FINANCING

1
FINANCING SECURITYDocumentary credits

• Purpose to organise payment against delivery in
  international sales
• Technique (simple case)
• - a bank
• - acting on instructions of a principal
  ( applicant , usually buyer)
• - undertakes an obligation to pay a beneficiary
  (usually seller)
• - against delivery by the beneficiary of the
  agreed documents (including a document
  representing the goods)
• concept of negotiable instrument the right out
  of the document follows the right to the document
  (das recht aus dem Paper folgt das Recht am
  Papier)

2
Documentary credits

• Order of acts
• Underlying contract (usually sale) determines the
  payment conditions more specifically which l/c
  the buyer will have to obtain for the benefit of
  the seller before the seller ships
• Applicant (buyer) contracts with a bank to
  undertake a  credit  issue such a l/c (in
  favour of the seller)
• Issuing bank issues a l/c this is notified to
  the beneficiary (seller)
• Seller sends / ships the goods
• Seller presents the documents to the issuing bank
  (presentation)
• Bank examines the documents (examination, 5 days)
  and honours (pays) or refuses
• Bank reclaims payment from its client (buyer)
  (recourse) and transfers the documents to the
  client (against payment)

3
Documentary credits
4
Documentary credits- applicable rules

• Conflict of law rule 3 separate relationships.
  To each of them is applied its own lex contractus
  (chosen law subsid. characteristic performance)
  (NB. Property rights in the goods are determined
  by the lex rei sitae)
• In the relationship issuer / beneficiary
• - Uniform customs practices  (UCP),
  (privately) codified by ICC. Since 2007 version
  600.
• - applicable by virtue of a reference in the
  contract or l/c in some countries accepted as
  customary law very succesful - but less in the
  USA (application of the UCC).
• UCP do not regulate all issues national law
  applies to other issues.
• DCFR has a model law for all independent
  guarantees (incl. documentary credits) in Book
  IVG Section 3.

5
Documentary creditsBank - beneficiary

• Legal effects between bank (delegated debtor) and
  beneficiary (usually seller) (performance
  relationship)
• Art. 4 UCP ( credits v. contracts )
• Independent from the relationship bank /
  applicant ( provision relationship ) (so-called
  abstraction)
• Independent from the underlying relationship
  between applicant (usually buyer) / beneficiary
  (usually seller) (valuta relationship , usually
  a contract of sale)  even if any reference is
  included in the credit 
• -  Separate   determined only by its own
  modalities (next slide)

6
Documentary creditsBank beneficiary

• Legal effects of the l/c between bank and
  beneficiary (usually seller (cont.)
• In principle irrevocable (art. 7b) (analysed
  either as a contract or a binding unilateral
  promise)
• In principle not transferable (infra, art. 38
  UCP) (but beneficiary can transfer the proceeds,
  art. 39)

7
Documentary credits Bank - beneficiary

• Legal effects of the l/c between bank and
  beneficiary (usually seller (cont.)
• Duty to pay (or honour otherwise) only
• - upon presentation of complying documents
  (complying presentation) strict interpretation
  detailed default rules in the UCP concerning the
  requirements for the various types of documents
  commonly required (infra) conditions without
  stipulated documents are disregarded (art. 14 h),
• and if presented before the expiry date,
• and at the agreed place for presentation (or one
  of the places for presentation).
• For electronic presentation, see the eUCP
  supplement to the UCP
• Standard for examination art. 14.
• Time for examination According to 14 b, the
  period for examination is 5 days.
• In case of refusal, duty to notify discrepancies
  to the presenter (art. 16 c)

8
Documentary creditsBank - beneficiary

• Independence is exceptionally set aside in case
  of manifest fraud. Manifest means proven by
  present evidence (DCFR IVG-3105)
• Undertaking to honour - modes for honouring the
  credit
• a) immediate payment (at sight),
• b) deferred payment (promise to pay with a
  term),
• c) by acceptance of a draft (bill of exchange)
  drawn by the beneficiary
• Alternative undertaking to negotiate, i.e.
  purchase of a draft (bill of exchange) drawn on
  another bank. The issuer will pay in exchange for
  a draft.
• UCP 600, art. 6 c a credit must not be issued
  available by a draft drawn on the applicant.
• Effect upon the rights obligations of the
  client client can not attach (seize) the
  beneficiarys right against the bank (case law)

