The Rise of Open Account, Prepayment, and Supply Chain Finance

A. Open Account and Prepayment Terms

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As letters of credit have become increasingly unattractive, unmanageable, and unavailable to banks and trade parties, the space for alternative technologies, financing mechanisms, and finance-providers has opened up.

Open account trade refers to trade transactions between a seller and a buyer where transac­tions are not supported by any banking or documentary trade instrument issued on behalf of the buyer or seller. The buyer is directly responsible for meeting the payment obligation in relation to the underlying transaction. Where trading parties supply and buy goods and services on the basis of open account terms an invoice is usually raised and the buyer pays within an agreed time frame. Open account terms can be contrasted with trading on the basis of cash in advance, or trading utilising instruments such as Documentary Credits, as a means of securing payment.

Over the last decade, open account and prepayment trading have usually been reported as accounting for anything between 45%^[1412] and 60%^[1413] of global trade-finance terms, although some surveys have put the figure even higher.^[1414] Whatever the precise figure, the modelling suggests that open account trading's market-share will ‘grow at 2% [compound annual growth rate] over the coming decade, dependent on macroeconomic factors, including in­dustry recovery from COVID-19'.^[1415] This growth is expected to be at the expense of docu­mentary trade finance, although (as indicated above) the global coronavirus pandemic has caused a shift back to lower-risk letters of credit.

14.14       There are, however, limits upon the use of such payment terms. First, open-account and prepayment terms carry considerable risk of non-payment for the seller in the former situ­ation and of non-delivery for the buyer in the latter. In many ways, such terms involve little more than crossing one's fingers and hoping for the best. Accordingly, such payment terms are only generally appropriate when a trade party has confidence in its counterparty's ability and willingness to perform. This will usually be the case when trade parties have dealt with each other successfully on previous occasions; already have an established and ongoing legal or commercial relationship; and/or for some other reason trust each other (whether as a result of the counterparty's size, reputation, or jurisdiction in which it is based). In such circumstances, there seems little point in the trade parties incurring the additional expense and uncertainty of interposing one or more banks between themselves. Where the trade parties are strangers to one another, however, they are likely to employ the risk-mitigating features of the letter of credit.^[1416] Nevertheless, even in trade with unknown counterparties, the desire to enter or expand into highly competitive markets or to secure a particular cus­tomer may compel a trade party to accept a higher risk of non-payment or non-delivery by offering particularly favourable payment terms.^[1417] In such circumstances, a seller may seek to mitigate its risk by employing state-backed credit-default mechanisms (such as an export credit guarantee) or private export credit insurance against the full range of circumstances that might result in non-payment, whether insolvency, war, nationalisation, or currency inconvertibility.

14.15       Secondly, even when the parties deal without any financial intermediary, there remain concerns for trade parties about compliance with anti-money laundering legislation and trade sanctions regimes.^[1418] ‘Open account' and ‘prepayment' terms require trade parties to be self-reliant in this regard by carrying out the necessary checks and bearing any compli­ance costs.^[1419] Whether these costs are higher for the trade parties than for the banks will depend upon the circumstances: on the one hand, as trade parties are not as accustomed or as well adapted as banks in performing these checks, this factor may drive the costs up; on the other, the fact that trade parties will be much better placed than issuing and confirming banks to understand the particular trade sector, the particular counterparty, and the par­ticular transaction may operate to reduce those costs. Indeed, by dealing with the same counterparties on a repeat basis, trade parties can avoid the need for extensive compliance checks, although this will obviously be a problem if trade parties are seeking to access new markets or customers.

Thirdly, ‘open-account’ or ‘prepayment’ terms will usually involve the buyer or seller 14.16 granting their counterparty a reasonable period of credit before payment or delivery is re­quired.^[1420] This can, however, create a liquidity problem for the person granting credit, as the seller may be looking to those funds in order to pay the price for the goods to its own sup­plier or to fund its operations more generally; whilst the buyer may have prepaid the seller, but may not be entitled to receive payment from its own sub-buyer until it has delivered the goods in question.

B. Supply Chain Finance

SCF is an umbrella term that has widespread commercial currency, even if it is not a legal 14.17 term of art. According to the ICC, SCF can be defined compendiously as ‘the use of fi­nancing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions’.^[1421] As considered above, whilst there are a number of reasons for the current popularity of open­account and prepayment terms, trade parties’ ability to use SCF in achieving their risk-miti­gation and liquidity aims has undoubtedly contributed to this state of affairs. SCF does, however, come with a couple of health warnings. First, as indicated above, there is little trust in times of crisis. Trust is critical to the attractiveness and use of open-account terms and consequently SCF. Accordingly, the longer the global coronavirus pandemic persists, the greater the impact on this type of financing, although it is not presently envisaged that the current downturn in SCF’s use is likely to be permanent.^[1422]

Secondly, there is an opacity around the accounting treatment of traders’ SCF liabilities: for 14.18 example, when Carillion collapsed in 2018 owing £500 million to banks through SCF facil­ities, ‘this was not immediately clear from its balance sheet: as per common practice, SCF debts were listed as money “owed to creditors” (ie “trade receivables”) rather than bank debt’^[1423] Whilst such favourable accounting treatment no doubt makes SCF more attractive to trading parties, its association with a number of corporate collapses^[1424] has tarnished its reputation and risks the heavy hand of regulation having a chilling effect on SCF activity.^[1425]

14.19face="Times New Roman">        'Thirdly, the willingness of banks to engage in SCF activity has been driven by their ability to manage their own risk by selling securitised trade-finance assets to investors who have generally perceived these as being low-risk assets.^[1426] The novelty of this market may make SCF-based securitised investments less attractive in the current uncertain climate, which in turn may make banks more reticent to engage in SCF activity if they are no longer able to offload their risk through securitisation structures.

14.20        Finally, as described above, the favourable regulatory treatment of letters of credit for bank capitalisation purposes was a battle a long time in the winning.

14.21        Whilst the excitement surrounding SCF might suggest that its aims are entirely novel, de­vices aimed at improving trade parties’ liquidity are far from new.

C.   Traditional Liquidity-Enhancing Techniques

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When trade parties employ a letter of credit as the means of payment, there are several liquidity-enhancing devices that they can employ. Some of these rely upon third parties to provide the necessary assurance or funds. For example, the seller might arrange for an export credit guarantee, which is issued by a state-sponsored body in order to support, en­courage, and facilitate trade transactions in particular sectors that are considered strategic in the broader national interest. Similarly, a performance bond may be issued at the seller’s request to incentivise the buyer to open a letter of credit or at the buyer’s request to incen­tivise the seller to ship the goods. In essence, the export credit guarantee or performance bond provides the seller with a fall-back position in the event that the letter of credit fails to produce payment. These third-party devices are beyond the present analysis, which focuses more on the way trade parties may structure their dealings in order to convert the illiquid letter of credit into liquid funds, namely by using a transferable letter of credit, a trust receipt arrangement, or a back-to-back letter of credit. As these devices have not often be subjected to detailed judicial scrutiny, their nature and effect remains somewhat obscure, even today.

