DICKINSON LAW REVIEW Published Since 1897

Vol. 106, No. 1 Summer, 2001

CONTENTS

Editor's Note to Librarians and Subscribers

Dedication

10TH BIENNIAL CONFERENCE OF THE INTERNATIONAL ACADEMY OF COMMERCIAL AND CONSUMER LAW

Introduction ...... Louis F. Del Duca 1

International Investment Development Designing a Regulatory Framework for Collective Investment Schemes in Emerging African Markets: The Ugandan Experience ...... S. K. Date-Bah 3

International Banking Developments Fraud in Documentary Credit, Letter of Credit and Demand Guaranty ...... Jean Stoufflet 21

Legal Aspects of the Banking Bailout in Mexico ...... Arcelia Quintana-Adriano 29

Competition Law and Enterprise Organization Disloyal Competition in the Honduran Commercial Code and in the Proposed Law for the Promotion and Protection of Competition ...... Dr. Laureano F. Guti~rrez Falla 69

Creating International Legislation for the Twenty-First Century Do We Need a Global Commercial Code? ...... Michael Joachim Bonell 87

Unified Private Law for the European Internal Market ...... Dr. Ulrich Drobnig 101

HeinOnline -- 106 Dick. L. Rev. [iii] 2001-2002 Electronic Commerce Consumer Protection in the Global Village: Recent Developments in German and European Union Law ...... Norbert Reich 111 and Axel Halfmeier

The Chilean Draft of Electronic Documents in Relation With the UNCITRAL Model Law of Electronic Commerce .... Dr. Ricardo Sandoval L6pez 139

Transnational Secured Financing Law Personal Property Security in Australia- A Long, Long Trail A-Winding ...... David E. Allan 145

Receivables Financing and the Conflict of Laws: The UNCITRAL Draft Convention on the Assignment of Receivables in International Trade ...... Catherine Walsh 159

Convention on the International Sale of Goods Selected Topics Under the Convention on International Sale of Goods (CISG) ...... Louis F. Del Duca 205 and Patrick Del Duca

Consumer Law Developments Consumer Protection in the Mexican Financial System ...... Miguel Acosta-Romero 255

Developments in Consumer Law in Puerto Rico, Case Brief: Costa v. Caguas Expressway Motors, Inc...... Pedro F. Silva-Ruiz 263

HeinOnline -- 106 Dick. L. Rev. [iv] 2001-2002 Dedication

The Penn State Dickinson Law Review in cooperation with the Penn State Dickinson School of Law Center for International and Comparative Law is privileged to dedicate this issue of the Law Review to John Honnold, Professor Emeritus of the University of Pennsylvania Law School; Kazuaki Sono, Dean of the Faculty of Law and Policy, Tezukayama University of Japan; Gerrold Herrmann, former Secretary of the United Nations Commission on International Trade Law and Chief of the International Trade Law Branch, Office of Legal Affairs, United Nations, Vienna; Michael Joachim Bonell, Professor of the University of Rome Law School and Consultant to the International Institute for Unification of Private Law headquartered in Rome, Italy; and Walter Rodino, Deputy Secretary General of the Institute.

HeinOnline -- 106 Dick. L. Rev. [v] 2001-2002 10th Biennial Conference of the International Academy of Commercial and Consumer Law

Introduction

Louis F. Del Duca*

The events of September 11 impose a new sense of urgency on the need to rationalize political, economic, and social interchange in a globalized world of increasing hostilities. Founded in the early 1980s, the International Academy of Commercial and Consumer Law continues to contribute to development of a more rational world order by "identifying the international nature of commerce, the common problems faced across jurisdictions and the benefits in solving commercial and consumer problems by attention to approaches elsewhere."1 Legal experts from Africa, Asia, Australia, Europe, and North and South America participated in the 10th Biennial Conference of the International Academy of Commercial and Consumer Law held August 9 through 13, 2000 at the Penn State Dickinson School of Law. Participants addressed a wide range of topics relating to the changing legal structure of an increasingly global economy as illustrated by the table of contents which precedes this preface. The Conference's discussions and revised papers presented in this volume facilitate exchange of ideas amongst distinguished scholars on cutting edge issues in their areas of expertise. The

* A. Robert Noll Professor of Law, Associate Dean for International and Comparative Law Programs, Director, Center for International and Comparative Law, The Dickinson School of Law of the Pennsylvania State University; President-elect International Academy of Commercial and Consumer Law. 1. COMMERCIAL AND CONSUMER LAW; NATIONAL AND INTERNATIONAL DIMENSIONS, Preface (Ross Cranston & Roy Goode eds., Clarendon Press Oxford, 1993). (We borrow this language from the eloquent preface by Oxford Professors Ross Cranston and Roy Goode to the proceedings of the fifth meeting of the Academy of Commercial and Consumer Law held in Oxford in August 1990).

HeinOnline -- 106 Dick. L. Rev. 1 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 discussions are designed to develop suggestions by legal practitioners and legal educators for improving the law, legal education, and the world community. An important symbolic event was also part of the 10th Biennial Conference. The Academy quite properly bestowed recognition awards for outstanding work in negotiation, preparation, and implementation of the United Nations Convention on Contracts for the International Sale of Goods to John Honnold, Professor Emeritus of the University of Pennsylvania Law School; Kazuaki Sono, Dean of the Faculty of Law and Policy, Tezukayama University in Japan, and Gerrold Herrmann, then Secretary of the United Nations Commission on International Trade Law and Chief of the International Trade Law Branch, Office of Legal Affairs, United Nations, Vienna. Professor Honnold and Dean Sono preceded Gerrold Herrmann in this capacity. Recognition awards were also bestowed for outstanding work in negotiation, preparation, and implementation of the Principles of InternationalCommercial Contracts to Professor Michael Joachim Bonell of the University of Rome Law School and Consultant to the International Institute for Unification of Private Law headquartered in Rome, Italy and Walter Rodino, Deputy Secretary General of the Institute. The Penn State Dickinson Law Review in cooperation with the Penn State Dickinson School of Law Center for International and Comparative Law is privileged to dedicate this issue of the Law Review to those five distinguished members of the International Academy for their outstanding contributions to development of a rational world order.

HeinOnline -- 106 Dick. L. Rev. 2 2001-2002 Designing a Regulatory Framework for Collective Investment Schemes in Emerging African Markets: The Ugandan Experience

S. K. Date-Bah*

I. The Need for Collective Investment Schemes in Emerging African Markets In the developed countries, there has in recent years been a great expansion of the investment capital mobilized by mutual funds and unit trusts. In many developing countries, particularly in Africa, the opportunities presented by the mechanism of collective investment schemes have not been seized upon adequately, if at all. There is a need to remedy this shortcoming. Collective investment schemes generally have the following shared characteristics: 1. They involve a pooling of investors' contributions and, of course, any profits or losses; 2. Such pooled contributions are then invested in marketable assets, such as securities, futures, cash and property, rather than directly in the production process or the service sector; 3. Such schemes afford their participants, usually smaller investors, an opportunity to spread risk because they buy parts of a larger pool, which diversifies their investment. Unit trusts, mutual funds and open-ended investment companies ("OEICs") share these characteristics. Because of these shared characteristics, they are useful investment vehicles to promote in developing countries wishing to mobilize the savings of small savers through products other than the traditional mechanism of deposits

* LL.B (Ghana); LL.M (Yale); Ph.D (London). Fellow of the Ghana Academy of Arts and Sciences. Special Adviser (Legal), Economic and Legal Advisory Services Division, Commonwealth Secretariat, London.

HeinOnline -- 106 Dick. L. Rev. 3 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 with commercial banks or building societies. Though unit trusts and OEICs are functionally equivalent, they differ in legal form. Unit trusts take the legal form of a trust while OEICs have a corporate form. II. The Need to Regulate Collective Investment Schemes Because collective investment schemes mobilize the savings of many people, many of them small savers, and because of the management of these pooled savings by others, it is prudent to put in place a framework of regulation to ensure that the managers of the pooled resources do not abuse their position. Although there is a need to encourage entrepreneurs in promoting collective investment schemes in African jurisdictions, such encouragement has to be carried out within a framework of regulation to ensure investment protection. It is in this context that the Government of Uganda has been engaged in formulating legislation governing collective investment schemes. An examination of the Ugandan experience may provide some lessons on designing regulatory legislation that seeks to simplify precedents borrowed from developed countries, but which retains sufficient protection against abuse based on patterns already manifest in the developed markets, and which may be imitated by operators in emerging markets. In Uganda, because of the historical connection with the United Kingdom ("U.K."), U.K. institutional and regulatory precedents were adopted and adapted to suit the circumstances of Uganda. These precedents will be reviewed below, but first the background to the proposed Ugandan legislation will be set forth. III. Background to the Ugandan Experience in Formulating a Regulatory Framework for Collective Investment Schemes In the early 1990s, The Government of Uganda decided to promote the development of its capital markets. This decision was part of Uganda's economic reform process to liberalize its markets. To this end, Uganda requested technical assistance from the Economic and Legal Advisory Services Division ("ELAS") of the Commonwealth Secretariat. Assistance was extended by ELAS, the first fruit of which was the enactment of the Capital Markets Authority Statute of 1995. Pursuant to this legislation, the Capital Markets Authority ("Authority") was established, and took on the role of actively promoting the development of the capital markets in Uganda. The Authority identified the mobilization of savings

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through collective investment schemes and the fashioning of a legal framework for facilitating this development as top priorities. The Authority made a further request to ELAS to assist it in developing legislation for this purpose. The legislative proposals discussed later in this paper are the result of cooperation between the Authority and ELAS. The Bill containing these proposals has been approved by the Cabinet of Uganda and has been placed before the Ugandan legislature.1

VI. Adaptation of Institutional and Regulatory Precedents From the English Jurisdiction

A. Unit Trusts

As already indicated, collective investment schemes take two broad forms: a company form and a contractual/trust form. Although functionally equivalent, these two legal forms are quite different. In the first, the investor buys shares in a company, which in turn invests in marketable assets such as securities, futures, cash or property. In the second, the investor contributes to a pool of funds, which is then invested. The receipt and investment of these funds will be governed by a contract between the investors and the manager of the fund. One of these contractual forms of collective investment schemes is the unit trust as it evolved in the U.K. Under this form, the contractual arrangement requires the manager to appoint a trustee to hold the scheme's assets and to protect the interests of investors by scrutinizing the manager's activities. The beneficial interest under the trust is divided into units held by the investors. One of the traditional rules of English company law, which is by and large followed in Uganda, is that a limited liability company may not reduce its issued share capital. The policy underpinning this rule is that creditors of a company that has issued capital should not be prejudiced by the company reducing the capital that it has raised. A corollary of this rule is that a limited liability company cannot buy back its own shares since this would result in a reduction in its share capital. In England, the Companies Act of 1985 introduced some limited reform in this aspect of company law enabling companies to repurchase their own shares. This reform

1. The legislation was published as Bill No. 25 of 2000 in the Bills Supplement to the Uganda Gazette No.73 Volume XCIII dated December 15, 2000.

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has not yet been adopted in Uganda. In any case, even in England, it remains true that shareholders cannot realize their investment by demanding that the company, whose shares they hold, repurchase them. Thus, the traditional limited liability company is not able to provide a ready market for its own shares. Such shares have to be traded on a stock exchange rather than sold back to the issuing company. Trusts, in contrast, offer more flexibility on this score. They provide a mechanism through which investors can realize their investment by selling their investment back to the trustees. There was, and is, no rule preventing this. This flexibility accounts for the development of unit trusts rather than corporate mutual funds in the English jurisdiction as the mechanism for mobilizing the savings of small investors through collective investment schemes. In the U.S., where investment companies were allowed to repurchase their own shares, the development of unit trusts was unnecessary. There, open-ended investment companies or mutual funds evolved to play the same role as unit trusts. Since a unit trust is not a company, it is not subject to regulation under the Companies Act. In Commonwealth jurisdictions, a company is usually prohibited from inviting subscriptions of money from the public unless it is a public company. A public company is then made subject to regulatory rules, such as the requirement to issue a prospectus, which are designed to give a measure of protection to the general public. Ugandan legislation seems to follow this pattern in the Companies Act of 1961 (Cap. 85), which provides in section 40(3) that it shall be unlawful for any company to issue any form of application for shares in or debentures of a company unless the form is issued with a prospectus that complies with the requirements of the section. Section 30 also provides that a private company must, by its articles of association, prohibit any invitation to the public to subscribe for any shares or debentures of the company. Without dedicated legislation, a unit trust could escape this regulation of its access to the public to raise capital for investment. Accordingly, in England, regulatory control over unit trusts was established initially under the Prevention of Fraud (Investment) Act of 1939, subsequently replaced by the Prevention of Fraud (Investments) Act of 1958. This in turn was repealed by the Financial Services Act of 1986, which brought in a new regulatory regime for unit trusts and other collective investment schemes (principally foreign schemes recognized in England).

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For Uganda, the moral of the English legal evolution is that it is prudent to regulate unit trusts. Therefore, dedicated legislation is needed to regulate this flexible investment vehicle. Under the Prevention of Fraud (Investments) Act of 1958, the Department of Trade and Industry ("DTI") of the U.K. Govern- ment interpreted the Act as preventing it from authorizing a unit trust to invest in anything other than "securities" as defined in the Act. It was not until the reforms enacted as part of the Financial Services Act of 1986 that unit trusts in England have been able to invest in a wider range of property. The Capital Markets Authority of Uganda has prepared draft regulations in anticipation of the enactment of the collective investment schemes legislation. These regulations, like those cautious regulations developed initially by the DTI, authorize unit trusts to invest in securities and money market unit trusts only, and umbrella funds comprising such trusts.

B. Open-ended Investment Companies ("OEICs") OEICs are defined in the Draft Ugandan Collective Investment Schemes Bill ("Bill") as: A collective investment scheme under which- (a) the property in question belongs beneficially to and is managed by or on behalf of, a body corporate having as its purpose the investment of its funds with the aim of spreading risk and giving its members the benefit of the results of the management of those funds by or on behalf of that body; and (b) the rights of the participants are represented by shares in or securities of that body which- i. the participants are entitled to have redeemed or repurchased, or which... are redeemed or repurchased from them by, or out of funds provided by, that body; or ii. the body ensures shares can be sold by the participants on an investment exchange at a price related to the value of the property to which they relate. OEICs are thus mutual funds on the U.S. model that could not be established in English and most Commonwealth jurisdictions because of the rule that a limited liability company cannot purchase its own shares. In the U.S., where this strict rule has not prevailed, the corporate alternative to unit trusts described in the definition,

HeinOnline -- 106 Dick. L. Rev. 7 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 supra, has become well established. The separation between the managers of the scheme property and the custodians of that property, which is an essential feature of unit trust schemes, is not an essential prerequisite of an OEIC or mutual fund since the scheme property is vested in the company and the company itself may manage that property, unless otherwise required by law. In the Open-ended Investment Companies (Investment Companies with Variable Capital) Regulations of 1996, which became effective on January 6, 1997, the U.K. adopted a particular type of OEIC that, in fact, imported the separation between managers and custodians of the scheme property. Policy makers in the U.K., presumably impressed by the efficiency of the indirect regulation inherent in unit trust schemes, borrowed an analogous regime for OEICs that may now be established in England. Under the unit trust system, as we have already noted, a trustee is appointed who must meet certain standards. It is the trustee, rather than a regulatory agency, who directly monitors the activities of the managers. Of course, both the managers and trustees are ultimately subject to the regulatory authority of the Government, but the primary responsibility for protecting investors by supervising the activities of the manager rests with the trustee rather than a government agency. Although this separation of managers from the custodians of the scheme property does not exist in the typical U.S. mutual fund, the English regulations require it. The scheme property, although owned by the OEIC, is held by a depositary. An independent manager, termed an Authorised Corporate Director ("ACD"), has responsibility for managing the scheme property under the broad supervision of the Board of Directors of the OEIC. The type of OEIC provided for under the English regulations is called an "investment company with variable capital." Uganda has borrowed and adapted this investment vehicle in the Bill. In recommending appropriate draft legislation to the Government for consideration, the Capital Markets Authority considered two options: the first option, like that adopted by Ghana and Bermuda, was to modify the basic company legislation to enable the operation of mutual funds registered as companies under the general companies legislation. In Ghana, the Companies Code of 1963 relaxed the very strict rules governing the conditions under which a normal limited liability company can buy back its own shares. In addition, it relaxed the normal rules governing public issuance of securities by mutual funds. Normally, a public company makes an issue of its shares at infrequent intervals by publishing a prospectus inviting subscriptions.

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A mutual fund may also make an initial block issue, but like the units of a unit trust, its shares may normally be purchased at any time. The company meets demand for further shares by increasing the quantum of its underlying investments. The fund is closed only when the fund managers conclude that the fund is as large as they are prepared to handle. But even then the fund remains open-ended in the sense that the company may re-purchase its shares. The fund may re-sell shares that it has re-purchased. This implies that the prospectus provisions governing normal companies should be modified in relation to mutual fund companies. Section 319 of the Ghana Companies Code authorizes the Registrar of Companies to publish an order in the Gazette declaring a body corporate fulfilling certain statutorily prescribed conditions as an authorised mutual fund. The order may also direct that, for as long as such body corporate remains an authorized mutual fund, certain specified provisions of the Companies Code "shall not have effect in relation to that body corporate or to invitations to the public to acquire or dispose of its shares or that any of such provisions shall have effect with such modifications as are specified in the order." Under this approach, the Registrar can modify the general company law regime to suit the operational requirements of mutual funds. The Bermuda Companies Act of 1981 contains analogous provisions in the sense that Part XIIA of the Act deals with mutual fund companies and relaxes the application of the general company law regime to such companies by exempting mutual fund companies from specified sections of the Act. The Capital Markets Authority ultimately recommended a second option. This second option is that of independent parallel legislation authorizing the establishment of a particular type of open- ended investment company, namely the investment company with variable capital. This option draws on the recent debate, practice, and legislation providing a special purpose corporate code for open- ended investment companies in the United Kingdom. The Capital Markets Authority recommended this course because it avoids the need for complicated amendments to the existing Companies Act, thus avoiding unforeseen consequences to the general law on companies. This approach enables the fashioning of a tailor-made regime responsive to the operational needs of open-ended investment schemes. In addition, because of the similar approach recently adopted in the U.K., Uganda can look to the English precedents and practice for guidance. In the U.K., those intending to establish and operate open- ended investment companies persuaded the Treasury that a free-

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standing special purpose corporate code was superior to a plethora of amendments scattered all over the text of the Companies Act. The Capital Markets Authority believes that the Ugandan legislature will find this argument equally persuasive. Thus, the kind of OEIC regime proposed for Uganda takes account of Uganda's regulatory capacity in that it does not overload the Capital Markets Authority by replacing the indirect regulation that a depositary can provide with direct regulation by the Capital Markets Authority.

V. Overview of the Provisions in the Draft Collective Investment Schemes Bill2

A. Licensing

A system of licensing and recognition is at the heart of the regulatory regime for unit trusts and OEICs. Part II of the' Bill imposes control on unlicensed persons and schemes. No person may establish or operate a collective investment scheme in Uganda unless that person is a licensed person and the scheme is either licensed or recognized. It is a criminal offence for any person to violate this prohibition. A "licensed" scheme is one established in Uganda pursuant to a license granted by the Capital Markets Authority under Part IV of the Bill. A "recognized" scheme is a foreign scheme that is recognised in accordance with the provisions of Part VI of the Bill. The restrictions on unlicensed persons and schemes imposed by the Bill also extend to advertisements inviting persons to participate in licensed or recognised schemes. No person may issue or cause to be issued such advertisements, referred to in the Bill as "scheme advertisements," unless that person is a licensed person or a licensed person has approved the contents of the advertisement. The restrictions also extend to advice and solicitation. No person may advise or procure any other person to become a participant in a collective investment scheme, unless the scheme is licensed or recognized. The role of the licensed person is very important in the regulatory regime for licensed and recognised schemes. The Bill provides for two types of licensed persons: first, persons granted

2. The Bill was published as the Collective Investment Schemes Bill 2000, Bill No. 25, in the Uganda Gazette No. 73 Volume XCIII dated December 15, 2000.

HeinOnline -- 106 Dick. L. Rev. 10 2001-2002 2001] THE UGANDAN EXPERIENCE licenses by the Capital Markets Authority in respect of activities specified in the license; second, any "investment company with variable capital" (the statutory name given to a company incorporated by virtue of the Bill). The investment company with variable capital is, in effect, deemed to be licensed with respect to activities carried out in connection with or for the purposes of the collective investment scheme instituted by the company. Because the granting of a license to an open-ended investment company automatically results in the statutory incorporation of the company, the Bill quite logically provides that an investment company with variable capital is to be regarded as a licensed person, without any need for it to make a further license application. The Bill specifies the process by which the Capital Markets Authority may grant or refuse a license application. Only banks, insurance companies and other financial institutions prescribed by the Capital Markets Authority may apply for a license as a trustee or depositary. When the Capital Markets Authority intends to refuse an application, it must give the applicant written notice stating reasons for its proposed action. A person receiving such notice has the right to require the Capital Markets Authority to refer the matter to the High Court for the exercise of the powers conferred on the High Court by Part XII of the Bill (discussed infra). The Bill describes the procedure for licensing unit trust schemes and investment companies with variable capital, which are the only types of collective investment schemes that may be licensed under the Bill. The Capital Markets Authority has the responsibility for granting the relevant licenses. An application for a license must be accompanied by the scheme's formation documents: namely, a trust deed and scheme particulars in the case of a unit trust; and the instrument of incorporation and a prospectus in the case of investment companies with variable capital. These formation documents must comply with the requirements of the Bill. As already mentioned, an investment company with variable capital becomes incorporated as soon as its license as an open-ended investment company becomes effective. The Capital Markets Authority sends a copy of the license to the Registrar of Companies as soon as practicable. The Registrar then forthwith registers the company's instrument of incorporation and details relating to the company, its directors and depositary. The criteria to be applied by the Capital Markets Authority in granting or refusing licenses are spelled out in the Bill as follows: 1. In the case of an investment company, the company must have a depositary independent of the company, and in the

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case of a unit trust scheme, the manager and the trustee must be independent of each other. 2. In the case of a unit trust, the manager and the trustee must each be a body corporate incorporated in Uganda with its registered or head office in Uganda and in the case of an investment company, the depositary must similarly be a body corporate incorporated in Uganda with its registered office or head office in Uganda. 3. In the case of an investment company, the company itself and its depositary must be licensed persons, while in relation to a unit trust, the manager and the trustee must be licensed persons. Although Clause 17 does not expressly state that an authorised corporate director or ACD should be a licensed person, it is implied from Clause that an ACD needs to be licensed since it is given an active role, under the legislative scheme proposed, to manage and operate OEICs. 4. The formation documents must comply with the requirements of Schedule 1 of the Bill. 5. The scheme must comply with the Regulations applicable to it. 6. The name of the investment company or of the unit trust scheme or of its manager must not be undesirable or misleading. 7. The aims of the scheme must be reasonably capable of being achieved. 8. The shareholders or unit holders must be entitled to have their shares or units redeemed or repurchased in accordance with the formation documents and the Regulations at a price related to the net value of the scheme property, or must be able to sell their shares or units on an exchange at a price not significantly different from that price. 9. In the case of an investment company with variable capital, the company must comply with the following requirements: a) the company must have at least one director; b) the directors of the company must be fit and proper persons to act as directors of the company; c) if the company has only one director, that director must be the authorised corporate director ("ACD"); d) if the company has two or more directors, the combination of their experience and expertise must be such as is appropriate for the purposes of carrying on the business of the company;

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e) the ACD has been appointed by the directors from among such of them as are bodies corporate and licensed persons and not prohibited by the Bill or the Regulations from acting in that capacity; f) the depositary appointed by the company is independent of the directors of the company.

B. First Line Supervision and Regulation by the Ttrustee and Depositary The proposed Ugandan regulatory regime for collective investment schemes maintains the separation of responsibility between the management of scheme property and responsibility for its custody. This important safeguard for investors is achieved through the trustee for unit trusts and the depositary for OEICs. The trustee has the duty of overseeing and supervising the manager and safeguarding the title to trust property. For OEICs, the depositary carries out this regulatory function in conjunction with the ACD. These two institutions bear the primary supervisory responsibility over collective investment schemes. As to the duty of trustees, the draft Collective Investment Schemes (Unit Trust) Regulations, adapted by the Capital Markets Authority from an English precedent, provide as follows: 1. It is the duty of the trustee to take reasonable care to ensure- a. except in relation to Part 5 (which deals with the investment and borrowing powers of unit trusts), that the scheme is managed by the manager in accordance with regulation 7.01 (which spells out the duty of the manager to manage the scheme), and b. in relation to Part 5, that decisions about the constituents of the property of the scheme do not exceed the powers conferred on the manager. 2. The trustee must satisfy itself on reasonable grounds and on a continuous basis that the manager has maintained and is maintaining sufficient records and is adopting such procedures and methods for the calculation of prices at which units are issued and redeemed to ensure that those prices are within the limits for the time being prescribed by Part 4 above. 3. If the trustee is at any time not satisfied of any matter specified in paragraph 2, it must inform the Authority. The depositary serves an equally important role in the regulatory regime for OEICs. As already noted, one of the criteria

HeinOnline -- 106 Dick. L. Rev. 13 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 for the grant of licenses for collective investment schemes is that there be an operator and a depositary of an OEIC, each of whom acts independently.3 The Bill provides that all the scheme property of an investment company with variable capital shall be entrusted to a depositary for safekeeping. Schedule 3 of the Bill makes provision for the appointment, retirement and certain rights of depositaries, and the Capital Markets Authority has power to establish the detailed duties of depositaries. These provisions on depositaries ensure that the successful regulatory techniques used for unit trusts, the separation of responsibility for the management of scheme property from responsibility for its custody, are imported into the regulation of OEICs. The Draft Collective Investment Schemes (Open Ended Investment Companies) Regulations adopted by the Capital Markets Authority for promulgation in due course contains the following more detailed provision on the regulatory responsibility of a Depositary:

6.05 General duties of the depositary 1. It is the duty of the depositary to take reasonable care to ensure that- a. the company is managed in accordance with- (i) Part 4 of these regulations (relating to pricing and dealing); (ii) Part 8 of these regulations (relating to income), and (iii) Regulations 11.04 and 11.05 of these regulations (relating to the investment and borrowing powers and the income of umbrella companies),

and without infringement of any provision of the instrument of incorporation that relates to- 1. the initial offer or issue or cancellation or sale or redemption or pricing of shares; 2. the dilution levy; 3. the valuation of the scheme property; 4. accounting periods (including half-yearly accounting periods); 5. the calculation of income available for allocation; 6. the allocation, payment or retention of income; and

3. The Bill provides that an operator, in relation to an OEIC, means that OEIC itself.

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7. unclaimed distributions;

b. decisions about the constituents of the scheme property do not cause an infringement of Part 5 of these regulations. 2. The depositary must satisfy itself on reasonable grounds and on a continuing basis that- a. the ACD is adopting procedures and methods which are appropriate to ensure that the price of a share is calculated for each valuation point in accordance with Part 4 of the regulations, and b. the ACD has maintained sufficient records to show compliance with Part 4. 3. The depositary, in the context of its role as such, must act solely in the interests of the shareholders.

6.06 Control by the depositary over the scheme property 1. The depositary shall be responsible for the safekeeping of all of the scheme property of the company (other than tangible movable property) entrusted to it and shall ensure that any of that scheme property in registered form shall, as soon as practicable, be registered in the name of the depositary, or subject to regulation 6.10, its nominee. 2. The depositary is responsible for the collection of any income due to be paid for the account of the company and shall hold and deal with any income so collected in accordance with these regulations. 3. The depositary must take all steps and execute all documents which are necessary to ensure that transactions properly entered into for the account of the company in accordance with Section A above are completed. 4. The depositary must keep such records as are necessary- a. to enable it to comply with these regulations, and b. to demonstrate that such compliance by it has been achieved. Unlike the trustee, however, the depositary does not have exclusive private sector authority to oversee the activities of the ACD. The Board of Directors also has authority under the Corporate Code,4 to oversee the activities of the ACD as permitted by the Capital Markets Authority regulations. Paragraph 1(4) of the Corporate Code provides as follows:

4. Appended to the Bill as Schedule 4.

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(4) The business of a company shall be managed- (a) where the company has only one director, by that director; or (b) where a company has more than one director, by the directors but subject to any provision contained in scheme regulations as to the allocation between directors of responsibilities for the management of the company (including any provision there may be as to the allocation of such responsibility to one or more directors to the exclusion of others). (5) Subject to the provisions of this Statute, scheme regulations and the company's instrument of incorporation, the directors of a company may exercise all the powers of the company. The Draft Regulations adopted by the Capital Markets Authority propose that where there is more than one director of the company, only the ACD has competence to deal with compliance issues. However, in matters apart from compliance, such as strategy or marketing, the other directors have a right to oversee the activities of the ACD. It has been said that where an investment company with variable capital has only one director, which must necessarily be an ACD, it is in effect a unit trust in a corporate wrapper because it is then very similar to a unit trust, which has no board. Where however, it has other directors, the Board of Directors retains the right of general oversight over the performance of the ACD. Indeed, under the proposed Regulations, the Board may remove the ACD from office, if not satisfied with his performance. The ACD's appointment can be terminated by a notice whose terms have been approved by a resolution of the Board of Directors. The Board thus maintains supervisory authority over the commercial performance of the ACD, although compliance issues are outside its authority.

VI. Regulations Under the Bill, the Capital Markets Authority is authorised to regulate unit trusts and OEICs. The Authority is likely to regulate matters such as: how the prices of the product are to be calculated; minimum portfolio diversification requirements; the kinds of investments the schemes may invest in; the scope of borrowing, and so on. These Regulations, when promulgated after the enactment of the Bill, will constitute another element in the regulatory system

HeinOnline -- 106 Dick. L. Rev. 16 2001-2002 20011 THE UGANDAN EXPERIENCE established for collective investment schemes in Uganda. These Regulations are to be enforced, in the first instance, by the trustee and depositary, and ultimately by the Capital Markets Authority itself. I do not propose to discuss here the contents of the Regulations, but the existence of Regulations is an important link in the regulatory system proposed for collective investment schemes in Uganda. In preparing an initial set of these Regulations, the Capital Markets Authority has endeavoured to treat the two investment vehicles (unit trusts and OEICs) in the same way as far as possible. Thus, what is being offered is a choice as to form and not as to the level of regulation. The regulatory burden should be equivalent for both forms of collective investment schemes. The purpose of the Regulations is to provide high business standards and adequate investor protection for both types of collective investment schemes.

A. The Regulatory Role of the Corporate Code

The Corporate Code appended to the Bill as Schedule 4 provides a free-standing corporate legal framework distinct from that provided by the Companies Act but which has many parallels to the Companies Act. The Companies Act has certain protections for investors that are conceptually imported into the Corporate Code for the benefit of investors in OEICs. Key protections for investors in limited liability companies registered under the Companies Act, such as limited liability, ability to invest without having to manage the business, ability to obtain information about the business, shareholder democracy, and ability to divest without residual obligations, are maintained in the Corporate Code. The main features of the Corporate Code parallel those of the Companies Act. As under the Companies Act, in the formation of an OEIC, certain documents relating to the constitution of the OEIC (the instrument of incorporation) must be registered with the Registrar of Companies on incorporation (which is automatic once the Capital Markets Authority has approved an application to establish an OEIC). The Registrar holds the instrument of incorporation and the company's prospectus (and their updates) as a matter of public record. The investment company with variable capital has disclosure requirements similar to a public company in Uganda, but probably a little more stringent. For instance, Part VI of the Code requires the directors to prepare annual and half-yearly reports. It defines the powers of directors and of shareholders.

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The main differences between the Corporate Code and the Companies Act relate to the maintenance of capital and arrangements for corporate governance. An OEIC under the Code does not have to maintain share capital, as a company under the Companies Act must. Another key difference between an OEIC and a public company under the Companies Act is that the latter must have at least two directors and a secretary,5 whereas an OEIC may have only one director. However, each director of an OEIC has to be approved by the Capital Markets Authority as fit and proper under the Bill before an OEIC scheme is licensed. 6

B. The Role in the Regulatory System of the CapitalMarkets Authority and the Courts

As outlined thus far, the Capital Markets Authority is at the apex of the regulatory system. Although established under a different enactment,7 the Bill has pressed the Authority into use, since unit trusts and OEICs will be operating in the Ugandan capital markets. The Authority has various powers under the Bill to make Regulations, to make orders, to grant licenses, to give approvals and to exercise the powers of intervention set out in Part IX of the Bill. The Capital Markets Authority has the responsibility for implementing the system provided for by the Bill and making it work in a way that suits the circumstances of Uganda. An aggrieved party is entitled to refer certain decisions of the Capital Markets Authority to the High Court. The High Court thus plays a role as a forum for review of the decisions of the Capital Markets Authority on those particular issues. These issues include: a proposal by the Capital Markets Authority to refuse an application for a license; a proposal to suspend or withdraw a license granted under the Statute; a proposal to give a direction that a particular individual is not a fit and proper person to be employed in connection with a collective investment scheme; or a proposal to publish a statement that a licensed person has contravened a provision of the Statute. In all such cases, upon a reference to the High Court by the person aggrieved, the High Court is to investigate the case and make a report to the Capital Markets Authority stating what would, in its opinion, be the appropriate decision in the matter, and the reasons for that opinion. The

5. See sections 177 and 178 of the Companies Act. 6. See section 17(2)(b) of the Bill. 7. The Capital Markets Authority Statute of 1996.

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Capital Markets Authority is then obliged to decide the matter forthwith in accordance with the report of the High Court. Where the matter referred to the High Court is the refusal of an application, the High Court may report that the appropriate decision would be to grant or refuse the application. Where the matter referred to the High Court is any action of the Capital Markets Authority other than the refusal of an application, the High Court may report that the appropriate decision would be to affirm or deny the action taken or proposed to be taken by the Capital Markets Authority, or to take any other action that it could take under the provision in question, or to take instead or in addition any action that it could take by virtue of its powers of intervention spelled out in Part IX of the Statute. The High Court thus represents an integral part of the regulatory system of the Bill, quite apart from its traditional role alongside other courts, of enforcing the criminal sanctions embodied in the Statute. VII. Any Lessons? Clearly, originality is not the hallmark of the statutory provisions outlined above. But there is no need to re-invent the wheel. Rather, the principle that can be extrapolated from the Ugandan experience is that established and successful legal concepts and mechanisms that exist in developed markets can be adapted for use in emerging markets. The advantage of this course is that it takes account of the fact that in a globalised world it is not safe to assume that deviant behaviour in developed markets will be unknown to, or will not be imitated by, operators in emergent markets. In borrowing precedents from developed markets for emergent markets, what is important is that they are adapted to fit the circumstances of the country in question.

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Jean Stoufflet*

Fraud is a notion frequently encountered in the field of law. Roughly speaking, fraud is a concept employed when a legal rule or a legal right is enforced in bad faith and that enforcement damages the interests of another individual or the interests of the public at large. In the commercial arena, fraud can be encountered in any number of contexts. This paper deals primarily with fraud in the context of fraudulent demands for payment under documentary letters of credit and non-documentary demand guaranties. Broadly speaking, letters of credit and demand guaranties secure to the beneficiary a right to payment from a financial intermediary, such as a bank. When a party presents a demand for payment under one of these arrangements, the "fraud exception" is often used to justify nonpayment on a letter of credit or demand guaranty or as a means to object to a payment that has already been made. In essence, the fraud exception preserves ethics when a conflict occurs between ethics and law. It is not surprising that the fraud exception becomes crucial in cases where a right to payment may be exercised with only minimum requirements for authenticating the alleged creditor's claim. Such situations occur in transactions involving letters of credit, both commercial letters of credit and stand-by letters of credit, and independent guaranties. The beneficiary of such a letter or guaranty has a right to be paid upon a simple demand or a presentation of the documents that conform to those named in the issuing letter. Only fraud in the underlying arrangement or documents can explain the refusal to pay the beneficiary his due. What acts constitute fraud in transactions involving letters of credit and demand guaranties? This point was addressed long ago in several jurisdictions. A common situation addressed by early

* Professor of Law, University of Clermont-Ferrand (France).

HeinOnline -- 106 Dick. L. Rev. 21 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 cases was one in which a seller, the beneficiary of a documentary credit, intentionally sent nonconforming goods instead of the valuables ordered by the buyer and named in the transaction documents. The rule fraus omnia corrumpit, which is clearly grounded in ethics, emerged from these cases indicating that such behavior is fraudulent and that a beneficiary who is guilty of fraud is not entitled to payment under the documentary credit instrument. This rule holds even if all the documents are correct, which is generally the only condition to payment of a documentary credit. In my opinion, this ethical conception of fraud, implying bad faith on the part of the beneficiary, is too restrictive and should no longer prevail. I shall try to justify this opinion in Part I of this paper by defining the elements of fraud. Part II will then address the consequences of fraud.

I. Notions of Fraud

A. DistinguishingBetween FraudulentLetters of Credit, Fraudulent Guarantiesand FraudulentExecution.

Practitioners within the industry know that some letters of credit or guaranties are fraudulent, having been issued either by swindlers, claiming to be first-class banks, or by insolvent issuers. Such behavior is unseemly and blameworthy, however, it is not really characteristic. More typical is a fraudulent demand for payment by the beneficiary of a letter of credit or demand guaranty.

B. Documentary and Non-Documentary Undertakings

The fraud analysis is relatively easy when discussing documentary instruments, such as commercial letters of credit and stand-by letters of credit. If the documents themselves are inadequate, in that they do not give a fair description of one or even several elements necessary to perform the contract, then a suspicion of fraud is raised.! The situation is very different for non-documentary undertakings, such as demand guaranties, in which the beneficiary has only to demand payment on a bank without presenting documentary authorization. The beneficiary need not mention or justify the basis for the demand. While the letter of credit and the

1. For example, a documentary credit should include elements such as the nature, quality, quantity, condition, and packaging of the goods.

HeinOnline -- 106 Dick. L. Rev. 22 2001-2002 20011 FRAUD IN DOCUMENTARY CREDIT demand guaranty differ in form, there is no real legal difference between the two when fraud is an issue. In both cases, the beneficiary claims money to which he is not lawfully entitled. In the first case, there is an express assertion of the legal grounds for the demand. In the second case, the assertion is implied.

C. Statutory Data, the Definition of Fraud,and the ICC Regulation.

There is no mention of fraud in the International Chamber of Commerce (ICC) regulation. Neither the ICC Uniform Customs and Practices for Documentary Credits2 nor the ICC Uniform Rules for Demand Guaranties address the issue of fraud. Rule 1.05 of the International Stand-By Practices4 leaves the issue of fraud to the applicable law.! The absence of rules and regulations discussing fraud is not difficult to explain. Rightly or wrongly, fraud is traditionally an issue involving public policy, ordre public, which precludes regulation by a professional authority.

D. The United Nations Convention on Independent Guarantiesand Stand-By Letters of Credit.

Article 19 of the United Nations (UN) Convention on Independent Guaranties and Stand-By Letters of Credit,6 contains a description of the situations in which a guarantor or issuer can rely on the fraud exception to deny payment to the beneficiary.7 The guarantor or issuer has a right to withhold payment from the beneficiary of the guaranty or stand-by letter of credit if it is clear that: (a) One or more of the documents involved in the transaction are not genuine or have been falsified; (b) No payment is due based on the demand asserted in the documents supporting the transaction; or (c) No basis exists for the demand because of the type and purpose of the transaction.

2. See ICC Uniform Customs and Practices at 500. 3. See ICC Uniform Rules at 458. 4. See ISP98 Rules. 5. See, e.g, James E. Byrnes, Official Commentary, 1998 at p.19. 6. Enforceable January 1, 2000. 7. The word "fraud" is not defined in the Convention itself but it appears in the Explanatory Note by the UNCITRAL Secretariat (§ 45).

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Section 2 of Article 19 mentions several situations in which a demand for payment may have no conceivable basis. This includes situations where: (1) the contingency or risk against which the beneficiary is secured has not materialized; (2) the underlying obligations have been declared invalid by a court or arbitral tribunal; (3) the underlying obligations have been fulfilled to the satisfaction of the beneficiary; (4) fulfillment of the underlying obligations were prevented by the willful misconduct of the beneficiary; and (5) the beneficiary of the counter-guaranty has made payment in bad faith.

E. The Case Law: Stand-by Letters of Credit and Independent Guaranties.

In many countries, the courts have arrived at a definition of fraud in the context of cases in which the account party or the issuer attempted to use the fraud exception to justify nonpayment on a letter or credit or demand guaranty or as a means to object to a payment that has already been made. French case law has many cases factually similar to the scenarios mentioned in Article 19. There is limited value in expounding on the case law however, because the solutions and rules found in the UN Convention closely mirror the established case law.

F. Fraudin the Context of Article 19

There appears to be a common notion of fraud implied in all of the Article 19 scenarios mentioned earlier. In each scenario, the guarantor or the issuer can withhold payment if an objective basis exists for refusing the beneficiary's demand. For example, a French court granted the fraud exception where the beneficiary of a demand guaranty demanded payment even though the beneficiary's own engineer signed a certificate of good performance on the equipment sold by the account party.8 Clearly there is a link between the beneficiary's behavior and the justification for the guarantor's refusal to pay. However, neither Article 19 of the UN

8. C.CoM., June 10, 1986, Banque Tejarat, Socidt6 / SA Pipe Line Service and Banque de Paris et des Pays-Bas, D.1987.jur.17 note Vasseur. See also, C.COM., January 20, 1987, St6 Technique Electrique de l'Oise / Union M6diterran6enne de banque et Wahda Bank, JCP.1987.II.20760 note J. Stoufflet.

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Convention nor decisions of the courts view the fraud exception as punishment for bad faith or fraud in the common meaning of the term. Rather, the fraud exception acknowledges an objective reality or a strong probability that the demand for payment is not legitimate. This analysis is confirmed by the application of the fraud exception to transactions involving documentary credits.

G. The Case Law: Documentary Credits.

To define fraud in the area of documentary credits, one must refer exclusively to the documents. The Cour de cassation of France has held that a documentary credit should be paid if the beneficiary presents regular credit documents even if the account party claims a fraudulent contract of sale.9 In the Banque de Neuflize Schlumberger case, it was argued that a fraud exception exists in cases where there is fraud in the commercial contract if the issuer's undertaking in a documentary credit is independent from the sales contract. The Cour de cassation did not accept this position.

H. A ProposedSolution

In my opinion, fraud should not to be considered an ethical matter in the area of documentary credits, letters of credit and guaranties. Rather, fraud is really a technical issue. Under this formulation, it is difficult to understand why fraud in the underlying obligation has no effect on the right to payment by the credit beneficiary. Consider a case in which an account party attempts to take advantage of a fraud when the fraud has been perpetrated by a third person and not by the beneficiary. Under my formulation, courts would be able to look behind the seeming regularity of the transaction to uncover and address the underlying fraud. The prevailing opinion in France favors of this argument, however, French courts have not clearly decided the issue. In contrast, English courts consider charging the beneficiary with fraud only when the beneficiary himself commits the fraud. In the American Accord case, the House of Lords held that an issuing bank must pay a documentary credit if the beneficiary presents the documents in

9. See C.COM., July 15, 1992, Banque de Neuflize Schlumberger, Mallet / The Hong Kong and Shanghai Banking Corp., arr~t n.1366 not published; See also C.COM., April 29, 1997 Socidtd des Automobiles Peugeot / Falcon Deutchland, BNP and others, JCP.E 1997.11.976. note J. Stoufflet.

HeinOnline -- 106 Dick. L. Rev. 25 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 good faith, even if an agent of the carrier had antedated the bill of lading.' °

L Courts Should View Fraud Objectively

In my opinion, there are strong reasons for courts to look objectively at fraud in transactions involving documentary credits, stand-by letters of credit and demand guaranties. It should not be necessary to prove that the beneficiary had malicious intent or that the beneficiary acted in bad faith. This position has some consequences as to the effects of fraud.

II. The Effects of Fraud

A. When a Bank is Aware of Fraud,that Bank May Refuse Payment

When a bank is certain that fraud is present, it may refuse payment to the beneficiary. This solution works well in the case of documentary credits because fraud can be presumed when one or more of the documents lack authenticity. If it is clear that the documents are not regular then payment is not due. The same principle applies to stand-by letters of credit and guaranties under Article 19 of the UN Convention." The bank's decision is based solely on objective criteria and not on notions of the good faith or fraudulent behavior of the beneficiary. Problems can arise however, with certain types of credit and in the bank's relationship with the account party.

B. Documentary Credit by Negotiation.

A documentary credit is an undertaking to pay a sum of money or to accept or to negotiate a draft. In the case of a draft, problems arise when a fraud is discovered between the date of negotiation and the date of maturity of the draft. Does the negotiating bank or the account party have the right to assert fraud after a negotiation by a corresponding bank or by the issuer? One French court has decided that no such right exists because the negotiation

10. Royal Bank of Canada v. United City Merchants, House of Lords, May 20, 1982. The Belgian Court of Appeal of Anvers took the same position in a case on September 23, 1981 (Revue de droit commercial beige 1986 p.369). 11. If it is manifest and clear that: a) Any document is not genuine or has been falsified b) No payment is due.., the guarantor/issuer, acting in good faith, has a right as against the beneficiary to withhold payment.

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constituted the performance of the credit and could not be considered as a discount.12

C. Deferred Payment Credits

Similar difficulties are encountered in another kind of credit called deferred payment credit. In a deferred payment credit, the beneficiary receives the amount of the credit at some time after the presentation of the documents. What happens when a fraud is discovered after the bank receives the documents but before payment to the beneficiary? Unlike negotiation credits, performance of a deferred payment credit occurs only on the date the credit is paid and not when the documents are presented to the bank. Therefore, receipt of the documents by the bank does not prevent the account party or the issuer from asserting fraud during this interim period. This is possible even against the confirming bank that paid a deferred payment credit in advance.13

D. Position of an Issueras Compared to an Account Party

This situation poses a difficult question. Practically, when an account party, relying on immediately available evidence, is able to show that it is likely that a beneficiary has made or will make a fraudulent demand, the account party can petition the court for a provisional measure. Article 20 of the UN Convention allows parties to stand-by letters of credit, demand guaranties, and documentary credits to petition the courts for provisional measures. Can the account party assert that the bank should have refused to pay in situations where the bank was aware of the fraud and paid the beneficiary anyway? If a fraud is manifest and clear, the bank has a right, as well as an obligation, to withhold payment. Article 19 of the UN Convention does not resolve this issue. That Article deals only with the relationship between the guarantor or issuer and the beneficiary and does not address the relationship between an account party and an issuer. French courts seem to be in favor of placing an affirmative obligation on the bank to refuse payment when fraud is present. The case law, however, is unclear.

12. Cass.Com. October 23, 1990 Credit du Nord / St6 Standing Meubles, Bull.civ.1990.IV.n.242, JCP.G.1991.LI.21687 note Vasseur. 13. C.CoM., April 7, 1987 Crddit G6n6ral / BNP, Bull.civ.1987.IV.n.84, JCP.G.1987.II.20829 note J. Stoufflet; See also App. Cas., Queen's Bench Div., February 25, 2000, Banco Santander / Banque Paribas. 14. C.COM., December 2, 1997, Banque IndoSuez/ SA Entrepose, JCP.E 1999.758 n.26 obs. Gavalda et Stoufflet; CA.Colmar June 14, 1985,

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Personally, I think that a bank has an obligation to refuse payment if there is no doubt about the existence of fraud at the time the payment is due. Banks have a general duty to act in accordance with their customer's interests.15

III. Conclusion What relevance does fraud have to letters of credit and guaranties? Sometimes demands for payment are fraudulent. However, what is usually called fraud in this context is really something else, an objective and more extensive concept. The guarantor or issuer may refuse payment when a beneficiary demands payment to which that beneficiary has no right. Therefore, the question should not be one of bad faith or fraud, but rather one of limiting of the independence of the guarantor or issuer in the undertaking.

D.1986.inf.rap.218 obs. Vasseur, JCP.G.1986.I.3265 n.112 obs.Gavalda et Stoufflet. 15. See, e.g., Nicolas de Gottrau, Le cr6dit documentaire et la fraude, Geneva Faculty of Law, nr 719, Helbing & Lichtenhahn, 1999 p. 242.

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Stages of the Banking System in M6xico ...... 31 A. FirstStage: Private or Specialized Banking System (1897- 1982) ...... 31 B . Second Stage ...... 31 1. Part One: NationalizedBanking System (1982-1988) ...... 32 2. Part Two: Public BureaucraticBanking System (1988- 1990) ...... 33 C. Third Stage: Re-privatized Banking System (1990-Present)...... 33 II. The Mexican Financial System ...... 33 A. Authorities of the Mexican Banking System ...... 35 1. The Ministry of Financeand Public Credit...... 35 2. National Banking and Securities Commission...... 37 a. Oversight and Supervisory Powers...... 38 b. Oversight Procedure...... 38 3. Banco de M xico ...... 40 B. The Mexican Banking System ...... 40 1. Banking and Credit...... 41 a. Development Banks ...... 41 b. Multiple Banking ...... 42 2. Bank Operations with Securities...... 43 a. A ctive Operations...... 43 b. Passive Operations...... 43 3. Auxiliary Credit Organizations...... 43 a. General Deposit Warehouses ...... 43 b. FinancialLeasing Companies...... 44 c. Savings and Credit Corporations...... 44 d. Credit Unions ...... 44 e. FinancialFactoring Companies ...... 45 C. The Result of Banking Nationalization...... 45

* Universidad Nacional Autonoma de Mexico, Mexico.

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III. Banking System Savings Protection Fund (FOBAPROA) ...... 46 A . N ature...... 46 B. Background of the Banking Fund...... 46 C. Purpose of FOBA PR OA ...... 47 D. Form of Operation...... 48 E. FOBA PROA Results...... 48 F. Various Scenarios About FOBAPROA ...... 50 1. Political-Economic Scenario ...... 50 2. JuridicalScenario ...... 52 G. Transfer of FOBAPROA-IPAB Credits...... 56 IV. Banking Savings Protection Institute (IPAB) ...... 57 A . N ature...... 57 B. Purpose of IPA B ...... 57 C. Form of Operation...... 58 D. Board of Governors...... 59 E. Executive Secretary ...... 59 E A djunct Secretaries...... 60 G. Powers...... 60 H . Obligations ...... 60 I. O versight...... 60 J. IPA B Scenario ...... 61 K . IPA B Today ...... 62 V. National Commission for the Protection and Defense of the Users of the Financial System (CONDUSEF) ...... 63 A . Powers...... 63 B. Purpose...... 63 C. Procedure...... 64 D . COND USEF D ispute Resolution...... 65 E. Final Considerations...... 65

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The Mexican Banking System has experienced a significant transformation over the course of time. The transformation can be divided into three great stages: First Stage: Private or Specialized Banking System (1897- 1982) Second Stage: Nationalized Banking System (1982-1988) and Public Bureaucratic Banking System (1988-1990) Third Stage: Re-privatized Banking System (1990-2000)

I. Stages of the Banking System in Mexico

A. First Stage

The first stage is characterized by the passage of legislation aimed at organizing the control of the banking activity that provides for the existence of mortgage, industrial and deposit banking. The idea of credit extension by banks granting equipment-operating credits also began during this stage. Also included in the first stage are banks performing trust operations. The operations carried out by the credit institutions are organized through the creation of special departments intended to avoid confusing operations. Two types of institutions emerged: (1) credit institutions and (2) national credit institutions. Furthermore, the recognition of the financial groups as intermediaries between the Specialized Banking System and the Multiple Banking System is prominent in the legislation of this stage. The internationalization of the Mexican Banking System occurred through the establishment of branch offices and agencies abroad as well as the consolidation, incorporation and diversification of the operations and services from the Multiple Banking System to the Mexican financial system. Legislation passed during this time includes: General Law of Credit Institutions and Banking Establishments (January 16, 1925); General Law of Credit Institutions and Banking Establishments (November 29, 1926); General Law of Credit Institutions (June 29, 1932); and General Law of Credit Institutions and Auxiliary Organizations (May 31, 1941).

B. Second Stage

The second stage of the Mexican Banking System is characterized by the establishment of the nationalized or public

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bureaucratic banking system, which had specific duties within its set of attributions. This stage can be further divided as follows: 1. First Part: Nationalized Banking System (1982-1988). In 1982, a presidential decree nationalized Mexico's banking system. The measure was designed to overcome the country's economic crisis. The decree sought to consolidate and ensure an optimum economic development for the nation. The decree did not include the money or securities deposited by the clients, safety deposit boxes, trusts or other real estate or personal property other than the properties of the institutions and the properties of the representatives of financial entities. Prior to the 1982 decree, the 1941 Law of Credit Institutions and Auxiliary Organizations regulated the Mexican banking system. The Regulatory Law of the Public Banking and Credit Service dated December 31, 1982 and the Regulatory Law of the Public Banking and Credit Service dated January 14, 1985 repealed the 1941 law. The main objectives of the 1941 Law of Credit Institutions and Auxiliary Organizations were to set the guidelines and characteristics of the credit institutions, their operation, and the national development policies that could guarantee and protect the interests of the public, promote savings and benefit the population by providing access to a public service. The national credit institutions had to be incorporated and were then subject to the guidelines and policies laid down by Banco de M6xico,' the Ministry of Finance and Public Credit,2 and the National Banking and Insurance Commission (now, National Banking and Securities Commission).' These institutions guided credit institution operations according to regional programs and

1. "The Bank will perform the following functions: (I) Regulate the emission and circulation of legal currency, exchange rates, intermediaries and financial services and payment systems." Ley del Banco de Mexico ("L.B.M.") Art. 3, § (I). 2. "The Secretary of Finance and Public Credit is in charge of the following affairs: ... (VII) Plan, coordinate, evaluate, and oversee the banking system, which is made up of the National Bank for Development and other institutions in the business of rendering banking and credit services." Ley Organica de la Administracion Publica Federal ("L.O.A.P.F.") Art. 31, § (VII). 3. Article 2 of the Ley de la Comision Nacional Bancaria y de Valores states: The Commission's primary objective will be to supervise and regulate, in the scope of its competence, the financial entities, so as to procure their stability and correct functioning, as well as to maintain and stimulate the sound and equal development of the financial system as a whole, protecting the public's interest. Also, it will be the commission's objective to oversee and regulate natural persons and other juridical persons, when they realize the activities foreseen in the laws relative to the financial system. Ley de la Comision Nacional Bancaria y de Valores ("L.C.N.B.V.") Art. 2.

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national development plans, in addition to coordinating the programs of allocation of budgetary resources of the public treasury and the credits of the institutions. 2. Second Part: Public Bureaucratic Banking System (1988- 1990). This era is characterized by the inefficiency of the federal government in running the credit institutions. During this period, the banking system was stagnant due to the lack of resources needed to boost its operations. The system, therefore, grew weak and was prevented from meeting its objectives. The success of the plans for the development thereof and particularly for the population appeared farther away than ever.

C. Third Stage

1. Re-privatized Banking System (1990). Through an executive initiative, the 5th Paragraph of Article 28 of the Constitution was repealed, subparagraph a) point 22 of Article 123 of the Constitution was amended in order to reestablish the mixed regime of the provision of banking services because, under the terms of the Third, Fourth and Fifth transitory articles of the Law of Credit Institutions ("LIC"), the Regulatory Law of the Public Banking and Credit Service ("LRSPBC") is still in force regarding certain cases. The banking system needed to concentrate its actions on fulfilling its objectives; namely, to meet social needs and raise the population's standard of living; to expand and improve the quality of banking and credit services and to avoid abuse, privileges, and subsidies. Also introduced during this period was a limitation stipulating that the public sector shall no longer intervene in the banking system. Two laws fundamental to the Mexican Financial System were enacted on July 18, 1990: (1) the Law of Financial Groups and (2) the Law of Credit Institutions. Finally, the re-privatization of the banking system gave rise to the formation of financial groups and shareholder ownership.

II. The Mexican Financial System The Mexican financial system hinges on state financial regulations that are set forth in Articles 25, 26 and 28 of the Political Constitution of the United Mexican States.4 The articles

4. Constitucion Politica de los Estados Unidos Mexicanos [Constitution] art. 25 provides in pertinent part: The State will plan, conduct, coordinate and orient the national economic activity, and will accomplish the regulation and fostering of the activities

HeinOnline -- 106 Dick. L. Rev. 33 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 stipulate that the State is in charge of controlling national development and strengthening the sovereignty of the country and its democratic regime. This was done through planning, coordination and orientation carried out to bolster the economic activity of the country in which the public, private and social sectors participate. The Executive branch is entrusted with the responsibility of financial control, which means that the credit or the capital flows and the interest rates serve as a mechanism of control for the proper maintenance of the economic balance of the country. To exercise this power, the Executive is assisted by a federal public administrative agency, the Ministry of Finance and Public Credit. The Ministry is empowered to project and coordinate development planning; to plan, coordinate, evaluate and oversee Mexico's banking system; and to exercise authority in matters of insurance, bonds, securities, credit organizations, and auxiliary credit activities.'

which are demanded by the public interest, within the scope of liberty given by this Constitution.... The public sector, the private sector and the social sector will concur, acting in a socially responsible manner, in the development of the national economy; without damaging other forms of economical activity that would contribute to the development of the Nation. Id. at Art. 25. Article 26 of the Mexican Constitution states: The State will organize a democratic system of planning to promote the national development, which will characterize the economic growth as solid, dynamic, permanent and equitable; so as to achieve independence, and political, social and cultural democratization.... Id. at art. 26. Finally, Art. 28 of the Constitution provides: In the United States of Mexico, monopolies, monopolistic practices, tax exemptions according to the terms and conditions stated by the laws are prohibited. The same treatment will be given to prohibitions given to protect certain industries. ... The laws will state the basis to determine the ceiling for prices of articles, materials or products that are considered necessary for the national economy or popular consumption, as well as impose modalities for the distribution of those articles, materials or products, so to avoid that unnecessary or excessive intermediation cause insufficiency to the supply as well as a raise in prices. The law will protect the consumers and foster their organization so to take the best care of their interests.... The State will have a central bank that will be autonomous when exercising its functions and administration. Its primary objective will be to procure the stability of the legal currency purchasing power, strengthening the national development, which corresponds to the State. Id. at art. 28. 5. See L.O.A.P.F., supra note 2.

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Two broad fields can be distinguished in the Mexican financial system: the field of authorities and the field of institutions. These two fields constitute the Mexican banking system.

