Financial Leasing under the UNIDROIT Convention and the Uniform Commercial Code: A Comparative Analysis


FINANCIAL LEASING UNDER THE UNIDROIT CONVENTION
AND THE UNIFORM COMMERCIAL CODE:

A COMPARATIVE ANALYSIS

David A. LeW

I. INMRODUCTION

International equipment leasing has emerged as an important means of
economic development in the global marketplace,' particularly where capital
intensive acquisitions such as aircraft, ships, or machinery are involved.2

Heretofore, financial developments have outpaced the evolution of sound legal
theories3 which are adapted to the sui generis form of the financial lease.4

* David A. Levy is a graduate of the School of Law at Southern Methodist University

and is a member of the Pennsylvania Bar. He is the editor of the GULF WAR CLAIMS REPORTER

and has written on the subject of Bulgarian legal development. Mr. Levy is the Kronstein
Visiting Research Fellow at the International Law Institute and has previously worked in the
area of commercial and trade law harmonization with the Office of the Assistant Legal Adviser
for Private International Law, U.S. Department of State.

Acknowledgements: The author wishes to express special thanks to Professor Charles
W. Mooney, Jr., of the University of Pennsylvania Law.School, Professor Peter Winship of
the Southern Methodist University School of Law, and Martin Stanford, Senior Research Adviser
of the International Institute for the Unification of Private Law (UNIDROIT), without whose
valuable assistance this paper would not have been possible. Any errors or omissions, however,
are the sole responsibility of the author.

I. Lawrence M. Taylor, Jr., InterationalLeasing, in 2 EQuiPMENT LEASiNG-LEVERAGED
LEASING 1223, 1223 (Bruce E. Fritch et al. eds., 3d ad. 1988). See also Ian Shrank, Cross-Border
Leasing, in HOT ISSUES IN EQUIPMENT LEASING I, 1 (A.B.A. Section of Business Law ed.,
1994). For an excellent discussion of the advantages and disadvantages of financial leasing
in the context of economic development, see Jack L. Upper, Asset Financing: Capital Equ4ment
Leasing(Economic Development Institute Seminar Paper 29, 1984). For a discussionofthe
impact of leasing in Europe, Latin America, and Asia, see Taylor, supra, at 1226-30. See
also Draft Convention on International Financial Leasing with Explanatory Report,
UNIDROIT Study LIX, at 20-22, Doc. 48 (1987) [hereinafter Secretariat Report].

2. Taylor, supra note 1, at 1225.
3. Id. at 1238. "[ln many.., jurisdictions around the world, leasing may have been

introduced as a financial product by foreigners before local laws and regulations had been
promulgated to deal with any of the[ ] conceptual issues." Id.

4. A financial leasing transaction involves three parties: (a) the lessee, who selects the
equipment from the supplier and pays rent to the lessor for the right to use the equipment;
(b) the supplier, who provides the equipment specified by the lessee and who is paid for the
equipment by the lessor in the supply agreement; and (c) the lessor, whose basic function is
that of a financier-to purchase the equipment specified by the lessee from the supplier under
the supply agreement, and to enter into a leasing agreement with the lessee granting the lessee
the right to use the equipment in exchange for payment. Peter Breslauer, Finance Lease, Hell
or High Water Clause, and Third Party Beneficiary Theory in Article 2A of the Uniform



IND. INT'L & COMP. L. REV.

National laws vary considerably--or are nonexistent-thus giving rise to
commercial uncertainty and hindering the utilization of financial leasing as
a vehicle for international economic development.6

Recognizing the need for certainty in international trade, the International
Institute for the Unification of Private Law (UNIDROIT) began work in 1974
on a set of Draft Rules designed to govern "the civil and commercial aspects"'

of international financial leasing. The effort culminated in a multilateral
convention. Both the UNIDROIT Convention on International Financial Leasing
and its companion instrument, the UNIDROIT Convention on International
Factoring,' were the end result of a diplomatic conference of fifty-five
participating States,9 four observer States,'" and seven intergovernmental

Commercial Code, 77 CORNELL L. REV. 318,319-20 (1992). See also U.C.C. § 2A- 103(l)(g)

(1990); UNIDROIT Convention on International Financial Leasing, May 28, 1988, art. 1, 27

I.L.M. 931 (1988) [hereinafter Leasing Convention].

5. States that have statutes directly affecting financial leasing include Belgium, Brazil,

Canada, France, Spain, and those jurisdictions in the United States that have enacted Article

2A of the U.C.C. Ronald Cuming, Legal Regulation ofInternationalFinancial Leasing: The

1988 Ottawa Convention, 7 ARIz. J. INT'L & COMP. L. 39, 41 n.5 (1989). Although the

Convention is designed to govern international leases, many states which lack a modem leasing

law may model their domestic laws upon the Convention. Martin Stanford, Strikinga Fair

Balance, ASSET FIN. & LEAsING DIG., Nov. 1988, at 5. In the absence of a modem law governing

leasing, such as U.C.C. Article 2A, many legal systems have been forced to conceptually view

a single leasing transaction as being two separate contracts: a supply contract between the supplier

and lessor, and a bailment contract between the lessor and lessee. Walter E. May, Note,

International Equipment Leasing: The UNIDROIT Draft Convention, 22 COLUM. J. TRANSNAT'L

L. 333, 338(1984). Bifurcating the financial leasing transaction ignores the interrelationship

of the dual contracts-the leasing agreement and the supply agreement-thereby creating

commercial uncertainty between the respective parties. Id.

