BACKGROUND TO THE PREPARATION OF THE UNIDROIT MODEL LAW ON LEASING

 

Recent developments, whether it be in relation to the UNIDROIT Convention on International Financial Leasing (hereinafter referred to as the UNIDROIT Convention), or the Cape Town Convention on International Interests in Mobile Equipment (hereinafter referred to as the Cape Town Convention), have highlighted the special need that developing countries and countries engaged in the transition to a market economy have for the introduction of modern legal rules governing the financing of equipment, of every level of value, in order to develop their economic infrastructure. In particular, those engaged in running the projects of the International Finance Corporation (I.F.C.) for the development of leasing industries in such countries have invariably taken the rules contained in the UNIDROIT Convention as the model for the leasing laws to underpin such new leasing markets. On occasions, the UNIDROIT Secretariat has been approached by Governments seeking UNIDROIT’s assistance in the development of leasing legislation. The States Parties to the UNIDROIT Convention are, moreover, almost all either developing countries or countries in transition.

 

A similar pattern has emerged with the Cape Town Convention. In particular, not only was the diplomatic Conference that saw the adoption of this Convention attended by an unusually high proportion of developing economies but the majority of the States that have to date become Parties to that Convention and the Protocol thereto on Matters specific to Aircraft Equipment are also developing countries.

 

These considerations led the UNIDROIT Governing Council to recommend and the General Assembly to decide that it would be appropriate for UNIDROIT to draw up a model law on commercial leasing, in particular targeted at just such developing countries and countries in transition. It was considered that this would be a more efficient way of developing basic leasing laws in developing countries and countries in transition than to reinvent the wheel each time a new leasing industry was being established, in particular since it would be primarily on the basis of the aforementioned UNIDROIT Convention, as, in effect, the latest expression of the international legislators’ will in this area, and through making use of UNIDROIT’s unique expertise in this area.

 

In recommending the preparation of the model law the Governing Council indicated that it should not impinge on the Institute’s Budget.

 

Before embarking on the preparation of such a model law, the UNIDROIT Secretariat considered it expedient to consult some of the potential key economic stakeholders in such a project, in particular the World Bank, the I.F.C. and the Equipment Leasing Association of the United States of America (E.L.A.). The idea behind this consultation was to ascertain both the economic and legal expediency of the project, as exemplified by such Organisations’ willingness to contribute thereto. The favourable outcome of this consultation, significantly, reflected the undoubted enthusiasm of such potential stakeholders to be able to avail themselves, at the earliest possible opportunity, of the use of such a model law. In particular, it was pointed out that the countries of Africa stood to benefit enormously from the sort of contribution that leasing might be expected to give to the overcoming of their serious infrastructure financing shortcomings. In addition, the model law was considered to be a particularly helpful tool for those countries currently engaged in the drafting of leasing legislation.

From the beginning, therefore, the parameters of the project were clearly delimited by reference to the needs of developing countries and countries in transition, the end product of the Institute’s work in this area being perceived as a particularly apposite and efficient method of ameliorating the inadequate investment capacities of such countries. In the first place, the UNIDROIT Secretariat, in establishing the composition of the Advisory Board to which the preparation of a preliminary draft model law was entrusted, had especial regard to the need to reflect adequately those legal and economic systems that were intended to be the essential beneficiaries of the project amongst its membership: in addition to a minimum number of experts from Europe and North America, the Advisory Board thus included experts from North Africa and the Arab-speaking world, sub-Saharan Africa, the People’s Republic of China, Latin America and countries of the Former Soviet Union. The members of the Advisory Board were Mr A. Albensi (European Federation of Equipment Leasing Company Associations), Mr E.M. Bey, UNIDROIT correspondent (France/Tunisia), Mr R. Castillo-Triana (Colombia), Mr R. Clarizia (European Federation of Equipment Leasing Company Associations), Mr C. Dageförde (Germany), Mr R.M. DeKoven, UNIDROIT correspondent (United Kingdom), Mr. R. Downey (E.L.A.), Ms R. Freeman (I.F.C.), Ms A. Normantovich (Russian Federation), Chief Mrs T. Oyekunle, UNIDROIT correspondent (Nigeria), Mr F. Peter, UNIDROIT correspondent (Switzerland), Ms Y. Shi (People’s Republic of China) and Mr M. Sultanov (I.F.C.). Ms Freeman being unable to attend the second session of the Advisory Board, she was represented by Ms M Ndonde. Mr Downey being unable to attend the third and final session of the Advisory Board, the E.L.A. was represented at that session by Ms I. Cassidy and Mr R. Petta. The Secretariat of the United Nations Commission on International Trade Law (UNCITRAL) was represented as an observer on the Advisory Board by Mr R. Sorieul and Mr S. Bazinas.

