of domestic receivables made in thecontext of subsequent assignments, business parties in do-mestic transactions could benefit from increased access tointernational financial markets and thus to potentiallylower-cost credit. The interests of assignors, protected, forexample, by national law prohibitions of assignments offuture receivables or of global assignments, would not beunduly interfered with to the extent that the draft Conven-tion does not preclude the assignor from offering its re-ceivables to different lenders for credit (e.g. to a supplier ofmaterials on credit and to a financing institution for work-ing capital) in that it does not give priority to one over theother. The interests of debtors, protected by national legis-lation, would not be unduly interfered with either, at leastto the extent that the draft Convention requires that thedebtor be located in a Contracting State and limits the ef-fects of an assignment on the debtor to mainly payment toanother creditor in the country and in the currency stipu-lated in the original contract. The interests of domesticassignees would not be unduly interfered with either, be-cause the draft Convention does not give priority to a for-eign over a domestic assignee. It merely specifies whichnational law would govern priority. In addition, for a con-flict between a domestic and a foreign assignee to be cov-ered by the draft Convention (article 24 (a) (i)), theassignor would need to be located in a Contracting State(article 1 (a)) and that State, by definition in a domesticassignment of a domestic receivable (article 3), would bethe State in which both the domestic debtor and the domes-tic assignee would be located. However, as a result of thecentral-administration location rule, different laws mightapply to a conflict between an assignment by a branchoffice and an assignment by the head office, if the branchor the head office is not located in a Contracting State.

Scope of chapter V

21. Under article 1 (3), the private international law pro-visions of chapter V apply to assignments with an interna-tional element as defined in article 3, whether or not theassignor or the debtor is located in a Contracting State. Thejustification for limiting the scope of application of chapterV lies in the wish to reduce any conflicts with other con-ventions, dealing with private international law issues ofassignment (e.g. the European Union Convention on theLaw Applicable to Contractual Obligations, Rome, 1980(“the Rome Convention”) and the Inter-American Conven-tion on the Law Applicable to International Contracts,Mexico City, 1994 (“the Mexico City Convention”)). TheCommission may wish to reconsider this approach. Defin-ing the scope of application of private international lawprovisions by reference to substantive or even artificialnotions of internationality would not appear to be appropri-


ate. In any case, the question of conflicts with other privateinternational law texts is already sufficiently addressed inarticles 36 (giving precedence to any other internationallegislative text that deals with the same matters) and 37(allowing States to opt out of chapter V).

22. The Commission may also wish to consider dealingwith the issue of the hierarchy between the substantive andthe private international law provisions of the draft Con-vention with a view to ensuring that the substantive lawprovisions apply first (the matter is addressed in article 24by the words “with the exception of matters which aresettled elsewhere in this Convention”). A new provisioncould be inserted at the beginning of chapter V that woulddeal with the scope of chapter V, the hierarchy betweenchapter V and the rest of the draft Convention and with theright of States to opt out of chapter V. Such a provisioncould read along the following lines: “Chapter V applies toassignments independently of the provisions of chapter I.In the case of an assignment to which this Conventionapplies in accordance with chapter I, chapter V applies tomatters that are not settled elsewhere in this Convention. Ifa State makes a declaration under article 37, chapter V doesnot apply.” Article 37 would serve to explain the effect ofsuch a declaration (for further comments on the scope andpurpose of chapter V, see paras. 187-189). If such an ap-proach were to be followed, article 1 (3) could be deletedor refer only to the possibility for a reservation by Stateswith respect to the application of chapter V.

Application of the annex

23. Article 24 of the draft Convention refers priority is-sues to the law of the assignor’s location (as to the meaningof “location”, see article 6 (i)). In recognition of the factthat some States may need to modernize or adjust theirpriority rules, article 1 (4) allows States to opt into one ofthe two substantive law priority rules set forth in the annex.Article 40 (2) clarifies the effect of a declaration underarticle 1 (4), namely, that, for the purposes of article 24, thelaw of the assignor’s location is the priority rule of theannex chosen by the Contracting State in which theassignor is located (for the choices given to States and ef-fects of declarations, see para. 216). Once article 40 is fi-nalized, the Commission may wish to reconsider the for-mulation and the proper place of article 1 (4) in the draftConvention.



(a) “assignment” means the transfer by agreementfrom one person (“assignor”) to another person (“as-signee”) of the assignor’s contractual right to payment ofa monetary sum (“receivable”) from a third person (“thedebtor”). The creation of rights in receivables as securityfor indebtedness or other obligation is deemed to be atransfer;

(b) in the case of an assignment by the initial or anyother assignee (“subsequent assignment”), the personwho makes that assignment is the assignor and the per-son to whom that assignment is made is the assignee.

References:

A/CN.9/420, paras. 33-44A/CN.9/432, paras. 39-69 and 257A/CN.9/434, paras. 62-77A/CN.9/445, paras. 146-153A/CN.9/456, paras. 38-43A/CN.9/466, paras. 87-91

Commentary

Assignment and contract of assignment or financingcontract

24. Like most legal systems, the draft Convention recog-nizes the distinction between the assignment itself as atransfer of property and the contract of assignment as atransaction creating personal obligations (in other words,between the assignment and its causa, that is, a sale, secu-rity agreement, gift or payment). This distinction may beapparent where the contract of assignment and the assign-ment take place at different points of time and are part ofseparate agreements (as, e.g. in securitization and projectfinance transactions). It may not be as apparent where thetwo transactions take place simultaneously and are embod-ied in a single contract (as, e.g. in factoring transactions).While the main focus of the draft Convention is on assign-ment as a transfer of property rights in receivables, thedraft Convention deals also with contractual matters in ar-ticles 13 to 16 and 28. However, the draft Convention doesnot address the issue of the relationship between the assign-ment and the contract of assignment. This relationship istreated differently from one legal system to another. Insome legal systems, the effectiveness of an assignmentdepends on the validity of the contract. In other legal sys-tems, the assignment is treated as an “abstract transaction”,that is, legally independent of the underlying contract in thesense that defects in the underlying contract do not auto-matically affect the validity of the assignment and viceversa. In yet other legal systems, the assignment is a sepa-rate act but may be affected by the invalidity of the con-tract. In practice, a defect in the contract of assignment willoften lead to the nullification of the assignment itself. How-ever, in those limited cases in which only the contract maybe invalid, the assignor will have only a personal claimagainst the assignee limited to restitution of any unjustenrichment and will not be able to have the assigned re-ceivable separated from the assignee’s insolvency estate orto oppose the attachment of the assigned receivable in thehands of the assignee.

25. In particular, the draft Convention does not refer to thepurpose of an assignment, that is whether an assignment ismade for purely financing purposes or for book-keeping,collection, insurance, risk-management, portfolio diversifi-cation or other purposes. Such qualifications interfere withthe purpose of the contract of assignment or the financingcontract and would result in: inappropriately limiting thescope of the draft Convention to purely financing transac-tions and in creating a special regime on assignments forfinancing purposes, even though one is not needed; uncer-tainty, since there is no universal understanding of the terms“financing” and “commercial”, and a uniform definition isneither feasible nor desirable; and in unnecessarily exclud-


ing from the scope of the draft Convention important trans-actions in which only services may be provided (with regardto the possible impact of such an approach on national law,see para. 20; as to potential conflicts with the Convention onInternational Factoring, Ottawa, 1980 (“the Ottawa Conven-tion”), see paras. 204-206).

“Transfer by agreement”

26. With the intention of bringing within the ambit of thedraft Convention, in addition to assignments, other practicesinvolving the transfer of property rights in receivables, suchas contractual subrogation or pledge, article 2 defines “as-signment” as a transfer. This approach takes into account thefact that significant receivables financing transactions, suchas factoring, take place, in some legal systems, by way of acontractual subrogation or pledge. Rather than creating anew type of assignment, the draft Convention is aimed atproviding uniform rules on assignment and assignment-re-lated practices with an international element, which, al-though covered in theory by currently existing national law,could not be sufficiently developed in view of the inherentlimitations on the application of national law to matters ofmandatory law in an international context. The reference totransfers “by agreement” is intended to exclude transfers byoperation of law (e.g. statutory subrogation).

27. Both outright transfers, including those made for se-curity purposes, and assignments by way of security areintended to be covered, whether “value, credit or services”is given or promised at the time of the assignment or at anearlier time (consideration is not mentioned in article 2,since it is a matter for the contract of assignment or thefinancing contract). In order to avoid any ambiguity as towhether an assignment by way of security is covered, thematter is addressed explicitly in article 2 (a), which createsthe legal fiction that, for the purposes of the draft Conven-tion, the creation of security rights in receivables is deemedto be a transfer. However, the draft Convention does notdefine outright assignments and assignments by way of se-curity. This matter is left to other law applicable outside thedraft Convention, since, in view of the wide divergencesexisting among legal systems as to the classification oftransfers, an assignment by way of security could in factpossess attributes of a sale, while a sale might be used asa security device.

“From one person to another person”

28. Both the assignor and the assignee can be legal enti-ties or individuals, whether merchants or consumers. Inparticular, the assignment between individuals is covered,unless the assignee is a consumer and the assignment ismade for his/her own consumer purposes (article 4 (1) (a)).As a result, the assignment of credit card receivables or ofloans secured by real estate in securitization transactionsand of toll-road receipts in project financing arrangementsfall within the ambit of the draft Convention. In view of thefact that in the draft Convention the singular includes theplural and vice versa, an assignment made by many per-sons (e.g. joint owners of receivables) or to many persons(e.g. a syndicate of financiers) is also covered (so is theassignment of more than one receivable). In the determina-tion, however, of the territorial scope of application or in-ternationality, each assignment should be considered a

separate assignment and meet the conditions of chapter Ifor the draft Convention to apply (as to cases involvingmultiple debtors, see para. 38). In an assignment to a trus-tee acting on behalf of several persons, whether there areone or several assignees depends on the exact authority ofthe trustee, that is, whether the trustee was a mere agent orhad the authority to make substantive decisions. This mat-ter is left to law outside the draft Convention.

“Contractual right to payment of a monetary sum”

29. Receivables arising from any type of contract are in-tended to be covered, whether the contract exists at thetime of assignment or not. The transfer of receivables aris-ing by operation of law, such as tort receivables, receiva-bles arising in the context of unjust enrichment, tax re-ceivables or receivables determined in court judgements orarbitral awards, are excluded, unless they are confirmed ina settlement agreement. What is a “contractual” right is amatter of interpretation in accordance with the law govern-ing that right. However, contractual receivables, the assign-ment of which is covered by the draft Convention, includereceivables arising under contracts for the sale of goods orthe provision of services, whether those contracts are com-mercial or consumer transactions; receivables in the formof royalties arising from the licensing of intellectual prop-erty; damages for breach of contract; interest if it was owedunder the original contract; dividends arising from shares,whether they were declared at, or arose after, the time ofthe assignment; the right to receive payment of the pro-ceeds of an independent guarantee or a letter of credit; andreceivables in the form of credit balances in deposit ac-counts or securities transactions.

30. While, in principle, the right of the assignor/seller toany goods returned by the buyer (debtor) is not a receivableunder the draft Convention, as between the assignor and theassignee, it is treated as a receivable to the extent that anygoods returned by the buyer take the place of the assignedreceivable (article 16; but, as against third parties, the as-signee does not have a right to any returned goods, sincethey are excluded from the definition of “proceeds” in article6 (k)). Furthermore, non-monetary rights convertible into amonetary sum (e.g. the assignment of rights arising in acommodity swap) are receivables the assignment of which iscovered. To the extent that the conversion is foreseen in theoriginal contract, this result is implicit in article 2; to theextent that such a conversion is not foreseen in the originalcontract, it is in line with the Working Group’s decision tocover the assignment of non-monetary rights converted intodamages for breach of contract. This result is also implicit inarticle 5, which relates to swaps and derivatives transactions.The Commission may wish to reflect this understandingexplicitly in the draft Convention. The Commission mayalso wish to consider whether unilateral assignments shouldbe covered, although such assignments are rare in practice.In addition, after acceptance of the proceeds of the assignedreceivable a de facto assignment would exist. However, inthe few situations where a unilateral assignment is made anda conflict arises with a Convention assignment before anyimplicit agreement by way of the assignee’s acceptance ofpayment, it may be desirable to ensure that the conflict isresolved under article 24 on the basis of the law of theassignor’s location.


Non-monetary performance rights

31. The assignment of other, non-monetary, contractualrights (e.g. the right to performance, the right to declare thecontract avoided or the right to request delivery of a com-modity or a security under a swap or repurchase agree-ment) or of composite rights (e.g. the right to present docu-ments and demand payment under an independentguarantee or a letter of credit) is not covered. The Commis-sion may wish to reconsider the exclusion of assignment ofnon-monetary contractual rights to performance. Such anapproach may result in parts of one and the same assign-ment transaction being submitted to different legal regimes,since in practice assignments often relate to all rights aris-ing under a contract and assignees rely on non-monetaryperformance rights as well (draft article 12.101 of the Eu-ropean Contract Principles refers to “rights to payment orother performance”;9 however, draft article 1.1 of the Prin-ciples on Assignment of the International Institute for theUnification of Private Law (“Unidroit”) is modelled onarticle 2).10 Assignments of contracts, which involve anassignment of contractual rights and a delegation of obliga-tions, are not covered either. While such transactions mayform part of financial arrangements, the financier wouldnormally rely mainly on the receivables. As to the delega-tion of obligations, the Working Group thought that itshould not be covered because it raises issues going farbeyond the desirable scope of the draft Convention.

Parts or undivided interests in receivables

32. Important practices that are intended to be covered bythe draft Convention involve the assignment of parts orundivided interests in receivables (e.g. securitization, loansyndication and participation). The effectiveness of suchpartial assignments is not common ground in all legal sys-tems. Article 9, therefore, validates such assignments.However, in view of the fact that there is no explicit refer-ence in chapter I to such partial assignments, it is not clearwhether the draft Convention as a whole applies to them(including the debtor protection provisions, the applicationof which is important if the receivable is partially assignedto several assignees and the debtor incurs expenses to payto more than one person). The Commission may, therefore,wish to clarify this matter in article 2 (a), by adding, forexample, before the words “of the assignor’s contractualright” the words “all or part” (the matter is addressed indraft article 12.103 of the European Contract Principles anddraft article 1.3 of the Unidroit Principles on Assignment).

33. With regard to monetary rights that are divisible, thedebtor will normally be able to make partial payment. Thismay not be the case with non-monetary performance rights,since dividing performance rights could change the rela-tionship between performance and counter-performanceand have a negative impact on the legal position of thedebtor. Therefore, if the Commission decides to includeassignments of non-monetary performance rights within the

ambit of the draft Convention, it may wish to clarify that apartial assignment of such rights is permitted only if theymay be divided (e.g. if the debtor is entitled to make aseparate payment for the part of the performance assigned;see draft article 12.103 (2) of the European Contract Prin-ciples). In addition, the Commission may wish to considerthe position of the debtor in the case of a partial assignmentof a monetary receivable. In practice, creditors are inter-ested in a normal flow of payments and it is, therefore,unlikely that a debtor would be requested to pay more thanone assignee. In addition, under article 17, such a requestcould only involve different payees in the same countryand could not result in any additional cost to the debtor.

34. However, the matter may need to be addressed explic-itly. The Commission may wish to consider, for example,that, at the discretion of the debtor, a notification should betreated as ineffective if the related payment instruction in-structs the debtor to pay to a designated payee less than theamount due under the original contract. Such an approachwould result in covering all combinations of single or mul-tiple assignments of parts or undivided interests in receiva-bles, whether they involve lump-sum or periodic payments.It would also result in protecting the debtor in a sufficient butflexible way, without prescribing, in a regulatory manner,what the assignor, the debtor or the assignee ought to do andwithout creating liability. If the debtor is prepared to complywith an instruction to pay multiple assignees, there is noreason to prevent parties from doing what they all want todo. On the other hand, if the debtor pays while being una-ware of its right to ignore such a payment instruction, theoptional character of the ineffectiveness of the notificationwould preserve the pro tanto discharge of the debtor as aresult of the payment in accordance with payment instruc-tions. Alternatively, in the case of a partial assignment, theidentification of a single payee could be made a condition ofthe effectiveness of a notification and the related paymentinstruction. In such a case, if the debtor is faced with instruc-tions to pay more than one assignee of parts of a receivable,the debtor could be allowed to obtain a discharge by payingthe assignor or the first assignee to notify (additional word-ing may need to be included in articles 18 and 19). A thirdalternative may be to establish the debtor’s right to seek fromthe assignor compensation of any additional costs incurredby the debtor as a result of a partial assignment or even aright of set-off against the assignee. In cases where a right tocompensation may not adequately protect the debtor againstexposure to separate proceedings commenced by theassignor and one or more assignees, the debtor may be givena right to apply for an order for all claimants to be joined inone proceeding, in which a decision will be binding to all(draft article 12.103 (3) and (4) of the European ContractPrinciples).

Personal rights/statutory assignability

35. Article 2 does not refer to personal rights that by laware not assignable (e.g. wages, pensions, insurance policiesand sovereign receivables). It is assumed, however, thatstatutory limitations on assignment, other than those ad-dressed in article 9, are not intended to be covered (seeparas. 84 and 85). The Commission may wish to state thisunderstanding explicitly in article 2 (draft article 12.302 ofthe European Contract Principles refers to “a performance

9Reference is made to the draft available in December 1999, prepared forthe Commission on European Contract Law by Professor Roy Goode.

10Reference is made to Unidroit 1999, Study L—Doc.65 of December1999, Working Group for the preparation of Principles on InternationalCommercial Contracts, chapter [...], Assignment of rights, transfer of dutiesand assignment of contracts, Section I: assignment of rights (draft andexplanatory notes prepared by Professor Marcel Fontaine).


which the debtor, by reason of the nature of the perform-ance or the relationship of the debtor and the assignor,could not reasonably be required to render to anyone ex-cept the assignor”; and draft article 1.3 of the UnidroitPrinciples on Assignment refers to rights that have “a per-sonal character or the assignment [of which] is prohibitedby the applicable law”).

“[Owed by] a third person”

36. Apart from the assignor and the assignee, the debtortoo could be a legal entity or an individual, a merchant ora consumer, a governmental authority or financial institu-tion (or there could be a multiplicity of debtors). Unlike theOttawa Convention, the draft Convention does not excludecommercial practices involving the assignment of contrac-tual receivables owed by consumers, unless the assignmentis to a consumer for his/her consumer purposes (articles 4(1) (a)). Assignments of consumer receivables form part ofsignificant practices, such as securitization of credit cardreceivables, the facilitation of which has the potential toincrease access to lower-cost credit by manufacturers, re-tailers and consumers and, as a result, could facilitate inter-national trade in consumer goods. However, while coveringthe assignment of consumer receivables, the draft Conven-tion is not intended to override consumer-protection law.This principle flows from the general debtor protectionprinciple enshrined in article 17 (1). It is also reflected ina number of provisions of the draft Convention, as, forexample, in articles 21 (1) and 23, under which a con-sumer-debtor cannot waive any defences and rights of set-off and has a right to recover payments from the assignee,if the consumer protection law applicable in the country ofthe debtor so provides (for anti-assignment clauses in aconsumer context, see para. 100).

37. The assignment of receivables owed by a Governmentor a public entity is covered, unless they are unassignable bylaw (a matter that may need to be explicitly clarified; as tostatutory limitations, see paras. 84 and 85). However, theState in which the sovereign debtor is located may enter areservation as to the rule of article 11 that assignments areeffective notwithstanding a contractual limitation on assign-ment (see paras. 213 and 214). Receivables owed by debtorsin financial contracts, such as loans, deposit accounts, swapsand derivatives, are also covered by the draft Convention.However, the effectiveness of an assignment in general oronly as to the debtor of such a receivable may be left to lawoutside the draft Convention (article 5). Furthermore, theassignment of one or more than one receivable, whether inwhole or in part, owed jointly (i.e. fully) and severally (i.e.independently) by multiple debtors is also covered, providedthat the contract from which the assigned receivables arise(hereinafter referred to as “the original contract”) is gov-erned by the law of a Contracting State. If, however, theoriginal contract is not governed by the law of a ContractingState and one or more, but not all, debtors are located in aContracting State, each transaction should be viewed as anindependent transaction and thus debtors who are not lo-cated in a Contracting State should not be affected by thedraft Convention. Otherwise, the predictability as regardsthe application of the draft Convention to rights and obliga-tions of debtors, which is one of the main objectives of thedraft Convention, could be compromised.