6. Financial leasing serves as a vehicle for international development by (1) providing

access to foreign capital; (2) permitting the leased equipment to be acquired earlier than if

purchased outright, thereby paying for itself through increased productivity; and (3) by expanding

the market for both the supplier and lessor/financier. Taylor, supra note 1, at 1232-34.

7. The Convention is intended to govern only the "civil and commercial aspects of

international leasing" while leaving accounting and taxation issues to applicable domestic

law. Stanford, supra note 5, at 5; Leasing Convention, supra note 4, pmbl.

8. UNIDROIT Convention on International Factoring, May 28, 1988, 27 I.L.M. 943

(1988).

9. UNIDROIT listed the 55 states that participated in the Ottawa Diplomatic Conference

as being:

"the People's Democratic Republic of Algeria; the People's Republic of Angola;

Antigua and Barbuda; Australia; the Republic of Austria; the Kingdom of Belgium;

the Federative Republic of Brazil; the People's Republic of Bulgaria; the Republic

of Burundi; the Republic of Cameroon; Canada, the Republic of Chile; the People's

Republic of China; the Republic of Colombia; the Republic of Cuba; the

Czechoslovak Socialist Republic; the Kingdom of Denmark; the Dominican

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UNIDROIT CONVENTION

organizations" hosted by the Canadian government in Ottawa in May, 1988.12

The United States signed 3 the UNIDROIT Convention on International
Financial Leasing on December 28, 1990."4 The Convention requires
ratification or accession by three States,'" and, as of this writing, has yet
to become effective.1

6

Republic; the Arab Republic of Egypt; the Republic of El Salvador; the Republic
of Finland; the Republic of France; the Federal Republic of Germany; the Republic
of Ghana; the Hellenic Republic; the Republic of Guinea; the Hungarian People's

Republic; the Republic of India; Ireland; the Italian Republic; Japan; the Republic

of Korea; the Lebanese Republic; the United Mexican States; the Kingdom of

Morocco; the Kingdom of the Netherlands; the Federal Republic ofNigeria; the

Kingdom of Norway; the Republic of the Philippines; the Polish People's Republic;

the Portuguese Republic; the Republic of Senegal; the Kingdom of Spain; the

Democratic Republic of the Sudan; the Kingdom of Sweden; the Swiss

Confederation; the Kingdom of Thailand; the Republic of Turkey; the Union

of Soviet Socialist Republics; the United Kingdom of Great Britain and Northern

Ireland; the United Republic of Tanzania; the United States of America; the

Republic of Venezuela; the Socialist Federal Republic of Yugoslavia; and the

Republic of Zaire."

UNIDROIT Final Act of the Diplomatic Conference for the Adoption of the Draft UNIDROIT

Conventions on International Factoring and International Financial Leasing, May 28, 1988,

at 1, 27 I.L.M. 927 (1988).

10. The four States which sentobserversto the Conference were Malaysia, the Republic

of Peru, the Republic of Uganda, and the Eastern Republic of Uruguay. Id.

I1. The seven intergovernmental organizations represented by observers to the Conference

were the Commission of the European Union, the Council of Europe, the Hague Conference

on Private International Law, the Organization of American States, the United Nations Commission

on International Trade Law (UNCITRAL), the United Nations Conference on Trade and

Development (UNCTAD), and the World Bank. Id. at 2.

12. Peter H. Pfund, International Unification of Private Law: A Report on US.

Participation-] 987-88,22 INT'L LAW. 1157, 1163 (1988).

13. Under United States treaty practice, the act of signing a treaty does not give that

instrument the binding force of law; rather it is deemed to "represent political approval and

at least a moral obligation to seek ratification." A signed treaty must then be submitted by

the executive branch to the Senate for its advice and consent pursuant to Article 2, Section

2 of the United States Constitution. RESTATEMENT (THIRD) OF FOREIGN RELATIONS § 312
cmts. d, j (1986).

14. Recent Actions Regarding Treaties to Which the United States is a Party,

30 I.L.M. 573 (1991).

15. Leasing Convention, supra note 4, art. 16(1).

16. Letter from Valerie Hughes, Senior Counsel, Constitutional and International Law,

Department of Justice, Canada, to David A. Levy, Legal Extern, State Department, Office

of the Legal Adviser, Private International Law (Feb. 18, 1994) (on file with the State

Department). The two countries which have ratified the Leasing Convention are France and

Italy, with France having made the declaration permitted under Article 20. Letter from Valerie

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IND. INT'L & COM. L. REV.

First, this paper examines the UNIDROIT Convention on International
Financial Leasing (Leasing Convention) from an American commercial law
perspective by comparing it with Article 2A of the Uniform Commercial Code
(U.C.C.), 7 which is a modern national law governing domestic commercial
leasing. 8 The Convention embodies principles which are familiar to U.C.C.

Hughes, Senior Counsel, Constitutional and International Law, Department of Justice, Canada,
to David A. Levy (Sept. 1, 1994) (on file with the State Department) [hereinafter Letter from
Hughes]. See discussion of Article 20, infra note 51.