1.            Transferable Letters of Credit

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A transferable letter of credit enables the seller to cede a portion of the existing credit issued in its favour to its own supplier.^[1433] In essence, where a letter of credit is stated to be ‘trans­ferable’, the beneficiary is able to instruct the confirming or nominated bank (termed, for these purposes, the ‘transferring bank’)^[1434] to issue a further letter of credit on ‘the terms and conditions specified in the original Credit’ (subject to a number of exceptions relating to the credit’s amount and expiry date)^[1435] to the seller’s own supplier (termed the ‘second benefi­ciary’). The second beneficiary is entitled to present the documents required by the credit, including his own invoice, to the transferring bank in return for payment of the amount owed by the credit’s first beneficiary. That beneficiary is entitled to substitute its own in­voice and documents for the second beneficiary’s documents held by the transferring bank and to receive payment of its profit on resale to the credit applicant. The transferring bank will then transmit the first beneficiary’s substituted documents for reimbursement by the issuing bank and applicant. In this way, a seller can employ a letter of credit as a means of paying for the goods without having to find the necessary funds, thereby ameliorating any potential cash-flow problems.

14.24        Whilst the procedure governing transferable letters of credit is comprehensively set out in the UCP 600,99 there are a number of practical difficulties arising from these instruments that flow from the uncertainty regarding their doctrinal underpinnings. In functional terms at least, there appears to be a transfer of rights from the first beneficiary to the second, but the juridical nature of the transfer mechanism remains obscure. In particular, it is unclear whether the transfer of a letter of credit can be analogised with other legal mechanisms that operate to transfer rights. Whilst a number of theories have been posited to explain how letters of credit are transferred, two suggestions may be given short shrift. The first such suggestion is that a transferable letter of credit involves the second beneficiary vicariously performing the first beneficiary’s obligations.^{[1436] [1437]} Whilst vicarious performance may explain the second beneficiary’s entitlement to present documents under a transferable credit, it does not explain its entitlement to be paid directly by the transferring bank. This is because an entity performing obligations vicariously does not generally acquire any rights by virtue of that performance, as it does not become a party to the agreement in question. The second suggestion that can be confidently dismissed is that the transfer of a letter of credit involves its negotiation to the second beneficiary. Whilst a letter of credit may well require the pres­entation of bills of exchange, which are then capable of being negotiated to third parties, the letter of credit itself is not a negotiable instrument that may be transferred by indorsement and delivery.^[1438] This view is supported by the UCP 600, which makes clear that a transfer­able credit (or any part thereof) may only be transferred once; a negotiable instrument may be negotiated on any number of occasions.^[1439] As a result, commentators have generally re­jected this view.^[1440]

14.25        A possible theoretical explanation of a letter of credit’s transfer might be that it involves nothing more than an equitable assignment of the rights under that credit.^[1441] There are a number of indications that the concepts of transfer and assignment are in fact distinct. First, an equitable assignment will be effective without the obligor’s prior consent,^[1442] whereas it

is not possible to transfer a letter of credit without obtaining the specific consent of the transferring bank.title="">^[1443] Secondly, some of the second beneficiary’s rights may be altered upon transfer,^[1444] whereas the assignee’s rights are identical to those of the assignor.^[1445] Thirdly, the UCP 600 makes clear that the beneficiary of a non-transferable letter of credit may never­theless assign the actual proceeds of that credit, although it is less clear whether there can also be an assignment of the right to receive those proceeds.^[1446] Fourthly, following a valid assignment, the first beneficiary must still present the documents required by the letter of credit, whereas a transferee steps into the transferor’s shoes and is accordingly entitled to present the documents and demand payment in its own right. In essence, to describe the operation as a ‘transfer’ is probably a misnomer: no chose in action is in fact transferred, but rather the second beneficiary obtains for the first time ‘a contractual right to engender a debt by presentation of the documents’.^[1447] Accordingly, there is little academic support for the assignment theory as the underlying explanation for transferable letters of credit.^[1448]

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A further theoretical explanation might be that the transferable letter of credit operates by way of an attornment or acknowledgement by the transferring bank in favour of the second beneficiary. An attornment occurs when one party instructs another, who is holding a fund on his behalf, to hold all or part of that fund for the benefit of a designated third party. If the fundholder consents to this instruction and informs the relevant third party accordingly, that third party will be entitled to receive the attorned portion of the fund.^[1449] The notion of a ‘fund’ for these purposes has received an expansive definition. In Shamia v Joory,^[1450] a ‘fund’ was held to include the fundholder’s liabilities to its instructing party. Accordingly, as the fundholder’s liability need not have accrued in order to constitute a ‘fund’, the con­cept could include the transferring bank’s future liability to pay the first beneficiary upon the presentation of conforming documents.^[1451] On this basis, a direction by the first bene­ficiary to the effect that a transferring bank should pay some or all of the credit’s proceeds to the second beneficiary could arguably amount to an attornment, provided the bank con­sents. There are a number of reasons, however, why the attornment theory is unsatisfac­tory. First, the inclusion of debts and other liabilities within the concept of a ‘fund’ not only appears inconsistent with previous authority,^[1452] but also has been subjected to trenchant criticism.^[1453] If these criticisms are sound, the concept of attornment can have little appli­cation in the letter of credit context.^[1454] Secondly, even if those criticisms are unsound, the concept of attornment alone cannot explain all of the rights acquired by the second bene­ficiary: an attornment could potentially justify the second beneficiary’s ability to receive payment under the credit, but cannot explain its right to present the documents required by the credit. The effect of an attornment is limited to the creation of an entitlement to a fund, rather than the creation of any wider rights, such as the right to present conforming documents. Thirdly, it seems tolerably clear from the authorities that, following an attorn­ment, the fundholder holds the relevant fund to the use of the attornee, who thereby ac­quires a proprietary right. Accordingly, if the fundholder refuses to pay the attornee, the latter can seek restitution of the attorned sum as money had and received;^[1455] otherwise, the fundholder would be unjustly enriched at the attornee’s expense. It has never really been doubted, however, that the second beneficiary’s rights under a transferred letter of credit, including its right to claim payment, are simply contractual in nature. As a result, the ana­logy with attornment does not seem convincing.

