Change of law and transitional provisions

Name Guy Morton

Date 12th October 2004

Introduction: traditional approach to change of law

General position for movables – change of location does not of itself affect existing rights of ownership .….. but the legal effects of any act or event after the change of location will be

governed by the law of the new location

Example – Picture stolen from owner (A) in England Thief takes picture to Italy Picture is acquired by good faith purchaser (B) in circumstances where

under Italian law B acquires an overriding title Later, B brings the picture to England to be sold by auction A seeks to claim the picture Court finds in favour of B, because Italian law (as the lex situs) was the

applicable law when B’s overriding title was acquired

Change of the applicable law under the Hague Convention: Article 7

Article 7 applies where account agreement is amended so as to change the applicable law under the Convention

Basic rule: the new law governs all issues relating to securities held in the account, whether credited before or after the change of applicable law

However, the old law continues to govern - existence of pre-change interests and perfection of pre-change dispositions in relation to pre-change interests –

— legal nature and effects against intermediary and other parties to pre-change disposition

— legal nature and effects against post-change attachment— all Article 2(1) issues in post-change insolvency

priority between pre-change interests…….

….. but new law governs post-change perfection of unperfected pre-change interest

Examples on change of law under Article 7

Account agreement is governed by the law of state A; intermediary has an Article 4 “qualifying office” in state A

Account holder grants security interest to bank X, which perfects under the law of state A

Account holder and intermediary agree, without the consent of bank X, to change the governing law of the account agreement to that of state B; intermediary also has a qualifying office in state B

Account holder grants security interest to Bank Y, which perfects under the law of state B

Priority dispute between banks X and Y is governed by the law of state B

Examples on change of law under Article 7 (continued)

Account agreement is governed by the law of state A: intermediary has a qualifying office in state A

Account holder grants security interest to bank X, which perfects under the law of state A

Account holder and intermediary agree, without the consent of bank X, to change the governing law of the account agreement to that of state B; intermediary also has qualifying office in state B

Judgment creditor of account holder seeks order attaching the securities account

Law of state A determines priority as between judgment creditor and bank X

If bank X had consented to the change of law, priority between bank X and the judgment creditor would have been governed by the law of state B

Basic transitional rule when Convention comes into force: Article 15

Priority between a pre-Convention interest and a post-Convention interest is governed by the applicable law under the Convention

This reflects the traditional conflicts of laws rule that priority is governed by the law applicable to the last dealing

Same basic rule as under Article 7, but different factual situation

“Pre-/post-Convention” = before or after the Convention comes into force in the forum state

Effect of pre-Convention agreements (Article 16)

Article 16 aims to minimize unnecessary “re-documentation” of account agreements

Basic rule: Convention applies to pre-Convention account agreements and securities accounts

Special rules on effect of pre-Convention agreements seek to give effect to the probable expectations of the parties under the new framework of the Convention

The two special rules in Article 16(3) and (4)

First special rule (Article 16(3)) - An express term which would have the effect, under the rules of the

contractual governing law, of determining the law applicable to any Article 2(1) issue, has the same effect in relation to all Article 2(1) issues, provided that the intermediary has a qualifying office in the relevant state

Example: express governing law clause under US Uniform Commercial Code, Article 8

Second special rule (Article 16(4)) – Where Article 16(3) does not apply, if there is express or implied

agreement that securities account is maintained in a state, the law of that state governs the Article 2(1) issues, provided that the intermediary has a qualifying office in that state

Examples –— “the securities account will be maintained at the Tokyo branch”

(express)— intermediary described as “XYZ Bank, Tokyo branch” (implied)

Exceptions to Article 16 rules

If account agreement expressly refers to the Convention, Article 16 does not apply

Rationale is that the parties must have had regard to the Convention

Otherwise, the special rules apply, unless a Contracting State elects, by declaration – that the special rules do not apply to account agreements entered into

after Convention first comes into force for any Contracting State under Article 19 (one month after Convention ratified etc. by first three states) (Article 16(2)), or

that the first special rule does not apply to agreements which include express provision that the securities account is maintained in a different state from that determined under the first special rule (Article 16(3))

Examples of operation of Article 16

Intermediary incorporated in state A has entered into account agreement, expressed to be governed by the law of state A, providing for securities account to be maintained in state B; intermediary has qualifying offices in states A and B

Account agreement was entered into more than one month after 3 states have ratified the Convention (Article 19(1)), but before ratification by forum state

Account holder grants security interests to bank X (before ratification by forum state) and bank Y (after ratification by forum state)

Priority between banks X and Y is governed by the law of state B (Article 16(4)) unless….. the forum state has made a declaration under Article 16(2), or the account agreement expressly refers to the Conventionin which case it is governed by the law of state A (as the express governing

law of the account agreement – Article 4(1))

Examples of operation of Article 16 (continued)

Pre-Convention account agreement, governed by New York law, provides that securities account is to be maintained at Tokyo branch of intermediary and that New York is “the securities intermediary’s jurisdiction”; intermediary has qualifying office in New York

Account holder grants security interests to bank X (pre-Convention) and bank Y (post-Convention)

Under New York Uniform Commercial Code, specification of “the securities intermediary’s jurisdiction” determines issues of perfection and priority

Law of New York governs legal nature and effects of the dispositions to banks X and Y and priority between banks X and Y (Article 16(3) rule applies)…….

…… but if the forum state has made a declaration under Article 16(3), the law of Japan, not that of New York, governs these issues (Article 16(4) rule applies)

If the account agreement was entered into after 3 states have ratified, but before the forum state has ratified, and the forum state has made a declaration under Article 16(2), Articles 4 and (if necessary) 5 will apply without reference to Article 16