A. Authorities of the Mexican Banking System The authorities in charge of the Mexican financial system are the Ministry of Finance and Public Credit ("SHCP"), the National Banking and Securities Commission ("CNBV"), the Banco de M6xico ("BM"), the National Commission for the Defense of Users of Financial Services ("CONDUSEF"), and the Banking Savings Protection Institute ("IPAB"). 1. The Ministry of Finance and Public Credit. The Ministry of Finance and Public Credit belongs to the Public Centralized Administration.6 Its competence is determined under Article 31 of the Organic Law of the Public Federal Administration.7 In banking matters, it is empowered to project and coordinate national development planning, to prepare the National Development Plan with the cooperation of the interested social groups, to plan, coordinate, evaluate and oversee Mexico's banking system that encompasses the National Development Banking System and other institutions in charge of providing banking and credit service, to exercise authority in matters of insurance,8 bonds,9 securities,"

6. L.O.A.P.F. Art. 26 provides: To accomplish the administrative affairs, the Executive Branch will have the following secretaries: Secretary of Government, Secretary of Foreign Affairs, Secretary of National Defense, Secretary of Admiralty, Secretary of Public Security, Secretary of Finance and Public Credit, Secretary of Social Development, Secretary of the Environment and Natural Resources, Secretary of Energy, Secretary of Economy, Secretary of Agriculture, Rural Development, Fishing and Feeding, Secretary of Communication and Transport, Secretary of Administrative Development, Secretary of Public Education, Secretary of Health, Secretary of Employment and Social Forecast, Secretary of Agricultural Reform, Secretary of Tourism, Legal Advice for the Federal Executive. Id. (emphasis added). 7. See L.O.A.P.F., supra note 2. 8. Article 2 of the Ley General de Instituciones y Sociedades Mutualistas de Seguros provides: The Secretary of Finance and Public Credit will be the competent entity to interpret, apply and resolve for administrative effects any matter related with the precepts of this law and in general for any matter that refers to the institutions and insurance companies.... It will be the referred Secretary's exclusive competence to adopt any measures relative to the creation and functioning of national insurance companies. Ley General de Instituciones y Sociedades Mutualistas de Seguros ("L.G.I.S.M.S.") Art. 2. 9. Article 1 of the Ley Federal de Instituciones de Fianzas provides in

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credit organizations, and auxiliary credit activities," and to construe the precepts of the Law of Credit Institutions for administrative 12 purposes. With respect to the multiple banking institutions, the Ministry of Finance and Public Credit must authorize, through the approval of the deed of incorporation, the credit institutions to carry out the provision of their institutional services 3 and to issue guidelines to be followed by the latter when the federal government holds control due to its shareholding in matters of preparation and approval of their annual budgets, as well as with respect to the administration of salaries, benefits and other matters subject to

pertinent part: ... It will be the exclusive competence of the Secretary of Finance and Public Credit to adopt all measures relative to the creation and functioning of the national bond institutions. Such institutions will be regulated by their special law, or in the absence of such laws or in the case that some aspect is not contemplated, this law will apply. The Secretary of Finance and Public Credit will be the entity competent to interpret, apply and resolve, for administrative effects, any matter related to the precepts contained in this law, and in general for any matter that refers to bond institutions ... Ley Federal de Instituciones de Fianzas ("L.F.I.F.") Art. 1 10. "The Secretary of Finance and Public Credit will be the competent entity to interpret, for administrative effects, the precepts of this law, and through norms of general observance, provide for any matter concerning this law." Ley del Mercado de Valores ("L.M.V.") Art. 8. 11. The Ley General de Organizaciones y Actividades Auxiliares del Credito provides: This law will regulate the organization and functioning of the auxiliary credit organizations, and it will be applied to the exercise of their activities. The Secretary of Finance and Public Credit will be the competent entity to interpret, for administrative effects, the precepts in this law, and in general, for everything to this institution. Ley General de Organizaciones y Actividades Auxiliares del Credito ("L.G.O.A.A.C.") Art. 1. "...It will be the exclusive competence of the Secretary of Finance and Public Credit, the instrumentation of every measure relative to the organization, as well as the functioning of the national credit auxiliary organizations." Id. at Art. 2. 12. "The Federal Executive branch, through the Secretary of Finance and Public Credit, may interpret, for administrative effects, the precepts of this law." Ley de Instituciones de Credito ("L.I.C.") Art. 5. 13. The Ley de Instituciones de Credito ("L.I.C.") also states: The authorization of the federal government is required in order to organize and operate a multiple banking institution. The Secretary of Finance and Public Credit is the entity in charge of granting such authorization, subject to its discretion, once it has heard the opinion of the Bank of Mexico and the National Banking and Securities Commission. Because of their nature, such authorization is not transmissible. Id. at Art. 8.

HeinOnline -- 106 Dick. L. Rev. 36 2001-2002 2001] BANKING BAILOUT IN MEXICO regulation. 4 Also, it can authorize the merger of two or more multiple banking institutions,'5 revoke authorizations in certain cases, and establish a term not to exceed sixty days for the repay- ment of capital in the amount necessary to maintain the operation of the institution within the legal limits. In matters of national credit corporations, the Ministry has the power to issue the organic regulations of each institution and to annually authorize the operative and financial programs, their general expenditure and investment budgets, and income estimations prepared by the institutions. 2. National Banking and Securities Commission. The National Banking and Securities Commission is an entity regulated by its own law with technical autonomy and executive powers decentralized from the Ministry of Finance and Public Credit. 16 Its purpose is to supervise and regulate, within the scope of its competence, the stability and proper operation of financial entities, as well as to maintain and promote the healthy and balanced development of the financial7 system as a whole, while protecting the interests of the public.1 This Commission is empowered to supervise financial entities as well as individuals and other corporations when they perform financial activities. The Commission also has the power to issue regulations to which the entities shall submit, render rules for the registration of operations applicable to the entities, determine the rules for the estimation of assets and the obligations and responsibilities of the entities under the terms set forth by the laws, issue rules concerning the information that the entities must periodically furnish and issue provisions of a general nature establishing requirements for auditors and the content of their reports. The Commission is also vested with the power to act as a consultant to the federal government in financial matters, to

14. The law further provides: The multiple banking institutions, in which the federal government has the control because of its equity participation must follow the guidelines enacted by the Secretary of Finance and Public Credit, concerning the making and approval of annual budgets, salaries, and other affairs subject to their regulation. Id. at Art. 20. 15. See id. at Art. 27. 16. "The National Banking and Securities Commission is created as a decentralized organ of the Secretary of Finance and Public Credit with technical and executive faculties autonomy within the terms of this law." L.C.N.B.V. Art. 1. 17. See L.C.N.B.V., supra note 3.

HeinOnline -- 106 Dick. L. Rev. 37 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 authorize the incorporation, operation, and minimum capital of the financial entities, to order the suspension of these entities under the terms of the law enacted by the National Banking and Securities Commission, and to place the entities under administrative or managerial receivership in order to suspend, regularize or resolve operations that endanger the solvency, stability, or liquidity of those operations. 8 a. Oversight and Supervisory Powers of the National Banking and Securities Commission. It is necessary to mention the importance of the National Banking and Securities Commission's power to conduct oversight or supervision. Its main purpose is "to evaluate the risks to which the financial entities are subject, the control and quality of their administration, the purpose of which consists of maintaining adequate liquidity, solvency and stability according to the legal provisions applicable to each institution and in accordance with the healthy uses and practices of the financial markets."19 This supervisory power is also aimed at assessing in a consolidated manner the risks of grouped financial entities that have property links and generally, the "adequate operation of the financial system."2 b. National Banking and Securities Commission Oversight Procedure. The Commission conducts oversight through inspection visits, assessment of operations and audits of records and systems at the facilities or their automated equipment to verify the status of the entity. Oversight will also be conducted through

18. The Commission shall: (I) supervise the entities, as well as natural persons and other juridical persons when they realize any activity foreseen in the laws relating to the financial system, (II) issue within the scope of its competence the prudential regulation to which the entities shall submit, (III) render rules for the registration of operations applicable to the entities, (IV) determine the rules for the estimation of assets, and as the case may be, of duties and responsibilities of the entities, under the terms set forth by the laws, (V) issue provisions of a general nature, setting out the characteristics and requirements to be fulfilled by the auditors of the entities, and their reports..., (VIII) advise the federal government in financial matters ... , (XI) authorize the creation and operation, as well as determine the minimum equity capital requirements of the financial entities.. ., (XIV) order the entities to cease operations, under the terms of this law, (XV) place under administrative or managerial receivership so as to suspend, regularize, or terminate operations puts into risk their solvency, stability or liquidity, or those violating their enabling statute or the provisions of a general nature emanating there from... L.C.N.B.V. Art. 4. 19. See id. at Art. 5. 20. See id.

HeinOnline -- 106 Dick. L. Rev. 38 2001-2002 2001] BANKING BAILOUT IN MEXICO analysis of the economic and financial information that the entities must periodically send to the Commission. These updates measure the overall health of the financial system. Prevention and correction measures are carried out through the establishment of programs that are to be fulfilled by the financial entities. These programs are established when the entities experience financial unbalance that may affect their liquidity, solvency or stability. In any event, the programs can be implemented by means of an agreement with the entities themselves. If the programs are not fulfilled, the Commission may proceed to place the entity under administrative or managerial receivership in order to suspend, regularize, or resolve the operations endangering the solvency, stability or liquidity of the institution.2' The National Banking and Securities Commission is widely empowered to supervise the proper operation of, among others, the

21. Art. 5 of L.C.N.B.V. further provides: The supervision realized by the commission will be according to the regulation that for such effect, issue the Federal Executive and will include the faculties of inspection, surveillance, prevention and correction which this law, as well as other laws and applicable precepts, confer to the Commission. The supervision of the financial entities will have as a main objective to evaluate the risks to which the financial entities are subject, their systems of control and quality of their administration, so as to procure that said entities maintain an adequate level of liquidity, be solvent and stable and in general comply with the laws regulating them, and to the uses and sound practices of the financial markets. Also, through the faculty of supervision the risks undertaken by financial consortiums or entities that have equity relations, will be assessed in a consolidated way; as well as the general and adequate functioning of the financial system. The inspection will be done through visits, verification of operations, auditing of logs and systems, in the offices or computerized systems of the financial entities, to verify their current status. The surveillance will be performed through the analysis of the financial and economical information, so as to measure possible effects on the financial entities and on the financial system as a whole. The prevention and correction will be done through the establishment of programs, of mandatory observance for financial institutions with the purpose to eliminate irregularities. Also, such programs will be established when a financial entity shows signs of financial instability that might affect its liquidity, solvency, or stability with the possibility of documenting the program through agreement with the respective entity. The noncompliance with such programs enables the commission to exercise the faculty stated in Article 4, paragraph XV of this law; nevertheless, the sanctions established in Article 108 of the Law of Credit Institutions. The supervision realized by the Commission regarding natural persons and other juridical persons when they realize activities foreseen in the laws relative to the financial system, will have as a purpose that such persons comply accordingly with the stated laws, as well as the regulations emanating from them. L.C.N.B.V. Art. 5.

HeinOnline -- 106 Dick. L. Rev. 39 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 credit institutions. From a formal point of view, it should not be possible for the financial institutions to perform prohibited or unlawful activities.. I will analyze below, however, that in practice, prohibited or unlawful activities occurred because the banks, in particular, took actions that if timely detected and corrected would not have resulted in the severe banking crisis suffered by Mexico. 3. Banco de M~xico. The Central Bank, which is known as the Banco de M6xico, is a juridical person organized for public purposes with an autonomous capacity.2 2 One of its purposes is to supply the country's economy with domestic currency. To achieve this purpose, it must foster the stability of currency and it must promote the healthy development of the financial system and favor the proper operation of the payment systems.24 The activities of the Banco de M6xico include regulating the issuance and circulation of currency, establishing exchange rates, performing intermediation, financial services and payment systems, operating with credit instructions as a reserve bank and a lender of last resort, providing treasury services to the federal government and acting as a financial agent thereof, acting as an advisor to the federal government in economic and particularly, in financial matters, and participating in the International Monetary Fund ("IMF") and in other international financial entities.25

B. The Mexican Banking System

The Mexican Banking System consists of the Banco de M6xico, the multiple banking institutions, the development banking institutions, public trusts established by the federal government for economic promotion and public trusts for economic promotion created by the Banco de M6xico.26

22. "The Central Bank is an autonomous public law person and it will be called the Bank of Mexico. In the exercise of its functions and in its administration, the bank will act according to this law, regulatory of the sixth and seventh paragraphs of Article 28 of the Constitution of the Mexican United States." L.B.M. Art. 1. 23. "It is the exclusive attribution of the Bank of Mexico to issue legal tender and order, as well as put in circulation such currency through the operations authorized by this law." Id. at Art. 4. 24. See id. at Art. 2. 25. See L.B.M. Art. 3. 26. The Ley de Instituciones de Credito ("L.I.C.") provides: The Mexican Banking System will be built-in by the Bank of Mexico, the multiple banking institutions, the development banking institution, the national savings trust, and the public trusts for economic promotion constituted by the federal government, as well as by those constituted for the accomplishment of the Bank of Mexico's functions which are created

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1. Banking and Credit. The Banking and Credit Service provides monetary resources to the domestic market for private lending through acts causing direct or contingent liabilities; the intermediary being committed to pay the principal amount and, as the case may be, the financial accessories of the resources obtained.27 The Banking and Credit Service may only be composed of credit institutions that are multiple banking institutions and development banking institutions. 8 a. Development Banks. The development banking institutions are entities of the federal public administration with their own legal capacity and estate. They are incorporated with the capacity as national credit corporations under the terms of their relevant organic laws and of the Law of Credit Institutions. 9 The organic laws of each institution set forth the form of organization and operation of its entities. Each institution must annually prepare its operative and financial programs, which must be submitted to the Ministry of Finance and Public Credit for authorization." The development bank institutions conduct

for that purpose. Id. at Art. 3. 27. See L.I.C. Art. 2. 28. The banking and credit service can only be rendered by credit institutions, which can be: (I) Multiple banking institutions and (II) Development banking institutions. For the purposes of this law, banking and credit services will be the obtainment of resources from the domestic market for their placement among the public, through direct or contingent liabilities acts, being the intermediary obliged to pay back the principal amount, and as the case may be, the financial accessories of the resources obtained. Transactions realized by financial intermediaries, duly authorized, other than credit institutions in the proper course of business will not be considered banking and credit transactions. Such intermediaries will not be able, in any case, to receive irregular money deposits in a checking account. Id. 29. See L.I.C. Art. 30. 30. The Ley de Instituciones de Credito ("L.I.C.") provides: The development banking institutions are entities pertaining to the Federal Public Administration, with their own juridical personality and net worth, enacted as national credit corporations, according to the terms of their organic regulation and this law. The Secretary of Finance and Public Credit will issue the organic regulation for each institution, which will state the basis of its organization and the relations between its organs. The organic regulation and its amendments must be published in the Official Gazette and register in the Commercial Public registry. Id. at Art. 30.

HeinOnline -- 106 Dick. L. Rev. 41 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 specialized activities authorized by the Congress of the Union in their respective organic laws." Because of government intervention and direct participation in these institutions, the institutions became bureaucratized to such an extent that their purposes and objectives were distorted and the institutions entered a stage of financial lethargy. These institutions, therefore, have been disappearing from the financial system to make way for economic development and growth programs, both by private banking institutions and by mercantile corporations or specific social programs designed to bolster productive areas of the economy. b. Multiple Banking. When re-privatized, these development banks become multiple banking institutions. The Law of Credit Institutions recognizes as national credit corporations those institutions that were customarily supported by the government to promote the development of a certain field of the national economy. An example would be Banrural in respect to the agricultural sector. Fixed capital corporations that are incorporated pursuant to the Law of Mercantile Corporations may operate as multiple banking institutions with prior authorization from the Ministry of Finance and Public Credit.32

31. The L.I.C. further provides: The development banking institutions should elaborate, annually, their operative and financial plans, general expenditure and investment budgets, approximate income, which should be submitted to the approval of the Secretary of Finance and Public Credit, according to the guidelines, measures and mechanisms issued. The mentioned Secretary should determine the pattern that each institution should follow, in relation to the global assignation of expenditure financing established by the Secretary of Planning and Budget. The programs should be formulated according to the guidelines and objectives of the National Development Plan, as well as by the sector programs of the stated plan. Id. at Art. 31. 32. Authorizations will only be granted to anonymous corporations with fixed equity capital, complying with the General Law of Commercial Corporations, the norms of this law, and particularly with the following: (I) Their activities will be the rendering of banking and credit services, within the terms of this law; (II) Their term will be indefinite; (III) They should meet with the minimum equity capital and equity capital required, according to this law; and (IV) Their social domicile must be in this country. Their enacting document, and any other amendment to such, must be submitted to the approval of the Secretary of Finance and Public Credit. Once the enacting document or amendment has been approved, they must be registered in the Commercial Public Registry without any judicial requirement necessary. Id. at Art. 9.

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2. Bank Operations with Securities. Credit institutions that carry out operations with securities listed in the National Securities Register are subject to inspection and oversight by the National Banking and Securities Commission33 with the intermediation of brokerage houses. a. Active Operations. Active operations are those that involve credit guaranties, i.e., the pledge, surety, or any real right or lien meeting the formalities of the credit agreements. Also understood as active operations are those operations carried out by the bank to extend credit secured by the capital previously received from the clients or chargeable to its own estate within the margins of the percentage allowed by the law. b. Passive Operations. Passive operations are those that do not involve a credit guaranty, pledge, surety, or any real right under a credit agreement. Practically speaking, these are operations where the bank intervenes to obtain capital from money deposits in order to apply them to its own purposes, and it issues debentures or cash bonds through which it becomes a debtor for the received capital. 3. Auxiliary Credit Organizations.34 Financial intermediaries other than credit institutions may carry out banking and credit operations, provided that they are authorized by law. These intermediaries in no event may receive money deposits in a checking account.' a. General Deposit Warehouses. The main purpose of a General Deposit Warehouse is the storage, safeguarding, preservation, handling, control, distribution, or marketing of goods or merchandise under its custody or while in transit under a certificate of deposit and financing guarantee." 36 These warehouses may also perform value-added processes, and may transform, repair, and assemble the merchandise in order to increase its value without essentially varying its nature. 37 They are also "permitted to 3 8 issue certificates of deposit and pledge bonds.

33. See L.C.N.B.V., supra note 3. 34. "The following will be considered Auxiliary Credit Organizations: (I) General Deposit Warehouses, (1I) Financial Leasing Companies, (III) Savings and Credit Corporations, (IV) Credit Unions, (V) Financial Factoring Companies, (VI) Any other that the laws consider as such." Ley General de Organizaciones y Actividades Auxiliares del Credito" ("L.G.O.A.A.C.") Art. 3. 35. See L.I.C., supra note 28. 36. L.G.O.A.A.C. Art. 11. 37. See id. 38. Id.

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b. Financial Leasing Companies. The corporations authorized as financial leasing companies may only enter into financial lease agreements, acquire assets through financial leases, acquire assets from the future lessee, and obtain loans and credits from domestic or foreign credit, insurance, and bonding institutions subject to a financial lease.39 c. Savings and Credit Corporations. The savings and loan corporations raise capital exclusively from their partners, through acts causing direct or contingent liabilities with the corporation being compelled to repay the principal amount plus, and as the case may be, interest on the capital. The capital shall be held by the partners themselves or in investments favored by the majority of partners.' d. Credit Unions. Credit unions may only provide credit to their partners, provide their guaranty or surety pursuant to the applicable legal and administrative provisions, and receive loans exclusively from their partners, foreign or domestic credit, insurance and bonding institutions and their suppliers.41

39. The corporations authorized to operate as financial leasing companies will only be allowed to perform the following transactions: (I) Enter into financial leasing contracts, pursuant to article 25 of this law; (II) Acquire assets to give them under financial lease agreements; (III) Acquire assets from the future lessee with the commitment to give them under financial lease to the latter; (IV) Obtain credit and loans from credit, insurance, and bonding institution, from the country or from foreign financial entities allocated to perform the transactions authorized by this chapter, as well as from providers, manufacturers and builders of assets destined to financial leasing agreements; (IV) Issue subordinate obligations and other credit instruments, by series or in mass, to be placed among the investing public; (V) Obtain credits and loans from credit institutions, national or foreign, to liquidity needs related to their business purpose; (VI) Repealed; (VII) Repealed; (VIII) Discount, pledge, or negotiate credit instruments and affect the rights originating from the financial lease contracts or from the transactions authorized to companies with persons that receive financing, under the terms of section IV, as well as constitute irrevocable trusts for the credit instruments and rights originating from the financial lease contracts to guarantee the payment of the securities issued according to section IV; (IX) Constitute deposits, on demand or term, in credit institutions and foreign banks, as well as acquire securities approved by the National Securities Commission; (X) Acquire goods and real state destined to the use of their offices; (XI) Any other authorized by the laws; (XII) Any other analog or connected transactions, authorized though general rules by the Secretary of Finance and Public Credit, with the opinion of the National Banking Commission and the Bank of Mexico. L.G.O.A.A.C. Art. 24. 40. Id. at Art. 38-B 41. See L.G.O.A.A.C. Art. 40.

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e. Financial Factoring Companies. Corporations operating as financial factoring companies may only enter into financial factoring agreements and obtain loans and credits from foreign or domestic credit, insurance and bonding institutions to carry out operations authorized by law or to cover liquidity needs related to the corporate purpose. Financial factoring companies may also issue subordinated obligations and other credit instruments on a serial or volume basis for placement among the investing public.42 This is how the Mexican banking system was established. The institutions or corporations that directly or indirectly participated in the banking system were aimed at fostering the social programs promoted by the federal government, which was eagerly seeking to control the institutions and the permanence of the capital in Mexico. Unfortunately, this was not handled as expected. 4. The Result of Banking Nationalization. As noted, any financial institution touched by the Mexican Federal Government becomes distorted and eventually is lost. Through the establishment of the means of operation and control mentioned above, it was thought that the banking system in Mexico would be the means to channel resources that would allow for the success of national development programs implemented by the federal government. The concept of a nationalized banking system supported with the auxiliary credit organizations never worked correctly. The federal regulatory agencies were not respected. The Ministry of Finance and Public Credit, the Banco de M6xico, and the National Banking and Securities Commission neglected their duties of control, administration, management and supervision of the resources of the banking system, apparently favoring the interests of economically powerful persons and groups. In view of this situation, the federal government sold the banks, whereby the banking system was re-privatized at an enormous profit. This profit, however, was limited in comparison with the social challenges posed by the internal and external debt. If all the mechanisms and means of operation proposed for the operation of the nationalized banking system had been entirely respected and if the authorities of the Mexican financial system, the Ministry of Finance and Public Credit ("SHCP"), the National Banking and Securities Commission ("CNBV"), and the Banco de Mexico ("BM") had performed their duties strictly in compliance

42. See id. at Art. 45-A.

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III. Banking System Savings Protection Fund

A. Nature

The Banking System Savings Protection Fund ("FOBAPROA") was a trust established within the Banco de M6xico. The supreme decision making body of the FOBAPROA is a nine member Technical Committee consisting of four representatives of the Ministry of Finance and Public Credit, two representatives of the Banking and Securities Commission and three representatives of the Banco de M6xico.

B. Background of the Banking Fund

The Fund for the Preventive Support to the Multiple Banking Institutions ("FONAPRE") was created in 1986. FONAPRE was contemplated in Article 77 of the Regulatory Law of the Public Banking and Credit Service, enacted in January 1985 and amended in December 1989. This law stipulated that the Multiple Banking Institutions must participate in the preventive support mechanism in order to preserve their financial stability. Article 122 of the Law of Credit Institutions established the Banking System Savings Protection Fund as follows: "the Multiple Banking Institutions must participate in the savings preventive and protective mechanism." On November 10, 1986, the agreement that gave rise to the FONAPRE was signed. FONAPRE was established pursuant to Article 77 of the Regulatory Law of the Public Banking and Credit System, in accordance with the following principles: the federal government, represented by the Ministry of Programming and Budget (now integrated into the Ministry of Finance and Public Credit), shall be the grantor; the Banco de M6xico as trustee; and the banks in the system shall be the beneficiaries. The actions taken by FONAPRE solved some problems of the banking system, because the resources of the fund made available additional credits to banks suffering capitalization problems. These credits were for use toward the subscription of patrimonial contribution certificates ("CAPS"), loans to the net capital of the banks, in order to facilitate a reactivation of the banks' unproductive assets

HeinOnline -- 106 Dick. L. Rev. 46 2001-2002 2001] BANKING BAILOUT IN MEXICO such as an overdue portfolio. In addition, they allowed different- iated support for social-interest housing portfolios and other forms of indemnification assistance. The banks supported by FONAPRE, however, posted operating losses that translated into short-term and structural problems. The name and attributions of the fund changed because of the legal reform of the financial system in 1990 reprivatizing the commercial banking system. The fund now remains as the Banking System Savings Protection Fund ("FOBAPROA"). Article 122 of the Law of Credit Institutions stipulated the establishment of the FOBAPROA as follows: Multiple Banking Institutions must participate in the savings preventive and protective mechanism, the organization and operation whereof shall be subject to the following:

I. Banco de Mdxico shall administrate a trust to be known as Banking System Savings Protection Fund, whose purpose shall be the performance of preventive operations designed to avoid financial problems that may be experienced by the Multiple Banking Institutions, as well as to foster the fulfillment of the obligations chargeable to said Institutions, express subject matter of protection by the fund.

C. Purpose of FOBAPROA

FOBAPROA's purpose was to protect the stability of the banking institutions so as to ensure not only the participation of the depositors, but also that of all the creditors of the banking system and the shareholders of the institutions. Within the scope of its authority, the fund was to perform preventive operations designed to avoid financial problems experienced by the banks and to promote the fulfillment of each bank's obligations to the fund, to its clientele, to its creditors and to other related entities. Thus, the fund's duty, at least as contemplated in the law, consisted not only of the administration of its assets, but also, in conjunction with the financial authorities, duties of supervision, diagnosis and assessment of the banking system, including the Banco de M6xico, the Ministry of Finance and Public Credit and the National Banking and Securities Commission. The fund was also to rehabilitate, administer and protect the assets of the institutions and to resolve problems of the banking system caused by the underlying circumstances of the market.

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Programs were designed and implemented to cope with the then-prevailing economic and monetary situation in Mexico. Such programs addressed liquidity in dollars, temporary capitalization ("PROCAPTE") and capitalization through the purchase of credit portfolios. Article 122 of the Law of Credit Institutions granted FOBAPROA both property and corporate rights in the stock taken as a guaranty, with the proceeds from the property rights inuring to the fund. The mere creation of the trust by the federal government did not establish it as an entity of the public administration. This aspect of the FOBAPROA is very important because it makes inapplicable the legislation generally applied to entities of public administration and it relieves FOBAPROA officers from compliance with the laws governing the responsibilities of Public Officers.

D. Form of Operation

The characteristics and general guidelines of the operation of FOBAPROA were established during this stage. As one of its characteristics, FOBAPROA did not need to wait for bank requests before granting financial support. Instead, the organization could act in a preventive manner based on information it received from the oversight system contemplated for the National Banking and Securities Commission. Therefore, the institutions that received support would have to guarantee that support with their capital stock or with government securities. When the assisted institutions used capital stock as a guaranty, the trust received the bank shares at seventy-five percent of their book value as shown by the latest financial statement approved by the boards of directors of the respective banks and by the National Banking and Securities Commission. In return, the banking institutions pledged to furnish the fund with requested information to make known to the fund any problem they experienced which would require the support of the fund itself. To discourage the extension of dollar credit lines with restrictive rates and short-term maturities to the Mexican banks, a rate reduction mechanism was established that was applicable to the extent the institutions decreased their disbursed amounts.

E. FOBAPROA Result

Amidst their failure to fulfill the imposed conditions and objectives, other obviously weak banks soon joined the banks immersed in the fund. The fund then intended to facilitate the

HeinOnline -- 106 Dick. L. Rev. 48 2001-2002 20011 BANKING BAILOUT IN MEXICO bank re-capitalization process by means of legal amendment to the structure of financial groups, banks and brokerage houses to allow for greater capital flows in the institutions. Encouraged by the purchase of a foreign investment portfolio, the federal government, through the fund, implemented and operated the capitalization program; an operation that has continued since June 1995. The program spurred the capitalization of banks through the purchase of a portfolio by FOBAPROA at the net value of reserves and liquidation of the portfolio with ten- year debt documents. These transactions were guaranteed by the federal government on the condition that the institution would allocate resources to the capital at a two-to-one ratio and that it would remain under the supervision of a committee formed by the authorities, the banks themselves and FOBAPROA. A debt-restructuring program was also put together to root out a culture of nonpayment. This involved a major fiscal sacrifice, on the basis of inflation-indexed investment units ("UDI's"), for the national economy, states, municipalities and for housing debtors. Additionally, the immediate bank debtors' support program ("ADE") was designed to relieve the credit situation of small bank debtors and was instrumental in keeping up-to-date or regularizing the credit situation of millions of bank borrowers. Unfortunately, the ADE was of a limited nature in various sectors such as agriculture. A unit operating as an "amicable compounder" was created for large debtors to coordinate the banking-entrepreneurial agreements. These measures reduced the overdue portfolio ratios and improved the banks' capitalization level. Being certain that the rescue of the banking system carried out in 1995 by the federal government prevented the collapse of the financial system, the President of the Republic justified the bailout of the financial institutions with public resources as necessary to avoid an economic recession worse than that suffered in 1993 and 1994. Failure to take this measure would have caused chain bankruptcies and a massive loss of jobs because credit access and deposit withdrawals would have been hampered. The bailout enabled the government to have in place an exchange and monetary policy that would avoid an imbalance of payments and price instability. Nevertheless, despite all of these measures, the consequences of the crisis are reflected in the shutdown or bankruptcy of companies and the loss of real estate and personal property by individuals who, notwithstanding credit restructuring or debtor support programs, were unable to pay their debts.

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The bailout led to a slight recovery of the public balance, but the banking system was still vulnerable due to vice and mismanagement. Turmoil and discussion followed the bailout on the subject of FOBAPROA because uncertainty had been introduced into the financial markets. In view of the steep cost of the bailout, strong discussions were also held in the Chamber of Deputies and the Senate. The banks immersed in the FOBAPROA, for example, Bancomer, Banca Cremi, Banca Union, Banca Serfin, Banca Confia, Banamex, Banco Del Atlintico, Banco Obrero, as well as various brokerage houses, received the benefits of the fund. FOBAPROA absorbed the liabilities of these institutions, with the exception of Inbursa and Citibank-the former because it repaid its credits and the latter because it was a foreign bank. This measure favored all of the banks. The representatives in the Mexican Chamber of Deputies, however, took different stances about the possibility of converting the bank liabilities absorbed by the fund into the public debt. In order to defend the official position, the Minister of Finance and Public Credit appeared before the Chamber of Deputies and recognized that only thirty percent of the 552 billion pesos of FOBAPROA liability was recoverable. Because of the foregoing, the representatives at the Chamber of Deputies requested FOBAPROA's director to deliver relevant information about the persons directly involved in the authorization and about the persons favored by the irrecoverable credits. FOBAPROA's director answered negatively to this request, arguing that disclosure would violate the "Banking Secret." After a long, chaotic and acrimonious session, the Chamber of Deputies and the Chamber of Senators voted to allow the government to absorb the debts of FOBAPROA. This represents public debt that will not be fully recovered until the year 2025.

F. Various ScenariosAbout FOBAPROA

1. Political-Economical Scenario. Because FOBAPROA debts could now become part of the public debt, the matter was submitted to the Chamber of Deputies in the Congress where it was the subject of various political and economic considerations. First, the debate about FOBAPROA started when a representative of the Chamber of Deputies asked why the audit of the trust had not been commenced. He also stated that the amount of the fund affects the well-being of the people and that it has

HeinOnline -- 106 Dick. L. Rev. 50 2001-2002 2001] BANKING BAILOUT IN MEXICO financial repercussions in the pockets of Mexicans because the accounting process was on hold. He argued that the delay permitted the executive to replace the fund portfolio, which was guaranteed in a fictitious manner. The representative proposed that the greater cost of the fund debt should be carried forward against the future profits of the banking institutions and to the property of the instruments of the credits involved in the overdue portfolios. In response, another representative of the Chamber of Deputies argued that his party would not endorse the conversion of the fund liabilities into public debt, proposing instead to support the debtors and the banks, so as to have a firm and solid financial system supporting the economic growth of the country. The Ministry of Finance and Public Credit recognized that only thirty percent of FOBAPROA's liabilities was recoverable. The Minister stated that the government's intervention contributed to keep both the Mexican economy and the financial system from collapsing. He also stated that thirteen out of eighteen banks became totally bankrupt. The Chamber representatives that were gathered there declared that the "Banking Secret" protects special interests and does not allow for free access to solve the problem. A new session of the Chamber was called as a result of these differing opinions. The fourth State of the Nation Report, dated December 1998, urged passage of the financial package, by accepting that a substantial part of the banking debt was due to the negligence and fraud of bank managers, executives and shareholders during the banking system nationalization period. The report stressed that the government could not choose between the cost of avoiding the banking system bankruptcy and the cost that would result if the system failed. The executive proposed to create a deposit guarantee fund as a substitute for FOBAPROA. This proposed fund would protect small and medium savers, convert the 552 billion pesos in FOBAOROA liabilities into public debt, fully empower Banco de M6xico in matters of exchange policy and wind up the National Bank of Internal Commerce as a National Credit Society due to its inefficient operation as a development bank. After the resignation of the President of the National Banking and Securities Commission and the Governor of Banco de M6xico, three of the main political forces proposed to have the large trust credits audited. They also proposed the creation of an organization to protect savings deposits of not more than fifty billion pesos and

HeinOnline -- 106 Dick. L. Rev. 51 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 to subsidize interest rates for minor debtors in consumer, automobile, public transportation, farming and merchant credits. In addition, they proposed an audit of FOBAPROA's assets in order to allocate the fund's economic costs equitably among banks, debtors and taxpayers. 2. JuridicalScenario. Auditor Mackey stated that he did not come to make an audit of FOBAPROA's operations, but to conduct a financial review. No audit took place because he did not have all of the information required to conduct an audit. The Ministry of Finance and Public Credit justified the absence of information regarding Banca Union, Banca Serfin, Bancomer, Banamex, Banpais and Bancrecer, on the basis of the banking secret, at least where the accounts were fully justified. This answer prevented the discovery of unlawful acts committed by the Revolutionary Institutional Party ("PRI") to finance the presidential campaign, and other acts that fostered unlawful behavior by public servants. This misbehavior increased the banking debt, the fiscal cost and the attendant public debt owed by all Mexicans. The National Banking and Securities Commission ("CNBV") timely identified the problems surrounding the Mexican banking and financial system, but its failure to make decisions has translated into fiscal cost. Hence, it can be contended that although the law regulating the duties of the CNBV clearly specifies its obligations, such as that of surveillance and inspection, the CNBV did not properly fulfill those duties. Namely, it failed to strictly enforce the law in matters of supervision of the banking system. Banking executives committed numerous violations. By furnishing false information on the amount of their assets and including false information on real estate and companies that did not have payment capacity, these executives obtained massive loans without appropriate bank security. The Mackey report stated that twenty-four billion pesos out of the total credits should have not been reported to FOBAPROA. According to the report, this occurred because the National Banking and Securities Commission relaxed the original terms of the relevant agreements to permit the trust to accept low quality, dubious credits, thereby failing to comply with the provisions of the law and of the National Banking and Securities Commission in matters of guaranties. Although it is true that the failure could have eventually resided in the non- fulfillment of banking regulations by the credit institutions, particularly with respect to the granting of credits with their

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respective guaranties, it is also true that the supervising authority acted poorly. Forty percent of the bank credits acquired by FOBAPROA and guaranteed by the federal government are denominated in dollars, evidencing the fragility of the liabilities of the fund and of the federal government, because a devaluation would result in a fiscal crisis. The Ministry of Finance and Public Credit determined that the cost of the banking bailout may amount to seventy billion dollars, but it insisted on the bailout because Mexico would have otherwise suffered a catastrophic economic crisis. As for the operations in the amount of 24,700 billion pesos classified as irregular, the audit report pointed out that many of these operations can be classified as illegal by the IPAB and returned to the banks, thereby reducing the cost of the banking system rescue. It seems, however, that a decision is still to be made in this respect. Both the federal government and the bankers proposed amendments to the bankruptcy laws, the law of guaranties and to procedures allowing banks to enforce judicial credit collection as additional measures to capitalize banks. In this regard, it is worth mentioning that now the Law of Mercantile Bankruptcies, in force since May 13, 2000, stipulates the creation of the Federal Institute of Specialists in Mercantile Bankruptcies, whose purpose is, inter alia, to avoid the bankruptcy of many companies, to preserve jobs and resources, and to clean up the economy. This new law grants the merchant support from the State, allowing continued operation.43 Furthermore, this law creates the Conciliator and the

43. The Federal Institute of Specialists in Mercantile Bankruptcies is created as an auxiliary organ of the Federal Judgeship Council, with technical and operative autonomy, with the following attributions: (I) Authorize the registration in the corresponding registry of the persons, who fulfill the necessary requisites to perform the functions of visitor, conciliator, and inspector in the mercantile bankruptcy proceedings; (II) Create and keep the registries of visitors, conciliators and inspectors; (III) Revoke, according to this law, the authorization to perform the functions of visitor, conciliator, and inspector in the mercantile bankruptcy proceedings; (IV) Designate the persons who will perform the functions of visitor, conciliator, and inspector in each bankruptcy proceeding, among the ones registered in the corresponding registries; (V) Establish by general rules, the proceedings for the random designation of the visitors, conciliators and inspectors; (VI) Elaborate and apply the public proceedings for selection and updating for the authorization to be a visitor, conciliator or inspector, who shall previously publish the criteria in the Official Gazette; (VII) Establish the applicable regime for the remuneration of the visitors, conciliators and inspectors for the services rendered in the mercantile bankruptcy proceedings; (VIII) Supervise the services rendered by the visitors, conciliators and

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Inspector, whose duties are, among others, to promote agreements between the parties in conflict (merchant and creditors) in order to make it possible for the merchant to subsist. Concilators and Inspectors propose one or several plans for the payment of the merchants' obligations and verify the proven insolvency of a company before it is declared under bankruptcy. These are protective norms provided by the State to guarantee and preserve the existence of the estate of the merchant and, in turn, the survival of the national industry. The laws enable faster collection from the assets of the debtors. The lack of payment capacity will thus increase the concentration of the national property in the hands of the bankers, with a resulting adverse impact on the industrial and agricultural producers and the eventual jeopardy of economic recovery and employment generation. For the first time in the parliamentary history of the country, the Commission of Internal Regime and Political Accord ("CRICP") of the Chamber of Deputies lodged a complaint with the President of the Republic against the heads of the Ministry of Finance and Public Credit and the CNBV. The CRICP asked that these agencies furnish the auditor with the requested information necessary to conclude the audit. The complaint caused the Minister of Finance and Public Credit to appear at the platform of the Parliamentary Chamber. Before a quorum of 303 lawmakers, and for five and a half hours the Minister emphasized that Mexico is absolutely trusted, particularly because it had timely reacted to unforeseen threats from abroad, such as the drop in international oil prices, financial volatility and internal social and economic phenomena. However, the audits to the Banking System Savings Protection Fund show that the mistakes of the present government will saddle taxpayers

inspectors in the mercantile bankruptcy proceedings; (IX) Promote the training and updating of the visitors, conciliators and inspectors, registered in the corresponding registries; (X) Conduct and support analysis, studies and investigations related with their functions; (XI) Make known to the public its functions, objectives and proceedings as well as the rules issued according to this law; (XII) Elaborate and diffuse statistics related to bankruptcy proceedings; (XIII) Issue general rules necessary to exercise the attributions stated in sections IV, V, VII, and XI of this article; (XIV) Inform the Congress of the Union, every six months, about the performance of its functions; and (XV) Any other granted by this law. Ley de Concursos Mercantiles y de Reformas al Art. 88 de la Ley Organica del Poder Judicial de la Federacion ("L.C.M.") Art. 311.

HeinOnline -- 106 Dick. L. Rev. 54 2001-2002 2001] BANKING BAILOUT IN MEXICO and the Mexican nation with a debt of at least seventy-eight billion dollars. The concern over the financial system has given rise to new rules for supervision and control at banking entities. Generally, these rules have created ad hoc institutions in charge of stated duties. These institutions have focused on paving the way for a healthy and well-balanced development of the financial entities and on protecting the interests of individuals. One example is the National Banking and Securities Commission. Recent experience, however, confirms the need to review and to improve the supervisory and regulatory efforts of the financial entities themselves. There is also a need to establish rules designed to preserve the liquidity, solvency, security, confidence and honesty of the financial and banking entities. In summary, an efficient internal and external system is needed to avoid, to the extent possible, bankruptcies or damage to the financial sector at large and to the public interest. In this sense, we contend that the State's duty is to ensure that the private sector is socially responsible and to ensure that the private sector subordinates itself to the common benefit. The State has a clear duty to guide, protect and maintain a fair and efficient organization of the various forces and instruments naturally promoting economic development. In view of these arguments and the well-known banking problem, lawmakers were forced to put forth a series of amendments and additions to various legal codes to create efficient and effective regulation of the banking system, and particularly, to eliminate so called "white collar" crimes. This criminal conduct has greatly damaged the national economy and imperiled some institutions of the Mexican financial system to the point that the state must now develop adequate means to correct the problem. The social environment surrounding the banking problem jeopardizes the healthy management of banking entities thereby adversely impacting their financial balance and credibility. In view of this problem, it is essential to modify the scheme of financial crimes. These crimes should be classed as felonies carrying stricter penalties. In order to uphold the national interest, the legislation must provide for the adequate management of the Mexican financial system and must avoid, in the future, all types of related crimes. Those positioned to commit this type of crime are knowledgeable in financial and banking matters, and are positioned to involve their employees or persons of confidence in this criminal

HeinOnline -- 106 Dick. L. Rev. 55 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 conduct. Because typifying these crimes is difficult, the legislation currently in force demands change and reform in this and in other areas. The establishment of rules and norms must lead to a human and social development in the public interest. Such a course of action obviously hinges upon knowledge of the prevailing conduct with respect to the banking problem and with respect to the various operations of the financial entities. The following aspects were considered in order to achieve the foregoing objectives: a wide-ranging review of the Criminal Code to define new financial crimes among the officers entrusted with the supervision and surveillance of the financial system; an increase in the severity of penalties; an extension of the statutes of limitations for financial crimes and a necessary reassessment of those officers' conduct to bring them in line with the general context of the legislation.

G. Transfer of FOBAPROA-IPAB Credits Following the publication of the Banking Savings Protection Law, the trust known as the Banking System Savings Protection Fund will continue to manage the operations of the "capitalization and portfolio purchase" program so as to conclude the audits ordered by the Chamber of Deputies. The audit report will identify criminal offenders and others responsible for the crisis in the financial market. Institutions may cancel the agreements and operations they maintained with FOBAPROA by returning the credit instruments (promissory notes) issued in their favor, with the fund returning the collection rights. The Banking Savings Protection Institute ("IPAB") will grant the institutions and persons a payment guaranty or instrument covering the legally established collection rights. If the IPAB detects any illegal credits, it may reject and return the credit instruments to the Institutions, which must designate different assets, to the satisfaction of the IPAB, for an amount equivalent to that of the returned credits. Further, the IPAB may reduce the amount of the respective payment guaranty or instrument. If the unlawfulness of the credit is attributable to the management of IPAB, the institution absorbs the cost of the credit and the Institute will reduce the amount of the payment guaranty or method.

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IV. Banking Savings Protection Institute

A. Nature

The IPAB is an entity decentralized from the federal public administration with its own legal capacity and estate entrusted with the management of the banking savings protection system, that is, the liabilities in the possession of FOBAPROA."4

B. Purpose of IPAB

The IPAB is aimed at providing financial institutions with a banking savings protection system to guarantee the payment of the obligations established in the law. In addition, the IPAB administers the financial cleanup programs prepared and executed to benefit the savers and users of the institutions and to safeguard the national payment system. The IPAB was created to clean up the financial systems in substitution for FOBAPROA. The IPAB absorbed the overdue portfolio of the trust itself. The issuance of savings protection bonds is an essential element of the IPAB's strategy to consolidate the financial system in the medium term. In approving the Banking Savings Protection Law, enacted on January 19, 1999, the legislature entrusted three fundamental missions to the IPAB. First, the IPAB was to design limited deposit protection insurance, an objective shared with most of its peer institutions in the world.45 The legislature also chose to entrust two other objectives upon the IPAB, which are not always shared with deposit insurance entities in the rest of the world. The first of these was to manage the assumed debt from the banking rescue; the second was to manage the asset repossession program while seeking and maximize repossession in the shortest amount of time. The Congress authorized the IPAB to use refinancing as the instrument to manage liabilities. The IPAB was to refinance the

44. "The system for protection of bank savings will be administer by a decentralized organ of the Federal Administration, with its own juridical personality and assets, its domicile will be in the Federal District and is called the Institute for Protection of Bank Savings." Ley de Proteccion al Ahorro Bancario ("L.P.A.B.") Art. 2. 45. "For the purposes of this law, guaranteed obligations will be considered deposits, credit and loans referred to in Sections I and 1I of Article 46 of the Law of Credit Institutions. The institutions have the duty to inform users of their services about the type and amount of the guaranteed obligations, according to the terms of this law." Id. at Art. 6.

HeinOnline -- 106 Dick. L. Rev. 57 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 debt previously contracted, seeking three fundamental objectives: (1) that the IPAB should always be in a position to fulfill its contractual obligations; (2) that the cleanup and sale process of Serfin and Bancrecer should be consolidated; and (3) that the debt maturity profile should be improved and that liquidity should be injected into liabilities now being financed by the banks.

C. Form of Operation

The provisions of the Banking Savings Protection Law govern the constitution, operation, control and assessment of the Banking Savings Protection Institute. To exercise its powers, the IPAB will have a Board of Governors, an Executive Secretary, Adjunct Secretaries, an Internal Control Organ and General Directors. The IPAB began to issue bonds with the intention of refinancing its liabilities. The Banco de M6xico is the financial agent in the issuance of such bonds. According to Article 2 of the Law of Revenues, the Central Bank can use resources of the Treasury of the Federation to meet maturities. All in all, the bonds are identical to federal government development bonds, with a rate subject to review every twenty- eight days, but the issuer thereof is the Institute. The Banco de Mexico is the placement agent. The maturity term of these instruments is three years with the base Cetes (Treasury Certificates) rate at twenty-eight days and the face value at 100 pesos. Finally, the amortization base is upon maturity and on the face value. In summary, the bond instruments can be acquired by all those who can purchase government securities now and by any national or foreign individual or corporation. All authorized institutions that can participate in the primary auction of the federal government will participate in the primary market. Basically, the remaining institutions that now have access to government securities can participate in the secondary market. The IPAB has a program that contemplates the issuance of between sixty and eighty billion pesos in bonds annually, depending on market conditions. The contingent payment mechanism normally works as follows: upon maturity of principal and interest, the IPAB deposits the resources in the Banco de Mexico and the latter pays off the bond holders. Should any contingency occur, the Banco de Mexico would automatically charge the Treasury of the Federation and pay off the bond holders. The sovereign guaranty of the IPAB's bonds

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is established pursuant to Article 45 of the Banking Savings Protection Law.46 Article 47 of the same legal code sets forth the obligation of the Chamber of Deputies to allocate sufficient budgetary resources so that the IPAB fulfills its obligations.47 In addition, Article 2 of the Law of Revenues empowers the Banco de M6xico as the placement agency in these transactions. It is contemplated that the Banco de M6xico will make an automatic contingent charge to the Treasury of the Federation. These bonds serve to make reportable everything that is done now with government securities.

D. Board of Governors

The Board of Governors will be composed of seven members, namely: the Minister of Finance and Public Credit, the Governor of the Banco de M6xico, the President of the Commission, and four members designated by the Federal Executive, who must be approved by two thirds of the members of the Chamber of Senators.

E. Executive Secretary

The Executive Secretary is the head of the Institute and is appointed by the Board of Governors. The Executive Secretary is in charge of the technical and administrative direction of the IPAB. The Adjunct Secretaries, the Units and the General Directors assist the Secretary with these duties.

46. The Ley de Proteccion al Ahorro Bancario ("L.P.A.B.") provides in pertinent part: If the institute cannot meet its obligations, the Congress of the Union will adopt the appropriate measures to pay for the guaranteed obligations and for the financing referred to in this article. This guaranty should be made visible, according to the terms of this law, in the credit or other instruments in which such obligations are documented. Id. at Art. 45. 47. The L.P.A.B. further provides: According to Article 74 Section IV of the Political Constitution of the Mexican United States, the Chamber of Deputies will provide, by request of the Federal Executive, in a special provision of the Federal Expenditure Budget, a budget assignation required by the institute to meet the obligations guaranteed and the financing referred to in the article above. Id. at Art. 47.

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F. Adjunct Secretaries The Adjunct Secretaries manage the financial cleanup programs for which the IPAB is responsible. Another task is to request financial support for the institutions in order to provide the liquidity or cleanup of those institutions.

G. Powers The IPAB is the party that assumes the institutional obligations in accordance with the provisions of its own law. The Federation authorizes the budget and expenditures of the IPAB. These resources support the fulfillment of the obligations that the Institute may have contracted for under the terms set forth by the law. The IPAB program supports depositors and debtors by avoiding non-fulfillment of obligations. The IPAB will subscribe and acquire common shares, subordinated obligations convertible into shares and other credit instruments issued by the institutions it supports. One of the fundamental purposes of the IPAB is the financial cleanup, for which purpose it subscribes credit instruments, performs credit operations, grants guaranties and sureties and assumes obligations. It performs these tasks for the benefit of both the institutions and the corporations in whose capital the IPAB directly or indirectly holds a stake.

H. Obligations The IPAB guarantees deposits, loans and credits set forth in the Law of Credit Institutions. Because the deposits, loans and credits are guaranteed, the institutions must inform customers about the type and amount of such obligations under the terms of the Banking Savings Protection Law. '8 The IPAB's duty is to pay the liquid and enforceable guaranteed obligations in the event of a liquidation or bankruptcy.

I. Oversight Any Chamber of the Congress of the Union is empowered to demand the appearance of the Executive Secretary of IPAB as part of its investigation of financial and banking entities.

4& See L.P.A.B., supra note 45.

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J. IPAB Scenario

One of the main points in FOBAPROA's case is the list of those responsible for the debt. There have been questions as to whether the list provided by the auditor to the Chamber of Deputies contains complete information. This issue impacts the Mexican people at large. One of the mysteries discussed in the Chamber of Deputies, brought up mainly by the opposition, is the creation of the IPAB itself, because it is said that the IPAB will be the instrument to protect the bankers to the detriment of society. A political party accused the Federal Executive of using funds from trusts of all the banks to support his presidential campaign. Significantly, the Minister of Finance and Public Credit is considered to be legally prevented from delivering to the Chamber of Deputies the information related to the Banco Uni6n trusts that were created in favor of the official party during the 1994 presidential campaign because delivery would violate the trust and banking secrets. Consequently, some deputies qualified the audit made by the Canadian specialist as illegal, because the National Banking and Securities Commission apparently wished to negotiate the result, and Congress is the competent entity that should review FOBAPROA's operations. The bankruptcy of Serfin, a leading Mexican bank, impacted the entire banking system due to the failure of the Congressional strategy. In the political arena, some parties argue that the persistence of the banking crisis makes it imperative that the Executive and the Congress of the Union agree upon a new strategy to resolve the de-capitalization of the Credit Institutions. The cleanup of the banks Atlantico, Bancrecer and Promex cost 124 billion pesos. The bankruptcy of these institutions could have generated very serious consequences for the economy, employment and the distribution of wealth. The reviewing commission appointed by the Chamber of Deputies stated that during this administration, the financial system caused a presidential-term crisis because only twenty-nine percent of the institutions are capitalized. Another reason for the crisis is that sixty-five percent of the institutions have maintained an overdue portfolio. As a result, a daily record is kept specifying the risk value of each of the ten operational Mexican banks. Mexico is a country building its democracy and it is getting closer to a change in the presidential administration, a necessary step to the success of the existing reforms. The administration change is also necessary to introduce new reforms that will clean up

HeinOnline -- 106 Dick. L. Rev. 61 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 the economy. As of August 1999, the cost to the Mexican taxpayers to clean up the banking system increased to 730 billion pesos. Furthermore, many feel that the National Banking and Securities Commission permitted the alteration of sale statements and the concealment of information. The IPAB answered this allegation by itself contributing resources to cover the losses estimated by the Commission. It is, however, worth mentioning that analysts agree on the need to correct the legal loopholes in the Mexican banking system to prevent a government bailout of failing financial institutions. Other people find IPAB's intervention positive because the shareholders cannot channel money to themselves, and because foreign investors are not interested in participating. The truth is, however, that the inefficiency of the banking system discourages investment in Mexico. FOBAPROA's audit revealed that the authority did not fulfill its responsibility to supervise banking operations. This revelation unleashed the banking system's collapse because the National Banking and Securities Commission permitted the falsification of account statements and the concealment of information. Should the IPAB succeed in its objectives, it will achieve a sustainable debt administration scheme that is cost-effective, enabling Mexico to consolidate its financial system. The savings protection bonds provide several advantages: they are guaranteed by the sovereign, they are reportable government securities and, in view of the large volume of issuances expected to be made by the Institute during the year, a resulting market with projected high trading ratios is likely to emerge.

K. IPAB Today

The Chamber of Deputies is still debating budgetary outlays related to the bailout. Based on the audit contracted by the Chamber of Deputies, the Chamber is also debating the "banking and trust secret" and the names of those included in the reportable credit portfolio. This list of names suggests that there are debtors with the ability to pay. Their debts however, have been assumed by the State and must be paid by the current and future citizens of Mexico. There is also evidence of unsecured credits that fail to comply with the most elementary banking standards. Although banks are responsible, the authorities in charge of supervising the financial institutions are also responsible, and the noncompliance is

HeinOnline -- 106 Dick. L. Rev. 62 2001-2002 20011 BANKING BAILOUT IN MEXICO aggravated by discretionary decisions of the officers of the Banco de M6xico, the Ministry of Finance and Public Credit and the National Banking and Securities Commission, which is acting as an instrument of FOBAPROA. The Executive Members of IPAB reported that the vast majority of the 422 questionable credits, a cost in excess of forty- two billion pesos, could no longer be prosecuted. However, three hundred of these debts can still be prosecuted and recovered. The foregoing indicates that the attempts of the Chamber of Deputies to identify the complete list of FOBAPROA debtors have been fruitless. One reason is because the list includes the names of powerful Mexican politicians and businessmen, who made sure that they would not be punished. Most of IPAB's liabilities mature between 2006 and 2007 and will result in an inevitable restructuring. This calls for a negotiation of the entire debt to gain some flexibility allowing for fulfillment of the debt within the next twenty years. The holder of the presidency will bequeath to his successor a debt equivalent to 84 percent of the Gross Domestic Product ("GDP"), an amount well in excess of the 1988-1994 presidential period. This is clearly an accumulation of debt that will be impossible to repay and very difficult to collect.

V. National Commission for the Protection and Defense of the Users of Financial Services (CONDUSEF)

A. Powers

The National Commission for the Protection and Defense of the Users of Financial Services ("CONDUSEF") is empowered to act as an arbitrator in conflicts submitted to its jurisdiction and to provide equity in the relations between consumers and the financial institutions.

B. Purpose

CONDUSEF is a public decentralized entity with legal capacity and assets of its own. It was created on January 18, 1998 through enactment of the Law for the Protection and Defense of the Users of Financial Services. 9 CONDUSEF absorbed the

49.The Ley de Proteccion y Defensa al Usuario de Servicios Financieros ("L.P.D.U.S.F.") provides in pertinent part: The protection of rights and interests of Users, will be carried out by decentralized public organism, with its own juridical personality and

HeinOnline -- 106 Dick. L. Rev. 63 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 powers previously enjoyed by the National Banking and Securities Commission, the National Insurance and Bonding Commission and the Retirement Savings System Commission, in matters of complaints and consultations by the users of the Mexican financial system. CONDUSEF is aimed at promoting, advising, protecting and defending the rights and interests of the people using or contracting for a product or service offered by the financial institutions that operate within Mexico and to promote among the users a culture open to banking operations and services. CONDUSEF has full technical autonomy to render decisions and awards and is empowered to impose penalties provided by law. CONDUSEF strengthens the security of financial consumers in both the operations they carry out and in the relations they keep with the financial institutions. A user is defined as a person contracting, using, or, for any other reason, entitled to a product or service offered by some financial institution duly authorized and classified as a Credit Institution and their auxiliary institutions, as well as for any other corporation that offers a financial product or service. CONDUSEF has a financial-service-supplier registry that contains the information furnished by the competent authorities. CONDUSEF also updates that registry. When consulting the. registry, CONDUSEF reviews the activities related to the types of products and/or services offered by the financial institutions in the country. CONDUSEF examines such things as the characteristics of similar products, the form of operation, the personnel to be contacted in each financial institution chosen, and the commitments assumed by the parties. CONDUSEF does not report cost or price information related to banking products and services.

C. Procedure The CONDUSEF procedure focuses on the user and the particular needs of each case proposed by the user. CONDUSEF primarily is designed to resolve contract disputes between the consumers and the banks. CONDUSEF can also handle claims that

assets, denominated National Commission for the Protection and Defense of Financial Services Users, whose domicile will be in the Federal District. The protection and defense this law attributes to the National Commission will have as a its main objective is to procure equity in the relations between Users and Financial Institutions, giving them elements to strengthen the juridical safety in the transactions realized and in the relations established with the latter. Id. at Art. 4.

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D. COND USEF Dispute Resolutions

CONDUSEF resolves disputes either through a conciliatory procedure or through an arbitration procedure. In the former, CONDUSEF is empowered to act as a conciliator between the financial institutions and the users in order to protect the user's interests. In the event that differences arise with regard to the fulfillment of trusts, CONDUSEF will deal with the claims submitted by the trustors or beneficiaries against the trustees. In an arbitration procedure, an agreement of amicable settlement is used in which the parties empower CONDUSEF to resolve the dispute justly and equitably, guided by truth and good faith. The subject matter of the dispute is specifically determined by the mutual agreement of the parties. In a settlement based on a strictly juridical lawsuit, the parties empower CONDUSEF to resolve the submitted dispute in accordance with the applicable law, and they determine the stages, formalities or terms to which arbitration applies. CONDUSEF is not a novelty or an institution designed to provide new options for settling conflicts between the authorities and the users of the Mexican financial system. Instead, CONDUSEF concentrates the separate responsibilities of the National Banking and Securities Commission, the National Insurance and Bonding Commission and the Retirement Savings System Commission into one system.

E. Final Considerations

The inadequate supervision of the financial system, particularly of the credit institutions, is one of the main problems that led to the serious banking crisis in Mexico. It also led to the ensuing federal government bailout that resulted in enormous public debt that all Mexican people, including future generations, will have to pay. It should be remembered that the Mexican financial system is made up both of institutions (like banks and auxiliary credit organizations) and authorities such as the Ministry of Finance and Public Credit ("SHCP"), the National Banking and Securities Commission ("CNBV"), the Banco de M6xico ("BM"), the National Commission for the Defense of Users of Financial

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Services ("CONDUSEF"), and the Banking Savings Protection Institute ("IPAB"). The main duty of the National Banking and Securities Commission is to supervise activities that are entrusted to the credit institutions under the applicable; namely, active and passive operations. It seems, however, that the responsible authorities failed to fulfill their duty. In this specific case, the codes governing the Commission and the Ministry of Finance and Public Credit define their obligations to include such tasks as granting authorizations, overseeing incorporation of banks and their capital amendments and performing oversight and inspection. The Commission is compelled to conduct scheduled visits to the credit institutions in order to assess the risks to which the banks are subject, to assess the control and quality of their administration, and to maintain the appropriate liquidity, solvency and stability under the terms of their regulatory laws. It is important to underscore the fact that the same authorities are empowered to issue administrative provisions in order to regulate and supervise the banks. Both the legal codes governing the banking institutions and the rules regulating the acts of the authorities clearly set forth the institutions' obligations and prohibitions precisely to avoid frauds, mismanagement and excessive discretion in granting credits and related guaranties (all of which had a bearing on the banking crisis). Hence, the problem is not due to inadequate laws or loopholes but to poor implementation and enforcement of existing laws by the supervisory authorities. Although it is true, as the federal government declared in due course, that the banking rescue was necessary to avoid an undesired crisis and economic instability, it is also true that if the authorities entrusted with the supervision of the credit institutions had strictly applied the law, the crisis would have been much less severe or avoided entirely. Finally, the replacement of FOBAPROA, whose structure was weak, with the Banking Savings Protection Institute, which has its own law, regulations and other administrative provisions, is not sufficient to correct the problem. As long as the various laws regarding the supervision of credit institutions (and, in general, all institutions that are part of the Mexican financial system) are not enforced, the underlying problem will not be solved even with the creation of institutions like IPAB or CONDUSEF. In this respect, it is necessary to reinforce the oversight powers of the entities in charge of supervising the financial system participants. Such oversight is necessary to ensure strict and

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complete compliance with applicable regulatory legislation and to avoid a future crisis in the Mexican banking system. This crisis will continue to wreak havoc upon the Mexican economy for many years to come.

