51. Department of State memorandum regarding developments in economic and commercial law (July 30, 2004)
July 30, 2004
TO: Joshua Markus, Chair
Section on International law and Practice
American Bar Association
FROM: Harold Burman
Government Liaison to the Council
on International Private Law
For the Section Council
Attached is our annual review of economic and commercial law developments through mid-2004 in the field of international private law relevant to the Section. Developments in the fields of jurisdiction, service of process and evidence, alternative dispute resolution, and international family law are available through other reports or by contacting Council liaison. Additional information and documentation for the use of any Committee of the Section can also be provided on any of the projects noted below.
International organization overview
Elections in the fall of last year returned the U.S. as a member of the UN Commission on International Trade Law (UNCITRAL), which was expanded from 36 to 60 member States, and the U.S. candidate for the UNIDROIT Governing Council was elected by a strong margin. Both had been of concern because of possible reactions to U.S. policies in other areas of international law (the U.S. candidate in a previous election for UNIDROIT several years earlier was unsuccessful). The U.S., along with the WEOG (“Western European and Other” country group, a UN regional caucus group of which the U.S. is a member,) supported the expansion of UNCITRAL as long as existing percentages were maintained between the UN geographic groups.
Non-government bodies (NGO’s) who are technically qualified, continued to participate at UNIDROIT, the Hague Conference and UNCITRAL as technical advisers upon invitation (e.g. they do not attend Uncitral as of right merely by being recognized as an NGO under UN ECOSOC procedures). Their pro-active role at UNCITRAL is in contrast to their often much more restricted and controversial role at a number of other UN General Assembly bodies, a matter that is once again under review. The American Bar Assoc. is a leading NGO example, with technical representatives appearing at UNCITRAL on insolvency law, secured finance, electronic commerce, and litigation and arbitration matters. SILP Section members are encouraged to participate in this effort by the ABA.
The probable future status of the European Union as a party to certain private law instruments has been on the table. Two new private law conventions, the 2001 Cape Town Convention on mobile equipment finance, affecting the globally important field of aircraft finance in its first Protocol, and the 2002 Hague Conference Convention on securities intermediaries, both contain similar provisions allowing REIO’s (regional economic intergovernmental organizations) to accede and undertake the obligations of a State party. Aimed at this stage primarily at the EU, it may open the door to other regional bodies at some future date if they assume a certain level of legal responsibility for actions of their member States. The provisions in the above two-mentioned treaties are designed to accommodate the reality of mixed competency between the EU and its member states in certain areas of the private law, such as jurisdiction and insolvency law. EU accession arguably would allow EC control over the application of those areas of law over which it had competence, and clear the way for its member states to ratify as to all other provisions. That said, since transactional and financing parties need a high level of reliance on provisions of private law treaties, it will be necessary to spell out more clearly what it means to state that the EU is a “party” to such an instrument. In addition, discussions are underway on the EU’s request to become a member of the Hague Conference. This may require resolution of matters such as when and to what extent the EU can vote or make representations binding on its member States, and whether those actions are effective only as to those EU member States present at a meeting.
Outer space finance law
UNIDROIT held its first intergovernmental meeting in October 2003 at Rome on the draft Protocol to the Cape Town Convention on secured finance rights in outer space equipment. This placed on the table the intersection between the existing UN Outer Space Treaty of 1967, and its follow-on treaties on registration of space objects, liability of damage by satellites, and return of space objects, as public law instruments on the one hand, and the UNIDROIT/ICAO Cape Town convention system that would set forth private law financing rights to equipment in space as between transacting parties. The same issues arise with the International Telecommunications Union (ITU) regulatory treaty regime for transmittal and orbital rights. States at the conference and industry representatives involved agreed that there was no conflict between these private and public law treaties, in that a private law treaty affecting transacting parties would have no effect on State obligations under the public law instruments. Further, it was agreed that secured creditors seeking to enforce international interests created by the Space finance protocol would remain subject to regulatory regimes in many States as to transference of rights to satellites.
The next intergovernmental meeting is scheduled for October 2004 at Rome. It has become clear that a protocol for space finance will be more difficult than one for airspace. First, a number of States, including the U.S., will interpose regulatory review prior to allowing transference of satellite operations, which in turn will necessitate negotiating new financial assurances to balance the credit risk. In addition, some States will seek to protect contractual arrangements for public services, which could undermine a secured finance market. Space finance is likely to need to cover manufacturing phases via project finance type provisions, unlike the air finance protocol.
The intersection of the treaty systems is under review by the UN’s Committee on the Peaceful Uses of Outer Space (UNCOPUOS). Participants agreed that while the private law protocol could affect States inter se, it could not affect public law obligations of States under the COPUOS-prepared Outer Space treaty system. As with the air finance registry to be supervised by ICAO (International Civil Aviation Organization), the space finance protocol would require a similar UCC-type filing system. Proposals that the Secretariat of the UN’s Outer Space Committee (OOSA) might perform some functions related to the registry, as it now does for the UN space object registration treaty, met with some resistance, in part on concerns about the UN staff being authorized to facilitate private financing systems.
