228

Payment in international sales

provides a consultancy function to assess the financial stability of the parties

and to give advice on conducting the transaction.

Q5 Discuss the nature and purpose of factoring as a means of financing inter-

national trade. What types of transactions is this method of payment most

suited to?

(c)â Laws governing factoring

The UNIDROIT Convention on International Factoring was drafted by the

International Institute for the Unification of Private Law in May 1988 in Ottawa,

Canada. The purpose of the Convention was to harmonise international factor-

ing transactions, reduce uncertainties and to promote international trade. The

Convention has been ratified, most noticeably by France, Germany and Italy.47

Article 2 states that the Convention will apply when parties have their places of

business in different states. Article 3 states that the parties may exclude the appli-

cation of the Convention. Article 8 sets out the duty of the debtor to pay the factor

for the receivables once they have been assigned to him. Article 6 (which was the

result of much compromise at the drafting of the Convention) provides that:

the assignment of a receivable by the supplier to the factor shall be effective not-

withstanding any agreement between the supplier and the debtor prohibiting

such assignment.48

However, Article 6(2) allows states which make a declaration under

Article 1849 to circumvent this provision. This is further qualified by Article

6(3), which stipulates:

Nothing in paragraph 1 shall affect any obligation of good faith owed by the sup-

plier to the debtor or any liability of the supplier to the debtor in respect of an

assignment made in breach of the terms of the contract of sale of goods.

This presents a concern over the certainty of the factoring transaction for

the parties involved. The Convention also presents limitations in its scope, as it

does not address issues such as insolvency of the parties or conflict of laws.

7â Forfaiting

The term ‘forfait’ derives from the French ‘a forfait’ which means to surren-

der one’s rights. Forfaiting is another mechanism used to finance international

trade and is most commonly seen in Europe. The forfaitor will purchase the

47

See www.unidroit.org/english/implement/i-88-f.pdf.

48

UNIDROIT Convention, Art. 6(1).

49

A Contracting State may at any time make a declaration in accordance with Art. 6(2) that an

assignment under Art. 6(1) shall not be effective against the debtor if, at the time of conclusion of

the contract of sale of goods, it has its place of business in that state.