9
Documentary credits- documents

• Art. 5  Banks deal with documents, not with
  goods 
• Documents dealt with in detail by the UCP
• Commercial invoice (art. 18)
• Transport documents. More specifically
• Bill of lading (cognossement) (art. 20)
• Charter party bill of lading (art. 22)
• Non-negotiable Waybill (art. 21)
• Multimodal transport document (art. 19), .
• General requirement transport document must be
   clean  (art. 27)
• Insurance documents (covering the goods) (art.
  28)
• Not defined in UCP but also frequently used
• Storage certificates (issued by bailee)
• Certificates of origin, composition or quality,
  compliance with norms, etc.

10
Documentary creditsBank - applicant

• Effects in the internal relationship applicant /
  bank (delegated debtor)
• Contract for (financial) services determines
  which l/c the bank undertakes to issue
• Bank must notify applicant of the presentation of
  documents
• has a duty of reasonable care in examining the
  documents (no stricter liability) (more detailed
  rules in art. 14 UCP)
• Must notify applicant of performance or refusal
• After performance by the bank to the presenter
  recourse of the bank against the applicant (DCFR
  IVG-3109 also secured by subrogation Belgian
  law no subrogation bank usually not interested
  in subrogation)
• Documents remain in the hands of the bank as
  security for reimbursement (recourse)

11
Documentary creditsBeneficiary - Applicant

• Effects in the relationship beneficiary (seller)
  / applicant (buyer)
• Seller does not have to ship before l/c is issued
• During the term for presentation right to
  payment against the buyer is suspended (comp.
  UPICC 6.1.7 (2) and DCFR III-2108)
• After undue payment buyer must demand
  reimbursement from the seller (only)
• Dispute settlement mechanism organised by the
  ICC  DOCDEX . Expert opinion (binding or not)
  in very short period of time by anonymous expert

12
Documentary credits

• Complex forms intervention of more than 1 bank
• Bank of (country of) the seller is merely an
  advising bank (see art. 9 UCP)
• gives advice on required formulation of the l/c,
  
• verifies the l/c issued (authenticity,
  conformity),
• transmits the l/c of the issuing bank to the
  beneficiary
• may be authorised by the issuing bank to examine
  the documents and to honour
• agent of the issuing bank (no proper
  undertaking)
• demands reimbursement from issuing bank after
  payment.
• Bank of (country of) the seller confirms
  (confirming bank) own obligation (see art. 8
  UCP) beneficiary has a joint and several right
  against both banks, but has to address the
  confirming bank first
• Bank of (country of) the seller guarantees the
  obligation of the issuing bank dependent
  personal security (suretyship), no independent
  obligation
• Nominated bank (art. 12 UCP) merely an agent of
  the issuing bank

13
Documentary credits

• Particular forms
• Transferable documentary credit art. 38 UCP 600
• Back-to-back-credit l/c on application by the
  seller for the benefit of its seller second bank
  takes the first l/c as credit security.
• Effect second bank in possession of the
  documents and demands reimbursement from the
  first bank on the basis of the first l/c.
• Revolving credit (with a ceiling) credit which
  can be used for several l/cs. Each payment by
  the buyer is credited to the current account of
  the seller so that new credit can be drawn in
  favour of the seller.
• Red clause bank is authorised to pay (or pay in
  part) in advance (before presentation) - usually
  upon presentation of a provisional document (eg
  storage certificate)

14
Standby letters of credit

• Standby l/c
• is rather a kind of independent guarantee (s.
  further), which can be called (demand) by
  presenting agreed documents (in principle proving
  the right to payment of the beneficiary).
• Standard practices are codified in the  ISP ,
  now ISP 1998

15
Export financing

• Distinction short-term (lt2 y) / medium-term (2-5
  y) / long-term (5-20 y)
• Export insurance a form of credit insurance
• - Often offered by government authorities (export
  guarantee department)
• Risks which are usually covered commercial,
  political-social, financial-monetary
• Premium depends on country risk (risk assessment
  by country)
• No coverage in case of fault of the insured party
  itself