14.27 A seemingly more fruitful theoretical explanation than assignment or attornment equates the operation of a transferable letter of credit to a novation of rights from the first to the second beneficiary.^[1456] A novation takes place when the obligor under a contract enters into a new contract with a third party on the same terms as its original contract with the obligee. At first sight, this is strikingly similar to how a transferable letter of credit operates: the first beneficiary will return the original credit to the transferring bank, so that it can issue a new credit in favour of the second beneficiary in largely identical terms (albeit for a smaller sum). The original credit, however, remains available for the balance remaining after the second beneficiary has drawn under the transferred credit,^[1457] with the result that the transferring bank remains liable to pay those sums to the first beneficiary. This continuing ability on the first beneficiary’s part to present substituted documents under the credit potentially dis­tinguishes the transferable letter of credit’s operation from a novation of rights. Following a novation, the obligor will ordinarily be released from all its obligations to the original obligee.^[1458] Whilst a possible reconciliation might be to suggest that a transferable credit in­volves only a partial novation that extinguishes only some of the transferring bank’s original obligations, this cannot explain why the first beneficiary’s right to claim the full amount due under the credit will revive in the event that the second beneficiary allows the credit to expire unused. In such a case, the first beneficiary’s rights appear at first to be merely suspended, with those rights only being extinguished when the transferring bank pays the

from the assignee. See also Walker v Rostron (1842) 9 M&W 411; Seasymbol Marine Ltd v BMM Shipbrokers Ltd, unreported, 27 November 1995; cf Banque de la Mediterranee v Streeters of Godalming Ltd, unreported, 9 July 1980, where Parker J suggested that Liversidge did not undermine the correctness of Shamia v Joory (n 113). The term ‘fund’ in CPR r 25.1(1)(l), does not include a debt or other liability: see Myers v Design Inc (International) Ltd [2003] 1 All ER 1168 (Ch).

THE RISE OF OPEN ACCOUNT, PREPAYMENT, AND SUPPLY CHAIN FINANCE 291 second beneficiary.^[1459] Accordingly, novation does not provide a satisfactory theoretical ex­planation of the transferable letter of credit.

14.28

As the transferable letter of credit is difficult to explain by reference to the ordinary mech­anisms in English law for the transmission of rights, it might be tempting to view the trans­ferable letter of credit as a sui generis institution that was designed specifically for the needs of international trade finance^[1460] and is incapable of classification according to domestic law criteria. Such a characterisation, however, merely begs the question. A better approach might be to analyse the matter through the lens of domestic contractual principles. The sus­pension of the first beneficiary’s right to payment under the transferred portion of a credit might be explained by reference to the equitable doctrine of promissory estoppel.^[1461] This is because the first beneficiary’s request that the transferring bank cede part of the credit to the second beneficiary constitutes a clear and unequivocal representation to the issuing and confirming banks (through the agency of the transferring bank) that the first beneficiary will not insist on payment of the transferred part of the credit. Moreover, by undertaking fresh obligations to the second beneficiary, those banks have clearly relied upon the first beneficiary’s representations. Accordingly, as it would be inequitable for the first benefi­ciary to revert to its original rights, it would be estopped from doing so. Those rights will, however, be finally extinguished when the second beneficiary receives payment according to the terms of the transferred credit.^[1462] In the event that the transferred part of the credit lapses unused and the second beneficiary remains unpaid, the first beneficiary may then re­sume its rights to receive full payment under the credit. As regards the creation of the new rights in favour of the second beneficiary, this might be explained by applying basic agency principles. By issuing a transferable credit, the issuing bank authorises the transferring bank to act as its agent in any dealings with the designated second beneficiary. By agreeing to the terms of a particular transfer, the transferring bank acts as the agent of the issuing bank and any confirming bank in creating a direct contractual relationship with the second benefi- ciary.^[1463] Accordingly, the second beneficiary is effectively put in the same position as that originally enjoyed by the first beneficiary in relation to the transferred part of the credit and to that extent enjoys the same undertakings from the issuing and confirming banks as the first beneficiary.^{New Roman",serif;color:black'>[1464]} Conversely, those banks owe the same duties to the second beneficiary with respect to the examination of tendered documents as they owe to the first beneficiary. Any documentary examination will accordingly need to comply with the procedures in the

UCP 600.¹²8 Like any other agent, the transferring bank does not undertake any direct con­tractual obligations to the second beneficiary.^{[1465] [1466]}

14.29 Whilst estoppel and agency principles adequately explain the operation of transferable let­ters of credit, there are two objections to this theoretical approach. The first objection is that this contract-based approach represents a distinctly English one to the issue and that reliance upon overtly domestic concepts is inappropriate in such an international con­text. Given that the UCP 600 does not deal comprehensively with all the issues concerning transferable letters of credit, however, the only solution is to fall back onto domestic law principles. Indeed, the ICC Banking Commission seems content with this position.^[1467] The second objection is that this contract-based approach provides little assistance in resolving the more controversial issues surrounding transferable letters of credit. There are three such controversies. The first controversy concerns whether the second beneficiary’s rights against the issuing and confirming banks are affected by any claims that those banks might have against the first beneficiary, such as a right of set-off^[1468] or a defence based upon the first beneficiary’s fraud. Certainly, the answer would have been negative if the transfer of a letter of credit had involved negotiation.^[1469] The same position would arguably have per­tained if such a transfer had operated by way of novation,^[1470] but not if it had involved an assignment.^[1471] A contract-based solution does not, however, provide any ready answer to this question. Nevertheless, it is possible to arrive at a solution from first principles: as each contractual relationship engendered by a letter of credit is autonomous,^[1472] the relationship between the issuing bank and the second beneficiary is independent of that between the issuing bank and the first beneficiary, so that equities arising from the latter relationship should not infect the former. Indeed, in Banca del Sempione v Provident Bank of Maryland, the second beneficiary was not precluded from enforcing a transferred letter of credit by virtue of the first beneficiary’s fraud against the issuing bank,^[1473] although the position may be different if the second beneficiary were shown to be privy to the fraud.^[1474] The second controversy concerns how one might determine the priority between two beneficiaries to whom the same part of the credit has been transferred.^[1475] Whilst assignment, negotiation, and novation would certainly provide a ready solution to this problem,^[1476] the contract­based solution can similarly provide an answer by reference to first principles: as the UCP 600 provides that a credit may only be transferred once, the first transfer in time should have priority. The third controversy concerns how the law governing the transfer of a credit is determined: given that the choice of law principles applicable to negotiable instruments and assignments are not without their legal difficulties, adopting a contract-based approach would enable a court to apply the contractual choice of law rules, which are relatively settled and much more straightforward to operate.