A receivable is international if, at the time of the conclu-sion of the original contract, the assignor and the debtor arelocated in different States. An assignment is internationalif, at the time of the conclusion of the contract of assign-ment, the assignor and the assignee are located in differentStates.

References:

A/CN.9/420, paras. 26-29A/CN.9/432, paras. 19-25A/CN.9/445, paras. 154-167A/CN.9/456, paras. 44, 45, 227 and 228A/CN.9/466, paras. 92 and 93

Commentary

38. With a view to achieving certainty in the application ofthe draft Convention, article 3, following the example ofother texts prepared by UNCITRAL or other organizations,defines internationality by reference to the location of theparties (under article 6 (i), “location” means place of busi-ness or, in the case of more than one place of business of theassignor and the assignee, the place of central administrationor, in the case of no place of business, the habitual resi-dence). In the case of more than one assignor, assignee ordebtor, internationality is to be determined for each of thoseparties separately (see paras. 28 and 37). As a result of article3, once a receivable is international, its assignment is cov-ered by the draft Convention, whether the receivable isassigned to a domestic or to a foreign assignee. On the otherhand, even if a receivable is domestic, its assignment maycome within the ambit of the draft Convention if it is inter-national or it is part of a chain of assignments that includesan earlier international assignment (see para. 19).

39. The international character of an assignment is deter-mined at the time it is made, while internationality of areceivable is determined at the time of the conclusion of theoriginal contract (“at the time it arises”). Determining theinternationality of a receivable at the time it arises is justi-fied by the need for a potential assignor to know at the timeof the conclusion of the original contract which law mightapply to a potential assignment. Such knowledge is impor-tant for a potential assignor to be able to determine whetherand at what cost the assignor may obtain credit and, on thatbasis, to decide whether to extend credit to the debtor andon what terms. As a result of this approach to the relevanttime for determining internationality, however, in the caseof a domestic bulk assignment of domestic and interna-tional future receivables, the parties may not be able topredict at the time of the assignment whether the draft Con-vention will apply (this problem would not arise, however,in the case of international assignments of domestic or in-ternational receivables, since the internationality of an as-signment could be determined at the time it is made). Fur-thermore, in the case of a domestic assignment of bothdomestic and international receivables, the draft Conven-tion would apply to the assignment of the internationalreceivables but not to the assignment of the domestic re-ceivables. This means that, depending on whether the draft


Convention applies, implied representations as between theassignor and the assignee, as well as the legal position ofthe debtor may be different (e.g. as to defences and rightsset-off, but not as to discharge, since the debtor may dis-charge under law applicable outside the draft Convention).However, the applicable priority rules would not be differ-ent, since the draft Convention would cover in any case allpossible conflicts of priority, including conflicts with adomestic assignee of domestic receivables.

40. Parties to domestic assignments will, therefore, needto structure their transactions in a certain way to avoid thisproblem (e.g. by avoiding to assign in one transaction bothdomestic and international receivables). Where parties arenot able to do so, they will be exposed to the possibilitythat one law may apply to domestic receivables while an-other law, the draft Convention, would apply to interna-tional receivables. This problem, however, is not created bythe draft Convention; it exists already outside the draftConvention in cases where domestic and international re-ceivables are assigned. Furthermore, structuring a transac-tion under the draft Convention would be easier than underother law, at least, to the extent that parties to a domesticassignment will be faced with only two laws that maypossibly apply to their assignment, the law of the country,in which the assignor and the assignee are located, and thedraft Convention. In addition, a debtor’s legal positionwould not be changed, unless the debtor is located in aContracting State or the law governing the receivable is thelaw of a Contracting State.


(1) This Convention does not apply to assignments:

(a) Made to an individual for his or her personal, fam-ily or household purposes;

(b) To the extent made by the delivery of a negotiableinstrument, with any necessary endorsement;

(c) Made as part of the sale, or change in the owner-ship or the legal status, of the business out of which theassigned receivables arose.

[(2) This Convention does not apply to assignments listedin a declaration made under article 39 by the State in whichthe assignor is located, or with respect to the provisions ofthis Convention which deal with the rights and obligationsof the debtor, by the State in which the debtor is located.]

References:

A/CN.9/432, paras. 18, 47-52, 106 and 234-238A/CN.9/434, paras. 42-61A/CN.9/445, paras. 168-179A/CN.9/456, paras. 46-52A/CN.9/466, paras. 54-59, 78-86 and 192-195

Commentary

41. In view of the broad scope of application of the draftConvention, article 4 is intended to exclude certain prac-tices that are either distinct from assignment-related prac-tices or are already sufficiently regulated.


42. Subparagraph (a) is intended to exclude from thescope of the draft Convention assignments from a businessentity or a consumer to a consumer but only if they aremade for the assignee’s personal, family or household pur-poses. The Working Group agreed that such assignmentswere of no practical significance. As a result, assignmentsof consumer receivables were not excluded, unless made toa consumer for his/her consumer purposes.

Assignments of negotiable instruments

43. Subparagraph (b) is intended to exclude transfers ofnegotiable instruments. Such transfers are distinct from as-signments and are regulated by specific rules of nationaland international law (e.g. there is no requirement for thenotification of a transfer; if the debtor pays a transfereewho is not the holder, the debtor is still liable to the holder;a person who takes the instrument for value and withoutknowledge of any hidden defences against the transferor isnot subject to those defences). Rather than referring to thedocumentary nature of a receivable, subparagraph (b) fo-cuses on the form of the transfer. Such an approach issufficient to preserve the negotiability of an instrument,while it avoids the need to define “negotiable instrument”,a term on which there is no universal understanding. Ex-cluded are transfers of receivables made by endorsementand delivery or by mere delivery of an instrument. Suchinstruments include bills of exchange, promissory notes,cheques and bearer documents (e.g. negotiable securities).

44. Receivables arising under a contract are often incor-porated into a negotiable instrument for the sole purpose ofobtaining payment by way of summary proceedings incourt, if necessary. In such cases, both the receivable aris-ing under a contract and the receivable incorporated into anegotiable instrument may be transferred. The words “tothe extent made by the delivery ... with any necessary en-dorsement” are intended to ensure that only the transfer ofthe receivable in the form of a negotiable instrument andnot of the receivable in its contractual form is excludedfrom the scope of application of the draft Convention. TheCommission may wish to consider whether article 4 (b)should refer to transfers of dematerialized (i.e. electronic)negotiable instruments.

Assignments of receivables in corporate buyouts

45. Subparagraph (c) is aimed at excluding assignmentsmade in the context of the sale of a business as a goingconcern, if they are made from the seller to the buyer. Suchassignments are excluded since they are normally regulateddifferently by national laws dealing with corporate buyoutsand are not of a financing nature. However, assignmentsmade to an institution financing the sale are not excluded.

Other types of assignments or receivables

46. In the course of its work, the Working Group consid-ered the exclusion of other types of assignments, such asassignments by operation of law, assignments as gifts, as-signments of wages, contractual rights in general, insurancepremiums, rights under independent guarantees and lettersof credit (“independent undertakings”), assignments of


rents from real estate and equipment and assignments ofbalances in deposit accounts. As to assignments by opera-tion of law, it should be noted that they are excluded inview of the definition of “assignment” by reference to a“transfer by agreement” (article 2 (a)). In view of the factthat consideration was thought to be part of the contract ofassignment, which, with the exception of articles 13 to 16and 28, is not addressed in the draft Convention, the Work-ing Group decided not to address assignments as gifts.

47. As to the assignment of wages (or pensions), theWorking Group decided to leave the matter to other law. Ifsuch assignments are prohibited under national law, thedraft Convention does not affect that prohibition. If, how-ever, such assignments are not prohibited under nationallaw, with a view to preserving significant practices, such asthe financing of temporary employment services, the draftConvention does not do anything to invalidate them. How-ever, that result may not be achieved, unless a specificreference to statutory limitations relating to personal orsimilar receivables is included in article 9, which validatesassignments of future receivables, without any exception asto personal rights that may not be assignable under nationallaw (on this matter, see also paras. 84 and 85).

48. The assignment of the right to present an independentundertaking along with any documents it requires and de-mand payment is not intended to be covered by the draftConvention (the Commission may wish to state this resultexplicitly in article 4). However, the assignment of the pro-ceeds of payment of an independent undertaking is coveredby the draft Convention, with the additional protection intro-duced in article 5 for the guarantor/issuer of such an inde-pendent undertaking. As to the assignment of receivablesarising from the sale or lease of mobile equipment, theWorking Group decided that it should not be excluded.Article 36 was thought to be sufficient to address any con-flicts with a preliminary draft Convention currently beingprepared (see para. 211; as to the assignment of receivablesother than trade receivables, see paras. 50-54). In order toreduce the potential for such conflicts, the Commission maywish to consider whether the assignment of receivables aris-ing from the sale or lease of high-value mobile equipmentshould be treated in the same way as assignments of receiva-bles other than trade receivables (i.e. whether contractuallimitations on assignment need to be given effect to theextent of invalidating the assignment in general or only asagainst the debtor). Article 12 (5) would be sufficient topreserve any form or registration requirements relating tosecurity and other supporting rights in high-value mobileequipment and article 24 would be sufficient to ensure thatany conflicts of priority would be subject to the preliminarydraft Convention if the assignor is located in a State party tothe preliminary draft Convention.

49. In the interest of enhancing the acceptability of thedraft Convention, paragraph (2), which appears withinsquare brackets since it has not been adopted yet by theWorking Group, is intended to ensure that States are giventhe option to exclude further practices. Such an approachmay be necessary if no agreement is reached on the practicesto be excluded in paragraph (1) or in order to address con-cerns that might arise in the future. However, a possibledisadvantage of such an approach would be that the scope of

the draft Convention could vary from State to State, with theresult that, in view of the multiplicity of parties involved andthe possibility that one or more but not all potentially rel-evant States might have made a declaration, the exact scopeof the draft Convention would not be easy to ascertain.

[Article 5. Limitations on [assignments of] receivablesother than trade receivables

Variant A

(1) Articles 17, 18, 19, 20 and 22 do not affect therights and obligations of the debtor in respect of a receiv-able other than a trade receivable except to the extent thedebtor consents.

(2) Notwithstanding articles 11 (2) and 12 (3), anassignor who assigns a receivable other than a trade re-ceivable is not liable to the debtor for breach of a limi-tation on assignment described in articles 11 (1) and 12(2), and the breach shall have no effect.

Variant B

Articles 11 and 12 and section II of chapter IV applyonly to assignments of trade receivables. With respect toassignments of receivables other than trade receivables,the matters addressed by these articles are to be settled inconformity with the law applicable by virtue of the rulesof private international law.]

Reference:

A/CN.9/466, paras. 60-77

Commentary

50. Article 5, which appears within square brackets sinceit has not been adopted by the Working Group, is intendedto address special needs of practices involving, for exam-ple, swaps and derivatives, repos, receivables in clearing-house transactions, deposit accounts, securities accounts, aswell as insurance receivables and receivables arising fromindependent undertakings. In those practices, it is essentialto ensure that the position of the debtor is not changed asa result of an assignment, without the debtor’s consent (i.e.that the debtor may ignore any notification, discharge itsdebt as stipulated in the original contract, retain all its de-fences and rights of set-off, as well as the right to amendthe original contract without the consent of the assignee).

51. With regard to swaps and derivatives in particular, theapproach of article 5 appears to be justified by the fact that,in such financial transactions, it is inherent that any partymay be debtor or creditor and, by definition, payments netagainst each other. As a result, if one payment is pulled out,the whole transaction may be unravelled. In other words, anassignment may increase the credit risk on the basis of whicha party entered into the transaction. In view of the impor-tance of such transactions for international financial marketsand their volume, such a situation may create a systemic riskthat may affect the financial system as a whole. The sametwo-way flow of payments and the need to preserve the


mutual character of payments may exist with regard to clear-ing-house transactions. As to repos, it would need to beensured that a party does not find its obligation to payassigned to and pursued by another party while the originalcounter-party refuses to return the security.

52. As to other types of receivables (assignments of bal-ances in deposit accounts, insurance receivables and pro-ceeds of independent undertakings), an article 5 approachmay be required for different reasons. With regard to inde-pendent undertakings, for example, there is a need to avoidupsetting well established practices or contradicting theUnited Nations Convention on Independent Guarantees andStand-by Letters of Credit, New York, 1995 (“the Guaran-tee and Standby Convention”)). Articles 11 (1) and 12 (2)would contradict article 10 of the Guarantee and StandbyConvention, under which the beneficiary may not assignany proceeds without the consent of the guarantor/issuer.As to deposit accounts and securities accounts, it is essen-tial to ensure that rights of set-off of the depositary institu-tion or the securities broker are not affected.

53. In both variants A and B, receivables are defined byreference to the well-known notion of “trade receivable”.This approach has the advantage that it avoids the need todefine the term “financial receivable”, a term that is notuniversally understood in the same way and whose mean-ing keeps changing with the creation of new practices. Onthe other hand, by referring to any receivable other than atrade receivable, article 5 may inadvertently result in ex-cluding transactions that should not be excluded. The Com-mission may, therefore, wish to define the excluded prac-tices in a more specific way. The main difference betweenvariants A and B lies in the fact that, under variant A, theassignment may be valid as between the assignor and theassignee and only its effects as against the debtor are left tolaw applicable outside the draft Convention, while, undervariant B, the validity and effectiveness of an assignmentaltogether is left to law applicable outside the draft Con-vention. Another difference is that, unlike variant B, vari-ant A gives the debtor the right to consent to the applica-tion of the draft Convention to the debtor’s rights andobligations. Yet another difference between variants A andB is that, under variant A, the debtor would not have theright to terminate the original contract for breach of a con-tractual limitation on assignment.

54. The value of preserving the validity of the assignmentas between the assignor and the assignee lies in the fact thatsuch validity is a condition for obtaining priority. If thedebtor pays the assignor, the assignee has a property claimin the assigned receivable. Such an approach is intended tofacilitate practices in which the assignor receives paymentson behalf of the assignee and holds the proceeds separatefrom its other assets (e.g, securitization or undisclosed in-voice discounting). In addition, such an approach is in-tended to preserve for assignors, assignees, third-partycreditors and consenting debtors, in practices involving theassignment of financial receivables, or of both trade andfinancial receivables, the main benefits of the draft Con-vention, which cannot be ensured by way of contract asthey are normally part of mandatory law (e.g. the validityof assignments of future receivables and of bulk assign-ments, as well as the priority rules of the draft Convention).




(a) “Original contract” means the contract between theassignor and the debtor from which the assigned receivablearises;

(b) “Existing receivable” means a receivable that arisesupon or before the conclusion of the contract of assign-ment; “future receivable” means a receivable that arisesafter the conclusion of the contract of assignment;

[(c) “Receivables financing” means any transaction inwhich value, credit or related services are provided forvalue in the form of receivables. Receivables financingincludes factoring, forfaiting, securitization, project financ-ing and refinancing;]

(d) “Writing” means any form of information that isaccessible so as to be usable for subsequent reference.Where this Convention requires a writing to be signed, thatrequirement is met if, by generally accepted means or aprocedure agreed to by the person whose signature isrequired, the writing identifies that person and indicatesthat person’s approval of the information contained in thewriting;

(e) “Notification of the assignment” means a communi-cation in writing which reasonably identifies the assignedreceivables and the assignee;

(f) “Insolvency administrator” means a person or body,including one appointed on an interim basis, authorized inan insolvency proceeding to administer the reorganizationor liquidation of the assignor’s assets or affairs;

(g) “Insolvency proceeding” means a collective judicialor administrative proceeding, including an interim proceed-ing, in which the assets and affairs of the assignor aresubject to control or supervision by a court or othercompetent authority for the purpose of reorganization orliquidation;

(h) “Priority” means the right of a party in preference toanother party;

(i) A person is located in the State in which it has itsplace of business. If the assignor or the assignee has morethan one place of business, the place of business is thatplace where its central administration is exercised. If thedebtor has more than one place of business, the place ofbusiness is that which has the closest relationship to theoriginal contract. If a person does not have a place of busi-ness, reference is to be made to the habitual residence ofthat person;

(j) “Law” means the law in force in a State other than itsrules of private international law;

(k) “Proceeds” means whatever is received in respect ofan assigned receivable, whether in total or partial paymentor other satisfaction of the receivable. The term includeswhatever is received in respect of proceeds. The term doesnot include returned goods;

[(l) “Trade receivable” means a receivable arising underan original contract for the sale or lease of goods or theprovision of services other than financial services.]


References:

A/CN.9/420, paras. 52-60A/CN.9/432, paras. 70-72, 94-105A/CN.9/434, paras. 78-85, 109-114, 167 and 244A/CN.9/445, paras. 180-190A/CN.9/456, paras. 53-78A/CN.9/466, paras. 25-31, 46-49 and 94-100

Commentary

“Original contract”

55. The original contract, which is used as a point of ref-erence in articles 6 (i), 17, 18 (1), 19 (1), 20 (1), 22 (2) (b)and 23, is the source of the assigned receivable. With theexception of those provisions which expressly state other-wise (e.g. articles 9-12 and 17-23), the draft Convention isnot intended to affect the original contract.

“Existing” and “future” receivable

56. The terms “existing” and “future” receivable are re-ferred to in articles 9 (effectiveness of an assignment) and10 (time of assignment). The distinction between an exist-ing and a future receivable is based on the time of theconclusion of the original contract. A receivable arisingunder a contract, which has been concluded before or at thetime of assignment, is considered to be an existing receiv-able, even though it does not become due until a future dateor is dependent upon counter-performance or some otherstated event. The definition covers the entire range of fu-ture receivables, including conditional receivables (i.e. re-ceivables that might arise subject to a future event that mayor may not take place) and purely hypothetical receivables(i.e. receivables that might arise from an activity not initi-ated by the assignor at the time of the assignment; for alimitation introduced in article 9, see para. 89). The exactmeaning of the term “conclusion of the contract” is left tolaw applicable outside the draft Convention. In any case,“conclusion” is not intended to refer to the performance ofthe contract.

“Receivables financing”

57. The term appears within square brackets in the pream-ble and in article 13 (3). The Commission may wish todelete this definition and, possibly, to refer to receivablesfinancing only in the preamble (see para. 5).

“Writing”

58. The term is referred to in articles 6 (e), 19 (1) and (5),21 (1) and (3), 41 (2) and (4), 44 (1) of the draft Conven-tion and in article 5 of the annex. Its definition is intendedto include other than paper-based means of communica-tions that can perform the same functions as a paper com-munication (e.g. provide tangible evidence, serve as awarning to the parties with regard to the consequences orprovide a legible communication, authentication and suffi-cient assurances as to its integrity). It is inspired by articles6 and 7 of the UNCITRAL Model Law on ElectronicCommerce and reflects the two distinct notions of “writ-ing” and “signature”.

59. On the assumption that the need for higher assurancesas to the authenticity of communications should be as-sessed differently depending on the context in which thecommunication is made, the draft Convention requires awriting for the notification of the assignment and a writingsigned by the debtor for the waiver of the debtor’s de-fences. Writing is also required for declarations by Statesand for certain registration-related acts. “Accessible” ismeant to imply that the communication is readable andinterpretable; “usable” refers not only to use by a physicalperson but also by a computer; and “subsequent reference”establishes a standard that is akin to that implied by a no-tion such as durability (while not referring to the strict in-terpretation given to the notion of durability in certain legalsystems as equivalent to non-alterability) but more objec-tive than that implied by notions such as readability orintelligibility (see Guide to Enactment of the Model Law,para. 50). Signature is defined by reference to the identifi-cation of the signer and indication of the signer’s approvalof the content of the communication.