17. For a useful overview of Article 2A, see generally Amelia H. Boss, The History
of Article 2A: A Lesson for Practitioner and Scholar Alike, 39 ALA. L. REV. 575 (1988);
Edwin E. Huddleson, III, Old Wine in New Bottles: U. C. C. Article 2A-Leases, 39 ALA. L.
REV. 615(1988). For an excellent discussionof issuesconcerning equipment leasesgenerally,
see Fritch et al., supra note 1.

18. As of this writing, Article 2A has been enacted in 42 American jurisdictions: Alabama,
ALA. CODE §§ 7-2A-101 to -532 (1993); Alaska, ALASKA STAT. §§ 45.12.101 to .532(1993);
Arizona, ARiz. REV. STAT. ANN. §§ 47-2AI01 to -2A532 (Supp. 1994); Arkansas, ARK. CODE
ANN. §§ 4-2A-101 to -532 (Michie Supp. 1993); California, CAL. COM. CODE §§ 10101 to
10532 (West Supp. 1994); Colorado, COLO. REV. STAT. §§ 4-2.5-101 to -533 (1992); Delaware,
DEL. CODE ANN. tit. 6, §§ 2A-101 to -532 (1993); the District of Columbia, D.C. CODE ANN.
§§ 28:2A-101 to -532 (Supp. 1994); Florida, FLA. STAT. ANN. ch. 680.1011 to .532 (Harrison
Supp. 1992); Georgia, GA. CODE ANN. §§ 11-2A-101 to -532 (Michie Supp. 1994); Hawaii,
HAW. REV. STAT. §§ 490:2A-101 to -532 (Supp. 1992); Idaho, IDAHO CODE §§ 28-12-101
to -532 (Supp. 1994); Illinois, ILL. ANN. STAT. ch. 810, paras. 5/2A- 101 to -532 (Smith-Hurd
1993); Indiana, IND. CODE ANN. §§ 26-1-2.1-101 to -532 (Burns 1992); Kansas, KAN. STAT.
ANN. §§ 84-2a-101 to -532 (Supp. 1993); Kentucky, KY. REv. STAT. ANN. §§ 355.2A-101
to-532 (Baldwin 1994); Maine, ME. REV. STAT. ANN. tit. 11, §§ 2-1101 to-1532 (WestSupp.
1994); Maryland, MD. CODE ANN., COM. LAW I §§ 2A-101 to -532 (Supp. 1994); Michigan,
MICH. COMp. LAWS ANN. §§ 440.2801 to .2982 (West 1994); Minnesota, MINN. STAT. ANN.
§§ 336.2A-101 to-531 (West Supp. 1994); Missouri,MO. ANN. STAT. §§ 400.2A-101 to -532
(Vernon Supp. 1993); Montana, MONT. CODE ANN. §§ 30-2A-101 to -532 (1991); Nebraska,
NEB. REV. STAT. §§ 2A-101 to -532(1994); Nevada, NEV. REv. STAT. §§ 104A.2101 to .2532
(1993); New Hampshire, N.H. REv. STAT. ANN. §§ 382-A:2A-101 to -532 (1994); New Mexico,
N.M. STAT. ANN. §§ 55-2A-101 to -532 (Michie Supp. 1993); New York, N.Y. U.C.C. LAW
§§ 2-A-101 to -532 (McKinney Supp. 1995) (effective June 30, 1995); North Carolina, N.C.
GEN. STAT. §§ 25-2A-101 to -532 (Supp. 1994); North Dakota, N.D. CENT. CODE §§ 41-02.1-01
to-80 (Supp. 1993); Ohio, OHiO REv. CODE ANN. §§ 1310.01 to .78 (Anderson 1993); Oklahoma,
OKLA. STAT. ANN. tit. 12A, §§ 2A-101 to -532 (West Supp. 1995); Oregon, OR. REV. STAT.
§§ 72A.1010 to .5310 (1993); Pennsylvania, 13 PA. CONS. STAT. ANN. §§ 2AI01 to 532 (Supp.
1994); Rhode Island, R.I. GEN. LAWS §§ 6A-2.1-101 to -532 (1992); South Dakota, S.D.
CODIFiED LAWS ANN. §§ 57A-2A-101 to -531 (Supp. 1994); Tennessee, TENN. CODE ANN.
§§ 47-2A-101 to -532 (Supp. 1994); Texas, TEx. Bus. & COM. CODE ANN. §§ 2A.101 to
.532 (West 1994); Utah, UTAH CODE ANN. §§ 70A-2a-101 to -532 (Supp. 1994); Virginia,
VA. CODE ANN. §§ 8.2A-101 to -531 (Michie Supp. 1994); Washington, WASH. REv. CODE
ANN. §§ 62A.2A-101 to -532 (West Supp. 1994); Wisconsin, WiS. STAT. ANN. §§ 411.101
to .532 (West Supp. 1993); and Wyoming, WYO. STAT. §§ 34.1-2.A-101 to -532 (1994).