Chief Mrs Oyekunle was elected Chairman of the Advisory Board. In the light of the unique expertise that he had acquired as the Reporter on Article 2A (Leases) of the Uniform Commercial Code of the United States of America, in addition to serving on the UNIDROIT Study Group that prepared the preliminary draft version of what was to become the aforementioned UNIDROIT Convention, Mr R.M. DeKoven was elected Reporter to the Advisory Board.

In view of the aforementioned decision by the General Assembly that the preparation of the model law should not impinge on the Institute’s Budget, all members of
the Advisory Board participated in sessions thereof either at their own expense or by arranging for their expenses to be met otherwise.

The Advisory Board met in Rome, at the seat of UNIDROIT, on three occasions, on 17 October 2005, on 6 and 7 February 2006 and from 3 to 5 April 2006. Its first session was devoted to a consideration of the issues to be encompassed by the preliminary draft model law. On the basis of these indications, the Reporter prepared a first draft which, after being submitted to members of the Advisory Board for comment, was considered by the latter at its second session. In the light of this first reading and the proposals for the amendment of the preliminary draft agreed at the second session, the Reporter prepared a second version of the preliminary draft model law, which was again submitted to members 3 of the Advisory Board for comment prior to its third and final session. This last session permitted a final reading of the preliminary draft as well as its revision and refinement by a drafting committee, composed of the Reporter, Mr Bey and Mr Sultanov.

 

The text of the preliminary draft model law as established by the Advisory Board on the last day of its third session was submitted to the UNIDROIT Governing Council, at its 85th session, held in Rome from 8 to 10 May 2006, for advice as to the most appropriate follow-up action. Subject to a number of amendments proposed by members of the Council, which were duly implemented by the UNIDROIT Secretariat, the preliminary draft model law was authorised for transmission to Governments for finalisation. It was agreed that, given the urgency attached by key economic stakeholders, in particular the I.F.C. and the E.L.A., to having the future model law available for implementation at the earliest possible opportunity, every effort should be made to complete the intergovernmental consultation process in respect of the preliminary draft as quickly as possible.

In summary, the Model Law focusses on the private law aspects of leasing, thus steering clear of its fiscal, accounting and supervision aspects. It applies only to commercial leases and, therefore, does not extend to consumer leases, thus focussing on the transactions judged to be most critical to economic development. The Model Law applies to an extended range of assets, in short encompassing all those categories of asset used in the trade or business of the lessee (and, in particular, plant, land, capital goods, equipment, future assets, specially manufactured assets, plants and living and unborn animals). It covers a broader range of leasing transactions than the UNIDROIT Convention, the idea being, while recognising that financial leasing is the most powerful engine of growth in this field, to avoid channelling the development of the industry into any particular category of transaction: it, therefore, applies to both financial leases and non-financial leases.

Two sessions of a UNIDROIT Committee of governmental experts responsible for converting the preliminary draft into a draft model law were held in Johannesburg from 7 to 10 May 2007 and in Muscat from 6 to 9 April 2008. They were attended by representatives of the Governments of Angola, Australia, Brazil, Bulgaria, Burkina Faso, Burundi, Cameroon, Chile, the People’s Republic of China, Colombia, Gambia, Germany, India, Indonesia, the Islamic Republic of Iran, Ireland, Japan, Kuwait, Latvia, Oman, the Islamic Republic of Pakistan, Poland, Portugal, Qatar, Russian Federation, Rwanda, South Africa, Sudan, Tanzania and the United States of America as well as by observers representing the Commonwealth Secretariat, the International Chamber of Commerce, the International Finance Corporation and the United Nations Commission on International Trade Law, as well as the Equipment Leasing & Finance Association of America and the Latin American Leasing Association. South Africa was elected Chairman of the Committee: Mr I.S. Thindisa chaired the Committee in Johannesburg and Mr N.J. Makhubele chaired it in Muscat. Mr DeKoven again acted as Reporter.

The text of the preliminary draft as it emerged from the Muscat session of governmental experts was laid before the UNIDROIT Governing Council, at its 87th session,
held in Rome from 21 to 23 April 2008, for advice as to the most appropriate follow-up action. The Governing Council decided, subject to a certain number of amendments, designed in particular to bring the French text into line with the English, to authorise transmission of what thus became a draft model law to a joint session of the UNIDROIT General Assembly, meeting in extraordinary session, and the UNIDROIT Committee of governmental experts for finalisation and adoption.

