European Commission Proposes Legislation to Provide Legal Certainty for Cross-Border Assignment of Claims

by Shearman & Sterling LLP
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The European Commission has published a proposed Regulation on the law applicable to the third-party effects of assignments of claims. The proposed Regulation was published alongside a Communication on the law applicable to the proprietary effects of transactions in securities.

Existing conflicts of law rules as to the contractual elements of the assignment of claims are governed at EU-level by the Rome 1 Regulation. However, there are no EU-level conflicts of law rules on the proprietary elements (or third-party effects) of the assignment of claims. The proprietary elements relate to who has ownership rights over a claim, which requirements must be met by an assignee to give him legal title over the claim and the resolution of competing claims. Currently, each Member State's conflicts of law rules govern the assignment of claims. These rules are inconsistent across the EU because they use different connecting factors to determine the applicable law - the rules in some Member States are based on the law of the assigned claim, others are based on the law of the assignor's habitual residence and other conflicts of law rules are based on the law of the assignment contract. In addition, some conflicts of law rules are unclear, particularly where they are not stated in legislation. Without legal certainty, market participants may not be aware of or choose to ignore the risk and then encounter unexpected losses; or they may mitigate the risk by seeking legal advice which will result in higher transaction costs; or they may be dissuaded by the legal risk, choose to avoid it and miss business opportunities.

The proposed Regulation seeks to address the legal uncertainty and legal risks that exist in cross-border assignments of claims arising from the lack of a uniform EU approach. A claim is the right of a creditor against a debtor to the payment of a sum of money or the performance of an obligation. In an assignment of a claim, the creditor transfers his rights to a claim against a debtor to another person. In cross-border transactions where several national laws could potentially apply, the assignee needs to know which laws apply so that it can ensure compliance and obtain legal title over the assigned claim. The collapse of Lehman Brothers International (Europe) in 2008 and its ongoing administration highlights the challenges that arise when there is legal uncertainty over who owns a claim.

The proposed Regulation provides that the national law designated as applicable under the Regulation can be the law of a Member State or that of a third country. As a general rule, the law of the country where the assignor has its habitual residence will govern the third-party effects of assignments of claims. That general rule is subject to two exceptions, the first of which provides that an assignment would be subject to the law of the assigned claim where the general rule is not suitable. The second exception is designed to enhance the securitization market and allows the assignee and assignor in a securitization to choose the law of the assigned claim.

The proposed Regulation covers traditional claims or receivables, financial claims (claims arising from financial instruments that are not securities) and cash credited to an account in a bank. The proposed Regulation does not apply to book-entry securities and instruments, the existence or transfer of which presupposes their recording in a register, an account, or centralized deposit system. Those book-entry securities and instruments are governed by the conflicts of laws rules applicable under the Financial Collateral Directive, the Settlement Finality Directive and the Winding-up Directive and are the subject of the Commission's Communication. However, and surprisingly (perhaps involving an error) transfer orders under the Settlement Finality Directive do not seem to be so excluded, creating further legal uncertainties as regards the effects of the proposal for participants in such systems.

The Commission anticipates that the proposed Regulation may result in market participants having to amend their legal documents. The proposed Regulation on the law applicable to the third-party effects of assignments of claims will now proceed through the EU legislative process. It will be directly applicable across the EU once it comes into force, which will be 18 months after it is finalized and published in the Official Journal of the European Union.

View the proposed Regulation.

View the Communication.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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