“Notification of the assignment”

60. The term is used in articles 15, 16, 18, 19, 20 (2) and22. A notification meets the requirements of the draft Con-vention if it is in writing and reasonably identifies the as-signed receivables and the assignee. If a notification doesnot meet those requirements, it is not effective under thedraft Convention (i.e. it does not trigger a change in theway in which the debtor may discharge its obligation ordoes not affect the debtor’s rights of set-off or the debtor’sright to modify the original contract in agreement with theassignor). However, the question whether such a notifica-tion is valid under law applicable outside the draft Conven-tion is subject to that law. In particular, if pursuant to sucha non-conforming notification the debtor pays the personentitled to payment (whether under the draft Convention orother applicable law), under article 19 (6), the debtor isdischarged (see para. 142).

61. What is a reasonable description in each particularcase is a matter to be determined in view of the circum-stances. In general, it would not be necessary to statewhether an outright assignment or an assignment by way ofsecurity is involved or to specifically identify the debtor orthe amount. A general identification along the lines “all myreceivables from my car business to X” or “all my receiva-bles as against my clients in countries A, B and C to Y”would be reasonable. However, in the case of a partial as-signment, the amount assigned may need to be specified inthe notification (on partial assignments, see paras. 32-34and 91). Furthermore, while the notification must reason-ably identify the assignee for it to be an effective notifica-tion under the draft Convention, it does not need to identifythe payee (i.e. the person to whom or for whose account orthe address to which the debtor is to pay). As a result, anotification containing no payment instruction is effectiveunder the draft Convention (article 19 (2)). However, inview of the fact that, under the draft Convention, a notifi-cation changes the way in which the debtor may dischargeits debt, parties notifying the debtor would be encouragedto include in their notification such a payment instruction.The Working Group based the discharge of the debtor on


the notification rather than on the payment instruction inorder to avoid confusing the debtor in cases where the twocommunications might be sent separately or in which sev-eral communications might be sent to the debtor by severalpersons.

“Insolvency administrator” and “insolvencyproceeding”

62. The term “insolvency administrator” is used in articles24 (a) (iii) and 30 (1) (a) (iii) of the draft Convention andarticles 2 and 7 of the annex. The term “insolvency pro-ceeding” is used in article 25 of the draft Convention andarticles 2 and 7 of the Annex. Their definitions have beeninspired by the definitions of “foreign proceeding” and“foreign administrator” contained in article 2 (a) and (d) ofthe UNCITRAL Model Law on Cross-Border Insolvency.They are also consistent with articles 1 (1) and 2 (a) and (b)of the European Union draft Regulation on InsolvencyProceedings. By referring to the purpose of a proceeding orto the function of a person, rather than using technicalexpressions that may have different meanings in differentlegal systems, the definitions are sufficiently broad to en-compass a wide range of insolvency proceedings, includinginterim proceedings. This approach is intended to avoid aContracting State recognizing as an insolvency proceedingor administrator a proceeding or person who does not havethat character under the lex loci concursus or is unable torecognize as an insolvency proceeding or administrator aproceeding or person who has that character under the lexloci concursus.

“Priority”

63. The term “priority” is used in articles 16, 24, 25 (2),26, 27, 30 and 40 of the draft Convention, as well as inarticles 1, 2, 6 and 7 of the annex. Priority under the draftConvention means that a party may satisfy its claim inpreference to other claimants. Priority does not mean valid-ity (in the draft Convention, the term “effectiveness” isused instead, to denote the proprietary effects of the assign-ment). It presupposes a valid assignment (substantive ormaterial validity is dealt with in chapter III, while formalvalidity is left to law applicable outside the draft Conven-tion; for a secretariat suggestion to deal with the law appli-cable to formal validity, see paras. 80-82).

64. In addition, priority does not mean that a claimant hasa proprietary (in rem) rather than a personal right (ad per-sonam) with respect to the assigned receivable or any pro-ceeds. This matter is left to the law of the assignor’s loca-tion (articles 24 and 26). Moreover, priority does notprejudge the issue of whether the assignee with priority willretain all the proceeds of payment or turn over any remain-ing balance to the assignor or to the next claimant in theorder of priority. This matter depends on whether an out-right assignment or an assignment by way of security isinvolved, a matter left to law applicable outside the draftConvention (article 24). Priority does not affect the dis-charge of the debtor either. The debtor paying in accord-ance with article 19 (or, if article 19 is not applicable, inaccordance with the law applicable under article 29) is dis-charged, even if payment is made to an assignee who does

not have priority (under article 24 or, if article 24 is notapplicable, under article 30). Whether that assignee willretain the proceeds of payment is a matter of priority to beresolved among the various claimants in accordance withthe law applicable under article 24 (or article 30).

65. The definition does not refer to the right to paymentsince, while this expression might be appropriate for as-signments by way of security, it might be restrictive inoutright assignments in which the assignee may, for exam-ple, have a right to receive any goods returned by thedebtor to the assignor. After the Working Group’s decisionto exclude returned goods from the definition of proceedsfor the purposes of the priority rules of the draft Conven-tion, the Commission may wish to revise the definition ofpriority to refer to a right to payment. The Commissionmay also wish to consider whether the combined applica-tion of articles 6 (h), 9 and 24 (a) (i) is sufficient to ensurethat more than one assignment of the same receivables bythe same assignor may be effective. This result is assumedin article 24 (a) (i), which refers to a conflict of prioritybetween several assignees of the same receivables assignedby the same assignor. However, in some legal systems, thismatter does not raise a question of priority at all but one ofeffectiveness (nemo dat quod non habet). As a result, insuch jurisdictions, the first assignment may be consideredeffective under article 9 and any subsequent assignmentineffective under national law, for lack of title (a matter notaddressed in article 9, dealing with the proprietary effectsof assignment, although addressed in article 14, dealingwith the contract of assignment). In such cases, article 24may never come into play.

“Location”

66. This term is referred to in several provisions of thedraft Convention (i.e. articles 1 (1) (a) and (2), 3, 4 (2), 17(2), 21 (1), 23, 24, 25, 30, 35 (3), 36, 37 and 39). The twomain subjects, however, in which the term “location” isreferred to, are the scope of application and questions ofpriority. The definition is intended to strike a balance be-tween flexibility and certainty. The place of business is awell-known term, widely used in UNCITRAL and otherinternational legislative texts, and on which abundant caselaw exists. It is used to denote a place in which the profes-sional activities of a person or an entity are conducted. Forthe purpose of the application of the law of a State, severalplaces of business in one and the same State are consideredone place of business. In order to ensure a sufficient degreeof predictability of the application of the draft Conventionwith regard to the debtor, in the case of multiple places ofbusiness of the debtor, reference is made to the place withthe closest connection to the original contract. On the otherhand, with a view to ensuring that priority issues are re-ferred to a single jurisdiction (and one in which any maininsolvency proceeding is most likely to be opened), article6 (i) provides that, if the assignor (or the assignee) hasmore than one place of business, “place of business” meansthe place of central administration. The rule contained inarticle 6 (i) is applied throughout the draft Convention inorder to avoid defining “place of business” differently fordifferent purposes. Such an approach could complicate theapplication of the draft Convention or even lead to incon-sistent results.


67. Place of central administration is akin to the centre ofmain interests (a term used in the UNCITRAL Model Lawon Cross-Border Insolvency), chief executive office orprincipal place of business. All those terms are understoodas denoting the centre of management and control, the realbusiness centre, from which in fact, not as a matter of form,the important activities of an entity are controlled and ul-timate decisions at the highest level are actually made(without regard to the place where most assets are locatedor books and records are kept), rather than the day-to-daymanagement of the affairs and operations of such an entity.However, unlike the UNCITRAL Model Law, in which arebuttable presumption is established that the centre ofmain interests is the place of registration (article 16 (3)),the draft Convention does not introduce such a “safe har-bour” rule. The reason for this approach is that, unlike theUNCITRAL Model Law whose main focus is on insol-vency, the draft Convention focuses mainly on the advanceplanning in the financing of a solvent debtor and for thatplanning to be facilitated it is absolutely necessary to definelocation by reference to a single and easily determinablejurisdiction.

68. In most cases, the place of central administrationwould be easy to determine. However, the place of centraladministration may not be as transparent as the place ofincorporation (formal location), for example, where theplace of exercise of central authority is so evenly dividedbetween two or more countries as to make the choice ofone over the other impossible or in the case of subsidiarycompanies where the real administrative control resides inthe parent company. However, the place of incorporationpresents the disadvantage that it is not a notion known inmany legal systems and that its use would raise the prob-lem of the application of the law of a jurisdiction withouta close connection to the contract of assignment, whichmay not have any developed laws. Referring to place ofcentral administration and creating a rebuttable presump-tion in favour of the place of incorporation could providea solution to this problem, but it would inadvertently resultin reducing the level of certainty achieved by a place-of-central-administration location rule (since there may bemore than one place of registration). In any case, in theexceptional situations in which the place of central admin-istration did not readily point to a single jurisdiction, par-ties would be left in no worse situation than they were tobegin with and would endeavour to ensure that their inter-est was effective and enforceable in each jurisdiction inwhich the assignor might possibly be located.

69. The definition of “location” does not address theproblem of subjecting transactions of branch offices to thelaw of the head office (in particular priority issues, whichmay arise in cases where the same receivables are assignedby one or more branch offices and the head office, or bydifferent branch offices to different assignees). In order toaddress that problem, the Working Group, at its thirty-firstsession, considered an exception for branch offices in thebanking industry only or in other industries as well, butwas not able to reach consensus (see A/CN.9/466, paras.25-30, 96 and 97). At the end of the thirty-first session, asuggestion was made with respect to branch offices of fi-nancial service providers, which the Working Group, forlack of sufficient time, was not able to consider (see A/

CN.9/466, paras. 98 and 99). The justification for such alimited exception is that financing institutions tend to dobusiness abroad through branch offices so that they are ableto draw on their capital as a whole (and not only the capitaldeposited, e.g. for the business of a separate entity, a sub-sidiary) and their branch offices tend to be subject to thelaw of the State in which they do business.

70. Under the proposed text, in the case of a branch of afinancial service provider with more than one place ofbusiness, “place of business” of the assignor and the as-signee means the place where the branch on whose booksa receivable is carried immediately prior to the assignmentis located. “Financial service provider” is defined by refer-ence to a “bank or other financial institution” (e.g. a secu-rities dealer) and “deposits, loans or other financial serv-ices”. The exact meaning of those terms is left to lawoutside the draft Convention. “Branch” is defined by refer-ence to a place of business other than the place of centraladministration. The words “is carried on the books” aredefined by reference to “[accounting] [regulatory] stand-ards”, the exact meaning of which is also left to law outsidethe draft Convention. If an exception is introduced to thelocation rule with respect to branch offices of financialinstitutions, it would need to be made also with respect toother industries in which a branch-based structure is used(e.g. the insurance industry). The broader the exception is,the more the appropriateness of the central administrationrule is put into doubt. In its deliberations on the issue of“location” of branch offices, the Commission may wish totake into account article 1 (3) of the UNCITRAL ModelLaw on International Credit Transfers (“for the purpose ofdetermining the sphere of application of this law, branchesand separate offices of a bank in different States are sepa-rate banks”). The Commission may wish to consider theplacement of article 6 (i) in the text of the draft Convention(see para. 13).

“Law”

71. The term “law” appears in the preamble and in articles1 (2), 5, variant B, 8 (2), 12 (1), (4) and (5), 21, 23 to 25,28 to 32, 35 and 40 (2). The definition of “law” is intendedto ensure that renvoi is avoided. If “law” included privateinternational law provisions, any matter could be referredto a law other than the law applicable by virtue of theprivate international law provisions of the draft Conven-tion. Such a result would defeat the certainty of applicablelaw sought by the private international law provisions ofthe draft Convention. The Commission may wish to define“law” for the case of a federal State with more than onelegal system (for the application of the draft Convention inthe case of a federal State, 202). Language along the fol-lowing lines may be considered: “In the case of a State withtwo or more territorial units in which different systems oflaw are applicable in relation to matters dealt with in thisConvention, ‘law’ means the law of the territorial unit iden-tified in the rules in force in such a State identifying whichterritorial unit’s law is applicable. In the absence of suchrules, ‘law’ means the law of the territorial unit with therelevant connection”. The Commission may also wish toconsider whether any other federal-State interpretationclause would be necessary (e.g. with respect to the meaningof “location”).


“Proceeds”

72. The term “proceeds” appears in articles 12 (1), 16 (1),24 (b) and 26. Its definition is intended to cover both pro-ceeds of receivables and proceeds of proceeds (e.g. if thereceivable is paid by way of a cheque, the cheque is “pro-ceeds of the receivable” and cash received by the payee ofthe cheque is “proceeds of proceeds”). It is also intended tocover, proceeds in cash (“payment”) and proceeds in kind(“other satisfaction”), whether received in total or partialsatisfaction of the assigned receivable. In particular, it isintended to cover goods received in total or partial dis-charge of the assigned receivable but not returned goods(e.g. because they were defective and the sales contract wascancelled or because the sales contract allowed the buyer toreturn the goods after a trial period). However, as betweenthe assignor and the assignee, the assignee has a right inreturned goods (see para. 126).

“Trade receivable”

73. The definition of “trade receivable”, a term that ap-pears in article 5, is in line with the general understandingwith regard to this term as codified in the Ottawa Conven-tion. Unlike the Ottawa Convention, however,subparagraph (l) excludes receivables arising from finan-cial services.


The assignor, the assignee and the debtor may derogatefrom or vary by agreement provisions of this Conventionrelating to their respective rights and obligations. Such anagreement does not affect the rights of any person who isnot a party to the agreement.

References:


Commentary

74. Article 7, which is modelled on article 6 of the UnitedNations Convention on Contracts for the International Saleof Goods, Vienna, 1980 (“the United Nations Sales Con-vention”), provides broad recognition of the principle ofparty autonomy. The assignor, the assignee and the debtormay vary or derogate from the provisions of the draftConvention. Unlike article 6 of the United Nations SalesConvention, however, article 7 does not allow parties tovary, or derogate from, provisions that affect the legalposition of third parties, or to exclude the draft Conventionas a whole. Accordingly, the assignor and the assignee mayonly vary or derogate from articles 13 to 16 and 28, whilethe assignor and the debtor are free to vary or derogatefrom articles 17 to 23, as long as the rights of third partiesare not prejudiced. The reason for this different approach isthat, while the United Nations Sales Convention deals withthe mutual rights and obligations of the seller and the

buyer, the draft Convention deals mainly with the propri-etary effects of assignment and may, therefore, have animpact on the legal position of the debtor and other thirdparties. Allowing parties to an agreement to affect therights and obligations of third parties would not only gobeyond any acceptable notion of party autonomy but wouldalso introduce an undesirable degree of uncertainty andcould thus frustrate the main objectives of the draft Con-vention, that is, to facilitate increased access to lower-costcredit and to provide, at the same time, an adequate debtorprotection system.

75. Like article 6 of the United Nations Sales Convention,article 7 requires an agreement, that is two correspondingdeclarations of intent, for the effective derogation from thedraft Convention. Such an agreement may be explicit orimplicit. A typical example of an implicit derogation iswhere the parties refer to the law of a non-ContractingState or to the domestic law of a Contracting State. Article7 is intended to apply to an agreement between the assignorand the assignee (“third parties” are the debtor, the credi-tors of the assignor and the insolvency administrator) andto an agreement between the assignor and the debtor (“thirdparties” are the assignee, the assignor’s creditors and theinsolvency administrator). The Commission may wish toclarify whether article 7 should apply also to an agreementbetween the assignee and the debtor (e.g. an agreementwhereby the debtor would waive its defences as against theassignee in return for a concession, such as a reduction ofthe interest rate or extension of the date of payment. Suchagreements are not covered and, therefore, not limited byarticle 21 (see para. 150).


(1) In the interpretation of this Convention, regard is to behad to its international character and to the need to promoteuniformity in its application and the observance of goodfaith in international trade.

(2) Questions concerning matters governed by this Con-vention which are not expressly settled in it are to be settledin conformity with the general principles on which it isbased or, in the absence of such principles, in conformitywith the law applicable by virtue of the rules of privateinternational law.

References:

A/CN.9/432, paras. 76-81A/CN.9/434, paras. 100 and 101A/CN.9/445, paras. 199 and 200A/CN.9/456, paras. 82-85

Commentary

76. Article 8, inspired by article 7 of the United NationsSales Convention, deals with the interpretation of and thefilling of gaps in the draft Convention. With regard to theinterpretation of the draft Convention, article 8 (1) refers tothree principles, namely, the international character of thetext, uniformity and good faith in international trade. These


principles are common to most UNCITRAL texts. The ref-erence to the international character or source of the textshould lead a court to avoiding interpretation of the draftConvention on the basis of notions of national law, unlessthe meaning of a term used in the draft Convention isclearly identical with its meaning under a particular na-tional law or is clearly left to law applicable outside thedraft Convention. The need to preserve uniformity can beserved only if courts or arbitral tribunals apply the draftConvention on its merits and have regard to decisions ofcourts or tribunals in other countries. The Case Law onUNCITRAL Texts (CLOUT), a system of reporting caselaw on UNCITRAL texts, has been established byUNCITRAL exactly with the need to preserve uniformityin mind. CLOUT is available in paper form in the six of-ficial languages of the United Nations and through theUNCITRAL home page on the World Wide Web(http:\\www.uncitral.org) in English, French and Spanish(depending on the resources available, the other languageversions will also be made available in the future).

77. The reference to good faith relates only to the inter-pretation of the draft Convention. If as a result of a contralegem interpretation it is applied to the conduct of the par-ties, caution should be exercised. While the principle ofgood faith would appropriately be applied to the contrac-tual relationship between the assignor and the assignee, orthe assignor and the debtor, it could undermine the cer-tainty of the draft Convention if applied to the relationshipbetween the assignee and the debtor or the assignee andany other claimant. For example, if the principle of goodfaith prevailing in the forum State were to apply to theassignee-debtor or the assignee-third party relationship, thedebtor, who might have paid the assignee after notification,may have to pay again if, for example, the debtor knewabout a previous assignment; and the law applicable underarticle 24 might be disregarded if it does not respect theprinciple of good faith as it may be understood in the forumState.

78. As to gap-filling, the rule is that, if matters fall withinthe scope of the draft Convention under chapter I but arenot expressly settled in it, they are to be decided in accord-ance with the general principles on which the draft Con-vention is based. Such principles include notably the prin-ciples expressly mentioned in the preamble or enshrined ina number of provisions of the draft Convention (e.g. theprinciple of facilitation of increased access to lower-costcredit and the principle of debtor protection). Recourse toprivate international law rules is permitted only if, withrespect to a matter governed by, but not explicitly settledin, the draft Convention, there is no principle on the basisof which it could be resolved or the matter is not governedby the draft Convention at all. Gaps left in the private in-ternational law provisions of the draft Convention are to befilled in accordance with the private international law prin-ciples underlying the draft Convention. In the absence ofsuch principles, such gaps would be filled in accordancewith the private international law rules of the forum.

79. Matters not governed by the draft Convention and leftto law applicable outside the draft Convention by virtue ofprivate international law rules include, but are not limitedto, the requirements and the legal consequences of an out-

right assignment, an outright assignment for security pur-poses and an assignment by way of security; the questionof the form of the contract of assignment; the accessory orindependent character of a security right, which is the basisfor determining whether it is transferred automatically withthe receivables the payment of which it secures, or whethera new act of transfer is needed; and the consequences of abreach of representations by the assignor. The draft Con-vention covers statutory assignability to the extent that itspecifies a number of receivables that are assignable, in-cluding future receivables and receivables not identified in-dividually, but leaves other statutory limitations (relating,e.g. to pensions or wages) to other law. Matters left to lawapplicable outside the draft Convention also include: thequestion whether the assignor is liable towards the debtorfor assigning trade receivables in violation of an anti-as-signment clause; the debtor’s obligation to pay (the draftConvention deals with the debtor’s discharge only); thedischarge of the debtor on grounds other than those speci-fied in the draft Convention (e.g. by paying the rightfulclaimant if the notification received does not meet the re-quirements of the draft Convention); the defences andrights of set-off that the debtor may raise against the as-signee; and agreements between the debtor and the as-signee by which the debtor waives its defences and rightsof set-off towards the assignee. Beyond those matters, thedraft Convention explicitly refers certain matters (e.g.questions of priority) to law applicable outside the draftConvention, while specifying that law. Whether the lawapplicable to all the matters mentioned above, as well as toother matters not governed by the draft Convention, is to bedetermined on the basis of the private international lawprovisions of the draft Convention or of the forum, dependson whether the forum is in a Contracting State and onwhether that Contracting State has opted out of chapter V.