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UNIDROIT CONVENTION

practitioners, including the obligation of good faith, 9 "expectation-type"
damages,2" and the right of the parties to freely contract, subject to certain
mandatory protections.2 Second, this paper contends that the United States
should ratify the Leasing Convention in order to protect the interests of
American lessors who wish to enter into international leasing transactions
secure in the enforceability of their contracts.2

A. The History of UNIDROIT

The International Institute for the Unification of Private Law (UNIDROIT)
was founded in 1926 by the League of Nations for the purpose of"examin[ing]
ways of harmonizing and co-ordinating the private law of States and groups
of States, and to prepare gradually for the adoption by the various States of
uniform legislation in the field of private law."2 3 UNIDROIT's offices are
in Rome, and it is today an autonomous international organization.24 The
United States joined UNIDROIT in 196425 in recognition of the need to
participate more actively in international law unification.26

19. Compare Leasing Convention, supra note 4, art. 6 (setting forth the need to interpret
the convention with regard to "observance of good faith in international trade") with U.C.C.
§ 1-203 ("Every contract or duty within this Act imposes an obligation of good faith in its
performance or enforcement."). ,

20. Leasing Convention, supra note 4, art. 13(2)(b); U.C.C. § 1-106.
21. Leasing Convention, supra note 4, art. 5. The comment to U.C.C. § 2A-101 emphasizes

this point by stating that the codification of leases in Article 2A "was greatly influenced by
the fundamental tenet of the common law as it developed with respect to leases of goods: freedom
of the parties to contract .... to vary the effect of the provisions. . . subject to certain
limitations... ." U.C.C. § 2A-101 cmt. (1987). See also U.C.C. §§ 2A-103(4), 1-102(3).

22. The full text of the Leasing Convention has been provided as an appendix to this
article for ease of reference.

23. Statute of the International Institute for the Unification of Private Law, done at Rome
Mar. 15, 1940, art. 1, 15 U.S.T. 2494, 2504, T.I.A.S. 5743 (entered into force July 15, 1955;
forthe U.S., Mar. 13, 1964). Amendments: June 15-16, 1965, 19 U.S.T. 7802, T.I.A.S. No.
6611; Dec. 18, 1967, 20 U.S.T. 2529, T.I.A.S. No. 6716; Feb. 18, 1968, 30 U.S.T. 5663, T.I.A.S.
No. 9519.

24. May, supra note 5, at 334 n.7.
25. Peter H. Pfund & George Taft, Congress "Role in the International Unification of

PrivateLaw, 16 GA. J. INT'L & COMp. L. 671,673 (1986). See also22 U.S.C. § 269(g) (1988)
(authorizing membership and participation in Hague Conference and UNIDROIT).

26. Peter H. Pfund, United States Participation in Transnational Lawmaking, in LEX

MERCATORIA AND ARBITRATION: A DISCUSSION OF THE NEW LAW MERCHANT 167, 177 (Thomas
E. Carbonneau ed., 1990).

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IND. INT'L & COMP. L. REv.

B. Financial Leasing Defined

Financial leasing represents a "distinctive triangular relationship" 7

requiring three discrete parties: 28 (1) a lessor who advances funds for the
purchase of the equipment which constitutes the subject of the leasing
transaction, (2) a lessee who selects the equipment and pays a rental fee for
the right to use it, and (3) a supplier who sells the equipment to the lessor.29

Financial leasing also links two separate, albeit interrelated, contracts: a leasing
agreement between the lessor and lessee, and a supply agreement between
the supplier and lessor.30

Article 1 of the Leasing Convention sets forth the basic financial leasing
transaction to which it applies and defines the relationship of the parties.
Paragraph (1) states that the lessor is provided with equipment specifications
by the lessee, and then, using those specifications, enters into a "supply
agreement" to obtain the equipment from the supplier. The equipment may
be "plant, capital goods, or other equipment," according to the lessee's
specifications, 3 and the lessee has the right to approve the terms of the
supply agreement entered into "so far as they concern its interests."32 This

27. The Leasing Convention explicitly recognizes the "distinctive triangular relationship"
created by the financial leasing transaction. Leasing Convention, supra note 4, pmbl. See also
U.C.C. § 2A-103 cmt. g ("A finance lease is the product of a three party transaction.").

28. Note that the Leasing Convention by its terms is inapplicable to a simple bilateral
lease, for example, where the supplier and the lessor are one and the same. Leasing Convention,
supra note 4, art. l(1)(a). The rationale for providing special protection for the lessor in a
finance lease whose function is that of a financier does not exist where the lessor plays the
more active role of the supplier. Secretariat Report, supra note 1, at 32. Consistently throughout
the Convention, the more the lessor deviates from the role of financier, the greater is the assumed
liability. See, e.g., Leasing Convention, supra note 4, art. 8(1) (lessor's liability increased
where "lessee has suffered loss as the result of its reliance on the lessor's skill and judgment
and of the lessor's intervention in the selection of the supplier or the specifications of the
equipment.").

29. "The reality of financial leasing is indeed that the technical specifications of the
equipment, the terms of payment and delivery are worked out directly between the lessee and
the supplier, with delivery being made directly by the supplier to the lessee." Secretariat Report,
supra note 1, at 35.

30. Breslauer, supra note 4, at 319-20.
31. Leasing Convention, supra note 4, art. I(1)(a). Moreover, the law of the Convention

continues to apply between those parties even where the equipment "has become a fixture to
or incorporated in land." Id. art. 4(1). Aircraft and other movables are expressly included.
Id. art. 7(3).