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Dr. Laureano F. Guti6rrez Falla*

Introduction ...... 70 I. Disloyal Competition in the Commercial Code ...... 71 II. Definition of Disloyal Competition in the Honduran Comm ercial Code ...... 72 III. Legitim ated Subjects ...... 73 IV . Field of A pplication ...... 73 V . Type of A ctivity ...... 74 A. It Must be an Act of Competition...... 78 B. The Act Must be "Improper"...... 78 VI. Defenses of the Affected Merchant ...... 79 A . In the Criminal Field...... 79 B . In the Civil Field ...... 79 C. Election of the Action ...... 80 VII. Disloyal Competition in the Proposed Law for the Promotion and Protection of Competition ...... 81 C onclusion ...... 83

* Professor of Law, Universidad Nacional Auton6ma de Honduras and the Universidad Tecnol6gica Centroamericana.

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In order to be able to play, cheating is not allowed; the basic principle of free competition requires that the specific competitive act not be in conflict with the justification of freedom of competition; central to this justification is the possibility that competition offers for guaranteeing the success of those products that are better, and as judged by the consumers through their manifest preference for certain goods in the satisfaction of their needs.'

Introduction Honduran legislation contains two different regulations on disloyal competition: a) disloyal competition under Articles 425 et seq. of the Honduran Commercial Code of 1950; and b) disloyal competition under the Proposed Law for the Promotion and Protection of Competition (hereinafter Proposed Law) now being debated in Congress. Although both regulations are intimately related, substantial differences exist. The Proposed Law specifies that it applies to the same types of factual situations as those of disloyal competition regulated by the Commercial Code. This is true beyond the procedural point of view. On the one hand, resolution of problems of disloyal competition under the Commercial Code requires that the rules of civil procedure be applied. On the other hand, in cases of disloyal competition under the Proposed Law, an administrative proceeding before the Institute for the Promotion and Protection of Competition is applied. There also exists in both laws a difference between the parties that are authorized to exercise the respective actions. Under the Commercial Code, only merchants or merchant associations are entitled to act. In contrast, under the Proposed Law the government or any natural or juridic person affected by anti-competitive acts has a right of action. The interest protected by the Commercial Code is the enterprise of the merchant, while the Proposed Law protects the market place and therefore, the national economy, and all persons

1. TULIo ASCARELLI, TEORIA DE LA CONCURRENCIA Y DE LOS BIENES INMATERIALES. 37 (Spanish translation of Verdera and Sudrez-Llanos, Ed. Bosch, Barcelona 1970). 2. Under Article 644 of the Honduran Commercial Code, an enterprise is the coordinated aggregate of labor, material and inmaterial elements to offer to the public with the purpose of obtaining a gain, goods or services, it being considered a movable good under Article 646 of the aforesaid Code, operated by a merchant who is its titular head though not necessarily its owner the term "merchant" includes both natural as juridic persons). See Laureano F. Gutidrrez Falla, Derecho Mercantil Vol.1 LA EMPRESA. (Editorial Astrea, Buenos Aires 1985).

HeinOnline -- 106 Dick. L. Rev. 70 2001-2002 2001] THE HONDURAN COMMERCIAL CODE who are directly or indirectly affected by illegal activities in said market. Notwithstanding, in both cases, acts of disloyal competition are considered by the Penal Code as felonies and are subject to prosecution under the Code of Criminal Proceedings.

I. Disloyal Competition in the Commercial Code Article 425 of the Honduran Commercial Code defines disloyal competition as "acts executed by a merchant to improperly attract the clientele of another merchant." Under the Commercial Code, disloyal competition refers to merchants. Accordingly, the juridically protected interest is the merchant's enterprise with its "aviamiento" (roughly translated as good will). In addition, the Commercial Code provides remedies against acts executed by another merchant that may improperly attract the merchant's clientele. Only merchants whose clients were affected by disloyal acts of the infracting merchant may exercise these remedies. Upon analysis of the Commercial Code's various regulatory effects, one must conclude that it is a typical example of the individualistic, professional or corporate doctrine of disloyal competition3 found in the legislation and doctrines of the early twentieth century. At the time, the Commercial Code was viewed as a set of rules intended to resolve the conflicts that arose between direct competitors whose forbidden acts were executed within a framework of direct competition. Only merchants were permitted to act in cases of disloyal competition. Illicit competition was considered a violation of the subjective rights of the merchant." Article 426 of the Honduran Commercial Code could raise doubts about the conclusions stated above. Article 426 provides: When acts of disloyal competition damage the interests of a professional group, the action corresponds not only to those directly affected, but also to the respective professional associations or chambers of commerce and industries. Interpreting a similar rule of the German Law of June 7, 1909, German jurisprudence established the principle that the repression of disloyal competition should also protect the consumer public against

3. The Proposed Law, which also contains rules of disloyal competition, applies the more modem doctrine of the social model (see section II). 4. See Rafael Acevedo, El Modelo de la Competencia Basado en la Eficiencia de las PropiasPrestaciones y la PublicidadDesleal. R.D.C.O., BUENOS AIRES, 183, afio 31, June-September 1998 at 495-496.

HeinOnline -- 106 Dick. L. Rev. 71 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 acts that could affect it In applying this doctrine, the German Law on Disloyal Competition of June 21, 1967 permitted the consumer associations to act in cases of publicity that were deceptive or contained false representations and similar acts. We believe this interpretation would not be applicable under the Honduran Commercial Code for two fundamental reasons: 1. The right of consumers to act against deceptive advertising, false representations and similar publicity is contained in the Consumer Protection Law (Decree #41-89 of April 7, 1989, which prohibits illicit publicity in the broadest sense), guaranteeing that consumers receive the goods or services that correspond to the price paid.6 2. The plain language of the Commercial Code, taken in its full context, clearly indicates that disloyal competition only applies to merchants.

II. Definition of Disloyal Competition in the Honduran Commercial Code As stated above, disloyal competition is institutionally regulated in Article 425 et seq. of the Honduran Commercial Code. As a result, the Honduran approach is similar to the category of laws that specifically regulate disloyal competition. In contrast, France does not expressly regulate disloyal competition, but permits consumers to seek relief under the general rule of extracontractual liability. In regulating disloyal competition, the Honduran Commercial Code follows the same approach as that of Italy and Germany. The approach sets forth a list of illustrative factual situations not intended to exhaust all possible scenarios. In addition, each provides a general definition that tries to embrace all the possible violations of disloyal competition in a deliberately generic form. This approach permits the inclusion of those factual situations not specifically described in Article 425, and others that are unforeseeable: "as the malice of the disloyal competitor is very ardent and his fantasy is always rich in new discoveries."7

5. See Consuelo Gachama, La Competencia Desleal, EDITORIAL TEMIs, Bogot6, Colombia (1982) at 103. 6. See Laureano F. Gutitrrez Falla, La Publicidad Ilicita y la Competencia Desleal a la Luz del Derecho Comunitario Europeo, R.D.C.O., BUENOS AIRES, 129/141, January-June 1991, at 145, reprinted in El Nuevo Derecho Mercantil y el Derecho del Consumidor, IMPRENTA DEMOGRAFIC, S. de R.L., Tegucigalpa, M.D.C. (1999) at 99. 7. Francisco Messineo, Manual de Derecho Civil y Comercial, (Traducci6n de Santiago Sentis Milendo, EDICIONES JURiDICAS EUROPA-AMtRICA, Buenos Aires

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Article 425 of the Honduran Commercial Code begins by providing that "[d]isloyal competition is considered the execution by a merchant of acts that improperly attract clientele (of another merchant)." Four general categories are enumerated:8 I) Deception of the public in general, or of particular persons. II) Directly damaging another merchant, without violating contractual obligations with same. III) Directly damaging another merchant by breach of contracts. IV) Any similar act that directly or indirectly deviates the clientele of another merchant. The analysis of Article 425 of the Commercial Code results in the following conclusions: III. Legitimated Subjects Article 425 of the Commercial Code defines, in precise terms, the active and passive subjects of disloyal competition. In a typical scenario, a merchant improperly attracts the clientele of another merchant. Therefore, the active and passive subjects of disloyal competition are both merchants. This includes, by virtue of Article 426 of the Commercial Code, merchant associations or chambers of commerce and industry. In all cases, the juridically protected interest is the merchant's enterprise. IV. Field of Application Honduran legislation clearly distinguishes between acts of disloyal competition, which are those defined in Article 425 of the Commercial Code, and acts which prejudice the free circulation of goods and services in the market. The latter are covered by "competition law," which is the subject matter of the Proposed Law. According to Champaud, there are substantial differences between the law that regulates disloyal competition and the law that regulates competition.' The source of the former is found in commercial deontology; the action for disloyal competition is of a disciplinary nature. In contrast, the sources of the latter are foreign to commercial law and beyond the limits of private law. Instead, far from being the expression of the will of the merchant, as is the private right of a merchant when confronted with disloyal competition, it not

1971, T.VI) at 576. 8. Article 425 sets forth various examples for each category. 9. C1 Les sources du droit de la concurrence au regard du droit commercial et des autres branches du droit commercial en France en etude en honneur de L. Houin, p.60 ss, quoted IN REF. INT. Du DROIT ECONOMIQUE, T. 0-198, at 25.

HeinOnline -- 106 Dick. L. Rev. 73 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 only assures free competition of enterprises, it forces them to compete effectively. Honduran legislation follows the principle stated above and distinguishes between disloyal competition, which isregulated by the Commercial Code and private law, from the "law of competition," which is of a public nature and which guarantees the free circulation of goods and services in the market. The law of competition forbids so-called monopolistic and other restrictive practices, which have been rendered illegal by Article 339 of the Honduran Constitution (and also the Proposed Law) as well as in treaties such as GATT. 1° In addition, Article 713 of the Commercial Code forces merchants who have concessions, authorizations, or permits to transact business with the public, or are otherwise able control the price of merchandise or services, to contract with consumers and comply with the Consumer Protection Law and its Regulation.

V. Type of Activity The third conclusion that must be reached in analyzing Article 425 of the Commercial Code is what type of activity constitutes disloyal competition. According to Garrigues: [C]ompetition means, in general, coincidence or concurrence (this is the French and Italian word) in the desire to obtain ... the same thing as another party at the same time. When the object is economic, we are in the field of commercial competition, which may be defined as the independent activity of various enterprises to obtain, each one, in the market, the largest number of contracts with the same clientele, offering the most favorable prices, qualities or contractual conditions. The basis of competition is the freedom of economic activity.... Honduras lives, at this date, in an economic regime ruled by the

10. By Decree 17/94 of April 13, 1994, the Honduran Congress approved the admission of Honduras to the General Accord on Customs Duties and Commerce (GATT). By Decree 177-94 of December 1994, it approved the final "Acta de la Ronda de Uruguay de Negociaciones Comerciales Multinacionales" of April 15, 1994, which includes the Resolution to apply Article VI of GATT. Article 2 of said Resolution prohibits dumping, which is typified in Section 2.1 as the act which: "introduces products in the market of another country at a lesser price than their normal value, when its exportation price upon being exported from one country to another, is less than the comparable price, in the course of normal commercial operations, of a similar product." The Resolution later explains the application of the rule in different situations.

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principles of market economy based on the freedom to compete, which entails the possibility all merchants have to obtain the largest number of clients, even on the basis of deviating the clients of another competitor by following the "rules of the game."" Obviously, disloyal competition is one of the limits to the fundamental principle of freedom to compete, prohibited to the benefit of the merchants themselves against abusive acts of other merchants. Following Acevedo, the object is to preserve a competitive system whereby merchants, through their own initiative, attempt to attract clients through strategies that do not imply availing themselves of the prestige or the results of the efforts of a third party, and which do not alter the consumers' rational process to reach their decisions.'2 How does the Commercial Code structure this prohibition? Article 425 of the Commercial Code clearly states that disloyal competition consists of the execution by merchants of acts intended to improperly attract the clientele of another merchant. To interpret this principle, it is necessary to determine the legal meaning of the word "clientele." Further, it must be determined if clientele can be a "commodity" of ownership and thus an absolute right of a merchant. 3 Authors such as Vivante 4 considered clientele to be an object of personal property of the merchant and protected by law. Thus, the term "aviamiento"" is the equivalent of clientele. To date, this explanation is unacceptable. Authors such as Ascarelli'6 state:

11. Curso de Derecho Mercantil, EDITORIAL IMPRENTA AGUIRRE, (5a ed., Madrid 1968) at 196. 12. See Acevedo, supra note 4, at 500. 13. See Laureano F. Guti6rrez Falla, El Derecho Mercantil y el Derecho del Consumidor. El Consumidor y la Clientela, ANUARIO DE DERECHO COMERCIAL, Montevideo, Uruguay, December 1993, at 97, reprinted in EL NUEVO DERECHO MERCANTIL Y EL DERECHO DEL CONSUMIDOR at 83. 14. C6sar, La Propieta commercialle della clientela, RIv. DIR. COM. 1930, Tomo XXVIII at 1. 15. The Exposici6n de Motivos of the Honduran Commercial Code defines "aviamiento" when it states that it has already been indicated that the enterprise is, by its own nature, an aggregate of elements. The adequate combination of same to be able to comply with the object of the enterprise is the "aviamiento", i.e. the aptitude of the enterprise to obtain the ends for which it was created. See Laureano F. Gutidrrez Falla. Derecho Mercantil, LA EMPRESA, V.1, (Editorial Astrea, Buenos Aires, 1985) at 42. 16. TULIo, INICIACION AL ESTUDIO DEL DERECHO MERCANTIL, (Evelio Verdera y Tuelles translation, Editorial Bosch, Barcelona) at 292.

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[c]lientele does not constitute a good, an object of personal property (which does not mean it does not have a value); it is a factual situation, that results from the elements that compose the "aviamiento" and which becomes a 'factor of same. Those who consider that the clientele is an inmaterial good, an object of personal property, forget the freedom to compete; if the clientele were an object of absolute right, this would mean that it would be protected against all acts of competition (whatever those may be). To reply, as has been replied before, that gas may also escape from the pipeline is to forget... that when said escape is provoked, it is an illicit act, whilst he who attracts the clientele of a third party (when the modalities that qualify the competition as illicit do not occur) executes a licit act (and, I will add, fortunately as progress would cease with the monopoly of clientele). Although it is true that the clientele, in accordance with Article 648 (II) of the Commercial Code, is one of the "elements" of the enterprise," under Honduran law, it does not constitute a "good." Nor is it the subject of an absolute right of ownership. On the contrary, it is an abstract term that has an economic value and a juridic meaning.'7 It is symbolic of the habitual flow of purchasers or users to a commercial establishment, separate from the individuality of those that compose it. It constitutes, therefore, one of the externalizations, or if preferred, a factor of the "aviamiento," that constitutes a non-tangible quality of the enterprise and not a tangible good. 8 For these reasons it cannot appear as an asset on the balance sheet of the merchant.19 For the aforesaid reasons we agree with Rodrfgues and Rodrfgues,2 ° in that: disloyal competition supposes, necessarily, an act that [improperly diverts] the clientele, as it is in the public that goes to an enterprise to obtain merchandise or services where the "aviamiento" is clearly [externalized]; it is a right that protects, not the clientele as such, but the enterprise as a whole, and as

17. Garrigues, supra note 11 at 170,293. 18. Laureano F. Gutirrrez Falla. El Derecho Mercantil, LA EMPRESA, Vol. I, at 42, 57. 19. Unless it is one of the items included in the acquisition price of an enterprise, in which case, in accordance with Article 438 III of the Commercial Code it cannot be calculated for a value in excess of its acquisition or cost and should be amortized annually within a period not to exceed five years. 20. CURSO DE DERECHO MERCANTIL, (Editorial Porrtia, 5a. ed., Mexico (1964) at 443.

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part of same, its capacity to make money, that constitutes its "aviamiento."

In considering the term "clientele" as used in the first paragraph of Article 425 of the Commercial Code and as defined above, the question remains: What are the "improper" acts that the Commercial Code considers as "unduly" attracting the clientele of another merchant? Different concepts have been used in comparative law. Article 1 of the German Law Against Disloyal Competition of 1909, described it as: "acts contrary to honest uses." Article 2598 of the Italian Civil Code used the term "principles of professional correctness," a concept that, according to Messineo,2" was based on the "honest uses of commerce" of the International Convention of Paris-Hague, and that it includes those acts which, by their nature, are contrary to ethics (or customs), a zone of contact between ethics and the law. Article 5 of the Spanish Law of Disloyal Competition defines it as "all conduct that produces results objectively contrary to the requirements of good faith." All these principles are, we believe, applicable to Honduran legislation in that, as the "Exposici6n de Motivos" of the Commercial Code establishes: [I]t was considered convenient to regulate two aspects of professional activities of the merchants: the one that refers to the necessary union between commercial activity and the public good, and that which refers to the duty to compete with loyalty, based on the requirements of a minimum ethical conduct. Therefore, an "improper act of disloyal competition" would be one that violates the principle of "loyalty" as applied to the minimum ethical requirements. As Baylos Carroza put it, "disloyal competition basically results in an exorbitant anomalous gain that does not correspond to the effort of the merchant."22 The Honduran Commercial Code contains an Article that helps explain these abstract concepts. Article 422 of the Commercial Code states: Merchants must exercise their professional activities in accordance with the law and commercial uses and customs without damaging the public, the national economy and without violating socially accepted mores.

21. Messineo, supra note 7, vol. VI, at 576. 22. HERMENEGILDO, TRATADO DE DERECHO INDUSTRIAL, (Editorial Civitas, Madrid, 1978) at 261.

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The violation of this obligation for the purpose of competing permits the injured party to request the cessation of the illegal conduct, and the payment of the damages he may have suffered. This rule of law not only serves as a parameter to identify acts that violate the "law of competition," but undoubtedly characterizes the "improper" acts of Article 425; a classification that, in many cases, would depend on the opinion of the judge ruling on the case. What are the elements that these "improper" acts should contain? Following Gacharna,23 in part, the act must comply with the following requirements.

A. It Must be an Act of Competition

This means that it must be capable of promoting or assuring the knowledge by the consumer public of the merchants' goods or services, or must cause alterations in the behavior or economic decisions in the marketplace.24 But, as Gacharna stated: [Flor this requirement to be met it is not necessary that the author of the illegal act actually have his own clientele, for he who is only in the initial stages of his commercial activities is, from that moment, the potential competitor of those who already have entered the market place; therefore, he may be an author of acts of improper competition, if he tries to obtain the existing clientele of others by illegal means; as he may also be protected against acts of disloyal competition, as a victim of same, if his future competitors execute illegal acts with the object of stopping him from obtaining his own clientele.25

B. The Act Must be "Improper"

In considering what is improper, as described above, it is necessary to stress that in the execution of the act, the element of subjective "animus" does not intervene. Therefore, even when the transgressor has acted in good faith, his acts would be considered as disloyal competition if they meet the statutory requirements. The element of damage is unnecessary (as would be the case if the rules of extracontractual liability were applied) because the potential of damage to a clientele of another competitor is sufficient. The right to

23. Consuelo Garcharna, supra note 5, at 52. 24. See Acevedo, supra note 4, at 497. 25. Consuelo Gacharna, supra note 5.

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VI. Defenses of the Affected Merchant The merchant or professional associations affected by an act of disloyal competition may assert their rights in two different areas: in the criminal field and in the civil field.

A. In the Criminal Field

Article 299(3) of the Penal Code (modified by Decree 59-97), considers that acts of disloyal competition under the Commercial Code and other special laws or international conventions, constitute felonies against the economy. Accordingly, violations subject the offender to sanctions including sentences of improsonment for three to six years and fines from Lps. 50,000.00 to Lps. 1,000,000. Additionally, if the acts of disloyal competition cause damages, the injured party has the right to invoke Article 105 of the Penal Code. A party who commits a crime in violation of Article 105, may be held liable to the injured party for civil damages. Under Article 107 of the Penal Code, the injured party may be entitled to restitution or repair of the material damages, indemnity for loss of profits and moral damages under Article 110. Moral damages are determined by the judge and may consist of economic indemnity as measured by the circumstances of the infraction, the conditions of the persons involved and the nature and consequences suffered, or which the injured party could potentially suffer.

B. In the Civil Field

Articles 427 et seq. of the Commercial Code regulate the means by which a merchant affected by acts of disloyal competition may assert his rights. The action covers three different stages. 1) A preparatory measure consisting of the exhibition or deposit of all the objects that serve as proof of the acts of disloyal competition or of a sufficient number of same. A security bond, however, must be filed by the damaged party to guarantee the payment by the plaintiff of the damages he might have caused the defendant if his claim is adjudged unfounded. This preparatory type of measure is usually utilized in cases in which, for example, the disloyal merchant used containers or labels that attributed the appearance of genuineness to a falsified or adulterated product.

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2) A request for the cessation of the act of disloyal competition. This would involve an action that, we believe, could be included within the precautionary measure of prohibiting the execution of acts or contracts on determined goods, and would involve following the procedures established in the Code of Civil Proceedings. 3) A claim for the damages or loss of profits caused by the act of disloyal competition. A damages claim may include, as in the case of criminal jurisdiction, indemnity for moral damages if substantiated. Actions for civil relief must be exercised under the rules of ordinary procedure before a court of civil jurisdiction.

C. Election of the Action

Article 25 of the Code of Criminal Proceedings clearly indicates that a claim for damages arising from a felony may be initiated either before a judge who is competent to rule on the criminal procedure or before a judge of competent civil jurisdiction. Notwithstanding, Article 25 provides that any procedure for civil indemnity cannot be initiated before a condemnatory sentence has been declared in a criminal proceeding. Article 25 is complemented by Article 194 of the Code of Civil Proceedings. Article 194 requires that if judge or tribunal of civil jurisdiction were to base its holding exclusively on the existence of a felony, and after having heard the district attorney's opinion, the judge considers it necessary to initiate the criminal proceeding, then he must suspend the civil judgment until the criminal proceedings have been terminated. Taking the aforesaid into account, may a merchant or professional association affected by an act of disloyal competition initiate and resolve its pleading in the civil jurisdiction without the need of using the criminal jurisdiction? We believe that Honduran law permits the affected merchant to choose either the criminal or the civil jurisdiction. The wording of Article 299 of the Penal Code recognizes as a felony the commission of an act of disloyal competition under the terms of the Commercial Code. This rule seems to emphasize the commercial nature of the infraction and therefore, the possibility of bringing action based on the civil aspects of the disloyal competitive act without entering into the criminal field. Nevertheless, we accept that, as there is, to our knowledge, no Honduran precedent for this conclusion, it would be a matter for resolution through future Honduran jurisprudence.

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VII. Disloyal Competition in the Proposed Law Article 1 of the Proposed Law provides that it will be enacted to protect and promote the process of free competition in the market place through the prevention and elimination of monopolies, monopolistic practices, monopsonies, oligopolies, hoarding and other restrictions on the efficient functioning of the market for goods and services. Further, Article 3 of the Proposed law prohibits any act or contract that restricts, diminishes, damages, impedes or which in any other manner, violates free economic competition in the production, processing, distribution, supply or commercialization of goods and services. The above mentioned rules clearly indicate that the protected interest under the Proposed Law is the "market," and this encompasses the national economy in all its phases, including consumers. Despite this, Massaguer26 states: [D]isloyal competition is not a law enacted in defense of consumers and users as such, and is not, therefore, an adequate forum to obtain, through its interpretation, an answer to the social-juridic problems that arise in the traffic of goods and services between merchants and consumers due to their undeniable inequality. The presence of the consumer in the regulation of disloyal competition should not be used to establish objectives other than those that the law itself permits: the protection of competition itself." The Proposed Law includes in Title II "Of Acts and Practices Restrictive to Competition," Chapter III provisions which regulate acts of disloyal competition. These specify in Article 15 that, without excluding those contemplated in the Commercial Code, acts of disloyal competition are those which create confusion, deception, denigration, imitation, exploitation of a third party's reputation, violation of secrets, inducement to breach contracts, violation of legal precepts, discrimination and publicity that in a direct or indirect manner implies falsehood, inexactitude, obscurity, omission, ambiguities, exaggeration or any other circumstances that could induce the consumer to deception, error or confusion with respect to products or services offered in commercial transactions, comparative publicity

26. Quoted in Acevedo, supra note 4. 27. Cf. Rogelio P6rez-Bustamante, Lecci6n Inaugural Fundamentos Hist6ricos y Jurdicos del Derecho de la Competencia en la Uni6n Europea y de Espaha in DERECHO DE LA COMPETENCIA EUROPEA Y ESPA&ZOLA, (Dykinson, ed. Madrid) at 17 (stating that the competition law, "does not protect competitors, nor even consumers, but competition itself').

HeinOnline -- 106 Dick. L. Rev. 81 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 being allowed if and when it is not deceptive, does not create confusion and does not discredit, denigrate or underrate. 8 Even though the aforesaid regulations include factual situations recognized by the Commercial Code as examples of disloyal competition,29 there exists a great difference between the disloyal competition of the Commercial Code, which, as we have already stated, is based on the individualistic, professional or corporative theory of the institution, and the Proposed Law which, to the contrary, is based on the social model. According to Acevedo," the social model protects three basic interests: a) The individual interests of the merchants; b) The collective interests of the consumers;31 and c) The public interest of the State to preserve the market. [T]he construction of the competitive illicitude integrates the interests of all those who expect to obtain their economic objective and the satisfaction of their economic and social needs in and through the market place, considered both individually as well as collectively. In this fashion, the new discipline of disloyal competition is no longer a mechanism to resolve conflicts between competitors; it is consolidated as a mechanism to order and control competitors. Bercovitz states that the prohibition of disloyal competition has now become the prohibition to act incorrectly in the market place.32 The requirement of loyal competition has been replaced by the principle of correction in the economic traffic. Therefore, once the Proposed Law has been enacted, Honduras will have two intimately related yet conceptually and procedurally different regulations governing disloyal competition. One regime being the Commercial Code's regulation of the competitive relations between merchants, whose protected interest is the merchant's enterprise itself. The other being the Proposed Law, enacted to protect the market. The latter entails, as Libonato well stated, "guaranteeing that competition is constantly guarded, excluding, at least, explicit or de facto barriers," 33 because, in the words of Adam Smith, the liberal

28. The Proposed Law defines each of these circumstances in the aforesaid Article. 29. See Gutinrrez Falla, supra note 6. These situations are also recognized by the rules of consumer protection on illicit publicity. 30. Acevedo, supra note 4, at 496. 31. Massaguer, quoted in Acevedo, supra note 4. 32. Quoted in Acevedo, supra note 4. 33. Bernardino, Ordine Juridico e Legge Economica Dell Mercato, Riv. Soc. Aro 43/1998, at 1554-59.

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State is "more than that of laissez faire in its most trivial meaning," it must always construct and preserve the market place.34 Nevertheless, as is the case of the Commercial Code, disloyal competition under the Proposed Law only requires the mere existence of the factual situation covered by the Proposed Law without considering the good or bad faith of the offending party. Conclusion What are the basic differences between disloyal competition as regulated in the Commercial Code and in the Proposed Law? In addition to the different procedures used in their application, they are conceptually based on two different principles. Disloyal competition under the Commercial Code is defined as those acts by which a merchant improperly attracts the clientele of another merchant. Merchants are both the active and passive subjects of disloyal competition, and the protected interest is the enterprise. On the other hand, disloyal competition under the Proposed Law applies to all persons, both natural and juridic, public or private, national or foreign, with or without animus lucrandi, who undertake economic activities in all or part of the national territory, including those persons not legally domiciled in Honduras who execute economic activities outside of the country insofar as such35 acts, activities or agreements produce effects in the national market. Therefore, the Proposed Law is applicable to all natural or juridic persons who directly or indirectly, through their acts, whether executed with or without animus lucrandi,affect the proper operation of, and competition within, the marketplace. As Lara Ferreiro stated:

34. A typical example of this type of legislation was the U.S. Sherman Antitrust Act of July 1890, which provides in Section 1: "Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal." Section 2 provides that "every person who shall monopolize, or intend to monopolize, or combine or conspire with another person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor." The Clayton Antitrust Act of October 15, 1914 completes the rules of law on protection of competition under the U.S. law. In Europe, Articles 85 and 86 of the Treaty of Rome of the European Economic Communities, forbade two types of restrictions on competition. Article 85 prohibits all agreements between enterprises and the decisions of association of enterprises and agreements on practices that may affect commerce between the member states whose purpose or effect is to impede, restrict or falsify competition within the Common Market. Article 86, considers incompatible with the Common Market and therefore prohibited, the exploitation by one or more enterprises of a dominant position in the market or in a substantial part of same. 35. Article 2 of the Proposed Law.

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[T]he defense against disloyal competition is not conceived, at this date, in our legal system as a sector of the juridic body directed to resolve conflicts between competitors but, as an instrument of order and control of the conduct of the operators in the market, be they merchants, artisans, farmers or members of the liberal professions, the law not requiring the existence of a direct competitive relationship between the parties.36 On the one hand, it is true that in Article 15, the Proposed Law identifies acts of disloyal conduct "without excluding those of the Commercial Code." The reference to the Commercial Code is not for the purpose of applying to the disloyal competition under the Proposed Law the same principles that govern disloyal competition in the Commercial Code. Instead, the purpose is to recognize that the factual situations contemplated in Article 425 of the Commercial Code are, as well, factual situations covered by the Proposed Law. Moreover, under the Proposed Law, the juridically protected interest and the parties authorized to act in accordance with it are totally different than those of the disloyal competition of the Commercial Code. As a result, the Proposed Law does not require that the questionable act lure away the clientele of another, because the Proposed Law is not intended to defend the enterprise of a particular merchant. Instead, the Proposed Law has the much broader purpose of protecting the market place. This is similar to the approach outlined in the preamble to the Spanish Law of Disloyal Competition (Law 3/1991 January 10): [T]his law introduces a radical change in the traditional concept of disloyal competition. It is no longer conceived as a regulation directed primarily to resolve conflicts between merchants, but broadens its sphere of application to become an instrument to assure order and control in the conduct of the market. Competition itself becomes, therefore, the direct object of the protection. The new orientation and discipline broadens the protection of the Spanish law to include the interests that traditionally eluded the attention of commercial legislators. The new law, in effect, protects not only the private interests of the merchants in conflict, but also the collective interests of the consumer. Nevertheless, the acts that typify disloyal competition, whether analyzed under the Commercial Code or under the Proposed Law,

36. Francisco Javier, Diferencia de la Competencia Desleal in DERECHO DE LA COMPETENCIA EUROPEA Y ESPAf4OLA at 297.

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also typify acts prohibited by other legislation such as the Industrial Property Law, Rights of Authors, Consumer Protection and the Penal Code. Lawmakers and scholars studying modem commercial law are faced with a body of law that regulates the massive traffic of goods and services in the market place, and that rotates on the two frequently antagonistic but always complementary poles of producer and consumer. The analysis of any institution of a commercial nature requires the investigator to take into account the regulations that coincide on the same issues. Therefore, to properly analyze and study modem commercial law and the nature of commercial institutions, the investigator must take into account all the regulatory acts coinciding on issues common to all. Notwithstanding that the economic system now predominant in Honduras is that of a market economy, those regulations, when duly coordinated, must seek the same fundamental objective expressly recognized by the Honduran Constitution. The primary and fundamental principle of all regulations, regardless of underlying intent, is to obtain "a state of law that assures a political, economic and socially just society, which affirms the nationality and propitiates the conditions for the full realization of man as a human person."

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Michael Joachim Bonell*

Introduction The International Institute for the Unification of Private Law (UNIDROIT) first launched the idea of preparing a code of international trade law. In 1970, the Secretariat of UNIDROIT submitted a note to the newly established United Nations Commission on International Trade Law (UNCITRAL) in justification of such an initiative and indicated some of the salient features of the project.! What was proposed was a veritable code in the continental sense. The proposed code included two parts: part one dealing with the law of obligations generally, and part two relating to specific kinds of commercial transactions.2 However, the "Progressive codification of international trade law" project was never given absolute priority. The "Progressive codification" was hampered by UNIDROIT's other commitments and limited resources and by continued skepticism as to the project's feasibility. Years later, the scope of the project was substantially altered and work then focused on the preparation of what is now known as the "Principles of International Commercial Contracts."3

* Professor of Law, University of Rome, Consultant to UNIDROIT. 1. See Progressive Codification of the Law of InternationalTrade: Note by the Secretariat of the International Institute for the Unification of Private Law (UNIDROIT), in UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW, YEARBOOK, Volume 1:1968-1970, 285. 2. "The time has come... to proceed beyond the stage of partial and fragmentary unification and undertake the systematic codification of at least the basic principles of the law of international trade. This would lay the foundations for any subsequent regulation of the major legal institutions pertaining to this law, including those which have already been unified." Progressive Codification,supra note 1, at 287. 3. For further details on this gradual but fundamental change in perspective, see M. J. BONELL, AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW 19-21 (2d ed. 1997).

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The Secretary of UNCITRAL has recently proposed the "Global Commercial Code, 4 which is something very different from the original UNIDROIT proposal. Rather, it resumes work on a "world code of international trade law" advocated by Clive M. Schmitthoff some twenty years ago.' The "Global Commercial Code" is similar to Schmitthoff's proposal in that it is conceived as an open-ended instrument intended "to weld together... into a logical, integrated work," existing and future uniform laws in the field of international trade law.6 It is by no means a coincidence that this idea has reemerged. The last two decades have seen the world-wide success of the United Nations Convention on Contracts for the International Sale of Goods (CISG) and also the adoption of additional international uniform laws dealing with topics within specific areas such as transport law, banking law, arbitration, e-commerce, and bankruptcy. The proliferation of specific uniform laws makes the idea of combining these specific pieces into a unified whole more compelling. Since most of the recently adopted instruments have been prepared under the auspices of UNCITRAL,7 its Secretary has taken the initiative to re-open discussion on the codification of international trade law. The General Assembly of the United Nations gave UNCITRAL the formal mandate "[to] further the progressive harmonization and unification of international trade by: (a) coordinating the work of Organizations active in this field and encouraging cooperation among them."8

4. See G. Herrmann, Law, International Commerce and the Formulating Agencies- The Future of Harmonisation and FormulatingAgencies: The Role of UNCITRAL (Paper presented at the Schmitthoff Symposium 2000 "Law and Trade in the 21st Century," Centre of Commercial Law Studies, London June 1-3, 2000); G. Herrmann, Towards a Global Commercial Code for Borderless Commerce: Global Commerce Needs Global Law (Outline of a paper presented at the 10th Biennial Meeting of the International Academy of Commercial and Consumer Law, Dickinson School of Law of the Pennsylvania State University, August 9-13, 2000). 5. C. M. SCHMITrOFF, COMMERCIAL LAW IN A CHANGING ECONOMIC CLIMATE 29-31 (2d ed. 1981). 6. Id. at 30. 7. Apart from the CISG, mention may also be made of the Limitation Convention (1974/1980), the Hamburg Rules (1978), the UNCITRAL Model Arbitration Law (1985), the UNCITRAL Bills and Notes Convention (1988), the UN Terminal Operators Convention (19991), the UNCITRAL Credit Transfer Law (1992), the UNCITRAL Model Procurement Law (1994), the UN Guarantee and Stand-by Convention (1995), the UNCITRAL Electronic Commerce Law (1996) and the UNCITRAL Model Insolvency Law (1997). 8. United Nations General Assembly Resolution 2205 (XXI) of December 17, 1966.

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Obviously, it is beyond the scope of this comment to address all the questions raised by a far-reaching project like the proposed codification of international trade law. Instead, I will concentrate on two main aspects: one, the kind of code envisaged and two, the relationship between the code and the general contract law. I. The Kind of Code Envisaged Within the discussion of codifying international trade law, it has been suggested that the experience of the United States' Uniform Commercial Code (U.C.C.) represents a particularly significant precedent.9 Regardless of whether the U.C.C. may or .may not be considered a suitable model,"0 the U.C.C. anticipates within a federal system what UNCITRAL intends achieve at the inter-

9. See Herrmann, supra note 4. Herrmann openly speaks of "inspiring aspects of the U.C.C. experience;" see also E. A. Farnsworth, The Uniform Commercial Code and the Global Unification of International Trade Law, in INTERNATIONAL ECONOMIC AND TRADE LAW 97 (C. M. Schmittoff & K. R. Simmonds eds. 1976) ("[T]he Code may advance international codification ...by serving as an example of a successful unification of the laws of many different jurisdictions"); SCHMrrroFF, supra note 5, at 30, ("[The] attempt to draft a world code on international trade law... is not an idle dream... there is the example of the Uniform Commercial Code of the United States. It started as an academic venture but became reality when it was adopted by 49 of the 50 jurisdictions of the United States"). 10. There are those who emphatically refer to the U.C.C. as "the most progressive commercial enactment of the Western world ... [which] has three outstanding merits: it is modern in spirit, pragmatic in treatment and comprehensive." C. M. SCHMITrOFF, supra note 5, at 14-15. Others more cautiously speak of "areas [where] the draftsmen of the Code have formulated novel solutions to troublesome problems of international trade in such a form that they can be easily adopted for international use," E.A. Farnsworth, supra note 9, at 99, and indicate as examples of provisions which already have been taken as models at the international level § 1-205 on trade usages and § 2-508 on the seller's right to cure, id. at 99-100, or § 1-203 on the obligation of good faith, § 2-302 on unconscionable contract terms and § 2-509 on the transfer of risk of loss. J. 0. Honnold, The Influence of the Law of International Trade on the Development and Character of English and American Commercial Law, in THE SOURCES OF THE LAW OF INTERNATIONAL TRADE 70, 86 (C. M. Schmittoff ed. 1964). Similarly, with respect to Article 9 dealing with security interests, see R. C. C. Cuming, The Internationalisation of Secured Financing Law: the Spreading Influence of the U. C.C. Concepts, Article 9 and its Progeny, in MAKING COMMERCIAL LAW: ESSAYS IN HONOUR OF R. M. GOODE 499 (R. Cranston ed. 1997). For examples of provisions of the U.C.C., which even in its home country are controversial and therefore hardly recommendable for imitation at the international level, see J. Gordley, An American Perspective of the UNIDROIT Principles, Centro di studi e ricerche di diritto comparato e straniero, Saggi, Conferenze e Seminari, 22 (1996), referring in particular to § 2-201 on the Statute of frauds, id. at 14-19, and to § 2- 202 on the parol evidence rule, id. at 19-24.

HeinOnline -- 106 Dick. L. Rev. 89 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 national level, namely integrated, uniform rules relating to the most important commercial transactions." However, as has been rightly observed, "[the U.C.C.] is perhaps as well named as the Holy Roman Empire," for it is neither "commercial" nor a "code" in the traditional continental sense, nor even strictly speaking, "uniform" throughout the United States.2 Paradoxically, it is precisely these points that make the U.C.C. so attractive." Therefore, the proposed Global Commercial Code should adopt the same approach with a much broader scope of territorial application.

A. Not a "Commercial" Code Like the U.C.C., the Global Commercial Code should not be a strict "commercial" code conceived as a special set of rules for merchants distinct from a general "civil" code. 4 One reason is

11. The current version (2000) of the U.C.C. consists of 10 substantive chapters or "articles" dealing with "Sales" (Article 2), "Leases" (Article 2A), "Negotiable Instruments" (Article 3), "Bank Deposits and Collections" (Article 4), "Funds Transfers (Article 4A), "Letters of Credit" (Article 5), "Bulk Sales" (Article 6), "Warehouse Receipts, Bills of Lading and other Documents of Title" (Article 7), "Investment Securities" (Article 8) and "Secured Transactions; Sales of Accounts and Chattel Paper" (Article 9). Most of these transactions were previously the subject of separate uniform acts, such as the Uniform Sales Act of 1906, the Uniform Negotiable Instruments Law of 1896, the Uniform Stock Transfer Act and the Uniform Bills of Lading Act, both of 1909, the Uniform Warehouse Receipt Act of 1906, the Uniform Conditional Sales Act of 1918 and the Uniform Trust Receipt Act of 1938. It was the recognition that "these acts needed substantial revision to keep them in step with modem commercial practices and to integrate each of them with the others" that prompted the National Conference of Commissioners on Uniform State Laws and the American Law Institute to prepare the U.C.C.. General Comment of the National Conference of Commissioners on Uniform State Laws and the American Law Institute, in UNIFORM COMMERCIAL CODE 17-18 (2000 Edition). 12. J. 0. Honnold, The Influence of the Law of International Trade on the Development and Character of English and American Commercial Law, in THE SOURCES OF THE LAW OF INTERNATIONAL TRADE 70, 83 (C. M. Schmittoff ed. 1964). For more recent remarks, see A. Rosett, Improving the Uniform Commercial Code 6-7, Centro di studi e ricerche di diritto comparato e straniero, Saggi, Conferenze e Seminari, 29 (1997), ("The title Uniform Commercial Code is somewhat misleading"). 13. See, e.g., R. M. Buxbaum, Is the Uniform Commercial Code a Code?, in RECHTSREALISMUS, MULTIKULTURELLE GESELLSCHAFT UND HANDELSRECHT 197 (U. Drobnig & M. Rehbinder eds. 1994). 14. Examples of countries that traditionally adopt such a dualistic system by applying special rules to commercial contracts different from the general rules contained in the respective civil codes are France, Germany and Austria, while the monistic approach is followed, for instance, by Switzerland, Italy and more recently by the new Dutch Civil Code. D. TALLON, INTERNATIONAL ENCYCLOPAEDIA OF COMPARATIVE LAW, vol. VIII, chap. 2 10 (1983).

HeinOnline -- 106 Dick. L. Rev. 90 2001-2002 20011 Do WE NEED A GLOBAL COMMERCIAL CODE? because no such "civil" code exists at the international level. Another, and more important reason, is that the traditional distinction between "civil" and "commercial" parties and transactions has become somewhat outdated and remains under challenge even in those legal systems that still hold to the distinction. 5 Accordingly, a provision of the CISG expressly states that, "[n]either the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention."16 The Global Commercial Code should apply to transactions between business people as well as to transactions between individuals acting in their personal capacity. Whether the so-called consumer contracts should be covered remains to be decided. A number of existing uniform law instruments, such as the CISG and the 1988 UNIDROIT Conventions on International Factoring and on International Financial Leasing, expressly exclude consumer contracts from their scope. 7 The U.C.C.'s position is less radical. Under the U.C.C., consumer transactions are in principle, covered, but when appropriate, the Code will not impair the application of special consumer protections that may exist outside the Code. 8 For the Global Commercial Code, the former approach would appear preferable. In any case, the Global Commercial Code should avoid interfering with existing or future domestic rules for the protection of consumers.

B. Not a "Code"

"It is fair to say that the draftsmen of the [U.C.C.] ... did not want to codify the law, in the continental sense of codification. They wanted to correct some false starts, to point the law in the indicated directions, and to restore the law merchant as an institution for growth only lightly kept in bounds by statute."1 9 In

15. Id. at 82. 16. CISG Article 1(3). 17. See CISG Article 2(a), ("This Convention does not apply to sales... of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use"). Article 1(2)(a) of the Factoring Convention and Article 1(4) of the Leasing Convention use similar language, without however including an escape clause. 18. See U.C.C. § 2-102, § 2A-104, § 4A-108 and § 9-103 Official Comment No. 8. 19. H. Kripke, Principles Underlying the Drafting of the U.C.C., in 1962 UNIV. ILL. L. FORUM 322. For more recent commentary see J. F. Dolan, Fundamentals of

HeinOnline -- 106 Dick. L. Rev. 91 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 like fashion, the Global Commercial Code should not be a comprehensive code of general principles and rules capable of providing an answer to all legal controversies that might arise in practice. 20 Rather, the Global Commercial Code should be a compilation of special rules relating to the most important kinds of commercial transactions. Most of these rules already exist in the form of separate international conventions or model laws2 and others are added for the occasion.22 Yet, even the existing rules cannot simply be transplanted as such in the new Code. Instead, these rules must be coordinated not only in terms of formal presentation and terminology' but also to some extent, in content.24 the Uniform Commercial Code, in PERSPECTIVES ON COMMERCIAL LAW 3, 24 (A. Mugasha ed. 2000). 20. As was the case, at least formally, in Article 1 of the 1963 International Trade Code of the former Czechoslovak Socialist Republic ("The purpose of this Act is to adopt a complete set of regulations governing proprietary relations arising in international commercial connections") or of section 3 of the 1976 International Commercial Contract Act of the former German Democratic Republic (according to which in the absence of specific provisions of the Act dealing with the case at hand or with analogous cases "the rule applicable to international commercial contracts is to be ascertained from the principles expressed in this Act." 21. See, e.g., supra note 7; 1988 UNIDROIT Conventions on International Financial Leasing and on International Factoring. 22. Herrmann, supra note 4, mentions, as additional areas of possible coverage, "business organizations, arbitration, transport law, assignment and insolvency." While transport law is an area that should definitely be included in the proposed code, doubts may be raised with respect to the other subjects, either because it would be very difficult to devise internationally uniform rules (business organizations) or because they belong to general contract law (assignment) or are comingled with procedural law aspects (arbitration, insolvency). 23. Just to mention, by way of example, what CISG refers to as "failure to perform"(CISG Art. 25, 49(1)(a)) and "fundamental breach" (CISG Arts. 25, 64(1)(a)), are referred to as "default" (Art. 13(1)) and "substantial default" (Art. 13(2)) in the UNIDROIT Leasing Convention. The right "to avoid" the contract in CISG (Arts. 49 and 64) becomes the right to "terminate" or "rescind" in the UNIDROIT Leasing Convention (Arts. 10(2) and 13). Likewise, although according to some transport law Conventions the carrier loses the benefit of the limits of liability if the damage was caused by its "wilftil misconduct or by such default on its part as, in accordance with the law of the court ... seized of the case, is considered as equivalent to wilful misconduct" (Art. 25 of the 1929 Warsaw Convention for the Unification of Certain Rules relating to International Carriage by Air; Art. 29 (1) of the 1956 Convention on the Contract for the International Carriage of Goods by Road (CMR)), in others, the carrier loses the benefit if the damage resulted from its act or omission "done with the intent to cause such... damage.., or recklessly and with knowledge that such.., damage.., would probably result" (Art. 25 of the 1929 Warsaw Convention as amended by the 1955 Hague Protocol; Art. 8 of the Hamburg Rules). The UNIDROIT Leasing Convention uses yet another formula and speaks of "intentional or grossly negligent act or omission" of the lessor (Art. 8(3)). 24. Suffice it to mention that revised Articles 24 and 27 of the CISG, dealing

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In any case, UNCITRAL should avoid embarking on an overall revision of the existing instruments-there is always the risk of being over-ambitious and ending up with nothing.25

C. Not a "Uniform" Code

The American Law Institute and the National Conference of Commissioners on Uniform State Laws drafted the U.C.C. in the form of a model law. The individual states were free to adopt the model law as stated or with modifications. In fact, many states have adopted variations of the model law, but most of the variations are of little or no significance.26 The Global Commercial Code should use the same approach for many reasons. First, sovereign states are less likely to adopt such a far-reaching instrument in its entirety without modification. Second, at the international level, there are marked differences in the legal traditions of the affected nations. In addition, some nations are parties to other regional or universal uniform laws covering the same topics as the Global Commercial Code. These nations may prefer to retain the other uniform laws and exclude the entirety of corresponding chapters of the Global Commercial Code.27 UNCITRAL should take the initiative in preparing the Global Commercial Code. UNCITRAL should work in close cooperation with the international organizations and formulating agencies that with time and place of receipt and the transmission risk of declarations made by traditional means of communication, would require revision in light of Article 15 of the UNCITRAL Electronic Commerce Law, dealing with time and place of dispatch and receipt of data messages. Likewise, the provisions in the transport law Conventions concerning the issuance of a "document" (Arts. 14-18 of the Hamburg Rules; Art. 4 of the UN Terminal Operators Convention) would have to be adapted to take into account Articles 16-17 of the UNCITRAL Electronic Commerce Law dealing with data messages instead of paper documents. 25. See Rosett, supra note 12, at 7 (On the difficulties encountered in the current revision of most of the Articles of the U.C.C., Rosett states, "Perhaps most troubling.., is the temptation to make the U.C.C. a complete statement of all its complex subject matter... To include everything in one code complicates the task impossibly"); see also Dolan, supra note 19, at 26-28. 26. See Rosett, supra note 12, at 7 (pointing out that "[a] limited degree of variation has not interfered with essential uniformity"). 27. Thus, with respect to negotiable instruments, countries that have adhered to the 1930/1931 Geneva Uniform Laws for Bills of Exchange, Promissory Notes and Cheques may decide not to adopt the corresponding chapter of the Global Commercial Code based on the UNCITRAL Bills and Notes Convention. Likewise, countries that are parties to the Hague-Visby Rules may decide not to adopt the provisions of the Global Commercial Code on maritime transport based on the Hamburg Rules.

HeinOnline -- 106 Dick. L. Rev. 93 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 have prepared uniform law instruments that may become part of a Global Commercial Code. The establishment of a "Code Coordi- nation Council," composed of independent experts and functioning as an advisory body, would seem to be particularly appropriate."

D. An "International"Code

The Global Commercial Code should definitely depart from the U.C.C. model with respect to its territorial scope. While the U.C.C. governs both domestic transactions and transactions bearing relationships with other states or nations,29 the scope of the Global Commercial Code should be limited to cross-border transactions. This limited scope, already evident in most of the existing international uniform law instruments in the field of trade law, would be even more appropriate with respect to the Global Commercial Code. To expect nations to agree on and adopt an instrument of this magnitude, which is intended to replace domestic laws in their entirety, would be absolutely unrealistic and politically counterproductive. Restricting the Global Commercial Code to cross-border transactions is appealing for many reasons. For instance, transactions between parties of different countries create confusion and conflict as to the applicable law governing the transaction. This situation exists in the world of electronic commerce. Although transactions occurring over the Internet may be considered "virtual," in that national boundaries have little or no effect on the transaction, these transactions often involve parties who reside in different countries. Electronic commerce should not be considered completely detached from the territory of individual countries and operating exclusively in a "lawless" Cyberspace. 3

28. Again, the Permanent Editorial Board of the U.C.C. may be taken as a viable model. 29. See U.C.C. § 1-105(1) and Official Comment 2. 30. L. EDWARDS & C. WAELDE, LAW AND THE INTERNET: REGULATING CYBERSPACE 3, 6 (1997) ("To acknowledge that the enforcement of national law in cyberspace is difficult, perhaps even cripplingly difficult, is not however the same as saying, as one net commentator recently has [G.P. Barlow], that 'digital technology is... erasing the legal jurisdictions of the physical world and replacing them with the unbounded and perhaps permanently lawless seas of Cyberspace' "). See H. Kronke, Applicable Law in Torts and Contracts in Cyberspace, in INTERNET: WHICH COURT DECIDES? WHICH LAW APPLIES? 65, 74 (K. Boele- Woelki & C. Kessedjian eds. 1998); see also C. Kessedjian, Rapport de Synthdse, in INTERNET: WHICH COURT DECIDES? WHICH LAW APPLIES? 149; P. Mankowski, Das Internet im Internationalen Vertrags- und Deliktsrecht, 63 Rabels Zeitschrift 203 (1999); J. DING, E-COMMERCE LAW & PRACTICE 74 (1999) ("[i]n an electronic environment.., distance, location and national boundaries are meaningless"

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Despite the fact that the legal regimes covering purely domestic contracts vary considerably from country to country, nations are more prepared to grant international contracting parties the widest possible autonomy in regulating their relationships. Nations are generally less determined to impose their own laws to ensure that their own nationals have the same opportunities enjoyed by their foreign competitors. This is generally true for all countries with a planned economy. For obvious reasons, nations cannot impose their own regulations, which are based on a more or less centralized system of production and distribution, on their foreign trade partners. Consequently, these nations have no other choice than to accept the idea of separate legal regimes governing domestic and international transactions.3' Yet to a certain extent, the remark is equally valid for countries with a market economy. For example, the English and German legislatures have taken a less rigid position on the unfair contract terms in international trade contracts and a more liberal attitude towards "international commercial arbitration."32 A Global Commercial Code could be applied in its entirety to a given transaction or applied chapter by chapter depending on the specific characteristics of the transaction. For instance, a general provision could state that the entire Code applies whenever a single transaction "involves a choice between the laws of different 33 ' 3 States" or "affects the interests of international trade " or, alternatively, individual chapters could apply based on specific transactional criteria.35 In either case, a provision should be added

Ding's view is that whenever no particular country's law can be found as the applicable law, courts should apply the UNIDROIT Principles which "are transnational in nature... and as such offer the most neutral system of law which parties must have inherently accepted, on the basis of providing business efficacy to their transactions."). 31. See, e.g., Article 38 of the new Chinese Contract Law of 1999 on contracts imposed by State mandatory plans as compared to Article 126 on the principle of party autonomy in the context of truly international commercial contracts. 32. See BONELL supra note 3, at 49-50 for further reference. 33. For this language, see Article 1 of the 1980 EEC Convention on the Law applicable to Contractual Obligations, and Article 1 of the 1986 Hague Convention on the Law applicable to Contracts for the International Sale of Goods (where, however, the such a conflict of laws situation may not arise solely from a stipulation by the parties as to the applicable law, even if accompanied by a choice of court of arbitration). 34. See Article 1492 (as amended by Decree no. 81-500 of May 12, 1981) of the French Code of Civil Procedure, according to which "[elst international l'arbitrage qui met en cause des intdrets du commerce international"). 35. For example, in sales and leasing contracts the fact that the parties have their places of business in different States (Art. 1(1) CISG; Art. 3(1) Leasing

HeinOnline -- 106 Dick. L. Rev. 95 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 stating that the Global Commercial Code, either in its entirety or by individual chapters, will not apply whenever the international character (however it is defined) of the transaction was not apparent to the parties involved.36 In addition, the scope of the Global Commercial Code should not prevent individual states from applying the Code, either in its entirety or by chapters, to purely domestic transactions. On the other hand, parties to international transactions should be free to exclude the application of the code in its entirety. The remaining issue is whether the parties should be permitted to make a purely negative choice, by deciding that they do not want the Global Commercial Code to apply, or whether they should be required to make a positive choice, by excluding the application of the Global Commercial Code only on condition that they indicate the domestic law applicable in its place.37

II. The Relationship Between the Global Commercial Code and the General Contract Law Subsections (1) and (2) of § 1-102 of the U.C.C. provide that "[t]his Act shall be liberally construed and applied to promote its underlying purposes and policies," one of which is "to make uniform the law among the various jurisdictions." The Official Comments further stress that "[t]he text of each section should be read in the light of the purpose and policy of the rule or principle in question and also of the Act as a whole." Section 1-103 of the U.C.C. states that "[u]nless displaced by the particular provisions of this Act, the principles of law and equity... shall supplement its

Convention); for factoring contracts the fact that the receivables assigned result from an international sales contract (Art. 2(1) Factoring Convention); for contracts for the carriage of goods by sea the fact that the port of loading, the port of discharge and the place of issuance of the bill of lading are located in at least two different States (Art. 2(1) Hamburg Rules); for independent guarantees and stand-by letters of credit the fact that the guarantor/issuer, the beneficiary, the principal/applicant, the instructing party and the confirmer are situated in at least two different States (Article 4 UN Guarantee and Stand-by Convention). 36. See, e.g., Article 1(2) CISG. 37. While the first approach is taken in most of the existing international uniform law instruments (such as Article 6 CISG, Article 5(1) UNIDROIT Leasing Convention, Article 3 UNIDROIT Factoring Convention), the latter approach is that taken by the U.C.C. (§ 1-105). On the advantages and disadvantages of the two approaches, see M. J. Bonnell, Uniform Law and Party Autonomy: What is Wrong with the Current Approach? in INTERNATIONAL UNIFORM LAW IN PRACTICE 433, Acts and Proceedings of the 3rd Congress of the International Institute for the Unification of Private Law (Rome, September 7-10, 1987) (1988).

HeinOnline -- 106 Dick. L. Rev. 96 2001-2002 2001] Do WE NEED A GLOBAL COMMERCIAL CODE? provisions." In other words, while the U.C.C. is the primary source of law in areas it governs, it is "open-ended towards general principles of contract law."38 Therefore, with respect to matters the U.C.C. does not regulate, it relies on the body of uncodified principles of common law and equity as a supplementary source." The Global Commercial Code should contain a similar provision, which would be interpreted as taking into account its international origin and the need to promote uniform application. As a model, Article 7(1) of the CISG states, "[i]n the interpretation of this Convention regard is to be had to its international character and to the need to promote uniformity in its application. Similar to the U.C.C., the Global Commercial Code should use general principles underlying the Code to fill the internal gaps arising from questions relating to the Code but not expressly settled by it. An example is found in Article 7(2) of the CISG, which states that "[q]uestions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based."4' A further issue is how the Global Commercial Code should deal with internal gaps that cannot be filled on the basis of general principles underlying the Code and also with external gaps, described as matters falling outside the scope of the Code. One possibility would be to resort to the general contract law of the individual States, as does the U.C.C. and most other existing international uniform laws.42 This approach has both advantages

38. Buxbaum, supra note 13, at 219. 39. See generally UNIFORM COMMERCIAL CODE, REVISED ARTICLE 1, General Provisions 2 (ALl Members Consultative Group Draft February 2000) ("The Uniform Commercial Code is not intended to be a comprehensive Code in the civil law tradition. Rather it was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement its provisions in many important ways. At the same time, the [U.C.C.] is the primary source of commercial law in areas that it governs."). 40. For similar provisions see, e.g., Article 6(1) UNIDROIT Leasing Convention; Article 4(1) UNIDROIT Factoring Convention; Article 4 of the UNCITRAL Bills and Notes Convention; Article 14 of the UN Terminal Operators Convention; Article 5 of the UN Guarantee and Stand-by Convention; Article 8 of the UNCITRAL Model Insolvency Law. 41. For similar provisions see, e.g., Article 6(2), first part, UNIDROIT Leasing Convention; Article 4(2), first part, UNIDROIT Factoring Convention. 42. Thus, Article 7(2), second part, expressly states that questions concerning matters governed by CISG but which are not expressly settled in it are to be settled, in the absence of general principles underlying CISG, "in conformity with the law applicable by virtue of the rules of private international law," while with respect to matters falling outside the scope of CISG, recourse to the applicable domestic law is generally taken for granted. For further references see, COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS

HeinOnline -- 106 Dick. L. Rev. 97 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 and disadvantages. The advantage is that there are solutions to most issues since only domestic laws provide a complete system of formally binding principles and rules in the field of contract law. However, one disadvantage is determining which of the conflicting domestic laws applies in each case. Another and more important disadvantage is that the differences in content between the various domestic contract laws in sovereign States are far more marked than those between the state laws in the United States. Consequently, the solutions may well vary considerably depending on which domestic law is applicable in a given case. Varied solutions seriously jeopardize the ultimate goal of the Global Commercial Code -uniformity. Another possibility would be to seek recourse by "internationally accepted principles of contract law" as the supplementary source of law of the Global Commercial Code. The obvious advantage is to obtain a maximum degree of uniformity, by avoiding the application of principles and rules of domestic law to transactions otherwise governed by the Global Commercial Code. However, the notion of "internationally accepted principles of contract law" is rather vague. Decisions would emerge on an ad hoc basis with the potential for unpredictable and arbitrary results.43 This disadvantage could easily be overcome if the Code specifically referred to the UNIDROIT Principles of International Commercial Contracts. The UNIDROIT Principles are specially tailored to the needs of international commercial transactions.' These principles, for the most part, reflect concepts found in many, if not all legal systems. These Principles cover important issues that are normally neglected in international uniform law instruments, such as contract formation, validity, interpretation, performance, non-performance and remedies.45 Additional chapters under preparation cover agency, assignment, limitation of actions, set-off, third party rights and waiver. 6 In its entirety, these Principles represent a comprehensive system of general contract law, which is particularly

43, 6 (P. Schlechtriem ed., 2d ed. 1998). 43. See Bonell, supra note 3, at 207. 44. See UNIDROIT-International Institute for the Unification of Private Law, Principles of International Commercial Contracts (1994), available at http://www.unidroit.org/english/principles/contents.htm. 45. Id. 46. In 1997, a new Working Group was established for the preparation of Part II of the UNIDROIT Principles, and it has met three times so far in plenary session (1998, 1999 and 2000) with an expected completion date in 2003.