The Administration sent the Cape Town Convention to the Senate in November 2003, and the Senate granted advice & consent to ratification in July 2004, in a major step forward for private commercial law conventions (the Section pushed this by its support of blanket authority and the House of delegates endorsement). Separately, implementing legislation was sent forward by the Transportation Department for FAA’s role in the new international registry, and passed by both houses of Congress in July 2004. Enactment into law is expected by the time of the Atlanta meeting of the Council.
The U.S. signed the 2001 UN (UNCITRAL) Convention on assignments of receivables financing on Dec. 30, 2003. Discussions have begun informally on possible coordination between the U.S. and the EU, which depend in part on the resolution of competency issues between the EU and its member states on secured financing and related areas of commercial law under its new constitutional framework. The EU process is complicated by the fact that the Convention, which tracks modern finance law as reflected in UCC Article 9, would be a sharp change in legal traditions for a number of EU States. This may require inter alia the need to revise the existing EU Rome Convention on law applicable to contracts. This Convention, unlike Cape Town and the Hague securities law conventions noted above, does not have an “REIO” clause allowing the EU to accede as a party.
On other secured finance fronts, UNCITRAL’s Working Group VI continued its project to conclude a UN legal guide on secured finance law reform. The present scope emphasizes inventory and trade finance; studies will be done as to whether to extend that to intellectual property rights, and deposit accounts and other banking mechanisms. Secured rights in investment securities would not be covered, since that is the subject of a new project by UNIDROIT. U.S. participants, including the ABA, State Department, Commercial Finance Assoc., and others have emphasized economic functionality as a test for what recommendations should be made to States, rather than theory or past practices. One of the key open issues is whether priority requires transparent publicity, and whether the UCC-type notice filing system should be the preferred approach.
A number of U.S.-based finance interests, the National law Center for Inter-American Free Trade (NLCIFT), the State Department and others have continued to seek implementation of the 2002 OAS Model Inter-American Law on Secured Finance. This effort includes seeking IADB (Inter-American Development Bank) support to approach secured finance reform on a regional basis in the CAFTA states, rather than state by state, as has been done in the past. While the size of each Central American State individually may not be large enough to attract new capital by this means, it is believed that regionally that approach could represent a combined market size that would work.
The Hague Conference completed its work on a Convention to determine law applicable to securities held indirectly by intermediaries, a new mechanism whereby rights to securities are held generally in and transferred by computer data. The exponential growth in this area created concerns about systemic risk, since older law (Revised UCC Article 8 is an exception) is unable to predict applicable law, making valuation and reserve requirements unreliable and raising risk levels. The new Convention at the last minute adopted, with EU support, the UCC solution - relying primarily on party choice of law through account agreements, because “location” is no longer an effective concept in a computer age. A draft official commentary which would confirm that result is expected to be agreed to by October 2004, and authority then sought for U.S. signature to the Convention.
Building on that, UNIDROIT has undertaken a new project to harmonize some aspects of substantive securities transaction law, such as closing and settlement, intermediaries’ rights and obligations, rights to reuse account holders’ securities and other matters. This is the first substantial effort in this field at the international level. A draft is expected to be circulated for public comment in September 2004 and a first negotiating meeting possibly by May 2005. A parallel project has been proposed by the U.S. and some other States for consideration by the OAS as a topic for its Seventh Specialized Conference on Private International Law (CIDIP-VII), in part because a number of Latin American States are more likely to adhere to a regional instrument developed at a body where their influence is pervasive.
Insolvency law reform
UNCITRAL, the World Bank and the International Monetary Fund continued to develop new guidelines for insolvency law reform, now seen as a critical part of a State’s ability to manage financial tailspins as well as to attract investment or start-up capital for its enterprises. The absence of an efficient legal system for recycling assets of failed enterprises was seen as one factor contributing to certain well-known meltdowns, and continues to be a major factor restricting the inflow of investment capital for many states. UNCITRAL’s text is clearly the more detailed, but also more flexible, and has a significant degree of support of many States through participation of experts and ministry representatives from over fifty countries. IMF has supported the UNCITRAL text as the preferred core of future standards which would be adopted jointly by the Fund and the Bank to assess activities in recipient States. The draft Legal Guide now contains, and in part rests on, more robust treatment of U.S.-type reorganization and refinancing options, rather than just liquidation for failed enterprises. In addition, U.S. bankruptcy law sector proposals for inclusion of expedited proceedings, supported by IMF, the World Bank, the Asian Development Bank and others, which are designed to allow quicker initial workout of debts to major investors so as to allow new rescue financing, are now included. Both initiatives, seen by some as critical to achieving economic progress, especially for developing and emerging States, were barely on the agenda when this effect began. The UNCITRAL project was completed in June 2004 and the final text will be available in the near future.