Form of assignment

References:

A/CN.9/420, paras. 75-79A/CN.9/432, paras. 82-86A/CN.9/434, paras. 102-106A/CN.9/445, paras. 204-210A/CN.9/456, paras. 86-92A/CN.9/466, paras. 101-103

Commentary

80. Chapter III settles issues of material validity of anassignment under the draft Convention. However, not allmatters relating to material validity are settled in the draftConvention. Matters that are not addressed and are left tolaw outside the draft Convention include, for example,statutory limitations on assignment, other than those dealtwith in articles 9, 11 and 12, and issues relating to capacityand authority. Matters of formal validity (e.g. whetherwriting, notification, registration or payment of a stampduty is required for an assignment to be valid/effective) are


not dealt with at all in the draft Convention. The WorkingGroup considered a wide variety of form requirements,ranging from written form (with or without any signaturerequirements) to the absence of any form. The widely pre-vailing view was that written form should be required forthe assignment to be effective, at least as against thirdparties. However, in order to avoid invalidating oral prac-tices in some countries, the Working Group decided toavoid introducing a written form requirement. The Work-ing Group also considered the question of the law applica-ble to form, but was not able to reach consensus. The dif-ficulty in dealing with form lies in the fact that form isdesigned to perform various functions. As between parties,a form requirement may function as a warning to theassignor with regard to the seriousness of the undertakingor as evidence minimizing the risk of disputes. As againstthird parties, in particular third-party creditors, a form re-quirement is designed to operate as a protection against therisk of fraudulent collusion in oral assignments (e.g. collu-sive ante-dating of an assignment or collusion as to thescope of the receivables intended to be assigned).

81. However, failing to address the issue of form in thedraft Convention will create uncertainty. The absence ofany rule on form may be interpreted by users of the draftConvention in different ways. It may either result in refer-ring issues of form to law applicable outside the draftConvention or in validating any assignment irrespective ofform. In the former case, uncertainty will arise with regardto the formal validity of an assignment under the draftConvention, which is a requirement of priority (as to themeaning of “priority”, see paras. 63-65; this is reinforcedby the fact that, unlike article 24 (b), article 24 (a) does notdeal with “existence” of a right; see paras. 165 and 170). Inthe latter case, the assignor, in return for a concessiongranted by an assignee, in particular before commencementof insolvency, may be able to grant priority to that assigneeby ante-dating or enlarging the scope of the assignment.The Commission may, therefore, wish to reconsider theissue of form. A substantive law rule would be preferable.However, it would seem that it would not be feasible toachieve consensus on such a rule. Therefore, a private in-ternational law approach may be considered.

82. The Commission may wish to consider the followingalternatives: either introduce a flexible rule in line withcurrent practice in private international law with regard toformal validity of the contract between the assignor and theassignee (the proper law of the contract, the law of thecountry where the contract is concluded or, in the case ofcontracts between persons in different countries, the law ofone of those countries; see article 9 of the Rome Conven-tion or article 13 of the Mexico City Convention), combin-ing this rule with a different rule with regard to effects asagainst third parties (the law of the assignor’s location); orestablish a “safe harbour” rule along the following lines:“An assignment is effective as against third parties if itmeets, at least, the form requirements of the law of theState in which the assignor is located” (for a special rule inthe case of a receivable supported by a security right, seepara. 108). A rule referring form as against third parties tothe law of the assignor’s location would not necessarily runcounter to current practice in private international law,since such practice relates to the contract of assignment,

not to the proprietary transfer itself, and form requirementsfor an assignment to be in writing, notified to the debtor orregistered, are intended to provide a temporal link for com-peting claims and thus touch upon issues of priority. In anycase, a “safe harbour” rule would allow third parties todetermine the formal effectiveness of an assignment as abasis for priority and would be in line with the approachfollowed in article 24, without interfering with prevailingtrends in private international law.

Article 9. Effectiveness of bulk assignments,assignments of future receivables and partial assignments

(1) An assignment of existing or future, one or more,receivables and parts of, or undivided interests in, receiva-bles is effective, whether the receivables are described:

(a) Individually as receivables to which the assignmentrelates; or

(b) In any other manner, provided that they can, at thetime of the assignment, or, in the case of future receiva-bles, at the time of the conclusion of the original con-tract, be identified as receivables to which the assign-ment relates.

(2) Unless otherwise agreed, an assignment of one ormore future receivables is effective at the time of the con-clusion of the original contract without a new act of trans-fer being required to assign each receivable.

References:

A/CN.9/420, paras. 45-60A/CN.9/432, paras. 93-112 and 254-258A/CN.9/434, paras. 122 and 124-127A/CN.9/445, paras. 211-214A/CN.9/456, paras. 93-97

Commentary

83. Assignments of future receivables, bulk assignmentsand assignments of parts of or undivided interests in re-ceivables are at the heart of significant financing practices(e.g. factoring, securitization, project financing, loan syndi-cation and participation, swaps and derivatives). Yet theireffectiveness as a matter of property law is not recognizedin all legal systems. Article 9 is intended to validate suchtransfers of property rights in receivables.

Statutory assignability

84. In validating the assignments to which reference ismade in paragraph (1), article 9 may set aside statutoryprohibitions that might exist in national law with respect tosuch assignments. While setting aside such statutory limi-tations, the draft Convention is not intended to interferewith national policies. Such policies are aimed at protectingthe assignor from alienating its future property and poten-tially depriving itself of means of subsistence. They areoften articulated by means of a requirement for specificity,which may not be possible in the case of an assignment offuture receivables or a bulk assignment. With a view tocounterbalancing the need to validate the assignments men-


tioned in paragraph (1) and the need to protect assignors,article 9 (1) requires that the receivables be identifiablewhen they arise (i.e. when the original contract is con-cluded) as receivables to which the assignment relates.Furthermore, in order to avoid limiting the assignor’s rightto transfer future receivables, the draft Convention does notgive priority to one creditor over another (e.g. to a globalassignee over a small supplier of materials on credit with aretention of title extending to the receivables from the saleof the assignor’s final products), but leaves matters of pri-ority to national law. As to statutory limitations aimed atprotecting the debtor in assignments mentioned in para-graph (1) (as, e.g. in the case of limitations relating topartial assignments), the draft Convention does not inter-fere with national policies underlying such limitations tothe extent that the debtor needs to be located in a Contract-ing State and, under the draft Convention, does not have toincur any additional cost as a result of the assignment (seeparas. 32-34 and 128).

85. The draft Convention is not intended to affect anyother statutory limitations, whether aimed at protecting theassignor (e.g. wage claimants or owners of retirement an-nuities) or at protecting debtors (e.g. sovereign or con-sumer debtors). This matter is left to national law applica-ble outside the draft Convention. This result is implicit inarticle 11, which deals only with contractual limitations onassignment (with regard to sovereign debtors, see paras.213 and 214; for consumer debtors, see para. 100). As aresult of the fact that this result is not stated explicitly in thedraft Convention, it would be a matter for interpretationwhether such matters are governed by the draft Conventionbut not explicitly settled, in which case article 8 (2) wouldapply (i.e. reference would be made first to the generalprinciples underlying the draft Convention and then to pri-vate international law rules), or not governed at all (i.e.they would be subject to the law applicable by virtue of theprivate international law rules of the forum). In any case,uncertainty would arise that could have a negative impacton the availability and the cost of credit. The Commissionmay, therefore, wish to consider whether statutory assign-ability should be expressly addressed in the draft Conven-tion. This result could be achieved by a new provision onstatutory limitations along the following lines: “This Con-vention does not affect any statutory limitations on assign-ment other than those referred to in article 9.” Alterna-tively, this result could be achieved by the exclusion ofcertain receivables in article 4 (“personal receivables, suchas wages, pensions, receivables under transactions for per-sonal, family or household purposes and sovereign receiva-bles, to the extent they are not assignable under the lawgoverning those receivables”).

Effectiveness

86. The term “effective” is intended to reflect the propri-etary effects of an assignment (the term “valid” could nothave that effect and, in any case, is not universally under-stood in the same way). The exact meaning of such effec-tiveness, that is, whether the assignee may retain any sur-plus and the conditions under which the assignee may seekto enforce the receivable as against the debtor or have re-course against the assignor, depends on whether an outrightassignment or an assignment by way of security is in-

volved, which is a matter left to law applicable outside thedraft Convention. In any case, the assignee may claim and(if the debtor does not raise the absence of notification asa defence and pays) retain payment (the debtor may obtaina valid discharge under article 9, irrespective of whether itpaid the person with priority). If the debtor pays someoneelse, the receivable is extinguished and the in rem or adpersonam nature of the assignee’s right and the priority ofthis right with respect to proceeds is to be determined inaccordance with the law of the assignor’s location (article24 (b); see paras. 165 and 170).

87. While the assignee acquires a proprietary right in theassigned receivable, the effect of such a right is limited tothe relationship between the assignor and the assignee andas against the debtor. Effectiveness as against third partiestouches upon issues of priority and the draft Conventiontreats such issues as distinct issues, subjecting them to thelaw of the assignor’s location (article 24). As a result, ar-ticle 9 should set aside a statutory limitation on the assign-ment of future receivables or of receivables not identifiedspecifically, for example, but not a rule dealing with prior-ity between competing claims (or with statutory form re-quirements). Furthermore, in view of this interplay betweeneffectiveness under article 9 and priority under article 24,article 9 would not validate the first assignment in timewhile invalidating any further assignment of the same re-ceivables by the same assignor or result in the assigneeprevailing over an insolvency administrator on the soleground that the assignment took place before the effectivedate of the insolvency proceeding, even if the receivablesarose or were earned after commencement of the insol-vency proceeding. In order to reflect this interplay betweeneffectiveness as between the assignor and the assignee andas against the debtor (as a condition for priority) and effec-tiveness as against third parties other than the debtor (pri-ority) and to avoid inadvertently leaving the effectivenessof the assignments referred to in paragraph (1) altogether tothe law applicable to priority, the Working Group decidedto delete language in article 9 that would have made article9, as well as article 10, subject to articles 24 to 27. For thesame reason, the Working Group decided to include inarticle 24 wording (“with the exception of ...”) clarifyingthat certain matters, including the effectiveness of an as-signment as a matter of general law, are not left to the lawgoverning priority (see para. 163).

88. However, the distinction between effectiveness andpriority, which the draft Convention draws, may not beknown in the law of the assignor’s location, which mayexpress limitations on assignment by way of a rule dealingwith effectiveness in general. As a result, it may not beeasy to determine, for example, whether a rule of the lawof the assignor’s location, limiting the effectiveness of anassignment of future receivables, is a rule dealing witheffectiveness inter partes or with effectiveness as againstthird parties (i.e. priority). The Commission may, therefore,wish to state explicitly in the chapeau of article 9 (1) thatan assignment is effective “ as between the assignor and theassignee and as against the debtor”. The Commission mayalso wish to state in a new paragraph (3) that: “The effec-tiveness of an assignment of the receivables referred to inparagraphs (1) and (2) of this article as against third partiesother than the debtor is governed by the law applicable


under article 24. However, such an assignment is not inef-fective as against such third parties on the sole ground thatthe law of the assignor’s location does not recognize itseffectiveness.” Such a rule would ensure that an assignmentof future receivables would not be invalidated on the soleground that it relates to future receivables, without, how-ever, interfering with the effectiveness of such an assign-ment as a matter of priority between competing claimants.

“Existing or future receivables”

89. The terms are defined in article 6 (b) by reference tothe time of the conclusion of the original contract. All fu-ture receivables are intended to be covered, including con-ditional receivables and purely hypothetical receivables(see para. 56). With a view to protecting the interests of theassignor, paragraph (1) introduces an element of specificity(receivables have to be identifiable at the time they arise).

“One or more”

90. The focus of the draft Convention is on the bulk as-signment of a large volume of low-value receivables (e.g.factoring of trade receivables or securitization of creditcard receivables) in view of their importance and practiceand the fact that their effectiveness is not common groundto all legal systems. For reasons of consistency, the assign-ment of single, large-value receivables (e.g. the assignmentof a loan for refinancing or portfolio diversification pur-poses) is also covered.

“Parts of or undivided interests in receivables”

91. Partial assignments are involved in significant transac-tions, such as securitization (in which the special purposevehicle (SPV) may assign to investors undivided interestsin the receivables purchased from their originator as secu-rity for the SPV’s obligations to investors) or loan syndica-tion and participation (in which the leading lender mayassign undivided interests in the loan to a number of otherlenders; for partial assignments, see paras. 32-34 and 61).

“Described”

92. The term “described” is intended to establish a stand-ard lower than that which would be established by the term“specified”. Under this standard, a generic description ofthe receivable, without any specification of the identity ofthe debtor or the amount of the receivable, would be suf-ficient (e.g. “all my receivables from my car business”).

“Individually”/“in any other manner”

93. These words are intended to ensure that an assignmentof existing and future receivables is effective, whether thereceivables are described one by one or in any other man-ner that is sufficient to relate the receivables to the assign-ment.

Time of identification of receivables

94. Existing receivables are to be identified as receivablesrelating to the assignment at the time of the assignment.

Future receivables should be identifiable at the time theyarise (which is, by definition, after the time of the assign-ment). As a result of article 7, which enshrines party au-tonomy, the assignor and the assignee may agree on thetime when future receivables should be identifiable tothe assignment, as long as they do not affect the rights ofthe debtor and other third parties.

Master agreements

95. With a view to expediting the lending process andreducing the cost of the transaction, paragraph (2), in ef-fect, provides that a master agreement is sufficient to trans-fer rights in a pool of future receivables. If a new documentwere to be required each time a new receivable arose, thecosts of administering a lending programme would increaseconsiderably and the time needed to obtain properly ex-ecuted documents and to review those documents wouldslow down the lending process to the detriment of theassignor. Under paragraph (2), which provides that themaster agreement is sufficient to transfer a pool of futurereceivables, and article 10, which provides that a futurereceivable is deemed to be transferred at the time of theconclusion of the contract of assignment, rights in futurereceivables are transferred directly to the assignee withoutpassing through the estate of the assignor. As a result, theassignee would have a proprietary right and, if the assigneealso has priority, its right would not be subject to the per-sonal claims of the assignor’s creditors or the insolvencyadministrator. In its original formulation, paragraph (2)referred to the time a future receivable “arises” with a viewto clarifying that an assignment of a future receivable couldbe effective only if that receivable arises. In view of thedeletion of the provision explaining the meaning of theword “arises”, the Working Group, at its thirty-first session,decided to substitute the words “at the time of the conclu-sion of the original contract” for the word “arises”. As aresult, paragraph (2) deals with the time of assignment in away that is inconsistent with article 10, under which theassignment of future receivables is effective at the time ofthe conclusion of the contract of assignment and partiesmay agree only on a later time. The Commission may,therefore, wish to delete the reference to the time of theconclusion of the original contract of assignment and leavethe matter to the commentary on article 10 (see para. 96).Alternatively, paragraph (2) could be aligned with article10 and refer to the time of the conclusion of the contract ofassignment.


An existing receivable is transferred, and a future receiv-able is deemed to be transferred, at the time of the conclu-sion of the contract of assignment, unless the assignor andthe assignee have specified a later time.

References:

A/CN.9/420, paras. 51 and 57A/CN.9/432, paras. 109-112 and 254-258A/CN.9/434, paras. 107, 108 and 115-121A/CN.9/445, paras. 221-226A/CN.9/456, paras. 76-78 and 98-103


Commentary

96. Article 10 is intended to recognize and, at the sametime, limit the right of the assignor and the assignee toagree on the time at which a receivable is transferred; to seta default rule that, in the absence of contrary agreementbetween the assignor and the assignee, the time at which areceivable is transferred is the time of the conclusion of thecontract of assignment; and to clarify the meaning of otherrelevant provisions, such as articles 7, 9, 19 and 24 to 27.The time of assignment agreed between the assignor andthe assignee binds third parties, a matter that may not besufficiently clear in article 7. However, for such an agree-ment to be binding on third parties, it has to set a time oftransfer that is not earlier than the time of the conclusion ofthe contract of assignment. This approach is in line with theprinciple of party autonomy enshrined in article 7, since anagreement setting an earlier time of assignment could affectthe order of priority between several claimants (however,neither article 7 nor article 10 precludes the parties fromagreeing to ante-date the coming into force of their mutualcontractual obligations).

97. In the absence of an agreement between the assignorand the assignee setting the time of transfer of rights in theassigned receivables, the time of such transfer is the time ofthe conclusion of the contract of assignment, which is afact that cannot be changed. While this approach is obviouswith regard to receivables existing at the time they are as-signed, a legal fiction is created with regard to future re-ceivables (i.e. receivables arising from contracts not inexistence at the time of the assignment). In practice, theassignee would acquire rights in future receivables only ifthey were in fact created, but, in legal terms, the time oftransfer would go back to the time of the conclusion of thecontract of assignment. Giving the assignee a proprietaryright in the assigned receivable as of the time of the con-clusion of the contract of assignment would result in pro-tecting an assignee with priority under the law of theassignor’s location. Without such a proprietary right, eventhe right of an assignee with priority may be subject to therights of secured and preferential creditors in the case ofinsolvency.


(1) An assignment of a receivable is effective notwith-standing any agreement between the initial or any subse-quent assignor and the debtor or any subsequent assigneelimiting in any way the assignor’s right to assign its re-ceivables.

(2) Nothing in this article affects any obligation or liabil-ity of the assignor for breach of such an agreement. Aperson who is not party to such an agreement is not liableon the sole ground that it had knowledge of the agreement.

References:


A/CN.9/434, paras. 128-137A/CN.9/445, paras. 49-51 and 227-231A/CN.9/447, paras. 148-152A/CN.9/455, paras. 47-51A/CN.9/456, paras. 104-116A/CN.9/466, paras. 104-106

Commentary

98. The main objective of article 11, which is inspired byarticle 6 of the Ottawa Convention, is to establish a balancebetween the need to protect the debtor, on the one hand,and the need to protect the assignor and the assignee, on theother. The debtor may have good commercial reasons forlimiting the ability of the assignor to assign the receivable(e.g. concern of incurring additional expenses). On theother hand, the assignor may need to assign its receivablesto obtain financing or a service, and the assignee may haveno way of knowing about the existence of a contractuallimitation on assignment (as, e.g. in the case of future re-ceivables or bulk assignments).

Substantive and territorial scope

99. Article 11 is intended to apply to contractual limita-tions, whether contained in the original contract or otheragreement between the assignor and the debtor or in theinitial or any subsequent assignment contract. It is alsointended to apply to any contractual clauses limiting theassignment (e.g. by making it subject to the debtor’s con-sent) and not only to clauses prohibiting assignment. It isnot designed to apply, however, to statutory limitations toassignment or to limitations relating to the assignment ofrights other than receivables (e.g. confidentiality clauses).As a result, if an assignment is made in violation of astatutory limitation or a confidentiality clause, article 11does not apply to validate such an assignment or limit anyliability existing under law outside the draft Convention.Depending on the approach the Commission decides totake with regard to assignments of financial receivables, thescope of the rule in article 11 may be different and theeffectiveness of an assignment in general or only as againstthe debtor may be left to law applicable outside the draftConvention (see article 5 and paras. 50-54).

