Assignment of claims is widely used in various financing arrangements such as factoring, invoice discounting, asset-based lending, supply chain financing and securitisation wherein claims are sold and/or otherwise assigned in order for a business to raise funding. To correctly assess the legal risks relating to such arrangements it is important for the assignee (being the financier) to ensure that the assignment is protected against the assignor's other creditors.
Different laws may govern different aspects of a transaction where claims are assigned, and thus, it is essential to establish:
- the law governing the assignment between the assignee and the assignor;
- the law governing the assigned claim; and
- the law governing the third party rights in relation to the assigned claims.
In a domestic transaction typically all the above relations would be governed by Swedish law, but receivables financing arrangements often involve multiple jurisdictions (or at least the customers (i.e. debtors) of the assignee may be incorporated in various jurisdictions). Consequently, there are a few questions to consider when establishing the law applicable to the transaction.
Governing law for the assignment and the assigned claims
Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (the "Rome I Regulation") sets the rules for the determination of governing law of items (a) and (b) above. In accordance with the Rome I Regulation a contract shall be governed by the laws chosen by the parties and the relation between the assignor and the assignee under a voluntary assignment of a claim against another person is governed by the law that applies to the contract between the assignor and the assignee. Further, in accordance with the Rome I Regulation, the law governing the assigned claim shall determine its assignability, the relationship between the assignor and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor's obligations have been discharged. Thus, the enforceability of claims against each debtor shall be governed by the laws governing the relevant underlying contract from which the receivables originate.
Current choice of law rules for third party protection
The Rome I Regulation does not cover the question of third party effects of assignment of claims. In fact, there are no uniform conflict of law rules at European level applicable to third party effects of assignment of claims and the national conflict of law rules in the various EU member states are inconsistent with each other. Therefore, in a cross-border transaction a prevailing law may not always be determined with certainty, which causes legal risks that businesses have to take into account when considering a cross-border assignment of claims.
Under Swedish conflict of laws rules, the main principle is that in order to create a valid assignment of an asset binding on third parties the perfection measures must be carried out in accordance with the laws of the jurisdiction where the asset was located at the time the assignment was executed (the principle of lex rei sitae). Swedish law offers no conclusive guidance on the issue of the location of a monetary claim such as a receivable, but the currently prevailing Swedish approach is that claims arising under a contract should be deemed to be "located" in the country where the debtor has its domicile and, consequently, the laws of that country would apply to the perfection of an assignment of such claims. This is also to some extent supported by Article 2(9)(viii) of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (the "Insolvency Regulation").
However, not all member states have adopted this same approach. For example, Polish law indicates that the law of the governing contract should be the determining factor, Norwegian law indicates that the domicile of the creditor assigning the claim should be the determining factor, while Finnish law follows the same rule as Swedish law.
The new proposal
To make it easier and more attractive for market participants to carry out cross-border transactions in the EU, and with the aim of improving legal certainty within the EU member states in order to reduce the financial losses resulting from materialised legal risks, eliminating the costs incurred by market participants when trying to mitigate the legal risks stemming from legal uncertainty , the European Commission has proposed a new regulation of the European Parliament and of the Council on the law applicable to the third party effects of assignments of claims. The regulation will, if it is approved, provide for uniform rules regarding law applicable on third party effects across the European Union.
The proposed regulation includes a mixed approach wherein the law of the assignor's habitual residence would be the general rule. Habitual residence would for a company be "the place of central administration" and for a natural person where "his/her principal place of business" is. Notwithstanding this, the law of the assigned claim would be applicable in two cases: (i) assignment of cash credit balance of a bank account; and (ii) assignment of claims arising from financial instrument (such as derivative contracts). In addition, the assignor and the assignee would in a securitisation be given the possibility to choose the law of the assigned claim as the applicable law to achieve protection against third party rights.
As such, the proposed general rule stating that third party effects of assignment of claims are to be determined based on the law of the assignor's habitual residence would seem to make sense in the light that in accordance with the Insolvency Regulation insolvency proceedings, as a main rule, are to be opened in the jurisdiction of the insolvent company's main interest (i.e. the place where the insolvent company conducts the administration of its interests on a regular basis and which is ascertainable by third parties). Therefore, the relevant court wherein the insolvency proceedings are commenced could effectively asses the effects of the assignment on other creditors of the insolvent company. But most of all, it would be good with a general principle applicable in all the EU member states.
The proposal is currently being processed by the Council of the European Union. At present, there is no indication as to when (and if) the proposed regulation will be approved. Hence, it may still take some time until the gap left by the Rome I Regulation on third party effects of assignment of claims has been filled and there are uniform rules across the European Union.