HeinOnline -- 106 Dick. L. Rev. 98 2001-2002 2001] Do WE NEED A GLOBAL COMMERCIAL CODE? suited to serve as the supplemental body of law for the Global Commercial Code. Nonetheless, the UNIDROIT Principles lack any binding force. These Principles were prepared by a private group of experts acting under the auspices of an intergovernmental organization, UNIDROIT, with no legislative power. Despite the fact that these Principles are nonbonding, they have gained worldwide recognition in academic circles and in practice, in only six years." In fact, a number of countries all over the world have used the UNIDROIT Principles as a model for their law reform projects.48 Moreover, parties have increasingly chosen these Principles to govern their contracts, even in the absence of an express reference to them within the contract, as an expression of "general principles of law," the lex mercatoria.49 This approach has also been confirmed implicitly by a federal court in the United States.0

47. This was amply confirmed on the occasion of the XVth International Congress of Comparative Law held in Bristol in 1998 where the UNIDROIT Principles were the subject of a special session. See A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS: THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (M. J. Bonell ed. 1999) (containing the National Reports of G.A. Moens (Australia), M. Fontaine (Belgium), H. Danhan (China), J. Lookofsky (Denmark), B. Fauvarque-Cosson (France), J. Basedow (Germany), B. Izadi (Iran), A.M. Rabello (Israel), G. Alpa (Italy), R. Yamashita (Japan), H. Veytia Palomino (Mexico), F. de Ly (Netherlands), F. Sabourin (Quebec), P.M. Cosmovici and R. Munteanu (Romania), C. Hultmark (Sweden), F. Werro and E.M. Belser (Switzerland), M. Furmston (United Kingdom), A. Rosett and M.W. Gordon (United States of America) and L6 Net (Vietnam), together with the General Report by M.J. Bonell). An exhaustive bibliography on the UNIDROIT Principles is available at http://www.unidroit.org/english/ principles/pr-bib.htm. 48. For further information, see M. J. Bonell, The UNIDROIT Principles of International Commercial Contracts: Nature, Purposes and First Experiences in Practice, in TRANSNATIONAL LAW IN COMMERCIAL LEGAL PRACTICE 7, 24-25 (Center for Transnational Law ed. 1999), available at http://www.unidroit.org /english/principles/pr-exper.htm. 49. For an analysis of the most significant decisions see M. J. Bonell, The UNIDROIT Principles and TransnationalLaw, in UNIFORM LAW REVIEW 2000 199, available at http://www.unidroit.org/english/publications/review/articles/2000- 2.htm. For a collection of decisions and arbitral awards referring in one way or another to the UNIDROIT Principles, see UNILEX II-INTERNATIONAL CASE LAW AND BIBLIOGRAPHY ON THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (Transnational Publishers, 2000). 50. See The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc., 29 F. Supp. 2d 1168 (S.D. Cal. 1998) (upholding the ICC Award No. 7365 of May 5, 1997, in which the Arbitral Tribunal held that since the parties have agreed on the application of general principles of international law and trade usages, it should be guided by the UNIDROIT Principles as to the contents of such rules); see also M. J. Bonell, UNIDROIT Principles:A Significant Recognition by a United States District Court, in: UNIFORM LAW REVIEW 2000, 651.

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Conclusions Three years ago, the Dutch Ministry of Justice invited eminent scholars and practitioners from all over Europe to meet in The Hague to discuss the advisability and feasibility of preparing a European Civil Code. On that occasion, Ole Lando recalled the controversy between the German jurists Thibaut and Savigny, which occurred at the beginning of the nineteenth century. Lando recognized that even today there are those who, like Thibaut, strongly advocate the idea of the codification of private law in Europe, and those who, like Savigny, object that such an ambitious project is questionable from a political point of view." As far as the proposed European Civil Code is concerned, I was then rather on Savigny's side. 2 My position with respect to the Global Commercial Code project is quite different. While this may appear to be a contradiction, it is not. What is envisioned at the international level is not a comprehensive code intended to replace the existing national civil codes. Instead, the proposed Code will be an integrated body of rules relating to the most important commercial transactions, leaving the general contract law to be supplemented by other more flexible instruments such as the UNIDROIT Principles of International Commercial Contracts.

51. See Ole Lando, Why Codify the European Law of Contract?, in 5 EUROPEAN REVIEW OF PRIVATE LAW 525 (1997). 52. M. J. BONELL, THE NEED AND POSSIBILITIES OF A CODIFIED EUROPEAN CONTRACT LAW 505. Since the reservations I expressed on that occasion were exclusively of a political nature, obviously they have nothing to do with the outstanding work on the preparation of the envisaged European Civil Code which is currently being carried out by a team of eminent scholars from all over Europe led by Professor Christian von Bar. For an account of the latest results of the Group's work as well as of the first positive reactions on the part of the European Parliament and the Commission, see Christian von Bar, The Study Group on a European Code, in TIDSKRIFT UTGIVEN AV JURIDISKA FORENINGEN I FINLAND 323 (2000).

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Dr. Ulrich Drobnig*

I. Introduction The European Communities have existed for more than 40 years. By the end of 1992, a European market without internal borders for the movement of goods, services, persons and capital was largely achieved.' Nevertheless, at present, domestic sales are still governed by fifteen different national sales laws. Not even intra-European cross-border sales are subject to a unified regime in all member countries because Portugal, the United Kingdom and Ireland have yet to ratify the United Nations Sales Convention of 1980. For negotiable instruments, such as bills of exchange and checks, two major regimes exist side by side: the European Civil Law countries and the Scandinavian countries adhere to the Uniform Laws of Geneva of 1930/1931, while the United Kingdom and Ireland subscribe to the British Bills of Exchange Act of 1882. The picture is even worse in almost all other areas of commercial and civil law. General contract law, banking, insurance, secured transactions, and proprietary security rights are governed by sixteen separate, and sometimes quite disparate, national legal systems. For intra-European cross-border transactions in all of these essential fields, the governing law must be determined by potentially divergent national conflict of laws rules, except insofar as the Rome Convention on the Law Applicable to Contractual Obligations

* Max Planck Institute for Foreign & International Private Law, Hamburg, Germany. 1. Treaty Establishing the European [originally: Economic] Community of March 25, 1957, as amended Nov. 10, 1997, O.J. (C 340) 173 (1997) [hereinafter TEC]; TEC art. 7a, as inserted by the European Single Act of 1986; since 1999 art. 14; cf. TEC art. 3(1)(c), where the internal market, defined in the same way, is mentioned as one of the major goals of the Community. 2. Convention on the Law Applicable to Contractual Obligations, signed in Rome on June 19, 1980.

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II. European Private Law Legislation

A. Primary Functions of European Law

The current state of affairs runs counter to all historical experiences regarding the unification of domestic law in multi- jurisdiction countries. In France, Germany and Italy, commercial law was the forerunner of the general unification of private law. In Spain, commercial law is uniform, although general civil law can be derogated by regional fueros to some degree.' In the United States, the Uniform Commercial Code, which has been adopted by every state except Louisiana, has created an almost completely uniform regulatory environment. Why do developments in the European Community differ? The primary purpose of the Treaty of Rome of 1957, which established the European Economic Community, was to remove public barriers to economic exchange. The Community's long catalog of activities focuses on the following three measures: " the abrogation of customs duties by establishing a customs union; " the abrogation of quantitative restrictions on the import and export of goods; and " the abrogation of all other measures having the same effect as import and export restrictions.4 Efforts towards the removal of non-tariff barriers remain a permanent task because member states often feel internal pressure to maintain or introduce rules protecting domestic industry or trade. A special regime was introduced in order to facilitate the harmonization of the national laws by measures aimed at "the establishment and functioning of the internal market."5 In practice, the emphasis of the measures taken between 1986 and 1992 was on removing border controls for goods and persons, lifting technical restrictions, and harmonizing indirect taxes, especially by introducing a unified value-added tax and by guaranteeing free competition. Yet, there has been no word on harmonizing commercial law.

3. Constituci6n de Espafia art. 149(1) no. 6 and 7. 4. 1957 Treaty of Rome, Article 3(a). 5. See TEC Article 100a, now Article 95.

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B. The Limited Role of European Private Law Legislation

Nevertheless, mandates contained in the Treaty Establishing the European Community (TEC) have allowed for some harmonization of civil and commercial law.6 First, nine Directives have been issued and another five have been or will be drafted on the basis of TEC Article 44(2)(g), which provides for the protection of members of corporations and of third parties.7 Second, core areas of civil law are affected by the European Community (EC) legislation on consumer protection. Two routes can be used to achieve the required "high level"8 of consumer protection: through measures incident to realizing the internal market,9 or by specific measures supplementing national consumer protection policy."° Since 1985, seven Directives of the latter type have been issued in this field, some dealing with specific methods of concluding contracts (such as doorstep transactions and distance marketing), others dealing with certain types of contracts (such as time-sharing rights in immovables, package tours, consumer credit, and guarantees in consumer sales), and one directive dealing generally with abusive clauses in consumer contracts. 1 Because of the supplementary role of EC legislation in this field, the Directives can set only minimum standards. Member states are permitted to maintain or introduce rules of consumer protection in these fields that go beyond the minimum standards established by the Directives. 2 This results in only partial harmonization in the fields of civil law affected by the aforementioned Directives. Third, apart from some clusters of EC legislation in marginal fields of private law, such as in labor law and intellectual property, attempts at harmonization are limited to dispersed individual

6. For a complete survey as of 1996, see Ulrich Drobnig, Private Law in the European Union (Forum Internationale 22, 1996). 7. See, e.g., V. EDWARDS, EC COMPANY LAW (Oxford 1999); DE PASQUALE & FRINGO, DIRITTO COMMUNITARIo DELLA SOCIETA (Padua 1997); Blaurock, Steps Toward a Uniform Corporate Law in the European Union, 31 CORNELL INT'L L.J. 377 (1998); G.C. SCHWARZ, EUROPAISCHEs GESELLSCHAFTSRECHT (Baden- Baden 2000). 8. TEC art. 153(1). 9. TEC art. 153(3)(a) and 95(3). 10. TEC art. 153(3)(b). 11. See, e.g., VERS UN CODE EUROPtEN DE LA CONSOMMATION (F. Osman ed., Brussels 1998); CURRENT AND FUTURE PERSPECTIVES ON EC CONSUMER LAW (Gormley ed. London, 1997); NORBERT REICH, EUROPAISCHES VERBRAUCHERSCHUTZRECHT (3d ed., Baden-Baden 1996). 12. TEC art. 153(5).

HeinOnline -- 106 Dick. L. Rev. 103 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 measures, such as the Directives on delays of payment, transborder transfers of payment, product liability, and independent commercial agents, among others. These Directives are based upon various general sources of legislative jurisdiction, such as the general clause for the harmonization of law,13 the specific clause for harmonization to achieve the internal market 4 and the general stopgap clause of Article 308. Finally, a new jurisdictional source for private international law and international civil procedure must be mentioned. Article 65 of the Amsterdam version of the TEC creates new Community jurisdiction in matters of cross-border judicial cooperation in civil matters. Article 65 is of paramount interest for intra-European cross-border legal relationships, especially those of a commercial nature. Article 65 includes within its scope various aspects of international civil procedure including service of process, taking of evidence, jurisdiction of courts, enforcement of decisions and the "compatibility" of conflict of laws rules. The member states have concluded revisions of several conventions on various aspects of international civil procedure and on the Rome Convention on the Law Applicable to Contractual Relations. These revisions will result in the conversion of these treaties to EC regulations. This conversion has already occurred with the EC Draft Convention on Transborder Insolvencies New EC regulations have also emerged from a convention on the jurisdiction and recognition of decisions in matrimonial matters and in proceedings relating to parental responsibility for children, 6 from the important and successful Brussels Convention on Jurisdiction and the Recognition and Enforcement of Judicial Decisions in Civil and Commercial Matters.7 Work continues with respect to a regulation on the Law Governing Torts. Thus, in this very particular area, the door has been opened to harmonization and the full unification of the conflict of laws in the broad sense of the word.18

13. TEC art. 94. 14. TEC art. 95. 15. Regulation no. 1346/2000 on Insolvency Procedures of May 29, 2000, 2000 O.J. (L 160) 1. 16. Regulation no. 1347/2000 on the Jurisdiction and the Recognition and Enforcement of Decisions in Matrimonial Matters and in Proceedings Relating to Parental Responsibility for Common Children of the Spouses of May 29, 2000, 2000 O.J. (L 160) 19. 17. Regulation no. 44/2001 of December 22, 2000, 2001 O.J. (L 12) 1. 18. See Basedow, The Communitarization of the Conflict of Laws Under the Treaty of Amsterdam, 37 COMMON MKT. L. REv. 687 (2000); Drobnig, European Private InternationalLaw After the Treaty of Amsterdam: Perspectives for the Next

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C. Criticism on Private Law Legislation at the European Level

The situation created by the present state of European legislation on substantive private law has been widely criticized. Most of the criticism has been directed at laws at the European level, although some criticism has focused upon the impact of the European law on the national systems of private law. Two major types of criticism can be identified, one against the gaps in European private law, and the other against its inconsistencies. 1. Fragmentation. The vast majority of private law instruments are focused on relatively small topics that, for one reason or another, have attracted the attention of the European legislature. Except in the fields of corporations, consumer contracts and intellectual property, European private law is a patchwork of individual measures aimed at specific economic or social needs. One author has aptly described the current state of EC legislative progress as "European islets in the oceans of national private law systems."' 9 A major consequence of the fragmented nature of European private law legislation is that most areas of commercial intercourse are still subject to divergent national laws. Merchants are forced to either incur transaction costs associated with ascertaining the law in many countries or risk non-compliance. Typically, the economically weaker party will suffer more from this uncertainty than the stronger party. In addition, discrepancies between national civil and commercial laws distort competition.0 Even worse is the situation where the crossing of national borders results in a change of applicable law, since this change may lead to a diminution of rights or even the complete loss of some rights. This typically occurs in the context of export transactions where goods are sent into the importer's country. The exporter's proprietary rights in the goods, especially retention of title under the new lex situs, may be reduced or eliminated under the law of the importing country. The same risk may affect collateral in which a

Decade, 2000 KING'S COLLEGE L. J. (2000). 19. Kotz, Rechtsvergleichung und Ggemeineuropaisches Privatrecht, in GEMEINSAMES PRIVATRECHT IN DER EUROPAISCHEN GEMEINSCHAFT 149, 151 (Miler-Graff ed., 2d ed. 1999). 20. Kirchner, A European Civil Code: Potential, Conceptual and Methodological Implications, 31 U.C.DAVIS L. REV. 671, 672, 677 (1998).

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bank has a security interest and which may be moved without the bank's knowledge into another member country. 2. Inconsistencies. Another consequence of the ad-hoc nature of the creation of private law instruments is that they may be drafted by different Directorates-General and spread over large spans of time. Inconsistencies are bound to arise because of the lack of a unified "system" of private law. Inconsistencies have even been found in the directives on consumer contracts despite the fact that one Directorate-General has recently reviewed these directives.1

D. Negative Impact of European Private Law upon the National Legal Systems

In assessing the impact of European private law legislation upon the national legal systems, one must distinguish between the two methods of European legislation -regulations and directives. A regulation adopts European law making that law directly effective in the member states.22 The member states cannot amend the regulation. Until recently, the use of regulations was uncommon, but several European instruments have been enacted in the form of regulations in 2000 and 2001. Most of these regulations relate to treaties between member states on private international law or international civil procedure23 and therefore do not affect substantive private law. In contrast, most private law measures have been enacted by directives. Directives require the member states to adopt the substance of the directive into national law, although the form and means for achieving this purpose is left to the discretion of the member states.24 This flexible method enables each member state to "translate" the Directives into national private law while avoiding major inconsistencies with the external forms and means of national legislation. The substance of the directives, however, may not be amended. The potential conflict between form, substance and procedure sometimes creates substantive inconsistencies. From the

21. Thus, a consumer's right of withdrawal from a contract expires according to the various directives, either seven days, seven working days, or ten days after the making of the contract. See Ulrich Drobnig, Neue Rechtliche Konzepte fiir den Europaischen Verbraucherschutz, in NEUES EUROPAISCHES VERTRAGSRECHT UND VERBRAUCHERSCHUTZ 201, 202 (W. Heusel ed. 1999). 22. TEC art. 249(2). 23. Convention on the Law Applicable to Contractual Obligations supra note 2, at 14-16. 24. TEC art. 249(3).

HeinOnline -- 106 Dick. L. Rev. 106 2001-2002 2001]UNIFIED PRIVATE LAW FOR THE EUROPEAN INTERNAL MARKET 107 national perspective, therefore, European private law is frequently regarded as an "intruder" that creates unpleasant disharmonies. A glaring example of inconsistency is furnished by the recent Directive on Guarantees for Consumer Sales.25 This Directive is based on a progressive system of remedies for breach of contract embodied in the 1980 UN Convention on the International Sale of Goods (CISG). In converting the provisions of the Directive into national law, problems arise because the sales law of many continental European nations is based on centuries-old classical Roman sales law rather than the sales law as envisioned by the 1980 Vienna CISG. One can easily imagine the resulting confusion and inconsistency.

III. Principles of European Patrimonial Law

A. Desiderataand Resistances

The preceding survey of the present state of European private law reveals three major desiderata: first, gaps in European private law must be filled; second, existing inconsistencies must be reconciled; and third, new inconsistencies in future EC legislation must be avoided. The only way to achieve these three ends seems to be the elaboration of a systematic set of rules for European private law. For the time being, this set of rules should be applied to those areas in which unification appears possible and most urgent, for example, in the law of obligations and movable property. In Civil Law categories, this field comprises contracts, non-contractual obligations, and movable property. By contrast, unified rules relating to immovables, family law and succession law, appear less realistic and less urgent. Until a few years ago, such a program would have been unthinkable. However, the picture is changing. In the last four years, more and more European lawyers have embraced the idea of a European Civil Code26 and numerous articles have been published

25. Directive no. 1999/44 on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees of May 25, 1999, 1999 O.J. (L 171) 12. 26. See Alps, The European Civil Code: E Pluribus Unurn, 14 TUL. EUR. & Civ. L.F. 1 (1999); Reimann, Towards a European Civil Code: Why Continental Jurists Should Consult Their Transatlantic Colleagues,73 TUL. L. REV. 1337 (1999). See also Kirchner, supra note 20 for an interesting methodological analysis of the problems raised by, and possible approaches to, the drafting of a code.

HeinOnline -- 106 Dick. L. Rev. 107 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 on the topic.27 Sceptics of course, do exist. A few passionate foes argue that the cultural identity of a nation will be endangered if its civil law, whether codified or not, is supplemented or absorbed by European rules.28 Subjective feelings and the proverbial conservatism of lawyers aside, most continental countries with old civil codes ought to, and some do, admit that a thorough modernization of both their codified and enacted civil law is necessary. In fact, in many Continental countries the codified rules on contracts, non-contractual obligations, and movable property have remained in essentially the same form since their original enactment. The French Civil Code still reflects the patrimonial law as enacted in 1804 and based upon Pothier's books. The same is true for the Spanish Civil Code of 1889 and the German code of 1900. Even the Italian code of 1942, although more modern than the "oldies," is based upon the legal thinking of the pre- World War II period. The only truly modem Civil Code that has generalized the provisions of the 1980 CISG is the Dutch Civil Code books III-VII, which were enacted in 1992.

B. Principles,Not a Code

Concerted efforts at codification must wait because an unambiguous basis for legislative jurisdiction of the European Communities to enact comprehensive private law legislation is lacking at present. A more modest and realistic aim is to elaborate, based upon thorough comparative research, European Principles of Patrimonial Law, which may later serve as the basis for a codification. In fact, European-minded comparative lawyers have been working in this direction since the early 1980's. A private group, the Commission for European Contract Law, consisting of experts from all member countries, has formulated and published 130 Principles of European Contract Law so far. 9 It consists of black-letter rules, comments, and notes, the latter presenting the major solutions to the issue(s) covered by the respective Principle found in the various member states. A further set of some 40 Principles is under discussion and will conclude the general rules on contracts.

27. TOWARDS A EUROPEAN CIVIL CODE (Hartkamp et al. eds., 2d ed. 1998). 28. See, e.g., Legrand, Against a European Civil Code, 60 MOD. L. REV. 44 (1997); Legrand, Codification and the Politics of Exclusion: A Challenge for Comparativists,31 U.C. DAVIs L. REV. 799, 803-805 (1998). 29. Principles of European Contract Law (0. Lando & H. Beale eds., 2000); Lando, European Contract Law, 31 AM. J. COMP. L. 653 (1983).

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A broader follow-up project using a different and more continuous working method started near the end of 1999. This project ventures into new fields: important types of specific contracts (such as sales, services, personal guarantees and insurance); non- contractual obligations (negotiorum gestio, unjust enrichment, and torts); and certain aspects of movable property (transfer of title and security rights in movables). The resulting Principles will be presented in the same way as the European Principles of Contract Law, with the latter being integrated into the project.

C. Relevant EC Legislation and Consumer Protection Integrated

In order to fulfill one of the aforementioned desiderata, any relevant EC legislation on private law will be integrated into the Principles. In this respect, the new set of Principles differs from the Principles of European Contract Law, which pursue a somewhat different goal. The desirable integration of certain features of EC private law legislation, especially in the field of conclusion of contracts, must be undertaken retrospectively. The integration of EC private law legislation already implies the integration of consumer protection rules. This integration may be difficult for two reasons: first, consumer protection rules have developed in rather different ways in the member states; and second, European harmonization has been selective as to subject matter and limited to setting minimum standards.

D. InternationalConventions on Uniform Private Law

It goes without saying that mere Principles of European private law are subject to international conventions unifying private law, whether binding upon a single member state or all member states. Future codifications should grant priority to all international conventions that unify private law and that are binding upon all member states over any new private law legislation enacted by the European Communities. For "old" conventions concluded before 1958 or, for acceding states, prior to their accession, this principle is laid down in Article 307, paragraph 1 of the TEC. This principle should be extended to all subsequent private law conventions since these, by their nature, do not conflict with the purposes of the TEC. The reason for the priority suggested here is that, in the interest of simplification, any existing unified regimes should, as far as possible, be uniform for both intra-European and extra-Community cross-

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HeinOnline -- 106 Dick. L. Rev. 110 2001-2002 Consumer Protection in the Global Village: Recent Developments in German and European Union Law

Norbert Reich* and Axel Halfmeier**

I. Prelim inary R em arks ...... 112 II. Aspects of Indeterminacy in Electronic Contracting ...... 115 III. European Rules on Jurisdiction in E-Commerce Cases ...... 119 IV . G lobal Rules on Jurisdiction? ...... 121 V. Conflict of Laws and Consumer Protection ...... 123 A . G eneral R ules ...... 123 B. Consumer Protection under the Rome Convention ...... 125 V I. Specific E C D irectives ...... 129 A . D irective on D istance Selling...... 129 B. Proposalon FinancialServices ...... 130 C. The EC Directive on Electronic Commerce ...... 131 1. Electronic Contracting...... 131 2. Country-of-OriginPrinciple ...... 132 VII. The European Court of Justice's Solution: European Union Law as the Mandatory Law of the Forum ...... 135

* Professor of Law, University of Bremen. Dr. iur., Johann-Wolfgang-von- Goethe-University Frankfurt/Main, 1966; Dr. iur. h. c., University of Helsinki, 2000. The article is based on a paper presented at the Tenth Meeting of the International Academy of Commercial and Consumer Law at The Dickinson School of Law of the Pennsylvania State University, Carlisle, Pa., August 9-12, 2000. ** Academic Assistant, University of Bremen. LL.M., University of Michigan, 1996; Dr. iur., University of Hamburg, 1999.

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I. Preliminary Remarks The expansion of electronic commerce has continued at a slow but steady pace despite some forecasts to the contrary. This growth continues to be supported by the economic players that have a natural interest in it, namely businesses using modern distribution systems, service providers, telecommunication networks and telemarketing companies. It is, however, not clear whether a similar interest is evident among consumers. Surely no one can be or should be prevented from electronic contracting, unless unfair or fraudulent marketing practices are being used; a problem with which John Rothchild has extensively and critically dealt.' We will not be concerned with that "dark" side of electronic contracting. Our objective is to see how the consumer's freedom of decision-making can be safeguarded under the new technological possibilities of the information society. What consumer model should be used to shape rules governing electronic contracting? What are the requirements of consumer protection as they are spelled out for the European Union in Article 153 of the Amsterdam Treaty? What are the special problems posed by cross- border contracting, which in the past has been a somewhat exotic playground for specialists on conflict of laws, but which may become an everyday problem of consumer contracting? International rule making, doctrinal writing, proposals for reform, codes of conduct and soft law regulations have exploded in parallel with the expansion of electronic commerce. Andersen informs us about the United Nations Commission on International Trade Law (UNCITRAL) Model Law that is, however, concerned only with commercial transactions, which will not be treated here.2 Harland gives an overview of the many actors and actions on the international level in his paper.3 Harland describes a situation in which hard law rarely follows the pronouncement of soft and diffuse proposals-a situation where, in the short run, consumers must seek their confidence elsewhere. On December 9, 1999, the Organization for Economic Cooperation and Development (OECD) issued "Guidelines for Consumer Protection in the

1. John Rothchild, Protectingthe Digital Consumer: The Limits of Cyberspace Utopianism, 74 IND. L. J. 895 (1999). 2. MATS B. ANDERSEN, ELECTRONIC COMMERCE-A CHALLENGE TO PRIVATE LAW? (Centro di studi e ricerche di diritto comparato e straniero no. 32, Rome, 1998). 3. David Harland, The Consumer in the Globalised Information Society- The Impact of InternationalOrganisations, 7 COMPETITION & CONSUMER L.J. 1 (2000).

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Context of Electronic Commerce,"4 which sets forth the basic proposition that consumers should enjoy the same protections when entering electronic contracts as they do when contracting is performed by traditional means. The OECD delegations did not reach agreement on more precise issues such as the applicable law and a mandatory right of withdrawal for distance contracts. On the other hand, national legislation has developed a variety of consumer protection standards that, to some extent, have been triggered by regional (namely European Union) or international rule making. Are national rules adapted to the requirements of electronic commerce and contracting? Can smart traders avoid national consumer protection laws by choosing less protective standards in offshore jurisdictions? Is there danger of a "race to the bottom" made possible by globalization and liberalization of electronic commerce? Will the least protective jurisdiction enjoy an advantage in attracting consumer contracts via electronic commerce? Although this paper cannot answer all of these questions, this contribution explores, in a wider sense, the European Union (EU) law on electronic contracting by consumers or, to be more precise, the law of the European Community (EC), which is one of the various EU institutions. In our perspective, this will include international law conventions, which may be replaced by EC law under Article 65 of the Amsterdam Treaty. This has already happened with regard to the 1968 Brussels Convention on jurisdiction,5 and may also happen with regard to the 1980 Rome Convention on the law applicable to contractual obligations.6 Both contain provisions on cross-border conflicts that are relevant to electronic contracting by consumers. The EC legislature has also been active in specific areas of consumer protection, most notably by adopting the Distance Selling Directive 97/7/EC of May 20, 1997,' which has been implemented by the member states. Germany has implemented the Directive by

4. See NORBERT REICH & ANNETTE NORDHAUSEN, VERBRAUCHER UND RECHT IM ELEKTRONISCHEN GESCHAFTSVERKEHR 156-68 (2000). 5. Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, consolidated reprint in OFFICIAL JOURNAL OF THE EUROPEAN COMMUNITY 1998 O.J. (C 27) 1. This Convention has been replaced by Council Regulation (EC) 44/2001 of December 22, 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, 2001 O.J. (L 12) 1. 6. Consolidated reprint in 1998 O.J. (C 27) 34. 7. 1997 O.J. (L 144) 19.

HeinOnline -- 106 Dick. L. Rev. 113 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 adopting the "Fernabsatzgesetz" of June 26, 2000.8 The "Fernabsatzgesetz" contains specific rules on information obligations, withdrawal and performance regarding contracts concluded at a distance. Although directive 97/7 does not apply to the important area of financial services, the proposed Directive on Distance Marketing of Financial Services (Directive on Financial Services) may close this gap.9 Another noteworthy piece of EC legislation, Directive 2000/31/EC on "Certain Legal Aspects of Information Society Services in the Internal Market (Directive on Electronic Com- merce),"'" is not so much concerned with consumer protection. Rather, it addresses internal market aspects, in particular the free access of EU-based providers to e-commerce; provision of information, especially on the identity of the provider; conclusion of electronic contracts; commercial communications; limitation of liability for mere "conduit," "caching," and "hosting;" and dispute settlement, preferably by codes of conduct and out-of-court mechanisms. The legislative techniques of these three EC instruments are strikingly different. The Distance Selling Directive uses the traditional minimum harmonization principle. In contrast, the proposed Directive on Financial Services contains a maximum harmonization concept. Finally, the Directive on Electronic Commerce proposes a country-of-origin principle, with some specific rules on electronic contracting. These three instruments also touch upon questions of conflict of laws, and again with different techniques. The Distance Selling Directive is concerned with choice of law clauses relating to non- member countries; such clauses may not deprive the consumer of the protection offered by the Directive. The proposed Directive on Financial Services prescribes objective criteria for its application, disregarding the existing conflict of laws rules. The Directive on Electronic Commerce, however, simply insists on the application of basic international law instruments relating to the EC, namely the 1968 Brussels Convention and the 1980 Rome Convention on the law applicable to contractual obligations, without setting its own standards for cross-border conflicts. The preamble to Section 23 of the Directive on Electronic Commerce reads:

8. 2000 BUNDESGESETZBLATr (Federal Gazette, BGBI.) 1897. 9. Latest proposal: 1998 O.J. (C 385) 10, amended by Commission Proposal of July 23, 1999, COM (99) 385 final, EC document no. 599PC0385. 10. 2000 O.J. (L 178) 1.

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This Directive neither aims to establish additional rules on private international law relating to conflicts of law nor does it deal with the jurisdiction of Courts; provisions of the applicable law designated by rules of private international law must not restrict the freedom to provide information society services as established in this Directive. This language is a bureaucratic masterpiece. Although the directive claims not to touch traditional conflicts rules, it will clearly affect their operation, especially through the so-called country-of- origin principle used in the area of commercial communications such as advertising or information services. As lawyers concerned with consumer law, we are thus faced with a complex mix of European legislation whose scope of application has yet to be determined. Before discussing these problems, we deal with the specifics of electronic contracting in cross-border situations with regard to place, persons, and time.

II. Aspects of Indeterminacy in Electronic Contracting Cross-border contracting, as it is described and regulated in traditional conflict of laws situations, presupposes three firm conceptual pillars: (1) a clear localization of the parties, (2) a precise identification of the parties, namely the supplier and the consumer, and (3) a foreseeable chronological sequence of actions. The clear localization of the parties-in consumer contracts the supplier or his representative on the one side and the consumer on the other-is important in order to know whether we have a cross- border transaction. In an intra-national transaction, the respective member state's consumer protection provisions apply, perhaps with some modifications in regard to the specifics of electronic contracting. We will not be concerned with these aspects. If the parties to the contract reside in different countries, conflict rules become important and the central question will be whether the consumer can expect to have his or her national consumer protection rules applied to the electronic transaction at hand. The personal sphere of application is equally important since EC law now has a clear definition of "consumer:" a natural person who, in contracts covered by relevant EC legislation, is acting for purposes which are outside of his trade, business, or profession." On the other hand, the concept of the "professional supplier" refers to any natural or legal person who, in contracts covered by a

11. GERAINT HOWELLS & T. WILHELMSSON, EC CONSUMER LAW 2-5 (1997).

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directive, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned. Of course, there may be difficulties in determining whether a person is a 1 2 "consumer," or whether a "professional supplier" acts within his business activity or acts privately. Since European and member states' legislation takes this distinction as a starting point for applying specific consumer law provisions, it presupposes that the parties know each other's role in the marketplace. Otherwise, the contracting parties would not know which rules apply and would be uninformed as to their rights in a specific transaction. Finally, the time frame of the transaction is important. The existence of withdrawal rights and time limits makes it necessary to know with reasonable certainty when a given transaction has been entered into, when a certain time lapses, and when certain information has been given. Article 5 of the Rome Convention reflects place, person, and time as the pillars of traditional conflict of laws doctrine. Article 5 is the fundamental conflict rule on consumer protection in cross- border situations for all consumers residing in the EU even with respect to third countries: Article 5. Certain consumer contracts.

(1) This article applies to a contract the object of which is the supply of goods or services to a person ("the consumer") for a purpose which can be regarded as being outside his trade or profession, or a contract for the provision of credit for that object.

(2) Notwithstanding the provisions of Article 3, a choice of law made by the parties shall not have the result of depriving the consumer of the protection afforded to him by the mandatory rules of the law of the country in which he has his habitual residence:

- if, in that country, the conclusion of the contract was preceded by a specific invitation addressed to him or by advertising, and he had taken in that country all the steps necessary on his part for the conclusion of the contract, or

12. In its case law, the European Court of Justice (ECJ) has preferred a narrow definition of the concept of the consumer. Cf. Case C-361/89, Criminal proceedings against M. di Pinto, 1991 I E.C.R. 1189; Case C-269/95, Benincasa v. Dentalkit. 1997 1E.C.R. 3767.

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- if the other party or his agent received the consumer's order in that country or

- if the contract is for the sale of goods and the consumer traveled from that country to another country and there gave his order, provided that the consumer's journey was arranged by the seller for the purpose of inducing the consumer to buy.

(3) Notwithstanding the provisions of Article 4, a contract to which this Article applies shall, in the absence of choice in accordance with Article 3, be governed by the law of the country in which the consumer has his habitual residence, if it is entered into in the circumstances described in paragraph 2 of this Article.

(4) This Article shall not apply to:

- a contract of carriage

- a contract for the supply of services where the services are to be supplied to the consumer exclusively in a country other than that in which he has his habitual residence.

(5) Notwithstanding the provisions of paragraph 4, this Article shall apply to a contract which, for an inclusive price, provides for a combination of travel and accommodation. Paragraph 2 of this rule refers to the "habitual residence" of the consumer, since the level of consumer protection in that country is deemed to be adequate for that person's transactions as a consumer. The time frame of a transaction is indirectly mentioned in Paragraph 2, first indent, which states that the conclusion of the contract must be preceded by a "specific invitation" addressed to the consumer or by advertising. It is therefore necessary to clearly determine the chronological sequence of a certain transaction. By using this terminology, private international law distinguishes between the "passive consumer" who was led to enter into a contract by a preceding invitation, offer or advertising, and the "active consumer" who personally initiated the act of contracting. The consumer protection rules of Article 5 apply in favor of the "passive," not the "active" consumer. 3 The passive consumer is

13. European Consumer Law group (ECLG), Jurisdictionand Applicable Law in Cross-BorderConsumer Complaints, 1998 J. CONSUMER POL'Y 315.

HeinOnline -- 106 Dick. L. Rev. 117 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 the beloved child of private international law who needs to be cuddled and protected, while the active consumer-whether an occasional surfer or an Internet addict-opts out of his or her home jurisdiction by choice and, therefore, may be subjected to whatever law the supplier proposes, even offshore jurisdiction. The above-mentioned basic concepts are not easy to handle with respect to traditional consumer transactions, but they become even more indeterminate when the Internet is used. Domain names, e-mail and web page addresses do not necessarily relate to the place of business of the supplier. The supplier may hide behind the business seat of the provider. To some extent the globe is his business seat. He seems to be everywhere and nowhere, a little bit like Alice in Wonderland. A German expert on electronic commerce even talks of "deterritorialization of the Internet,"'4 and Rothchild of "geographic indeterminacy."" A fair and reliable supplier will make clear his place of business and may be forced to do so by applicable law. This is exactly the purpose of Article 5(1) of the Directive on Electronic Commerce, which requires the name, the geographic address, the e-mail address, and other particulars of the supplier to be provided. Similar provisions are found in the Distance Selling Directive and in the German Fernabsatzgesetz, but all of these rules cannot be directly enforced against third country providers. The element of time may also prove problematic with respect to the above-mentioned Article 5(2) of the Rome Convention. What preceded what? Is the consumer in the transaction a passive or an active one? Existing conflict rules force us to decide. If the consumer is passive, he or she will be protected by the mandatory laws of the country of residence in case of a choice of law clause or, in the absence of such a clause, by their home country's legislation. On the other hand, an active consumer is regarded as having completely opted out of the protection offered by the home country's legislation. As a preliminary result we may say that determining the applicable law in cross-border consumer transactions may be difficult under normal conditions. It will become more difficult as electronic commerce becomes more popular. The expansion of electronic commerce is paralleled by an expansion of indeterminacy

14. T. Hoeren, Internet und Recht-Neue Paradigmen des Informationsrechts, 1998 NEUE JURISTISCHE WOCHENSCHRIFr 2849. 15. Rothchild, supra note 1; cf Raymond T. Nimmer, InternationalInform- ation Transactions:An Essay on Law in an Information Society, 26 BROOK. J. INT'L L. 5, 46 (2000) (stating that electronic commerce means the "death of distance").

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III. European Rules on Jurisdiction in E-Commerce Cases Questions of jurisdiction and enforcement of judgments with respect to civil and commercial matters are well regulated in the European Union by the 1968 Brussels Convention.16 The Brussels Convention is applicable only to cross-border litigation within the Union, and not with regard to third countries. Articles 13 to 15 contain rules on consumer protection, which to some extent, are similar to the above-mentioned Article 5 of the Rome Convention. The basic idea is that the so-called passive consumer may only be sued in the consumer's country of domicile. If the consumer sues the trader, the consumer may choose either the home courts or the courts in the place of the trader's business seat. On the other hand, the active consumer can sue only according to the general rules of jurisdiction contained in Articles 2 to 6 of the Brussels Convention, which apply to everybody. These general rules follow the actor sequitur forum rei principle (plaintiff must use defendant's home forum) with certain exceptions. Although the Brussels Convention is still in force today, it will be replaced by EC Regulation 44/200, which goes into effect on March 1, 2002. The Brussels Convention will remain important in certain cases, especially since Regulation 44/2001 does not apply to Denmark due to Danish reservations to the Union treaties. EC Regulation 44/2001 contains some improvements in the jurisdiction provisions and enforcement procedure. With respect to consumer protection, it contains a new provision in Article 15(1), which reads: In matters relating to a contract concluded by a person, the consumer, for a purpose which can be regarded as being outside his trade or profession, jurisdiction shall be determined by this Section, without prejudice to Article 4 and point 5 of Article 5, if:

(a) it is a contract for the sale of goods on instalment credit terms; or

16. Convention on Jurisdiction, supra note 5. 17. Id.

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(b) it is a contract for a loan repayable by instalments, or for any other form of credit, made to finance the sale of goods; or

(c) in all other cases, the contract has been concluded with a person who pursues commercial or professional activities in the Member State of the consumer's domicile or, by any means, directs such activities to that Member State or to several States including that Member State, and the contract falls within the scope of such activities. Regulation 44/2001 then goes on to state the principle known from the Brussels Convention-the consumer may choose where to sue his opponent while the consumer can only be sued at his or her domicile. As is the case under the Brussels Convention, a prior forum selection conflicting with these provisions is impossible. The difference between the new regulation and the Brussels Convention lies in the scope of application for consumer protection. It is not only the passive consumer who enjoys special protection, but also every consumer who is contracting across borders with a supplier who is active in the consumer's state of domicile. Offers of goods or services contained on a web site, which can be downloaded by the consumer on his computer, will suffice under this language. Litigation regarding all consumer contracts entered into via electronic commerce will therefore take place in the consumer's country of residence unless the consumer chooses to litigate abroad. Regulation 44/2001 thus offers the consumer a very high level of protection with regard to jurisdiction. It must be noted that this protection ends if the European consumer chooses to contract with suppliers from non-member states, say, with a U.S. company which is not acting through a European branch office or subsidiary. In this case, neither the Brussels Convention nor Regulation 44/2001 as its successor applies. The consumer is left to the jurisdictional rules of his home country. Under the German Code of Civil Procedure, for example, there is no provision that would provide for jurisdiction in every such case. Again, the general rule is actor sequitur forum rei, so that the consumer who wishes to sue the U.S. supplier in Germany must rely on certain special grounds for jurisdiction. Such grounds may be found under German procedural law if the U. S. defendant holds any assets in Germany,18 or if the place of performance of the

18. ZIVILPROZESSORDNUNG (ZPO, Code of Civil Procedure) § 23.

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IV. Global Rules on Jurisdiction? This example shows that a large number of consumer transactions via electronic commerce do not fall under the scope of regional or international agreements on jurisdiction. This situation is unsatisfactory not only from the consumer protection perspective but also from the perspective of economic players who are engaged in electronic commerce and must, in theory, seek advice on a wide range of legal regimes. Therefore, it is not a coincidence that the activities of the Hague Conference on Private International Law in this area received a lot more attention recently than activities in other areas. In 1992, the United States initiated the work on a global convention on jurisdiction and enforcement of judgments in civil and commercial matters. The draft of the convention, dating from October 1999,2 contained the following rule on consumer contracts: (1) A plaintiff who concluded a contract for a purpose which is outside its trade or profession, hereafter designated as the consumer, may bring a claim in the courts of the State in which it is habitually resident, if

(a) the conclusion of the contract on which the claim is based is related to trade or professional activities that the defendant has engaged in or directed to that State, in particular in soliciting business through means of publicity, and

(b) the consumer has taken the steps necessary for the conclusion of the contract in that State.

19. See ZPO § 29; Patzina, in MONCHENER KOMMENTAR ZUR ZIVILPROZESSORDNUNG § 29 no. 19 (2d ed., 2000). 20. HAGUE CONFERENCE ON PRIVATE INTERNATIONAL LAW, PRELIMINARY DRAFT CONVENTION ON JURISDICTION AND FOREIGN JUDGMENTS IN CIVIL AND COMMERCIAL MATTERS, available at http://www.hcch.net/e/conventions/draft 36e.html. For a general discussion of the relation between this draft convention and the U.S. internal law of jurisdiction, see Kevin M. Clermont, Jurisdictional Salvation and the Hague Treaty, 85 CORNELL L. REV. 89 (1999).

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(2) A claim against the consumer may only be brought by a person who entered into the contract in the course of its trade or profession before the courts of the State of the habitual residence of the consumer. As in EC Regulation 44/2001, a forum selection clause conflicting with these provisions would not be valid (art. 7 (3) of the draft). It seems that among other controversial matters, these provisions on consumer contracts caused conflicts in the Special Commission of the drafters of the Hague Convention. The U.S. Department of State raised considerable objections to the October, 1999 draft in a formal letter to the Hague conference. The U.S. claimed that the above-cited provision on consumer contracts2 "raised a storm of controversy in the electronic commerce world.", 1 Why this storm broke out is not exactly clear. If the intention of American e-commerce companies was to force forum selection clauses on consumers through the small print of their business terms, this strategy seems rather outdated and unfair. Although U.S. courts apparently enforce derogation of forum selection clauses, to a certain extent even in consumer contracts, this may be limited to domestic cases. It may be reasonable to expect an American consumer plaintiff to travel from Washington state to Florida in order to sue the supplier,22 but this reasoning is not necessarily the same in an international setting.23 Furthermore, today any American e-commerce supplier already faces the possibility of suits by customers in courts all over the world, depending on local procedural rules. In the same vein, European e-commerce suppliers face the possibility of a suit in the U.S. based on long-arm statutes and the "minimum contacts" doctrine. It is hard to see why a global harmonization of such rules would do any harm to e-commerce companies. Nevertheless, for the moment it must be acknowledged that the Hague project has reached an impasse and that it is uncertain whether or when it will be continued.24

21. Jeffrey D. Kovar, Letter of February22, 2000 to the Hague Conference on Private International Law, 2000 DAJV (GERMAN-AMERICAN LAWYERS' ASSOCIATION) NEWSLETTER 44, 45. 22. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991). 23. SCOLES & HAY, CONFLICT OF LAWS 369 (2d ed., 1992). 24. See Arthur T. von Mehren, The Hague Jurisdiction and Enforcement Convention Project Faces an Impasse-A Diagnosis and Guidelines for a Cure, 2000 PRAXIS DES INTERNATIONALEN PRIVAT-UND VERFAHRENSRECHTS 465.

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V. Conflict of Laws and Consumer Protection

A. General Rules

In the logic of the conflict of laws, rules that are in force throughout the EU by virtue of the Rome Convention on the Law Applicable to Contractual Obligations,25 the applicable law will either be determined by choice of the parties or by the criteria listed in Article 4 of the Rome Convention, in particular by the concept of the "closest connection." In the absence of a choice of law, Article 4(2) of the Rome Convention stipulates that a transaction will be most closely connected with the home country of the party performing the "characteristic performance" under the contract. This is usually the supplier of goods or services, since the consumer has only to pay, which is not characteristic for any specific type of contract. Therefore, the law of the country of the supplier, not the law of the consumer's residence will normally govern the contract. The exceptions possible under Article 4, for example, if it appears that as a whole the contract is more closely connected to another country, are narrowly interpreted by European courts and are reserved for truly exceptional cases. Under these rules, it is therefore possible for e-commerce suppliers to select a laissez-faire offshore jurisdiction as their business seat thereby making that jurisdiction's law applicable to its transactions. The use of choice of law clauses is another method to select the applicable law in cross-border contracts. Since the Rome Convention gives the parties nearly unlimited freedom in choosing a governing law for their transaction as long as the facts of the case show some connection with a foreign country, parties are not necessarily connected with the country whose law is chosen. In consumer contracts, choice of law clauses usually are not freely negotiated between business partners, but are in fact unilaterally determined by the commercial supplier. We therefore need norms that regulate when and under what conditions such clauses become part of the contract and, therefore, binding on the consumer. Under Article 8(1) of the Rome Convention, the governing law is the law that would be applied if the contract or term were valid. On the other hand, Article 8(2) allows each party to rely on their home country law in order to establish that they did not consent to a choice of law clause, if it appears from the circumstances that it

25. See Consolidated reprint, supra note 6.

HeinOnline -- 106 Dick. L. Rev. 123 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 would not be reasonable to determine the effect of the party's conduct according to the law envisaged by the choice of law clause. The interplay between the two paragraphs of Article 8 of the Rome Convention is particularly difficult to handle in cases where choice of law clauses are contained in general contract terms. Will any reference to a country named by the supplier or service provider suffice, or must certain requirements of the law of the consumer's home country, especially the principle of transparency as it is stipulated in EC Directive 93/13 on Unfair Terms,26 be respected? What is the content of the specific choice of law provision in Article 6(2) of this directive, which has been implemented differently by Member States? What will be the importance of Article 10(3) of the Directive on Electronic Commerce, which requires that "contract terms and general conditions provided to the consumer must be made available in a way that allows him to store and reproduce them?" In our opinion, a minimum requirement for choice of law clauses used in electronic commerce is a sufficient degree of transparency. Choice of law clauses should be enforced only in cases where these clauses have been submitted to the consumer in plain and intelligible language before the consumer enters into a contract. In the context of e-commerce this means that the consumer must have easy access to contract terms, via a hyperlink for instance, before the contract is entered into. The supplier must prove that these conditions have been met; otherwise no choice of law can be proven. The material validity of choice of law clauses must be 2 determined by the law chosen to govern the transaction. ' This may present certain difficulties, especially when the law of a non-EC country is chosen. New EC directives try to maintain the minimum level of protection that EC law offers to the consumer. The practical effect of the rules contained in the directives on Unfair Terms, Distance Selling and, most recently, Consumer Sales 28 has not yet been tested in litigation.

26. 1993 O.J. (L 95) 29. On this issue, see, e.g., 2 DICEY & MORRIS ON THE CONFLICT OF LAWS margin no. 33-106 (13th ed., 2000) (Unfair Terms Directive must be enforced by British courts regardless of choice of law clauses). 27. This has been the opinion of the German Bundesgerichtshof in its judgment of March 19, 1997, 1997 JURISTENZEITUNG 612 with comment by Ralf Michaels & Hans-Georg Kamann at 601. 28. Directive 99/44/EC of the European Parliament and of the Council of May 25, 1999 on certain aspects of the sale of consumer goods and associated guarantees, 1999 O.J. (L 171) 12.

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B. Consumer Protectionunder the Rome Convention

The supplier operates under the general rules of the Rome Convention on the applicability of the law, either by the objective criteria of the closest connection or by choice of law clauses. These general rules may be superseded by the consumer protection rules of the consumer's home country if the requirements of Article 5 of the Rome Convention are met. As mentioned above, the idea of Article 5 is to protect the "passive" but not the "active" consumer. Article 5(2) accomplishes this goal by distinguishing between different forms of solicitation. The drafting materials of the Rome Convention describe the importance and practical application of Article 5(2): The first indent [of Article 5(2)] relates to situations where the trader has taken steps to market his goods or services in the country where the consumer resides. It is intended to cover inter alia mail order and doorstep selling. Thus the trader must have done certain acts such as advertising to the press, or on radio or television, or in the cinema or by catalogues aimed specifically at that country, or he must have made business proposals individually through a middleman or by canvassing. If, for example, a German makes a contract in response to an advertisement published by a French company in a German publication, the contract is covered by the special rule. If, on the other hand, the German replies to an advertisement in American publications, even if they are sold in Germany, the rule does not apply unless the advertisement appeared in special editions of the publication intended for European countries. In the latter case the seller will have made a special advertisement intended for the country of the purchaser.29 This wording was obviously not addressed to the specifics of electronic commerce. It shows, however, that the trader's intention and the sequence of his actions will be decisive in determining whether the consumer will be protected by the law of his home country. With regard to electronic commerce, the present discussion has focused mainly on the question of whether an offer contained on the web site of a trader can be regarded as a "specific invitation" addressed to the consumer, or as (specific) "advertising" in the sense of the first indent of Article 5(2) of the Rome Convention. Some German writers argue that a web site containing offers for

29. 1980 O.J. (C 282) 23.

HeinOnline -- 106 Dick. L. Rev. 125 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 sale or services is usually directed at the entire world and that the possibility of interaction with the consumer makes it a specific invitation or specific advertising in the sense of Article 5(2) of the 3 Rome Convention. ' These writers conclude that a supplier offering products or services on the Internet must respect all consumer protection legislation of countries in which a potential user 31may reside. "He who is active on the Internet must know the risks." This is a clear but not very convincing conclusion. Must the trader or supplier in the European Union really respect the legislation of fifteen states? Even though this result may be favorable to consumers, it has some weak points. Article 5(2) seems to require a specific target group of consumers in a certain country and not simply an offer directed erga omnes on the Internet or in a globally circulated magazine. This opinion also disregards the fact that modern consumers may actively "surf the net" to find interesting offers. They may even use search engines or other devices for finding the optimal bargain. It is difficult to say that in these cases the consumer can be regarded as "passive" in the sense of Article 5. A more traditional approach to defining the applicable law in cases of electronic contracting can be found in a paper by Marc Fallon: In the case of Internet use, two possibilities can arise. Either the user locates a site offering a database to consult or goods to acquire during a search; if he then identifies himself to the person in charge of the site, he probably becomes an "active" consumer. On the other hand, if the user discovers a product or service when opening his electronic mailbox and responds to this information, he probably becomes a "passive" consumer, provided that the act necessary to conclude the contract in the country of his residence takes place. This last condition does not appear difficult to fulfill. The only possible identification of the site of this act seems to be through the IP address of the user. It is true that this will not necessarily be transparent for the seller. 32

30. See Peter Mankowski, Das Internet im Internationalen Vertrags-und Deliktsrecht, 63 RABELS ZEITSCHRIFT FOR AUSLANDISCHES UND INTER- NATIONALES PRIVATRECHT 206 (1999); Andreas Heldrich, in PALANDT, BORGERLICHES GESETZBUCH, EGBGB art. 29 margin no. 5 (60th ed., 2001); M. Lehmann, Electronic Commerce and Consumer Protection in Europe, 17 COMPUTER & HIGH TECH L.J. 101 (2000). 31. Mankowski, supra note 30, at 230. 32. Marc Fallon, La protection internationale de l'acheteur sur l'interrdseau

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This opinion is more closely relates to the idea of Article 5 of the Rome Convention,33 but again contains practical difficulties. Neither the trader nor the consumer may know whether the other is active or passive. The applicable law, especially with regard to consumer protection rules of the country of residence of the consumer, is not clear at the moment the contract is concluded. A certain degree of legal insecurity remains. The underlying problem is that the distinction between active and passive consumers, which is embodied in Article 5(1) of the Rome Convention, "does not really make any sense in the context of a system which may enable the website to be accessed from most parts of the world."34 Article 5(2), second indent, of the Rome Convention contains another alternative to guarantee the consumer the protection of the law of his or her country of residence. This will be the case if the other party (namely the trader) or his agent received the consumer's order in the consumer's home country. This rule is particularly important for the current practice of booking a package holiday tour. This booking takes place in a travel office, which usually will be the agent of the tour operator who may have its business seat outside the consumer's country of residence. Under the second indent of Article 5(2), the mandatory rules of consumer protection cannot be waived, especially the consumer protection in case of insolvency of the tour operator, per Directive 90/314 Article 735 Tour operators may be tempted, however, to offer package holidays via the Internet, thus avoiding the services of a travel agent. The consumer may profit by enjoying increased freedom of choice and by avoiding commissions for the travel agent. On the other hand, the consumer loses the protection offered by Article 5(2), second indent of the Rome Convention. The applicable law, especially in cases of insolvency protection, will be determined by

dans le contexte communautaire, in LA PROTECTION DES CONSOMMATEURS- ACHETEURS A DISTANCE 241, 270 (B. Stauder ed., 1999). 33. Kurt Siehr, Telemarketing und Internationales Recht des Verbraucherschutzes, in 1999 JAHRBUCH DES SCHWEIZER KONSUMENTENRECHTS 169. 34. 2 DICEY & MORRIS, supra note 26, at margin no. 33-011. An illustration of the mechanisms of Rome Convention art. 5 in a hypothetical case is provided by Stephanie Francq, Conflict of Laws, Comparative Law and Civil Law: The Impact of EC Legislation for a Service ProviderEstablished in the United States, 60 LA. L. REV. 1071, 1074 (2000). 35. Cf. Case C-140/97, Walter Rechberger v. Rep. of Austria, 1999 I E.C.R. 3499 (where the European Court extends art. 7 also to tours won by participating in promotion offers by newspapers).

HeinOnline -- 106 Dick. L. Rev. 127 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 choice of law clauses or by objective criteria. The dilemma in distinguishing between the active and passive consumer is repeated. The problem is reduced if the tour operator has its business seat in the EU or the law of an EC country is chosen. The minimum protection rule under Directive 90/314 is then applicable. If the law of a non-member country is applicable, this will not be the case, and the consumer may get a "better bargain" but possibly without mandatory protection in case of insolvency. The opportunity to opt out of protective standards set by the EC seems problematic in view of the mandatory character of the directive. In the future, the problems of Article 5 of the Rome Convention may be reduced when the Convention is amended or even trans-formed into Community law, as was the case with the Brussels Convention on jurisdiction. If such amendments occur, reform of Article 5 and other provisions seems desirable. A group of distinguished scholars has recently recommended that Article 5 should be revised in a fashion similar to its counterpart in the area of jurisdiction, so that it would basically apply to all contracts between consumers and professional suppliers that are concluded across borders, and the distinction between active and passive consumers would fall away.36

VI. Specific EC Directives

A. Directive on Distance Selling

The directive on solvency protection in mass tourism is only one example for specific EC regulatory activities that run parallel to conflict of laws rules. For many forms of electronic commerce, the main piece of legislation in this field is the Distance Selling Directive 97/7, since contracting through the World Wide Web or through e-mail falls under its scope.37 It contains consumer protection rules such as rules on the proper identification of the supplier. If prepayment by a credit card is demanded, the business address of the supplier must be presented. In the case of sales, the consumer also has a right of withdrawal within seven working days after delivery. In the case of services, the consumer has a right of

36. European Group for International Private Law, Proposalsfor a Revision of the European Convention on Contractual Obligations, 2001 PRAXIS DES INTERNATIONALEN PRIVAT-UND VERFAHRENSRECHTS 64. 37. Norbert Reich, Die neue RiLi 97/7/EG uber den Verbraucherschutz beim Fernabsatz, 1997 EUROPAISCHE ZEITSCHRIFT FOR WIRTSCHAFTSRECHT 581; J. DICKIE, INTERNET AND ELECTRONIC COMMERCE LAW IN THE EU 91-100 (1999).

HeinOnline -- 106 Dick. L. Rev. 128 2001-2002 2001] CONSUMER PROTECTION IN THE GLOBAL VILLAGE 129 withdrawal within seven days after the conclusion of the contract and distribution of information about withdrawal rights. This information may be presented electronically. The implementation of Directive 97/7 into member state law might increase the consumer's freedom of decision vis-a-vis electronic commerce, even though this freedom is weakened by numerous exceptions (regarding financial services, sale excursions, certain recreation services and contracts concluded at an auction).38 Since many transactions in electronic commerce involve prepayment by the consumer via credit card, several provisions of Directive 97/7 lose much of their practical importance. This is particularly true in case of a withdrawal by the consumer. Unlike Section 75 of the British Consumer Credit Act of 1974, there are no protective rules on the effects of a withdrawal on the consumer's relation to the credit card issuer. 9 There are provisions, as in Article 11(2) of the Consumer Credit Directive 87/102/EC,4 ° regarding the effects of the sales contract on the credit card contract.41 Under the Directive on Distance Selling, the consumer is explicitly protected against falsifications and fraud, but not against losing the right of withdrawal through prepayment by credit card. A new section 676(h) of the German Civil Code implements the Distance Selling Directive and protects the consumer against any abuse of the credit card transaction by third persons. In our opinion, this includes cases where the seller presents the card number for payment to the card issuer, but where in reality it has no right to do so (e.g., because of effective withdrawal or any other defenses of the consumer against the validity of the transaction or against the claim for payment). Thus, the German legislature has created a limited "charge back system" in favor of credit card holders.42 Directive 97/7 on Distance Selling also contains rules limiting choice of law clauses vis-A-vis non-EU countries, but its scope of application is very limited in this field. In the absence of a choice of law clause, the law of the trader's non-EU country of residence will

38. This exception is already subject to heated debate in Germany as far as Internet auctions are concerned, see REICH & NORDHAUSEN, supra note 4, at no. 66, 131. 39. See GERAINT HOWELLS & S. WEATHERILL, CONSUMER PROTECrION LAW 265 (1995). 40. 1987 O.J. (L 42) 48. 41. GERAINT HOWELLS & T. WILHELMSSON, EC CONSUMER LAW 208-210 (1997). 42. REICH & NORDHAUSEN, supra note 4, at 94.

HeinOnline -- 106 Dick. L. Rev. 129 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 usually be applicable according to the principle of the "closest connection" contained in the Rome Convention. In this case, the consumer may lose the protection offered by Directive 97/7, unless the above-mentioned rules of Article 5 of the Rome Convention apply.

B. Proposalon FinancialServices

The proposal for an EC directive on distance marketing of financial services would have supplemented Directive 97/7, but differed with regard to information obligations and right of withdrawal. The challenge in this proposal is to simultaneously allow for certain specifics of the trade in financial services while guarding the consumer's freedom of decision. The amended proposal of July 23, 19994" puts the information and withdrawal rights of the consumer in distance contracts for financial services somewhat in line with Directive 97/7. However, the Council has not yet adopted a Common Position. It is uncertain whether the proposed directive will ever become law in the EU. In contrast to the Directive on Distance Selling, the proposed directive on financial services would guarantee the consumer the EU standard of protection, even in cases where the law of a third country is applicable, as long as the transaction has an adequate connection with the EU. Thus, this proposal goes beyond Article 5 of the Rome Convention and similar clauses in other EC directives. As discussed later, the proposal could be a sound basis for increasing and harmonizing the protection of the European consumer in cross-border electronic commerce.