2.             Trust Receipt Arrangements

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Whilst the transferable letter of credit is a traditional way of providing liquidity to a seller so that it can pay its own supplier, a buyer may equally face cash-flow difficulties if its obli­gation to reimburse the issuing bank matures before the buyer has received the funds from on-selling the relevant goods. Part of the difficulty arises from the fact that the issuing bank will have a pledge over the goods as security for the buyer's reimbursement obligation, but the bank's rights as pledgee depend upon its continued possession of the bill of lading. Once that document is released, the bank's pledge ends. Accordingly, the issuing bank will not wish to transfer the bill of lading until it has been paid, but the buyer cannot sell the goods in order to reimburse the bank without the bill of lading. Accordingly, there is an impasse. The solution is for the bank to release the bill of lading to the buyer pursuant to a trust-re­ceipt arrangement: this effectively sub-divides possession into its actual and constructive elements, so that the bank's rights as pledgee continue despite its losing physical control of the bill of lading.^[1477] Accordingly, the issuing bank has continuing protection by virtue of the trust receipt from the consequences of the buyer's insolvency.^[1478] This is clear from Northwestern Bank Ltd v John Poynter, Son & Macdonalds,^[1479] in which the House of Lords held that a bank was entitled to claim the proceeds from the sale of goods under a trust re­ceipt in priority to the buyer's unsecured creditors.

14.31

Whilst trust receipts are far from uncommon, there remains a degree of uncertainty sur­rounding the nature of the issuing bank's rights under such arrangements, as well as their susceptibility to legal challenge. Most of the legal difficulties surrounding trust receipts arise from their drafting. There are two key issues. The first drafting challenge arises from the fact that the issuing bank's rights as pledgee are only preserved when the bill of lading is re­leased for a specific or limited purpose. Accordingly, the bank must carefully define how the buyer may use the bill of lading. If that document is released for general or unspecified pur­poses, then the issuing bank will lose its security interest.^[1480] The second drafting challenge arises out of the fact that banks will often attempt to extend their security rights beyond the goods themselves to other forms of property that represent those goods, whether the pro­ceeds from their re-sale, the receivables to which the re-sale gives rise or other property into which the goods are subsequently incorporated. Each of these difficulties will be considered in turn.

14.32 Given that the whole purpose underlying the trust receipt is to enable the buyer to re-sell the goods, the simplest form of trust receipt usually contains a recital recognising the con­tinuing validity of the bank's rights as pledgee over both the goods and the proceeds of their sale.^[1481] In addition, the trust receipt may also purport to give the bank security over the receivables from the resale of the relevant goods. Whilst the bank's property rights can un­doubtedly survive in such proceeds, the bank's interest over the receivables or proceeds cannot be a pledge.^[1482] Accordingly, the question has arisen as to whether the bank might instead have a fixed or floating charge over the buyer's book debts and their proceeds.^[1483] If the bank's interest were indeed characterised as a charge, then there is a risk that the charge would need to be registered in order to bind the buyer's liquidator.^[1484] English law currently requires that a ‘charge' created by a company^[1485] must be registered within twenty-one days of its creation.^[1486] If the charge is not registered, then it will be absolutely void as against the buyer's liquidator or administrator or any of its creditors.^[1487] In Re David Allester Ltd (‘David Allestef),^[1488] which concerned a trust receipt whereby the buyer undertook ‘to hold the goods when received, and their proceeds when sold as your trustees’,^[1489] Astbury J held that the trust receipt did not create any new independent security interest over the goods themselves, but merely acknowledged and evidenced the bank's pre-existing pledge.^[1490] Moreover, as regards the bank's interest over the proceeds, these were held on trust by the

face="Times New Roman">buyer for the bank.^[1491] According to Astbury J, ‘[t]he object of these letters of trust was not to give the bank a charge at all, but to enable the bank to realise the goods over which it had a charge in the way in which goods in similar cases have for years and years been realised in the City and elsewhere’.^[1492] It followed that the trust receipt in David Allester did not re­quire registration under the bills of sale legislation then in force. Albeit decided on slightly different grounds to David Allester,^[1493] this approach was similarly adopted by the English Court of Appeal in Re Hamilton, Young & Co.^[1494] That said, there are other decisions both in England and abroad suggesting that the issuing bank does have a registrable charge under a trust receipt arrangement.^[1495] Accordingly, given that the decided cases have concerned the interpretation of foreign or domestic legislation that has since been repealed,^[1496] there remains some uncertainty as to how the courts would approach this question under more modern legislation, such as the Companies Act 2006.^[1497]

14.33

Where the trust receipt is drafted in even wider terms, so that the issuing bank seeks to as­sert an interest in any finished product resulting from the pledged goods being subjected to some manufacturing process,^[1498] the bank’s interest is at even greater risk of being charac­terised as a charge over the mixed or processed goods. Certainly, in the context of retention of title clauses, attempts by a seller to retain an interest in any subsequent products have suffered precisely this fate in order to prevent the seller receiving a windfall at the buyer’s expense.^[1499] Upon such a characterisation, the charge would require registration in order to retain its validity against the buyer’s liquidator, administrator, and creditors.^[1500] Moreover, as the buyer is likely to be free to deal with the processed goods by selling them in the ordinary course of business, the charge is likely to be floating in nature.^[1501] Traditionally, floating charges have been subjected to additional grounds of invalidity that are not otherwise applicable to fixed charges.^[1502] One way to avoid this conclusion might be to use language indicating an intention to create some form of interest in the product (such as a beneficial interest under a trust) other than a charge.^[1503] It may be dangerous, however, to place too much reliance upon such drafting techniques, given the English courts' willingness to re­characterise property rights if the language used for their creation does not reflect the true nature of the interest created.^[1504] Accordingly, in the absence of modern judicial guidance regarding the application of the current regime for registering security interests, an issuing bank that insists on security over the products of the original goods should probably err on the side of caution by taking steps to register their interest.

14.34        The legal uncertainty over trust receipts has effectively undermined their reliability, which may in large part explain the absence of recent judicial consideration.^[1505] It is possible that the development of the electronic bill of lading may make the trust receipt mechanism more attractive to trade parties.^[1506] Digitisation of the shipping documents would enable the trade parties to employ blockchain technology to provide a permissioned platform that records the interests of the various parties involved in a trade transaction in a manner that is vis­ible to all: as the bank's rights would no longer be dependent upon possessing a piece of paper, the buyer would be able to deal with the bill of lading subject to the bank's rights, which would be protected by means of a ledger entry in the electronic record.^[1507] Replacing a paper-based trust receipt with a straightforward ledger entry showing that the bank re­tained virtual possession of the bill of lading would certainly simplify matters for a bank seeking to retain its rights against the goods themselves, the receivables arising on their re­sale or the proceeds of those receivables. After all, as stated in David Allester,^[1508] ‘[t]he letters of trust merely record the terms on which the pledgors were to realize the goods on behalf of the pledgees’. Accordingly, it should matter little whether that ‘record' is paper-based or electronic. That said, it is less clear that technology can solve the legal difficulties concerning the need to register security interests over the products of the goods in question.

