There are three projects of the United Nations Commission on International Trade Law that may be of interest to this gathering. UNCITRAL has produced (1) a Convention on International Bills of Exchange and International Promissory Notes and (2) a Model Law on International Credit Transfers, and is currently working on (3) a uniform law on independent guarantees and letters of credit.

There are three projects of the United Nations Commission on International Trade Law that may be of interest to this gathering. UNCITRAL has produced (1) a Convention on International Bills of Exchange and International Promissory Notes and (2) a Model Law on International Credit Transfers, and is currently working on (3) a uniform law on independent guarantees and letters of credit.

Convention on International Bills of Exchange and International Promissory Notes

This convention contains a number of innovations from the point of view of traditional negotiable instruments law. Among these innovations are its recognition of floating rates of interest; its treatment of forgeries; its concept of the protected holder; its rule on the liability of a transferor; and its rule on aval and guarantee.

Floating Rates of Interest

The Convention on International Bills of Exchange and International Promissory Notes1 contains an option to stipulate floating rates of interest in bills or notes. It was said that this might be a disadvantage for representatives of countries that represent debtors rather than creditors, since historically interest rates tend to go up. However, it would be wrong simply to say that it is to the disadvantage of debtors to allow a floating rate of interest. Absent the floating-rate option, creditors might set an artificially high fixed rate to cover the long-term risk of rising interest rates. A floating rate that basically follows market conditions does not necessarily work to the detriment of the debtor. There was also a concern that, if the rate of interest is tied to some index, perhaps the index would be manipulated. This concern led to a provision in Article 8(6) that limits the choice of reference rates. There are also other ways of limiting the risk of the possible float. For example, one can set an upper and lower limit. The ability to write instruments with a floating rate of interest while preserving their negotiability allows a measure of flexibility in structuring loans and credits for customers. This, when coupled with the ability to write instruments payable in ECUs or SDRs, will provide the legal framework for new types of credit instruments.


One major disparity between the Geneva Convention and the common law concerns forged endorsements or endorsements made by an agent without authority. In this area, the Convention achieves an ingenious marriage.

The “know your endorser” principle, a common law concept, is the ultimate solution, where the loss is deemed to fall on the endorsee. By contrast, under the civil law, the endorsee can become a holder if there is an uninterrupted series of endorsements, even if one of the endorsements was forged. These two elements were married in the Convention.

Protected Holder

Major compromises were made in relation to the position of the holder. Let me give a few examples. What are the rights of a holder? The common law and the civil law are quite different on this point. Formally speaking at least, the Convention has adopted the two-tier system of the common law. It has a double system comprising (1) a “protected holder” and (2) a holder that is not a “protected holder” but nevertheless enjoys a considerable amount of protection. However, if one looks at the provisions closely, there are many civil law ideas in them.

Here is one example: under the common law rules, you cannot become a “holder in due course” if you are aware of a certain defense or claim (the “all or nothing” principle). This was regarded as too strict by civil law experts. They preferred a more developed, individualized approach. Thus, under Convention Articles 27-32, most of the defenses can only be invoked if the holder was aware of them at the time he took the instrument. The Convention adopts a mix of common law and civil law concepts.

Liability of Transfer

Another example is the liability of the transferor based on the transfer “warranty.” It is not so much the solution that may be surprising to someone who comes from a civil law country, but rather finding a provision of that kind in a negotiable instruments law at all. One would expect to find reference to warranties under the general law of contracts or sales. But the solution of the Convention is to incorporate it in the negotiable instruments law, as you would find it in Article 3 of the U.S. Uniform Commercial Code (UCC), for example. Nevertheless, it was not the U.S. influence that led to its incorporation in the Convention. It was the realization that it would be very useful to try to find some harmony between systems of law, and that this goal could be accomplished in the context of this project.

Aval and Guarantee

Yet another of the compromises on important rules relates to guarantee or aval. Comparing the law of Geneva countries that have adopted the aval with the equivalent guarantee under the common law, one can say, as a general statement, that the aval tends to be the stronger guarantee. Still, there is a considerable degree of uncertainty in civil law over the concept of aval. This is even more the case concerning the concept of guarantee in the common law, which appears in many different forms. Faced with this situation, the Convention’s solution was to include both the aval and the guarantee (Articles 46-48) and thus widen the options available to parties.