32. Id art. l(1)(a). This right of approval becomes important as the Convention provides
that the lessee effectively becomes the beneficiary of the supplier's warranties "as if it were
a party to [the supply agreement] and as if the equipment were . . . supplied directly to the
lessee." Id. art. 10(1). Accord U.C.C. § 2A-209(l).

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UNIDROIT CONVENTION

definition of financial leasing under the Convention is consistent with the
conception of a "finance lease" under U.C.C. Section 2A-103(g)."

Article 1, paragraph (2) of the Convention sets forth three criteria that
must be met in order for the Convention to apply. First, the lessee must specify
the equipment and select the supplier "without relying primarily on the skill
and judgment of the lessor. 34 Second, the lessor must acquire the equipment
in connection with the leasing agreement, and the supplier must know that
the leasing agreement has been, or will be, entered into between the lessor
and the lessee." Third, rentals under the leasing agreement must "take into

33. Comment (g) to U.C.C. Section 2A-103 states:
A finance lease is the product of a three party transaction. The supplier
manufactures or supplies the goods pursuant to the lessee's specification, perhaps

even pursuant to a purchase order, sales agreement or lease agreement between

the supplier and the lessee. After the prospective finance lease is negotiated,

a purchase order, sales agreement, or lease agreement is entered into by the lessor

(as buyer or prime lessee) or an existing order, agreement or lease is assigned

by the lessee to the lessor, and the lessor and lessee then enter into a lease or

sublease of the goods. Due to the limited function usually performed by the

lessor, the lessee looks almost entirely to the supplier for representations, covenants
and warranties.

Id. Note that under the U.C.C., in order to qualify as a finance lease, a transaction must first

satisfy the definition of a "lease" under 2A-103(1)(j): "a transfer of the right to possession

and use of goods for a term in return for consideration, but a sale, including a sale on approval

or a sale and return, or retention or creation of a security interest is not a lease." U.C.C. §

2A-103(g) cmt. g.
34. Leasing Convention, supra note 4, art. 1 (2)(a) (emphasis added). While the use of

the term "primarily" suggests that the lessor may take steps to protect its investment by

recommending a particular type of equipment or a dependable supplier, the lessor who does

more than simply finance the transaction creates a greater potential for liability both to the

lessee and to third parties. Secretariat Report, supra note 1, at 39. Article 8(1)(a) states that

the lessor shall not incur any liability to the lessee in respect of the equipment

save to the extent that the lessee has suffered loss as the result of its reliance

on the lessor's skill and judgment and of the lessor's intervention in the selection
of the supplier or the specifications of the equipment.

Leasing Convention, supra note 4, art 8(1)(a) (emphasis added). The U.C.C. similarly states

that in a finance lease in which the lessor does more than simply supply funds, "express warranties,

covenants, and the common law will protect the lessee." U.C.C. § 2A-103 cmt. g. However,

the Code explicitly provides that there is no implied warranty of fitness for a particular purpose

in a finance lease. U.C.C. § 2A-213.

35. Leasing Convention, supra note 4, art. 1(2)(b). Prof. Ronald Cuming, the chief

spokesperson for the Canadian delegation at the Ottawa Diplomatic Conference, points out

that while the supplier must be aware that the equipment is being acquired in order to lease

to the lessee, there is no requirement that the supplier be aware that the Convention will govern

the leasing transaction. Because a primary goal of the Convention is to shift liability from

the lessor to the supplier, suppliers who deal with foreign lessors risk facing additional potential

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IND. INT'L & COMP. L. REV.

account in particular the amortisation of the whole or a substantial part of
the equipment. '3 6 Paragraph (3) states that the Convention is applicable
whether or not the lessee has the right to purchase the equipment or extend
the lease period, and "whether or not for a nominal price or rental. 37

C. International Commercial Leases

The Leasing Convention was drafted to apply to international leases
necessitating, at a minimum, that the parties to the leasing agreement,3 the
lessor and lessee, have their places of business in different Contracting States. 9

The supplier, the third essential party to the international financial lease, may
have its place of business in the same Contracting State as the lessor or the
lessee, or in a third-party State, provided that both the supply and leasing
agreements are governed by the law of a Contracting State,40 either through
affirmative choice of law, or by virtue of conflicts rules.

If all three parties choose to do so, they may elect to exclude the
Convention in toto.4' However, the Convention permits the parties "in their
relations with each other" to vary the effect of any of the Convention's

liability without being aware of the consequences. Cuming, supra note 5, at 54. See also

Leasing Convention, supra note 4, art. 10.
36. Leasing Convention, supra note 4, art. 1(2)(c). Because under the Code, a finance

lease must afortiori qualify as a lease, U.C.C. § 2A-103(j), whether the obligations under

the lease exceed the economic life of the leased goods is an important factor in U.C.C. Section

1-201(37) for determining whether a given transaction is a true lease ora "disguised" security

interest governed by Article 9. This is a fact-specific determination that focuses on the economics

of the transaction in question. U.C.C. § 1-201(37) & cmt. 37. This is not merely an exercise

in semantics. If the transaction is determined to be a security interest disguised as a lease,

the lessor will be required to file a financing statement to perfect its rights in the equipment

as against the competing claims of third parties. U.C.C. § 2A-101 cmt. See also Edwin E.

Huddleson III, New Developments: Article 2A Leases of Goods, in COMMERCIAL LAW ANNUAL

115, 117-23 (Louis F. & Patrick Del Duca eds., 1993) [hereinafter New Developments].