C. The EC Directive on Electronic Commerce

1. Electronic Contracting. The EC member states must implement the Directive 2000/31 on Electronic Commerce ' by January 17, 2002. As to electronic contracting, the Directive aims to remove requirements regarding written form of contracts by supplementing them with an electronic equivalence. Article 9(1) contains the basic rule: Member States shall ensure that their legal systems allow contracts to be concluded by electronic means. Member States shall in particular ensure that the legal requirements applicable to the contractual process neither create obstacles for the use of

43. Proposed Directive on Financial Services, supra note 9. 44. Directive on Electronic Commerce, supra note 10.

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electronic contracts nor result in such contracts being deprived of legal effectiveness and validity on account of their having been made electronically. There are many exceptions to this rule. It does not alter existing Community legislation on form requirements for certain consumer contracts, such as consumer credit according to Directive 87/102'5 and life insurance contracts according to Directive 92/96.46 However, it is not clear whether the exception also includes the minimum harmonization provision of these directives. Member states may exclude contracts that create or transfer rights in real estate (except for rental rights), contracts of suretyship and on collateral securities furnished by persons acting for purposes outside their trade, business, or profession. Furthermore, the rule cited above applies only to "contracts," which seems to imply the exclusion of negotiable instruments and rights created by company or securities law even if, as under German law, applicable member state law applies a contract theory for the creation of these rights. In the future, the European Court of Justice will have to interpret the concept of "contract" in this context. With regard to the conclusion of a contract via electronic commerce, Article 11 of the Directive on Electronic Commerce contains the following language on "placement of the order:" (1) Member States shall ensure, except when otherwise agreed by parties who are not consumers, that in cases where a recipient of a service places his order through technological means, the following principles apply:

- The service provider has to acknowledge the receipt of the recipient's order without undue delay and by electronic means.

- The order and the acknowledgement of receipt are deemed to be received when the parties to whom they are addressed are able to access them.

(2) Member States shall ensure that, except when otherwise agreed by parties who are not consumers, the service provider makes available to the recipient of the service appropriate, effective and accessible technical means

45. Consumer Credit Directive, supra note 40. 46. 1992 O.J. (L 360) 1.

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allowing him to identify and correct input errors, prior to the placing of the order. Member states must determine the legal effects of the different steps in the placement of the order. As shown above, the conclusion of the contract in cross-border cases will be governed by the law that would be applied to the contract if it were valid. The applicable law usually depends on choice of law clauses or the objective criteria of the Rome Convention leading to the law of the supplier's business seat. Since an ordinary consumer will rarely understand this complicated legal analysis, doubts may arise as to exactly when the contract is concluded. Such doubts would be reduced if the directive contained its own substantive rules on the conclusion of contracts. Even though the Community's compet-ence may be limited in the field of private law, it certainly has the competence to regulate contract law if such regulation aims at removing obstacles to the free movement of goods and services.47 2. Country of Origin Principle. Because of the lack of substantive contract law rules, the impact of the Directive on Electronic Commerce may remain limited in that field. The situation is much different in the field of non-contractual obligations and administrative regulation. In this field, the Directive tries to establish a so-called "country of origin" principle-a principle already applied to cross-border television and financial services. 48 The practical application of this principle is less than clear because of a number of alterations and exceptions. For example, the important fields of data protection and intellectual property rights are excluded from the country of origin principle and remain governed by their own rules. The so-called country of origin principle is described in Article 3 of the Directive on Electronic Commerce: (1) Each Member State shall ensure that the information society services provided by a service provider established on its territory comply with the national provisions applicable in the Member State in question which fall within the coordinated field.

47.. JUrgen Basedow, A Common Contract Law for the Common Market, 1996 COMMON MKT. L. REV. 1169. 48. See NORBERT REICH, BORGERRECHTE IN DER EU 263-267 (1999); P.J.G. KAPTEYN ET AL., INTRODUCTION TO THE LAW OF THE EC 579-581 (3rd ed., 1999).

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(2) Member States may not, for reasons falling within the coordinated field, restrict the freedom to provide information society services from another Member State. The "coordinated field" is defined in Article 2(h)(i) broadly as all "requirements regarding the quality or content of the service including those applicable to advertising." This means that claims against businesses located in the EU that are based on certain Internet contents or Internet advertising practices can succeed only if they go no further than the law in the home member state of that business. For example, unfair advertising on the Internet in German language aimed at German consumers would give rise to a cause of action before German courts only if the law of the defendant's home member state so provides. Although the Directive claims not to affect private international law rules, it does exactly that. Its implementation will lead to a substantial change in results compared to the conflict of laws rules as they are traditionally used in German law. These provide that, in general, the law of the affected marketplace will govern any tort claim or other non-contractual claims based on unfair marketing practices. However, it is not completely precise to speak of a "country of origin" principle in the Directive in the sense that all claims brought in the receiving state would now be adjudicated according to the originating EU country's law.49 The existing conflict rules remain formally untouched by the Directive, but their results must comply with the Directive. This means that a restriction on commercial Internet contents can only be ordered by the courts of the receiving country if such a restriction would also apply under the originating country's law. On the other hand, if the receiving country's law allows the content in question, this result of the receiving country's law would be unaffected by the rules in the Directive. Therefore, a more precise description of the Directive's operation would be a "most-favorable-law" principle rather than "country of origin" principle.' This is also the approach followed by the German government in its recently presented draft of legislation that is

49. But see Nina Dethloff, Europaisches Kollisionsrecht des unlauteren Wettbewerbs, 2000 JURISTENZEITUNG 179, 180 (claiming that the Directive on Electronic Commerce establishes a true country of origin principle in this sense). 50. For this distinction regarding EC Treaty law, see Juirgen Basedow, Der kollisionsrechtliche Gehalt der Produktfreiheiten im europidischen Binnenmarkt: favor offerentis, 59 RABELS ZEITSCHRIFr FUR AUSLANDISCHES UND INTER- NATIONALES PRIVATRECHT 1 (1995).

HeinOnline -- 106 Dick. L. Rev. 133 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 intended to implement the Directive on Electronic Commerce." It remains to be seen how the courts and other member states' legislatures will cope with the consequences of the Directive before January of 2002. The wording of the Directive suggests one solution. According to Article 3(4), even if laws in the receiving state are stricter than those in the state of origin, national consumer protection rules may be applied insofar as they are justified by the public interest. The application of stricter national rules on a case-by-case basis can be justified by reliance on the standards of rationality and proportion- ality that have been developed by the European Court of Justice over the last decades with regard to national limitations on the free movement of goods and services inside the EU.52

VII. The European Court of Justice's Solution: European Union Law as the Mandatory Law of the Forum The main problem of cross-border electronic contracting seems to be that the consumer residing in the European Union cannot be sure that EC consumer protections will apply in all cases. Abrogation of EC protections may be accomplished by the use of choice of law clauses referring to non-EU countries as seen in several recent Directives. This minimum standard of consumer protection will not be applied where the governing law is determined by the objective criteria of Article 4 of the Rome Convention. Article 11(3) of the proposed directive on distance marketing of financial services offers an interesting rule in this context: Consumers may not be deprived of the protection granted by this Directive when the law governing the contract is that of a country that does not belong to the European Community, when the consumer is resident on the territory of a Member

51. ENTWURF EINES GESETZES OBER RECHTLICHE RAHMENBEDINGUNGEN FUR DEN ELEKTRONISCHEN GESCHAFTSVERKEHR, February 15, 2001, at http://www. bmwi.de. 52. For a more detailed analysis of the implications of the Directive on Electronic Commerce in the field of tort law see Axel Halfmeier, Vom CassislikOr zur E-Commerce-Richtlinie: Auf dem Weg zu einem europaischen Mediendeliktsrecht, 2001 ZEITSCHRIFr FOR EUROPAISCHES PRIVATRECHT (forthcoming). Cf. M. Lehmann, supra note 30, at 114 (describing Art. 3(4) of the Directiveon Electronic Commerce as an "emergency brake" regarding the effects of the country of origin principle). 53. Directive 93/13 on Unfair Terms, Directive 97/7 on Distance Selling, and Directive 1999/44 on Consumer Sales.

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State of the European Community and when the contract has a close link with the Community. The cases that are referred to will be those where the trader has his business seat outside the EU and where the marketing activity is directed towards consumers residing in the EU. This rule could be extended to cover all cases of electronic contracting between consumers and professional suppliers. Such a general extension would guarantee that the consumer residing in, and being solicited in, the EU would expect that the minimum protection rules of EC law will apply to his or her transactions, whatever law is mentioned in the small print and wherever the trader has his business seat. This principle would also avoid distortions of trade that may be possible if traders were allowed to opt out of mandatory community law either by imposing choice of law clauses or by taking their business seat outside the EC. During the discussion on drafts of the Directive on Electronic Commerce, the following general rule was proposed: The consumer contracting electronically may not be deprived of the protection granted by EC directives, when the law governing the contract is that of a country that does not belong to the European Community, when the consumer is resident on the territory of a Member State of the European Community and when the contract has a close link with the Community.- The Community legislature did not follow this suggestion. German law, by implementing Directive 97/7, has created a new EGBGB Article 29(a) supplementing existing conflict rules: (1) If a contract is not governed by the law of a Member State of the EU... because of choice of law clauses but has a close connection to one of the Member States, the provisions on implementing EC consumer protection directives have to be applied notwithstanding.

(2) A close connection is deemed to exist, if

- the contract is concluded upon a public offer, advertising or similar business activity taking place in a Member State of the EU.... and

54. See Norbert Reich, Der Vorschlag der EG-Kommission fir eine Richtlinie iiber bestimmte rechtliche Aspekte des elektronischen Geschaftsverkehrs, in EUROPAISCHE RECHTSANGLEICHUNG UND NATIONALE PRIVATRECHTE 79, 101 (H. Schulte-No1ke & R. Schclze eds. 1999).

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- to the the other party [the consumer] had its habitual residence in a Member State of the EU while making his declaration leading contract. This new provision relates only to choice of law clauses, not to the applicability of a third country law by objective criteria. In all cases, however, the mandatory rules provision in Article 7(2) of the Rome Convention can be applied. Article 7(2) reads: Nothing in this convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract. Scholars of private international law are usually quite hostile to this rule, which looks like a relic of legal imperialism. Therefore, a restrictive criterion is used to avoid the application of "mandatory rules of the forum," in particular, the necessity of a "close connection." The restriction to rules with special public policy aims goes beyond the general idea of consumer protection or the exclusivity of the consumer protection rules under Article 5 of the Rome Convention." On the other hand, such a narrow reading of Article 7(2) of the Rome Convention is justified if, and only if, Community law, with its insistence on creating uniform conditions of consumer protection in the internal market, does not determine the basic rules for electronic contracting. It makes sense that the European Court of Justice has now supported a wider reading of the concept of mandatory rules of the forum. In the Ingmar case, the European Court ruled that certain claims of a commercial agent based on EC Directive 86/653 must be applied in favor of a British commercial agent who represented a principal from California. The Court ordered the application of Directive 86/653 notwithstanding the fact that California law governed the agency contract by virtue of a valid choice of law clause. The Court argued that Directive 86/653 aims at uniform conditions of competition in the European Community and that it was therefore important that the parties could not circumvent its provisions through a simple choice of law clause.56 While the Court does relate this judgment to the conflict of

55. This approach had been taken by the German Federal Court in its decision of March 19, 1997, supra note 27; cf. Ulrich Magnus, in STAUDINGER, BORGERLICHES GESETZBUCH, EGBGB art. 34, margin no. 36-38 (12th ed., 1998). 56. Case C-381/98, Ingmar GB Ltd. v. Eaton Leonard Technologies Inc., [2001] 1 C.M.L.R. 9 (English version); German version in 2001 EUROPAISCHE ZEITSCHRI-r FUR WIRTSCHAFrSRECHT 50 with comment by Norbert Reich.

HeinOnline -- 106 Dick. L. Rev. 136 2001-2002 2001] CONSUMER PROTECTION IN THE GLOBAL VILLAGE 137 laws rules of the Rome Convention, European Advocate General Lger explicitly points to the French concept of lois de police. This concept is always applicable regardless of the law governing the contract and is considered a "mandatory rule of the forum" in the sense Article 7(2) of the Rome Convention.57 The importance of the Ingmar decision lies in the sweeping argument used by the Court to qualify the Directive on Commercial Agents 86/653 as a European loi de police. This directive, among others; aims at creating uniform conditions of competition throughout the European Union. The specific directives on consumer law follow the same goal-they try to set a minimum standard in their respective field in order to create a level playing field for competition in the European Union's internal market. It follows from Ingmar that the specific EC directives on consumer law set the minimum standard for transactions with consumers residing in the EU, regardless of the applicable law determined according to the Rome Convention." The applicable law must still be consulted for any problem that goes beyond this minimum European standard. This solution has the advantage that it is not always necessary to go through complicated conflict of laws mechanisms in order to find the applicable minimum rules for consumer transactions in electronic commerce. The EU consumer can rely on a uniform, minimum level of protection. Suppliers who are active in the EU can use these minimum rules as a guideline for their activities directed towards EU consumers. 9 They are contained in easily accessible EC Directives; no research into national laws is necessary to identify the minimum standard. Since all suppliers must conform to these standards, distortions of competition in the EU market would be reduced. Such a concept could strike a fair balance between freedom of trade and adequate consumer protection by uniform EU law that is not based on national idiosyncrasies.

57. Id., margin no. A88. 58. Cf. Ludovic Bernardeau, Droit Communautaire et Lois de Police, 2001 EUROPE, janvier 2001, 1 at 5. This has already been argued before Ingmar for the Unfair Terms Directive, see 2 DICEY & MORRIS, supra note 26. 59. Cf. Maureen A. O'Rourke, Progressing Towards a Uniform Commercial Code for Electronic Commerce or Racing Towards Nonuniformity? 14 BERKELEY TECH L.J. 635, 656 (arguing in favor of an international clarification regarding mandatory rules in electronic commerce).

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Dr. Ricardo Sandoval L6pez*

1. Introduction At its most basic, a document is a writing that uses a signature as support for its contents. In the early days of commerce, documents served the simple function of proving the existence and scope of a contract. Over time, the formality of documenting commercial transactions became so pronounced, that many transactions and contracts would not be recognized in the absence of proper documentation. Eventually, the use of documentation in commercial transactions evolved to the level where the documents themselves were used as means of both establishing and transferring rights, as is the case with credit instruments. The documents that served these various functions have, until now, taken only a tangible form, such as a papyrus, a parchment or a piece of paper. However, as we move from the 20th to the 21st century, the advancement of technology has brought on a fundamental change in the way we do business. The traditional reliance on tangible documentation is quickly being replaced by a system where contracts are documented electronically and transmitted to the contracting parties instantaneously.' This new way of doing business has created a need to establish an international instrument that can facilitate this electronic data

* Professor of Commercial Law, Universidad de Concepci6n, Chile. 1. The law draft on electronic documents was handed to the Commission on Constitutional, Legislative, Justice and Regulations of the Senate of the Republic of Chile by the Honorable Senators Edgardo Boeninger, Juan Hamilton, Hern~n Larrafn, Sergio Romero and Jos6 Antonio Viera-Gallo, and is still pending, having neither been discussed nor approved.

HeinOnline -- 106 Dick. L. Rev. 139 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 interchange. With this goal in mind, the United Nations Commission on International Trade Law (UNCITRAL), established a working group on International Payments to frame a model law on this subject. The end result was the creation of the UNCITRAL Model Law of Electronic Commerce ("Model Law"), which was approved by UNCITRAL in 1996. The Model Law, once it is adopted by the various nations of the world, will ensure uniform rules regulating the electronic exchange of information. As Chile is a country with an open economy, where international commerce plays a valuable role, a great part of which is carried on by electronic means, it became necessary to have a juridical text, internationally harmonized, to regulate this area. To further this goal, Chile is considering adopting a law on electronic commerce, largely drawn from the Model Law. The object of this article is to consider the antecedents of Chile's draft, its principles and objectives, and its contents.

II. Antecedents of the Draft The major sources of inspiration for the Chilean draft were the Model Law, the Guidelines of the European Union about electronic signature of May 13, 1998, and recent legislation on this matter by Italy, Germany and Argentina. In many areas, the Chilean draft resembles the Model Law. Drawn from the Model Law and incorporated into the Chilean draft, were the general rules regarding recognition and acceptance of electronic documents. The Chilean draft deviated from the Model Law in the area of the electronic signature, with these provisions being drawn largely from the Guidelines of the European Union.

III. Principles and Objectives of the Draft One of the fundamental principles of the Chilean draft is that there shall be no discrimination among the diverse technologies that may be employed for the creation of the electronic document and the electronic signature. This principle is reflected in the fact that the Chilean legislation on this matter does not favor the use of any particular technology, rather, it permits the use of any of them. Thanks to this principle, once the draft is approved as national law, its dispositions will continue to be applicable, notwithstanding the changes that may appear in the technological field. The other major guiding principle of the draft is one of equating the electronic document and the electronic signature with its equivalent on paper and the holographic signature. This

HeinOnline -- 106 Dick. L. Rev. 140 2001-2002 2001] THE CHILEAN DRAFT OF ELECTRONIC DOCUMENTS 141 comparison pertains to the juridical regime applicable to both, as well as to the effects or juridical consequences that they produce. Based on these principles, the Chilean law grants juridical effect to any act, contract, transaction or operation, whether arising between private parties or out of the public sector, that is memorialized by means of an electronic document, save the cases particularly excepted by law. Recognition of particular exceptions reflects the intent of the authors that the draft be enacted with minimum change to the existing legal order. This criterion is justified only by the need to obtain draft approval, because once it becomes law, it will be necessary to implement all other pertinent reforms, so as to facilitate its incorporation into the existing legal system. The primary objective of this legal initiative is to establish a limited legal system creating the fundamental rules regarding electronic documents and electronic signatures. Thus, the draft serves as somewhat of a framework, spelling out only the most general rules, while leaving the more specific and detailed matters to by-laws that are to be enacted in the future. This reflects the difficulty of arriving at a consensus regarding the recognition and regulation of this new area of law and the need to provide flexibility in this area of law that is still evolving. IV. Contents of the Draft As far as the scope of the matters included in the legal initiative, we regret to say that it is extremely limited. The areas with which this draft is concerned, is limited to: 1. the concept of the electronic document; 2. establishing the electronic document and the electronic signature as the legal equivalent of a document on material paper and a holographic signature; 3. the legal recognition of many acts and contracts that are memorialized by means of electronic documents, save those which expressly require documents on paper format or the personal appearance of some of the parties.2

2. In this sense it is more complete than the Supreme Decree No. 81 of June 10, 1999, of the Ministry Secretary of Government, published in the diario oficial of 26 June, 1999, that regulates the use of Digital Signature and Electronic Documents in the Administration of the State, which defines, in Title I, the concept of electronic document, electronic signature, digital signature, private key, public key, integrity and certificate of digital signature. Title II deals in particular with the use of these documents, the subscription of the same by means of a digital signature and their treatment as the equivalent a document on paper supported by

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It seems to us that the Chilean legislature should adopt a more ambitious draft, one that includes a clear definition of data message, whether this substitutes or compliments the definition given for an electronic document. Likewise, we also believe it is necessary to include within the draft a definition of an original, and duplicate, electronic document. Further, the drafters should establish some rules about the preservation of electronic documents. We also believe that now is the best time to legislate on critical matters, such as the time and place -in which an electronic contract is consummated. It is not enough that the draft limits itself to simply acknowledging the general validity of such a contract. Obviously, the parties that agree on a contract by electronic means are not present in the same place. Because the time and place of contracting has many important consequences, such as the substantive legislation applicable (which may be of one or another country) it becomes necessary to have clear rules about the moment and place in which such a contract is consummated. It is possible to go even further with the legal initiative without transforming it in an extensive and complex text. The drafters could easily establish certain fundamental rules about electronic business in certain specific areas, particularly in the field of documents relating to land, maritime, and air transportation, such as the bill of lading, that fulfill the juridical function of mobilizing the goods represented by them. Establishing rules regulating these areas is necessary given that the use of paper documents in such transactions is quickly being replaced by the use of electronic documents, according to the free will of the parties, without an objective juridical norm to regulate them. It is evident that if the draft recognizes the validity of the electronic document as a proper means of memorialing all kinds of acts and contracts, and correlates the electronic document to that on paper, it should naturally follow that it is possible to issuance and circulate, by electronic means, credit instruments that support these acts and contracts. Given the economic importance and the frequent use of credit instruments in such transactions, the draft should consider the essential rules about the electronic issuance and circulation of these electronic credit documents. Despite its shortcomings, we recognize that the Chilean draft will fill a legal vacuum in our juridical system, which has no special a holographic signature. Title III deals exclusively with the digital signature, describing the form in which it is generated by means of a cryptographic system that is composed of a pair of correlative keys, one private and other public.

HeinOnline -- 106 Dick. L. Rev. 142 2001-2002 2001] THE CHILEAN DRAFT OF ELECTRONIC DOCUMENTS 143 rules regarding electronic commerce. It is also important to recognize that the model law will later be complemented by more specific norms on electronic commerce, as has been the case in Mexico, Peru and other Latin American countries that have already adopted legislation on this matter.

V. Conclusion The Chilean Parliament is faced with the alternative of approving the law that we have analyzed, with its limited objectives, and later complementing it with rules and regulations issued by the President of the Republic using his constitutional authority, or establishing more comprehensive legislation. The latter option would involve either adopting in full the Model Law or selectively incorporating those provisions of the Model Law that deal with areas which the Chilean draft does not address. Given these options, the Chilean Parliament should adopt the Model Law in full. Adoption of the Model Law will not only give Chile comprehensive rules regulating this new area of commerce, but, as it is incorporated to the international law of other countries it will attain a second objective, furthering the uniformity of law in this area. The existence of a uniform regulation on electronic commerce will facilitate international business by removing the obstacles arising out of the diversity of juridical regimes applicable in different countries.

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David E. Allan*

The Promised Land "Cheaper, Faster, Easier, Simpler, Safer"

These are the criteria for a new, effective, national security system over personal property in Australia. Bankers and their legal counsel articulated these criteria at the 1999 Conference of the Australia-New Zealand Banking Law Association. The promised land, where it exists, is a new security law. It is based on, but does not necessarily follow, Article 9 of the United States Uniform Commercial Code ("U.C.C.") in all respects. Several countries, including Canada and New Zealand, have followed Article 9. In Australia and New Zealand it has indeed been a long, long trail a-winding. There have been many difficult mountain ranges, and sometimes direct opposition, to surmount. Each time a mountain range has been crested, we have expected to see the promised land on the other side. However, all too often it has been just another range of mountains. The Australia-New Zealand Banking Law Association Conference in June 2000 revealed the most recent mountain range. I wrote Part 1 of this paper in the days preceding that Conference. This paper discusses the path we have followed and the ranges we have crested. I wrote Part 2 on June 12, 2000, just after we crested the range revealed at the Conference.

* Professor, Bond University School of Law. This article is based in part on a paper presented at the Australian National University in 1998. Prospect Media P/L (St. Leonards 1999) published the papers from that seminar under the title "Perspectives on Commercial Law." Also, the author wishes to thank the Prospect Press for their permission to include extracts from the paper in the present article. A further version of this paper is published in 11 BOND L. REv. 178-191 (1999).

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What did we see?

I. Part 1 As Banking and Finance lawyers, we are compelled in our professional role to take a materialistic view of society. Often, we measure the wealth of any person, natural or juristic, in terms of property or assets. For many centuries, assets were limited to land because of its permanence and its role in the economic and political system. Land, to lawyers, meant real property. Historically, other types of assets were classified as personal property with dubious value. For example, one cow or one cart is very much like any other cow or cart. Thus, personal property held little value because it was easily replaceable and transient. However, personal goods with some permanence were sometimes recognized as valuable. Accordingly, gold was highly valuable since it did not rust and its supply was limited. As such, gold was recognized as an asset. But, itinerant merchants did not like to carry gold, so it became their custom to carry messages or promises written on papyrus or parchment promising to pay in gold. Hence, negotiable instruments were born. However, negotiable instruments remained outside the common law, existing only as a feature of the customary law of merchants. For centuries, gold remained the medium of satisfaction of those merchant promises. Today, however, gold has lost its role as a stable commodity. By the end of the nineteenth century, personal property assets included not only gold, cattle and carts, but also heavy machinery and inventory. Following on the heels of the industrial revolution, the consumer revolution added motorcars, sewing machines, radios, TVs, washing machines, refrigerators, ships and aircraft to the growing list of personal assets. During the recent and ongoing technological revolution, most wealth is held in the form of intangible assets. Laws directed towards the marshalling of assets for personal or business security must keep pace with these societal changes. Assets represent wealth, which has value as collateral for security. The law can offer a means of making wealth, represented by those assets, available for secured and even unsecured creditors. Sadly, the law has often lagged centuries behind the problem. We started with the mortgage of land. Despite this option, people wanted to use cattle and carts as security. Because of the transience of these assets, the law, in its attempt to protect creditors, allowed creditors to take possession of such assets so that

HeinOnline -- 106 Dick. L. Rev. 146 2001-2002 20011 PERSONAL PROPERTY SECURITY IN AUSTRALIA the owner could not dispose of the collateral. Thus, the pledge or pawn was born. With the growth of commerce and corporate entities during the nineteenth century, companies produced the bill of sale and the charge. The consumer revolution and the ingenuity of lawyers produced a host of new devices based largely on some form of title retention. These new devices included such things as the conditional sale, hire purchase and Romalpa. A body of common law emerged from these concepts. As previously noted, intangibles now represent the bulk of personal assets. Some thirty years ago, I was confronted with the problem of evaluating intangibles for security purposes.! I once advised a business that did much of its trade on credit terms, and hence had a large value of accounts receivable. When I suggested to the business' bank that the accounts receivable could stand as security for loans, I was met with a disgusted snort. The bank considered these "fugitive assets!" The theme of this paper is that we have at last emerged from the limited view of the value of personal property. Today, we are faced with the challenge of bringing the law into line with the contemporary needs of society. Fortunately, models from other common law countries such as the United States, most Canadian Provinces, and most recently New Zealand, can guide our steps.2 For many years, there has been a reluctance to follow North American models because of their seeming irrelevance to laws and financial practices in Australia. Most recently, however, the emergence of New Zealand's model combined with the whispers that reform may become a real issue in England, caused reconsideration in Australia.

A. The Case for Reform

The key word for most reformists today is "Globalisation." This connotes that we now live in one world and that there should be an end to national frontiers, which act as barriers to the free flow

1. "Intangibles" include not only accounts receivable, but also any form of intangible property that has a monetary value. Generally, intangibles include stocks, shares, debentures, negotiable instruments, letter of credit rights, and all forms of intellectual property. 2. The United States uses Article 9 of the Uniform Commercial Code. U.C.C. § 9-101 - § 9-507 (2001). The Canadian provinces of Ontario, Manitoba, Saskatchewan, Alberta, British Columbia, New Brunswick, Nova Scotia, NW Territories, and Yukon Territory have security legislation based on Article 9 of the United States U.C.C. New Zealand has the Personal Property Securities Act 1999.

HeinOnline -- 106 Dick. L. Rev. 147 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 of people, money, goods, ideas, technology and services. The move to the free flow of services must include legal services, despite the difficulties that might arise from the different laws and cultures of other countries. However, the General Agreement on Trade in Services ("GATS") has this under review. For those of us who live and work in Australia, it is not clear whether this dilemma is a matter of laughter or tears. In Australia, we have six state jurisdictions, two territorial jurisdictions and a federal jurisdiction, all of which derive their roots and legal culture from England. Nonetheless, the laws in these territories are distinguishable from one another, particularly in the law of securities over personal property.3 To explain this phenomenon one must ask what4 we mean by the expressions "personal property" and "security., Today in Australia and in England, security remains the security of the sewing machine age.' The accepted forms of security over personal property are still the chattel mortgage or charge, the pledge, and various forms of title reservation. But, there is an additional problem in common law jurisdictions such as Australia, which do not have a numerus clausus-a closed list of securities. The problem is diversity and innovations. Australia does have some legislation that originated in England during the sewing machine age providing for instruments such as bills of sale, hire- purchase and chattel securities. But, there are many local variations to this legislation based on cultural or commercial habits within Australia. The major difficulties go back to the age when cattle were used as security. Cattle and other movables could, and often did, cross borders. Often, problems arose as to the recognition of foreign securities. Complicating the issue further, movable personal property implicates all the problems associated with conflict of

3. See CRAIG WAPPETT & DAVID E. ALLAN, SECURITIES OVER PERSONAL PROPERTY, Chapter 2, (Buttersworth, Syndey 1999). 4. Professor Sir Roy Goode of Oxford University and I crossed swords on this issue some years ago in a Monash University Law Review. See David E. Allan, Security: Some Mysteries, Myths, & Monstrosities, 15 MON. U.L.R. 337 (1989); see also, Roy Goode, Security: A Pragmatic Conceptualist's Response, 15 MON. U.L.R. 361 (1989). 5. In England, the 1989 Diamond Report issued an article titled, A Review of Security Interests in Property (HMSO), which strongly urged the reform of English law on security over personal property. This article called for a law similar to Article 9 of the U.C.C. Despite the rumours, no action has been taken. to implement these laws. See David E. Allan, Personal Property Security - Rip van Winkle Awakes in the Antipodes 13 J.I.B.L. 1 (1989).

HeinOnline -- 106 Dick. L. Rev. 148 2001-2002 2001] PERSONAL PROPERTY SECURITY IN AUSTRALIA laws. These problems are enhanced in today's marketplace of intangible assets. The problems associated with movable assets are most acute in federal jurisdictions such as the United States, Canada, and Australia. For more than forty years, America has had Article 9 of the Uniform Commercial Code. Canadian Provinces, on the other hand, have a choice between the models of the Personal Property Security Acts of Saskatchewan and Ontario. The UK, as a non- federal jurisdiction, has felt no urgency to reform secured transactions law, although its current dalliance with federalism may produce some change. Additionally, New Zealand passed an Act in the closing stages of 1999. If closer economic relations with New Zealand mean anything, given the ease with which all forms of personal property can bridge the Tasman, this should operate as a spur to reform in Australia. The fact that our conflicts of laws provide a rich hunting ground for many practicing lawyers is no justification for its retention.6 Fortunately, this is now recognized by most of the Australian legal community.

B. The Australian Story

The Australian story began in New Zealand in 1964, when Professor Byron Sher of Stanford University and I conducted a study of the problem in that country. Upon my relocation to Tasmania in 1966, I conducted a similar study in Australia.8 The studies culminated in 1971 with a series of reports by state committees during the late 1960's on reform of consumer credit laws. In addition, the studies included a report from the Committee of the Law Council of Australia It seemed that the time was ripe for reform. Thus in 1972, as Dean of the Monash Law School and with the support of the Law Faculty, I convened a national conference in Melbourne to consider national law reform in this area." Unfortunately, the Conference

6. One needs to distinguish the repetitive and lucrative work, which threatens the reform from the creative financing techniques that have been produced to meet quite different needs. The latter are not under challenge. 7. See Byron Sher & David E. Allan, Financing Dealers' Stock-in-Trade, 1 NZULR 371 (1965). 8. See David E. Allan, Stock-in-Trade Financing, 2 U. TAS. L. REV. 383 (1966). 9. See Molomby Committee Report on Fair Consumer Credit Laws, (1972). 10. See DAVID E. ALLAN, CONSUMER CREDIT-THE CHALLENGES OF CHANGE, (CCH Australia Ltd, Sydney) (1972).

HeinOnline -- 106 Dick. L. Rev. 149 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 failed to fulfill our hopes and expectations. It attracted strenuous opposition from the Australian Finance Conference, which then represented non-bank financing institutions, on the grounds that financers were familiar with the existing system. The result was a negotiated compromise that finally emerged in the form of the Chattel Securities legislation. Like all compromises, it satisfied only a few and served only to add further complexity and diversity to this area of Australian law. For the next twenty years, the only pressure for reform came from academics. In 1992, the Australian Law Reform Commission produced a Report and draft bill. The Report, however, was not acceptable to most areas of the banking, finance, and legal sectors because it paid insufficient regard to the practical aspects and problems of financing in Australia. So, the pressure continued at an academic level. In 1995, the Australian Department of the Attorney General sought to revive the 1972 issues and controversies through a Discussion Paper. I convened a national workshop at Bond University in December, 1995 that met for four days to debate the issues. Governments, universities, banks, non-bank financial institutions, traders, consumer interests and the private legal sector were represented. Also present were representatives from overseas, including the United States, Canada, New Zealand and the European Bank for Reconstruction and Development, which had just completed drafting a new security law for the former socialist states of Central and Eastern Europe. The Workshop considered an Issues Paper, which identified eleven issues that we would have to resolve to determine the case for reform and its content. Almost all parties agreed to the issues that are set out in the Report of the Workshop."

C. Summary of the Workshop

There was complete agreement among the participants on the following issues: 0 For a broad range of reasons, reform of personal property security laws in Australia is both desirable and necessary.

11. Professor Tony Duggan, from the University of Toronto, and I prepared the Issues Paper. Professor Ross Buckley of Bond University prepared the Final Report. Neither the Issues Paper nor the Final Report has been published, except to those who attended the Workshop. Only a shortened summary of each appears in this Article.

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* Securities given by non-corporate entities, as a matter of principle, should be included in a new personal property security law. " Consumer transactions should be included in the new law as a matter of principle, provided privacy issues are adequately handled. * The inclusion of land in the new regime would not be feasible at this time. However, once the computerization of land records has been completed, the cross-referencing of land and personal property indices would be desirable. Such a cross-referencing should be for notification purposes only and not affect priorities of the land system. * Future property and all forms of personal property should be included in the new Personal Property Security Law, which should apply to all transactions that create security interests. * A national registration system that is searchable by both name and asset should be instituted based on electronic filing and should be accessible by computers at multiple outlets around the country. * Whoever administers the new regime must do so as a facilitator and not in a regulatory way. * Advanced appropriate search logic is vital. • There is no substantive reason for including a reference to stamp duty on the financing statement. " The registration of agreements is not desirable. * A compensation scheme would add credibility to the new law. " A super-priority purchase money security interest is necessary for commercial efficacy. * The approach to future advances in the ALRC report is appropriate. * In the case of security over inventory, the interest of the buyer who bought property from the seller in the ordinary course of the seller's business should prevail over the interest of a secured creditor, regardless of registration because of the licence to deal given by the creditor. * The date of the transaction should not be included in the financing statement because it generates additional opportunities for error and creates a lacuna in the financing statement when the filing of the statement precedes the transaction.

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The Bond Workshop, as a representative forum, defined the issues and pointed the way to security law reform.

D. So What Happened Next?

Gentle persuasion led to some progress. However, the discussion needed facts, not speculation or emotion, to spur progress. Following the Workshop, there have been some encouraging developments for reform of secured transaction law. In June 1999, the topic was on the agenda for the Annual Conference of the Australia-New Zealand Banking Law Associa- tion. By that time, a Bill had been introduced in the New Zealand Parliament. Also, the Canadian legislation received considerable acclaim and the revised and updated U.C.C. Article 9 had been completed in America. These developments were discussed at the Conference, both in the Conference session itself and at another private meeting attended by representatives from many Australian banks. These discussions revealed that opposition from the banks was based on their experiences implementing the Consumer Credit Code, and problems with the Y2K bug, GST,12 and CLERP 6.13 The parties reached a consensus that they would not oppose an Australian Article 9 if it could be shown that it would be cheaper, faster, simpler, easier, and safer than the present system of security. But, if this could not be demonstrated, then the reform proposal could not proceed. The challenge was too great to ignore! The Law Council of Australia, 4 the Australian Law Reform Commission, the Australian Finance Conference, the Australian Equipment Lessors' Association, and the Australia-New Zealand Banking Law Association agreed to cooperate on reform. They have been assisted, although without commitment to any outcome, by the Business Law Division of the Federal Treasury and by the Australian Bankers Association. All parties agree that reform cannot proceed without total industry support. Therefore, the problem is how to persuade banks, industry, consumer interests and governments that this new proposal will make financing cheaper, faster, simpler, easier, and safer. To meet this challenge, the Banking Law Association established a new committee, which represented the finance

12. The Federal Goods and Services Tax introduced July 1, 2000. 13. The Federal Corporate Economic Reform Program. Chapter 6 is concerned with the Reform of Financial Services. 14. The Law Council is the peak federal body of Australian lawyers.

HeinOnline -- 106 Dick. L. Rev. 152 2001-2002 2001] PERSONAL PROPERTY SECURITY IN AUSTRALIA industry and consumer interests."5 I, as Chairman and Craig Wappett 16 as Vice-Chairman, along with financial assistance from the Banking Law Association, arranged for the drafting of an appropriate Australian version of Article 9. Harry Sigman, one of the draftsmen of the revised Article 9, came to Australia to assist with the drafting. Also, a representative of the Resource Group of lawyers was present to provide continuous advice to the writers on the acceptability of their draft to Australian conditions. A draft Bill was created with the aid of the Resource Group and the Committee. The draft Bill is in Australian format and language, and addresses Australian financing techniques and problems and implements the fundamental and applicable concepts of U.C.C. Article 9 as approved by the Bond Workshop. A Policy Guide, a Question and Answer Marketing Document and a document setting out a number of typical financing transactions accompanied the Bill. Moreover, the Bill contained sample forms and a cost comparison under the existing law and under the proposed law.17 The real public evaluation, aimed particularly at participants with hands-on experience with the various financing arrangements contemplated by the new law, came at the annual conference of the Australian Banking Law Association in June 2000. The project was given three sessions at the Conference. The first session was devoted to the New Zealand Act and its implications for Australia. The second session discussed five concurrent workshop sessions, 8 each looking at the implications of the draft Bill for a specific type of financing. The final session dealt with reports from the other Workshops.

15. The new committee replaced the Business Law Section of the Law Council of Australia, which was headed by Rowan Russell of Mallesons Stephen Jaques. 16. Craig Wappett is a partner at Mallesons Stephen Jaques, which is based in Brisbane, Australia. Craig Wappett has considerable experience with the Canadian system. 17. The Bill was also intended to be sent to the federal Treasury and the Productivity Commission for a comparative cost/benefit analysis with the present situation. However, as a result of the problems with the Corporations Law, which resulted from the recent decision of the Australian High Court in The Queen v. Hughes, 74 A.L.J.R. 802 (2000), the Treasury and the Productivity Commission could not undertake this task at this time. Nevertheless, we are planning to have a comparative cost/benefit analysis done privately. 18. Separate Workshops were set up for New Zealand, Corporate Finance, Consumer Finance, Equipment and Inventory Financing, Accounts Receivable and other Intangibles.

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II. Part 2: The Australia-New Zealand Banking Law Conference of 2000 The Conference was well attended. One hundred and eighty- six delegates, consisting mainly of private sector lawyers, bankers and bank counsel attended. Also in attendance were six students from Bond University Law School, who assisted me and the Chairpersons of the Workshops. In my opening address at the Conference, I made clear the following: 1. That the purpose of the conference was to achieve a consensus on establishing a cheaper, faster, easier, simpler, and safer means to security law; 2. That we were concerned not with drafting but with policy, and thus, more focused on the concepts, systems, and procedures; 3. We acknowledged that the draft was not suitable as a final draft, even if the policies it enshrined were approved, and we intended to redraft the Bill in light of the comments and suggestions made at the conference; 4. We were not committed to an American, Canadian or New Zealand approach, but would produce an acceptable Australian final draft; 5. Our discussions should be practical and not theoretical, and that we looked to the participants for their frank views and experience; 6. If we achieved a consensus on the need for reform and upon our broad approach, then there was still a lot of work to be done. Namely, we had to redraft the Bill, design a filing system, both national and electronic, and resolve the constitutional problems affecting the implementation of the legislation, which resulted from the High Court decision in The Queen v. Hughes.'9 The first Conference dealt with a paper on the New Zealand Act and its implications for trans-Tasman trade and finance.20 The paper acknowledged that the New Zealand Act had some imperfections and that it had not yet been proclaimed. It envisaged an amending Bill, primarily to give effect to the 1998 amendments

19. 74 A.L.J.R. 802 (2000). 20. Mark O'Regan and Matt Yarnell of Chapman Tripp, Wellington, and New Zealand issued the paper. Steve Edwards, the Associate Legal Director of the Australian Finance Conference, gave the Australian commentary.

HeinOnline -- 106 Dick. L. Rev. 154 2001-2002 2001] PERSONAL PROPERTY SECURITY IN AUSTRALIA to the U.S. U.C.C. Article 9. The New Zealand Conference stressed the need for further revision of the New Zealand Act to deal with the problem of intangibles. 21 The five Workshop sessions 22 were held on the afternoon of the first day. The Chairmen were told specifically that their task was to seek a consensus on approval of the reform policy and that they could call on the assistance of a specially established Resource Group to that end.23 The Corporate Finance Workshop, 24 after considering the application of the Bill to several topics such as book debts, Re Chargecard,25 accounts, contracts and priorities, reported that reform was desirable. The Consumer Finance Workshop 26 did report some problems about reconciling the draft Bill with the Consumer Credit Code and with important issues such as privacy. However, assurances were given that these problems would be tackled on the redrafting of the Bill. The Equipment and Inventory Finance Workshop 7 expressed support for the concept, but was hesitant about several particular aspects that they thought should be further considered on the redraft. The Accounts Receivable and Other Intangibles Workshop' also experienced difficulty. Some members of the Workshop concentrated on policy rather than drafting and others were concerned with the New Zealand Act. Specifically, some thought the New Zealand Act, in spite of the absence of the

21. Laurie Mayne of Russell, Mcveagh, Auckland, Chaired the group. Glen Lovell of Bond University Law School assisted. 22. This article only briefly summarizes the Reports of the Workshops. 23. The Resource Group consisted of myself, Craig Wappett, Mark O'Regan, Jacqueline Lipton of Case Western Reserve Law School, Marion Hetherington of the Commonwealth Bank of Australia. Tim Jay of the Bond University Law School assisted the group. 24. Chaired by David Turner of the Commonwealth Bank of Australia and assisted by Debra Anderson of Bond University Law School. 25. See Re Chargecard Services Ltd, 1 Ch. 497 (1989) (holding that a bank could not take a charge over a customer's deposit). However, the House of Lords in Re Bank of Credit & Commerce InternationalSA (No.8), 4 All E.R. 568 (1997), overruled Re Chargecard Services Ltd. The Australian courts have not had an opportunity to reconsider the rule, but the draft of the Australian Bill does reverse it. 26. Chaired by Elizabeth Lanyon of the Banking Law Centre of Monash University assisted by Bill Tomlinson of Bond University Law School. 27. Chaired by Steve Edwards, Associate Director Legal of the Australian Finance Conference assisted by Darren McClafferty of the Bond University Law School. 28. Chaired by Professor Ralph Simmonds, Dean of the Law School at Murdoch University assisted by Fiona Graham of the Bond University Law School.

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"control" concept, conveyed the basic ideas much more clearly and that following Article 9 could cause new problems. At the end of the day, four of the five workshops were in favor of reform. The fifth workshop failed to reach consensus primarily because of disagreements over drafting. The dissenters, however, overemphasised the drafting problems, which the Australian draft still needed to resolve. On the afternoon of the last day, the Workshop Chairpersons reported to the plenary session. It was my task to sum up the work and present conclusions. We made a bad mistake by leaving this task until the final Friday afternoon. 9 Although 186 registrants attended the Conference, there were less than fifty registrants present at the final session. Most likely, those that were absent had family engagements for the weekend that required them to catch afternoon planes. The Chairpersons fully and fairly reported the views of their Workshops, including criticism and dissent, as this plays an important role in guiding our future steps. In summing up the Workshops, I stressed that U.S. and Canadian models of personal property security law had existed for many years. Both the U.S. and Canadian models were good, but they lacked the cogency that proximity provides. The record shows that wherever security systems of this type have been adopted, litigation decreased, paperwork dwindled, while advisory opinions and planning prospered. Personally, I did not think that this was a bad result, but it became clear that not everyone agreed with me. Even though we had a very good New Zealand draft in accordance with long-standing New Zealand standards, there were some faults that we needed to address before completion. I stressed that now we should concentrate on the underlying concepts and systems, rather than any particular draft. I promised a new Australian draft in light of the discussions at the Conference. We would then submit to a comparative cost/benefit analysis with the present law. Next, we would need to design the national electronic filing system to overcome the implementation problems resulting from the Hughes decision. Following the meetings, there were some perfunctory discussions. However, it was clear that among the remaining participants, there was no groundswell of support for reform.

29. This was Queen's Birthday Weekend celebrated over much of Australia.

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III. Conclusion

A. So what do we conclude?

First, the result, or rather lack of result, was a disappointment. Leading up to the Conference there had been a large measure of enthusiasm by the presenters, assistants, and others with whom we discussed our ideas. As I indicated above, we made a bad mistake by seeking an enthusiastic endorsement of our views. Furthermore, we made a mistake by seeking a consensus from the final session of the Conference after three-quarters of the participants had departed. However, many of the presenters and assistants thought that we expected too much when we looked for an enthusiastic endorsement. Generally, three issues destroyed the enthusiasm of the conference. First, the dependence of our proposal on new technology destroyed the enthusiasm because not all of our audience was happy with the electronic world. Second, the amount of baggage that many of the participants already carry such as the Consumer Credit Code, GST and CLERP6 dampened enthusiasm for reform." Third, some viewed the dwindling amount of litigation, paperwork, advising and planning as, sadly, a negative result of reform. Inevitably, we are entering a new world that requires new laws and lawyers who can continue to provide important legal services. We must build upon the generally accepted realization that reform, along the lines proposed, is inevitable.

B. So where do we go now?

We must, at all costs, hold to the consensus that we already have. For some, this is limited to a consensus as to the inevitability of reform. For many others, agreement goes beyond the inevitability of reform to recognition that personal property security is appropriate for the world we are entering. To hold the consensus, we must complete the comparative cost/benefit analysis and confirm that the new laws will be cheaper, faster, easier, simpler, and safer than anything we have presently. At the same time, we should proceed to design and cost the national electronic filing system.3

30. The Federal Goods and Services Tax introduced July 1, 2000. 31. It will be essential to demonstrate that the savings in operational costs will rapidly cover the capital costs of creating and installing the electronic filing system.

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Additionally, we must overcome the difficulties created by recent High Court decisions, which make it necessary to find a new and effective constitutional platform to regulate matters, such as personal property law reform that fall within both federal and state competence. This last difficulty raises the possibility of another workshop at the Bond Law School during 2001. Another workshop would enable the Standing Committee of (federal, state and territory) Attorneys General and the Law Reform Agencies of these jurisdictions to meet together with selected experts in the area of constitutional law. These experts should seek a solution to the most serious problem facing Australia in the field of corporate and commercial law-enabling the federal government to legislate in the field of national as well as international commerce. The pressure for reform must come not only from constitutional lawyers and corporate lawyers, but also from banking and finance lawyers. It must happen NOW!

HeinOnline -- 106 Dick. L. Rev. 158 2001-2002 Receivables Financing and the Conflict of Laws: The UNCITRAL Draft Convention on the Assignment of Receivables in International Trade

Catherine Walsh*

In a country a great part of whose commercial capital is employed abroad, it is particularlyproper that such capital over which the traderhas disposing power although situated out of the Kingdom, should be considered as referable to the domicilium of the owner.'

I. Introduction Private international law solutions to legal problems created by differences among legal systems are often distrusted. Instead of a substantive solution, a choice of law rule merely provides a signpost -and not always a clear one -to the source where the solution may be found. Moreover, a solution incubated in a domestic factual

* Faculty of Law, McGill University, Montreal, Canada; email [email protected]. The author was a member of the Canadian delegation to the Working Group charged with developing the UNCITRAL Draft Convention on the Assignment of Receivables in International Trade which is the focus of this paper. The text of the Draft Convention appears in annex 1 of the Report of the United Nations Commission on International Trade Law on its thirty- fourth session 25 June-13 July 2001, Doc A/56/17. To view or print the report and annex, go to the UNCITRAL web site at www.uncitral.org and follow the links to the 34th Annual Session. The other Canadian representatives to the Working Group were Michel Deschamps, a partner in the Montreal office of McCarthy, Tetrault, and Kathryn Sabo, Senior Counsel in the Public Law Policy Section of the Department of Justice in Ottawa. Although I am indebted to these colleagues for sharing their expertise and experience, the views expressed here do not necessarily reflect theirs, nor do they represent the official position of the government of Canada. I am, of course, solely responsible for all errors and omissions. 1. Philips v. Hunter (1795) 2 G, Blackst., 402, 406, as quoted by MARTIN WOLFF, PRIVATE INTERNATIONAL LAW 510-511 (2d ed. Oxford: Clarendon, 1950).

HeinOnline -- 106 Dick. L. Rev. 159 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 and legal context may not prove appropriate or workable beyond local borders. Distrust of private international law is matched by distrust of the private international lawyer. Although considered a speciality in itself, private international law covers the entire spectrum of private law. As such, it requires the skills of the generalist. Yet a generalist may not be sufficiently attuned to the practical contexts in which a conflicts rule must operate to recognize when a theoretically defensible solution may turn out to be unworkable. On the other hand, to leave the matter exclusively to the substantive law specialist risks undermining carefully cultivated general conflicts norms. In the area of assignment2of receivables, the challenges are particularly fearsome.3 The assignment matrix is a complex one, involving not one but two sets of contractual relations; the original contract between the assignor and debtor which generates the assigned receivable and the contract between the assignor and assignee by which the assignment of that receivable is accomplished. From a choice of law perspective, the original contract and the contract of assignment are sufficiently independent to justify subjecting each to its own proper law. But what of the impact of the assignment on the debtor? Should this be governed by the proper law of the contract of assignment or the original contract? Is a contract-based choice of law approach even appropriate? Consensus, after all, is the essence of contract, and the assignee/

2. In this paper, the term "assignment" is used in the same broad way as in the Draft Convention; it covers both the outright transfer or sale of receivables, and the creation of rights in receivables as security for debt (article 2(a)). At the conflict of laws level, there is no rational reason to distinguish between the two types of transactions. Indeed, such a distinction would make the conflicts regime unworkable. See further the discussion later in the text under the sub-heading "Characterization of assignments as sale or security." 3. On choice of law for assignment, see, in particular Henri Batiffol, Assignment (Cession de cr~ance) in LECTURES ON THE CONFLICT OF LAWS AND INTERNATIONAL CONTRACTS (delivered at the Summer Institute on International and Comparative Law, University of Michigan Law School, August 5-20, 1949) (Buffalo: William S. Hein, 1982); RoY GOODE, COMMERCIAL LAW 1107-1130, especially 1126-1130 (2d ed. London: Sweet & Maxwell, 1995); Mark Moshinksy, The Assignment of Debt in the Conflict of Laws 109 L.Q.R. 591 (1992); Teun H.D. Struycken, The Proprietary Aspects of International Assignments and the Rome Convention, Article 12, L.M.C.L.Q. 345 (1998); MARTIN WOLFF, PRIVATE INTERNATIONAL LAW 502-576 (2d ed. Oxford: Clarendon, 1950); Note, 67 YALE L.J. 402 (1958).

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debtor relationship is typically an involuntary one from the debtor's perspective. The dual juridical nature of the assigned debt adds a further layer of complexity. From the perspective of the debtor/assignor relationship, the debt is purely a personal obligation-the debtor's creditor does not own the debt, the creditor is owed it. But it becomes a species of property when the original creditor assigns the right to payment to another.4 As with any contract involving the divestment of property rights in favour of another, competing third party claimants may enter the picture: the recipient of a competing assignment, attaching creditors of the assignor, or the assignor's insolvency administrator. This makes a contractual approach inappropriate because freedom of contract ends where third party rights begin both in substantive law and in the conflict of laws. Yet solutions drawn from choice of law for property, where the lex situs dominates, are not readily transplanted to a right which lacks a corporeal object, and therefore a physical situs. Early conflicts analysts sought to impose simplicity on this web of complexity through a unitary choice of law rule. Drawing on the medieval continental maxims mobilia sequuntur personam (movables follow the person), and mobilia ossibus inhaerent (movables inhere in the bones), they advocated application of the law of the domicile of the assignor, as the original "owner" of the debt For reasons which will emerge, the assignor's location is enjoying a deserved revitalization as the paramount connecting factor for the choice of law to govern assignments of receivables. But as the exclusive connecting factor for all issues, it insufficiently respects

4. I am using the concept of property (proprietg) here in the comprehensive sense of English and French law. Some legal traditions restrict the equivalent term to rights in land and corporeal and quasi-corporeal movables, finding juris- prudential difficulty in assigning the status of a right in re to a right which has no object independent of the personal relationship of obligation which generates it: see Wolfgang Mincke, Property: Assets or Power? Objects or Relations as the Substrata of Property Rights 78-88 in PROPERTY PROBLEMS: FROM GENES TO PENSION FUNDS (J.W. Harris, ed., Kluwer Law International, 1997). While it is everywhere recognized that the creditor is enriched by another's indebtedness, and that the value of that debt must be to some degree transferrable, conceptual differences in the characterization of an assigned debt have contributed to difficulties in achieving international consensus in the conflict of laws rules applicable to assignment: see, e.g., WOLFF, supra note 3, at 537,539. 5. See WOLFF, supra note 3, at 539-40; see also Moshinsky, supra note 3, at 591 (citing Joseph Story, Commentaries on the Conflict of Laws (1834) in footnote 2). This choice of law approach is reflected in the quote from the 1795 English decision in Phillips v. Hunter, supra note 1, which precedes the text of this article.

HeinOnline -- 106 Dick. L. Rev. 161 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 the debtor's interests and imposes unnecessary restrictions on freedom of contract between the assignor and assignee. Later writers advocated a more pluralistic approach in which the different issues that may arise within the assignment matrix are each assigned the connecting factor for choice of law most appropriate for that issue.6 While a pluralistic approach has attracted wide support, consensus on which issues should be assigned to what law has proved frustratingly elusive. It is no exaggeration to say that the area continues to be the most confused and confusing in the conflict of laws regimes of legal systems everywhere.7 The bifurcated rule in Article 12 of the European Convention on the Law Applicable to Contractual Obligations ("Rome Convention"), initially seemed to promise the beginning of international consensus.8 Paragraph 12(1) refers the mutual obligations of the assignor and assignee to the proper law of the contract between them,9 while paragraph 12(2) refers issues relating to the impact of the assignment on the debtor to the "law governing the receivable."'" However, article 12 has proved to be more a vehicle for disharmony than harmony. There is little agreement not just among, but even within, Rome Convention states on its meaning and scope. The major source of contention is whether article 12 applies to the property effects of assignments and the assignee's priority status against third parties, and, if so, which of its two branches contains the appropriate rule. On its face, article 12 does not explicitly address either issue. However, some regard article

6. In the English conflict of laws, this approach is associated with the late Dr. John Morris circa 1949: see Moshinsky, supra note 3, at 592. 7. See, e.g., Struycken, supra note 3, at 345 ("The assignment of debts belongs to the most hazardous areas of private international law."); see also Moshinsky, supra note 3, at 59 ( "The assignment of intangible things, such as debts, has long been one of the most intractable topics in the English conflict of laws. The writers on the subject are fundamentally divided and the little case law that exists is old, confused and inconclusive."). 8. See generally Giuliano & Lagarde, Report on the Convention on the Law Applicable to ContractualObligations 1980 O.J. (C282) (October 31, 1980). 9. 12(1): "The mutual obligations of assignor and assignee under a voluntary assignment of a right against another person ('the debtor') shall be governed by the law which under this Convention applies to the contract between the assignor and assignee." 10. 12(2): "The law governing the right to which the assignment relates shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any question whether the debtor's obligations have been discharged." 11. See Struycken, supra note 3,at 348-49.

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12(1), insofar as it refers "the mutual obligations of the assignor and assignee" to the proper law of the contract between them, as thereby also determinative of the law applicable to the relative property rights acquired by subsequent third parties claiming through the assignor. 12 Others believe that article 12(2), insofar as it addresses issues of assignability and the assignee's right to payment from the debtor, as also determinative of priority among several assignees.13 Disharmony in choice of law for assignment frustrates both commercial and conflicts values. 4 Conflicts values favouring uniformity of result in transnational litigation are defeated because the applicable law will vary depending on the forum of litigation." And commercial values are undermined because the relevant actors, not being able to predict with certainty where future litigation concerning the assignment may take place, cannot predict which state's choice of law rule will control. Consequently, they must structure the transaction to conform to the substantive laws of all potentially connected jurisdictions, a burden which inevitably restricts access to financing, and increases its cost. In hindsight, it may have been a mistake to bring unification of the conflicts rules for assignment within the scope of the Rome Convention. A project devoted to choice of law for contracts in general was unlikely to deal adequately or appropriately with a species of contract in which the proprietary issues predominate, both legally and from a commercial risk assessment perspective.

12. This interpretation has been endorsed by the highest court in the Netherlands: Brandsma q.q. v. Hansa Chemie AG, HR, May 16, 1997, Rechtspraak van de Week 126, as cited and summarized by Struycken, supra note 3. 13. This interpretation has been endorsed by the highest German court: BGH 8.12.1998, XI ZR 302/97 (WM 1999, 126 = ZIP 1999, 101 = NJW 1999, 940 (on file with author); see Struycken, supra note 3, at 349. 14. See Note, supra note 3, at 421-22. 15. Uniformity of result as a paramount value is contentious in the conflicts scholarship. If a lts is connected sufficiently to a state to justify adjudication there, why should that state's ideas of substantive justice not also control the selection of the most appropriate law to govern? For a recent discussion, see, e.g., Catherine Walsh, Territoriality and Choice of Law in the Supreme Court of Canada: Applications in Products Liability Claims 76 CAN. BAR. REV. 91-129 (1997), republished in NEW DEVELOPMENTS IN INTERNATIONAL COMMERCIAL AND CONSUMER LAW 237-272 (Jacob S. Ziegel & Shalom Lerner, eds. Oxford: Hart, 1998). Whatever the relevance of that debate in other areas, notably tort, surely substantive justice equates with uniform choice of law in the commercial receivables financing sphere, in view of the deleterious impact of disharmony on the cost and availability of credit and capital.

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Now comes the Draft United Nations Commission on International Trade Law ("UNCITRAL") Convention on the Assignment of Receivables in InternationalTrade ("Convention" or "UNCITRAL Convention"), approved by the Commission at its 2001 annual Session and submitted to the General Assembly for adoption as a United Nations Convention, a process which is expected by be concluded by the end of 2001.16 The bulk of the Convention is devoted to stating international substantive rules for assignments within its scope. However, it adopts a choice of law solution for the critical issue of the priority of the assignee's right in the assigned receivable against competing claimants. 7 In addition, Chapter V incorporates a more comprehensive "mini-convention" on the choice of law rules for receivables financing. With some important refinements discussed later, Chapter V follows article 12 of the Rome Convention on the appropriate law to govern assignor/assignee and assignee/debtor relations, with the former governed by the proper law of the contract of assignment,'8 and the latter by the law governing the original contract which generated the receivable.19 However, parallelling the choice of law rule in the main text of the Convention, Chapter V adopts a separate connecting factor for priorities-the law of the assignor's location." It also states a specialized rule for the law applicable to the form of a contract of assignment which is compatible with the general Rome Convention rule on contract formalities.21 This paper presents a general overview of the conflicts rules incorporated into the Draft Convention and their justifications. In general, it will be seen that the regime promises to bring a welcome level of appropriate order to an area of private international law badly in need of it. As such, it demonstrates the happy results of marrying general conflicts analysis with substantive commercial law expertise. However, several problem areas are identified where application of the rules will require a practised hand, or where Contracting States may need to adjust aspects of their existing

16. See Report of the United Nations Commission on International Trade Law on its thirty-fourth session, 25 June-13 July 2001, Doc. A/56/17, p.38 para 200. The text of the Draft Convention appears in annex 1 of the Report To view or print the Report or annex, go to the UNCITRAL web site at www.uncitral.org and follow the links to the 34th Annual Session of the Commission. 17. UNCITRAL Convention article 22. 18. UNCITRAL Convention article 28. 19. UNCITRAL Convention article 29. 20. UNCITRAL Convention article 30. 21. UNCITRAL Convention article 27.