Model Law on International Credit Transfers

A second project of UNCITRAL concerned electronic funds transfers. This was a follow-up to the UNCITRAL Legal Guide on Electronic Funds Transfers2 that was prepared by the UNCITRAL secretariat in cooperation with a study group of experts from banking and commercial circles. This Legal Guide raised issues but did not give any definitive answers. Subsequently, UNCITRAL attempted to give definitive answers to assist in the drafting of legislation. The project resulted in the UNCITRAL Model Law on International Credit Transfers.3 The main motivation was that existing law was fragmentary and, where it did exist, the rules stemmed from a mix of legal sources. Sometimes they consisted of general principles of law, sometimes contractual provisions by way of general conditions of bank payment systems, clearinghouses, and so forth. The uncertainty was a source of confusion. Modern funds transfers characterized by high speed and high volume have aggravated the problems, because there is less time for individual attention to particular transfers. The UNCITRAL Model Law is not limited to electronic funds transfers but extends to all international credit transfers. In a credit transfer, first, there is a debit to the transferor’s account and then a credit to the account of the transferee. In the debit transfer, funds move in the opposite direction. While there are some similarities between credit and debit transfers, because of the differences it is not feasible to have the same rules for both kinds of transfers. At this time, moreover, the use of electronics is much greater in the credit transfer area than in the debit transfer area. Since we view transfers in their entirety, the rules govern a series of messages flowing between different banks to implement a single payment order of a customer, even if part of the series is paper based. The U.S. delegation had recommended that new Article 4A of the UCC4 be considered as a basis for the Model Law,5 and its influence on the Model Law has been significant.

Uniform Law on Independent Guarantees and Letters of Credit

A third project of UNCITRAL in the field of banking is to prepare a uniform law on independent guarantees and stand-by letters of credit.6 The core idea is that although they are equivalent functionally, the existing legal frameworks are quite different. The stand-by letter of credit is governed by letter of credit law. In such law it has long been established as a principle that the credit is independent of the underlying obligation. In the area of letters of credit, the problem is which of the individual provisions of the legal framework is really applicable. Many of the opinions of a recent International Chamber of Commerce (ICC) commission dealt with questions of which of the Uniform Customs and Practice articles are applicable. Article 5 of the UCC is very elaborate.7 In contrast to letter of credit law, the law on independent guarantees is normally developed by case law. There are very few statutes that deal with independent guarantees. In the area of these guarantees, the struggle for independence from the underlying obligation has not yet been won in all jurisdictions. Regarding the issue of fraud and other objections to payment, elements of the underlying transaction may become relevant to some extent. Let me conclude by saying that UNCITRAL does not want to compete in these matters with the International Chamber of Commerce, but wants to complement their work through legislation; UNCITRAL has cooperated with the ICC over the years and basically assisted in their work on guarantees.



Mr. Herrmann has done a very thorough job of explaining the details of the Convention on International Bills and Notes. As any UN official properly should, he has limited his focus to the activities of the United Nations and UNCITRAL. But this movement is much more broadly based than that, and you should be aware of the broader potential for change. We have a global market at this time, and there is a general thought that the best thing lawyers can do is to try to reduce the transaction costs created by the existence of different national laws affecting transborder transactions in a global market. The objective is to create a uniform international law, which means persuading more than 100 nations to enact the same or similar statutes or to ratify a set of conventions to harmonize the law covering various aspects of those transborder transactions.

We already have in force the Convention on Contracts for the International Sale of Goods (CISG), a project of UNCITRAL now ratified by 26 countries.1 The second is the Convention on International Bills of Exchange and International Promissory Notes (CIBN),2 which has been ratified by Mexico, signed by the United States and Canada, and endorsed by the American Bar Association at its 1989/90 meeting. The third is the Convention on International Financial Leasing,3 opened for signature and ratification by a diplomatic conference in Ottawa, Canada, in 1988. The fourth is a Convention on International Factoring, which has the same pedigree.

All these projects are going forward and, together with the UNCITRAL projects on International Credit Transfers4 and International Letters of Credit,5 we have the ingredients for an international commercial law, drafted and available for ratification or enactment by the various states. This would take the friction of extra transaction costs out of international transactions inasmuch as there would be one set of rules. Who would be interested in this besides business executives? Would bankers be interested?

Much of the commercial paper in current circulation pretends to be negotiable but is not. This commercial paper may have floating interest rates, or be payable in installments or be payable in units of account. Such instruments are not necessarily negotiable under most national laws.

Those of you who are interested in economic development should consider what would happen to the secondary market of debt instruments if floating-rate notes should become negotiable. Would that enhance their value? Multinational corporations are another potential beneficiary of uniform international commercial paper rules, because they would like to have one set of rules governing all the instruments that they issue. All these parties would be very interested in a legal regime that is stable across national borders. (All these measures are designed to apply only to the international transaction; they do not preempt domestic law.)

The United States has a great deal of experience in a similar development. At one time a transaction between New York and California or between Virginia and Florida was a terrible problem because the commercial laws in each state were different. The United States did not solve that problem by enacting a federal law. Instead, the Uniform Commissioners met together, proposed a uniform commercial code, and then sought its enactment by each of the 50 states. That system of going to each individual state to enact uniform commercial laws has worked very well for commerce within the United States.

The market has now gone from national to global and, as usual, lawyers are struggling to catch up with the marketplace. We are, however, moving in the right direction, and I urge each of you to request your government to consider each of these various conventions and model laws. No one will ever be totally happy with the product, because an acceptable result is always the product of compromise; yet it may be better to accept some compromises rather than attempt to become expert in every national legal system of influence on the global market.

Note: For further development of this subject, see Spanogle, “The Arrival of International Private Law,” 25 George Washington Journal of International Law and Economics 477 (1991).