UNCITRAL moved forward with its draft convention on formation of contracts in e-commerce, which would encompass enabling provisions, a number of which are derived from UNCITRAL’s first 1996 e-commerce Model Law. Provisions on location of parties (not an easy issue in a computer age), time and place of dispatch and receipt, and rule on error correction are unresolved. The Convention would essentially validate e-communications for contract purposes and resolve base-line issues. Earlier draft provisions on disclosure obligations and other more regulatory features were removed. Standards for determining location need to be resolved if the present scope applying the Convention to cross-border activities is maintained. While e-commerce may inherently be international, as is air transportation, it would be much more difficult to gain acceptance for a text that would replace domestic law. This would be so in the U.S., where the intersection between existing state law, i.e. the Uniform Electronic Transactions Act (UETA) and the Federal E-signature and Global E-commerce Act would need to be worked out, even though each of those draws substantially on the 1996 UNCITRAL Model Law as a common source.
The treaty law aspects of the new convention will need buy-in by enough countries to become effective. The draft Convention states that its provisions will also apply to certain listed UN Conventions, such as the Vienna Convention on Contracts for the Sale of Goods (CISG), as well as other conventions or treaties if so listed by declaration by States party thereto, so that terms in those instruments can be interpreted in a manner consistent with modern technology and practices. Such a provision would be effective only inter se, that is only between any two or more States that adopt the new Uncitral Convention, and would not affect obligations of those States to any other States party to the other conventions or treaties affected. The scope of this new approach itself is still unresolved, i.e. whether it should be limited to PIL treaties, extend to all commerce and trade agreements (arguably the reach of Uncitral’s charter), or extend to any treaty a ratifying State chooses to apply it to, whether trade related or not. Either way, the purpose is to extend the “footprint” of modern e-commerce law to more States than have adopted such measures so far.
Carriage of goods by sea, and effect on inland transportation
After more than 80 years disharmony amongst international legal regimes, the carriage by sea mini-world may be on the way to a new convention that will unify liability issues for ocean carriage and can extend to certain aspects of inland rail and road transportation as well. A draft convention, prepared by the Brussels-based Comite Maritime Internationale (CMI), which involved national maritime law associations and other industry groups, as well as a variety of governments, is now under negotiation at UNCITRAL. After compromise was reached between various U.S. groups representing shippers, carriers, cargo interests, and others, itself a feat, a combined U.S. proposal (UN Doc.A/CN.9/WG III/WP.34) was tabled at UNCITRAL in October 2003 that would package together resolution of certain issues that are key to U.S. support. These include the scope provisions and the degree to which it applies to carriers and shippers; how it applies to some aspects of related road and rail transportation; new liability limits and exemptions from liability, including modification of the navigational fault rule; ocean liner service agreements; party autonomy, and forum selection rules. While on the agenda, the Working Group has not yet made substantial progress on transfer of rights in transit or storage by computer. As to the basic scope issues, while some aspects of related rail and road carriage is included, there is little support at the Commission to take on a full multimodal convention, i.e. one that substantively covers all modes of transportation under a unified regime. That would require full harmonization between ocean, rail and road interests, an interesting project possibly for some future generation.
An international colloquium held in April 2004 in Vienna, organized by UNCITRAL with the assistance of the UN Crime Commission, considered the impact of growing levels of fraud in commercial sectors, often aided by the internet and other computer-based communications networks. The impact was felt in most States, including the U.S., but its implications were seen as especially serious in some developing countries. Sectors reviewed were banking, maritime carriage, insurance, bankruptcy and other asset recovery, and others. One common problem was the inability of applying remedies in non-criminal matters in cross border cases, and the difficulty of obtaining multi-jurisdiction cooperation in the absence of some framework international instrument or process. The Commission agreed in June 2004 to authorize studies on possible next steps, including possible preparation of best practice rules designed to limit fraudulent actions.
Uniform International Rules
The UNIDROIT Principles of International Commercial Contracts has been reissued in a 2004 edition, updating the original 1995 version. The widely used Principles have served as a common set of party choice of rules and as a reference point for many transactional and academic purposes. Often an effective means of avoiding extended discussions and due diligence on comparative laws in commercial transactions, the Unidroit Principles have been generally accepted in commercial arbitration as an enforceable party choice. Generally merging best practices from both common and civil law jurisdictions, the new edition added chapters on agency, third party rights, set off, assignment of rights, transfer of obligations and assignment of contracts, and limitation periods. In addition, some provisions of existing chapters were also revised. A brief review of the new edition is available in Unidroit’s Uniform Law Review, Vol. IX, 2004-1, by rapporteur Michael Joachim Bonell. Comments on the new chapters and other revisions will be of valuable assistance in assessing whether to recommend use of the new edition.
Section members are encouraged to participate in any of these efforts, both in the preparation of international instruments and in securing domestic application in the U.S. and other States. Contact your Committee or Division Chairs