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II. Scope of Application of the Conflicts Rules of the Convention Before analysing the choice of law rules established in the Convention, it is important to understand the differences in the scope of application of the choice of law rule for priority in article 22 of the main text of the Convention and the more comprehensive conflicts "mini-convention" found in Chapter V. The choice of law rule for priority in article 22 applies to all assignments which come within the general scope of application of the Convention. For the Convention to apply, an assignment must first satisfy the criteria for "internationality." Internationality exists if either the assignment is international-i.e. the assignor and the assignee are located in different States-or the assigned receivable is international--i.e. the assignor and the debtor on the assigned receivable are located in different states.22 Even if an assignment qualifies under these criteria, the Convention applies generally only if the assignor is located in a Contracting State.23 There is one further territorial qualification. This relates to those provisions of the Convention which affect the debtor's rights and obligations. These provisions remain inapplicable, even if the assignor is located in a Contracting State, unless the debtor is also located in a Contracting State, or the law governing the original contract between the assignor and debtor is the law of a Contracting State.24 It bears emphasizing that the threshold requirement for internationality does not mean that assignees under a purely domestic assignment can safely ignore the Convention. First, the Convention, including the choice of law rule for priority in article 22, extends to subsequent sub-assignments, if any prior assignment is governed by the Convention, and to subsequent sub-assignments to which the Convention applies even if it did not independently apply to a prior assignment of the same receivable. 5 Second, the choice of law rule for priority in article 22 applies to any dispute between the right of an assignee under an assignment governed by the Convention and a competing claimant. Competing claimant for this purpose is defined to include, in addition to the assignor's

22. UNCITRAL Convention article 3. 23. UNCITRAL Convention article 1.1(a). 24. UNCITRAL Convention article 1.3. 25. UNCITRAL Convention articles 1.1(b) and 1.2.

HeinOnline -- 106 Dick. L. Rev. 165 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 creditors and insolvency administrator, another assignee of the same receivable from the same assignor, even if the assignment under which the competing assignee claims does not independently satisfy the criteria for internationality.2 6 The definition also includes a claimant who asserts a right in the receivable by operation of law by virtue of having a prior right in an asset which generated the assigned receivable.27 This latter category is meant to recognize that under some national laws, a claimant may have a right to receivables as proceeds of a security right in other assets which have been disposed of by the debtor; in effect these legal systems effect an automatic assignment of all proceeds, including receivables, generated by the debtor's disposition of property in which the claimant initially held security.28 Application of the more comprehensive "mini-convention" in Chapter V is likewise limited to assignments that satisfy the Convention's criteria of "internationality."'2 9 However, the role of Chapter V varies depending on whether or not the assignment falls within the direct scope of the Convention under the criteria just outlined." For assignments within the direct scope of the Convention, Chapter V plays only a supplementary or "gap filling" role.31 It operates to designate the law applicable to those matters for which the main body of the Convention does not supply a direct solution, either expressly or by appealing to the general principles on which it is based.32 The main body of the Convention provides a substantive rule for most important issues that might arise between the assignor and the assignee,33 or between the assignee and the debtor,34 and, for issues of priority, there is the independently applicable choice of law rule for priority in article 22.

26. UNCITRAL Convention article 5(m)(i). 27. UNCITRAL Convention article 5(m)(i). 28. An automatic statutory security right in the identifiable proceeds of a disposition or dealing in the property originally charged with security is primarily associated with the secured transactions regimes established by Article 9 of the Uniform Commercial Code (U.C.C.) in the United States and by the Personal Property Security Acts (PPSAs) enacted by Canada's common law provinces and three federal territories. See U.C.C. revised Article § 9-315(2); and, for the PPSAs, see, e.g., Ontario PPSA section 25(1)(b), section 1(definition of proceeds). 29. UNCITRAL Convention articles 1.1(a), 1.4, 26. 30. UNCITRAL Convention article 26. 31. UNCITRAL Convention article 26(b). 32. UNCITRAL Convention articles 26(b) and 7.2. 33. UNCITRAL Convention see primarily Chapter III; Chapter IV, Section 1. 34. UNCITRAL Convention see primarily Chapter IV, Section II.

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Consequently, Chapter V will play only a limited role in the case of assignments within the direct scope of the Convention. However, it may happen that litigation involving an assignment which satisfies the criteria of internationality is heard in a contracting State but the application of the Convention is not triggered. It follows from the scope criteria summarized above that this may occur whenever the assignee, but not the assignor, is located in a Contracting State, or whenever the litigation relates to the debtor's rights and obligations, and the debtor is not located in a Contracting State nor is the original contract governed by the law of a Contracting State. In such cases, Chapter V is meant to add an additional layer of international harmony by providing an independently applicable uniform conflicts regime (albeit one subject to an opt-out by Contracting States) to determine the applicable law.35 III. Choice of Law for Priority

A. Introduction: Why not a uniform substantive law solution? As the experience under the Rome Convention attests,36 the most controversial choice of law issue in the area of assignment concerns the appropriate law to govern the priority of the assignee's interest against competing assignees and the assignor's creditors or insolvency administrator. Not surprisingly, priority is also the issue on which there is the greatest range of difference among legal systems at the substantive level. All systems adopt a first-in-time rule, at least as a starting point, but differ on the relevant event.37 In some systems, priority turns simply on when the first assignee reached agreement with the assignor.3" This is based on pure property doctrine: after the assignor's rights are vested in the assignee under the first assignment, there is nothing left that the assignor can transfer or that the assignor's creditors or insolvency administrator can attach. However, uniformity even among states

35. UNCITRAL Convention articles 26(a), 1.4. 36. See supra text beginning at note 8. 37. See generally Hein Kotz, Rights of Third Parties: Third Party Beneficiaries and Assignment, Chap 13, Vol VII 93-99, in INTERNATIONAL ENCYCLOPEDIA OF COMPARATIVE LAW (J.C.B. Mohr (Paul Siebeck),Tubingen,and Martinus Nijhoff, Dorderecht, Boston, Lancaster: 1990); see also SECURITY ON MOVABLE PROPERTY AND RECEIVABLES IN EUROPE: THE PRINCIPAL FORMS OF SECURITY IN THE EUROPEAN COMMUNITY EXCEPT GREECE AND SWITZERLAND (Michael G. Dickson et al. eds., Oxford: ESC Publishing Limited, 1988). 38. See K6tz, supra note 37, at 97. This rule is associated with German, Austrian and Swiss law.

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adopting this technique is undercut by non-uniform exceptions. Some regimes, for instance, impose special additional requirements in the case of assignments for security purposes.39 In others, the prominent example being German law, a first-in-time bank- assignee of a general bulk assignment may be subordinated to a subsequent inventory supplier who takes an assignment of the receivables arising on the assignor's authorized resale of the inventory.n In other systems, an assignment is not effective against third parties until the debtor is either notified of or accepts the assignment, and the first assignee to give notice prevails.4" The notification theory of priority is justified on two complementary rationales: notice to the debtor is the closest functional equivalent for intangibles to the general rule that title to tangible goods passes on physical delivery; and the rule enables a prospective assignee or interested creditor to assess their priority risk by inquiry of debtor as to whether there have been any previous notices. Again, however, systems that agree on this general rule do not necessarily agree on the appropriate exceptions, 3 or some have legislated

39. E.g., in Austria, an assignment for security purposes is not effective unless accompanied by an "overt act" of publicity, e.g., notification of the debtor or an entry in the assignor's books: see K6tz, supra note 37, at 98. 40. This qualification exists in German law as a result of court decisions. It is said to be based on the theory that where a business makes a bulk assignment of future receivables to a bank in circumstances where both parties ought to know that the assignor's inventory suppliers will refuse to supply without an assignment of the accounts arising on the sale of the inventory, the assignment constitutes a fraud on the suppliers and is invalid as unconscionable or against public policy pursuant to general codal values. The exception does not apply where these conditions do not exist, or where the bank loan was made specifically for inventory financing purposes, or where a suitably crafted clause in the bank assignment documentation proves successful. Note that the German courts have also ruled that the supplier/assignee may be subordinated in turn to either a prior or a subsequent assignee of the same receivables who purchases the receivables under a non-recourse bulk factoring agreement. See Kotz, supra note 37, at 98-99; see also Jens Hausman, The Value of Public-Notice Filing Under Uniform Commercial Code Article 9: A Comparison with the German Legal System of Securities in PersonalProperty, 25 GA. J. INT'L & COMP. L. 427 (1996). 41. This is the position in French law which requires notice or acceptance to be given in the form prescribed by the Civil Code. The French rule is considered to be representative on this point of the Romanistic systems. In the Scandinavian systems, and in English common law (based on the rule in Dearle v. Hall (1828) 38 E,R, 475, 492), the validity of the assignment against third parties likewise depends on the notification of the debtor and competing assignees are ranked according to the order of notification. See Kbtz, supra note 37, at 94-96. 42. See Kbtz, supra note 37, at 95; see also GOODE, supra note 3, at 705. 43. For instance, in England and France, the first assignee to give notice is subordinated if there is evidence the assignee knew at the time of the assignment

HeinOnline -- 106 Dick. L. Rev. 168 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 169 partial alternatives, as in the case of the Loi Dailly in France," and the fragmented statutory registration regimes available in England 4.5 In still other systems, notice of an assignment must be registered in a public registry to take effect against third parties, and ranking among successive assignees depends on the order of 4 registration. ' The rationale for this approach is obvious: a public registry for giving notice of an assignment protects assignees by enabling them to preserve their priority status through timely registration, and it protects third parties by providing an objective accessible means for them to find out about prior assignments. Once again, however, matters are not so simple, and there is disagreement among systems adopting a first-to-register rule on the appropriate exceptions.47 that the claim had already been assigned to a prior assignee who has not yet notified the debtor. The law of the Scandinavian countries does not recognize any equivalent exception. See K6tz, supra note 37, at 95. 44. Loi Dailly (named for its principal promoter)-Law no. 81-1 facilitating the granting of credit to enterprises (Loi facilitant le credit aux enterprises) of Jan. 2, 1981, JO 3 Jan p. 150. The Loi Dailly provides for the ongoing bulk transfer or accounts, both outright (cession) or as security (nantissement) by the delivery of a schedule or memorandum (bordereau) listing the accounts in prescribed form and signed by the assignor. The Loi Dailly was modified by the Law of Jan. 23, 1984 to provide explicitly for the assignability of future receivables even though the amount and the debtors are not yet determined. See Kotz, supra note 37, at 80, 94- 95; see also Sidney Posel, Factoring Accounts Receivable in France: Some Legal Aspects and American Comparisons, 57 TUL. L. REV. 282 (1982). 45. In England, the first-to-give notice priority rule is effectively displaced when a prior assignment is registrable, and is in fact registered, on the theory that the second assignee is then presumed to have notice of the prior registered assignment. However, registration is not comprehensively available. A charge on the book debts of a company can be registered under the Companies Act 1985, but the Act does not extend to an outright sale of the book debts or to other kinds of receivables or intangibles. A general assignment of book debts by a sole proprietor or partnership can be registered as if it were a bill of sale but this is not possible for specific assignments (debts due from specified debtors or under specified contracts). See GOODE, supra note 3, at 705. 46. This is the general rule under the Personal Property Security Acts in effect in the Canadian common law provinces and three federal territories: see, e.g., Ontario PPSA, sections 20(1) and 30(1). It is also the general rule under Article 9 of the Uniform Commercial Code in the United States which greatly influenced the Canadian PPSAs: see U.C.C. §9-322(a) (2000). The recently-enacted New Zealand Personal Property Securities Act 1999 is based on the Canadian PPSAs and adopts the same general rule in s. 66. 47. For instance, while the Canadian PPSAs and Article 9 of the Uniform Commercial Code share much commonality in their registration-based priority rules, revised Article 9 (2000) contains many more exceptions than its Canadian counterparts, including assignments of deposit accounts (where a concept of 'control' generally substitutes for registration-based priority under § 9-312, § 9-314, § 9-327) and the outright assignment (sale) of "payment intangibles" i.e. loan

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The Working Group charged with preparing the draft Convention initially favoured a uniform substantive rule for priority. However, there was no consensus on what that rule should be. The Group explored the possibility of a registration-based priority rule supported by an international registry for filing notices of assignments. But states without an equivalent domestic priority theory were unwilling to take the radical step of endorsing that theory at the international level. Nor could such a regime have been confined to the international level since otherwise it would have been incapable of resolving priority between an assignment which met the criteria of internationality and a completely domestic assignment. Indeed, even states with a strong commitment to a general registration-based priority theory would not have been likely to endorse that solution at the international level without reserving the right to preserve their own diverse exceptions and qualifications under national law. Faute de mieux, the Convention instead attempts international uniformity only at the choice of law level. It is true that the Annex to the Convention still provides for the possibility of a substantive priority regime based on registration. Section I of the Annex contemplates a simple time of registration priority rule, while Section II leaves open the possible future establishment of an international registry for the filing of data about assignments governed by the Convention. However, both sections operate purely on an opt-in basis by interested Contracting States.48 Moreover, a State may instead decide to opt-in to the priority regime in Section III of the Annex (priority based on the time of the contract of the assignment) or Section IV (priority based on the time of notification of the assignment to the debtor). Even if the registration-based priority option is selected, States are free to declare non-uniform exceptions pursuant to article 42, and may develop and designate a domestic registry for filing notices of assignments as a substitute for the international registry. In other words, the Annex essentially codifies the current diversity in substantive priority regimes among different legal systems.49 Since it does nothing to achieve international substantive uniformity, it is unlikely that its provisions will be adopted by receivables other than credit card receivables (automatically effective without registration under § 9-309). See generally Ronald C.C. Cuming and Catherine Walsh, Revised Article 9 of the Uniform Commercial Code: Implications for the Canadian PersonalProperty Security Acts, 16 B.F.L.R. 339 (2001). 48. UNCITRAL Convention article 42. 49. See supra text beginning at note 37.

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Contracting States. This leaves the choice of law rule in the Convention as the principal hope for enhancing legal certainty and predictability in international receivables financing.

B. Application of the Law of the Assignor's State to Priority

Under article 22 of the Convention, the priority of an assignee's right in the assigned receivable against competing claimants is referred to the law of the State in which the assignor is located.' The reasons why the assignor's location was thought to be the most appropriate connecting factor in the receivables financing context are best revealed by comparing it to the possible alternatives. The proper law of the contract of assignment is clearly unacceptable. The only virtue of deferring priority to that law would be to empower the assignor to escape from an overly rigid domestic regime by including a choice of law clause in the assignment contract in favour of the law of a State with a more sympathetic receivables financing law. This motivation may be the realist subtext which explains the startling decision of the highest court in the Netherlands to interpret article 12(1) of the Rome Convention as intended to give the assignor and assignee unrestricted freedom to choose the governing law for the purposes of determining the effectiveness of the assignment against the assignor's insolvency administrator. 1 The effect of the court's decision was to apply German law so as to preserve the priority of an assignment in favour of a German assignee in Dutch insolvency proceedings despite the fact that the assignor was Dutch, and the assigned debt was governed by Dutch law and owed by a Dutch debtor. As the Netherlands decision demonstrates, the effect of giving the assignor and assignee unqualified freedom to choose the law governing the priority of their assignment against third parties enables them to evade mandatory limitations on assignment of the most closely connected law. The regime governing assignments in the new Dutch Civil Code of 1992 has been subjected to widespread criticism as inimical to modern receivables financing practices, and it has naturally been speculated that the court saw contractual choice as an attractive means of escape. But whether or not one

50. Article 30.1 replicates the same rule for the purposes of the mini- convention on conflict of laws contained in Chapter V of the Convention. 51. See Brandsma q.q. v. Hansa Chemie AG, HR, May 16, 1997, supra note 12. 52. See Struycken, supra note 3, at 353.

HeinOnline -- 106 Dick. L. Rev. 171 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 agrees with the wisdom of limitations on assignment articulated by any particular national law regime is beside the point. The fact is that unrestrained freedom of contract inevitably undermines the integrity of all national property law standards aimed at the protection of third parties and enacted in the interests of national public policy. 3 And this will be the result whether the particular regime is objectively considered to be inimical or sympathetic to an efficient and fair receivables financing regime. There are those who defend unrestricted freedom of choice on the theory that it is best calculated to produce a free market in legal ideas, ultimately leading in practice to the choice of the "best" secured financing regime, thereby producing practical uniformity of result. This argument in effect amounts to a privatization of public policy; it is left to the parties to each individual assignment, not the law makers, to decide the optimal legal regime to govern the third party effects of assignment. But what is the best choice of law from the point of view of any particular assignee does not necessarily coincide with what is best from the point of view of the public order and of competing claimants. The likelihood of this discrepancy in perception means that a party autonomy rule may fail to yield a single governing law in a simple dispute involving competing assignments, each governed by a different proper law, and each valid and entitled to a first priority under that law (a plausible scenario, as where, e.g., the law chosen by the parties to govern the first assignment orders priority on the basis of first-in-time whereas the law chosen by the parties to a subsequent assignment orders priority on the basis of the order of registration of the assignments, and the second assignment in time is the first to be registered). Considerations of this kind long ago persuaded law makers to settle on an objective connecting factor, the lex situs of the relevant asset, to determine the law applicable to the property effects of transactions involving tangible assets.54 The fact that receivables and other intangible rights do not by definition have a physical situs does not justify discarding the general principle of objectivity which underpins the lex situs rule. It simply requires identification of an acceptable functional alternative to physical situs.

53. Id. at 354-56. 54. See, e.g., WOLFF, supra note 3, at 511ff; Schilling, Some European Decisions on Non-Possessory Security Rights in Private InternationalLaw, 34 INT'L & COMP. L.Q. (1985).

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Of the possible alternatives,55 two enjoy significant support at the domestic law level. The first is the national lex situs of the debt, the law of the place where the debtor is located. The second is the law applicable to the assigned receivable-for contract-generated receivables of the kind governed by the Convention, this is effectively the proper law of the original contract between the assignor and the debtor.56 The attractiveness of one or the other depends to some extent on how the assigned obligation is conceptualized.57 If it is viewed as a species of property right once "vested" in the assignee, then the situs of the debtor is attractive as the closest functional equivalent to the idea of practical control over the res (here the person of the debtor) that underlies the lex situs rule for tangible property rights. Conversely, if the assignment is conceptualized as merely a substitution of the creditor to whom the assigned obligation is owed, then it is reasonable to see the priority of the assignee's right as governed by the same law that governs the assigned obligation. Conceptual considerations aside (although their influence should never be underestimated), the law governing the assigned receivable is the more attractive choice of the two. Admittedly, the applicable law is subject to manipulation by the insertion of a standard form choice of law clause in all contracts entered into between a prospective assignor and its various debtors. Nonetheless, the law governing the assigned obligation offers a more stable connecting factor than the debtor's location which is vulnerable to change after an initial assignment. This makes it a better choice to deal with issues of priority between competing assignments. It also has the advantage of simplifying the choice of law matrix since the same law also governs the assignee's rights against the debtor (more on this later 5).

55. Before the principle of party autonomy (free choice) became the near- universal rule for choice of law in contract, the law of the place where the contract of assignment was executed was seen as a possible connecting factor. It suffers from the same defect as the proper law of the contract of assignment in being incapable of designating a single governing law in a competition between successive assignments, each executed in a different state. Moreover, to quote Wolff's withering dismissal of such a rule, to "test the assignment by the place where it was made is to choose the least important of all points of contact, to substitute fortuity for reason." WOLFF, supra note 3, at 542. 56. This is the approach endorsed in German law: see supra note 13. 57. See WOLFF, supra note 3, at 537-539. 58. See the text under the sub-heading "Choice of Law for Assignee-Debtor Relations" infra.

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However, in modern financing practice, the assignment of multiple and future receivables in a single transaction is commonplace, whether the assignment involves the outright sale of receivables as in a factoring or securitization arrangement, or their assignment merely as collateral for a secured obligation. This practical reality makes application of the law governing the assigned debt a commercially inefficient solution. The assignee would need to scrutinize each of the assigned contracts to determine the applicable law and would then have to conform to the priority rules of all relevant states. Priority would vary for different receivables depending on their governing law, increasing the costs of dispute resolution and insolvency administration. If the assignment included future receivables owing by as-yet-unidentified debtors, the assignee might not even be able to predict which laws might potentially apply. It is the practical demands of modern receivables financing which ultimately led the Commission to endorse the law of the assignor's location as the most appropriate choice of law rule for priority. It is the only approach capable of supplying a single predictable governing law for the global assignment of multiple receivables owing by debtors in different states and for the assignment of future receivables, thereby vastly reducing the inquiry and monitoring burden on the assignee. The superiority of the assignor location rule has been recognized by analysts who have examined the issue with the practical realities of modern global assignment practices in mind. 9 Some, however, have suggested a dualist approach. The law of the assignor's location would apply to bulk assignments of existing and future debts but the lex situs of the debt (effectively the lex situs of the debtor) would apply to assignments of specific debts.' This kind of qualification did not find its way into the Convention. A dualist approach would have introduced an undesirable level of

59. See Moshinsky, supra note 3, at 611-13, 624; Struycken, supra note 3, at 357-60; Note, supra note 3. Struycken, supra note 3, at 357 n.50 cites Kieringer as also favouring the same rule. See also Group of Experts Report Prepared by the Permanent Bureau of the Hague Conference on Private International Law, UNCITRAL A/CN.9/WG.II/WP90 (July 10, 1998) para 4.4. 60. See GOODE, supra note 3, at 1148. But Goode is somewhat ambiguous on the whole question. In footnote 182 at 1128, he acknowledges that "in order to have a uniform regime for debts generally, even the assignment of specific debts could be subjected to the law of the assignor's place of business as regards their proprietary effects." But then, at 1149-50, he appears to revert to an unqualified rule in favour of the lex situs of the debtor for priorities, with no mention of any exception for global assignments of receivables.

HeinOnline -- 106 Dick. L. Rev. 174 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 175 complexity and uncertainty into the choice of law exercise: a different law would potentially be applicable depending on whether the assignment was structured as a global one or as a series of specific assignments. This would have created the potential for manipulation of the governing law. Moreover, such an approach would fail to yield a single governing law in a contest between an assignee of a specific receivable and an assignee taking under a global assignment of all of the same assignor's receivables, including the specific receivable which was the subject of the prior assignment.

C. Defining the Location of the Assignor

Under the Convention, the assignor is presumed to be located at its place of business or at his or her habitual residence in the rare case of an assignor without a place of business.61 But what if the assignor is an enterprise with multiple places of business or branches in different states? In such a case, it is necessary to designate one place of business as controlling. Otherwise, the assignee's priority status would be governed by multiple and potentially conflicting priority regimes, destroying the certainty and predictability sought to be obtained by using a single stable connecting factor for choice of law in the first instance. Two choices are possible: the de facto centre of the assignor's business, i.e. its chief executive office or centre of administration, or its legal centre, i.e .the place under whose law it is constituted and where its registered "head office" is located. From the point of view of the assignee, a registered head office or equivalent test provides greater certainty and predictability than one predicated on a firm's administrative centre. The former is easily ascertained by checking the public records of the state under whose laws the entity was constituted. Locating the latter is a subjective and fact-dependent exercise, which may give rise to interpretative difficulties on particular facts.62 Moreover, a

61. UNCITRAL Convention article 5(h). 62. See Kevin White, 0' Give Me a Home: Determining the Location of the Debtor's Chief Executive Office Under Section 9-103 of the UCC, 18 REV. LITIG. 207 (1999) (reviewing conflicting tests developed by different United States courts to determine chief executive office for the purposes of the conflicts rules for perfection in old U.C.C. Art 9: (1) centre of greatest volume of business; (2) centre of main business management taking into account the reasonable expectations of creditors; (3) executive headquarters.) The latter is the most appropriate test and the one evidently intended by the use of the more explicit wording, "place where [the assignor's] central administration is exercised " in article 6(i) of the

HeinOnline -- 106 Dick. L. Rev. 175 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 company's administrative centre is more easily relocated and more prone to relocation than its registered head office or place of incorporation. The Convention nonetheless adopts a de facto centre of business test: an assignor with places of business in more than one state is deemed to be located in the state where its central administration is exercised.63 Once again, this policy choice is in line with the views of analysts who have seriously considered the issue.64 Priority is concerned with the impact of the assignment on third parties, and from their perspective, a de facto centre of business test is more appropriate. The law of that jurisdiction is more likely to be in the reasonable contemplation of assignees and creditors who enter into business dealings with the assignor. Application of the assignor's law also eliminates any incentive for assignors to incorporate in an insolvency haven to the potential prejudice of less sophisticated creditors. The assignor's real centre of administration is also the place where the principal insolvency proceedings involving the assignor are most likely to be commenced. This means that the law of the insolvency forum will typically coincide with the substantive law applicable to priorities, decreasing the costs of having to plead and prove a foreign law, and eliminating the potential for conflict with the public policy of the insolvency forum. Finally, the assignor's location in a Contracting State is the principal territorial triggering factor for application of the Convention.65 To avoid confusion and enhance predictability, it is desirable that the test for location be the same in both contexts, and a centre of administration test is more satisfactory for territorial

UNCITRAL Convention. 63. UNCITRAL Convention article 5(h). 64. See Note, supra note 3; Moshinsky, supra note 3, at 611-613; Struycken, supra note 3, at 358-60. Note that the general rules for locating an assignor under revised Article 9 of the Uniform Commercial Code in the United States are substantially similar to those found in article 5(h) of the Convention. Under revised § 9-307(b), a debtor who is a natural person is deemed to be located at his or her principal residence, while a legal person is deemed to be located at its place of business, or at its chief executive office if it has a place of business in more than one state. The Article 9 concept of chief executive office is essentially the same as the central administration concept used in the Convention. See § 9-307 Official Comment 2: "'Chief executive office' means the place from which the debtor manages the main part of its business operations or other affairs." The Canadian Personal Property Security Acts also adopt a chief executive test location rule for debtors located in multiple jurisdictions: see e.g. Ontario PPSA section 7. 65. Article 1(1)(a).. And see supra text under the sub-heading "Scope of Application of the Conflicts Rules of the Convention."

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D. Location of the Assignor in Federal States

In states organized on federal lines, law making jurisdiction over assignment law may be, and typically is, vested in the individual territorial units which comprise that state rather than at the federal or national level. In such instances, it is not enough to locate the assignor in the state as whole; it is necessary to link the assignor in a territorial unit. The Convention accommodates this need by a special interpretation rule, which essentially repeats the general rules for location within a State proper. Thus, an assignor is deemed to be located in the territorial unit within a State in which it has its place of business, in the territorial unit where it has its central administration is exercised if it has a place of business in more than one territorial unit, and in the territorial unit of habitual residence if the assignor has no place of business.66 However, states are permitted to specify different intrastate location rules by declaration under the Convention.67 This qualification is intended to accommodate the needs of states, the notable example being the United States under revised Article 9 of the Uniform Commercial Code, which, for reasons of administrative efficiency, use different location criteria in the intra-state as opposed to international conflicts context.68

66. UNCITRAL Convention article 36. 67. Id. 68. Under revised U.C.C. article 9, the general rules for location in article § 9- 307(b) are subject to an exception in the case of a "registered organization," i.e. an entity organized under a United States federal or state law which requires a public record to be maintained disclosing the organization, e.g. U.S. companies and U.S. limited partnerships. Such U.S.-registered organizations are deemed to be located in their state of organization within the United States in the case of entities organized under U.S. state law, or in the state within the United States designated by federal law or by the parties in the case of entities organized under U.S. federal law. See U.C.C. §§ 9-102(70)(76), 9-307 (e), (f). The ability to make a declaration under article 36 of the Convention will enable the U.S. to preserve these special internal location criteria in cases where the assignor is found to be located somewhere within the United States under the location rules in article 5(h) of the Convention.

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E. Location of Banks and Other FinancialInstitutions

During the preparation of the Convention, there was a certain level of ongoing support for creating special location criteria in the case of assignments made by a bank carrying on business in different countries through a branch or agency structure, as opposed to a separate corporate subsidiary. The aim of such exceptions would have been to refer priority issues to the law of the State where the branch or agency that had the closest connection to the assigned receivable is located, as opposed to the law of the State where the central administration of the bank is exercised.69 In the end, no such exception appears in the Convention, and, on balance, that was the appropriate result. Such an exception would have generated far more difficulties than it would have resolved.7"

69. This is the approach apparently taken by revised U.C.C. article 9, which adopts special location rules for a foreign bank that carries out operations in the United States through a branch or agency structure, as opposed to an independent corporate subsidiary. The branch or agency of the foreign bank is deemed to be located in the state within the United States where it is licensed if all branches or agencies are licensed only in that one state. See U.C.C. § 9-307(i). If the foreign bank has branches or agencies in more that one state within the United States, then the branch or agency is deemed to be located in the state within the United States designated by federal law, or designated by the branch or agency itself if federal law authorizes such designation; otherwise, it is deemed to be located in the District of Columbia. See U.C.C. § 9-307(f). These special location rules apply for the purposes of the general choice of law rule in § 9-301 under which the law of the assignor's location governs issues relating to perfection and priority. They effectively seek to treat the branch or agency as though it were an independent assignor, a separate entity, so as to bring into play the application of U.S. law. To be workable, the application of these special location rules must therefore be conditioned implicitly on the assignment having been executed in the name or on behalf of the U.S. branch or agency acting as though it were a separate entity. This may raise difficult questions of proof of intent. And what if such an assignment comes into competition with an assignment of the same receivable made by the bank as whole, or through another department or agency located in a different country? This is not an implausible scenario as where, e.g., the branch assigns specific receivables arising through branch operations and the bank executes a global assignment of all its receivables. Does U.S, law still govern simply because one of the competing assignments happened to be made by or through a U.S. branch or agency? If so, what happens if the litigation is heard in a different jurisdiction, e.g. the jurisdiction where the competing assignee is located? The foreign court is unlikely to defer to U.S. law simply because one of the assignments happened to be made through a U.S. branch. Similarly, what happens if insolvency proceedings involving the foreign bank are instituted in its home jurisdiction? Without a developed international consensus on the treatment of branches as separate legal entities, it is unlikely that a foreign insolvency tribunal will be willing to defer to United States assignment law in view of the potential detriment to creditors and competing assignees in other countries. 70. For a detailed critique of the problems of a branch office location rule for determining the law applicable to an assignment of accounts, from which some of

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First, there is the very serious challenge of defining the concept of a "bank" and a "branch." The problems are especially acute in today's dynamic financial climate in which such traditional banking activities as accepting deposits and making loans or extending credit are being undertaken by entities far removed from the traditional idea of a bank, and with technological advances rapidly changing the traditional physical idea of the "branch" as well as the accounting structure of branch operations. Second, treating the in-country branch of a foreign financial service provider as effectively a separate legal entity threatens the certainty and stability of general legal doctrine concerning legal personality. Admittedly, the local branch of a foreign bank is generally subject to separate regulation and supervision under the banking laws of most states to much the same extent as if it were operating as a corporate subsidiary However, for the purposes of private law, including debtor/creditor, property, obligations, mandate or agency and insolvency law, branches are not typically treated as having a distinct or independent legal personality. Third, there are the public policy implications inherent in excepting banks from the general rules applicable to other businesses. It is true that banks are more apt to operate internationally through a branch rather than subsidiary structure, in part so as to be able to more easily satisfy minimum capital or asset requirements imposed by regulators. However, this is not a static state of affairs and other entities may find benefits in a branch or agency structure. Fourth, a branch office exception would generate uncertainties and complexities in the event of the assignor's insolvency. The effectiveness of assignments would have to be tested by reference to the laws of the state in which each individual branch is located. This would greatly increase the adjudicatory burden on the insolvency court. Moreover, there is no necessary correlation in the insolvency context between the location of the various branches and the claims of the assignor's creditors. Since insolvency laws typically extend national treatment to foreign and local creditors alike, the benefits of subordination of the assignee's interest under the laws of a state where a particular branch is located would not necessarily inure to the benefit of those creditors most closely connected to that branch. Although a rule to such effect might be

the points made in the text of the paper are taken. See Note, supra note 3, at 433- 37; see also supra note 69.

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fashioned, there is no easy or obvious way to carry out the accounting. Fifth, a branch office exception would also increase the burden on prospective assignees. An assignee of receivables owing to branches located in a multiplicity of states would have to conform to the priority rules of all of them, including conformity with any filing requirements imposed by those laws. Finally, what about creditors whose principal dealings with the assignor are at the assignor's head office or through a different branch than the one to which the receivables relate? On what theory should their priority rights against the assignee be determined by reference to the law of the jurisdiction where the branch office to which the receivable relates is located? And why should creditors be required to investigate the records, if any, of all states in which branch offices are located in order to gain an overall picture of the assignor's financial health?

F. Public Policy and Mandatory Law Limits on the Application of the Law of the Assignor's Location

Will States hesitate to endorse the Convention out of concern that deference to the law of the assignor's location to determine the priority of the assignee's interest may interfere with their own fundamental third party protection and insolvency policies? Under the centre of administration location rule, the litigation forum will very often coincide with the state where the assignor is located. This means that the forum's own domestic law will be the law applicable to priority under the Convention choice of law rule in any event. So a conflict between domestic priority policy, and the priority policy of the law designated as applicable under the Convention can arise only if the litigation takes place in a State other than the State where the assignor is located, e.g. the state where the debtor or assignee is located. The whole point of the Convention choice of law rule is, of course, to ensure certainty and predictability in the determination of the law applicable to the priority of an assignee's interest against competing claimants. If extensive exceptions were permitted, that objective would be lost. So the Convention recognizes only two highly qualified limitations. First, a court may refuse to apply a provision of the law of the State in which the assignor is located only if that provision is

HeinOnline -- 106 Dick. L. Rev. 180 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 181 manifestly contrary to the public policy of the forum State.71 This is a commonplace qualification in international law conventions, and its sphere of operation is now everywhere understood to be very attenuated.72 The law otherwise applicable will be excluded only if its application would offend some widely-shared moral or ethical standard, not merely the singular policy of the particular forum. Public policy in this sense operates primarily as an exclusionary rule: it permits rejection of the relevant provision of foreign law without thereby necessarily substituting the positive application of an equivalent provision of domestic law. The latter is the -function of so-called "super-mandatory rules:" rules which may not be excluded by contract and which reflect a sufficiently strong social or economic policy concern of national law to justify their application so as to override the otherwise applicable law even in cases with an international complexion, provided that the policy objectives of the rule are engaged in the facts before the court.73 The Convention does not generally preserve the super- mandatory rules of the forum or of any other interested state. On the contrary, it expressly prohibits the displacement of the law of the assignor's state by reference to the mandatory rules of either the forum or any third state. 74 This unprecedented approach was considered necessary to avoid the risk of completely undermining the Convention's general choice of law rule. Unlike the public policy exclusion, mandatory rules may reflect no more than the singular, albeit strongly-held, policy objectives of the particular jurisdiction in which they are found. As such, they could, in theory, include rules requiring registration or notification of the debtor as a pre-condition to priority, predicated as such rules are on public policy considerations having to do with the protection of local third parties. To avoid forum priority policy overriding the priority policy of the assignor's location, the Convention contains only a very limited saving clause for a very limited category of forum priority rules"5 : preferential rights to priority that arise by operation of law76 of the

71. UNCITRAL Convention article 23.1. 72. See generally Nathalie Voser, Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration, 7 AM. REV. INT'L ARB. 319 (1996). 73. See, e.g., GOODE, supra note 3, at 1111-13; see also Voser, supra note 72. 74. UNCITRAL Convention article 23.2. 75. UNCITRAL Convention article 23.3. 76. Although only non-consensual preferential rights are preserved, note that the claim of a creditor which is "secured" by a preferential right may itself have arisen out of a consensual relationship, e.g. statutory preferential rights in favour

HeinOnline -- 106 Dick. L. Rev. 181 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 forum state, and which would have priority over the rights of an assignee in insolvency proceedings under the law of the forum state. This exception is stated in permissive terms ("may") to signal that the courts should take a restrained approach, preserving local preferential rights to priority only if their underlying policy rationale is clearly engaged. Despite its highly qualified scope, this exception still creates some uncertainty for prospective assignees. They must still investigate other potentially connected laws, particularly the law of the debtor's location, to determine to what extent their priority under the law of the assignor's location may be undermined by super- priority rights afforded by operation of law under that other law in favour of competing claimants, e.g., the state or employees of the assignor. A provision which appeared in earlier versions of the Convention, (and which was retained in the UNIDROIT Convention on InternationalInterests in Mobile Equipment) would have offered a more satisfactory compromise between preserving the rights of preferential creditors under domestic law and the certainty needs of financiers. Under that provision, contracting states would have been required to specifically identify by declaration the categories of preferential rights arising under domestic law that are to have priority over the assignee's interest in proceedings occurring in that state. However, a number of States objected, apparently on the basis that it would be "too difficult" to identify the complex of such interests within their domestic systems, a basis of objection scarcely calculated to alleviate the concerns of financers. So while the Convention permits such a declaration to be deposited on a purely voluntary basis,77 preferential rights are still preserved in the absence of a declaration. It is to be hoped that most States take advantage of the opportunity (and that interested commercial organizations encourage them to do so).

G. Effect of Absence of a Public Registration Regime Under the Applicable Law

For states that require public filing as a pre-condition to the third party effectiveness of an assignment, the prospect of having to refer priority to a governing law which does not have an equivalent public disclosure rule may well create concern. Consider, for

of employees. 77. UNCITRAL Convention article 23.3 (final sentence).

HeinOnline -- 106 Dick. L. Rev. 182 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 183 example, a Ruritanian company which operates branch establishments throughout Canada and the United States where public registration is generally required to perfect the assignee's interest against competing claimants and operates as the usual means of ordering priority. Assume Ruritanian law instead orders priority on the basis of a simple nemo dat quod non habet principle, under which an assignment once executed takes effect against subsequent third parties. If Ruritanian law applies at the choice of law level, a prospective assignee or creditor who deals with the company through any of its North American branches will have no objectively reliable means of ascertaining whether the receivables already have been assigned. The conflicts regimes in some of the Canadian Personal Property Security Acts and in Article 9 of the Uniform Commercial Code in the United States seek to protect local creditors and assignees in this situation by way of an explicit exception to the general application of the law of the assignor's location to issues of perfection and priority. Under the relevant provision in the Canadian Acts, an assignee's interest is subordinate to an interest acquired in any receivable payable within the province if the assignor's law does not provide for public filing or similar public notification of an assignment. To avoid subordination, the assignee must file locally before the competing interest arises."8 A similar policy informs revised Article 9 of the Uniform Commercial Code in the United States. A foreign business assignor whose home law does not require public registration is deemed to be located in the District of Columbia so as to require filing of a notice of the assignment in the DC registry as a condition of asserting rights in the assigned receivables against competing claimants.79 In contrast, the priority regimes in Canada's largest and most populous provinces, Ontario and Quebec, refer priority in accounts to the law of the assignor's location without regard to the presence or absence of a public filing system under that law.' The legal and business communities in these provinces apparently have not lobbied for the introduction of the exceptions found in the other provincial laws and in Article 9. This may reflect the perception

78. See, e.g., New Brunswick PPSA sections 7(3)-(4). 79. U.C.C. § 9-307(c). The revised rule replaces old UCC § 9-103(3) under which the law of the state in which the foreign assignor had its "major executive office" within the United States governed perfection where the assignor was located in a jurisdiction which did not provide for perfection by public filing. 80. See Civil Code of Quebec article 3108 and Ontario PPSA section 7(2).

HeinOnline -- 106 Dick. L. Rev. 183 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 that such exceptions serve only to increase transaction costs without bringing about any complementary increase in certainty and predictability. Transaction costs are increased because prospective assignees must investigate the law in place in the assignor's location and reach qualitative judgments on the existence and adequacy of any filing regime provided by that law in order to know whether they should also file under Article 9 or the PPSA, as the case may be. Moreover, any such filing does not relieve a prospective assignee from the need to also comply with the priority requirements of the law of the assignor's location. This is because, as a practical matter, priority disputes are most likely to be litigated in the state where the assignor is located, and the courts in that state will apply their own priority rules, not those of Article 9 or the PPSAs, to resolve that dispute. In other words, such exceptions may actually operate to decrease certainty and predictability by bringing into play two different and conflicting priority regimes, depending on the forum in which any future priority dispute is eventually litigated. At the level of principle, exceptions of this kind constitute an attempt to superimpose domestic priority standards on assignments emanating from a foreign assignor and otherwise considered to be most appropriately governed by the law of the assignor's location. As noted above, the Convention generally prohibits the displacement of the priority rules of the assignor's state by reference to the super-mandatory priority rules of forum law.8" It follows that States wishing to adopt the Convention must be prepared to abandon attempts to export their own national priority policy to the international private law sphere. In fact, no proposal was ever made in the course of preparation of the Convention to incorporate any exception to the general choice of law rule where the assignor's location lacked a public filing regime. Politically, this was wise. If international consensus could not be achieved on a registration-based priority rule at the substantive level, why would states lacking such a system have been prepared to agree to a registration-biassed exception at the choice of law level? Politics aside, such an exception would have detracted, for the reasons given above, from the general mission of the Convention to ensure application of a single predictable governing law for priority.

81. See supra note 74.

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H. Choice of Law for Priority in the Proceeds of the Assigned Receivable

The Convention confirms, as a matter of uniform substantive law, that an assignee's right in the assigned receivable carries with it a legal right to the proceeds of its collection, regardless of whether the proceeds are paid directly to the assignee, to the assignor, or to a third party over whom the assignee has priority.82 However, the substantive right to proceeds recognized by the Convention operates only "as between the assignor and assignee."83 The priority of the assignee's right to retain or claim proceeds against competing claimants is dealt with only in a very limited fashion, and then only at the choice of law level. The law of the assignor's location determines the priority of the assignee's entitlement to any proceeds of the assigned receivable in two instances. The first is where the proceeds are already in the assignee's hands when the priority dispute arises.8' The second is where the proceeds are received by the assignor under instructions from the assignee to hold the proceeds for the benefit of the assignee separately, and are in fact sufficiently segregated from the assignor's other assets so as to be reasonably identifiable.85 However, this second exception is qualified. The law of the assignor's location does not necessarily apply to the priority of any person who has a right of set-off against the proceeds or whose right in the proceeds is created by agreement and is not derived from a right in the receivable.' 6 This latter reference clearly covers, and is meant minimally to cover, a claim to cash proceeds which have been deposited into a deposit account held by the assignor with, and asserted by, a bank or securities intermediary pursuant to an agreement entered into with the assignor. But the caveat is cast in general terms and is potentially much broader. It covers any competition between a receivables assignee and a claimant who

82. UNCITRAL Convention article 14. 83. This is made clear in the chapeau to article 14. Note that the assignee's right to proceeds as against the assignor is subject to any contrary agreement between the parties, and, under article 14.3, is limited to the value of the assignee's right in the assigned receivable. This latter caveat covers cases where the receivables are assigned by way of security only, with the result that the assignee's may retain collected proceeds only to the extent necessary to discharge the secured obligation. 84. UNCITRAL Convention article 24.1. 85. UNCITRAL Convention article 24.2. 86. UNCITRAL Convention article 24.3.

HeinOnline -- 106 Dick. L. Rev. 185 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 asserts a right to the proceeds as a result of an agreement which directly covers the relevant proceeds as opposed to claiming them as a result of an assignment of the receivable which generated the proceeds. These two exceptions aside, the priority of an assignee's claim to proceeds will be governed by the law applicable by virtue of the rules of private international law of the particular forum. In other words, the Convention choice of law rule for priority in the assigned receivable does not apply to priority in the proceeds of collection of the receivable. This is a necessary gap. Proceeds may take any form and it would have been inappropriate and practically impossible to establish a uniform choice of law regime for all conceivable categories of tangible and intangible movables in a convention devoted to the specific topic of receivables.

IV. Choice of Law for the Contractual Aspects of Assignor and Assignee Relations

A. Introduction

At the substantive level, all legal systems accept that the reciprocal rights and obligations of the assignor and assignee are governed by their contract." This philosophy is replicated in the substantive rules of the Convention on the terms, condition, representations and warranties of the assignor and assignee relationship. These are uniformly stated as suppletive or default rules, applicable only in the absence of contrary agreement.8 Not surprisingly, the same philosophy is carried over to the choice of law regime in article 28 of Chapter V of the Convention. In line with the prevailing approach for choice of law in contract generally, 9 the assignor and assignee are left free to choose the law

87. See Kotz, supra note 37, at 82. 88. See Chapter IV, Section I (articles 11-14). 89. See, e.g., article 3(1) of the Rome Convention. A few legal systems still require that the transaction bear at least a minimal reasonable connection to the chosen law. Most notably, the rule of party autonomy in the United States is subject to the proviso that the law chosen by the parties bear some reasonable relation to the transaction. See, e.g., UCC § 1-105(1) (1994) which permits the parties to stipulate the law which will govern their transaction if the stipulated law "bears a reasonable relation" to the transaction. The official comment explains that ordinarily the parties must choose a jurisdiction "where a significant enough portion of the making or performance of the contract" will occur. However, the proviso is construed liberally and the American Law Institute is currently considering adoption of a broader rule of party autonomy for choice of law matters governed by UCC § 1-105(1). See Ryan E. Bull, Operation of the New Article 9

HeinOnline -- 106 Dick. L. Rev. 186 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 187 governing the mutual rights and obligations arising from the agreement between them.9' In the absence of a choice, the applicable law is that of the State with which the contract of assignment is most closely connected.9 This again reflects widely- shared views on the appropriate default formula.92. The parties' freedom of choice is subject to one caveat. The Convention preserves the discretionary application of the super- mandatory rules of the forum state and of a closely-connected third country.93 The preservation of super mandatory rules is unlikely to have much practical impact. In the vast majority of legal systems, the parties to a contract of assignment are left free to stipulate their mutual rights and duties.94 Moreover, it is widely agreed that in international contracts, the exercise of judicial discretion to override the parties' choice of law should be confined to those rules which are of such fundamental importance to the social or

Choice of Law Regime in an InternationalContext, 78 TEx. L. REv. 679, 692 (2000) (references cited in n.46). 90. See Article 28.1. Note that Article 28.1 refers simply to the "law chosen by the parties." There is no explicit requirement for an express choice. In determining whether a choice of law can be implied, the forum court presumably can apply its own supplementary private international law principles. Under, e.g., article 3(1) of the Rome Convention, the parties' choice may be implied if their intention is demonstrated with reasonable certainty from the terms of the contract or the circumstances of the case. It only if an examination of the parties' intention does no reveal an implied choice that one then applies the closest connection formula in article 4(1). It is a matter of debate whether there is any practical difference in result between an implied choice and closest connection formula. See, e.g., PETER GABRIEL, LEGAL ASPECTS OF SYNDICATED LOANS 21-27 (London: Butterworths, 1986). Courts frequently have used the tests of implied intention and closest connection interchangeably, and in a manner which takes account of the parties's interests. Thus, the fact that the contract uses language and terms which are appropriate for one system but not another, or contains a choice of forum or currency of payment obligation in favour of one country as opposed to another, has been regarded in some cases as a weighty indicator of both implied intention and closest connection. See, e.g., Imperial Life Assurance Co. of Canada v. Colmenares [1967] SCR 443; Amin Rasheed Shipping Corp. v. Kuwait Insurance Co. [1984] AC 50 (HL). 91. See article 28.2. 92. See, e.g., article 4(1) of the Rome Convention. The Rome Convention, in article 4(2), presumes that a contract is most closely connected with the country where the party who is to effect the performance is located. The test of characteristic performance means the performance that is most characteristic of the particular type of contract, e.g. for a contract of sale, the delivery of goods, for a contract of services, the performance of those services. Applied to the assignment context, application of the characteristic performance test in the Rome Convention would yield, at least in simple cases, a presumption in favour of the law of the assignor's location as the most closely connected law. See also Sturycken, supra note 3, at 359. 93. UNCITRAL Convention article 31. 94. See Kotz, supra note 37, at 82.

HeinOnline -- 106 Dick. L. Rev. 187 2001-2002 DICKINSON LAW REVIEW [Vol, 106:1 economic goals of the relevant state as to require their application even in cases where the contract also implicates the interests of other states by virtue of its international connectivity.95 Even then, the forum rule should be invoked only if the issue falls within the spatial scope of the rule, as determined from the territorial linkages expressly spelled out in the rule, or, in the more typical case where the legislation is silent, from an analysis of its underlying policy. A similar cautionary approach must be taken to the operation of the public policy exception recognized by the Convention.96 In contrast to super-mandatory rules, which are rules of positive application overriding the proper law of the contract, the public policy exception is concerned with the circumstances when the court can invoke forum public policy as a negative rule of rejection to exclude the application of a foreign law which would otherwise be applicable. Under the Convention, the court can do this only if the foreign provision is "manifestly contrary" to forum public policy. This terminology is widely used in international conventions and is designed to signal to the courts that they should exercise extreme caution before invoking subjective domestic concepts of public policy to deny effect to contractual provisions contained in an international contract which are valid and enforceable under the law governing that contract. V. Choice of Law for the Proprietary Aspects of Assignments Under article 29, the sphere of the proper law of the contract of assignment is clearly confined to the purely contractual or personal aspects of the assignor/assignee relationship, e.g. the interpretation of its terms and conditions including implications as to party intent, the assignee's obligation to pay the price or to render the promised credit as the case may be, the existence and effect of any representations and warranties as to the validity and enforceability of the assigned debt, and as to the assignee's recourse against the assignor in the event of breach. But what law governs the assignment itself, i.e., the actual transfer of title, or the creation of security rights, in the assigned receivables as opposed to the contractual arrangements surrounding that transfer? Considerations of comparative law support referring issues relating to the proprietary aspects of assignments to the law governing priority.97 This is because, while some legal systems draw

95. See, e.g., GOODE, supra note 3, at 1111-13; see also Voser, supra note 72. 96. UNCITRAL Convention article 32. 97. See the persuasive analysis by Struycken, supra note 3, at 357-360.

HeinOnline -- 106 Dick. L. Rev. 188 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 189 a clear distinction between the inter partes and third party effectiveness of assignments, and their relative priority ranking, in others, the only question is whether the assignor has done whatever is required to vest title to the assigned receivable in the particular assignee. If so, the assignment takes effect simultaneously against the debtor and third parties, including subsequent assignees and the assignor's insolvency administrator. This diversity of conceptual approaches makes it difficult, in devising a workable choice of law formula, to sever the law to govern issues relating to the proprietary effectiveness of the assignment from the law to govern issues relating to its third party effects. The Convention seeks to straddle the murky property/priority dividing line through an expansive definition of the scope of the "priority" issues governed by the law of the assignor's location. Read in isolation, the definition is broad enough to capture the property transfer rules of the applicable law on the theory that the satisfaction of any requirements necessary to render an assignment effective as between the parties are necessarily also preconditions to the effectiveness of the assignment against third parties.98 In other words, where issues of proprietary effectiveness arise in the context of a priority dispute with a competing claimant, the Convention can be read as endorsing the view that property and priority issues should be subject to the same governing law; the law of the assignor's location. However, for assignments within the territorial scope of the Convention, the choice of law rule for priority in article 22 (and the associated definition of priority in article 5(g)) has to be read in conjunction with the substantive rule in article 8 dealing with the effectiveness of assignments.' Article 8 stipulates that an assignment is not ineffective and may not be denied priority even against third parties solely on the ground that it involves multiple receivables or future receivables. This attempt to combine a substantive rule for the effectiveness of assignments and a choice of law rule for priority

98. Article 5(g) defines "priority" for the purposes of the choice of law rule in article 22 (and the parallel rule in article 30 of Chapter V) as follows: "'Priority' means the right of a person in preference to the right of another person and, to the extent relevant for such purpose, includes the determination whether the right is a personal right or a property right, whether or not it is a security right for indebtedness or other obligation and whether any requirements necessary to render the right effective against a competing claimant have been satisfied." 99. The opening words of article 22 indicate that the law of the assignor's location governs priority "with the exception of matters that are settled elsewhere in the Convention..."

HeinOnline -- 106 Dick. L. Rev. 189 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 may give rise to difficult interpretive questions depending on the content of the legal regime in place in the particular assignor's location. Consider, for instance, the provisions of the 1992 Dutch Civil Code under which an assignment by way of security takes effect only upon notification of the debtor or upon execution (and registration in a private registry to prevent fraudulent antedating) of a notarial deed specifically listing the assigned receivables one by one.' °° By virtue of these requirements, it is clear that an assignment of the kind sought to be validated by article 8 of the Convention-an assignment of all present and future debts owing to the assignor-would be treated as invalid and ineffective as a matter of Dutch law. But what if the Netherlands were to adopt the Convention? Article 8 stipulates that an assignment cannot be declared ineffective even against third parties merely because it involves unspecified future or multiple receivables. It is arguable that article 8 would therefore operate to render such an assignment effective, even against competing claimants, and even though, assuming the assignor were Dutch, the law of the Netherlands would be the law otherwise applicable to priority under article 22 of the Convention. While this result might seem welcome in view of the criticism that has been levelled against the restrictive Dutch regime, it does little to advance certainty and predictability. After all, if Dutch law does not contemplate such an assignment ever being effective in the first instance, how can the parties predict how its priority status will be resolved?1 ' The preceding analysis suggests that if confusion is to be avoided, states that elect to implement the Convention may need to adjust their domestic rules on the effectiveness of assignments of bulk and future receivables in a manner compatible with the liberal Convention rules. It would still be open to these states to limit the third party effects of such assignments if this is considered desirable for public policy reasons, e.g., in order to preserve a cushion of assets in the form of future receivables to feed the claims of the assignor's execution creditors or insolvency trustee. However, to enable the smooth coordinated application of articles 8 and 22, this

100. See Struycken, supra note 3, at 352. 101. As noted earlier, in Brandsma q.q. v. Hansa Chemie AG, May 16 1997, supra note 12, the Hoge Radd validated such an assignment of future receivables, relying on an implied choice of German law in the Dutch assignor's contract of assignment. However, the contest there was between the assignee and the assignor's Dutch liquidator meaning that simple property theories were adequate to resolve the priority issue. But if the dispute involved competing assignments, the courts would have to manufacture a more sophisticated theory of priorities.

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will likely need to be done via an explicit priority or third party opposability rule fashioned in a manner that does not bring about an a priori invalidation of an assignment of future receivables. In other words, States unfamiliar with the concept may nonetheless need to introduce the idea of the relativity of title into their assignment laws in order to accommodate future receivables financing as contemplated by article 8 while still preserving their own national substantive priority policies as contemplated by article 22. In the context of current Dutch law, a rule which authorized the effective assignment of future receivables, but then ordered priority against competing claimants on the basis of the time of notification of the debtor or execution of a deed identifying the particular receivable, would probably work. Although such a regime would continue to impair full-fledged future receivables financing, it would not run directly afoul of article 8 since it would not operate to invalidate such assignments in the first instance. In other words, while article 8 will likely have the effect of bringing about a liberalization of the domestic rules of Contracting States so as to permit bulk and future receivables financing, the ultimate effectiveness of such assignments against third parties, including insolvency administrators, will still be dependent on the national priority policies of the assignor's home State.

VI. Choice of Law for Formal Validity of Contracts of Assignment

The preceding discussion sheds some light on the issue of the choice of law to govern the formal validity of a contract of assignment. Because the contract of assignment is usually the vehicle by which the assignment itself is effected, legal systems often prescribe special formality requirements, especially where the assignment operates by way of security. In some cases, compliance with the relevant formality is a precondition even to the inter partes effectiveness of the assignment." In other legal systems,

102. This is the rule of U.C.C. article 9 under which the contract effecting or evidencing the assignment must be reduced to a writing signed by the assignor and containing a description of the assigned receivables for the assignment itself to become effective. See revised U.C.C. article 9§-203(b)(3)(A). It is also the approach taken by the Civil Code of Quebec (CCQ) in the case of hypothecary assignments, that is to say, an assignment of receivables by way of security. Article 2696 of the CCQ requires a security assignment to be granted in writing and signed by the parties, on pain of absolute nullity. Moreover, the writing must contain a description of the receivables and indicate the maximum $ sum secured by the security right.

HeinOnline -- 106 Dick. L. Rev. 191 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 compliance with the relevant contract formality is necessary only for the purposes of third party effectiveness of the assignment.10 3 These differences indicate that formal requirements may be intended to perform multiple functions, relevant to both the inter partes and third party contexts, depending on the particular legal regime and its policy concerns. As between the parties, a formality rule may be designed to protect the assignor by bringing home the seriousness of the undertaking. Or it may be aimed at minimizing future disputes between the parties as to the scope of the receivables covered by the assignment. As regards third parties, especially third party creditors, a writing requirement or other contract formality, e.g., a notarial instrument, may be intended to operate as a prophylactic against the heightened risk of fraudulent collusion which exists with oral assignments, either in the form of a collusive antedating of the assignment, or collusion as to the true scope of the receivables assigned. In systems in which priority is ordered according to a simple first in time rule, formality rules may also function to establish a "certain date" for the ranking of competing assignments, thereby avoiding a waste of judicial resources on resolving difficult evidentiary issues. Other formality rules, e.g., a requirement to specify the value or maximum value of the secured obligation in the context of a security assignment, may be aimed at limiting the value of the assignee's priority as regards competing claimants, thereby also limiting that assignees's monopolistic position in the provision of credit to the debtor. '°4 The same is true in respect of formalities rules that require specification of the assigned debts in a written document to the extent that such rules are intended to ensure that a certain level of future receivables will remain free to satisfy unsecured creditor claims. Because the purpose of formality rules thus includes the protection of third parties in the position of competing creditors, it follows that such rules may also partake of the character of priority rules. As such, they should logically be referred to the law applicable to priority.

103. For instance, the Canadian Personal Property Security Acts require the contract of assignment to be signed by the debtor and to describe the assigned receivables only in order for the assignee's property interest in the receivables to take effect as against third parties. As between the parties, an assignment can be effected via a purely oral agreement. See, e.g., British Columbia PPSA §§ 10, 12(1)(c). 104. This is the approach taken in the Civil Code of Quebec, supra note 102.

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How does the Convention accommodate the diverse nature of formality rules, and their diverse purposes? Article 27 of Chapter V adopts a relatively flexible and facilitative choice of law rule in line with the approach taken generally to contact formalities in the Rome Convention. If the contract is concluded between parties located in the same State, it is formally valid if it meets the form requirements of its proper law or of the law of the state in which it is concluded. If the parties are resident in different states, the contract is formally valid as long as it conforms either to its proper law or to the law of either of the States in which the parties are located. However, article 27 is explicitly confined to issues of formal validity where they arise as between the parties. It follows that even if the contract is formally valid under one or another of the laws designated as applicable, the assignment itself may still be ruled invalid for failure to comply with the formality rules of the law of the assignor's location to the extent these requirements are interpreted as [also] relating to priority.