100. Article 5 is also intended to apply to assignments ofreceivables owed by sovereign debtors, unless a State inwhich that debtor is located makes a reservation under ar-ticle 38 as to the application of article 11 (see paras. 213and 214). In such a case too, whether an assignment iseffective as against a sovereign debtor would be left to lawoutside the draft Convention. Furthermore, article 11 is in-tended to apply to assignments of receivables owed byconsumer debtors. It is not intended, however, to overrideconsumer-protection legislation (although, in practice, withthe exception of wealthy individuals, who may not needstatutory protection, consumers do not have the bargainingpower to include such limitations in their contracts; forconsumer receivables and consumer protection, see paras.36, 128, 152, 160 and 196). In any case, consumers wouldeither not even be notified of any assignment or would be


notified and asked to continue paying to the same bankaccount or post office box. In such a case, a debtor con-cerned about losing rights of set-off that may arise fromcontracts unrelated to the original contract could discon-tinue its relationship with the assignee.

101. In effect, with the limited application of article 11 toconsumer situations and with the exclusion of financialservice providers (article 5) and the possible exclusion ofGovernments and public entities (article 38), article 11would apply mainly to cases where the debtor is a largesupplier who may not be in need of statutory protection. Inany case, the Commission may wish to consider furtherlimiting the scope of the rule in article 11 to assignments offuture receivables or receivables assigned in bulk, in whichvalidating contractual limitations would have a negativeimpact on the cost of credit. In other assignments (e.g. ofsingle, existing receivables), a contractual limitation wouldrender the assignment ineffective as against the debtor(draft article 12.301 of the European Contract Principles).Such an approach would preserve the free transferability ofreceivables in important financing transactions, while lim-iting any undue interference with party autonomy. TheCommission may also wish to deal with assignments thatare not true assignments but rather take-over bids (i.e.where a competitor obtains an assignment of the debts ofan entity in order to obtain access to confidential businessinformation, although if such information is covered by aconfidentiality clause and an assignment provides to theassignee access to confidential information, article 11would not apply to validate such an assignment).

The rule

102. The thrust of the rule in article 11 is that both thecontractual limitation on assignment and the assignment areeffective. However, unlike the assignment, which is effec-tive as against the debtor, the contractual limitation doesnot produce any effects as against the assignee. The under-lying policy is that it is more beneficial for everyone tofacilitate the assignment of receivables and to reduce thetransaction cost rather than to ensure that the debtor wouldnot have to pay a person other than the original creditor(assignor). Under article 11 (1), the debtor is bound by theassignment. The question whether there is any liability forbreach of contract is left to law applicable outside the draftConvention. If there is any such liability, under article 11(2), it is not extended to the assignee and cannot be basedsolely on the assignee’s knowledge of the contractual limi-tation (knowledge may be relevant in the case of tortiousliability of the assignee, e.g. for malicious interference withadvantageous contractual relations). Penalizing the as-signee for having mere knowledge of the anti-assignmentclause would inadvertently result in encouraging the as-signee either to avoid a due-diligence test or to proceedwith such a test and refuse to accept the receivables oraccept them at a much lower price. Other rights that thedebtor may have under law outside the draft Conventionsuch as, for example, the right to terminate the originalcontract for breach of contract, are not affected either,unless a financial receivable is involved (see, article 5,variant A, paragraph (2); for a secretariat suggestion tolimit the rights of the debtor to a claim for compensatorydamages, see para. 104).

Justification

103. Contractual limitations have a negative impact on thevalue of receivables, whether they relate to all receivablesassigned in bulk or only to some. If contractual limitationswere enforceable as against assignees, assignees would haveto examine the documentation of each receivable. As aresult, a small number of receivables that are subject tocontractual limitations would raise the cost on a much largernumber of receivables that are not subject to any such re-striction. In addition, unless they are aimed at preservinglegitimate interests, contractual limitations may constitute anundue interference with market economy principles. To theextent that the payment obligation has the same effect on thedebtor, irrespective of the identity of the creditor, a contrac-tual restriction would run counter to the principle againstrestraints of alienation of property. Furthermore, aneconomy in which receivables are freely transferable yieldssubstantial benefits to debtors. The cost savings achieved forcreditors through the free transferability of their receivablescan be passed along to debtors in the form of lower costs forgoods and services or lower cost for credit.

104. In any case, the draft Convention provides a highlevel of protection to the debtor (articles 17-22). In addi-tion, under law applicable outside the draft Convention, thedebtor may even declare the original contract avoided (withthe exception of debtors of financial receivables; article 5,variant A, para. (2)). Such avoidance of the contract, how-ever, which could deprive the assignee of the contractualright to demand payment from the debtor, should be avail-able only in exceptional circumstances (the assignor mayhave an unjust enrichment claim or other claims arising byoperation of law against the debtor but any assignment ofsuch rights would not be covered by the draft Convention).Otherwise, the risk of the contract being avoided might initself have a negative impact on the cost of credit. In orderto avoid this result, the Commission may wish to considerclarifying in article 11 that any relief available to the debtoragainst the assignor for breach of an anti-assignment clausewould be limited to a claim for compensatory damages (orthat the debtor may not declare the original contractavoided on the sole ground that the assignor violated ananti-assignment clause; see article 5, variant A, paragraph(2)). Articles 11, 20 (3) and 22 could be construed as pre-cluding such a radical remedy anyway, at least after noti-fication of the assignment. Allowing the debtor to declarethe contract avoided on the sole ground of the violation ofan anti-assignment clause would run counter to the princi-ple that the assignment is effective even if it is made inviolation of an anti-assignment clause and to the principlethat, in such a case, the debtor may not raise against theassignee any claim it might have against the assignor forbreach of contract. In addition, if the minimum, that is, amodification of the original contract, is not allowed afternotification of the debtor without the consent of the as-signee, the maximum, that is the cancellation of the con-tract, could not be allowed either. Such a limitation of thedebtor’s cancellation rights may be combined with the ap-proach taken in article 5, variant B, paragraph (2). If theassignment is ineffective as against the debtor, the debtorwould not need to cancel the original contract simply be-cause of a violation of a contractual limitation on assign-ment (see para. 102).



(1) A personal or property right securing payment of theassigned receivable is transferred to the assignee without anew act of transfer, unless, under the law governing theright, it is transferable only with a new act of transfer. Ifsuch a right, under the law governing it, is transferable onlywith a new act of transfer, the assignor is obliged to trans-fer this right and any proceeds to the assignee.

(2) A right securing payment of the assigned receivable istransferred under paragraph (1) of this article notwithstand-ing an agreement between the assignor and the debtor orother person granting the right, limiting in any way theassignor’s right to assign the receivable or the right secur-ing payment of the assigned receivable.

(3) Nothing in this article affects any obligation or liabil-ity of the assignor for breach of an agreement under para-graph (2) of this article. A person who is not a party to suchan agreement is not liable on the sole ground that it hadknowledge of the agreement.

(4) The transfer of a possessory property right under para-graph (1) of this article does not affect any obligations ofthe assignor to the debtor or the person granting the prop-erty right with respect to the property transferred existingunder the law governing that property right.

(5) Paragraph (1) of this article does not affect any re-quirement under rules of law other than this Conventionrelating to the form or registration of the transfer of anyrights securing payment of the assigned receivable.

References:


Commentary

Accessory and independent rights

105. Paragraph (1) reflects the generally accepted princi-ple that accessory security rights (e.g. a suretyship, pledgeor mortgage) are transferred automatically, while independ-ent security rights (e.g. an independent guarantee or astandby letter of credit or a real security right of an abstractnature) are transferable only with a new act of transfer (thewords “right securing payment” are used in order to ensurethat rights that may not be security rights, for example,rights arising from independent guarantees and standbyletters of credit, would be covered). Under article 7, theassignor and the assignee may agree that an accessory rightis not transferred to the assignee and is thus extinguished.Such an agreement may reflect the lack of willingness onthe part of the assignee to accept the responsibility and thecost involved in the maintenance and safekeeping of collat-eral (e.g. taxation and insurance costs in the case of realestate or storage and insurance costs in the case of equip-ment). The question of the accessory or independent char-acter of the right and the substantive or procedural require-ments to be met for the creation of such a right are left to

the law governing that right. In view of the wide range ofrights covered by article 12 and the divergences existingamong the various legal systems in this regard, article 12does not attempt to specify the law applicable to suchrights. Paragraph (1) also creates an obligation for theassignor to transfer to the assignee any independent rightsecuring payment of the assigned receivables as well as theproceeds of such a right. As a result, if an independent rightand its proceeds are assignable, the assignee will be able toobtain them. If such rights are not assignable or not as-signed for any reason, the assignee will have a personalclaim against the assignor. As to the formulation of para-graph (1), the Commission may wish to consider deletingthe second part of the first sentence (i.e. the words “unless... transfer”) as superfluous (the first part of the secondsentence may be sufficient).

Contractual limitations

106. Paragraph (2) is intended to ensure that any limita-tion agreed upon between the assignor and the debtor orother person granting a security right does not invalidatethe assignment. Under paragraph (3), any liability that theassignor may have for breach of contract, under law appli-cable outside the draft Convention, is not affected but is notextended to the assignee (this approach is consistent withthe approach taken in article 11). The underlying policy isthat, with regard to limitations on assignment, securityrights should be treated in the same way as receivables,since often the value relied upon by the assignee lies in thesecurity right and not in the receivable itself. However, alimitation included in a contract with a sovereign third-party guarantor located in a State that has made a declara-tion under article 38 would render the assignment ineffec-tive but only as against the sovereign third-party guarantor.Similarly, a limitation in a contract with a third-party guar-antor of a financial receivable may invalidate the assign-ment in general or only as against the third-party guarantor,depending on whether the Commission adopts variant A orvariant B of article 5.

Possessory rights

107. Whether or not the transfer of a security right isprohibited by agreement, if it involves the transfer of pos-session of the collateral and such transfer causes damage tothe debtor or the person granting the right, any liability thatmay exist under law applicable outside the draft Conven-tion is not affected. Paragraph (4) envisages, for example,a transfer of pledged shares that might empower a foreignassignee to exercise the rights of a shareholder to the det-riment of the debtor or any other person who might havepledged the shares.

Form requirements

108. Under paragraph (5), any requirements of the lawapplicable outside the draft Convention relating to the formof the transfer of security rights are not affected. As a re-sult, a notarized document and registration may be neces-sary for the effective transfer of a mortgage, while deliveryof possession or registration may be required for the trans-fer of a pledge. In addition, the draft Convention is notintended to affect any requirements as to the form of an


assignment of receivables secured by a certain asset (e.g.registration of an assignment secured by real estate or byaircraft). However, if the Commission includes a rule onthe form of assignment, subjecting the form of the assign-ment to the law of the assignor’s location (see paras. 80-82), that rule would need to be aligned with paragraph (5)(e.g, by providing that the law of the assignor’s locationwould govern form, unless the receivables are backed by asecurity right, in which case the law governing that rightwould govern form).



Commentary

Purpose of section I

109. Unlike the other provisions of the draft Conventionthat deal with the proprietary aspects of assignment, theprovisions contained in this section deal with contractualissues. The usefulness of these provisions lies in the factthat they recognize party autonomy, a principle enshrinedin a general way in article 7, and provide default rulesapplicable in the absence of an agreement between theassignor and the assignee. Such default provisions offerimportant benefits. They reduce transaction costs by allo-cating risks and by eliminating the need for parties to rep-licate standard terms and conditions in their contract. Theyalso reduce dispute resolution costs by providing a clear-cut rule for both the courts and the parties in the event theparties have not addressed a particular issue. Furthermore,they perform a useful educative function by offering achecklist of matters for parties to address at the time of theinitial contract negotiations. Most significantly, they en-hance uniformity and certainty by reducing the need forcourts to look to national solutions offered by the properlaw of the contract. However, the role of the proper law ofthe contract is not wholly eliminated in section I of chapterIV. The effect of mistake, fraud or illegality on the validityof the contract is left to the proper law of the contract, asare remedies available for breach of contract (in so far asthey are not characterized as procedural and are, therefore,subject to the lex fori).

Article 13. Rights and obligations of the assignor andthe assignee

(1) The rights and obligations of the assignor and theassignee as between them arising from their agreement aredetermined by the terms and conditions set forth in thatagreement, including any rules or general conditions re-ferred to therein.

(2) The assignor and the assignee are bound by any usageto which they have agreed and, unless otherwise agreed, byany practices which they have established between them-selves.

(3) In an international assignment, the assignor and theassignee are considered, unless otherwise agreed, to haveimpliedly made applicable to the assignment a usage which

in international trade is widely known to, and regularlyobserved by, parties to the particular [receivables financ-ing] practice.

References:


Commentary

110. The primary purpose of article 13 is to restate in thecontext of the relationship between the assignor and theassignee the principle of party autonomy, a principle al-ready reflected in general terms in article 7. The assignorand the assignee are free to structure their mutual rights andobligations so as to meet their particular needs. They arealso free to incorporate into their agreement any rules orconditions by referring to them in a general manner, ratherthan reproducing them in their agreement. The conditions,under which the parties may exercise their freedom, and therelevant legal consequences are left to the law governingtheir agreement. In line with article 9 of the United NationsSales Convention, article 13 also states in paragraphs (2)and (3) a principle that may not be recognized in all legalsystems, namely, that, in the interpretation of assignmentcontracts, trade usages and practices must be taken intoaccount. Paragraph (2) draws a clear distinction betweentrade usages and practices established between the assignorand the assignee. Such usages and practices may producerights and obligations for the assignor and the assignee.However, they cannot bind third parties, such as the debtoror creditors of the assignor. They cannot bind subsequentassignors or assignees either. All those parties would notnecessarily be aware of usages agreed upon by, and prac-tices established between, the initial assignor and the initialassignee.

111. In view of the recognition of party autonomy inparagraph (1), parties will always have the right to agreeotherwise as to the binding nature of practices establishedbetween themselves. The words “unless otherwise agreed”contained in paragraph (2) may therefore not be necessary.These words, which do not appear in article 9 (1) of theUnited Nations Sales Convention, had initially been in-cluded in paragraph (2), since, as opposed to the hierarchyof legal rules established in the United Nations Sales Con-vention, the draft Convention prevails over the parties’agreement. After the limitation of paragraph (1) to themutual rights and obligations of the assignor and the as-signee, the rule about the prevalence of the draft Conven-tion has been deleted and the reason for deviating from thewording of article 9 (1) of the United Nations Sales Con-vention has been eliminated.

112. Paragraph (3) defines the scope of the matters cov-ered by an international usage. Under paragraph (3), inter-national usages bind only the parties to international as-signments. Such a limitation was not thought to benecessary in article 9 of the United Nations Sales Conven-


tion since this Convention applies only to internationaltransactions. It is, however, necessary in article 13 in viewof the fact that the draft Convention may apply to domesticassignments of international receivables. In addition, underparagraph (3), as under article 9 (2) of the United NationsSales Convention, usages are applicable only to the rel-evant practice. This means that an international factoringusage cannot apply to an assignment in a securitizationtransaction. However, unlike article 9 (2) of the UnitedNations Sales Convention, paragraph (3) does not refer tothe subjective, actual or constructive knowledge of theparties but only to the objective requirements that the us-ages must be widely known and regularly observed. TheWorking Group felt that, while such a reference to thesubjective knowledge of the parties might be useful in atwo-party relationship, it would be inappropriate in a tripar-tite relationship, since it would be extremely difficult forthird parties to determine what the assignor and the as-signee knew or ought to have known. In view of the factthat article 13 has been revised to make clear that it refersto the rights and obligations of the assignor and the as-signee as between themselves and that, under article 7,agreements between parties do not affect third parties, theCommission may wish to reconsider this matter.


(1) Unless otherwise agreed between the assignor and theassignee, the assignor represents at the time of the conclu-sion of the contract of assignment that:

(a) The assignor has the right to assign the receivable;

(b) The assignor has not previously assigned the re-ceivable to another assignee; and

(c) The debtor does not and will not have any defencesor rights of set-off.

(2) Unless otherwise agreed between the assignor and theassignee, the assignor does not represent that the debtorhas, or will have, the financial ability to pay.

References:

A/CN.9/420, paras. 80-88A/CN.9/432, paras. 145-158A/CN.9/434, paras. 152-161A/CN.9/447, paras. 25-40A/CN.9/456, paras. 129 and 130

Commentary

Party autonomy/default rules

113. Representations undertaken by the assignor are in-tended to reduce the risk of whether the assignee will beable to collect the receivables from the debtor, if necessary.Because of their purpose, representations constitute a sig-nificant factor in the assignee’s determination of theamount of credit to be made available to the assignor andthe cost of credit. In view of their importance, representa-tions are highly negotiated and explicitly settled betweenthe assignor and the assignee. Recognizing this reality, ar-ticle 14 embodies the principle of party autonomy with

regard to representations of the assignor. Such representa-tions may stem from the financing contract, the contract ofassignment (if it is a separate contract) or any other con-tract between the assignor and the assignee. In accordancewith article 13 (2) and (3), they may also stem from tradeusages and practices. Article 14 allows parties to modifythe representations, whether explicitly or implicitly, eventhose which relate to the very existence of the assignedreceivable.

114. In addition to recognizing the principle of party au-tonomy, article 14 is intended to set forth a default ruleallocating risks between the assignor and the assignee inthe absence of an agreement of the parties as to this matter.In the allocation of risks, the overall aim of article 14 is tocounterbalance the need for fairness and the need to facili-tate increased access to lower-cost credit. Article 14 isconsistent with normal practice in which the assignor guar-antees the existence of the assigned receivable but not thesolvency of the debtor. If the parties have not agreed onrepresentations, in the absence of a rule along the lines ofarticle 14, the risk of non-payment would be higher. Thissituation could defeat a transaction (if the risk is too high)or, at least, reduce the amount of credit offered and raisethe cost of credit. Furthermore, to the extent that theassignor has to bear a certain risk, the assignor’s goods orservices would be more expensive or even inaccessible tothe debtor.

Representations as to the “existence” or assignabilityof a receivable

115. Under paragraph (1), the assignor represents that ithas the right to assign the receivable, that it has not as-signed it already and that the debtor does not and will nothave any defences. In view of the need for the assignee tobe able to estimate the risk involved in a transaction beforeextending credit, paragraph (1) provides that the represen-tations have to be made, and take effect, at the time of theconclusion of the contract of assignment. Such representa-tions are considered as being given not only to the imme-diate assignee but also to any subsequent assignee. As aresult, any subsequent assignee may turn against theassignor for breach of representations. If representationswere considered as being undertaken only as against theimmediate assignee, any subsequent assignee would haverecourse only against its immediate assignor, a process thatwould increase the risk and thus the cost of transactionsinvolving subsequent assignments. Subparagraphs (a) to (c)introduce representations that could be broadly describedas representations relating to “the existence” of the receiv-able (or its assignability). If the assignor does not have thepower to assign, has already assigned or has deprived thereceivable of any value by improperly performing the con-tract with the debtor, the receivable does not “exist”. TheCommission may wish to consider whether other existence-related representations, such as the factual basis of theclaim, its formal and substantive validity and enforceabilityare sufficiently covered (see draft article 12.204 of theEuropean Contract Principles).

116. The assignor is in violation of the representation asto its right to assign, introduced in subparagraph (a), if itdoes not have the capacity or the authority to act, or if there


is any statutory limitation on assignment. This approach isjustified by the fact that the assignor is in a better positionto know whether it has the right to assign. However, theassignor is not liable for breach of representations if theoriginal contract contains a limitation on assignment. TheWorking Group decided that no explicit reference to thatrule was necessary in subparagraph (a), since it is implicitin article 11, under which the assignment is effective evenif it is in breach of an agreement limiting assignment. Therepresentation, contained in subparagraph (b), that theassignor has not already assigned the receivable is aimed atholding the assignor accountable to the assignee if, as aresult of a previous assignment by the assignor, the as-signee does not have priority. This result may occur if theassignee has no objective way of determining whether aprevious assignment has occurred. Subparagraph (b), how-ever, does not require the assignor to represent that it willnot assign the receivables to another assignee after the firstassignment. Such a representation would run counter tomodern financing practice in which the right of theassignor to offer to different lenders parts of the same re-ceivables as security for obtaining credit is absolutely es-sential. The Commission may wish to consider whethersubparagraph (b) should cover also assignments or othertransfers by law (see draft article 12.204 (c) of the Euro-pean Contract Principles).