16
Export financing

• Export financing by public institutions (form of
  subsidy) OECD has adopted Guidelines on
  officially supported export credits to avoid
  unfair competition (now version 2013)
• Scope of application official support for export
  outside the EU with a repayment term of 2 or more
  years
• Support can be granted only if
• Buyer must pay min. 15 before delivery (or
  obtain credit in its own country) (art. 10 a)
• Max. repayment term 5 y. (possibly 8 ½ y) for
  export to richer countries, 10 y. for poorer
  countries (12 y. for big projects) (art. 11 -
  13)
• Rules concerning insurance premium
• Minimum interest rates to be respected (art. 14
  15, 19)

17
Export financing

• Export financing by suppliers credit or by
  buyers credit (both by bank in exporting
  country) when exporting seller is obliged to
  grant credit to the buyer
• Suppliers credit (credit to exporter)
• - Often discounting bills of exchange drawn on
  the buyer bank pays supplier against bills of
  exchange drawn on the buyer (and accepted by the
  buyer) supplier remains liable to the bank in
  case the buyer does not honour the bill
• Buyers credit credit granted to the foreign
  buyer by a bank (in the country) of the supplier
• to be distinguished from credit granted by the
  buyers bank to the buyer by virtue of which the
  supplier (or holder) collects the bill of
  exchange with the buyers bank.

18
Credit security

• Proprietary security
• Distinction giving credit by delivering goods /
  credit by providing money.
• Eg reservation of title is granting credit by
  delivering unpaid goods but at the same time
  retaining title until payment (secured credit)
  retained rights of seller will have priority over
  rights granted by buyer
• Proprietary security exists in many forms,
  varying from jurisdiction to jurisdiction
• sometimes only  fixed  on present assets,
  sometimes also by anticipation on future assets,
  sometimes on floating assets (stocks,
  receivables, )
• Sometimes only  possessory  security, sometimes
  also non-possessory, usually requiring instead
  registration or some other form of publicity
• Rights to enforce also vary
• General Model law in DCFR Book IX Proprietary
  security in movables (s. infra).

19
Credit security

• Applicable law - different aspects
• Contractual relationship between the parties lex
  contractus
• Proprietary aspects lex rei sitae. Conflit
  mobile possible
• In case of insolvency often also application of
  the lex concursus
• Uniformisation ?
• Cape Town Convention 2001 (general framework
  aircraft protocol (2013 ratified for EU (w/o
  Denmark) 51 other countries). In addition
  Luxemburg railroad protocol 2007 Berlin Space
  Assets Protocol 2012
• EU Collateral Directive security in financial
  assets (financial instruments and account money
  and bank loans). Directive only for relationships
  between financial institutions. Some Member
  states (as Belgium, UK) also apply it in other
  relationships.
• Ottawa Convention international leasing, infra.
• DCFR Book IX

20
Cape Town Convention
21
Proprietary security of the seller Reservation
of title

• Sellers security under Belgian law
• Before delivery right to suspend performance
  (effective against third parties)
• Termination for non-performance proprietary
  effect under Belgian law if exercised before
  insolvency (even if debtor in possession at
  insolvency)
• After delivery and transfer of title still has a
  sellers lien (privilege) on the goods (by
  operation of law)
• If stipulated, retention of title effective in
  insolvency since 1998
• Applicable law lex rei sitae
• Extensions of retention of title (not widely
  recognised)
• Extended into the buyers right to payment after
  resale
• Extended into the product manufactured
• Broadened to other claims (all moneys clause)
• Harmonisation and recognition ? Model rules in
  DCFR IX

22
Factoring

• Transfer (assignment) of rights to payment
  (receivables) for the purpose of financing
  and/or credit security factor may provide
  additional services
• Advance payment (with a discount) before maturity
  financing
• Payment even if debtor in default also credit
  security
•  Master agreement  determines which receivables
  the factor undertakes to take over from the
  assignor and on which conditions (often credit
  line with a ceiling), and which costs factor
  deduces (commission, discount )
• True factoring No recourse factoring factor
  bears the credit risk, except in specific cases
  where he has a right to recourse (against the
  assignor)
• Assignment in bad faith (buyer already insolvent)
  
• Buyer refuses to pay because of non-performance
  of seller
• Some other risks not covered
• Spurious factoring recourse factoring factor
  has recourse against the assignor when debtor
  does not pay. Rather a mandate to collect (pro
  solvendo) additional services.