3.             Back-to-Back Letters of Credit

14.35        The final mechanism that sellers might employ to enhance their liquidity position is the ‘back-to-back' letter of credit. In a similar fashion to the transferable letter of credit con­sidered above, the ‘back-to-back' letter of credit involves a seller (who is also the beneficiary under one letter of credit) arranging for its bank to issue a second letter of credit on the same terms in favour of the seller's own supplier. The seller's bank is usually content to issue this second credit against an undertaking that the proceeds of the first credit will be paid into the seller's account held with that bank. Accordingly, without actually receiving payment, a seller is able to use its illiquid letter of credit to fund its acquisition of the goods, thereby avoiding a potential credit-crunch if there is a mismatch between its own supplier's credit terms and those of its buyer. Whilst the two letters of credit in a ‘back-to-back' arrangement bear a high degree of resemblance, the reality is that there is no legally enforceable link be­tween them. Indeed, in PT Adaro Indonesia v Rabobank,^[1509] the Singapore High Court made clear that, even if both letters of credit relate to the same cargo and have the same documen­tary requirements, they remain legally separate transactions. As a result, even though the letters of credit are expressed to be ‘back-to-back’, payment (or the failure to pay) under one credit does not necessarily trigger payment or default under the other credit. Accordingly, the absence of an enforceable linking mechanism means that ‘back-to-back' letters of credit provide rather weak legal protection.

D.   Modern SCF Techniques

Given the legal uncertainty and practical difficulties surrounding the traditional liquidity- 14.36 enhancing devices considered above, the development of more flexible financing tech­niques under the umbrella of ‘SCF' is unsurprising. As well as being a ‘holistic concept', SCF is also a dynamic one, covering ‘a broad range of established and evolving techniques for the provision of finance and management of risk’.^[1510] Moreover, different SCF techniques can be used in a standalone fashion or in combination. SCF is also ‘event-driven' in that the particular liquidity-enhancing technique employed by the parties ‘is driven by an event or “trigger” in the physical supply chain’^[1511] Accordingly, there is considerable scope for auto­mation of the SCF processes, especially as the SCF-providers require visibility of the under­lying trade flows.^[1512]

Such high-level sentiments are not, however, particularly helpful in identifying the detail 14.37 of those transactions that might arguably fall within the broad notion of SCF. On one level, any loan, overdraft or security could be described as a form of SCF if it is used to finance the sale or purchase of goods or services internationally. It is because of the potentially broad and nebulous nature of SCF that the GSCFF^[1513] concluded that there was a need to define more closely the ‘core' SCF techniques being used by trade parties and to develop standard market-wide definitions to facilitate dialogue around the refinement of current SCF tech­niques and the development of new ones. Moreover, given the uncertainty described above surrounding the financial reporting and regulation of SCF, a common nomenclature for

‘core’ SCF techniques can only assist in clarifying how such transactions should be treated for regulatory purposes.^{New Roman">[1514]} To that end, the GSCFF has divided the SCF area into three broad categories:, namely ‘Receivables Purchase SCF’; ‘Loan or Advance-based SCF’; and ‘Enabling Frameworks for SCF’. As regards the last category, the prime example is the Bank Payment Obligation (or ‘BPO’); as the BPO has been considered more fully elsewhere,^[1515] it will not be analysed further below. Accordingly, the present focus is on the first two categories.

1.             Receivables Purchase SCF

14.38        The hallmark of the SCF techniques that fall within this first category is that they involve the seller obtaining financing by selling all or part of its receivables to a finance-provider by way of an assignment or transfer in return for the face-value of the receivables, minus a margin or deduction (to reflect the quality of the receivables) and finance charges (re­flecting the service provided). Accordingly, the financial institution makes a profit on the transaction and the trader obtains immediate access to liquid funds in place of its illiquid assets. Overall, using the standard terminology suggested by the GSCFF, there appear to be four architype transactions that constitute the category of ‘Receivables Purchase SCF’, although these transactions do not exist in watertight categories and there will naturally be market variations on the broad themes considered next.

(a)             Receivables Discounting

14.39        Sellers may engage in ‘receivables discounting’, which involves a transaction between a seller and (usually) its bank, whereby the former agrees to ‘sell individual or multiple receivables (represented by outstanding invoices) to [the] finance provider at a discount’.^[1516] The trans­action may contemplate the transfer of a single receivable or multiple receivables on a sea­sonal or continuous basis (sometimes termed ‘block discounting’), and in the latter case the facility may be made available to the seller on a committed or uncommitted basis. The trans­action will ordinarily be structured as a ‘true sale’ of the receivables, in the sense that there is an outright assignment to the finance-provider upon the seller providing a certified copy of the relevant invoice or invoice data set.^[1517] Accordingly, receivables discounting enables the seller to manage its balance sheet.^[1518] Assuming the buyer is aware of the discounting arrangement, it may be asked to provide validation to the finance-provider of the receiv­ables’ existence and genuineness, as well as acknowledging the fact of their assignment.^[1519] When the receivables fall due, they may be collected by the finance-provider itself (with payment being made directly by the buyer) or by the seller, acting as the finance-provider’s agent (with payment being made into an account in the seller’s name against which the finance-provider would have special drawing rights).^[1520] If the receivables are sufficiently high in quality (so that the likelihood of the buyer’s default remains sufficiently low), the finance-provider may agree to purchase them without the possibility of having any further

recourse against the seller; otherwise, the finance-provider may retain such rights expressly in the discounting agreement to protect against the receivables defaulting. In non-recourse receivables discounting, the finance-provider may manage its own risk through credit-de­fault insurance or by off-loading risk through securitisation, participation, or syndication structures.