117. Subparagraph (c) places on the assignor the risk ofhidden defences or rights of set-off of the debtor that maydefeat in whole or in part the assignee’s claim. This provi-sion is premised on the fact that, by performing its contractwith the debtor properly, the assignor will be able to pre-clude such defences from arising. In particular in the con-text of the sale of goods in which service and maintenanceelements are included, such an approach would result in agreater degree of accountability of the assignor for per-forming properly its contract with the debtor. The provisionis also based on the assumption that, in any case, theassignor will be in a better position to know whether thecontract will be properly performed, even if the assignor isjust the seller of goods manufactured by a third person(there is no need for the assignor to have actual knowledgeof any defences). Furthermore, subparagraph (c) is prem-ised on the fact that placing on the assignor the risk ofhidden defences normally has a beneficial impact on thecost of credit. Subparagraph (c) has a wide scope, encom-passing defences and rights of set-off whether they have acontractual or non-contractual source and whether theyrelate to existing or to future receivables. It also coversrights of set-off, whether they arise from the original or anyrelated contract or from contracts unrelated to the originalcontract (with the exception of rights of set-off from unre-lated contracts that become available after notification,which under article 20 (2) the debtor cannot raise againstthe assignee). With regard to representations relating to theabsence of defences against future receivables assigned inbulk by way of security, the Working Group thought thatthe representation contained in subparagraph (c) properlyreflected current practice. According to such practice, inbulk assignments of defence-free and defence-ridden re-ceivables assignors normally receive credit only in theamount of those receivables which are not likely to besubject to defences, while they have to repay a higheramount. In addition, in the case of non-payment by the

debtor, the assignor has to take back the receivables forwhich the assignee is not able to obtain payment fromthe debtor and replace them with other receivables or topay back the price of the unpaid receivables (“recoursefinancing”).

Representations as to the solvency of the debtor

118. Paragraph (2) reflects the generally accepted princi-ple that the assignor does not guarantee the solvency of thedebtor. As a result, the risk of debtor default is on theassignee, a fact that the assignee takes into account in de-termining whether to extend credit and on what conditions.Recognizing the right of the parties to financing transac-tions to agree on a different risk-allocation, paragraph (2)allows the assignor and the assignee to agree otherwise.Paragraph (2) also provides that such an agreement may beimplicit or explicit. The question of what constitutes animplicit agreement is left to the contract interpretation rulesof the law governing the contract.

Additional representations

119. The Commission may wish to consider adding to therepresentations listed in paragraph (1) that the assignor willnot modify the original contract without the actual or con-structive consent of the assignee (article 22) and that theassignor will transfer to the assignee any non-accessorysecurity or other supporting rights (article 12; see alsoarticle 12.204 (d) and (e) of the European ContractPrinciples).

Breach of representations

120. The Working Group decided to leave the legal con-sequences of a breach of representations to other law. Rea-sons cited by the Working Group in support of this ap-proach include that matters relating to the underlyingfinancing contract were beyond the scope of the draft Con-vention and, in any case, it would be very difficult to reachagreement on issues such as liability for breach of repre-sentations. The Commission may wish to consider address-ing, at least, any consequences a breach of representationsmay have on the assignment (i.e. whether the receivablesare automatically re-transferred to the assignor or whethera new act of transfer is necessary). This issue is of particu-lar importance if the assignor becomes insolvent after abreach of representations.


(1) Unless otherwise agreed between the assignor and theassignee, the assignor or the assignee or both may send thedebtor a notification of the assignment and a payment in-struction, but after notification is sent only the assigneemay send a payment instruction.

(2) A notification of the assignment or payment instruc-tion sent in breach of any agreement referred to in para-graph (1) of this article is not ineffective for the purposesof article 19 by reason of such breach. However, nothing inthis article affects any obligation or liability of the party inbreach of such an agreement for any damages arising as aresult of the breach.


References:

A/CN.9/420, paras. 89-94 and 119-122A/CN.9/432, paras. 159-164 and 175A/CN.9/434, paras. 162-165A/CN.9/447, paras. 41-47A/CN.9/456, paras. 131-144 and 193A/CN.9/466, paras. 116 and 117

Commentary

Independent right of the assignee to notify the debtorand request payment

121. The main objective of article 15 is to recognize theright of the assignee to notify the debtor and to requestpayment, even without the cooperation or the authorizationof the assignor. It is not intended to define notification(article 6) or to address the conditions for a notification tobe effective as against the debtor (article 18) or the legalconsequences of notification (articles 19, 20 and 22).Granting the assignee an autonomous right to notify thedebtor is considered important, in particular since theassignor might be unwilling or, in the case of insolvency,unable to cooperate with the assignee. Furthermore, at leastin those legal systems in which priority is determined onthe basis of the time of notification of the debtor, theassignor, acting in collusion with one claimant against theinterests of another claimant, could determine the order ofpriority, unless each claimant had the right to notify thedebtor independently of the assignor. The Working Grouprecognized that, in some practices, it was normal for theassignor to send a bill to the debtor requesting payment andnotifying the debtor about the assignment (e.g. infactoring). At the same time, however, the Working Groupwas mindful of the fact that, in other practices, it was im-portant for the assignee to be able to notify and to requestpayment independently of the assignor, whether in theevent of default or not. The protection of the debtor againstthe risk of being notified and being asked to pay a poten-tially unknown person was thought to be a different matter,which could be addressed by allowing the debtor in thecase of notification by the assignee to request adequateproof (by definition, a notification has to identify the as-signee; see para. 60; see also draft article 12.303 of theEuropean Contract Principles, under which, in such a casethe assignment has to be in writing and the debtor has tohave a chance to inspect it).

Notification as a right, not an obligation

122. With a view to accommodating non-notificationpractices, notification is formulated in paragraph (1) as aright and not as an obligation. In such practices, normallythe debtor is not notified of the assignment and the assignorreceives payment on behalf of the assignee. Article 15 isalso intended to recognize practices in which the debtorkeeps paying as before the assignment, while the assignorand the assignee agree on the control of the bank accountor post office box to which payment is made. In thosepractices, in order to avoid any inconvenience to the debtorthat might result in an interruption to the normal flow ofpayments, the debtor is either not notified at all or is noti-

fied and instructed to continue paying the assignor (such anotification is normally intended to preclude the debtorfrom acquiring rights of set-off after notification from con-tracts unrelated to the original contract). In those practices,the debtor is notified and given different payment instruc-tions (i.e. to pay the assignee or another person or to adifferent account or address) only in exceptional situations(e.g. in the case of default).

Notification and payment instruction

123. In line with the approach followed in article 6 (e)(which defines notification without any reference to a pay-ment instruction), paragraph (1) draws a clear distinctionbetween a notification and a payment instruction. Thisapproach is intended to recognize the difference, both inpurpose and in time, between a notification and a paymentinstruction and to validate practices in which notification isgiven without any payment instructions. Under this ap-proach, a mere notification of an assignment is valid for thepurpose of cutting off the debtor’s rights of set-off arisingfrom contracts unrelated to the original contract, as well asfor the purpose of changing the way in which the assignorand the debtor may amend the original contract. However,in order to avoid complicating the debtor’s discharge, theWorking Group decided not to base the debtor’s dischargeon the receipt of a payment instruction. Under paragraph(1), a payment instruction may be sent either by theassignor or the assignee with the notification or, subsequentto a notification, by the assignee. Paragraph (1), unlikearticle 19, refers to the time notification is “sent” (and not“received”), since neither the assignor nor the assignee hasa way to assess the time of receipt. That matter may beimportant for the discharge of the debtor, dealt with inarticle 19, but not for the determination of who has theright to give a payment instruction as between the assignorand the assignee.

Agreements as to notification

124. While paragraph (1) grants the assignee an autono-mous right to notify the debtor and to request payment,paragraph (2) recognizes the right of the assignor and theassignee to negotiate and agree on the matter of notificationof the debtor so as to meet their particular needs. For ex-ample, the assignor and the assignee may agree that nonotification would be given to the debtor as long as theflow of payments is not interrupted (as, e.g. in undisclosedinvoice discounting). In order to ensure that there is noneed for a specific agreement, the opening words of para-graph (1) are formulated in a negative way (“unless other-wise agreed”). The rule introduced in paragraph (2) is that,if notification is given in violation of such an agreementand the debtor pays, the debtor is discharged. The underly-ing rationale is that the debtor should be able to dischargeits obligation as directed in the notification and should notconcern itself with the private arrangements existing be-tween the assignor and the assignee. Whether the personviolating such an agreement is liable for breach of contractunder law applicable outside the draft Convention is aseparate matter and should not affect the discharge of thedebtor, who is not a party to that agreement. A notificationgiven in violation of an agreement between the assignor


and the assignee, however, does not cut off any rights ofset-off of the debtor from contracts unrelated to the originalcontract (article 20), trigger a change in the way theassignor and the debtor may amend the original contract(article 22), or create a basis for the determination of pri-ority under the law applicable to priority issues (articles 24-26). The Working Group thought that such results wouldgive an undue advantage to the assignee who wrongfullynotified the debtor. The negative formulation in paragraph(2) “is not ineffective” is intended to ensure that the mereviolation of an agreement between the assignor and theassignee, on the one hand, does not invalidate the notifica-tion for the purpose of debtor-discharge, but, on the otherhand, does not interfere with contract law as to the condi-tions required for such an agreement to be effective.


(1) As between the assignor and the assignee, unless oth-erwise agreed, and whether or not a notification of theassignment has been sent:

(a) If payment in respect of the assigned receivable ismade to the assignee, the assignee is entitled to retain theproceeds and goods returned in respect of the assignedreceivable;

(b) If payment in respect of the assigned receivable ismade to the assignor, the assignee is entitled to paymentof the proceeds and is also entitled to goods returned tothe assignor in respect of the assigned receivable; and

(c) If payment in respect of the assigned receivable ismade to another person over whom the assignee haspriority, the assignee is entitled to payment of the pro-ceeds and is also entitled to goods returned to such per-son in respect of the assigned receivable.

(2) The assignee may not retain more than the value of itsright in the receivable.

References:


Commentary

Objective and scope

125. Article 16 is intended to state explicitly what is al-ready implicit in articles 2 and 9, namely, that, as betweenthe assignor and the assignee, the assignee has a proprietaryright in the assigned receivable and any proceeds (asagainst third parties, this matter is left to the law governingpriority under article 24 (b)). As the scope of article 16 islimited to the relationship between the assignor and theassignee, it is subject to the general principle of party au-tonomy embodied in article 7 and is intended to operate asa default rule applicable in the absence of an agreementbetween the assignor and the assignee. It is not intended toaffect the debtor’s legal position or issues of priority.

Rights in proceeds and returned goods

126. As between the assignor and the assignee, the as-signee’s right extends to proceeds (which, under article 6(k), includes both proceeds of receivables and proceeds ofproceeds), as well as to returned goods. In this context, theWorking Group considered that there was no reason tolimit the ability of the assignor and the assignee to agreethat the assignee could claim any returned goods and that,even in the absence of an agreement, a default rule allow-ing the assignee to claim any returned goods could reducethe risks of non-collection from the debtor and thus have apositive impact on the cost of credit. Paragraph (1) coverssituations in which payment has been made to the assignee,the assignor or another person. In the latter case, the assign-ee’s right is, under paragraph (1) (c), subject to priority.Paragraph (2) reflects normal practice in assignments byway of security, under which the assignee may have theright to collect the full amount of the receivable owed, plusinterest owed on the ground of contract or law, but has toaccount for and return to the assignor or its creditors anybalance remaining after payment of the assignee’s claim.Paragraph (2) does not repeat the reference to a contraryagreement of the parties, which is included in the chapeauof paragraph (1), since the assignee’s right in the assignedreceivable flows from the assignment contract and is, underarticle 13, subject to party autonomy anyway. As to theinterplay between articles 16 and 38, it should be noted thata sovereign debtor, located in a State that has made a res-ervation under article 38, could discharge its debt by pay-ing the assignor, while the assignee would have a right toclaim the proceeds of payment from the assignor.

Notification of the debtor

127. The assignee’s right in proceeds is independent ofany notification of the assignment. The reason for this ap-proach is the need to ensure that, if payment is made to theassignee before notification, the assignee may retain theproceeds of payment, and if payment is made to theassignor after notification (which does not discharge thedebtor’s debt), the assignee would have a right in suchpayment. Such a right is of particular importance if theassignor or the debtor becomes insolvent. If payment ismade to the assignor after notification, in principle the as-signee could claim payment from the assignor, under arti-cle 16 (1) (b), or from the debtor, under article 19 (2). Thisresult is appropriate in that the debtor, who pays theassignor after notification, takes the risk of having to paytwice. In practice, however, the assignee would not claim asecond payment from the debtor, unless the assignor hasbecome insolvent. In such a case, any claim that the debtormight have against the estate of the insolvent assignor (e.g.on the basis of the principles of unjust enrichment) wouldnormally be meaningless, since it is unlikely that claimantswith personal claims would be able to obtain payment.

Section II. Debtor


(1) Except as otherwise provided in this Convention, anassignment does not, without the consent of the debtor,affect the rights and obligations of the debtor, including thepayment terms contained in the original contract.


(2) A payment instruction may change the person, ad-dress or account to which the debtor is required to makepayment, but may not:

(a) Change the currency of payment specified in theoriginal contract, or

(b) Change the State specified in the original contract,in which payment is to be made, to a State other than thatin which the debtor is located.

References:

A/CN.9/420, para. 101A/CN.9/432, paras. 33-38, 89, 90, 206 and 244A/CN.9/434, paras. 86-95A/CN.9/445, paras. 195-198A/CN.9/456, paras. 21, 81 and 168-176

Commentary

Principle of debtor protection

128. The principle of debtor protection is one of the maingeneral principles of the draft Convention. It is referred toin a general manner in the preamble and in article 17.Furthermore, it is reflected in a number of provisions of thedraft Convention (e.g. articles 1 (3), 5, 7, 19-23, 28 and38). The thrust of the rule set forth in paragraph (1) is thatthere are no implied effects of the draft Convention on thelegal position of the debtor (any doubt as to whether anassignment changes the debtor’s legal position should beresolved in favour of the debtor). The draft Convention is,in particular, not designed to change, without the consentof the debtor, the payment terms stipulated in the originalcontract (e.g. the amount owed, whether for principal orinterest; the date of payment; and any conditions precedentto the debtor’s obligation to pay), the defences or rights ofset-off that the debtor may raise under the original contract,or to increase expenses in connection with payment. Aprinciple flowing from article 17 is that the draft Conven-tion is not intended to have an adverse effect on the rightsof consumer debtors and, in particular, to override con-sumer-protection legislation (articles 21 (1) and 23; forconsumer receivables and consumer protection, see paras.36, 100, 152, 160 and 196).

Country and currency risk

129. Whatever change is effected in the debtor’s legalposition as a result of an assignment under the draft Con-vention, under paragraph (2), a payment instruction,whether given with the notification or subsequently, maynot change the currency of payment. It may not change thecountry of payment either, unless the change is beneficialto the debtor and results in payment being allowed in thecountry in which the debtor is located. Such a change ofthe country of payment is often allowed in factoring con-tracts with a view to facilitating payment by debtors. TheCommission may wish to make even that change subject tothe debtor’s consent so as to cover those exceptional casesin which the debtor may have an interest in paying in thecountry identified in the original contract and not in its owncountry.


(1) A notification of the assignment and a payment in-struction are effective when received by the debtor, if theyare in a language that is reasonably expected to inform thedebtor about their contents. It shall be sufficient if a noti-fication of the assignment or a payment instruction is in thelanguage of the original contract.

(2) A notification of the assignment or a payment instruc-tion may relate to receivables arising after notification.

(3) Notification of a subsequent assignment constitutesnotification of any prior assignment.

References:

A/CN.9/420, paras. 124 and 125A/CN.9/432, paras. 176,177 and 187A/CN.9/434, paras. 172-175A/CN.9/447, paras. 45-47, 158 and 159A/CN.9/455, paras. 59-66A/CN.9/456, paras. 177-180

Commentary

Time of effectiveness of notification: the receipt rule

130. The primary purpose of article 18 is to restate the“receipt rule” with regard to the time of effectiveness of anotification, that is, that a notification and a payment in-struction become effective when received by the debtor. Anotification, whether accompanied by a payment instruc-tion or not, has significant consequences for the legal po-sition of the debtor (it triggers a change in the way in whichthe debtor may discharge its debt, it cuts off rights of set-off arising from contracts unrelated to the original contractand it changes the way in which the debtor may amend theoriginal contract in agreement with the assignor). Suchconsequences may occur only when a notification or apayment instruction is in a language that is “reasonablyexpected to inform the debtor about its contents”. For ex-ample, when the notification is in electronic form and is notreadily readable, the debtor should be able to decode iteasily. In order to avoid creating uncertainty, paragraph (1)introduces a “safe harbour” rule, according to whichthe language of the original contract meets the requiredstandard.

Notification with respect to receivables not existingat the time of notification

131. Unlike article 8 (1) (c) of the Ottawa Convention,which provides that notification may be given only withrespect to receivables existing at the time of notification(and which reflects current factoring practice), paragraph(2) allows a notification to be given with respect to receiva-bles not existing at the time of notification. Such a notifi-cation may not have an impact on the debtor’s dischargeuntil the original contract is concluded and the paymentobligation becomes due. However, it simplifies and reducesthe cost of notification in that it ensures that the assigneedoes not need to give a notification each time a receivable


arises. It also ensures that, once a receivable arises, thedebtor cannot accumulate rights of set-off from unrelatedcontracts with the assignor or modify the original contractwithout the consent of the assignee. More importantly, sucha notification allows the assignee to obtain priority, oncethe receivable arises, as of the time notification is receivedby the debtor, if, under the law of the assignor’s location,priority is determined on the basis of the time of notifica-tion (in order to achieve this result, draft article 24 providesthat matters settled in the draft Convention, including no-tification-related matters, are excluded from the law of theassignor’s location; see para. 163). The time when a receiv-able arises is left to law applicable outside the draft Con-vention.

Notification in subsequent assignments

132. Paragraph (3), which is inspired by article 11 (2) ofthe Ottawa Convention, is one of the most important pro-visions of the draft Convention, in particular for interna-tional factoring transactions. In such transactions, theassignor normally assigns the receivables to an assignee inits own country (export factor) and the export factor subse-quently assigns the receivables to an assignee in the debt-or’s country (import factor). Under such an arrangement,collection from the debtor is facilitated to the extent thatthe import factor is able to take all the necessary measuresfor the second assignment to be effective as against thedebtor. The efficient operation of such transactions is basedon the assumption that the first assignment is also effectiveas against the debtor. In view of the fact that the debtor isnormally notified only of the second assignment, it is es-sential to ensure that notification of the second assignmentcovers the first assignment as well. Otherwise, the firstassignment might be rendered ineffective as against thedebtor, a situation that might affect the effectiveness of thesecond assignment as well. In order to address situations inwhich more than one subsequent assignment is made, para-graph (3) provides that a notification covers any prior, andnot only the immediately preceding, assignment (with re-gard to the issue of the discharge of the debtor in the caseof several notifications relating to subsequent assignments,see para. 138). The Commission may wish to considerwhether a notification should indicate that it relates to asubsequent assignment, even if it does not list all the sub-sequent assignments. Such an approach would allow thedebtor to determine, in the case of multiple notifications,whether it should pay in accordance with the first notifica-tion received (article 19 (2)) or in accordance with thenotification of the last of such subsequent assignments (ar-ticle 19 (4)).


(1) Until the debtor receives notification of the assign-ment, the debtor is entitled to be discharged by paying inaccordance with the original contract. After the debtorreceives notification of the assignment, subject to para-graphs (2) to (6) of this article, the debtor is dischargedonly by paying the assignee or, if otherwise instructed inthe notification of the assignment or subsequently by theassignee in a writing received by the debtor, in accordancewith such instructions.

(2) If the debtor receives notification of more than oneassignment of the same receivable made by the sameassignor, the debtor is discharged by paying in accordancewith the first notification received.

(3) If the debtor receives more than one payment instruc-tion relating to a single assignment of the same receivableby the same assignor, the debtor is discharged by paying inaccordance with the last payment instruction received fromthe assignee before payment.