23
Factoring

• Assignment

24
Factoring

• International factoring
• Was often a case of refactoring the export
  factor assigns to an import factor (system of
  indirect factoring ). When factor present in
  both countries (international group) usually
  direct factoring. In case of indirect factoring a
  contract between both factors governs their
  internal relationship (who bears which risk)
• Applicable law ? Different conflict rules for
  different aspects !
• Factoring agreement lex contractus
• Relationship with the debtor lex causae
• Assignability (inc. Effect of no-assignment
  clauses) lex causae
• Proprietary aspects (property rights in the
  receivable) different solutions possible (eg.
  lex causae, country of debtor, law of the
  factoring contract) - now often country of the
  assignor

25
Factoring

• International factoring uniformisation of the
  law ?
• Ottawa-convention 1988 on international factoring
  (into force in 7 count. Belgium since 1 Oct
  2010)
• Scope of application only assignment of
  receivables (right to payment of price) arising
  out of international sales
• Despite the name, it deals not with the factoring
  agreement but with the assignment
• Interpretation of the Convention art. 4 (idem as
  CISG 7)
• One of the critical questions effect of
  no-assignment clauses.
• Why do buyers stipulate them ?
• - can disregard notices of assignment (more
  certainty for payor)
• - maintain future rights of set-off
• National law often gives effect to such clauses.
  Even recent restrictions leave the 2 mentioned
  interests of the buyer untouched (eg German HGB)
• Ottawa Convention no-assignment clauses are
  overruled (art.6). But reservation in 4 countries
  (i.a. Belgium)

26
Factoring

• Ottawa-convention 1988 on international factoring
  (cont.)
• Relationship debtor assignee
• The debtor of the assigned right (buyer) retains
  all other defences arisen out of the sales
  contract (provision relationship) (art. 9), incl.
  any set-off already available.
• But in principle no right to reimbursement from
  the factor in case of non-performance of the
  seller
• (with 2 exceptions in art. 10 (2) where there is
  a right to reimbursement against the factor
  factor has not yet paid assignor or paid only
  after knowing of the non-performance).
• Art. 8 determines under which conditions the
  debtor is under a duty to pay the assignee
  (instead of the seller) if notified by the
  supplier (or with his authority) in writing and
  no older right has been notified earlier.

27
Forfeiting

• Forfeiting
• Comp. a no recourse factoring for a single
  transaction
• Supplier assigns its right to payment against the
  buyer to a forfeiter
• usually by endorsing bills of exchange drawn
  upon the buyer for successive terms of payment
  (usually every 6 months during 2 to 5 year)
• Forfeiter will pay the bills with deduction of
  the discount commission
• Forfeiter bears the credit risk and waivers its
  recourse against the drawer (exporter)
• (NB. Under the Geneva Convention on Bills of
  Exchange such a waiver cannot be binding upon any
  other holder of the bill)
• Endorsing signing on the back ( en dos )

28
Leasing

• Finance leasing 3 party operation
• The (prospective) user negotiates with a supplier
  the sale of equipment
• Leasing contract between the user as lessee and a
  financer as lessor
• Lessor buys upon instruction of the lessee and
  becomes owner( security)
• Lessee leases for a fixed term. Usually with an
  option to purchase at the end of the term (for
  the residual value)
• Leveraged leasing
• Lessor itself is partly financed by a bank
  (investment credit granted by bank to lessor)
• lessor assigns the rights to payment against the
  lessee to the bank (by way of security
  assignment)
• sometimes additionally a security right in the
  equipment.
• Sale and leaseback (2 parties) owner sells for
  cash and then leases back

