International leasing and the Ottawa Convention

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Cross-border financing requires appropriate legal frameworks. Le international leasing meets this need but creates areas of legal uncertainty. The Ottawa Convention seeks to remedy this.

Definition and characteristics of international leasing

A leasing transaction becomes international when the parties are governed by different legal systems. The contract itself is international when the lessor and lessee are subject to different jurisdictions.

The operation is based on a triangular relationship:

• A financial backer
• A buyer who uses
• A supplier who delivers

The disparities between national legislations complicate these arrangements. The security of transferable securities varies from one country to another. Hence the need for a harmonised framework.

The Ottawa Convention: minimum legal framework

The International Institute for the Unification of Private Law (UNIDROIT) worked on this subject for two decades. The Ottawa Convention, adopted on 28 May 1988, is the result of this work.

France ratified it by law no. 91-636 of 10 July 1991. The text entered into force on 1 May 1995 (decree no. 95-879 of 28 July 1995).

It is not a complete uniform legislation but a minimum framework which:

• Clarifies the sensitive points of triangular operations
• Leaves plenty of room for contractual autonomy
• May be excluded by the parties (article 5)

Scope and limits of the Convention

The Convention applies to transactions meeting these conditions:

• The lessor and lessee are established in different countries
• These States and that of the supplier are parties to the Convention or the contracts are governed by the law of a contracting State.

It covers only capital goods for professional use, including registered movable property (aircraft, ships).

Notable limitations:

• Does not apply to buildings
• Does not apply to consumer goods
• The purchase option is not compulsory (difference with French law)
• The lessor does not have to be a credit institution

Scope and content

The Convention deals with several crucial aspects:

1. Lessor's liability:
   • Exempt from liability if not involved in the choice of goods (art. 8-1)
   • Must guarantee against disturbances of use caused by a third party holding a superior right
2. Lessor's rights:
   • Opposability to third parties and the trustee in bankruptcy (art. 7-1)
   • In the event of default: collection of unpaid rent and interest
   • Possibility of recovering equipment (art. 13-2)
3. Obligations of the lessee:
   • Payment of rent
   • Maintenance of the property in accordance with the contract

Specific risks and COFACE's role

International leasing presents particular risks:

• Uncertain solvency of foreign debtor
• Catastrophic and political risks
• Difficulty realising the security (ownership of the asset)
• Customs and tax problems

COFACE offers a specific guarantee. The 1988 reform a:

• Extended eligibility to all French landlords
• Admitted contracts with no residual value
• Creates cover against non-return of the asset

This guarantee covers political risks, but excludes losses resulting from catastrophic events or disputes between parties.

Signatory countries and status of ratifications

In 2001, the Convention was:

Signed by:

• Ghana, Guinea, Nigeria, Philippines, Tanzania (28 May 1988)
• Morocco (4 July 1988)
• France (7 November 1989)
• Czechoslovakia, Finland, Italy, Belgium, United States, Panama (1990)

Ratified by:

• France (23 September 1991)
• Italy (29 November 1993)
• Nigeria (25 October 1994)
• Panama (26 March 1997)

Joined by membership:

• Hungary, Latvia, Russia, Belarus, Uzbekistan

The Convention came into force on different dates in different countries, between 1995 and 2001.

Practical implications for businesses

Using the Convention offers decisive advantages:

1. Legal certainty:
   • Protection of the lessor's right of ownership
   • Clarifying responsibilities
   • Opposability to third parties
2. Points to watch:
   • Financial risks remain
   • Customs problems persist
   • Possibility of excluding the Convention under Article 5
3. Optimised strategies:
   • Set up via a subsidiary in a strategic country
   • Judicious choice of legislation applicable to ancillary contracts
   • Use of appropriate credit insurance

Our firm advises companies wishing to structure their international leasing operations. We identify the legal risks specific to each arrangement and propose solutions that comply with the Ottawa Convention.

Sources

• Ottawa Convention of 28 May 1988
• Law no. 91-636 of 10 July 1991 (JO 11 July 1991)
• Decree no. 95-879 of 28 July 1995 (OJ 4 August 1995)
• Gavalda, Ch., "Acte final de la conférence diplomatique pour l'adoption des projets de convention d'Unidroit", Petites affiches, 13 July 1988.
• Béraudo, J.-P., "Le nouveau droit du crédit-bail international et l'affacturage international", JCP E 1985, I, 458.

Contact us before initiating your international leasing project. We'll assess whether it's appropriate to apply the Convention and secure your contracts. The complexity of these operations justifies a legal support right from the negotiation phase.

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