14.40

Receivables discounting does, however, give rise to three particular practical and legal difficulties, namely whether or not the discounting can occur on a confidential basis and without notice to the buyer (in case this impacts unfavourably upon the seller's continuing business relationship with the buyer); whether the contracts underlying the receivables contain provisions restricting their assignment (as the buyer might wish to retain control over the identity of its creditor); and how the law applicable to the assignment of the receiv­ables is determined. These difficulties will be explored further below.^[1521]

style='font-size: 9.0pt;line-height:125%;font-style:italic'>(b)             Forfaiting

14.41

The seller may seek to improve its liquidity position through ‘forfaiting', which will usually involve a ‘forfaiting agreement' for existing instruments, or a ‘master forfaiting agreement' for existing and future instruments, between the seller and a finance-provider.^[1522] The par­ties often choose to subject their forfaiting transaction expressly to the Uniform Rules for Forfaiting (‘URF 800'),^[1523]8⁶ which is a standard set of rules governing forfaiting agreements in much the same way as the UCP 600 governs documentary letters of credit. The URF 800 also contains annexes setting out template agreements for use in the primary forfaiting market.^[1524] According to the URF 800, the forfaiting agreement should set out the docu­ments that the seller has to provide to the finance-provider and the price payable for the transferred instruments, as well as the time-frame for presenting the relevant documents and making payment.^[1525]

14.42

Like receivables discounting, forfaiting ordinarily operates by way of an outright transfer. That said, forfaiting usually differs from receivables discounting in a number of ways, al­beit that particular transactions may involve a degree of convergence between those two types of financing. First, whilst receivables discounting may occur on a recourse or non­recourse basis, the hallmark of forfaiting is non-recourse financing,^[1526] although the URF 800 recognises exceptions to this core principle when the seller knows of defects in the pay­ment instruments; is not the owner of the instrument; has failed to transfer the instrument properly; has breached the underlying agreement with the buyer; or is guilty of fraud.^[1527] If the agreement allows the finance-provider to have recourse against the seller, then it cannot be properly classified as an example of forfaiting. Secondly, forfaiting is tradition­ally limited to the transfer of instruments embodying a payment undertaking (usually bills of exchange and promissory notes, but potentially even letters of credit), rather than ‘pure'

300 OPEN ACCOUNT, PREPAYMENT, AND SUPPLY CHAIN FINANCE non-documentary receivables. Increasingly, ‘forfaiting’ can extend to non-documentary re­ceivables,^[1528] but only if the financing is provided on a non- recourse basis. Thirdly, whilst it is always possible for finance-providers to mitigate their exposure to receivables discounting by engaging in various risk-mitigating operations, there happens to be a deep and liquid secondary forfaiting market,^[1529] which means that finance-providers can dispose of any pay­ment instruments quickly and cheaply to other financial institutions, without having the additional expense of purchasing or negotiating risk-mitigation mechanisms. The reason for these differences between the forfaiting and receivables discounting markets stems from the reification^[1530] of the payment obligation in a document that is negotiable in character:^[1531] not only does the finance-provider generally take the instrument free of prior defects in title and the buyer’s own equities, but these benefits can equally be passed on to third par­ties making such instruments highly transmissible. Accordingly, a number of the disadvan­tages associated with receivables discounting simply do not apply to forfaiting activity,^[1532] although there certainly remain some difficult choice of law issues. That said, the principal disadvantage of forfaiting is that it still relies upon paper-based instruments that require endorsement and delivery unless in bearer form;^[1533] if the electronic bill of exchange can be developed successfully,^[1534] then forfaiting will become a much more attractive option.

(c)             Factoring

14.43        ‘Factoring’ may be employed by the seller to manage its cash-flow.^[1535] In many ways, factoring resembles receivables discounting, since the agreement between the seller and the finance-provider involves an outright transfer of the receivables in return for a discounted payment on a recourse or non-recourse basis.^[1536] In general, the seller will receive two pay­ments from the factor: upon sending a copy of the relevant invoice to the factor, the seller will receive prepayment of part of the price (usually around 80%); and, upon the buyer paying the invoice, the factor will then transfer the remainder of the price, less any fees and financing charges.^[1537]

14.44        There are, however, two key differences between factoring and receivables discounting. First, beyond the assignment of the receivables themselves, factoring usually involves ‘the finance provider [becoming] responsible for managing the debtor portfolio and col­lecting payment of the underlying receivables’, as well as offering credit insurance protec­tion against the buyer’s insolvency.^[1538] Indeed, the UNIDROIT Convention on International Factoring 1988 (‘UCIF')^[1539] makes clear that to qualify as a ‘factoring contract' not only must the seller assign the receivables to the finance provider, but the latter must also ‘perform at least two of the following functions: finance for the supplier, including loans and advance payments; maintenance of accounts (ledgering) relating to the receivables; collection of re­ceivables; protection against default in payment by debtors'.^[1540] Accordingly, it is the package of management and collection services beyond the bare provision of financing that makes the finance-provider a factor. Indeed, factoring has become such a specialised branch of SCF that certain financial institutions focus almost exclusively on such activity. Secondly, whilst receivables discounting may occur on a confidential basis, the additional manage­ment and collection services provided by a factor usually mean that the assignments will have to be notified to the buyer, as debtor. Indeed, according to the UCIF, a transaction only counts as a ‘factoring contract' if ‘notice of the assignment of the receivables is to be given to debtors'.^[1541] The practical consequence is that, under a factoring arrangement, the proceeds of the receivables will generally be paid directly to the factor (although it is possible to have ‘non- notification factoring' when the proceeds of the receivables will be paid into the seller's account or an escrow account for forward transmission to the finance-provider).^[1542] Given these additional services offered by the finance-provider, factoring may attract higher fees that can only be justified if a large number of receivables is involved. In terms of legal dif­ficulties, the requirement of notification to the debtor means that at least one of the legal difficulties associated with receivables discounting (as considered further below) is not relevant; the other legal problems remain the same.

(d)             PayablesFinance

14.45

The seller's liquidity might be managed through a ‘payables finance' structure. Unlike the three types of financing considered above, payables finance is initiated by the buyer ra­ther than the seller, provided that the buyer has established a contractual payables-finance programme with one or more finance-providers. By providing a programme under which sellers can enhance their liquidity, the buyer hopes to attract business. When the buyer concludes a sale contract with a seller, the former will encourage the seller to use the pay- ables-finance programme to obtain immediate payment of its receivables from specified finance-providers.^[1543] The decision whether to do so or not lies entirely with the seller. If the seller does require liquidity enhancement, it will conclude a contract with the finance-pro­vider to assign its receivables in return for immediate payment of their full value, subject to financing fees and charges. Funds are released to the seller, when the buyer gives its uncon­ditional approval of the particular invoice; this constitutes an unconditional commitment by the buyer to pay the relevant receivables directly to the finance-provider on maturity.^[1544] Electronic invoicing and automated reconciliation can facilitate this process.^[1545] As the

302 OPEN ACCOUNT, PREPAYMENT, AND SUPPLY CHAIN FINANCE finance-provider is relying upon the buyer's assurances and creditworthiness, the financing will often be provided without recourse to the seller.^[1546] A ‘softer' version of payables finance is ‘reverse factoring', where the buyer does not give the finance-provider an irrevocable commitment to pay the invoices, but does furnish the finance-provider with information regarding the invoices that it considers to be valid and accurate.^[1547] Given that in legal terms the resulting transaction between the seller and the finance-provider is indistinguishable from receivables discounting, the same difficulties apply as are considered further below.