29
Leasing

• Risks in international leasing ? Especially
  recognition of proprietary rights (lex rei sitae)
• Uniform rules ?
• International leasing also an Unidroit
  Convention Ottawa 1988
• Unidroit model law 2008
• Ottawa Convention
• Scope of application  international 
   leasing  (art. 1)
• Proprietary insolvency aspects
• - Recognition of the right of ownership of the
  lessor (art. 7)
• - But states may require filing/registration (7
  II)

30
Leasing

• Unidroit Convention Ottawa 1988
• Obligations of the parties
• - Lessee may refuse to accept equipment in case
  of non-conformity (and terminate contract if not
  remedied) (art. 12)
• But the lessor is not liable in respect of the
  equipment (art. 8) lessee must go directly
  against the supplier (on the basis of the sales
  contract). Lessee cannot terminate the sales
  contract without consent of the lessor, but has
  other remedies (art. 10)
• Duty of the lessee to take proper care of the
  equipment (art. 9)
• Remedies in case of default (non-payment) of the
  lessee, including possibility of termination
  (art. 13)
• Lessor may assign its rights, but remains liable
  for its obligations (art. 14)
• Lessee may transfer its rights only with consent
  of lessor (art. 14)

31
Project financing

• Very large projects entail specific risks for
  financer apart form the credit risk also
  exploitation risk, market risk, exchange risk,
  political risks... Output of the project is
  essential.
• A particular form is BOT ( build operate
  transfer ) foreign supplier (or consortium of
  suppliers) participates in the capital of the
  exploitation company (at least initial years)
• Often financed by a syndicate of suppliers and/of
  financial institutions
• UNCITRAL Model Legislative Provisions on
  Privately Financed Infrastructure Projects

32
Project financing

• Financers try to limit risks by different
  structures or techniques, eg
• Security provided by or on behalf of sponsors
  (states or international institutions) eg
  completion guarantee, cost overrun undertaking,
  repayment guarantee, etc.
• long term unconditional commitments from buyers
  (possiby incl. suppliers of materials) to
  purchase the products or services purchase
  obligations possibly guaranteed by security. May
  include a take-or-pay contract.
• Contract manufacturing (tolling agreement)
  products manufactured are property of the
  supplier / financer who sells them to purchasers
  (possibly with a long-term purchase agreement)
• Eg. Eurotunnel

33
Independent guarantees

• Independent guarantee 3 party relationship (type
  delegatio solvendi)
• Underlying contract requires the debtor to obtain
  a guarantee
• On application of that debtor, bank (guarantor)
  issues a guarantee
• in the form of a (conditional) promise
• to pay a sum of money to a beneficiary
• on demand by the beneficiary made in conformity
  with the terms and conditions of the guarantee,
  normally incl. at least a declaration that the
  debtor defaults on its obligations (supporting
  statement)
• Independent from the underlying contract (the
  valuta relationship, such as sale, construction
  contract, etc)
• Independent from the internal relationship
  between bank and applicant/principal (the
  provision relationship, a financial service
  contract).
• demand guarantee, performance bond, indemnity,
  in UK not guarantee or bank guarantee  (as
  this is a form of dependent suretyship)

34
Independent guarantees

• Independent guarantees

35
Independent guarantees

• Examples
• Tender guarantee (bid bond)
• Performance bond
• Advance payment guarantee repayment guarantee
• Maintenance guarantee
• Payment guarantee
• Retention money guarantee

36
Independent guarantees

• Applicable rules
• Conflict of law rule chosen law, otherwise place
  of guarantor ...
• UN (UNCITRAL) Convention independent guarantees
  standby l/c (not very successful, in force in 8
  countries)
• Standard conditions drafted by the ICC
• Uniform rules for demand guarantees (URDG) (v.
  758 replaces v. 458 since 1 July 2010), better
  coordinated with UCP
• applicable if the guarantee refers to them (art.
  1 URDG)
• default rules ( except so far as the guarantee
  modifies or excludes them )
• not yet sufficiently succesful to be considered
  as customs
• can be used for domestic or international
  relations
• National law remains applicable by default or
  where mandatory. Art. 34 URDG contains choice of
  the country where issued
• International Standby Practices (ISP 1998)