 

 

Note on the Joint Session of the UNIDROIT General Assembly - meeting in extraordinary session - and the UNIDROIT Committee of governmental experts for the finalisation and adoption of a draft model law on leasing (Rome, 10-13 November 2008)

 

 

Completion of UNIDROIT’s project for the establishment of a model law on leasing

 

It had everything. The Joint Session of the UNIDROIT General Assembly and the UNIDROIT Committee of governmental experts for finalisation and adoption of a draft model law on leasing, held in Rome from 10 to 13 November 2008, provided the first instance of the business of the General Assembly being extended beyond its traditional statutory functions, to permit those member States not having a seat on the UNIDROIT Governing Council to get more involved in the life of the Institute. Under the chairmanship of South Africa, the Joint Session came out with a product specifically designed to make the lot of developing countries and countries engaged in the transition to a market economy easier; indeed, it learned that some developing countries had already taken the draft model law as the basis of new domestic legislation designed to encourage the development of leasing within their jurisdiction. Not entirely surprisingly, it even had a cliff-hanger finale, with delegations scuttling from one corner of the room to another in a mad, last-minute effort to secure agreement on what had proven to be a particularly divisive point.

 

The Joint Session got underway under the chairmanship of Her Excellency Mrs Amanda Vanstone, Ambassador of Australia in Italy and the sitting President of the General Assembly. Once the business reached the point of substantive discussion of the draft model law on leasing transmitted for finalisation and adoption by the Governing Council at its 87th session, the Ambassador of Australia, however, handed over to Mr John Makhubele, Chief Director of the Chief Directorate for International Legal Relations of the Department of Justice and Constitutional Development of South Africa, South Africa having been appointed to the chair of the Committee of governmental experts at the first session of that Committee, held in Johannesburg in May 2007. Mr Makhubele then chaired the proceedings right through until the final afternoon meeting, when the Ambassador of Australia returned for the formal adoption proceedings. Mr Ronald M. DeKoven, a longstanding correspondent of Unidroit, who had acted as Reporter throughout the development of the draft model law, also acted as Reporter to the Joint Session. Thirty-three States participated in the Joint Session; six of these were non-member States, evidence of the decision taken by the Governing Council to broaden the composition of the Committee of governmental experts beyond the Institute’s membership with a view to ensuring that the type of country primarily identified as beneficiary of the projected model law also be involved as far as possible in its negotiation, notwithstanding the Institute’s under-representation among such countries. Two intergovernmental Organisations, including the International Finance Corporation (I.F.C.), were represented at the Joint Session, as also two international non-governmental Organisations and three professional associations.

 

The main business of the Joint Session was to polish up the text of the draft model law, both in the light of the comments submitted by Governments and Organisations and in particular with a view to improving the concordance of the French-language version with the English. The principal issues on which the Joint Session focussed were three in number, first, whether or not to accept the joint proposal submitted by the UNIDROIT Secretariat and the Aviation Working Group regarding the application of the projected model law in respect of aircraft transactions, secondly, how best to reconcile the ambition of the drafters to enhance the access of developing countries and transition economies to lease finance while preserving the lessee’s right to terminate the leasing agreement where the lessor had committed a fundamental default and, thirdly, while relieving the lessor in a financial lease, qua lessor and owner, from liability to the lessee or third parties for death, personal injury or damage to property caused by the leased asset or use thereof, how best to make it clear that such relief should not affect any liability that it might have for acts committed fraudulently or fault nor any liability that might be incumbent upon it under international Conventions, such as the International Convention on Civil Liability for Oil Pollution Damage adopted in Brussels in 1969 and amended in London in 1984.

 

On the first issue, there was general agreement that leases or supply agreements for large aircraft equipment (of the type covered by the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment, adopted in Cape Town in 2001, i.e. airframes, aircraft engines and helicopters of a certain size) should be excluded from the sphere of application of the proposed model law, unless the lessor, the lessee and the supplier otherwise agreed in writing. At the same time, the draft model law was amended with a view to removing what was seen as a potential source of conflict between the proposed model law and the Convention on International Interests in Mobile Equipment in general.