2.             Loan or Advance-based SCF

14.46        The hallmark of this category of SCF is that, rather than the finance-provider purchasing receivables or payment instruments from the seller, the finance is advanced in the form of a term loan or revolving facility to provide working capital for the seller's trade-related activ­ities. There are four types of transaction that fall within this broad category.

14.47        First, the seller could obtain a loan or advance against the receivables from its trade activity. Unlike receivables discounting, which requires an outright assignment of the receivables, this form of SCF involves taking security over those receivables, or even simply lending on an unsecured basis in the expectation that the receivables will produce sufficient funds to service the loan.^[1548] Although granting security over the receivables will reduce the fi­nancing costs for the seller and increase the finance-provider's protection, some of the legal difficulties considered below will apply to such a transaction.

14.48        Secondly, rather than lending against the seller's receivables, a finance-provider may se­cure a loan or advance to either the buyer or seller against the inventory in their warehouse. Whilst the transaction normally takes the form of secured lending, it is possible to structure the transaction as a ‘true sale' under a repo agreement. Inventory financing can extend to raw materials (such as minerals, metals, or agricultural products), work-in-progress, and finished products.^[1549] A pledge and/or charge over the inventory and its proceeds can be cre­ated by the delivery of negotiable warehouse receipts when the goods are in storage or the bills of lading (or other transport document) when they are in transit. If the buyer or seller is entitled to use the inventory or their proceeds in the ordinary course of business, then the security will likely take the form of a floating (rather than fixed) charge. Whilst inventory financing is not generally problematic, there is at least one legal difficulty that it entails as considered further below.

14.49        Thirdly, the requisite liquidity may be provided through ‘pre-shipment finance', which involves a contract between the finance-provider and seller to provide the funds ‘for the sourcing, manufacture or conversion of raw materials or semi-finished goods into finished goods and/or services, which are then delivered to a buyer'.^[1550] Pre-shipment finance looks similar to loan-based SCF against the seller's receivables, which was considered above, es­pecially as pre-shipment finance can also involve security over the seller's receivables. There is, however, one key difference: lending against receivables involves the finance-provider

creating post-shipment liquidity on the strength of the receivables that have already arisen; whereas pre-shipment finance is aimed at providing the working capital needed to produce the goods in question, with the security over the receivables being purely incidental to that core purpose. Similarly, pre-shipment finance differs from loan-based SCF against inven­tory, which was considered above: inventory-based lending can involve advances to either seller or buyer (according to the location of the relevant inventory); whereas pre-shipment finance can only be advanced to the seller, as it aims to assist with the production of the goods that will subsequently be shipped. Moreover, inventory-based financing necessarily involves taking security over the borrower’s inventory, whereas pre-shipment finance may involve other forms of security or even no security at all. Nevertheless, despite these differ­ences, pre-shipment finance is sufficiently close to the other two forms of loan-based SCF considered above that the same types of legal difficulty arise, as considered further below.

Finally, the finance-provider may provide ‘distributor finance’. This may be distinguished 14.50 from the other forms of loan-based SCF, as it is exclusively offered to the buyer. In essence, distributor finance is designed to provide entities purchasing goods with a means of man­aging their cash-flow, given that there may be a significant period of time between the short credit terms imposed by a large manufacturer and the longer period of time to on-sell the goods in question.^[1551] The reason why this type of financing deserves special treatment is be­cause it usually involves the large manufacturer entering into a ‘master distributor finance agreement’ with a finance-provider, which then enters into individual financing arrange­ments with individual distributors by offering better terms than those entities would have been able to arrange for themselves. Accordingly, such an arrangement is advantageous for the distributor (which can access cheaper finance) and the manufacturer (with which dis­tributors are encouraged to deal). Whilst the finance-provider will often take security over the distributor’s receivables or inventory, the manufacturer may also enter into some risk­mitigating or risk-sharing arrangement with the finance-provider. As with other forms of loan-based SCF, the processing speed for transactions can be facilitated through web-based platforms and automated processes.

E.   Problems

There are three particular legal difficulties that arise from SCF, especially when the tech- 14.51 nique in question concerns the assignment of receivables whether outright or by way of security for advances.

1.    Prohibitions or Restrictions on Assignment

The first difficulty arises when an international sale contract (and accordingly the receiv-             14.52

able to which it gives rise) contains a provision prohibiting its assignment or transfer. On its face, such a clause would appear to prevent recourse to assignment-based SCF techniques. Indeed, such non-assignment clauses have been held valid in English law as a matter of public policy at the highest level.^[1552] Accordingly, if there was an attempt by the seller to transfer the right to payment under a receivable in violation of a non-assignment clause, not only would this constitute a breach by the seller of the underlying sale agree­ment, but the assignment would not confer any rights upon the finance-provider against the buyer.

14.53 That said, there are techniques that a finance-provider might employ in order to sidestep (or at least minimise) the impact of a non-assignment clause. First, rather than taking an assignment of the right to be paid the receivables’ proceeds, the assignment could simply re­late to the proceeds themselves: the seller would still retain the right to payment, but would be obliged to hand over the proceeds, once received, to the finance-provider. From the finance-provider’s perspective, such a solution is sub-optimal: as well as having no direct rights against the buyer, the finance-provider’s proprietary rights in the proceeds will only ‘bite’ once the funds are received by the seller, with the result that the finance-provider is ef­fectively bearing a double risk that either the buyer or seller may become insolvent. Whilst this risk can be mitigated to a degree by the finance-provider taking security over the seller’s other assets, this is only likely to make SCF more costly and slower than desired. Secondly, rather than taking a direct assignment of the right to be paid the receivable, a seller could declare a trust over that right or its proceeds in favour of the finance-provider. Whilst a trust over the proceeds similarly suffers from the disadvantage that the finance-provider’s rights only attach at the moment that the funds are received by the seller, a trust over the chose in action representing the right to payment does not suffer from this weakness, as it is existing rather than future property. As recognised by the English Court of Appeal in Barbados Trust Co Ltd v Bank of Zambia,^[1553] a declaration of trust would appear to confer upon the finance-provider many of the advantages that would derive from a direct assign­ment: the finance-provider would be entitled to use the Vandepitte procedurehref="#_ftn1554" name="_ftnref1554" title="">^[1554] to bring proceedings against the buyer directly if necessary;^[1555] and the finance-provider might be able to compel the seller to transfer the legal title to the right to payment pursuant to the rule in Saunders v Vautier.^[1556] Accordingly, despite the non-assignment clause, a declaration of trust over the right to receive payment would effectively operate as the functional equiva­lent of an assignment. Indeed, given that a trust arrangement will generally destroy the mutuality needed for a set-off to operate, the trust mechanism may even place the finance­provider in a stronger position than if an assignment were actually permitted. Thirdly, as recognised in First Abu Dhabi Bank PJSC v BP Oil International Ltd,^[1557] the finance-provider may seek to protect itself by securing a warranty from the seller that none of the receivables arise from non-assignable contracts. Whilst this may not confer upon the finance-provider any proprietary rights to a particular receivable, such a clause would at least confer upon the finance-provider some possibility of recourse in the event that the receivables are in fact non-assignable.