37
Independent guarantees

• Main rules in the URDG (NB. Wording in v.758
  aligned with UCP)
• Issued on demand of a principal/applicant (or its
  agent - the instructing party) (definitions of
  parties in art. 2)
• Binding as soon as it leaves the control of the
  guarantor (art. 4 a)
• Irrevocable (art. 4b)
• Guarantee not transferable (unless otherwise
  agreed) (art. 33) (variations in national law as
  to the effect of such a no-assignment clause
  most national restrictions of the prohibition
  concern only receivables comp. discussion under
  Factoring)
• Independent from any other relationship (art. 5)
  guarantor deals with documents, not with goods
  (art. 6) disregarding conditions which are not
  documentary (art. 7) with a list of exceptions
  (esp. externally verifiable facts or index)
• If no expiry date, expires after 3 years (art. 25
  c) (in the UN Convention 6 years)

38
Independent guarantees

• Relationship guarantor beneficiary
• Payment requires presentation of a written
   demand  and documents specified in the
  guarantee
• usually at least a declaration by the beneficiary
  that the principal is in breach of obligation,
  art. 15 URDG  supporting statement , unless
  the guarantee is explicitly merely  on first
  demand 
• guarantee may contain further conditions for
  demand (if further documents are required,
  usually called a standby l/c). Art. 8 URDG
  ( content of instructions and guarantees 
  contains a checklist
• Thus the default rule is a guarantee on motivated
  demand (gtlt guarantee on simple demand)

39
Independent guarantees

• Relationship guarantor beneficiary (cont.)
• Procedure
• presentation of the  demand  before expiry date
  (presentation, art. 14 ff.)
• partial demands and multiple demands are possible
  (art. 17)
• guarantor must inform the applicant/principal
  (art. 16) and transmit copies of a complying
  demand (art. 22)
• examination by guarantor with reasonable care
  (art. 19) whether it appears to be on its face a
  complying demand
• within 5 working days (art. 20a) (in UN
  Convention 7 days)
• in case of a demand  extend or pay , guarantor
  may wait 30 days (art. 23)
• in case of complying demand pay (art. 20 b)
• in case of refusal to pay notify beneficiary
  (art. 24) stating reasons for refusal
  (discrepancies) otherwise guarantor must pay !
• payment in the indicated place (art. 20)

40
Independent guarantees

• Effects in the internal relationship between
  applicant/principal and guarantor
• Contract between applicant/principal and
  beneficiary determines which guarantee the
  guarantor will issue (useful checklist in art.
  8) duty of bank to inform/advice
  applicant/principal before that is determined
• Duty of guarantor to inform applicant/principal
  in case of demand (art. 16 and 22 URDG)
• Duty of reasonable care in examination of the
  demand (art. 19 URDG)
• No extension of term ( extend or pay ) without
  consent of the applicant/principal (art. 23)
• After payment recourse against the
  applicant/principal (under Belgian law
  traditionally no subrogation)

41
Independent guarantees

• Complex guarantees, esp. with counter-guarantee
• - bank of the applicant/principal issues a
  guarantee in favour of the bank of the
  beneficiary (corresponding bank)
• corresponding bank issues a guarantee in favour
  of beneficiary. First guarantee is a
   counter-guarantee .
• guarantee and counter-guarantee are independent
  from each other (art. 5)
• Possibility of an advising bank (on the side of
  the beneficiary) (art. 10 URDG)

42
Independent guarantees

• Refusal c.q prohibition to pay (stop-payment
  order) is possible in the following situations
• Guarantee conditions not fulfilled
• Underlying contract (valuta relationship)
  manifestly contrary to the (international) public
  order
• Manifest fraud
• Manifest abuse of right.
• Fraud is more specifically described in art. 19
  Uncitral Convention
• - Provisional order possible of  highly
  probable  on the basis of  immediately
  available strong evidence  (art. 20 Uncitral
  convention)
• Comp. Also DCFR IVG-3105.

43
Accessory guarantees

• E.g. Uniform Rules for Contract Bonds (URCB)
• Terms used surety bond, guarantee (wthout the
  word demand).
• Often a guarantee by an insurer
• Comparable to suretyship (dependant personal
  security) the obligation is dependent upon the
  valuta relationship (between main debtor and
  creditor).

44
Accessory guarantees