MODEL LAW ON FACTORING – OVERVIEW
Factoring is a vitally important type of financing used across the globe, with annual global factoring volume over 3 trillion euros. While Europe accounts for majority of the world’s domestic volume of factoring, new markets account for the highest growth in factoring volume, with the leading regions being the Middle East, Africa and South America.
Evolution of Global Factoring Volume (in Euro billions)
Source: FCI, Industry Statistics
In 1988 the UNIDROIT Convention on International Factoring was adopted in Ottawa, Canada. The Factoring Convention entered into force in 1995 and has been ratified by 9 States. However, international factoring represents approximately 20% of global factoring volume, whereas domestic factoring accounts for 80%. Despite the growing importance of factoring, no intergovernmental organisation has adopted a factoring model law to assist States in undertaking reforms to improve their domestic legal frameworks.
In December 2018, as a proposal for the UNIDROIT 2020-2022 Work Programme, the World Bank suggested that UNIDROIT develop a Model Law on Factoring. The World Bank proposal highlighted three reasons why a UNIDROIT Model Law on Factoring should be developed:
The proposal noted that then existing instruments largely focused on international or cross-border transactions and did not provide sufficient guidance to States to develop functional domestic factoring frameworks.
At its 98th session in May 2019, the UNIDROIT Governing Council approved the project for the 2020-2022 Triennial Work Programme as a high priority project.
COORDINATION WITH OTHER INTERNATIONAL INSTRUMENTS
The Unidroit Model Law on Factoring has been designed to be complementary and largely consistent with other relevant international standards.
The Model Law on Factoring is Unidroit’s second instrument in the field of factoring, having also prepared the Unidroit Convention on International Factoring (1988). The Factoring Convention, which entered into force in 1995, provides a treaty framework for international factoring with parties in different States, whereas the MLF provides a domestic legal framework for both domestic and international factoring transactions.
The MLF was carefully developed to also complement international standards prepared by the United Nations Commission on International Trade Law (UNCITRAL), including the United Nations Convention on the Assignment of Receivables in international Trade (2001) and the UNCITRAL Model Law on Secured Transactions (2016).
The MLF has a different purpose to the Receivables Convention, which provides a treaty framework for the international assignment of receivables between parties in different countries.
The MLF is closely aligned with the policy objectives, language and terminology of the Model Law on Secured Transactions (MLST). This approach was deliberately adopted to ensure that the two instruments would not only be complementary, but that a State enacting the MLF would be able to subsequently transition to a broader secured transactions reform using the MLST. Necessarily, the MLF has a much narrower scope as it deals only with receivables, whereas the MLST provides a comprehensive framework for security interests in different assets. Due to its narrower scope, the MLF is significantly shorter and less complex than the MLST.
During the development of the MLF, the Working Group also took into account other standards prepared by non-governmental organisations, such as the FCI Model Law on Factoring (2013) and the Afreximbank Model Law on Factoring (2016), which they themselves had been developed to be consistent with the earlier UNCITRAL and UNIDROIT instruments.