VII. Law Applicable to the Characterization of "Assignments" as Sale or Security The term "assignment" is not uniformly understood. In some legal systems, it designates an outright sale of the relevant receivables, as distinct from their hypothecation as collateral for secured debt. In others, it encompasses all transactions intended to vest real rights in receivables in another, whether by way of ownership or merely security. In still others, it refers merely to the form of the transaction, not its substantive character. The Convention uses the term assignment to cover both the transfer of and the creation of rights in receivables as security."' It follows that the Convention conflicts regime applies to both types of transaction. This is appropriate. There is no rational reason to have a different choice of law rule for each. Indeed, such a distinction would make the conflicts regime unworkable from the point of view of both the debtor and competing claimants. They would be forced to investigate and seek legal advice on the substantive nature of the assignment in order to know what law governed their rights vis d vis the assignee. Moreover, priority between competing assignments, one by sale and the other by

105. See UNCITRAL Convention article 2(a).

HeinOnline -- 106 Dick. L. Rev. 193 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 security, would end up being governed by different laws, leading to an impasse. This is not to say that the nature of the transaction is irrelevant in applying the choice of law rules of the Convention. The distinction between sale and security determines the extent of the assignee's interest in the assigned receivable against the assignor. An assignor who has sold its receivables outright has no further claim to them, whereas one who has assigned them merely as security, is entitled to any value left once the underlying secured debt has been paid. This indirectly affects priority, insofar as characterization determines the quantum of the priority right enjoyed by the assignee under the applicable national law against competing claimants. It is for this reason that the Convention defines the scope of the "priority" issues governed by the law of the assignor's location to include the determination of whether or not the assignment is a security right for a debt or other obligation.1 6

VIII. Choice of Law for Assignee and Debtor Relations

A. Introduction

Chapter V of the Convention also deals with the appropriate law to govern relations between the assignee and debtor.1 7 Even if the assigned receivable can be conceived as property in the hands of the assignor as against the assignee, the contractual relationship between the assignor and debtor continues to exist after the assignment. This requires a choice of law solution which protects the debtor against undue prejudice to his or her original contractual rights and obligations, without unduly impeding the assignee's expectations of payment, thereby undermining the ability of creditors to secure optimal value for their receivables. Historically, there was considerable debate among conflicts analysts as to the most appropriate connecting factor to satisfy these competing tensions.10 Opinion was divided between the law of the domicile of the original creditor on the debt (that is, the assignor) and the law of the domicile of the debtor. Neither alternative seems quite satisfactory since each ends up favouring exclusively one or the other of the parties to the original contract. To give a greater appearance of objectivity to the choice of the

106. UNCITRAL Convention article 5(g). 107. See UNCITRAL Convention article 29. 108. See, e.g., Batiffol, supra note 3.

HeinOnline -- 106 Dick. L. Rev. 194 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 195 debtor's domicile, it is sometimes argued that it reflects the notional lex situs of the debt since this is the place where any action to enforce the debt will often have to be taken as a practical matter. °9 On the other hand, one might just as logically argue that the notional lex situs of the debt is the original creditor/assignor's location. After all, many legal systems, in the absence of an express term, regard the place of payment as being the creditor's location on the theory that a debtor is impliedly obligated to seek out the creditor. Today, application of the law governing the assigned obligation is generally thought to be the approach that best reflects the interests of the concerned parties. This is the rule endorsed by article 29 of Chapter V of the Convention, following the general lead of article 12(2) of the Rome Convention. However, whereas the Rome Convention refers to "the law governing the receivable to which the assignment relates," article 29 of the UNCITRAL Convention more precisely speaks of the law governing the original contract between the assignor and the debtor. Greater linguistic precision is possible because, unlike the Rome Convention, the UNCITRAL Convention applies only to contract-generated receivables. ° Application of the proper law of the original contract is fair to the debtor because it ensures that the debtor's original rights and obligations can be changed by the assignment only to the extent permitted by the law under which the debtor undertook those rights and obligations. And it does not unduly undermine the assignor's ability to market the debt to prospective assignees since, from the latter's perspective, the law governing the original contract is foreseeable at least in the context of an assignment of presently owed or specifically identified receivables. As for bulk assignments and assignments of future receivables owing by future unknown debtors, predictability can be enhanced by virtue of an arrangement between the assignor and assignee requiring the assignor to include a choice of law clause in its contracts with its debtors and to warrant the governing law in respect of all such contracts.

109. See, e.g., Moshinsky, supra note 3. 110. UNCITRAL Convention article 2(a).

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B. Relationship Between Article 29 and the TerritorialScope Rules of the Convention

Article 29 is fairly explicit as to the issues falling within the scope of the law governing the original contract: the effectiveness of contractual limitations on assignment as between the assignee and debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor, and any question relating to whether the debtor's obligations have been discharged.1" Most of these issues are the subject of a uniform substantive rule in the preceding articles of the Convention.1 2 If follows that the role of article 29 is quite limited as a supplementary gap filling technique for assignments which fall within the overall scope of the Convention. However, it will be recalled that even if the assignor is located in a Contracting State, the substantive provisions of the Convention as they relate to the debtor are triggered only if the debtor is also located in a Contracting State or the law governing the original contract is the law of a Contracting State."3 This latter connecting factor may enable an assignee who wishes to ensure that the substantive rules of the Convention apply to a debtor who is not located in a Contracting State to indirectly achieve that result by requiring the assignor to include an express choice of law clause in the original contract in favour of the law of a Contracting State. This technique may not, however, be completely reliable if the litigation is heard in the debtor's home jurisdiction. The courts of a non-contracting State are not of course bound by the Convention and may not be prepared to interpret the contractual reference in the original contract to the law of a Contracting State as a reference to that State's Convention rules as opposed to its purely domestic rules. Even if this interpretive hurdle is surmounted, forum public policy and forum super-mandatory rules may be invoked to reject application of the substantive rules of the Convention rules as they relate to such controversial issues as nullification of the effects of an anti-assignment clause as between the assignee and debtor.

111. UNCITRAL Convention article 29. 112. See generally UNCITRAL Convention Chapter IV, Section II, comprising articles 15-21. 113. UNCITRAL Convention article 1.3. And see text infra under the sub- heading "Scope of Application of the Conflicts Rules of the Convention."

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C. Preservationof Overriding Consumer Protection Norms of the Debtor'sHome State

The substantive provisions of the Convention as they relate to the debtor are subject to the express preservation of any applicable consumer protection norms. The Convention contains an omnibus provision preserving the effectiveness of consumer protection laws governing the protection of a debtor under consumer protection laws, i.e., laws governing the protection of the parties to transactions made for personal, family or household purposes."' So, for instance, notwithstanding that the Convention validates the effect-iveness of a waiver by the debtor of defences or set-off rights available under the original contract,"5 this will be subject to any applicable consumer protection laws nullifying the effects of such a waiver. The law governing the original contract presumably governs the question of whether or not a particular consumer protection norm applies so as to override the substantive provisions of the Convention. Does this mean that consumer protection norms enacted by the state in which the debtor is located can be evaded by inserting a choice of law clause in the original contract in favour of a less protective legal regime? To allow this would nullify the policy underpinning the explicit preservation of consumer protection laws. Two theories can, and likely will be, invoked to avoid that result. First, in light of the general principle of consumer protection articulated in the Convention, the forum court may well interpret the reference to the "law governing the original contract" as requiring an objective reference, in the case of a contract involving a consumer debtor, to the most-closely connected law, as opposed to giving full effect to party autonomy.' 6 Alternatively, even if the choice of law clause is given presumptive effect, the court may still appeal to those provisions of Chapter V which preserve the super-mandatory norms of the forum or a closely connected third state to override the otherwise applicable law."7

114. UNCITRAL Convention article 4.4. 115. UNCITRAL Convention article 19. 116. See the interpretation principles in article 7.2. 117. UNCITRAL Convention article 31.

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D. Law Applicable to Debtor's Set-off Rights

Does the law governing the original contract also determine the availability to the debtor of set-off rights and defences as against the assignee? The question is important because, on the matter of set-off, the substantive provisions of the Convention do not supply an exhaustive code. It follows that the choice of applicable national law may be relevant even in respect of assignments within the direct scope of the Convention. In exploring this question, it is useful to distinguish between what is sometimes called transaction set-off and independent set- off."8 Transaction set off is a cross-claim arising out of the same transaction or one so closely related that it operates as a complete or partial defeasance of the plaintiff's claim. Independent set-off, as its name suggests, does not require any relationship between the transactions out of which the cross claims arise. Under the substantive provisions of the Convention, transaction set-off-defined as defences and rights of set-off arising from the original contract, or any other contract that was part of the "same transaction" -is available to the debtor in a claim for payment of the receivable by the assignee to the same extent as if the claim had been made by the assignor."9 In other words, it makes no difference whether the defence or set-off right arose before or after the debtor received notification of the assignment. In contrast, independent set-off -referred to in the Convention simply as "other rights of set-off"-may be raised against the assignee only if the right was "available" to the debtor at the time notification of the assignment was received. ° The approach taken by the Convention to transaction set-off reflects a widely-shared consensus at the national law level. 2' Nonetheless, the rule does not dispense with the need to resort to national law. Recourse to national law will still be necessary to determine what substantive defences and rights of set-off are available to a debtor by way of transaction set-off, and to determine when a related contract is considered to be sufficiently connected to the original contract to constitute part of the "same transaction"

118. See, e.g., PHILIP WOOD, TITLE FINANCE, DERIVATIVES, SET-OFF AND NETTING 101, 110 (London: Sweet & Maxwell, 1995). 119. UNCITRAL Convention article 18.1. 120. UNCITRAL Convention article 18.2. 121. See K6tz, supra note 37, at 89-91.

HeinOnline -- 106 Dick. L. Rev. 198 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 199 and therefore qualify for transaction set-off. But which national law? The choice of law rule for assignee-debtor relations in article 29 of Chapter V does not explicitly cover set-off issues, and this silence was deliberate. Nonetheless, transaction set-off is arguably covered as an aspect of "the conditions under which the assignment can be invoked against the debtor." Although the conflicts literature on set-off is sparse, at least one commentator considers this to be the result intended by art 12(2) of the Rome Convention from which article 29 is derived.122 As a matter of logic and policy, it is difficult to see what law other than the law governing the original contract should govern defences and cross-claims arising under that contract and any related transactions. The appropriate law to govern the availability of independent set-off rights is more problematic. The choice of law issue is important in view of the significant absence of uniformity at the substantive law level among different legal systems on such issues as the pre-conditions to the availability of independent set-off (must the debt have become payable before notification or is it sufficient for the claim to have accrued?) and the manner in which set-off is exercised if by self-help (e.g., automatic or by declaration). 3 It has been suggested that in principle, the question of whether a claim may be discharged by independent set-off should be governed by the law of the claim which the debtor asserts has been discharged by set-off.124 Application of the law of the primary claim, it is argued, would confer some measure of predictability of result where one law allows set-off and the other does not. In the context of a claim by the assignee against the debtor, this would lead to application of the law governing the original contract. In the view of others, such a choice of law rule would be unfairly arbitrary. By definition, independent set-off comes from an independent transaction or event which may have a different governing law than that which governs the primary claim under the original contract, and which may regulate the conditions for the availability of set-off in a different fashion than would the law governing the original contract. The only fair way to accommodate this duality in governing laws, it has been suggested, is to apply a cumulation of laws, i.e., independent set-off should be available

122. See WOOD, supra note 118, at 145. 123. See K6tz, supra note 37, at 91-92; WOOD, supra note 118, at 143. 124. See WOOD, supra note 118, at 144.

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only to the extent it is available under both the law governing the primary claim and the law governing the independent cross-claim.'

E. Effectiveness of Assignments Contrary to a No-Assignment Clauses

Under the Convention, an assignment is fully effective even if a term in the original contract purports to prohibit or restricts its assignment (an anti-assignment clause). The debtor retains a right of action against the assignor for breach of the term, but the assignment itself is valid, both as between the parties, and as against the debtor.26 The approach taken by the Convention is not without controversy. A debtor may have sound commercial reasons for incorporating an anti-assignment clause in the contract. Yet if such clauses were rigorously enforced, this would deprive businesses- particularly small and medium sized businesses without sufficient bargaining power against economically stronger customers-to use what may be their most valuable assets to raise credit or capital. These competing tensions have lead to wide variations in legal systems on the appropriate treatment of anti-assignment clauses.27 In some, the statutory policy is broadly similar to the Convention. In others, an assignment in breach of an anti-assignment clause is still valid as between the parties, but cannot be enforced by the assignee directly against the debtor.9 In still others, the anti-

125. Id. at 144. 126. See articles 9, 10.2-3. Article 18.3 further confirms that breach by the assignor of an anti-assignment clause does not constitute a defence or give rise to a right of set-off if the assignee claims payment of the receivable from the debtor. 127. See Ktz, supra note 37, at 64-70. 128. In Canada, this is the general rule under the Personal Property Security Acts except for the Ontario PPSA: see, e.g., section 41(9) of the Saskatchewan PPSA and section 41(10) of the New Brunswick PPSA. The rule is justified as necessary to facilitate receivables financing, In France, anti-assignment clauses are thought to be invalid, not so much in the interests of supporting access to commercial credit, but as contrary to the long-standing strong French public policy against restraints on the alienation of property. Italian law takes the same approach. See Kotz, supra note 37, at 64-65. 129. This is the current position in the Canadian province of Ontario. See Rodaro v. Royal Bank of Canada [2000] [QL] O.J. 272, approving Yablonski v. Cawood (1997), 143 D.L.R. (4th) 65 at 76 (Sask. C.A.) (which held that even if a contract contains a prohibition on assignment, the assignment would still be effective as between assignor and assignee; such a prohibition merely prevents the assignee from having direct recourse against the non consenting party to the assigned contract). However, the Canadian Bar Association-Ontario Branch recently recommended amendments designed to bring Ontario policy into conformity with the more liberal policy found in the other PPSAs on this point.

HeinOnline -- 106 Dick. L. Rev. 200 2001-2002 2001] RECEIVABLES FINANCING AND THE CONFLICT OF LAWS 201 assignment clause nullifies the effectiveness of the assignment not just as against the debtor but also between the assignee and competing third party claimants (despite the fact that such a contractual term is clearly aimed only at the protection of the debtor) .130 In light of this controversy, the scope of the provisions of the Convention nullifying the effects of assignment clauses is limited to assignments of what might loosely be called ordinary trade receivables.13 It follows that the effects of an anti-assignment clause in the case of other assignments will instead be determined by the law governing the original contract pursuant to article 29. Article 29 may also have a role to play even in cases where the assignment itself falls within the scope of the substantive anti- assignment clause provisions of the Convention. If the application of the Convention has not also been triggered as against the debtor,'32 these provisions will only operate to ensure that the assignment takes effect as between the assignor and assignee. They cannot deprive the debtor of the benefit of any protection which the law governing the original contract offers pursuant to the choice of law rule in article 29. Article 29 is concerned with the assignee's rights against the debtor, the aim being to protect the debtor against an involuntary change in the law regulating those rights. It follows that if the contract under which the receivable arises contains a prohibition on assignment, and the law governing that contract entitles the debtor to ignore the assignee's title or security interest under a subsequent assignment in breach of that prohibition, then the debtor should be able to invoke the protection of that law, regardless of what the law governing the contract of assignment may say.133

See Submission to the Minister of Consumer and Commercial Relations Concerning the Personal Property Security Act 19-20 (Toronto: Canadian Bar Association- Ontario, 21 Oct 1998). In the civil law province of Quebec, the position is uncertain. The validity and effects of anti-assignment clauses are not addressed explicitly in the Civil Code. However, some analysts believe that an assignment in breach of an anti-assignment clause would be valid, not only as between the assignor and assignee and as against third parties but also against the debtor, by virtue of the general codal articles which limit the effectiveness of stipulations which attempt to restrict the free alienation of property rights by contract. See articles 1212-1217. 130. This is the general rule in German, Swiss and Austrian law. See Kotz, supra note 3, at 65-67. 131. UNCITRAL Convention articles 9.3, 10.4. 132. UNCITRAL Convention article 1.3. And see the text under the sub- heading "Scope of Application of the Conflicts Rules of the Convention" supra. 133. See GOODE, supra note 3 and Moshinsky, supra note 3 who make this

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For assignments falling wholly outside the Convention, article 29 will also determine the choice of law to govern the assignee's rights as against the debtor in the face of an anti-assignment clause. However, the debtor may also be able to rely on the law governing the contract of assignment, pursuant to the choice of law rule in article 28. If that law treats an assignment in breach of an anti- assignment clause as a complete nullity even as between the parties, then surely it is also a nullity as against the debtor, even where the debtor's own law is less protective.

F. Statutory Prohibitionsor Restrictions on Assignments

Issues relating to the effectiveness of an assignment, between the parties and against third parties may also arise as a result of a statutory prohibition on the assignment of certain classes of receivables, e.g, future wages, pension entitlements, or family maintenance payments owing to individual debtors, or payments due under life insurance policies. Article 12(2) of the Rome Convention refers issues of "assignability" to the law governing the receivable and at least some analysts regard this as including issues of assignability stemming from statutory restrictions. There are, however, logical difficulties with that assumption. If the law regulating the assignee's right to the receivable against the assignor prohibits the assignment, then surely the assignee has no right to the receivable against the debtor. Happily, article 29 does not incorporate the confusing term "assignability," and the Convention elsewhere explicitly confirms that it is not intended to affect limitations on assignment arising from law. 34 This is appropriate. Most statutory prohibitions on assignment are directed at the protection of the assignor or the assignor's family, rather than the debtor. Consequently, their territorial scope of operation would normally be limited to cases involving an assignor resident within the enacting jurisdiction. It follows that issues of assignability arising from the effect of statutory prohibitions on assignment would normally be covered by the choice of law governing the in rem effect of the assignment as between the assignor and assignee without ever getting to the choice of law issue covered by article 29 which is concerned with the rights of the assignee under a valid assignment against the debtor.

point in the context of the equivalent rule in article 12(2) of the Rome Convention. 134. UNCITRAL Convention article 8.3.

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IX. Concluding Observations On the whole, the choice of law rules of the Convention respond exceedingly well to contemporary currents of private international law opinion in the light of commercial needs. This is most dramatically seen in the designation of the law of the assignor's location as the governing law for issues relating to the priority of the assignee's interest against competing claimants, a rule crafted to accommodate modern financing practices where bulk assignments of present and future receivables are commonplace. The Convention nonetheless leaves open some areas of uncertainty, perhaps inevitably. The issue of what law governs the proprietary effectiveness of an assignment is most problematic in this regard. From a pure choice of law perspective, the optimal solution would be to subject the property aspects of an assignment to the same law that governs priority. This is because, while priority in the usual sense presupposes a valid assignment, the issues of validity and priority are not so neatly separated in many legal systems. Instead, the constitutive rules for a valid assignment often incorporate elements aimed at the protection of both the immediate parties and third parties, making it conceptually difficult to cleanly separate the issues at the level of choice of law, and objectionable to do so at the level of policy. For assignments falling within the direct scope of the Convention, however, such a separation is necessary. This is because the Convention combines a substantive rule validating the effectiveness of assignments of multiple and future receivables with a choice of law rule for issues of priority. Consequently, Contracting States, if confusion is to be avoided, will need to ensure that their domestic laws on the effectiveness of such assignments are liberalized to an equivalent degree. Otherwise their courts will be left with the difficult task of having to deconstruct the priority rules of the assignor's location to determine whether or not they are overridden as indirectly impeding such assignments. So, while the decision to adopt a choice of law solution to the issue of priority was taken so as to avoid interference with domestic priority policies, some interference was inevitable to accommodate the consensus among Commission members on the wisdom of endorsing the free assignability of the full range of present and future receivables owing to an assignor. However, the interference is minimal. The state in which the assignor is located remains free to impose whatever level of policy restrictions on the priority or

HeinOnline -- 106 Dick. L. Rev. 203 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 distributive effects of assignments of future and multiple receivables are feel to be necessary to protect competing assignees and the assignor's creditors. All that is required is that the rule be expressed in a way which avoids the a priori invalidation of such assignments. Designation of the assignor's law to control priority represents a partial return to an earlier era of globalized trade in which commercial transactions involving movable assets wherever located were referred to a single governing law, that of the domicile of the owner, the assignor in this context. We.are not likely, however, to see the assignor's law resurrected to any equivalently comprehensive extent. While the Convention covers most types of contract-generated receivables, it excludes a number of commercially important categories, including bank deposits and receivables arising out of investment securities and other financial assets or instruments held with an intermediary. "6 The question of whether and why a different specialized choice of law rule may be needed for these excluded categories is the subject of another article. What is important is that the UNCITRAL Convention has established the assignor's law as the baseline rule for choice of law in intangibles, shifting the burden of proof to those who wish to advocate any deviation from the single governing law theory for global assignments which underpins the rule.

135. As reflected in the quote from the 1795 English decision in Phillips v. Hunter reproduced at the beginning of this article: see above footnote 1. 136. UNCITRAL Convention article 4.2.

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Louis F. Del Duca* and Patrick Del Duca**

I. Applicability-Statute of Frauds and Parol Evidence Issues ...... 207 Places of Business In Different ContractingStates-Statute of Frauds and Parol Evidence Issues ...... 208 Liaison Office Which Does Not Qualify as a Place of B usin ess...... 212 Private InternationalLaw-Conflict of Laws ...... 213 Conflicts Rule of the Forum State Leads to the Application of the Law of a State that has Ratified the CISG ...... 213 Op t In ...... 2 14 Ambiguities Created By Opting Into the Law of a ContractingState Without Explicitly Specifying that the CISG Is Included or Excluded...... 214 L ex Mercatoria ...... 218 Use of "Lex Mercatoria"as Basis for Applying the CISG Where the Convention Is Not Otherwise Applicable ...... 218 II. Timely Discovery and Notification of Nonconformity of Goods ....219 Exam ination Requirement ...... 219 How Much Time Does the Buyer Have to Examine the Goods and D iscover Defects? ...... 220 Timely Notification of Nonconformity by the Buyer ...... 222 Seller's Knowledge or Reason to Know of Nonconformity Bars Use of Defense that Buyer Failed to Make Timely Discovery or Give Timely Notice of Nonconformity...... 225 Advantage of Clause Providingfor Explicit Time for Giving N o tice ...... 227 Ineffective Cure-New Notice Required ...... 228

* A. Robert Noll Professor of Law, Associate Dean for International and Comparative Law Program, Director, Center for International and Comparative Law, The Dickinson School of Law of The Pennsylvania State University; President-elect International Academy of Commercial and Consumer Law. ** Partner, Kelley, Drye & Warren, Los Angeles, California. Adjunct Professor, UCLA Law School.

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1II. New Concepts in Breach and Remedies ...... 228 Specific Performance ...... 228 Seller's R ight to Cure ...... 231 FundamentalBreach and Avoidance ...... 232 "Nachfrist ...... 236 "Adequate Groundsfor Insecurity -Anticipatory R ep udiation ...... 240 Buyer's Damages and Reduction of Price...... 244 IV. Award of Attorney's Fees to Prevailing Party-Statutory, Agreement and Bad Faith Theories ...... 246 V. Current Status of the United Nations Convention on Contracts for the International Sale of Goods ...... 249 V I. CISG R eporting Services ...... 253

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The Convention on International Sale of Goods (CISG)1 has been in effect since January 1, 1988 following its ratification by ten States (including the United States). The CISG has now been ratified and is in effect in 60 countries, including all three of the North American Free Trade Area countries (i.e., Canada, Mexico and the United States) and most of the European Community Member States as well as China and Russia. It covers much of the same ground as Article 2 of the Uniform Commercial Code and substantial similarities exist between the CISG and the Uniform Commercial Code. However, as this article illustrates, the CISG handles many important issues in ways different from the UCC.

I. Applicability-Statute of Frauds and Parol Evidence Issues

Overview

There are four bases for applying the CISG: (1) Places Of Business In Different ContractingStates The parties to the contract have their places of business in different states and such states are Contracting States (hereafter referred to as the "places of business in different contracting states" basis for applying the CISG). (2) PrivateInternational Law- Conflict of Laws Only one of the parties has a place of business in a contracting state and the rules of private international law lead to the application of the law of a state that has ratified the Convention (hereafter referred to as the "private international law-conflict of laws" basis for applying the CISG); (3) Opt In The parties to the contract include a choice of law clause making the CISG applicable to their contract (hereafter referred to as the "opt in" basis for applying the CISG); or (4) Lex Mercatoria The CISG can be applied because it is part of the "lex mercatoria". The CISG is applicable if: (a) the parties to the contract have their places of business in different states and such states are

1. CISG (The United Nations Convention on Contracts for International Sale of Goods, U.N. Doc. A/Conf.97/19 (1981); 19 I.L.M. 668 (1980). The U.N. English language text is reproduced in 52 Fed. Reg. 6264 (1987); 15 USCA App.). Article 99 of the CISG provides in part that "This convention enters into force... on the first day of the month following the expiration of twelve months after the date of deposit of the tenth instrument of ratification ...." CISG, Art. 99(1).

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Contracting States; or (b) if the rules of private international law lead to the application of the law of a state which has ratified the Convention.2 The CISG may also be applicable despite the fact that a transaction is not covered by the "place of business" or "conflict of laws" rules. The parties may include in their contract a provision to make the CISG applicable (i.e. opt in to the CISG). The Convention then will be applicable if such a provision is permitted under domestic law. The Convention has also been applied on a "lex mercatoria" basis (i.e. as a restatement of generally recognized rules of commercial law).

Places of Business In Different ContractingStates: Statute of Frauds and ParolEvidence Issues

If the individual parties to the sales transaction have places of business in more than one state, selection of the state to be used in determining whether the parties have places of business in different Contracting States is made under the "place of business" definition in Article 10. This provides that for purposes of the CISG, the "place of business" is the one "which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract." The term "conclusion of the contract" is used in this context to refer to the time of formation of the contract. Recent United States cases have routinely recognized the applicability of the CISG where Seller and Buyer have their place of business in different contracting states. Statute of fraud and parol evidence issues have arisen in recent "applicability" cases noted below. Unlike the statute of frauds requirement in Section 2-201 of the Uniform Commercial Code (U.C.C.), Article 11 of the CISG makes an oral contract for the sale of goods enforceable despite the absence of any writing evidencing the contract. However, Article 96 allows ratifying countries to make a reservation that makes the CISG Article 11 inapplicable. The United States has not made such a reservation. CISG Article 8(3), in effect, abolishes the parol evidence rule by directing courts to consider all relevant circumstances of the case, including negotiations, to determine the parties' intent.

2. See CISG Articles 1(1)(a), 1(1)(b).

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Recent cases suggest that courts are beginning to correctly apply the Article 8(3) abolition of the parol evidence rule.

Case No. 1: In sharp contrast to the earlier decision in GPL (discussed infra), the court in Calzaturificio Claudia recognized the applicability of CISG under the "places of business in different contracting states" rule.' Claudia involved a contract for a sale of shoes between an Italian manufacturer and a United States buyer. Applying Article (1)(1)(a), the court stated that the CISG was applicable "because the contractual relationship between the seller, an Italian shoe manufacturer, and a buyer, a United States corporation, did not provide for a choice of law .... Applying CISG Article 11, the court rejected the buyer's argument that in the absence of a written contract or any purchase order setting forth the terms of the parties' sales transaction no enforceable agreement existed between the buyer of the shoes and the manufacturer. The court concluded that "unlike the U.C.C., under the CISG a contract need not be [in writing] or evidenced by a writing.., and is not subject to any other requirement as to form." The court also noted that under CISG Article 8(3) a contract may be proved by any means and any evidence that may bear on the issue of formation is admissible. This provision frees the CISG contracts from the limits of the parol evidence rule and any evidence that may bear on the issue of formation is admissible. The court stated: "Consequently, the standard U.C.C. inquiry regarding whether a writing is fully or partially integrated has little meaning under the CISG and courts are therefore less constrained by the four corners of the instrument in construing the terms of the contract."

Case No. 2: An American buyer brought an action against an Italian seller of tiles for breach of contract. The seller counterclaimed seeking damages for non-payment. The court stated that since the parties had their place of business in different contracting states (the United States for buyer and Italy for seller), Article

3. CISG Article 1(1)(a). 4. Calzaturificio Claudia s.n.c. v. Olivieri Footwear Ltd, 1998 WL 164824 (S.D.N.Y.) (Not reported in F. Supp.).

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1(1)(a) governs. The court also considered evidence of the parties' subjective intent that certain terms of their written agreement were not applicable. It ruled that the U.C.C. parol evidence rule does not apply to cases involving the CISG.5

Case No. 3: In a dispute over allegedly defective fruit sold by an Argentinean seller to a Mexican buyer, COMPROMEX 6 ruled that the CISG was applicable and that Argentina had effectively exercised its reservation right under Article 96 of the CISG to make Article 11 inapplicable. COMPROMEX nevertheless decided that despite the inapplicability of Article 11, a contract of sale was concluded between the parties under Argentina law because of the exchange of documents, payment under the letter of credit, the parties' course of conduct, and the Argentinean seller's own admissions. COMPROMEX concluded that there was therefore no need for the parties to draft a formal contract and that a different interpretation"would be in conflict with the general principles of the CISG."7

Case No. 4: The Morales case highlights the distinction between Art. 11 of the CISG and Section 2-201 of the U.C.C. The Mexican Commission for the Protection of Foreign Trade

5. MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, S.P.A, 144 F.3d 1384 (11th Cir. 1998). 6. The Mexican Commission for the Protection of Foreign Commerce ("COMPROMEX") is a governmental entity established in 1956 for the purpose of supervising ethical standards in the practice of foreign commerce. COMPROMEX has set up a committee composed of representatives of various official bodies, which provides Mexican importers and exporters, as well as those who trade with them, with a forum of conciliation and arbitration to which any of those parties may submit commercial disputes. Claims may be submitted directly to COMPROMEX or through Mexican trade representatives at Mexican embassies and consulates. The claim procedure is divided into two stages. First, COMPROMEX tries to reach a settlement through a hearing conducted before a conciliation board. If no settlement is reached, the parties are urged to go to arbitration administered by COMPROMEX (Organic Law of COMPROMEX, Art. 12). If those efforts fail, COMPROMEX may proceed with the examination of the evidence and issue a non-binding opinion (dictamen) (Organic Law of COMPROMEX, Articles 2.IV and 14), see GISGW3 database, Pace University School of Law at http://cisgw3.law.pace.edu. 7. Conservas La Costena S.A. de C.V. v. Lanin San Luis S.A. & Agroindustrial Santa Adela, M/21/95, April 29, 1996 (Mexico COMPROMEX Comision para la Proteccion del Commercio Exterior de Mexico), UNILEX 1997.

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(COMPROMEX) held enforceable an oral agreement for the sale of twenty-four tons of garlic between a Mexican seller and a California buyer. Article 11 of the CISG was applicable to the transaction because the parties had places of business in different contracting states (i.e., states which had ratified the CISG). The invoice sent to the buyer and the documents of carriage were sufficient evidence of the contract's existence.8

Case No. 5: The earlier United States Beijing case completely failed to recognize the applicability of the CISG. In a dispute between a Chinese seller and a U. S. buyer, the trial court, by erroneously applying the parol evidence rule, did not allow the buyer to introduce evidence that its obligation to pay was conditioned on the seller's shipment of back orders.9 So ruling, the Court stated erroneously that "[w]e need not resolve the choice of law question of whether Texas law or the CISG is applicable because our discussion is limited to application of the parol evidence rule (which applies regardless)." Note that Article 8(3) of the CISG in effect abolishes the parol evidence rule by providing that: In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. Since both China and the United States are contracting parties to the CISG and the seller had a place of business in China and the buyer had a place of business in the United States, the CISG was applicable under the "place of business" test of Article 1(1)(a). Contrary to the result reached by the Court, parol evidence should have been allowed.

8. Jose Luis Morales y/o Son Export, S.A. de C.V. v. Nez Marketing, M/66/92, MAY 4, 1993 (Mexico COMPROMEX, Comision para la Proteccion del Commercio Exterior de Mexico), UNILEX 1994. 9. Beijing Metals & Minerals Import-Export Corp. v. American Business Center, Inc., 993 F.2d 1178 (5th Cir. 1993), UNILEX 1994, CLOUT abstract no. 24. LEXIS 14211.

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Case No. 6: A Canadian-based seller sued a U. S.-based buyer for breach of an oral contract for sale of wood products.' ° The majority opinion overlooked the clear applicability of the CISG and undertook a complicated application of U.C.C. Section 2-201(2) "failure to object to a confirmatory memorandum"statute of frauds requirement. The court concluded that the communication sent by the seller to the buyer after the alleged oral contract was entered into qualified as a confirmation of the oral contract. Accordingly, the seller was entitled to enforce the oral agreement. The dissent concluded that: (1) Buyer's response did not qualify as a confirmation of an oral contract. However, the CISG is probably applicable because the parties have a place of business in different "contracting states" and,

(2) application of the CISG would enable the seller to enforce the oral agreement because CISG Article 11 abolishes the statute of frauds requirement.

Liaison Office Which Does Not Qualify as Place of Business

A new type of issue was raised in a recent case before the French Supreme Court (Cour de Cassation) where the question was whether a mere contact office (Bureau de Liaison) constituted a "place of business:"

Case No. 1: The French Supreme Court ruled that the CISG was applicable even though the transaction appeared to be a purely French transaction entirely within the boundaries of France where the French buyer had ordered electronics components through the German seller's liaison office in France. The court rejected the German seller's argument that since both the French buyer's "place of business" and the German seller's "bureau de liaison" were in France, the contract was not governed by the CISG. In so ruling, the court concluded that the liaison office "was not an autonomous legal entity but rather a branch of the German seller in France.""

10. GPL Treatment, Ltd. v. Louisiana-Pacific Corp., 894 P.2d 470 (Or. Ct. App. 1995), UNILEX, CLOUT abstract no. 137. 11. Fauba France case. St6 Fauba France FDIS GC Electronique v. Ste

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Private InternationalLaw -Conflict of Laws

Under CISG Article 1(1)(b), if one of the parties to the international sales transaction has its place of business in a contracting state and the other does not, the CISG will be applicable if the conflicts of law rule applied by the forum court makes the law of the state that has ratified the CISG applicable. However, Article 95 of the CISG gives a ratifying state the right to declare, at the time of the deposit of its instrument of ratification, that it would not be so bound. The United States exercised this right as part of the ratification process. It was decided that because of the availability of the sophisticated body of sales law provided by Article 2 of the U.C.C., that body of law is preferable to the more general provisions of the CISG in cases where United States law would otherwise be applicable under private international conflict of law rules.

Conflicts Rule of the Forum State Leads to the Application of the Law of the State that Has Ratified the CISG

Case No. 1: The buyer had its place of business in the United States and the seller had its place of business in Hong Kong at the time when Hong Kong was still a British colony (in 1995). Britain has not ratified the CISG. In ratifying the CISG, the United States filed an Article 95 reservation stating that it chooses not to be bound by Article 1(1)(b). The court properly ruled that while the United States law was applicable, the CISG was not applicable under either CISG Article 1(1)(a) or 1(1)(b).12

Case No. 2: In a dispute between a German buyer and an Italian seller, where the contract was silent as to excluding or including the CISG, and the German private international law rules led to the application of the law of Italy, a country that ratified the CISG, the court concluded that the CISG was applicable."

Fujitsu Mikroelectronik GmbH, Jan. 4, 1995 (France, Cour de Cassation), UNILEX, CLOUT abstract no. 155. 12. Kahn Lucas Lancaster, Inc. v. Lark Int'l, Ltd., 956 F. Supp. 1131 (S.D.N.Y 1997). 13. (Parties not reported), 17 HKO 3726/89, July 3, 1989 (Germany, Landgericht Munchen I), UNILEX 1994, CLOUT abstract no. 3; see also

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Case No. 3: Even though an Italian seller and the Swedish buyers included in their contract a choice of law clause making the "Italian law" applicable, the CISG was inapplicable because: (1) Article 1(1)(b) (private international law-conflict of laws) operates only in the absence of a choice of law clause in the contract between the parties; and (2) the parties choice of "Italian Law" without specifying "Italian law including the CISG" made the CISG inapplicable. 4

Opt In

The CISG may also be applied where the parties in their agreement have so provided, even though it would not otherwise be applicable under the "places of business in different contracting states" or "private international law-conflict of laws" bases. If the parties include in their contract a provision to make the CISG applicable, it will be applied if such a provision is permitted under domestic law. The split of authority in the cases that follow illustrates the importance of explicitly excluding or including the CISG where the choice of law clause in the contract makes applicable the law of a country which has ratified the CISG. Explicit inclusion or exclusion of the CISG in such a case will avoid unnecessary litigation. Ambiguities Createdby Opting into the Law of a ContractingState Without Explicitly Specifying that the CISG is Included or Excluded

Cases Holding the CISG Applicable:

Case No. 1: The United States District Court in California has recently held the CISG applicable where a California buyer's purchase orders were expressly conditioned upon acceptance by the Canadian seller of the buyer's terms and conditions which, inter alia, provided that the contract should be governed by the "laws of" the state of California. Conversely, the Canadian seller's terms and conditions of sale in its shipment documents provided that the contract should be governed by the laws of the Canadian province

Cofacredit S.A. v. Import-en Exportmaatschappij Renza BV, 350/1988, Feb. 8, 1990 (Netherlands, Arrondissementsrechtbank Alkmaar), UNILEX 1994. 14. Nuevo Fucinati S.p.A. v. Fondmetal International A.B. (no number in original), Jan.14, 1993 (Tribunale Civile di Monza), UNILEX, CLOUT abstract no. 54. See also case cited at note 23, infra.

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of British Columbia. Nothing that both Canada and the United States have ratified the CISG and that the buyer's place of business was in the United States and seller's place of business was in Canada, the court ruled that the CISG was applicable under the Article 1(1)(a) "place of business in different contracting states" basis for applying the Convention. 5 The court stated in reference to the effect of choice of law clauses: [Buyer] next argues that, even if the Parties are from two nations that have adopted the CISG, the choice of law provisions in the "Terms and Conditions" set forth by both Parties reflect the Parties' intent to "opt out" of application of the treaty. Article 6 of the CISG provides that "the parties may exclude the application of the Convention or,... derogate from or vary the effect of any of its provisions." 15 U.S.C. App., Art. 6. [Seller] asserts that merely choosing the law of a jurisdiction is insufficient to opt out of the CISG, absent express exclusion of the CISG. The Court finds that the particular choice of law provisions in the "Terms and Conditions" of both parties are inadequate to effectuate an opt out of the CISG.

Although selection of a particular choice if law, such as "the California Commercial Code" or the "Uniform Commercial Code" could amount to implied exclusion of the CISG, the choice of law clauses at issue here do not evince a clear intent to opt out of the CISG. For example, [seller's] choice of applicable law adopts the law of British Columbia, and it is undisputed that the CISG is the law of British Columbia. (International Sale of Goods Act. ch. 236, 1996 S.B.C. 1 et seq. (B.C.).) Furthermore, even [buyer's] choice of applicable law generally adopts the "laws of" the State of California, and California is bound by the Supremacy Clause to the treaties of the United States. U.S. Const. art. VI, cl. 2 ("This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land.") Thus, under general California law, the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. In the absence of clear language indicating that both contracting parties intended to opt out of the CISG, and in view of [seller's] Terms and Conditions which would apply the CISG, the Court rejects [buyer's]

15. Asante Techs., Inc., v. PMC - Sierra, Inc., 164 F. Supp. 2d 1142 (N.D. Cal. 2001).

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contention that the choice of law provisions preclude the applicability of the CISG. Because the CISG was applicable as federal law under the Supremacy Clause of the United States Constitution, the court concluded that the buyer's complaint arose under federal law thereby entitling the seller to have the case removed from state to federal court. The so-called "well-pleaded complaint rule," for removal of a case from a state to the federal court, was also complied with even though the CISG was not specifically mentioned in the buyer's complaint. Under that rule, a cause of action arises under federal law only when the well-pleaded complaint raises issues of federal law. Conceding that the CISG was not mentioned in the buyer's complaint, the court ruled nevertheless that where Congress as in the instant case, in ratifying the CISG establishes a federal law that so completely preempts a particular area of the law that any civil complaint raising that select group of claims is necessarily federal in character, the federal law applies. In the case of the CISG Treaty, this intent was discernible from the introductory text which states that "The adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade."16 These objectives were further reiterated in the President's letter of transmittal of the CISG to the Senate as well as the Secretary of 17 State's letter of submittal of the CISG to the President.

Case No. 2: An Italian seller and a Czech buyer agreed to a contract that provided that Austrian law governed, without specifically "including" or "excluding" the CISG. The Arbitral Court held that Austria's ratification of the CISG made the Convention part of Austrian law. Therefore, Austrian law "including" the CISG should be applied."8

16. 15 U.S.C. App. at 53. 17. Id. at 70-72. 18. (Parties not reported), 7660/JK, Aug. 23, 1994 (International Chamber of Commerce Court of Arbitration (Paris)), UNILEX 1994.

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Case No. 3: A similar result was reached by a German court which ruled that reference to provisions of the German Civil Code was not sufficient to exclude application of the CISG even though the reference to German law was a valid choice of law under German conflicts of law.19 A Czech seller and an Austrian buyer concluded several contracts for the sale of umbrellas. As the installments delivered under the first contract remained unpaid, the seller suspended delivery of the umbrellas. The seller sued to recover the unpaid price. The parties agreed to the choice of law clause in favor of Austrian law as the governing law of the contract. The German Supreme Court held that the contract was governed by CISG. It stated that where the parties agree upon a choice of law in favor of the law of a contracting state as the governing law of the contract, CISG is applicable even if the parties did not indicate that CISG is the applicable law."

Cases Holding the CISG Inapplicable:

Case No. 4: The French Cour de Cassation ruled in Ceramique Culinaire de France S.A. v. Musgrave, Ltd.,2 that when the parties have explicitly chosen that the domestic law of one the parties governs, the CISG is excluded by virtue of the opt-out procedure authorized by CISG Article 6.

Case No. 5: In a dispute between an Italian seller and a Japanese buyer about the sale of leather and textile wear, a contract clause specified that the contract was to be "governed exclusively by Italian law." The arbitral tribunal in Florence, Italy decided that the CISG was not applicable, either because Japan had not yet ratified the Convention or because the contract itself had specified that the parties were exclusively subject to Italian law. The choice of Italian law by the parties amounted to an implicit exclusion of CISG by virtue of Article

19. (Parties not reported) 54 0644/94, Apr. 5, 1995 (Germany, Landgericht Landshut), UNILEX 1995. 20. (Parties not reported) 2ob328/97r, Feb. 12, 1998 (Austria Oberster Gerichtshof) (applying Article 1(1)(b) CISG), UNILEX 1999. 21. 2205 D, Dec. 17, 1996 (France, Cour de Cassation), UNILEX 1997, CLOUT abstract no. 206.

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6. A dissenting opinion held that the CISG was applicable since the choice of Italian law confirmed that the parties actually intended to apply CISG according to Article 1 (1)(b).22

Case No. 6: German seller and a Swiss buyer concluded a contact for the sale of milking machines. After the buyer suspended payment of the goods, the seller sued for recovery of the unpaid price. The seller's general conditions of sale referred to German law as the law governing the contract. The buyer never signed the seller's conditions and never objected to the choice of law clause favoring German law. Holding: CISG is not applicable because the parties impliedly excluded it by integrating in the contract a choice of law clause favoring German law.23

Lex Mercatoria

The Court of Arbitration of the International Chamber of Commerce and the Iran-United States Claims Tribunal and other arbitral bodies have applied the CISG as a part of the lex mercatoria (the customs and practices governing commercial law) where the "places of business in different contracting states, the "private international law-conflicts of law" and the "opt-in" bases are all inapplicable. The potential for expanded use of the CISG on the lex mercatoria basis is potently conveyed by the language of the arbitration panel of the International Chamber of Commerce which follows.

Use of "Lex Mercatoria"as Basis for Applying the CISG Where the Convention Is Not Otherwise Applicable

Case No. 1: Where neither buyer nor seller were located in contracting states and the contract contained no choice of law clause, the ICC Court of Arbitration nevertheless applied the CISG. It determined the applicable law governing the nonconformity of goods by looking to the ICC rules which

22. Societa X v. Societa Y, April 1994 (Italy, Ad hoc Arbitral Tribunal- Florence), UNILEX 1995, CLOUT abstract no. 92.; Accord case no. 1, Scenario 3, supra. 23. (Parties not reported) Nov. 23, 1998 (Switzerland, Bezirksgericht Weinfelden) (applying CISG Article 6), UNILEX 1998.

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required it to consider the relevant trade usages. In making its decision it stated: There is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of goods of 11 April 1980, usually called the "Vienna Convention." This is so even though neither the [country of the Buyer] not the [country of the Seller] are parties to that Convention. 24 Case No. 2: The Islamic Republic of Iran entered into a contract with a U. S. company to buy electronic communications equipment and related services. When Iran did not pay the U.S. seller the entire purchase price, the U.S. seller notified Iran of its intention to sell the equipment not yet delivered. It then sold the equipment. The Iran-United States Claims Tribunal applied the CISG as part of the lex mercatoria even though no other basis for applying the CISG was applicable. It held that under Article 88(1) of the CISG, the seller had the right to mitigate its damages by selling the undelivered equipment. So ruling, it noted that this right was "consistent with recognized international law of commercial contracts."25

II. Timely Discovery and Notification of Nonconformity of Goods

Examination Requirement

The CISG requires the buyer to examine the goods, or cause them to be examined "within as short a period as is practicable in the circumstances."26 The buyer loses the right to rely on lack of conformity of the goods if notice is not given to the seller specifying the nature of the lack of conformity "within a reasonable time after buyer has discovered it or ought to have discovered it."27 Such time in any event is not to exceed two years from the date on which the

24. (Parties not reported), 5713/1989, 1989 (ICC, Court of Arbitration of the International Chamber of Commerce), UNILEX 1994; CLOUT abstract no. 45. 25. Watkins-Johnson Co. & Watkins-Johnson, Ltd. v. The Islamic Republic of Iran & Bank Saderat Iran, 370 (429-370-1) July 28, 1989 (Iran-United States Claims Tribunal), UNILEX 1994. 26. CISG Article 38. 27. CISG Article 39.

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How Much Time Does the Buyer Have to Examine the Goods and Discover Defects? Case No. 1: A Dutch buyer lost its right to rely on a lack of conformity of the goods because they did not discover the defects by examining all the goods as soon as practicable29 and did not give notice to the French seller within a reasonable time after it ought to have discovered the lack of conformity.3" The French seller delivered fish to the Dutch buyer, which transformed it into filets and sold it to various customers. Following receipt of customers' complaints about the quality of the product, the buyer refused to pay part of the price and claimed a set-off. The court ruled that a very short term for examination of goods was necessary in this case in view of the perishable nature of the food product and because the goods had to be transformed by the buyer, thereby making it impossible for the seller to confirm whether the goods sold were really defective. In addition, the buyer had the opportunity to examine all the

28. Id. 29. See CISG Article 38. 30. See CISG Article 39.

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fish since each fish had to be individually fileted and the buyer could sample part of the fish before reselling the filets to its customers. The defects therefore should have been discovered and notice of the defect should have been given within a reasonable time thereafter to the seller.31

Case No. 2: A Dutch court held that the buyer bears the burden of proving that the goods were inspected within a reasonable time. Although the cheese ordered by the buyer had been delivered frozen, the buyer was not exempt from the duty to make a timely examination. According to the court, the buyer could have defrosted a portion of the cheese and discovered the nonconformity.

Case No. 3: In another case, a German buyer lost the right to rely on lack of conformity by failing to promptly inspect ham delivered by the seller. Because the alleged defect (inadequate seasoning) was easily recognizable, the buyer should have examined the goods within three days.33

Case No. 4: Even where the buyer had to install the seller's engines in order to discover possible defects, a German court has held that the duty to examine promptly imposes a duty on the buyer to examine the goods as soon as practicable. Waiting to examine the engines "a full four months" after delivery could not be considered "as short as is practicable under the circumstances. 34

Case No. 5: In another case dealing with insufficient quantity as a defect, a German court held that the Article 38 duty to examine the quantity of the items delivered must be

31. CME Cooperative Maritime Etaploise S.A.C.V. v. Bos Fishproducts Urk BV,HA ZA 95-640, March 5, 1997 (Netherlands, Rb. Zwolle), UNILEX 1998. 32. Fallini Stefano & Co. S.N.C. v. Foodic BV, 90036, Dec 19, 1991 (Netherlands, Arrondissementsrechtbank Roermond), UNILEX 1994, CLOUT abstract no 98. 33. (Parties not reported), 2 C 395/93, Oct. 21, 1994 (Germany, Amtsgericht Riedlingen), UNILEX 1995. 34. (Parties not reported), 31 0 231/94, June 23, 1994 (Germany, Landgericht Dusseldorf), UNILEX 1995.

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immediately complied with at the place of performance of the obligation. According to the court, the Swiss buyer of German clothing should have examined or caused the goods to be examined as soon as they arrived at the agreed destination. The court found that examination of the quantity of the items delivered more than a week after delivery was unreasonable under the circumstances.35

Case No. 6: A buyer lost the right to rely on a lack of conformity because it had not made a timely examination of the goods and it did not give notice of non conformity in timely manner to the seller where: (1) An Italian seller delivered a certain number of medical devices to a Swiss buyer who was its exclusive distributor; (2) The Swiss buyer immediately resold a small quantity of the goods to a Swiss hospital; and (3) The Hospital refused acceptance after discovering defects in the goods. The court ruled that the buyer should have examined the goods at the time of delivery, since it re-dispatched only a small quantity of the delivered goods and kept the rest in its warehouse. Pursuant to CISG Article 38(1) and given the circumstances of the case, the court found that ten days would have been enough time to check the goods. The devices could have been easily removed from the boxes without being damaged. Additionally, the transparent wrapping made it possible to discover defects in the goods.36

Timely Notification of Nonconformity by the Buyer

Many cases deal with the issue of what constitutes a reasonable time for giving notice of nonconformity under CISG Article 39.

Case No. 1: Notice of nonconformity was held to be given within a reasonable time by a French Court of Appeals where:

35. (Parties not reported), 54 0 644/94, April 5, 1995 (Germany, Landgericht Landshut), UNILEX 1995. 36. (Parties not reported) 11 95 123/357, January 8, 1997 (Switzerland, Obergericht Luzern), UNILEX 1997, CLOUT abstract no. 192.

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(1) A French buyer sent a letter to an Italian machinery seller's agent in France two weeks after a provisional test had been performed at the seller's premises, and informed the seller of the nonconformities discovered and specified the improvements to be made before a new test was made; (2) One month after the second test, the buyer sent another letter informing the seller of its refusal to take delivery until certain modifications were made; (3) Subsequently, on the seller's request to test a machine at the buyer's premises, the two machines were delivered and installed; (4) The buyer sent further letters specifying the defects six months after delivery of the first machine and eleven months after delivery of the second machine. The combination of notices of nonconformity satisfied the reasonable time requirements of Article 39 CISG.37

Case No. 2: A buyer lost its right to rely on lack of conformity of the goods where it failed to give the seller notice after receiving complaints from customers regarding defective fabric in textile goods it purchased from the seller and subsequently resold to the customers. The court noted that the buyer did not give notice to the38 seller of the defect until it had been sued by its customers.

Case No. 3: Correspondence between a buyer and its customers in which the customers complained about defects in furniture which the buyer had resold to them would not be considered a proper notice of nonconformity because the correspondence was external to the contractual relationships between the seller and the buyer. In addition, the correspondence between the buyer and the seller was not sufficient to meet the requirement of a notice of nonconformity because the phrases included in this correspondence were too general and did not specify the

37. Societe Giustina Int'l v. Societe Perfect Circle Europe, 56 R.G. no.1222/95, Jan. 29, 1998 (France, Cour d'Appel de Versailles), UNILEX 1998, CLOUT abstract no. 225. 38. (Parties not reported)-June 20, 1997 (Spain, Audiencia de Barcelona), UNIEI.X 1998

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nature of the lack of conformity of the goods as required by Article 39 of the CISG.39

Case No. 4: The Court of Arbitration of the International Chamber of Commerce has held that notice given within eight days after publication of a report by the buyer's inspector who had

examined the seller's goods40 prior to shipment, satisfied the Article 39 requirements.

Case No. 5: A notice given twenty-three days after delivery was not timely and the buyer had therefore lost the right to rely on the lack of conformity where the clothes which had been sold turned out to be of bigger sizes than the ones agreed upon and it was impossible to resell them. The court stated that the reasonableness of the time of notice of nonconformity provided in CISG Article 39 is strictly related to the duty to examine the goods within as short a period as practicable in the circumstances set forth in CISG Article 38. Therefore, when the defects are easy to discover by a prompt examination of the goods, the time of notice must be reduced.41

Case No. 6: Notice of defects in nonseason-dependent goods was not timely when an Austrian buyer had entered into a contract with a German seller to deliver goods to a Danish company and waited two months after the Danish company received delivery before notifying seller of nonconformity. The court stated that under normal circumstances in a sale of durable non season-dependent goods, eight days is a reasonable time for giving notice 2

39. P v. I., 15/96Z, Dec. 3, 1997 (Switzerland, Kantonsgericht Nidwalden), UNILEX 1998. 40. (Parties not reported) 5713/1989, 1989 (Paris, ICC Court of Arbitration), UNILEX 1994, CLOUT abstract no. 45. 41. Sport d'Hiver di Genevieve Culet v. Ets Louys et Fils, 45 /96, Jan. 31, 1996 (Italy, Tribunale Civile di Cuneo), UNILEX 1996. 42. (Parties not reported), 7 U 3758/94, Feb. 8, 1995 (Germany, Oberlandesgericht Munchen), UNILEX 1995, CLOUT abstract no. 167.

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Case No. 7: A buyer bears the burden to show that notice of nonconformity has been given within a reasonable time. 3

Case No. 8: Instead of giving notice to the seller of a nonconformity following its own inspection of the seller's engines, the buyer sent the engines to a university for further examination. The court ruled that the reasonable time for giving notice started to run at the moment when the buyer had concluded its own examination.'

Case No. 9: As between merchants, if the defect is apparent under CISG Article 39, a buyer should give immediate notice of the nonconformity rather than waiting until customer complaints are received 45

Case No. 10: Where a buyer failed to introduce evidence demonstrating that the notice had specified the nature of the nonconformity, the buyer's notice was ineffective and therefore the buyer was obliged to pay the purchase price of the goods46

Seller's Knowledge or Reason to Know of Nonconformity Bars Use of Defense That Buyer Failed to Make Timely Discovery or Give Timely Notice of Nonconformity

Case No. 1: A seller diluted wine with 9 percent water. Even though the buyer did not examine the wine after delivery and therefore did not comply with Articles 38 and 39, the buyer did not lose its right to rely on nonconformity because the seller could not have been unaware of the nonconformity.

43. (Parties not reported), 3/15 0 3/94, July 13, 1994 (Germany, Landgericht Frankfurt am Main), UNILEX 1995. 44. (Parties not reported), 31 0 231/94, June 23, 1994 (Germany, Landgericht Dusseldorf), UNILEX 1995. 45. (Parties not reported), 6252, Apr. 27, 1992 (Switzerland, Preturea della giurisdizione di Locarno-Capmagna), UNILEX 1994, CLOUT abstract no 56. 46. (Parties not reported), 3/13 0 3/94, July 13, 1994 (Germany, Landgericht Frankfurt am Main), UNILEX 1995. 47. (Article 40 CISG) (parties not reported) 7 HO 78/95, October 12, 1995 (Germany, Langericht Trier), UNILEX 1996, CLOUT abstract no. 170.

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Case No. 2: A United States seller replaced a part of a press with a substitute part but did not inform the Chinese buyer or instruct the buyer's engineer as to how to install it. The press was disassembled in the United States for delivery to the buyer's factory in China where it was reassembled by the buyer's technicians and put into operation. The press worked without incident for almost three years while in continuous use. Thereafter the press failed, resulting in serious damage to the press itself. Only after the press failed did the buyer become aware that part of the press was replaced with a device that deviated from the seller's drawing. In Buyer's suit for damages due to nonconformity of the press, it was agreed that the buyer had given notice of the alleged nonconformity well beyond the eighteen month contractual period and also beyond the two-year limitation period of CISG Article 39(2). Nevertheless, the court ruled that the CISG was applicable because the lack of conformity related to facts that the seller new or could not have been unaware of, and that the seller failed to disclose these facts to the buyer. Article 40 of the CISG therefore barred the seller from relying on the examination and notice requirements of Articles 38 and 39 of the CISG. 48

Case No. 3: The difficulty of giving specific meaning to the requirement that the seller is not entitled to rely on the provisions of Article 38 and 39 if the lack of conformity "relates the facts of which he new or could not have been unaware" and which Seller did not disclose to the buyer, is illustrated by this case. A German seller sold a chemical substance to be used for the production of plastic tubes to a Moroccan buyer. Approximately one month after delivery, the buyer attempted to produce the plastic tubes with used machinery. The tubes caught fire and the buyer was unable to produce the product. The German court ruled that the buyer was barred from recovery because of his failure to comply with

48. Beijing Light Auto. Co., Ltd. v. Conell Ltd. P'ship, June 5, 1998 (Arbitral award, Arbitration Institute of the Stockholm Chamber of Commerce, Stockholm, Sweden), UNILEX 1998, CLOUT abstract no. 237.

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the examination and notice requirements of Articles 38 and 39 of the CISG. The court also ruled that the buyer was not exempt from these requirements on the ground that the seller did not give any warning regarding the type of machinery that should have been used for treatment of the chemical substance. The court ruled that the seller was not barred by Article 40 of the CISG from using the Article 38 and 39 defenses because he had delivered a standard blend which did not cause any problems when used with a standard machine. The seller was not required to inform the buyer that the product could not be used by an outdated machine. The court concluded that it was up to the buyer to inform the seller that it intended to operate a twenty-year old machine in producing its product, since the buyer was to be considered a "competent tradesman." In light of the fact that, in developing countries, it is generally known that used rather than new machinery is commonly used in production activities, the question has been raised as to whether the seller should be required to disclose to such buyers that only updated, new machinery may be used with the product being sold.' 9

Advantage of Clause Providingfor Explicit Time for Giving Notice

To minimize litigation over whether examination and notice were performed within a reasonable time, the parties may wish to utilize the derogation right of Article 6 to exclude applicability of the notice provisions of Articles 38 and 39 and incorporate into the contract a clause specifying the time within which the buyer is required to notify the seller of a nonconformity.

Cases No. 1 and 2: For example, the validity of a clause providing that any complaints concerning defects in the goods could only be raised within eight days after receipt of the goods has been sustained. Because a buyer did not give notice within the agreed period of eight days, the court held that buyer had lost the right to rely on a nonconformity under CISG Article 39.50

49. (Parties not reported) 2U5801 96 Sept. 11, 1998 (Germany, Ofberlandsgericht Koblenz), UNILEX 1998. 50. (Parties not reported), 6 0 85/93, July 5, 1994 (Germany, Landgericht Giessen), UNILEX 1995; see also (Parties not reported), 7660/JK, Aug. 23, 1994 (Arbitral Award, International Chamber of Commerce Court of Arbitration

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A clause fixing a maximum time limit of eighteen months for buyer to notify seller of a nonconformity has also been sustained. 1

Case No. 3: The degree of specificity required for proper notice has also been considered in at least one instance. Despite the buyer's timely notice, the buyer had failed to comply with the CISG's notice provisions because notice of "poor workman- ship and improper fitting" was not sufficiently specific. Buyer thus lost its right to rely on nonconformity. 2

Ineffective Cure- New Notice Required

When receiving goods that are offered as a cure for nonconforming goods, a buyer must give new notice of any defects should the new goods also be nonconforming. For example, in one case, 53 a German court held that a German buyer that had claimed that the Italian seller's cure was ineffective lost the right to claim a lack of conformity by failing to renew notice of nonconformity upon discovery that the cure was also ineffective. Because the court held that a failed repair represents another nonperformance of the contract, the buyer's exercise of remedies for breach of contract by seller requires another notice. 4

III. New Concepts in Breach and Remedies

Specific Performance

A basic assumption of the remedies provisions of the CISG is that the contract of the parties should normally be specifically performed.5 This is unlike the U.C.C., under which damages rather than specific performance is the preferred remedy.56 However, by

(Paris)), UNILEX 1995. 51. (Parties not reported) 7U442F197, March 11, 1998 (Germany, Oberlandesgericht Munchen), UNILEX 1998. 52. (Parties not reported), 17 HKO 3726/89 July 3, 1989 (Germany, Landgericht Munchen I), UNILEX 1994, CLOUT abstract no. 3. 53. (Parties not reported), 12 0 674/93, Nov. 9, 1994 (Germany, Landgericht Oldenburg), UNILEX. 54. Id. 55. CISG, supra note 1, arts. 46(1) (specific performance for buyers), 62 (specific performance for sellers) and 28 (applicability of the specific performance law of the forum state). Compare U.C.C. § 2-716, infra note 56. 56. U.C.C. §2-716 provides:

HeinOnline -- 106 Dick. L. Rev. 228 2001-2002 2001] CONVENTION ON INTERNATIONAL SALE OF GOODS 229 providing that in a case involving application of the CISG a court is not bound to enter an order for specific performance if it would not be required to do so under the law of the forum state in which litigation is initiated, the CISG makes it possible to bypass its normally applicable specific performance remedy. Thus, if a U.S. court is selected as the forum for resolution of disputes, the narrower specific performance remedy of U.C.C. section 2-716 rather than the broader CISG specific performance remedies would be applicable. The interplay between the CISG and United States' law of specific performance is illustrated5 7 by Magellan International Corp v. Salzgitter Handel GMGH. In Magellan, the court denied a German seller's motion to dismiss an Illinois buyer's action for specific performance of a contract to sell specified quantities of steel. The court concluded that if proven, allegations in the complaint would establish that the seller had breached the contract and that the buyer was entitled to specific performance under the special rule of Article 28 which would make U.C.C. section 2-716 rather than Article 46 of the CISG applicable. After ruling that the buyer's allegations were sufficient to establish the seller's breach of contract, the court addressed the buyer's specific performance claim. It noted that Article 46(a) of the Convention makes specific performance routinely available by providing that a buyer may require the seller to perform its obligations unless the buyer has resorted to an inconsistent remedy. This contrasts with the limited availability of specific performance under section 2-716 of the UCC. The court also noted that although Article 46 makes specific performance the preferred remedy for aggrieved buyers, Article 28 of the Convention conditions the availability of this remedy as follows: If, in accordance with provisions of the Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter judgment for specific

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances. (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he us unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. 57. 76 F. Supp. 2d 919 (N.D. Ill. 1999), 40 U.C.C. Rep. Serv. 2d 321.

