Change of law and transitional provisions

1. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Do not re-size text boxes as they are measured to fit paper with pre-printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. Change of law and transitional provisions 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 B’s overriding title was acquired

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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 expressor 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)

9. 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))

10. 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))

11. 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