Change of law and transitional provisions

1
Change of law and transitional provisions
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• Name Guy Morton
• Date 12th October 2004

2
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
  Bs overriding title was acquired

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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

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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

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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

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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

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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

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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)

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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))

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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
  Convention
• in which case it is governed by the law of state
  A (as the express governing law of the account
  agreement Article 4(1))

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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 intermediarys
  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 intermediarys
  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