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performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention. Since Illinois had enacted the U.C.C., availability of specific performance in the Illinois court was therefore governed by section 2-716 of the Uniform Commercial Code, which provides that a court may grant specific performance "where the goods are unique or in other proper circumstances." (emphasis added) The limited common law grant of specific performance for sale of goods contracts in cases where the goods are unique has been expanded by addition of the "other proper circumstances" language in U.C.C. section 2-716. The Official Commentary to this section notes that the test appears to be whether goods are replaceable as a practical matter-for example, whether it would be difficult to obtain similar goods on the open market. 8 Given the centrality of the replaceability issue in determining the availability of specific performance under the U.C.C., the court ruled that a pleader need allege only the difficulty of cover to state a claim under section 2-716. In denying the motion to dismiss it noted however that perhaps when the facts were further developed through discovery, the buyer's claims against the seller might succumb either to lack of proof or to some other deficiency. The CISG specific performance provisions are further softened by their inclusion in a mixed traditional and sometimes innovative set of breach and performance rules addressed elsewhere in this article. These provisions pertain to: (1) requiring buyers to discover and give timely notice of lack of conformity;59 (2) giving sellers opportunity to cure defects;6° and (3) utilizing innovative concepts like "fundamental breach,, 61 "Nachfrist, '' 62 "avoidance, 63 and "reduction in purchase price to the extent of the defect."'

58. U.C.C. § 2-716, Official Comment 2. The court also cited Andrea G. Nadel, Annotation, Specific Performance of Sale of Goods Under Section 2-716, A.L.R. 4th 294 (1983). 59. CISG, supra note 1, art. 38; see discussion supra at 219-228. 60. CISG, supra note 1, art. 48; see discussion infra at 231. 61. CISG, supra note 1, art. 25; see discussion infra at 232. 62. CISG, supra note 1, arts. 47, 49(I) (i.e., buyer's Nachfrist) and 63(1)- 64(1)(b) (i.e., seller's Nachfrist); see discussion infra at 236-240. 63. CISG, supra note 1, art. 49; see discussion infra at 232. 64. CISG, supra note 1, art. 50; see discussion infra at 244.

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Seller's Right to Cure

A seller's right under the CISG to cure defective performance is substantially similar to that of a seller under the U.C.C.65 Under the CISG, where the seller has delivered goods before the date for delivery, any defective delivery up to the delivery date may be cured by the seller, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense.6 The buyer nevertheless retains any right to claim damages provided elsewhere by the Convention.67 The seller may, even after the date for delivery,6 remedy a defective tender if this can be done without unreasonable delay and without causing the buyer unreasonable inconvenience or "uncertainty of reimbursement by the seller of expenses advanced by the buyer." 69 Again, the buyer retains any right to claim damages as provided elsewhere in the Convention. A recent Swiss case, discussed previously, illustrates this right of the seller. Recall the case where the Swiss buyer notified the Italian seller of defects in upholstery after receiving consumer complaints. The seller offered to cure the defect by replacing the

65. U.C.C. § 2-508 provides: (1) Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery. (2) Where the buyer rejects a non-conforming tender which the seller has reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. 66. CISG, supra note 1, art. 37 provides: [i]f the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. 67. Id. 68. CISG, supra note 1, art. 48(1) provides: (1) Subject to article 49, the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer. However, the buyer retains any right to claim damages as provided for in this Convention. 69. Id.

HeinOnline -- 106 Dick. L. Rev. 231 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 upholstery, but the buyer refused. The Swiss court held that the buyer erred in refusing to allow the seller to cure.70 In another previously discussed case, where a French seller and a Portuguese buyer contracted for the sale and dismantlement of a second-hand airplane hangar,7' the seller had delivered nonconforming metallic elements. The court held that although the seller had effectively cured the nonconformity by repair of the elements, the buyer was entitled nonetheless to claim damages because the seller had delayed in delivering the conforming goods thereby requiring the buyer to arrange for transportation of the goods twice. In another case, the arbitrator for an International Chamber of Commerce arbitration ruled that where the breach by the seller was of such a substantial character as to constitute a fundamental breach under Article 25 , the buyer was entitled to avoid7" the contract. Furthermore, the seller was not entitled to exercise a right of cure under CISG Article 48(1), apparently because the defect was of such a serious nature in the sole arbitrator's view that the seller only had a right to cure after the due date for delivery if the buyer so consented.

FundamentalBreach and Avoidance

If the seller's failure to cure a defective delivery results in a detriment to the buyer so as to substantially deprive the buyer of

70. (Parties not reported), 6252, Apr. 27, 1992 (Switzerland, Pretura della giurisdizione di Locarno-Campagna), UNILEX. 71. Marques Roque Joachim v. La Sarl Holding Manin Riviere, RG 93/4879, Apr. 26, 1995 (France, Cour d'Appel de Grenoble Chambre Commerciale), UNILEX. 72. (Parties not reported), 7531/1994, 1994 (Court of Arbitration of the International Chamber of Commerce, (Paris)), UNILEX. 73. CISG, supra note 1, art. 25 provides: (a) breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as to substantially deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. 74. CISG, supra note 1, art. 49(1) provides: (1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver. within the period so fixed.

HeinOnline -- 106 Dick. L. Rev. 232 2001-2002 2001] CONVENTION ON INTERNATIONAL SALE OF GOODS 233 what buyer was entitled to expect according to the contract, such a breach is deemed to be "fundamental" unless the party in breach did not foresee the result, and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.75 Such a breach gives the buyer the right to avoid (i.e., cancel) the contract.76 The concept of fundamental breach has been examined in a number of cases. For example, in one case involving a German buyer and an Italian seller,7 the buyer had ordered 120 pairs of shoes from the seller through a commercial agent. The contract included a clause that granted the buyer the exclusive right to distribute the shoes in a certain geographical district. After selling twenty pairs of shoes, the buyer learned that the seller had supplied the identical shoe to a competing local retailer who was offering the shoe at a considerably lower price. The buyer attempted to cancel the remainder of the order and avoid the contract. The German court found no fundamental breach of the exclusive contract by the seller because the seller had no way of knowing that the competing retailer had a branch within the buyer's district and that, in the judgment of the court, the seller could not reasonably have foreseen this circumstance. 8 In another case, a German buyer ordered shoes from an Italian seller and provided specifications.79 The seller produced the shoes, which bore the buyer's trademark, and subsequently displayed them at a trade fair. When the buyer gave notice of its intention to avoid the contract because of the seller's refusal to remove the shoes from the trade fair, the seller sued to recover the price of the shoes. The German court found that the seller's display of the shoes at the trade fair was a fundamental breach of the contract. It was foreseeable to the seller that its conduct would endanger the buyer's interest in controlling all sales of that shoe under its

75. CISG, supra note 1, art. 25. 76. CISG, supra note 1, art. 49(1)(a) provides: (1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract of this Convention amounts to a fundamental breach of contract.... 77. (Parties not reported), 3/11 0 3/91, Sept. 16, 1991 (Germany, Landgericht Frankfurt am Main). 78. Id. 79. (Parties not reported), 5 U 164/90, Sept. 17, 1991 (Germany, Oberlandesgericht Frankfurt am Main). See Interpretive Decisions Applying CISG, 12 J.L. & CoM. 261 (1993).

HeinOnline -- 106 Dick. L. Rev. 233 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 trademark to such an extent that the buyer's interest would be virtually nonexistent. The issue of fundamental breach also arose in the previously discussed airplane hangar case.0 There, the court ruled that because the nonconformity related only to a part of the hangar and seller had been able to repair the defective parts, the lack of conformity did not constitute a fundamental breach of contract. So ruling, the court reasoned that the buyer had not been substantially deprived of what it was entitled to under the contract and that, therefore, avoidance was not a proper remedy. Partial delivery of goods as a basis for establishing fundamental breach of contract was recently litigated.81 In that case, a German buyer had ordered eleven computer parts from an American seller in order to fulfill its contract with an Austrian company. The buyer faxed its order to the seller and included the price of only five of the parts. The seller, in turn, delivered only five parts and the buyer was forced to obtain substitute goods to cover the remaining six component parts that it needed. The buyer subsequently refused to pay the purchase price of the goods, claiming that the seller's partial delivery constituted a fundamental breach of the contract. The court, however, held for the seller because the seller's partial delivery had not substantially deprived the buyer of what it was entitled to expect under the contract because the buyer had been able to obtain substitute goods. 2 Another recent decision83 also addressed nonconformity of goods as a basis for establishing fundamental breach. In this case, a German buyer and an Italian seller entered into a contract for the sale of women's shoes. The buyer refused to pay the purchase price, claiming that delivery had been late and that the goods were nonconforming. The German court held that a contract may be avoided on the basis of nonconforming goods only when that nonconformity constitutes a fundamental breach. Because the buyer failed to establish that the goods could not be reasonably used for their original purpose, the nonconformity of the goods under the contract did not amount to a fundamental breach.

80. Marques Roque Joachim v. La Sarl Holding Manin Riviere, RG 93/4879, Apr. 26, 1995 (France, Cour d'Appel de Grenoble Chambre Commerciale). 81. (Parties not reported), 0 42/92, July 3, 1992 (Germany, Landgericht Heidelberg), UNILEX. See also (Parties not reported), 19 U 97/91, Sept. 22, 1992 (Germany, Oberlandesgericht Hamm), UNILEX (buyer's failure to take delivery of more than half of the goods constituted fundamental breach). 82. Id. 83. (Parties not reported), 5 U 15/93, Jan. 18, 1994 (Germany, Oberlandesgericht Frankfurt am Main), UNILEX, CLOUT abstract no. 79.

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A German court has recently found no fundamental breach of a contract involving a Swiss seller and a German buyer in a contract for the sale of New Zealand mussels. ' The buyer was not entitled to avoid the contract and refuse to pay the purchase price on the grounds that the mussels were not completely safe'5 because of the quantity of cadmium they contained. The cadmium concentration admittedly exceeded the threshold level published by the German Federal Health Department. However, the court concluded that the mussels were nonetheless conforming to the contract because they were fit for the purpose for which goods of the same description would ordinarily be used. 6 The court reasoned that sellers normally cannot be expected to observe public law, that is, regulatory requirements of the buyer's state. A seller could only be expected to do so where the same rules exist in both the seller's and the buyer's countries or where the buyer draws the seller's attention to their existence. The Court d' Appel de Grenoble Chambre Commerciale in France has held that the buyer's breach of a contract by reselling to a Spanish buyer rather than to a South American buyer constituted a fundamental breach that entitled the seller to declare the contract avoided. 7 The court found that the parties clearly understood that resale was to be in South America and that the seller's expectations under the contract were substantially impaired because sale of its products in Spain had been seriously hampered by the parallel distribution caused when the buyer resold the goods in Spain rather than in South America. Deviations from the quality and quantity of the goods originally ordered under a contract have also been litigated as constituting fundamental breaches of contract. For example, a German court has held that a German buyer of coal could not avoid the contract where the quality of the coal actually deviated from that specified in the contract but not enough to amount to a fundamental breach.88

84. (Parties not reported), VIII ZR 159/94, Mar. 8, 1995 (Germany, Bundesgerichtshof), UNILEX. 85. Id. 86. CISG, supra note 1, art. 35(2)(a) provides: (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used. 87. SARL Bri Production "Bonaventure" v. Societe Pan African Export, 53, Feb. 22, 1995 (France, Cour d' Appel de Grenoble Chambre Commerciale). 88. (Parties not reported), 7 U 4419/93, Mar. 2, 1994 (Germany,

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An Italian court has held that delay of the seller in delivering only one-third of the goods ordered two months after conclusion of the contract, amounted to a fundamental breach that entitled the buyer to avoid the contract.89 So ruling, the court noted that the parties had specified in their agreement that the seller was bound to dispatch all of the goods within one week after the contract was concluded.

"Nachfrist"

"Nachfrist" is a procedure 9 taken from German law and

Oberlandesgericht Munchen), CLOUT abstract no. 83. 89. Foliopack AG v. Daniplast S.p.A., 77/89, Nov. 24, 1989 (Italy, Pretura di Parma-Fidenza), CLOUT abstract no. 90. 90. The Nachfrist procedure is incorporated into the CISG for the buyer in Articles 47 and 49. CISG art. 47 provides: (1) The buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations. (2) Unless the buyer has received notice from the seller that he will not perform within the period so fixed, the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance. CISG, art. 49(1) provides: [t]he buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in the case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. The Nachfrist procedure that applies to the seller is incorporated into the CISG in articles 63(1) and 64. CISG, art. 63(1) provides: (1) The seller may declare the contract avoided: (a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (10 of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed. (2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so: (a) in respect of late performance by the buyer, before the sellers has become aware that performance has been rendered; or (b) in respect of nay breach other than late performance by the buyer, within a reasonable time: (i) the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligation

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incorporated into the CISG.91 It can be utilized by either a buyer or seller. We first discuss the buyer's Nachfrist right. Under the Nachfrist concept incorporated into the CISG, a buyer may avoid a contract where performance by the seller has been delayed even though such delay does not rise to the level of a fundamental breach if: 1. The buyer gives the seller an additional reasonable period of time for performance, fixing a new deadline beyond the contract delivery date by which the seller must perform; and

2. seller does not perform within the additional reasonable period of time.92 Although the CISG does not provide that expiration of the additional period of time without performance by the seller creates a fundamental breach, it does provide that the buyer may nevertheless avoid the contract after the expiration of such period of time.93 Applying the relevant CISG Nachfrist provisions, a German court94 held that an Egyptian buyer was entitled to avoid the contract where the German seller failed to deliver goods within an eleven-day extension period fixed by the buyer for performance of the remainder of an installment contract that seller had only partially performed. The court found that the additional eleven- day period was not unreasonable in the context of the particular transaction. Accordingly, the court awarded the buyer the amount

within such an additional period. 91. The German Civil Code II §326 provides: (1) If, in the case of mutual contract, one party is in default in performing, the other party may give him a reasonable period within which to perform his part with a declaration that he will refuse to accept the performance after the expiration of the period. After the expiration of the period he is entitled to demand compensation for non-performance, or to withdraw from the contract, if the performance has not been made in due time; the claim for performance is barred. If the performance is only partly made before the expiration of the period, the provision of §325(1) sent. 2, applies mutatis mutadis. (2) If, in consequence of the default, the performance of the contract is of no use to the other party, such other party has the rights specified in (1) without giving any period. Ian S. Forrester et al., THE GERMAN CIVIL CODE (Fred B. Rothman & Co. 1975). 92. CISG, supra note 1, art. 47. 93. CISG, supra note 1, art. 49(1). 94. (Parties not reported), 20 U 76/94, May 24, 1995 (Germany, Oberlandesgericht Celle), UNILEX.

HeinOnline -- 106 Dick. L. Rev. 237 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 by which pre-payment exceeded the amount due for the limited amount of goods actually delivered.9 Another German case9 6 illustrates the consequences of failure to utilize the Nachfrist procedure. In this case, a German buyer and an Italian seller of fashion goods entered into a contract that specified that the goods were "to be delivered July, August, September + - ."9' The seller made the first delivery in September, but the buyer refused the goods claiming the quoted language required that one-third of the goods should have been delivered in July, one-third in August, and one-third in September. The court held that the seller was entitled to the full purchase price, even if the goods had been delivered late, because the buyer had not established a fundamental breach by the seller or offered the seller an additional reasonable period of time to perform. The court reached the same result where a German buyer and an Italian seller entered a contract for the sale of women's shoes and the buyer refused to pay the entire purchase price, claiming in part that delivery of the goods been untimely. 98 The court held that the buyer, in the absence of a fundamental breach by seller, had not validly avoided the contract because it had failed to provide an additional time period for the seller to perform. Avoidance of the contract, either for reasons of fundamental breach or because of compliance with the Nachfrist procedure, releases both parties from their obligations under the contract, subject to any damages that may be due.99

95. See CISG, supra note 1, art. 81(2), which provides: (2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently. See also CISG, art. 84(1) which provides: (1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid. 96. (Parties not reported), 5 C. 73/89, Apr. 24, 1990 (Germany, Amtsgericht Oldenburg in Holstein), CLOUT abstract no. 7. 97. Id. The "+ or -"is the actual content of the contract clause specifying time for performance. 98. (Parties not reported), 5 U 15/93, Jan. 18, 1994 (Germany Oberlandesgericht Frankfurt am Main), UNILEX, CLOUT abstract no. 79. 99. See CISG, art. 81(1), which provides: (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

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The CISG also provides Nachfrist rights for sellers. Under Article 63,1°° the seller may fix an additional period of time of reasonable length for performance by the buyer of its obligations. Under Article 64,"1 a seller is empowered to avoid a contract because of fundamental breach by the buyer or failure of the buyer within the additional period of time fixed by the seller to perform its obligation to pay the contract price or to take delivery of the goods, or if the buyer declares that it will not do so within the period so fixed. Sellers' Nachfrist right was recently litigated in a German case 10 2 where a German seller had given an Italian buyer an additional time period within which to take delivery of acoustic prostheses at the seller's place of business. The court held that the seller was entitled to recover damages for failure of the buyer to perform within the additional period of time granted by the seller. A decision of an International Chamber of Commerce arbitration panel. 3 awarded damages to an Austrian seller where a

100. CISG, supra note 1, art. 63 provides: (1) The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations. (2) Unless the seller had received notice from the buyer that he will not perform within the period so fixed, the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance. 101. CISG, supra note 1, art. 64 provides: (1) The seller may declare the contract avoided: (a) if the failure by the buyer to perform any of his obligation under the contract or this Convention amounts to a fundamental breach of contract; or (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so withing the period so fixed. (2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so: (a) in respect of late performance by the buyer, before the seller has become aware that performances has been rendered; or (b) in respect of any breach other than late performance by the buyer, within a reasonable time: (i) after the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (10 of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period. 102. (Parties not reported), 43 0 136/92, May 4, 1993 (Germany, Landgericht Aachen), UNILEX, CLOUT abstract no. 47. 103. (Parties not reported), 7197/1992 - 1992 (ICC International Chamber of

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Bulgarian buyer had failed to perform its obligation of opening a document of credit for payment within the additional period of time fixed for such performance by the seller. In so ruling, the court held that the suspension of payment of foreign debts ordered by the Bulgarian government did not constitute a "force-majeure" that prevented the buyer from opening a documentary credit. In another arbitral award by the International Chamber of Commerce Court of Arbitration," although a delay in opening a documentary credit by itself did not amount to a fundamental breach, the Italian seller was nevertheless entitled to avoid the contract. According to the arbitration award, the fact that the seller waited several months before declaring the contract avoided was "equivalent to the fixing of an 'additional period of time' for performance pursuant to Article 63 CISG" with the result that failure by the Finnish buyer to perform within that period of time entitled the seller to avoid the contract under CISG Article 64(1)(b).05

"Adequate Groundsfor Insecurity-AnticipatoryRepudiation"

Under the CISG, a party may suspend performance of its obligations if it becomes apparent that the other party will not perform a substantial part of its obligations as a result of; 1. Serious deficiency in its ability to perform or in this credit worthiness or 2. Because of its conduct in preparing to perform or in performing the contract. A party suspending performance must immediately give notice of suspension to the other party and must continue with performance if the other party provides adequate assurance of performance.' ° Although this is similar to the U.C.C. provision ' °7

Commerce Court of Arbitration (Paris)), UNILEX, CLOUT abstract no.104. 104. (Parties not reported, 7585/1992 - 1992 (ICC International Chamber of Commerce Court of Arbitration (Paris)). 105. CISG, supra note 93, art. 61(1)(b) provides: (1) The seller may declare the contract avoided: (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price of take delivery of the goods, or if he declares that he will not do so within the period so fixed. 106. CISG, supra note 1, art. 71(1) provides: (1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligation as a result of: (a) a serious deficiency in his ability to perform or in his

HeinOnline -- 106 Dick. L. Rev. 240 2001-2002 2001] CONVENTION ON INTERNATIONAL SALE OF GOODS 241 pertaining to a party's right to adequate assurance where reasonable grounds for insecurity arise indicating that the other party will not be able to perform the contract, it is not identical as illustrated by the following cases. The CISG further provides that where the seller has already dispatched the goods before the grounds for insecurity have become evident, the seller may prevent the handing over of the goods to the buyer even though the buyer holds a document that entitles the buyer to obtain them1 The CISG grants the aggrieved party the right to avoid the contract if, prior to the date of performance of the contract, it is clear that one of the parties will commit a fundamental breach of contract," or if one of the parties has declared thai it will not perform its obligation under the contract."' This latter provision, in

creditworthiness; or (b) his conduct in preparing to perform or in performing the contract. CISG, supra note 1, art. 71(3) provides: (3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance. 107. U.C.C. §2-609 provides: (1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. (3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance. (4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract. 108. CISG, supra note 1, art. 71(2) provides: (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance. 109. CISG, supra note 1, art. 72(1) provides: (1) If prior to the date for the performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided. 110. CISG, supra note 1, art. 72(3) provides: (3) The requirements of the preceding paragraph do not apply if the

HeinOnline -- 106 Dick. L. Rev. 241 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 effect, explicitly makes anticipatory repudiation a basis for avoidance under the CISG.'" A German court"1 2 found that a German shoe retailer would not be able to pay the purchase price of the shoes ordered and thereby would commit a fundamental breach of contract. The court held that the probability of a future breach of contract was very high, and that complete certainty or inability of the retailer to pay for the shoes was not necessary. It found that there was reason to believe that the buyer would breach the later contract because the buyer had not paid for shoes delivered under two prior contracts. "3 The court rejected the buyer's claim that it had a right to suspend payment on grounds that the goods delivered under the earlier contract were nonconforming. The court refused to accept this argument because the buyer had not given notice of such nonconformity within a reasonable time as required by Article 39114 of the CISG and held the buyer accountable for the purchase price.

other party has declared that he will not perform his obligations. 111. Id. The anticipatory repudiation provisions of the U.C.C. are sections 2- 610 and 2-611. Section 2-610 provides: [w]]hen either party repudiates the contract with respect to performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or (b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and (c) in either case suspend his performance or proceed in accordance with the provisions of this Article on the Seller's right to identify goods to the contracts notwithstanding breach or to salvage unfinished goods (Section 2-704). U.C.C. §2-611 provides: (1) Until the repudiating party's performance is due he can retract his repudiation the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final. (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609). (3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation. 112. (Parties not reported), 99 0 123/92, Sept. 30, 1992 (Germany, Landericht Berlin). Accord (Parties not reported), 17 U 146/93, Jan. 14, 1994 (Germany, Oberlandesgericht Dusseldorf). 113. Id. 114. Supra notes 27-37.

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The possible loss of remedies by an aggrieved party with reasonable grounds for insecurity who fails to give the other party an opportunity to provide adequate assurance of its performance is illustrated by a German case. 1'5 A German buyer and an Italian seller entered into a contract for the sale of shoes agreeing that the goods should be delivered to the buyer's place of business by the carrier after the buyer had paid 40 percent of the balance due within sixty days of delivery. The seller ordered the carrier to suspend delivery, which was subsequently resumed five months later after buyer had paid 40 percent of the agreed price. Following delivery of the goods, the buyer paid only one-sixth of the balance due and the seller sued to recover the balance of the purchase price. Applying CISG Article 71(3)116 literally, the court dismissed the seller's claim for the balance of the purchase price on grounds that the CISG requires a party suspending performance based on an assumption that the other party will not be able to perform its contract obligations to immediately give notice of suspension to the other party and to continue with performance if the other party provides adequate assurance of its performance. Having failed to give the buyer notice of its suspension of performance, the Italian seller not only lost its right to an action for the balance of the purchase price due but the German court also held that because seller had failed to perform its obligation of giving notice of suspension of performance to the buyer, the buyer was entitled to recover damages under CISG Articles 74-77.17

115. (Parties not reported), 32 C 1074/90-91, Jan. 31, 1991 (Germany, Amtsgericht Frankfurt am Main), UNILEX, CLOUT abstract no. 52. 116. CISG, supra note 1, art. 71(3) provides: (3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance. 117. CISG, supra note 1, art. 74 provides: [d]amages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. CISG, supra note 1, art. 75 provides: [i]f the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74. CISG, supra note 2, art. 76 provides:

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Buyer's Damages and Reduction of Price The buyer may claim damages if the seller fails to perform any of the obligations imposed by the Convention. "8 Breach of contract damages consist of a sum equal to the loss, including the loss of profit, suffered as a consequence to the breach.1 9 These provisions resemble the direct, incidental, and consequential damages provisions of the U.C.C."2° The CISG provides a novel "reduction

(1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance. (2) For the purpose of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price of such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods. CISG, supra note 1, art. 77 provides: [a] party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measure, the party in breach may claim a reduction in the damages in the amount by which the loss could have been mitigated. 118. CISG, supra note 1, art. 45 provides: (1) If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may; (a) exercise the rights provided in articles 46-52. (b) claim damages as provided in articles 74-77. (2) The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies. (3) No period of grace may be granted to the seller by a court or arbitral tribunal when the buyer resorts to a remedy for breach of contract. 119. CISG, supra note 1, art. 74 provides: [d]amages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. 120. U.C.C. § 2-714 provides: (1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable. (2) The measure of damages for breach of warranty is the difference at

HeinOnline -- 106 Dick. L. Rev. 244 2001-2002 2001] CONVENTION ON INTERNATIONAL SALE OF GOODS 245 of price" remedy. If the goods do not conform with the contract, the buyer may reduce the price by the difference between the value of the nonconforming goods at the time of delivery and the value that conforming goods would have had at that time. 2 ' This remedy was utilized where a German Buyer and an Italian seller entered a contract for the sale of shoes. 22 When the buyer paid only half the purchase price, claiming that the goods were nonconforming under the contract, the seller sued for the entire purchase price. The court found that because the buyer had satisfied its obligations to timely inspect the goods and notify the seller of defects, it was entitled to a reduction in price of the goods. 23 However, the court noted that the buyer could not arbitrarily reduce the price. The price reduction must reflect the difference between the value of the goods as delivered and the value the goods would have had if they had been in conformity with the contract. Thus, the seller was entitled to recover the difference

the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. (3) In a proper case any incidental and consequential damages under the next section may also be recovered. U.C.C. § 2-715 provides: (1) Incidental damages resulting from the seller's breach including expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. (2) Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty. 121. CISG, supra note 1, art. 50 provides: [i]f the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price. 122. (Parties not reported), 41 0 198/89, Apr. 3, 1990 (Germany, Landgericht Aachen), UNILEX. 123. Id.

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between the price reduction the buyer actually took and the price reduction the buyer was entitled to take. In a similar case,125 an Italian seller and a Swiss buyer entered into a contract for the sale of furniture. The buyer claimed that one set of furniture was defective and when the seller refused to repair the defect, the buyer asked to be reimbursed for its repairs. When the seller sued to collect the entire purchase price, the court found that the buyer was entitled to a reduction in price, although the reduction would not necessarily be the equivalent of the buyer's repair expenses. The court held that the price reduction was to reflect the proportion the value of the goods as delivered bore to the value the goods would have had they been free from defect. The court further held that the latter value was to be determined by the price stated in the contract, unless the seller produced evidence to the contrary.126

IV. Award of Attorney's Fees to Prevailing Party-Statutory, Agreement, and Bad Faith Theories

In Zapata Hermanos v. Hearthside Baking Co.,12 after prevailing before the jury in a breach of warranty case, Mexican Plaintiff Seller moved for an award of attorney's fees against United States Defendant Buyer. Granting Seller's motion, the Illinois District Court rejected Buyer's argument that Seller was not entitled to recovery of attorney's fees because Seller had sued in a United States court and the "American rule" for assessment of attorney's fees "which calls for litigants to bear their own legal expenses" was therefore applicable. In so ruling, the court noted that the so-called "American rule" specifies that in the absence of a statute or enforceable contract providing for such recovery, attorneys' fees are ordinarily not recoverable. The seller was entitled to recover attorney's fees because the agreement between the parties provided that: (1) in the event Buyer failed to pay the agreed purchase price, Buyer would, inter alia, be liable for court costs and attorney's fees as consequential damages; and (2) claims and counterclaims under the contract were governed by the CISG (which had been ratified by the

124. Id. 125. (Parties not reported), 6252, Apr. 27, 1992 (Switzerland, Pretura di Locarno-Campagna), UNILEX. 126. Id. 127. No. 99 C 4040, U.S. Dist. LEXIS 15191 (N.D. 111.Aug. 28, 2001), available at http://cisgw3.Iaw.pace.edu/cases/01829ul.html.

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United States and Mexico) thereby making the consequential damages provision of Article 74 of the CISG applicable. Article 74 of the CISG provides that: Damages for breach of contract by one party consist of a sum equal to the loss, including loss of property, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. (emphasis added). After finding that the buyer had acted in extremely bad faith in refusing to pay, both before and during the litigation, the court also concluded that the seller was entitled to recover its attorney's fees not only under the terms of the agreement between the parties and the consequential loss provision of the Convention but also under the court's inherent power to award attorney's fees in cases of bad faith. The court stated: Before trial the litigants entered into a June 8, 2001 Stipulation that provided in relevant part (again with emphasis added):

1. As of the dates when [buyer] issued its purchase orders for the tins described in the invoices attached as Group Exhibit A to [seller's] Complaint in this case, [buyer] foresaw or should have foreseen that if Lenell failed to pay for the tins that it ordered, received and accepted, [seller] would incur litigation costs including attorneys fees, to seek payment of the invoices for said tins.

2. The Court shall determine if attorney's fees are recoverable as a matter of law.

3. The amount of litigation costs, including attorney's fees, to be assessed as consequential damages in this case, if any, will be for the Court to determine on a fee petition, rather than for the jury to decide.

When the searchlight of analysis is thus properly focused on the language of the Convention without any inappropriate overlay from the American Rule, the question becomes a simple one. As n.2 has said, it truly smacks of a shell game for [buyer] to

HeinOnline -- 106 Dick. L. Rev. 247 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 have entered into the commitment to which it has stipulated and yet to urge that [seller's] admittedly foreseeable legal expense ("which the party in breach [buyer] foresaw or ought to have foreseen," in the language of Article 74) was not "suffered by the other party [seller] as a consequence of the breach" (again the language of Article 74]. It is totally unpersuasive for [buyer's] counsel to contend instead that those commitments are [buyer's] admissions do not equate to saying that the attorneys' fees are "consequential damages" recoverable under the Convention.

In sum, the award of attorneys' fees has really been agreed to, although [buyer] does not now acknowledge it, by the combination of [buyer's] stipulation and Article 74.

Although what has been said to this point is dispositive of the issue, it is worth looking at [seller's] other string to its bow: its invocation of the inherent-power predicate for imposing a litigant's fees on its adversary where the adversary has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons" (F.D. Rich, 417 U.S. at 429) in its prelitigation or litigation conduct or both. Although Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991) has become the most recent definitive case in that respect, the Supreme Court had earlier confirmed that teaching in such cases as Hall v. Cole, 412 U.S. 1, 15 (1973), reconfirmed in Roadway Express, Inc. v. Piper,447 U.S. 752, 766 (1980); Alyeska Pipeline, 421 U.S. at 258-59; and Hutto v. Finney, 437 U.S. 678, 689 n. 14 (1978).

This Court has already spoken and written at some length about the bad faith with which [buyer] and its people conducted their dealings with [seller] and then, when they ceased to do business with [seller] and the latter was forced to sue to collect for the unpaid sale price of its tins, with which they conducted this litigation. Instead of repeating that discussion, this opinion attaches [seller] Mem. 2-3, which provides an encapsuled and accurate description of [buyer's] activity. That conduct by [buyer] both leading up to and during the litigation supports an award of attorneys' fees pursuant to the inherent power doctrine under the cited Supreme Court decisions and such other cases as United States v. Fidelity & Deposit Co., 986 F.2d 1110, 1120 (7th Cir. 1993).

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V. Current Status of the United Nations Convention28 on Contracts for the linternational Sale of Goods' United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980)

Ratification, Accession (a), State Signature Approval (AA), Entry into force Acceptance (A), succession (d) Argentina 1/ 19 July 1983 a 1 January 1988 Australia 17 March 1988 a 1 April 1989 Austria 11 April 1980 29 December 1987 1 January 1989 Belarus 1/ 9 October 1989 a 1 November 1990 Belgium 31 October 1996 a 1 November 1997 Bosnia and Herzeaoanda12 January Herzegovina 1994 d 6 March 1992 Bulgaria 9 July 1990 a 1 August 1991

Burundi a4 September 1998 1 October 1999 Canada 2/ 23 April 1991 a 1 May 1992 Chile 1/ 11 April 1980 7 February 1990 1 March 1991 China 3/ 30 September 11 December 1986 1 January 1988 1981 AA Colombia 10 July 2001 (a) 1 August 2002 Croatia 8/ 8 June 1998 d 8 October 1991

Cuba 2 November 1994 1 December 1995 a Czech 30 September 1993 1 January 1993 Republic a/ 7/ d Denmark 4/ 26 May 1981 14 February 1989 1 March 1990 Ecuador 27 January 1992 a 1 February 1993 1982 1 January 1988 Egypt a6 December

Estonia 1/ a20 September 1993 1 October 1994 Finland 4/ 26 May 1981 15 December 1987 1 January 1989

128. The CISG current status of parties is based on the United Nations database, available at http://www.uncitral.org/en-index.htm (last updated on Oct. 30, 2001).

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France27 August France 1981 6 August 1982 AA 1 January 1988 Georgia 16 August 1994 a 1 September 1995 Germany b/ 5/ 26 May 1981 21 December 1989 1 January 1991 Ghana 11 April 1980 Greece 12 January 1998 a 1 February 1999 Guinea 23 January 1991 a 1 February 1992 Hungary 1/ 6/ 11 April 1980 16 June 1983 1 January 1988 Iceland 10 May 2001 a 1 June 2002 Iraq 5 March 1990 a 1 April 1991

Italy 30 September 11 December 1986 1 January 1988 Italy _1981 Kyrgyzstan 11 May 1999 a 1 June 2000 Latvia 1/ 31 July 1997 a 1 August 1998 Lesotho 18 June 1981 18 June 1981 1 January 1988 Lithuania 1/ 18 January 1995 a 1 February 1996 Luxembourg 30 January 1997 a 1 February 1998 Mauritania 20 August 1999 a 1 September 2000 Mexico 29 December 1987 1 January 1989 a

Mongolia 31 December 1997 1 January 1999 a

Netherlands 29 May 1981 13 December 1990 1 January 1992 A

New Zealand a22 September 1994 1 October 1995 Norway 4/ 26 May 1981 20 July 1988 1 August 1989 Peru 25 March 1999 a 1 April 2000 Poland 28 September 19 May 1995 1 June 1996 1981 Republic of 13 Moldova October 1994 a 1 November 1995 Romania 22 May 1991 a 1 June 1992 Russian Federation c/ 16 August 1990 a 1 September 1991 1/ Saint Vincent and the 12 September 2000 1 October 2001 a Grenadines 7/ Singapore 7/ 11 April 1980 16 February 1995 1 March 1996 Slovakia a/ 7/ 28 May 1993 d 1 January 1993

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Slovenia 7 January 1994 d 25 June 1991 Spain 24 July 1990 a 1 August 1991 Sweden 4/ 26 May 1981 15 December 1987 1 January 1989 Switzerland 21 February 1990 a 1 March 1991 Syrian Arab 19 October Republic 1982 a 1 January 1988 Uganda 12 February 1992 a 1 March 1993 Ukraine 1/ 3 January 1990 a 1 February 1991 United States 31 August 11 December 1986 1January 1988 of America 7/ 1981 Uruguay 25 January 1999 a 1 February 2000 27 November 1996 Uzbekistan 2 1 December 1997 a Venezuela 28191______September 1981 Effective for Yugoslavia on Yugoslavia d/ 12 March 2001 d 27April 1992, the date of State succession. Zambia 6 June 1986 a 1 January 1988

Parties:60 a/ The Convention was signed by the former Czechoslovakia on 1 September 1981 and an instrument of ratification was deposited on 5 March 1990, with the Convention entering into force for the former Czechoslovakia on 1 April 1991. 7/ On 28 May 1993 Slovakia, and on 30 September 1993 the Czech Republic, deposited instruments of succession, with effect from 1 January 1993, the date of succession of States. b/ The Convention was signed by the former German Democratic Republic on 13 August 1981, ratified on 23 February 1989 and entered into force on 1 March 1990. c/ The Russian Federation continues, as from 24 December 1991, the membership of the former Union of Soviet Socialist Republics (USSR) in the United Nations and maintains, as from that date, full responsibility for all the rights and obligations of the USSR under the Charter of the United Nations and multilateral treaties deposited with the Secretary-General. d/ The former Yugoslavia had signed and ratified the Convention on 11 April 1980 and 27 March 1985, respectively. Reference C.N.254.2001.TREATIES-1 (Depositary Notification) regarding

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Yugoslavia: Succession, states: "The Secretary-General of the United Nations, acting in his capacity as depositary, communicates the following: The above action was effected on 12 March 2001. The Convention became effective for Yugoslavia on 27 April 1992, the date of State succession."

Declarationsand Reservations

1/ Upon ratifying, or acceding to, the Convention, Argentina, Belarus, Chile, Estonia, Hungary, Latvia, Lithuania, Ukraine and USSR declared, in accordance with articles 12 and 96 of the Convention, that any provision of article 11, article 29 or Part II of the Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance. or other indication of intention to be made in any form other than in writing, would not apply where any party had his place of business in their respective States. 2/ Upon accession, Canada declared that, in accordance with article 93 of the Convention, the Convention will extend to Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Island and the Northwest Territories. (Upon accession, Canada declared that, in accordance with article 95 of the Convention, with respect to British Columbia, it will not be bound by article 1(1)(b) of the Convention. In a notification received on 31 July 1992, Canada withdrew that declaration.) In a declaration received on 9 April 1992, Canada extended the application of the Convention to Quebec and Saskatchewan. In a notification received on 29 June 1992, Canada extended the application of the Convention to Yukon. 3/ Upon approving the Convention, the People's Republic of China declared that it did not consider itself bound by sub-paragraph (b) of paragraph (1) of article 1 and article 11 as well as the provisions in the Convention relating to the content of article 11. 4/ Upon ratifying the Convention, Denmark, Finland, Norway and Sweden declared in accordance with article 92(1) that they would not be bound by Part II of the Convention (Formation of the Contract). Upon ratifying the Convention, Denmark, Finland, Norway and Sweden declared, pursuant to article 94(1) and 94(2), that the Convention would not apply to contracts of sale where the parties have their places of business in Denmark, Finland, Sweden, Iceland or Norway.

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5/ Upon ratifying the Convention, Germany declared that it would not apply article 1(1)(b) in respect of any State that had made a declaration that that State would not apply article 1(1)(b). 6/ Upon ratifying the Convention, Hungary declared that it considered the General Conditions of Delivery of Goods between Organizations of the Member Countries of the Council for Mutual Economic Assistance to be subject to the provisions of article 90 of the Convention. 7/ Upon ratifying the Convention, Czechoslovakia, Saint Vincent and the Grenadines, Singapore and the United States of America declared that they would not be bound by paragraph (1)(b) of article 1. 8/ Upon succeeding to the Convention, the Republic of Croatia has decided, on the basis of the Constitutional Decision on Sovereignty and Independence of the Republic of Croatia of 25 June 1991, and the Decision of the Croatian Parliament of 8 October 1991, and by virtue of succession of the Socialist Federal Republic of Yugoslavia in respect of the territory of the Republic of Croatia, to be considered a party to the Convention with effect as from 8 October 1991, the date on which the Republic of Croatia severed all constitutional and legal connections with the Socialist Federal Republic of Yugoslavia and took over its international obligations.

VI. CISG Reporting Services Cases litigated in United States courts are routinely reported in the hard copy West Publishing Services and electronically in the WestLaw and LEXIS services. For hard copy reports of cases decided in countries outside the United States as well as in the United States the following service is available in English: UNILEX: Transnational Publishers, Inc. 410 Saw Mill River Road Ardsley, NY 10502 Tel: (914) 693-5100 For electronic reports of cases decided in countries outside the United States as well as in the United States the following services are available: Pace University School of Law: http://cisgw3.law.pace.edu CLOUT: http://www.uncitral.org

HeinOnline -- 106 Dick. L. Rev. 253 2001-2002 HeinOnline -- 106 Dick. L. Rev. 254 2001-2002 Consumer Protection in the Mexican Financial System Miguel Acosta-Romero*

I. Introduction At the outset, a brief history about the way the consumer protection issue was introduced in the Mexican legislature is necessary for a fuller understanding of the development of consumer protection in the Mexican financial system. On December 22, 1975 the Mexican Congress of the Union, empowered by its constitutional authority, enacted the Federal Consumer Protection Law, the first law of its kind in Mexico.2 This initial Mexican consumer protection law, however, extended no protection to users of banks, insurance and bond companies, auxiliary credit organizations, general deposit warehouses, or stock exchange agents.3 These omissions sparked a debate on whether the new law extended any practical consumer protections to the users of the Mexican financial system. Many observers concluded that the law did not provide any such protection because the users of these services constituted such a significant portion of Mexican consumers.

* Doctor of Law, UNAM, Professor Emeritus of the Autonomous University of Nayarit, Honorary Doctor of the Autonomous University of Nuero Leon. 1. "Constituci6n Politica de los Estados Unidos de Mexicanos" [ C.P.] art. 73 (X ): "The Congress shall have power to: (X) Legislate for the entire Republic, on fossil fuels, mining, film industry, commerce, gaming, intermediation and financial services, electric and nuclear energy, and to enact laws relative to employment according to art. 123." 2. The Mexican Congress enacted the most recent version of the law on December 24, 1992. 3. "Ley Federal de Proteccion al Consumidor" [ L.F.P.C.] art. 5 : "Services originated from a employment contract or relationship, services which are supervised by the National Banking and Securities Commission,* Insurance and Bond Commission or the Pension Fund System, as well as services which do not have a commercial nature are not included in the scope of this law."

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Six years after the Federal Consumer Protection Law was enacted, the Mexican government finally attempted to create a new law designed to protect consumers of financial services. It was not until September 1, 1982, soon after the debt crisis had exploded - prompting then-President Jose Lopez Portillo to nationalize the banks-that the Mexican legislature enacted a law regulating the public service of banking and credit. The Mexican legislature passed two laws, one in 1982 and one in 1985, aimed at banking and credit.4 Both laws created a legal framework establishing a protection procedure for the users of banking services and gave authority to the National Banking Commission (now known as the National Banking and Securities Commission) to mediate, and in some cases, arbitrate disputes. Though a significant step towards the protection of financial services users, the limited scope of the consumer laws continued to leave unprotected the users of insurance and bond companies, general deposit warehouses, factoring and financial lease companies, and credit unions. Providers of these services remain outside the scope of both the General Law of Credit Organizations and Auxiliary Credit Activities and the Stock Market Law. This situation did not change until the period between 1990 and 1992, when Mexico began to re-privatize the banks after the 1982 nationalization. Changes in the Mexican legal system introduced conciliation and arbitration procedures to be carried out by State institutions aimed at protecting financial system users. The law established the National Banking and Securities Commission as the office in charge of protecting consumers of bank and auxiliary organization services.5 Taking advantage of these changes to the Mexican legal system, the legislature enacted a new Law of Credit Institutions in July, 1990,6 and amended several laws during 1993,

4. Regulation of Public Service for Banking and Credit (1982), Regulation of Public Banking and Credit (1985). The objective of both laws was to adjust banking expropriation to the new reality. Both were very short-lived. The first law lasted three years and the second five. They are now repealed. 5. "Ley de la Comision Nacional bancaria y de Valores" [ L.C.N.B.V.] art. 1: "The Commission primary objective will be to supervise and regulate, in the scope of its competence, the financial entities, so as to procure their stability and correct functioning, as well as to maintain and stimulate the safe and equilibrated development of the financial system as a whole, protecting the public interest. Also it will be the Commission objective to oversee and regulate natural persons and other juridical persons, when they perform the activities foreseen in the laws relative to the financial system." 6. "Ley de Instituciones de Credito" [L.I.C.] art. 1: "This law regulates the banking and credit service,. the organization and operation of credit institutions; the transactions done by them, their safe and equilibrated development, the

HeinOnline -- 106 Dick. L. Rev. 256 2001-2002 2001] CONSUMER PROTECTION IN MEXICO including the General Law of Insurance Institutions and Mutual Companies, the General Law of Credit Organizations and Auxiliary Credit Activities, and the Stock Market Law. Other changes in Mexican law established the National Commission of Insurance and Bonds. More recently, the government created the Commission of Pension Fund Savings, charged with the goal of protecting the pension funds of Mexican workers. The procedures employed by recent Mexican agency rulemaking are similar. The first step is a conciliation procedure between the consumer and the institution. If the parties reach a consensus, of course, the dispute is resolved. If the parties fail to agree, however, the matter is submitted to an equity or strict law procedure. The law prescribes the stages of this procedure and gives authority to the Commission to award damages; however, with one exception, the Commission's determination must be given an exequatur by a judge. The only exception to this general approach was given to the National Insurance and Bonds Commission, which has the authority to execute its award by selling insurance and bond company equities that act as a legal reserve in the Mexican stock market. The law provides that the damages won by successful claimants derive from the proceedings of such sales. Recent reforms permit the parties to name arbitrators from outside the Commission. Many experts laud the reforms as a significant advance in consumer protection. The recent reforms in the Mexican legal system aimed at protecting consumers of the financial system appear to have filled the void created by the operation of consumer laws during the period from 1976 to 1982 and, to a secondary extent, until 1998. In my opinion, however, the operation of these laws does not provide an actual solution for at least two reasons. First, the different sets of laws that may apply in a single matter do not force financial institutions to resolve consumer problems. Second, institutions do not implement the procedures prescribed by the laws, in effect, turning them into dead letter laws. The end result is that such procedures are inefficient solutions because of the reluctance of the institutions to follow the procedures. This reluctance results in a waste of time for users, forcing them to sue before the courts of law. In countries such as Mexico, where there is high annual inflation, those institutions who can delay trials for several years- while obtaining interest from money while the matter is in protection of the users interests; and the terms by which the government will guide the Mexican Banking System."

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II. Recent Developments in the Mexican Financial System

Introduction

In response to the shortcomings of the previous laws, the Federal Government, on January 19, 1999, introduced a new system designed to protect Mexican consumers of financial services. Mexico has a vast financial system comprised of more than 700 financial intermediaries servicing more then twenty-five million credit card holders, more than two million bank debtors, over fifteen million checking and savings accounts and over seven million term deposits Overall, more than half the population of Mexico participates in the Mexican financial system. It is important to note that this population does not include users of financial institutions such as insurance and bond companies, credit unions, leasing and factoring companies, general deposit warehouses and workers participating in the System of Savings for Pension Funds. Taking all of these institutions into account, the total number of financial services customers in Mexico tops fifty million. In an effort to better serve this population, the Mexican government sought to address the growing number of consumer complaints about Mexican financial institutions. Mexico's most recent attempt to protect the rights of financial consumers began on January 18, 1999, when the Law for the Protection and Defense of Financial Services Users was published in the Official Gazette.8 The main purposes of this law are to

7. National Banking and Securities Commission data as of December 1999. 8. "Ley de Proteccion y Defensa al Usuario de Servicios Financieros" [L.P.D.U.S.F.] art. 4: "The protection and defense of the users rights and interests will be charged to a public decentralized organism, with its own juridical personality. This institution will be called the National Commission for the Protection and Defense of Financial Services Users, and will have its domicile in the Federal District. The protection and defense this law commends to the National Commission, have as a prioritary objective achieving equity in the relations between Users and Financial Intermediaries, giving the Users elements to strengthen the juridical security in the operations carried out with the latter." Art. 1 L.P.D.U.S.F.: "The main purpose of this law will be to protect and defend the interests of users of financial services, rendered by public, private and social institutions duly authorized to operate; as well as to regulate the organization, procedure and functioning of the public entity in charge of said functions."

HeinOnline -- 106 Dick. L. Rev. 258 2001-2002 20011 CONSUMER PROTECTION IN MEXICO protect and defend the rights of financial services users and to regulate the organization, procedures, and operation of the National Commission for the Protection and Defense of Financial Services Users (National Commission).9 The new law is of public order, social interest, and binding in the whole national territory. This new law grants absolute rights not subject to waiver or abrogation by private parties. ° The main purpose of the Law for the Protection and Defense of Financial Services Users is to strengthen the security in financial operations and in consumer relations with the financial institutions." The goals of the National Commission are to promote, advise, protect and defend the interests of users, to act as an arbiter in the conflicts subject to its jurisdiction, and to assure fairness in the relationships between users and institutions. The by- laws of the National Commission provide full autonomy to dictate resolutions and awards and to impose the sanctions provided for in the law. The National Commission must maintain strict confidentiality about the information and documents that come into its possession, especially information related to the deposits, services, and operations performed by the financial institutions. The National Commission may disclose such information only if requested by a judicial authority, by virtue of a court order in a trial in which the holder is a party. The law dictates that National Commission employees will be held responsible for violating banking secrets and will be ordered to make restitution for any damages caused by such violations.

ConciliationProcedure

The conciliation procedure set forth in the Law for Protection and Defense of Financial Services Users is simple. It begins after submission of either a written claim or a claim made by any other means accepted by the National Commission or any of its regional delegations. 2 The National Commission assumes the role of a

9. Id. 10. Art. 3 L.P.D.U.S.F.: "This law is of public order, social interest and mandatory in the entire territory of the Republic, in accordance with the terms and conditions set forth herein. The rights granted by such law may not be given up." 11. See supra note 6. 12. Art. 63 L.P.D.U.S.F.: "The National Commission will receive the users claims according to this law. Such claims may be filed by the aggrieved party personally, in written form or by any other ideal means..."

HeinOnline -- 106 Dick. L. Rev. 259 2001-2002 DICKINSON LAW REVIEW [Vol. 106:1 conciliator between the Financial Institution and the aggrieved party. 3 The claim must include the following: 1. The Claimant's name and address; 2. The Representative's name and legal document; 3. A relation of the facts that originated the claim; 4. The name and address of the financial institution against which the claim is directed; and 5. Documents that help to identify the service that precipitated the claim. In addition, the National Commission may ask for any further information it considers relevant to identify the financial institution. Once the claim is filed, the National Commission will notify the financial institution within five days of receiving the claim. This notification should include all the documents and information produced by the claimant and should schedule the time and date for the conciliation proceeding. The notification advises the financial institution that the National Commission will impose a pecuniary sanction for failure to appear at this meeting.

Arbitration Procedure

The arbitration procedure is initiated when the parties sign an arbitration agreement authorizing the National Commission to render an award based on equity, stating the points of dispute, and stating the stages, formalities or terms of the arbitration.1 4 The arbitration proceeds along the following timetable: 1. The claimant has five days following day the agreement was signed to file his claim; 2. The respondent has five days, starting from the day following the filing of the claim, to present any documents relevant to its defense; 3. Once the respondent has answered, the trial will be declared open for fifteen days to produce further evidence.

13. Art. 60 L.P.D.U.S.F.: "The National Commission is authorized to act as a conciliator, between Financial Institutions and Users, with the goal of protecting the latter's interest." 14. Art. 73 L.P.D.U.S.F.: "In the arbitration agreement, the parties will designate the National Commission or any of the arbiters proposed by it to consciously, truly and in good faith resolve the dispute, and will state in a common agreement the precise object of the arbitration, fixing the stages, formalities, terms and times to which the arbitration will be subject. For any matter not agreed upon, the Commercial Code will apply."

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After a careful study of the evidence produced by the parties, the National Commission will render an arbitration award, and, if necessary, will dictate the measures needed to carry out the award. Once the award is given, the parties can ask for a formal explanation of the award within seventy-two hours following notification if either party believes mathematical or typographical errors exist. If the National Commission orders the financial institution to compensate the claimant, the institution will have five business days, starting from the day following the award, to do so.

Legal Counsel of the Users

The National Commission is authorized to offer free legal representation and counseling to consumers.15 Consumers seeking legal counsel from the National Commission must present an affidavit stating that they do not have sufficient funds to hire a counselor to assist them. In case of doubt, the National Commission performs a socio-economic study to verify the consumer's financial status. If the National Commission concludes that the user is not eligible for free counsel, it will provide one-time advice. There is no right of appeal from this ruling. If the National Commission does provide legal counsel to the consumer, the consumer must furnish all relevant documents and information to the Counselor appointed by the National Commission. If for any reason the documents or information cannot be produced, the consumer must justify his or her inability to produce this information. If the consumer fails either to provide the pertinent information or to justify his lack of documentation, the National Commission will not render the legal defense.

Statistics of the First Year of Operation of the National Commission for the Defense of Users of the FinancialSystem (CONDUSEF)

According to data provided by CONDUSEF, in the first year of operation the National Commission President reported to the newspaper "El Sol de Mexico" that the Commission had, in seventeen months, assisted 40,746 claims against banking and insurance companies and other financial intermediaries of the Pension Fund Savings System. Of the total amount of assistance,

15. Art. 85 L.P.D.U.S.F.: "The National Commission may, according to its criteria approved by the Board, render gratitous legal counsel to the User. The National Commission will abstain to render said counsel in any case in which the parties are subject to the arbitration procedures set forth in this law."

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8,032 were claims and 32,714 were guidance and counseling. These numbers show that the number of claims is very low in relation to the total number of users. III. Conclusion At the time of this writing (August 2000), CONDUSEF has been operating for too short a period of time to draw firm conclusions regarding its effect. The creation of CONDUSEF is relatively recent (January 19, 1999). The text is full of formalities and is written in a form that is very difficult for the user, and the majority of Mexicans, to understand. The result is inaccessibility, which undermines, in part, the law's objective of encouraging the development of a "financial culture" among the population. We are dealing with an institution copied from the experience of other countries, with different traditions and legal frameworks. It is possible that in the future, the Mexican legislature will amend the law in order to adapt it to experience. One practice that may be strongly criticized in my opinion is that when there is only a small amount of money involved-that is to say quantities below the amount of the fine that CONDUSEF imposes-institutions invariably accept a quick solution to a conflict. When higher sums are involved, they do not submit to CONDUSEF's jurisdiction.

HeinOnline -- 106 Dick. L. Rev. 262 2001-2002 Developments in Consumer Law in Puerto Rico, Case Brief: Costa v. Caguas Expressway Motors, Inc. Pedro F. Silva-Ruiz*

I. Introduction As early as 1973, the Government of Puerto Rico created a Department (Ministry) of Consumer Affairs' as an executive department within the government.2 According to its enabling act, the Department "shall have as its primary purpose to defend and implement the rights of the consumer, to restrain the inflationary trends and to establish and inspect price control over goods and services offered in commerce., 3 The powers and faculties granted to the Secretary (Minister) are very broad.! This article makes reference to only a few of these powers. Among the powers granted to the Department are: (j) to regulate and inspect advertisements and deceitful practices in commerce, including the faculty of inspecting the advertisement of products and services published through different media of communication and to require advertisers to produce evidence of the truthfulness of the published advertisement.5 This note examines a recent case interpreting the "Regulations on Deceptive Practices and Advertisements. '

* Professor of Law, University of Puerto Rico; Honorary Professor of Law, University of Arequipa, Peru. 1. D.A.C.O. (Spanish acronym for "Departmento de Asuntos del Consumidor"). 2. Act no. 5 of April 23, 1973, 3 P.R. LAWS ANN. § 342 et seq. 3. 3 P.R. LAWS ANN. § 341(b). 4. 3 P.R. LAWS ANN. § 341(E) ((a) through (z), (aa) 1-4). 5. 3 P.R. LAWS ANN. § 3410). 6. Regulation no. 4339 approved by the Department of Consumer Affairs and filed with the Department of State on October 3, 1990. The Spanish version,

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II. Regulations on Deceptive Practices and Advertisements As stated in Article 2, "[T]he purpose of this regulation is to protect the consumer against practices and advertisements that create or tend to create a false or deceptive appearance of goods or services offered in commerce." As expected, the regulation "shall be interpreted freely in favor of the consumer. ' The Regulations also set forth the following definitions: Advertisement: any oral, written, graphic, pictorial or other manifestation made for the purpose of offering, describing or otherwise representing a good or service or some aspect of a good or service.

Deceptive advertisement: any advertisement that constitutes or tends to constitute fraud or deception or that communicates or tends to communicate a false or incorrect idea about the thing being advertised. 9

Deceptive practice: any act, practice, course of conduct, persuasive mechanism, offering, information or promise made, apparently made or suggested, whether it be deceptive, false, fraudulent or otherwise tends to deceive, or through which the true facts about the things are twisted or can be misinterpreted.' °

III. Case Brief In Costa v. Caguas Expressway Motors, Inc.," Costa filed an administrative complaint with the Department of Consumer Affairs against Caguas Expressway Motors for not agreeing to sell a motor vehicle for the price stated in a newspaper advertisement. Four days after the initial advertisement, the price of the car was modified ("corrected") in an advertisement published in a different newspaper. The Department of Consumer Affairs dismissed the complaint. The Court of Appeals affirmed the ruling and the consumer appealed to the Supreme Court of Puerto Rico. The Supreme Court of Puerto Rico reversed. The issue was whether an advertisement of a sale of goods could be corrected by a

"Regalmento de Practicas y Anuncios Enganosos," prevails in the event of a discrepancy between the original Spanish text and the English translation. 7. Regulation 4339, article 4. 8. Regulation 4339, article 5(c). 9. Regulation 4339, article 5(d). 10. Regulation 4339, article 5(1). 11. 99 PRSC 80, 1999 PR Sup. LEXIS 203 (Dec. 29, 1999).

HeinOnline -- 106 Dick. L. Rev. 264 2001-2002 2001] DEVELOPMENTS IN CONSUMER LAW IN PUERTO RICO 265 rectification in another newspaper other than the one in which the advertisement was originally published. Article 21 of the Regulations requires a merchant that discovers an error in an advertisement prior to publication to correct the error immediately. If the error is discovered after publication, the merchant must publish the correct information in an "adequate and reasonable fashion," and further shall place a copy of the correction in the place where he exhibits for sale or sells the good or service that was the subject of the advertisement. 2 The merchant must honor the published offer prior to correction because consumers may be motivated to act based on the erroneous advertisement. In considering article 21 of the Regulations on Deceptive Practices and Advertisements, the Court ruled that it was not adequate or reasonable to publish a "correction" (a supposed rectification of the incorrect advertisement) in a newspaper other than the newspaper that carried the original advertisement. The Court also ruled that the merchant should post the corrected advertisement at the entrance to the store. The decision also reaffirms the principle that "[Any] affirmation in an advertisement that lends itself to various interpretations, one of which may be deceptive, shall be interpreted adversely for the advertiser."" The dissent points out that the Opinion is an act of judicial legislation, as article 21 of the regulations requires only the publication of the correct information in an adequate and 1 4 reasonable fashion.

IV. Conclusion The organic act creating the Department of Consumer Affairs15 grants the Secretary (Minister) a full and broad range of powers and faculties for protection of the consumer. The Regulations of Deceptive Practices and Advertisements is one of the rules in force to protect consumers, in particular, to remedy deceitful advertisements and practices in commerce. In my opinion, the Regulations, which date back to 1990, are in need of revision in certain respects to bring them up to date with current commercial advertising practices.

12. Regulation 4339, article 21. 13. Garage Ruben, Inc. v. Tribunal Superior de Puerto Rico, 101 D.P.R. 236, 245 (1973). 14. Costa, 99 PRSC 80, 1999 PR Sup. LEXIS 203, at *26 (Lopez, J. dissenting). 15. Supra note 3.

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