 

On the second issue, while there was concern that the special nature of the lessor’s role in a financial lease should be preserved, it was, nevertheless, recognised that the concern with coming up with a balanced instrument highlighted by the Deputy Minister of Justice and Constitutional Development of South Africa when opening the first session of governmental experts required the lessee in a financial lease to be able to terminate the lease in the event of a fundamental default by the lessor in respect of its warranty of quiet possession; that special case apart, once the leased asset had been delivered to, and accepted by the lessee, the lessee in a financial lease would not be entitled to terminate the lease upon fundamental default by the lessor or the supplier.

 

On the third issue, there was agreement that in a financial lease the lessor should be relieved from liability to the lessee or third parties for death, personal injury or damage to property caused by the leased asset or use thereof when acting in its capacity of lessor and as owner within the limits of the transaction, as documented under the supply agreement and the lease.

 

The draft model law was formally adopted, as the UNIDROIT Model Law on Leasing, by the Joint Session at the closing meeting on the afternoon of 13 November 2008. The Joint Session passed a Resolution, enjoining the preparation of a commentary on the Model Law by the UNIDROIT Secretariat, acting in close co-operation with Mr DeKoven, as Reporter, Mr Brian Hauck, who had acted as Secretary to the Joint Session, Mr Makhubele and members of the Drafting Committee.

 

As mentioned above, the Model Law in its form as a preliminary draft, following the second session of governmental experts, has already served as the basis of national legislation in a number of developing countries where the I.F.C. is active in using leasing as a means of developing the private sector, in particular Jordan, Tanzania and Yemen. It is the I.F.C.’s intention to continue recommending use of the Model Law in its countries of operations, as a best practice reference. The I.F.C. will, furthermore, incorporate all the key principles of the Model Law in its new edition of Leasing Guidelines. The Commonwealth Secretariat has also declared its interest in working with UNIDROIT to recommend implementation of the Model Law in Commonwealth jurisdictions.

 

Note on the preparation of the Official Commentary to the UNIDROIT Model Law on Leasing

 

 

Preparation of an Official Commentary on the UNIDROIT Model Law on Leasing

 

The UNIDROIT Secretariat was invited by the Resolution passed by the Joint Session of the UNIDROIT General Assembly and the UNIDROIT Committee of governmental experts for the finalisation and adoption of a draft model law on leasing in Rome on 13 November 2008 to prepare an Official Commentary on the UNIDROIT Model Law on Leasing, adopted by the Joint Session. It was invited to prepare this Official Commentary in close co-operation with the Chairman of the Committee of governmental experts, the reporter to the Joint Session and members of the Drafting Committee of the Committee of governmental experts.

 

It was agreed between the Secretariat and those invited to work in close co-operation with it that the proposed Official Commentary should concentrate on those issues referred for clarification by the Committee of governmental experts and the Joint Session to such an Official Commentary, notably with a view to ensuring that the Official Commentary in question be made available at the earliest possible opportunity, in view of the generally recognised urgency of an authoritative interpretation being provided to the international community on such issues, all the more so given that the Model Law had already been implemented in a number of jurisdictions and was in the process of being implemented in other jurisdictions too.

 

A first draft of the requested Official Commentary was prepared by Mr R.M. DEKOVEN, as Reporter to the Joint Session, in April 2009 and circulated among those invited under the Resolution passed by the Joint Session to work closely with the Secretariat in preparing the Official Commentary, for comment. On the same occasion, the Secretariat invited the same persons to attend a meeting for finalisation of the planned Official Commentary, to be held in Rome on 23 and 24 June 2009.

 

Detailed comments were received from the Chairman of the Committee of governmental experts and the Governments of Canada, France and the United States of America, as members of the Drafting Committee. These comments were circulated amongst all those invited to work with the Secretariat on preparation of the Official Commentary. A proposed revised draft Official Commentary was submitted by the Government of Canada, on the basis of those comments.

 

This proposed revised draft provided, together with the comments received on the Reporter’s first draft, the main focus of the discussions at the meeting, which was attended by the Chairman of the Committee of governmental experts, representing the Government of South Africa, the Reporter and representatives of the Governments of Canada, France and the United States of America, as members of the Drafting Committee. The meeting was chaired by Mr M.J. STANFORD, deputy Secretary-General of UNIDROIT.

 

At the meeting, in the light of the further proposals made for improvement of both the first draft Official Commentary and the proposed revised draft, it proved possible to agree on not only the elements to be included in the Official Commentary but also, subject to one exception, to be resolved by correspondence after the meeting, on the language to be employed for this purpose. The Secretariat was given responsibility for finalising the text of the Official Commentary in the light of this agreement.