37. Leasing Convention, supra note 4, art. 1(3). Note that under U.C.C. Section 1-201(37),

a purchase option of the leased equipment for nominal consideration is a factor which identifies

a transaction as creating a security interest, rather than a true lease.

38. The drafters of the Leasing Convention focused on the leasing agreement to establish

the international character of the lease because it represents the "fundamental legal relationship

contained within the complex financial leasing transaction .... Secretariat Report, supra

note 1, at 42.

39. The Convention defines "place of business" as being that which has the "closest

relationship to the relevant agreement and its performance." Leasing Convention, supra note

4, art. 3(2).

40. Id. art. 3(1).
41. Id. art. 5(l).

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UNIDROIT CONVENTION

provisions.42 The only exceptions to this permission are in Article 8(3)
(lessor's warranty of quiet possession-intentional or grossly negligent acts
of the lessor); Article 13(3)(b) (lessor's damages in the event of default by
lessee); and Article 13(4) (acceleration of rentals due). The Leasing Convention
thus follows the traditional principle of freedom of contract subject to limited
mandatory provisions, which is generally consistent with Section 1-102(3)
of the Uniform Commercial Code.43

Consumer leasing transactions are explicitly excluded from the
Convention,4 which also is inapplicable to leases purely of real estate.4"
Martin Stanford, Senior Research Adviser of UNIDROIT, observes that these
limitations are a result of the different concerns underlying consumer and
commercial laws, the limited instancesof consumer leasing at the international
level, and the impracticality of intertwining real and chattel property concepts
into a single, uniform international law.46

42. Id. art. 5(2).
43. U.C.C. Section 1-102(3) states as a general principle that:

The effect of provisions of this Act may be varied by agreement, except as
otherwise provided in this Act and except that the obligations of good faith,
diligence, reasonableness and care prescribed by this Act may not be disclaimed
by agreement but the parties may by agreement determine the standards by which
the performance of such obligations is to be measured if such standards are not
manifestly unreasonable.

See also U.C.C. § 2A-101 cmt., supra note 21.
44. The Convention does not apply to equipment which is leased "primarily for the lessee's

personal, family, or household purposes." Leasing Convention, supra note 4, art. 1(4). By
contrast, a financial lease under U.C.C. Section 2A-103(g)(iii) may be either a commercial
or consumer transaction. The rationale for insulating a financial lessor against tort liability
to third parties is weaker when consumer transactions are involved. The Code leaves consumer
protection in leasing transactions primarily up to other law. U.C.C. § 2A-104(1)(c) & cmt.
4.

45. See Leasing Convention, supra note 4, art. 4(2):
Any question whether or not the equipment has become a fixture to or incorporated
in land, and if so the effect of the rights interse of the lessor and a person having
real rights in the land, shall be determined by the law of the State where me
land is situated.

The effect of this provision is that while the Convention was never intended to apply to real
estate, it may potentially be applicable depending on the interpretation of the term "plant" in
national courts. Secretariat Report, supra note 1, at 37. Section 2A-309(2) of the Code avoids
this distinction by stating that "no lease exists under this Article of ordinary building materials
incorporated into an improvement on land."

46. Stanford, supra note 5, at 5.

1995]



IND. INT'L & COMP. L. REv.

II. LESSOR-LESSEE RELATIONSHIP

The leasing agreement, which gives rise to the lessor-lessee relationship,
represents the core transaction in financial leasing. The treatment of the lessor
and lessee under the Convention is substantially in accord with the rights and
remedies of the respective parties set forth in the Uniform Commercial Code.

Financial leasing is a hybrid transaction; the concerns of the lessee parallel
those of a buyer in a sales transaction, while the lessor's are those of a financier,
rather than a seller of goods. The lessee wants to be able to use the equipment
that it selects free from the competing claims of third parties, such as the seller's
creditors, and with essentially the same warranty protection it would have
if it had purchased the equipment from the supplier directly.

The lessor, on the other hand, wants to be guaranteed the right to receive
payment from the lesseewithout the concern of liability (particularly products
liability) exposure to third parties. This concern is due to the fact that the
lessee selects the equipment regardless of its operational fitness.47 Because
of its limited involvement with the selection and acquisition of the equipment,
the lessor seeks to maintain the supplier's warranty responsibility. Equally
important, the lessor seeks assurance of the maintenance of its rights in the
leased equipment in the event of the lessee's insolvency. The Convention
addresses and clarifies each of these concerns.

A. Lessor's Warranty of Quiet Possession

Both the Leasing Convention4" and the Uniform Commercial Code49

provide a lessor's warranty of quiet possession. Article 8(2) of the Leasing
Convention states that "[t]he lessor warrants that the lessee's quiet possession
will not be disturbed [unless such disturbance is] derived from an act or

47. The drafters of the Convention, in recognition of this point, stated in the Secretariat
Report:

[I]t would be morally indefensible for a lessee that has had ample opportunity
to check on the technical suitability of the equipment required by it prior to delivery
to be able to blame the lessor for its own bad choice when the equipment on

delivery proves to be unsuited to its requirements.
Secretariat Report, supra note 1, at 38.