The confusion that has resulted from the English courts simultaneously upholding and undermining non-assignment clauses in equal measure has led to legislative intervention. On a domestic level, assuming the issue is governed by English law, section 1 of the Small Business, Enterprise and Employment Act 2015 allows the Secretary of State to enact regu­lations invalidating any term preventing or restricting the assignment of receivables that arise out of ‘a contract for goods, services or intangible assets (including intellectual prop­erty)' when ‘at least one of the parties has entered into [the contract] in connection with the carrying on of a business’.^[1558] Those regulations have now been enacted, providing that ‘a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties’^[1559] Whilst on their face, the Business Contract Terms (Assignment of Receivables) Regulations 2018 (‘the Regulations') would apply to facilitate SCF in the trade finance context, the statutory avoidance of non-assignment clauses does not operate when the seller qualifies as a ‘large enterprise’^[1560] This important qualification means that the Regulations will only generally operate when SCF is provided to sellers and buyers that qualify as an ‘SME’ Nevertheless, where the seller qualifies as a ‘large enterprise’ the UCIF might operate to invalidate a non-assignment clause, since it provides that ‘[t]he assignment of a receivable by the supplier to the factor shall be effective notwithstanding any agreement between the supplier and the debtor prohibiting such assignment’^[1561] The rationale for these legislative interventions is clear: SCF would become inordinately expen­sive and slow if finance-providers had to perform due diligence on all the relevant receiv­ables. Accordingly, the direction of travel (both at common law, in domestic legislation, and under international instruments) is to facilitate SCF by enabling the free transfer of receiv­ables, regardless of any contractual restrictions.

14.54

2.             Notice to the Buyer

14.55

Secondly, where the particular SCF technique involves an assignment that is notified to the buyer, then the transaction may fall within the scope of section 136(1) of the Law of Property Act 1925, provided that the relevant notice is given in writing. Statutory assign­ments cause few legal difficulties. In the event that the seller and finance-provider choose not to notify the buyer, the assignment can only be effective in equity.^[1562] Whilst notice to the buyer may not be a precondition of a valid equitable assignment, it is nevertheless advisable from the finance-provider's perspective to give notice for three reasons.

14.56

The first reason concerns priority. In the event that the seller were to assign the same receiv­able twice to different finance-providers (whether as part of a fraudulent scheme or simply because the SCF arrangements with different finance-providers happen to overlap), the pri­ority of claims to the receivable will be determined according to the order in which notice has been given to the buyer.^{New Roman",serif;color:black'>[1563]} Accordingly, a finance-provider who has not given notice of an equitable assignment runs the risk of losing priority to other finance parties. The second reason concerns discharge. Until notice is given to the buyer of the assignment, the buyer is free to discharge its liability by paying the seller; whereas, if the buyer does so after receiving notice, it can be made to pay the same amount again to the finance-provider.^[1564] The third reason concerns the equities that the buyer might be able to raise. Once notice of an assign­ment has been given to a debtor, no further set-offs that that debtor might acquire against the assignor after that date can be raised against the assignee.^[1565] Furthermore, the buyer and seller are no longer free to modify the underlying agreement.^[1566] Accordingly, by not giving notice, a finance-provider risks the value of the receivables that it has acquired being eroded by the seller's continued dealings with the buyer. To counter this risk, the finance-provider is likely to increase its fees and retain some form of recourse against the seller, including taking security over its other assets. Alternatively, the seller can arrange for the receivables to be embedded in a negotiable instrument and enter into a forfaiting arrangement with the finance-provider: the concept of negotiability would protect the finance-provider from fur­ther equities regardless of whether or not notice has been given to the buyer.^[1567] Accordingly, where there is a desire or need to keep the SCF arrangements confidential from the buyer, forfaiting may provide a better route for achieving the parties' commercial aims.

3.             Choice of Law

14.57        Thirdly, there are real choice of law difficulties that arise out of SCF. In the case of loan­based SCF, the position ought to be relatively straightforward, as the respective rights of the seller and finance-provider will generally be determined by the law that the parties have chosen or that is otherwise applicable in the absence of party choice.^[1568] That said, where the finance-provider takes security over the buyer's or seller's inventory, the validity and effect of that security interest will normally be governed by the lex situs of the relevant in- ventory;^[1569] whilst this is unproblematic when the inventory is located in the same juris­diction, the position is more difficult when the inventory is scattered across a number of jurisdictions. In such circumstances, a court would have to apply multiple different laws to the finance-provider's rights over the inventory and the finance-provider would poten­tially have to perfect or register its security interest in a number of different jurisdictions. To avoid this difficulty, the courts may choose to apply a single, global law to the inventory wherever it is located (most likely the law applicable to the contract between the seller and finance-provider).

14.58        Similar difficulties arise when security is taken over receivables or they are transferred out­right to the finance-provider. Whilst the initial view was that the choice of law rule for the transfer of intangibles should be their lex situs (which would effectively be the jurisdiction where the debtor was located),^[1570] the modern trend is that an intangible should be governed by the law of the contract that engenders it.^[1571] Whichever approach is applied, given that the seller will be financing sales to many different buyers, neither provides a satisfactory solution in the SCF context. Accordingly, a special choice of law rule appears to be neces­sary when dealing with global assignments of receivables, whether by way of security or outright.^[1572]5 As in the context of inventory financing, the most obvious candidate is the law applicable to the agreement between the seller and finance-provider.

That said, the choice of law position may be more straightforward when the parties use a ne- 14.59 gotiable instrument in place of a pure intangible. With respect to bills of exchange, it is tol­erably clear that the lex situs governs the transfer of negotiable instruments,^[1573] although it is less certain whether that principle operates by virtue of the statutory choice of law rule in section 72 of the Bills of Exchange Act 1882 or general choice of law principles.^[1574] Whatever the source of the lex situs principle in this context, the lex situs would likely be the place where the bill of exchange was endorsed and delivered by the seller to the finance-provider. As this is likely to be the same place for any bills of exchange in the seller's hands, there is no need to develop a special choice of law rule to govern global transfers of such instruments to a finance-provider under a forfaiting arrangement.

IV.