(4) If the debtor receives notification of one or more sub-sequent assignments, the debtor is discharged by paying inaccordance with the notification of the last of such subse-quent assignments.

(5) If the debtor receives notification of the assignmentfrom the assignee, the debtor is entitled to request the as-signee to provide within a reasonable period of time ad-equate proof that the assignment has been made and, unlessthe assignee does so, the debtor is discharged by paying theassignor. Adequate proof includes, but is not limited to, anywriting emanating from the assignor and indicating that theassignment has taken place.

(6) This article does not affect any other ground on whichpayment by the debtor to the person entitled to payment, toa competent judicial or other authority, or to a public de-posit fund discharges the debtor.

References:

A/CN.9/420, paras. 98-117, 127-131, 169-173 and 179A/CN.9/432, paras. 165-174 and 178-204A/CN.9/434, paras. 176-191A/CN.9/447, paras. 69-93 and 153-157A/CN.9/455, paras. 52-58A/CN.9/456, paras. 181-193A/CN.9/466, paras. 124-132

Commentary

133. Article 19 has a twin goal, to provide a clear mecha-nism for the discharge of the debtor’s obligation by pay-ment and to ensure payment of the debt. It is not intendedto deal with the discharge of the debtor in general or withthe payment obligation as such, since that obligation issubject to the original contract and to the law governingthat contract. It is not intended to address issues of priorityeither. The basic rule is that, until the debtor receives no-tification of an assignment, it may be discharged by payingin accordance with the original contract, while, after noti-fication, discharge is obtained only by payment in accord-ance with the instructions given by the assignor or by theassignee with the notification, or subsequently by the as-signee. Article 19 deals also with a number of particularsituations in which several notifications are involved, thedebtor is notified by the assignee and is in doubt as towhether the assignee is the rightful claimant, and with dis-charge effected by payment under law applicable outsidethe draft Convention.


Debtor’s discharge by payment beforeand after notification

134. Under paragraph (1), until the time of receipt of anotification, the debtor is entitled to discharge by paying inaccordance with the original contract (i.e. by paying theassignor or another person or to an account or address indi-cated in the original contract). In view of the fact that theassignment is effective as of the time of the conclusion of thecontract of assignment, the debtor, having knowledge of theassignment, may choose to discharge its debt by paying theassignee. However, in such a case the debtor takes the riskof having to pay twice, if it is later proved that no assignmenttook place. The Working Group decided not to refer explic-itly to the possibility of the debtor being able to pay eitherthe assignor or the assignee in order to avoid underminingpractices, such as securitization, in which the debtor is nor-mally expected to continue paying the assignor. The refer-ence to payment “in accordance with the original contract”,rather than to payment to the assignor, is intended to pre-serve the right of the assignor and the debtor to agree to anytype of payment suitable to meet their needs (e.g. paymentto a bank account without identification of the accountowner, or payment to a third person).

135. After notification, the debtor does not have a choiceas to how to discharge its debt. The debtor may only dis-charge its obligation by paying the assignee or as instructedby the assignee. The reference to payment instructions isintended to address the needs of various practices. Theassignee may, for example, notify the debtor, so as tofreeze the debtor’s rights of set-off, without requestingpayment or requesting the debtor to continue paying theassignor (this is the case, e.g. with undisclosed invoicediscounting or securitization). To avoid leaving any uncer-tainty, paragraph (1) repeats what is already stated in article15 (1), namely, that such instructions may be given by theassignor or the assignee with the notification or only by theassignee subsequent to a notification.

Knowledge/good faith

136. Knowledge of an assignment is not to be treated as anotification and to trigger a change in the way in which thedebtor could discharge its obligation. While making busi-ness practice conform to good faith standards is an importantgoal, this should not be at the expense of certainty. Certaintywould be reduced if knowledge of the assignment were totrigger a change in the way in which the debtor could dis-charge its obligation. Knowledge should not be treated as anotification, since, in certain cases in which the assigneedoes not have the business structure necessary to receivepayments (e.g. in securitization), it is normal business prac-tice for the debtor to continue paying the assignor eventhough the debtor knows of the assignment. With regard towhether the nullity (e.g. for fraud or duress or lack of capac-ity to act) or whether the knowledge of the nullity of anassignment should be taken into account in the debtor’sdischarge, the Working Group decided that the issue ofpayment to a person, the assignment to whom was null andvoid, arose only in exceptional situations and could be left tolaw applicable outside the draft Convention. The Commis-sion may wish to reconsider this matter. Even if fraudulentnotifications do not pose a problem in practice, the fact that

a debtor could not rely on a prima facie legitimate notifica-tion may undermine the certainty necessary for the debtor toobtain a discharge. A rule that would protect a debtor payingin good faith in the case of a “purported assignment” wouldbe consistent with the overall policy to protect the debtor(draft article 12.308 of the European Contract Principlesrefers to a debtor who performs in good faith and neitherknows nor ought to know of such invalidity).

Debtor’s discharge and priority/knowledgeof superior claims

137. Unlike article 8 (1) of the Ottawa Convention, article19 does not require the debtor to pay the person with pri-ority so as to obtain a valid discharge. Having agreed thatthe assignment should not adversely affect the legal posi-tion of the debtor, the Working Group drew a clear distinc-tion between the issue of the debtor’s discharge and theissue of priority. Thus, payment under article 19 dischargesthe debtor, even if the person receiving payment does nothave priority. It would be unfair and inconsistent with thepolicy of debtor protection to require the debtor to deter-mine who among several claimants has priority and that thedebtor pay a second time if, in the first instance, it has paidthe wrong person. The debtor would most likely have acause of action against that person, but the debtor’s rightsmay be frustrated if that person becomes insolvent. Therisk of insolvency of the person who received paymentshould be on the various claimants of the receivables andnot on the debtor. Such claimants would have to settleamong themselves their rights in the proceeds of paymentin accordance with the law governing priority under thedraft Convention.

Multiple notifications

138. Paragraphs (2) and (4) are intended to provide sim-ple and clear discharge rules in the case of several notifi-cations. Paragraph (2) deals with situations in which thedebtor receives several notifications relating to more thanone assignment of the same receivables by the sameassignor (“duplicate assignments”). Such situations do notnecessarily involve fraud. They may, for example, involveseveral outright assignments for security purposes of re-ceivables for credit not exceeding the value of the receiva-bles. In such assignments, the main issue is who will obtainpayment first (i.e. who has priority). Paragraph (4) dealswith notifications relating to more than one subsequentassignment. Such situations are rare in practice, since nor-mally only the last in a chain of assignees notifies thedebtor and requests payment. In any case, in order to avoidany uncertainty as to how the debtor may discharge itsdebt, paragraph (4) provides that the debtor has to followthe instructions contained in the notification of the lastassignment in a chain of assignments. For that rule to ap-ply, the notifications received by the debtor have to bereadily identifiable as notifications relating to subsequentassignments. Otherwise, the rule contained in paragraph (2)would apply and the debtor would be discharged by pay-ment in accordance with the first notification received (fora secretariat suggestion in this regard, see para. 132). Inany case, under paragraph (5), the debtor, if in doubt, couldrequest adequate proof from the assignees notifying. If thedebtor receives several notifications relating to several as-


signments of the same receivables by the same assignorand to subsequent assignments, under a combined applica-tion of paragraphs (2) and (4), the debtor is discharged bypaying in accordance with the first notification of the lastassignment (as to the debtor’s discharge in the case ofpartial subsequent assignments, see paras. 32-34).

Change or correction of payment instructions

139. Paragraph (3) is intended to ensure that the assigneemay change or correct its payment instructions. Whetherthe debtor is notified by the assignor or the assignee, if anew payment instruction is sent with regard to one and thesame assignment, the debtor may discharge its debt only inaccordance with that instruction. The only condition is that,in line with the policy underlying article 15 (1), subsequentto the notification, a payment instruction be given by theassignee. In order to protect the debtor against the risk ofhaving to pay twice, paragraph (3) expressly provides thata payment instruction received by the debtor after paymentis to be disregarded.

Right of the debtor to request additional information

140. Under article 15, notification may be given not onlyby the assignor but also by the assignee independently ofthe assignor. As a result, the debtor may receive notifica-tion of the assignment from a possibly unknown person andmay be in doubt as to whether that person is a legitimateclaimant, payment to whom would discharge the debtor. Inorder to protect the debtor from uncertainty as to how todischarge its debt in such cases, paragraph (5) gives thedebtor a right to request the assignee to provide adequateproof of the assignment within a reasonable period of time.Paragraph (5) does not introduce an obligation of thedebtor, since requesting additional proof in all cases wouldunnecessarily delay payment and add to the cost of thenotification. The determination of what constitutes “ad-equate” proof and a “reasonable” period of time is a matterof interpretation for the courts or arbitral tribunals takinginto account the particular circumstances. The WorkingGroup thought that the flexibility introduced with theseterms was necessary, since no rule could be found thatwould be suitable for all possible cases. In addition, inorder to avoid any uncertainty that might ensue as a resultof the use of these terms, the Working Group decided toinclude a “safe harbour” rule, according to which a writtenconfirmation from the assignor constituted adequate proof(in such a case, under draft article 12.303 of the EuropeanContract Principles, the assignment has to be in writing andthe debtor should have a chance to inspect it).

141. The notification does not trigger the obligation topay, which remains subject to the original contract and thelaw applicable thereto. This means that the debtor does nothave to pay upon notification and does not owe interest forlate payment while it awaits the adequate proof requested.If, however, the debt becomes payable within that period inaccordance with the original contract, the question arises asto whether the payment obligation is suspended until thedebtor receives such proof and has a reasonable time toassess and act on it. If the payment obligation is not sus-pended, the significance of the protection afforded to thedebtor by paragraph (5) may be reduced to the extent that

the debtor delaying payment, even for good reasons, wouldhave to pay interest. The Working Group proceeded on theunderstanding that the payment obligation would be sus-pended in such cases, but chose not to include any explicitwording in paragraph (5), since that result could bereached, in any event, without any additional wording andsuch wording could inadvertently interfere with nationallaw on interest.

Debtor’s discharge under other law

142. Paragraph (6) is intended to ensure that article 19does not exclude other ways of discharge of the debtor’sobligation that may exist under national law applicableoutside the draft Convention (e.g. a notification not con-forming with the requirements of article 6 (f), 15 or 18).


(1) In a claim by the assignee against the debtor for pay-ment of the assigned receivables, the debtor may raiseagainst the assignee all defences or rights of set-off arisingfrom the original contract, or any other contract that waspart of the same transaction, of which the debtor couldavail itself if such claim were made by the assignor.

(2) The debtor may raise against the assignee any otherright of set-off, provided that it was available to the debtorat the time notification of the assignment was received.

(3) Notwithstanding paragraphs (1) and (2) of this article,defences and rights of set-off that the debtor may raisepursuant to article 11 against the assignor for breach ofagreements limiting in any way the assignor’s right to as-sign its receivables are not available to the debtor againstthe assignee.

References:

A/CN.9/420, paras. 66-68 and 132-135A/CN.9/432, paras. 205-209A/CN.9/434, paras. 194-197A/CN.9/447, paras. 94-102A/CN.9/456, paras. 194-199A/CN.9/466, paras. 133-136

Commentary

143. Article 20 is another particular application of thegeneral principle that the debtor’s legal position should notbe unduly affected as a result of the assignment. The debtorhas against the assignee all the defences and rights of set-off that the debtor could raise against the assignor (for anexception, see article 20 (3)). What those defences andrights of set-off are is a matter not addressed in the draftConvention but left to other law. However, the assignee isnot a party to the original contract and incurs, therefore, nopositive contractual liability for non-performance by theassignor. In such a case, the debtor can raise the non-per-formance to defeat the assignee’s claim, but needs to makea separate claim against the assignor to obtain, for example,compensation for any loss suffered as a result of theassignor’s non-performance.


Defences and rights of set-off under the originaland related contracts: no limitation

144. Under paragraph (1), the debtor may raise againstthe assignee all the defences that arise from the originalcontract, without any limitation, including contractualclaims, which, in some legal systems, might not be consid-ered “defences”; rights for contract avoidance, for example,for mistake, fraud or duress; exemption from liability fornon-performance, for example, because of an unforeseenimpediment beyond the control of the parties; and counter-claims under the original contract. The debtor may alsoraise defences and rights of set-off arising from contractsbetween the assignor and the debtor that are closely relatedto the original contract (e.g. a maintenance or other serviceagreement supporting the original sales contract) andshould be treated in the same way as rights of set-off aris-ing from the original contract. Such defences and rights ofset-off may be raised irrespective of whether they are avail-able at the time of notification of the assignment or becomeavailable only after such notification.

Other rights of set-off: available up to notificationof the debtor

145. Paragraph (2) introduces a time limitation with re-gard to rights of set-off arising from any source other thanthe original contract, that is, a separate contract between theassignor and the debtor, a rule of law (e.g. a tort rule) or ajudicial or other decision. Such rights may not be raisedagainst the assignee if they become available after notifica-tion of the assignment. The rationale underlying this rule isthat the rights of a diligent assignee who notifies the debtorshould not be made subject to rights of set-off arising atany time from separate dealings between the assignor andthe debtor or other events, of which the assignee could notreasonably be expected to be aware. On the other hand, theinterests of the debtor are not unduly affected, since, if thefact that the debtor cannot accumulate rights of set-offconstitutes an unacceptable hardship for the debtor, thedebtor can avoid entering into new dealings with theassignor (on the question whether the debtor could declarethe original contract avoided, see paras. 102 and 104). Inview of the above-mentioned rationale of paragraph (2),rights of set-off arising from separate contracts between thedebtor and the assignee are not affected. Such rights can beasserted against the assignee even after notification of theassignment, like rights of set-off arising from the originalcontract. It should also be noted that a notification resultsin freezing the debtor’s rights of set-off, whether it containsa payment instruction or not. This approach is intended toaccommodate practices in which a bare notification isgiven exactly for the purpose of precluding the debtor fromaccruing rights of set-off from acts or omissions of theassignor that are beyond the assignee’s control, while thedebtor is expected to continue paying the assignor.

“Available”

146. The exact meaning of the term “available” (e.g.whether the right of set-off has to be “actual and ascer-tained” at the time notification is received by the debtor) isleft to other law. The Working Group was not able to agreeon introducing such a clarification in the text of article 20,

since it considered that it would result in limiting inappro-priately the rights of set-off available to the debtor to thosewhich are quantified at the time of the notification. TheWorking Group was not able to agree on the law governingissues relating to rights of set-off either (see, however,para. 195). The Commission may wish to consider clarify-ing, at least, that the relevant cross-claim of the debtor doesnot need to have matured at the time of notification. Oth-erwise, a debtor’s potential cross-claim, due to mature atthe same time as the creditor’s claim, would be extin-guished by the creditor’s assignment of its claim. Such aresult would run counter to the principle that an assignmentshould not prejudice the debtor’s legal position.

Defences and rights of set-off in the case of breachof a contractual limitation

147. Paragraph (3) is intended to ensure that the debtormay not raise against the assignee by way of defence orset-off the breach of a contractual limitation by theassignor. The debtor may have a cause of action against theassignor, if, under law applicable outside the draft Conven-tion, the assignment constitutes a breach of contract thatresults in a loss to the debtor. However, the mere existenceof a contractual limitation is not a violation of the represen-tation contained in article 14 (1) (a). In the absence of aprovision along the lines of paragraph (3), article 11 (2),holding the assignee harmless for breach of contract by theassignor could be deprived of any meaning.


(1) Without prejudice to the law governing the protectionof the debtor in transactions made for personal, family orhousehold purposes in the State in which the debtor is lo-cated, the debtor may agree with the assignor in a writingsigned by the debtor not to raise against the assignee thedefences and rights of set-off that it could raise pursuant toarticle 20. Such an agreement precludes the debtor fromraising against the assignee those defences and rights ofset-off.


(a) Defences arising from fraudulent acts on the part ofthe assignee;

(b) Defences based on the debtor’s incapacity.

(3) Such an agreement may be modified only by anagreement in a writing signed by the debtor. The effect ofsuch a modification as against the assignee is determinedby article 22 (2).

References:

A/CN.9/420, paras. 136-144A/CN.9/432, paras. 218-238A/CN.9/434, paras. 205-212A/CN.9/447, paras. 103-121A/CN.9/456, paras. 200-204A/CN.9/466, paras. 137-140


Commentary

Waivers of defences agreed between the assignor andthe debtor

148. In order to obtain more value for their receivablesand at a lower cost, assignors normally guarantee as againstassignees the absence of defences and rights of set-off bythe debtor. Recognizing this practice, article 14 (1) (c) pro-vides that such a guarantee exists even in the absence of anagreement between the parties in this regard. In practice, ifsuch representations cannot be given and the receivablesare likely to be subject to defences, such receivables areeither not accepted by assignees, or are accepted at a sig-nificantly reduced value or only on a recourse basis (i.e. ifthe assignee cannot collect from the debtors, it has the rightto return the receivables to and collect from the assignor).In order to avoid those adverse effects, assignors, as amatter of practice, negotiate with debtors waivers of thedefences and rights of set-off that debtors may raise againstany future assignee. On the basis of such waivers, assigneesdetermine the credit terms offered to assignors, which inturn are likely to affect the credit terms assignors offer todebtors.

149. With a view to allowing assignors to obtain lower-cost credit, article 21 validates such waivers of defencesand rights of set-off. Furthermore, in order to avoid uncer-tainty as to the legal consequences of a waiver and that acourt may override it as being unfair to the debtor or asbeing enforceable only as between the assignor and thedebtor, paragraph (1) states what may appear obvious insome legal systems, namely, that a waiver agreed uponbetween the assignor and the debtor may benefit the as-signee. In recognition of the fact that in practice a waivermay be agreed upon at the time of the conclusion of theoriginal contract, as well as at an earlier or later time, para-graph (1) does not make specific reference to the point oftime at which a waiver may be agreed upon. Paragraph (1)does not require either that the defences are known to thedebtor or are explicitly stated in the agreement by whichthe defences are waived. The Working Group thought thatsuch a requirement would introduce an element of uncer-tainty, since the assignee would need to establish in eachparticular case what the debtor knew or ought to haveknown. Whether the acceptance of an assignment by thedebtor should be construed as a waiver or as a confirmationof a waiver or whether a waiver of defences is to be con-strued as a consent or confirmation of the debtor’s consentto the assignment is left to other law.

Waivers of defences agreed between the assignor andthe debtor

150. Paragraph (1) is limited to waivers agreed upon bythe assignor and the debtor. As a result, the limitationscontained in paragraph (2) do not apply to waivers agreedupon by the debtor and the assignee. The Working Groupthought that the draft Convention should not limit the debt-or’s ability to negotiate with the assignee in order to obtaina benefit, such as a lower interest rate or a longer paymentperiod. At the same time, the Working Group also thoughtthat, in view of the fact that agreements between assigneesand debtors were outside the scope of the draft Convention,

the draft Convention should not empower the debtorto negotiate waivers with assignees, if, under the lawapplicable, the debtor would not have such a power (seepara. 75).

Limitations on waivers

151. While aimed at facilitating increased access tolower-cost credit, which is in the interest of trade in gen-eral, article 21 does not neglect the protection of the debtor.In order to protect debtors from undue pressure by creditorsto waive their defences, paragraphs (1) and (2) introducereasonable limitations with respect to such waivers of de-fences. Such limitations refer to the form in which suchwaivers can be made, to certain types of debtors and tocertain types of defences.