48. Leasing Convention, supra note 4, art. 8(2)-(4).
49. U.C.C. § 2A-2 11 (1). "There is in a lease contract a warranty that for the lease term

no person holds a claim to or interest in the goods that arose from an act or omission of the

lessor ... which will interfere with the lessee's enjoyment of the leasehold interest." Note
that unlike the broader warranty stated in Article 8 of the Leasing Convention, the lessor under
U.C.C. Section 2A-2 11 (1) only warrants against conflicting claims that arise from the lessor's
own acts or omissions.

[Vol. 5:2



UNIDROIT CONVENTION

omission of the lessee." Consequently, the lessor is deemed liable for any
conflicting claims on the leased equipment brought by third parties, except
those caused by the lessee.

The liability of the lessor for breaches of the warranty of quiet possession
may, however, be contractually limited, subject to two exceptions: the
mandatory provisions under paragraphs (3) and (4). Paragraph (3) states that
the lessor cannot contract away responsibility for grossly negligent or intentional
acts that give rise to superior claims in the equipment. Paragraph (4) provides
that if a broader warranty of quiet possession is mandatory under the law
governing the contract as determined by conflicts of law rules, attempts at
disclaimer are ineffective.5"

The rationale behind requiring a broad warranty of quiet possession,
while perhaps understandable in domestic consumer transactions, makes little
sense in the context of international commercial leasing. Effectively, the lessor
is required to act as a title insurer, and presumably passes the cost of the risk
to the lessee. This overlooks the fact that it is the lessee that selects both
the leased equipment and the supplier, and arguably is in a better position
to evaluate the reliability of title to the leased equipment. The well-advised
lessor consequently will seek: (1) to narrow the scope of the warranty
contractually, as is common practice in financial leasing, (2) to press the
supplier and the lessee to exclude the Convention entirely,5 or (3) to avoid
the transaction altogether.52

50. Leasing Convention, supra note 4, art. 8(2)-(4). In addition, the same concerns are
addressed in Article 20 which states that " [a] Contracting State may... substitute its domestic
law for Article 8(3) if its domestic law does not permit the lessor to exclude its liability for
its default or negligence." This right to substitute domestic law was designed to accommodate
French law, among others, which considers a warranty of quiet possession to be a fundamental
feature of a leasing contract. Cuming, supra note 5, at 59. France, in fact, made the declaration
under Article 20 in ratitying the convention. Letter from Hughes, supra note 16. Nevertheless,
the domestic law declaration of Article 20 does defeat the purpose of "formulating certain
uniform rules.. .of international financial leasing." Leasing Convention, supra note 4, pmbl.
(emphasis added). The harmonization of commercial laws requires a degree of willingness
to adapt domestic laws in order to achieve international commercial certainty. See, e.g., The
Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9 (1972) (noting that "[w]e cannot have trade
and commerce in world markets ... exclusively on our terms, governed by our laws. .. ").

51. Leasing Convention, supra note 4, art. 5. See also supra text accompanying note
41.

52. For a through analysis of the lessor's warranty of quiet possession, see Charles W.
Mooney, Jr., Filing Requirements for Personal Property Leases: A Comment and Response
to Professor Ziegel, 16 CANADIAN Bus. L.J. 419, 432-36 (1990). Professor Mooney was a
member of the U.S. delegation that participated in the drafting of the Leasing Convention.

1995]



IND. INT'L & COMP. L. REV.

B. Improper Tenders-Nonconformity or Delivery Problems

Both the Leasing Convention and the Uniform Commercial Code outline
the respective rights and duties of the lessor and the lessee when the leased
equipment either fails to conform to the supply agreement or where the
equipment is not delivered as agreed. Although fundamentally similar, their
approaches differ in several important respects.

Article 12 of the Leasing Convention represents the sole set of remedies
available to the lessee for claims against the lessor regarding the performance
of the leased equipment 3 or its delivery under the Convention. 4 This is
consistent with the theory of the finance lease that it is the supplier to which
the lessee should look for claims arising out of the equipment."

Article 12 of the Convention provides that when the equipment is not
delivered, is delivered late, or otherwise fails to conform to the specifications
contained in the supply agreement, the lessee has a right as against the lessor
to reject the nonconforming tender56 or to terminate the leasing agreement,57

subject to a corresponding right of the lessor to cure the defective tender."
These rights must be exercised or lost, as if the lessee had bought the equipment
directly from the lessor on the same terms as those whom the lessor bought
the equipment from the supplier under the supply agreement. 59 When the

53. This is distinguished from claims under Article 8 for breaches of the lessor's warranty
of quiet possession or the lessor's interference with the selection of the equipment or the supplier.
Leasing Convention, supra note 4, art. 8.

54. Id. art. 12(5). Note that where the defective tender or delivery is through the fault
of the lessor-for example, by failure to pay the supplier-the lessee may potentially recover
additional sums as damages. Secretariat Report, supra note 1, at 69.

55. Leasing Convention, supra note 4, arts. 10, 12(6). Accord U.C.C. § 2A-209(1).
In fact, the U.C.C. places so much importance on this fundamental finance lease concept that
comment (1) to Section 2A-209(l) states that "[a]s a matter of policy, the operation of this
provision may not be excluded, modified or limited ...."

56. Leasing Convention, supra note 4, art. 12(l)(a). AccordU.C.C. § 2A-509(l) (restating
'perfect tender" rule of U.C.C. § 2-601 in the context of a lease).