152. Under paragraph (1), a waiver cannot be a unilateralact or an oral agreement; it has to take the form of a writtenagreement signed by the debtor, so as to ensure that bothparties, and in particular the debtor who is waiving rights,are well informed about the fact of the waiver and its con-sequences, including the benefits offered to the debtor inreturn, and to facilitate evidence. In addition, a waiver can-not override the consumer-protection law prevailing in thecountry in which the debtor has its place of business (forconsumer receivables and consumer protection, see paras.36, 100, 128 and 196). In cases where the draft Conventionapplies, this provision in effect substitutes a specific appli-cable law reference to the debtor’s location for the generalrule set forth in article 29. In order to avoid terminologicaland other differences existing among the various legal sys-tems, paragraph (1) refers to debtors in transactions for“personal, family or household purposes”. Furthermore,under paragraph (2), a waiver cannot relate to defencesarising from fraudulent acts committed by the assignee.Such a result would run counter to basic good faith stand-ards. With a view to protecting an assignee who accepts anassignment in good faith, the Working Group decided notto apply the same limitation to defences relating to fraud bythe assignor. If the debtor could not waive such defences,the assignee would have to investigate in order to ensurethat no fraud was committed by the assignor in the contextof the original contract. The limitation under paragraph (2),however, applies not only to defences relating to fraud bythe assignee alone but also to defences relating to fraud bythe assignee in collusion with the assignor.

Modifications of waivers

153. In line with paragraph (1), paragraph (3) requires theform of a written agreement signed by the debtor for themodification of a waiver. Parties need to be warned of thelegal consequences of such a modification, which shouldbe easily proved, if necessary. With a view to ensuring thata modification, which may be agreed upon by the assignorand the debtor, does not affect the rights of the assignee,paragraph (3) subjects a modification to the procedureforeseen in article 22 (2) for the modification of theoriginal contract after notification of the assignment (i.e. toactual or constructive consent by the assignee; seepara. 157).



(1) An agreement concluded before notification of theassignment between the assignor and the debtor that affectsthe assignee’s rights is effective as against the assignee andthe assignee acquires corresponding rights.

(2) After notification of the assignment, an agreementbetween the assignor and the debtor that affects the assign-ee’s rights is ineffective as against the assignee unless:

(a) The assignee consents to it; or

(b) The receivable is not fully earned by performanceand either modification is provided for in the originalcontract or, in the context of the original contract, a rea-sonable assignee would consent to the modification.

(3) Paragraphs (1) and (2) of this article do not affect anyright of the assignor or the assignee for breach of an agree-ment between them.

References:

A/CN.9/420, para. 109A/CN.9/432, paras. 210-217A/CN.9/434, paras. 198-204A/CN.9/447, paras. 122-135A/CN.9/456, paras. 205 and 206A/CN.9/466, paras. 141 and 142

Commentary

154. In practice, the original contract may often need tobe modified, for various reasons (e.g. equipment or mate-rials different from the ones agreed may be necessary in theconstruction of a project). The effects of such contractmodifications as between the assignor and the debtor, or asbetween the assignor and the assignee, are addressed in therelevant contract. In recognition of party autonomy in thisregard, article 22 does not interfere with the relationshipbetween the assignor and the debtor or between theassignor and the assignee. Accordingly, the requirementsand the legal consequences of an effective modificationagreement as between the assignor and the debtor remainsubject to the law governing that agreement and any rightsthat the assignee might have against the assignor for breachof contract are not affected (see para. 158). However, arti-cle 22 deals with the third-party effects of such contractmodifications that may be addressed only by way of legis-lation and are regulated only in a few jurisdictions. Toaddress those third-party effects, article 22 provides, on theone hand, that the debtor has as against the assignee theright to modify the original contract and, on the other hand,that the assignee acquires rights as against the debtor underthe modified original contract. Accordingly, if the price ofthe goods or services offered under the original contract ismodified, the debtor may not raise the modification of thecontract as a defence, asserting that the assignee has norights under the new modified contract, and refuse to payeven the reduced price. Similarly, payment of the reducedprice would discharge the debtor’s obligation.

155. The basic rule introduced by article 22 is that, beforenotification, the assignor and the debtor may freely modifytheir contract. They do not need to obtain the consent of the

assignee, even though the assignor may have undertaken inthe assignment contract to abstain from any contract modi-fications without the consent of the assignee or may beunder the good faith obligation to inform the assigneeabout a contract modification. The breach of such an un-dertaking may give rise to liability of the assignor asagainst the assignee. It does not, however, invalidate anagreement modifying the original contract, since such anapproach would inappropriately affect the rights of thedebtor. After notification, a modification of the originalcontract becomes effective as against the assignee subjectonly to the actual or constructive consent of the assignee.The underlying rationale is that, after notification, the as-signee becomes a party to a triangular relationship and anychange in that relationship that affects the assignee’s rightsshould not bind the assignee against its will. This approachis in line with article 19, according to which, before noti-fication, the debtor may discharge its obligation in accord-ance with the original contract.

Modification before notification of the debtor

156. Paragraph (1) requires an agreement between theassignor and the debtor, which is concluded before notifi-cation of the assignment and affects the assignee’s rights. Ifthe agreement does not affect the rights of the assignee,paragraph (1) does not apply. If the agreement is concludedafter notification, paragraph (2) applies. Under article 18,the relevant point in time is the time when notification isreceived by the debtor, since as of that time the debtor maydischarge its obligation only in accordance with the assign-ee’s payment instructions.

Modification after notification of the debtor

157. Paragraph (2) is formulated in a negative way, sincethe rule is that, after notification, a modification is ineffec-tive as against the assignee, unless an additional require-ment is met. “Ineffective” means that the assignee mayclaim the original receivable and the debtor is not fullydischarged by paying less than the value of the originalreceivable. Paragraph (2) requires actual or constructiveconsent of the assignee. Actual consent is required if thereceivable has been fully earned by performance and theassignee has thus the reasonable expectation that it willreceive payment of the original receivable. For the pur-poses of the draft Convention, a receivable is considered asbeing fully earned when an invoice is issued, even if therelevant contract has only partially been performed. As aresult, for such partially performed contracts to be modi-fied, the actual consent of the assignee is required. Con-structive consent exists if the original contract allows modi-fications or a reasonable assignee would have given itsconsent. Such a consent is sufficient if the receivable is notfully earned and the modification is foreseen in the originalcontract or a reasonable assignee would have consented tosuch a modification. In requiring actual or constructiveconsent, the Working Group intended to establish an appro-priate balance between certainty and flexibility. If a receiv-able is fully earned, its modification affects the reasonableexpectations of the assignee and has thus to be subject tothe actual consent of the assignee. If, on the other hand, areceivable is not fully earned, there is no need to overbur-den the parties with requirements that may affect the effi-cient operation of a contract. In particular, in long-term


contracts, such as project financing or debt-restructuringarrangements (in which receivables are offered as securityin return for a reduction in the interest rate or an extensionof the maturity date), a requirement that the assignor wouldhave to obtain the assignee’s consent to every little contractmodification could slow down the operations while creat-ing an unwelcome burden for the assignee. This problemwould normally not arise, since in practice parties tend toresolve such issues through an agreement as to which typesof modifications require the assignee’s consent. In the ab-sence of such an agreement or in the case of breach of suchan agreement by the assignor, paragraph (2) would providean adequate degree of protection to the debtor.

Assignor’s liability for breach of contract

158. Paragraph (3) is intended to preserve any right theassignee may have under other law as against the assignorif a modification of the original contract violates an agree-ment between the assignor and the assignee. This meansthat, if, under article 22, a modification is effective asagainst the assignee without its consent, the debtor is dis-charged by paying in accordance with the contract as modi-fied. The assignee, however, may turn against the assignorand claim the balance of the original receivable and com-pensation for any additional damage suffered, if the modi-fication is in breach of an agreement between the assignorand the assignee under the law applicable to the agreement.


Without prejudice to the law governing the protection ofthe debtor in transactions made for personal, family orhousehold purposes in the State in which the debtor is lo-cated and the debtor’s rights under article 20, failure of theassignor to perform the original contract does not entitlethe debtor to recover from the assignee a sum paid by thedebtor to the assignor or the assignee.

References:

A/CN.9/420, paras. 145-148A/CN.9/432, paras. 239-244A/CN.9/434, paras. 94 and 213-215A/CN.9/447, paras. 136-139A/CN.9/456, paras. 207 and 208A/CN.9/466, paras. 143 and 144

Commentary

The rule: no recovery of payments from the assignee

159. In practice, the debtor may pay the assignee beforethe assignor performs its obligations under the originalcontract. If the assignee does not perform, the questionarises whether the debtor may recover from the assigneethe sums paid. This question is of particular importance ifthe assignor becomes insolvent and thus recovery of pay-ments from the assignor is impossible. Article 23 providesthat, if the debtor pays the assignee and the assignor doesnot properly perform the original contract, the debtor can-not turn against the assignee; it is left with any cause ofaction it might have against the assignor under the original

contract and the law governing that contract. As a result,the debtor bears the risk of insolvency of its contractualpartner, which would be the case anyway in the absence ofan assignment. Noting that article 10 of the Ottawa Con-vention follows this approach only if the debtor has a causeof action against the assignor and provides for exceptionsin the case of unjust enrichment or bad faith on the part ofthe assignee, the Working Group thought that the differ-ence was justified. A right of the debtor to recover pay-ments from the assignee operates as a guarantee by theassignee that the assignor will perform the original con-tract. Such a guarantee may be appropriate in the specificfactoring situations addressed in the Ottawa Convention,but was thought to be inappropriate in the context of thewide range of financing or service transactions covered bythe draft Convention.

Exceptions

160. In line with the principle that the draft Convention isnot intended to override consumer protection law, article23 preserves any right that the consumer debtor mighthave, under the law of the country in which it is located, todeclare the original contract avoided and to recover fromthe assignee any payments made to the assignee (for con-sumer receivables and consumer protection, see paras. 36,100, 128, 152 and 196). The reference to article 20 appearsto introduce a second exception. In the case of payments ininstalments, the debtor’s defences and rights of set-off withrespect to outstanding instalments are preserved. The Com-mission may wish to consider whether this result is alreadysufficiently clear in article 20.


Commentary

Structure of section III

161. Articles 24 (law applicable to priority issues) and 25(public policy) are private international law rules. Article26 (special proceeds rules) is a mixed private internationallaw and substantive law rule and article 27 (subordination)is a substantive law rule. Articles 25, 26 and 27 are in-tended to qualify the application of article 24. Article 25appears before article 26 not because it does not equallyapply to situations dealt with in article 26, but becausearticle 26, with respect to private international law matters,refers back to article 24 and, with respect to substantive lawmatters, it is a self-standing rule. Article 25 is not intendedto limit the application of the special substantive law prior-ity rule in article 27.

Article 24. Law applicable to competing rightsof other parties

With the exception of matters which are settled else-where in this Convention, and subject to articles 25 and 26,the law of the State in which the assignor is located gov-erns:

(a) The extent of the right of an assignee in the as-signed receivable and the priority of the right of the


assignee with respect to competing rights in the assignedreceivable of:

(i) Another assignee of the same receivable fromthe same assignor, even if that receivable is notan international receivable and the assignment tothat assignee is not an international assignment;

(ii) A creditor of the assignor; and(iii) The insolvency administrator;

(b) The existence and extent of the right of the personslisted in paragraph (1) (a) (i) to (iii) in proceeds of theassigned receivable, and the priority of the right of theassignee in those proceeds with respect to competingrights of such persons; and

(c) Whether, by operation of law, a creditor has a rightin the assigned receivable as a result of its right in otherproperty of the assignor, and the extent of any such rightin the assigned receivable.

References:

A/CN.9/420, paras. 149-164A/CN.9/432, paras. 245-260A/CN.9/434, paras. 238-258A/CN.9/445, paras. 18-29 and 30-40A/CN.9/455, paras. 18-34A/CN.9/456, paras. 209-213A/CN.9/466, paras. 20-24 and 32-35

Commentary

162. Article 24 is one of the most important provisions ofthe draft Convention. It is intended to serve the main goalof the draft Convention to facilitate increased access tolower-cost credit by enhancing certainty as to the relativerights of competing claimants. This result is achieved notby way of a substantive law priority rule (as to the meaningof the term “priority”, see paras. 63-65), since the WorkingGroup was not able to reach consensus on such a rule (forsubstantive law priority rules, see, however, articles 26 and27, the annex and article 40). Rather it is achieved by wayof a private international law rule subjecting conflicts ofpriority to the law of a single and easily determinable juris-diction (the law of the assignor’s location; for the meaningof the term “location”, see paras. 66-70). Such a rule con-stitutes a significant improvement of the present situationin which assignees tend either to reject international re-ceivables as security for credit or accept them at a lowvalue or only with additional security, since they eithercannot determine which law may govern priority or have tomeet the requirements of several jurisdictions in order toensure priority.

“With the exception of matters which are settledelsewhere in this Convention”

163. The opening words of article 24 are intended toensure that article 24 would apply only to matters that arenot settled by way of a substantive law rule of the draftConvention. For example, the general effectiveness of anassignment of future receivables or notification of the as-signment is addressed in article 9; the question whether, in

the case of receivables arising or being earned after thecommencement of an insolvency proceeding with respectto the assignor, the assignee has priority is left to the lawof the assignor’s location. As a result, an assignment of areceivable not existing at the time of notification is effec-tive as between the assignor and the assignee. Similarly, anassignment is effective as against the debtor, even in theabsence of a notification, and, if national law requires no-tification for priority reasons, notification has to be givenunder the draft Convention (it may thus relate to receiva-bles not existing at the time of notification, even if nationallaw does not allow notification with respect to such re-ceivables). Furthermore, an assignment is effective in theabsence of registration (even if national law makes registra-tion a condition of effectiveness and requires a specificdescription of the assigned receivable). However, prioritywill be determined on the basis of registration, if the law ofthe assignor’s location so provides (whether the receivableneeds to be specifically described for the purpose of obtain-ing priority through registration is left to the law of theassignor’s location). Issues of formal validity (e.g. whethera writing, notification or registration is required for theassignment to be effective inter partes) are left to law out-side the draft Convention (for a secretariat suggestion toaddress this matter, see para. 82); as are issues of materialvalidity other than those addressed in articles 9 to 12.

“Subject to articles 25 and 26”

164. The matters mentioned in article 24 are referred tothe law of the assignor’s location unless a rule of that lawis manifestly contrary to the public policy of the forum orthere is a super-priority right under the law of the forum. Inthe former case, the balance of the law of the assignor’slocation applies. In the latter case, the super-priority right,which under the law of the forum has priority, is givenpriority. The Commission may wish to consider whetherthe application of article 24 should also be subject to theabsence of a subordination agreement (article 27). Alterna-tively, the Commission may wish to consider that, in viewof the fact that article 27 is a substantive law rule, theopening words of article 24 (“With the exception of ...”)are sufficient to cover matters settled in article 27 (althougharticle 26 is also a substantive law rule and the applicationof article 24 is made subject to article 26).

Extent of a right and priority in receivables

165. Article 24 (a) draws a clear distinction between pri-ority and the extent of the assignee’s rights. The words“extent of a right” are intended to reflect whether an as-signment by way of security or an outright assignment isinvolved and the in rem or ad personam nature of a rightas against third parties (the proprietary effects of an assign-ment as between the assignor and the assignee are settled inarticle 9). Priority, on the other hand, deals with the ques-tion of who obtains payment first. In a conflict between aclaimant with priority, who has a personal right, and aclaimant, with a right in rem, the claimant with priority willprevail. However, in the case of insolvency, such a prevail-ing claimant would be paid pari passu with other creditorswith a personal right, while it would be paid before thosecreditors if it had a right in rem.


Conflicts between assignees in the caseof duplicate assignments

166. Conflicts between assignees of the same receivablesfrom the same assignor arise in the case of “duplicate as-signments”. Such assignments are normal practice in thecase of assignments by way of security in which the samereceivables are offered to different lenders as security forvarious amounts of credit. However, duplicate outright as-signments may be a fraudulent or an unconscionable act.While fraud may be a rare occurrence, simple inadvertenceon the part of the assignor, or ignorance of the legal effectsof a previous assignment, occurs frequently. A typical ex-ample is the assignment to a receivables financier in returnfor working capital and to an inventory financier or to asupplier of materials on credit with a retention of title orother security interest until full payment of the price of theinventory or of the materials. In such a case, the conflictmay be between a global assignment (an assignment of allpresent and future receivables) to the receivables financierand an assignment to the inventory financier or the supplierof the proceeds from the sale of the inventory or materials.

Conflicts between Conventionand non-Convention assignees

167. Article 24 (a) (i) explicitly provides that a conflictbetween a Convention and a non-Convention assignee (e.g.between a foreign and a domestic assignee of domesticreceivables) is also covered (however, a conflict betweenan assignee in a Contracting State and an assignee in a non-Contracting State is not covered). Such an approach avoidsany negative impact on domestic law and practice. In fact,one of the reasons for which the Working Group decidedto turn the priority rules into private international law ruleswas that such rules would not negatively affect domesticpractices. The draft Convention does not give priority to aforeign assignee over a domestic assignee. It merely refersconflicts of priority to the law of the assignor’s location.With one possible exception (see para. 20), that law wouldbe the law the requirements of which the domestic assigneeof a domestic receivable would have to meet to obtainpriority, whether the draft Convention applies or not.

Conflicts with the assignor’s creditorsor the insolvency administrator

168. A creditor of the assignor or the insolvency admin-istrator may have a competing right with the assignee, if,after the assignment, that creditor obtains a court judge-ment attaching the receivables in the hands of the assignor(if the assignment is made after attachment or the com-mencement of an insolvency proceeding, no conflict arises;any rights that the assignee may obtain are subordinate tothe rights of the assignor’s creditors or the insolvency ad-ministrator). If priority is based on the time of assignment,the fact that the assignment is made before attachment orcommencement of the insolvency proceeding is sufficientto establish that the receivables are separated from theassignor’s estate (if an outright assignment is involved) orthat the assignee may satisfy its claim in preference tounsecured creditors (if an assignment by way of security isinvolved). If, however, priority is determined on the basisof notification of the debtor or registration of certain dataabout the assignment in a public registry, the fact that the

assignment is made before attachment or commencementof the insolvency proceeding is not sufficient for the pur-pose of establishing priority. Notification of the debtor orregistration also needs to take place before attachment orcommencement of the insolvency proceeding.

Insolvency of the assignee or the debtor

169. Issues arising in the case of insolvency of the as-signee are beyond the scope of the draft Convention andare not addressed, unless the assignee makes a subsequentassignment and becomes an assignor. The draft Conventionis not intended to address issues arising in the context ofthe debtor’s insolvency either. It is assumed that the as-signee would have in the receivables the same rights thatthe assignor would have in the case of insolvency of thedebtor.

“The existence and extent of the right ...and the priority of a right” in proceeds

170. In line with subparagraph (a), subparagraph (b) pro-vides that the law of the assignor’s location governs theextent of the rights of the persons mentioned above and thepriority of such rights with respect to proceeds. Proceedsinclude, under article 6 (k), proceeds of receivables andproceeds of proceeds. Therefore, the words “of the assignedreceivable” may need to be deleted, so as to avoid creatingthe impression that only proceeds of receivables are coveredin article 24 (b). The words “the extent of the right” relate tothe in rem or ad personam nature of the assignee’s rights inproceeds. The Commission may wish to consider whetherthe word “existence”, which was added at the thirty-firstsession of the Working Group without any discussion,should be retained (see A/CN.9/466, para. 212). It wouldseem that subparagraph (b) goes far beyond subparagraph(a), in that it covers, with respect to proceeds, issues that thedraft Convention does not address even with respect toreceivables, namely, substantive validity in every respectand formal validity matters. If article 24 (b) is retainedunchanged, the title of the article may need to be revised.

The existence and the extent of rights in receivablesthat are proceeds of other property

171. The extent of any rights and the priority of suchrights in receivables that are proceeds of other receivablesis subject to the law of the assignor’s location by virtue ofarticle 24 (a) (i), if such rights are created by agreement, orby virtue of article 24 (a) (ii), if such rights are created byoperation of law. Depending on whether the Commissiondecides to retain the reference to the “existence” of suchrights, it may wish to merge subparagraph (c) intosubparagraph (a) (ii) or to delete subparagraph (c) alto-gether and include a clarification of the matter in the com-mentary (for the meaning of the words “the extent of theright”, see para. 165).

Applicable law

172. Departing from the approach traditionally followedin many legal systems, subjecting priority issues to the lexsitus of the receivable (the law of the country where pay-ment is due or the debtor is located), the Working Group

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