57. Leasing Convention, supra note 4, art. 12(1)(a). Accord U.C.C. §§ 2A-508(l)(a),
2A-501(1), 2A-505(1).

58. Leasing Convention, supra note 4, art. 12(l)(b). Compare U.C.C. § 2A-513 (limiting
the lessor's right of cure under the U.C.C. to instances where time for performance has not
expired, U.C.C. § 2A-513(l), or in the case of substituted deliveries, U.C.C. § 2A-513(2)).

59. Leasing Convention, supra note 4, art. 12(1). Article 12(2) of the Leasing Convention
reiterates that "[a] right conferred by [art. 12(1)] shall be exercisable in the same manner and
shall be lost in the same circumstances as if the lessee had agreed to buy the equipment from
the lessor under the same terms as those of the supply agreement." Thus, Article 12 effectively
states a choice of law rule rather than an independent, substantive rule of law. See Cuming,
supra note 5, at 57. By making specific rights and remedies of the lessee and lessor dependent
on the domestic sales law of the supply contract, Article 12 fails to state the outcome where

[Vol. 5:2



UNIDROIT CONVENTION

lessee exercises the right to terminate the leasing agreement, it is entitled under
the Convention to a restitution of rentals and other sums paid in advance,
less an offset for beneficial use.6"

For example, if the lessor purchases the equipment from the supplier
under a supply agreement subject to U.S. sales law, Article 2 of the Uniform
Commercial Code would govern, and the lessor as buyer can reject a less
than perfect tender6 or revoke its initial acceptance only in very limited
circumstances.62 The supplier as seller will have the right to cure only if
the time for its performance has not yet passed,63 or if it has tendered the
nonconforming goods in the reasonable belief that they are acceptable.'

If the supply contract is governed by the Vienna Convention on the
International Sale of Goods (CISG), following the contractual time for delivery,
the lessor as buyer can reject the equipment and declare the contract avoided
"if the failure by the seller to perform any of his obligations under the contract
or [the CISG] amounts to a fundamental breach of contract."65 If the contract

there is no comparable right, such as the right to cure defective tenders provided under the
applicable law. Given the generally recognized freedom of commercial partiesto choose the
substantive law applicable to their contract, this interperative anomaly will probably remain
more of a theoretical, rather than a practical consideration. Id. at 57-58.

60. Leasing Convention, supra note 4, art. 12(4). Accord U.C.C. § 2A-508(l)(b) (allowing
the lessee to rightfully reject or revoke acceptance of goods and recover amounts paid "as is
just under the circumstances").

61. U.C.C. § 2-601 (allowing buyer to reject "if the goods or the tender of delivery fail
in any respect to conform to the contract . . .")

62. Revocation of acceptance under Section 2-608 of the U.C.C. requires a higher degree
of nonconformity than the "perfect tender" rule of Section 2-601. For a buyer to be able to
revoke its initial acceptance of goods, the nonconformity of the goods must "substantially im-
pair[ ] its value' to the buyer, U.C.C. § 2-608(1), and where the initial acceptance was either
based on the "reasonable assumption" that the nonconformity would be cured by the seller,
U.C.C. § 2-608(l)(a); or that the defect was difficult to discover or that acceptance was based
on the seller's assurances, U.C.C. § 2-608(l)(b). Even if the buyer has colorable grounds
for revocation of acceptance, it must do so within a reasonable period of time and must notify
the seller, U.C.C. § 2-608(2). See JAMES J. WHrTE & ROBERT S. SUMMERS, UNIFORM
COMMERCIAL CODE § 8-3 (2d ed. 1980).

63. U.C.C. § 2-508(!).
64. U.C.C. § 2-508(2).
65. United Nations Convention on Contracts for the International Sale of Goods, Apr.

11, 1980, art. 49(1)(a), U.N. Doc. A/CONF.97/18, 19 I.L.M. 668 (1980) [hereinafter CISG]
(entered into force Jan. 1, 1988; for the U.S., Jan. 1, 1988). Article 25 of the CISG defines
a "fundamental" breach as that which "results in such detriment to the other party as substantially
to deprive him of what he is entitled to expect under the contract, unless the party in breach
did not foresee and a reasonable person of the same kind in the same circumstances would
not have foreseen such a result." See Fritz Enderlein, Rights and Obligations of the Seller
Under the UN Convention on Contracts for the International Sale of Goods, in

1995]



IND. INT'L & COMP. L. REv.

is not declared avoided, the supplier as seller has the right to cure "without
unreasonable delay and without causing the buyer unreasonable
inconvenience .... ,66

Rather than invoking the law of sales to provide rights for the lessee
against the lessor, as opposed to the supplier, for equipment or deliveries.which
are not in conformity with the contract (and thereby ignoring the linited role
of the financial lessor), the Uniform Commercial Code takes a functional
approach in restricting the remedies available to the lessee which reflects actual
commercial practice in financial leasing. Section 2A-509(l) states a "perfect
tender" rule, which permits the lessee to reject prior to acceptance equipment
that fails to conform to the supply agreement in any way. Acceptance, which
cuts off the right to reject the leased goods,67 occurs after the lessee has
inspected the goods and either indicates that they are conforming, accepts
them despite non-conformity,68 or otherwise fails to make an effective
rejection."9

In a finance lease under the Code, once the lessee has accepted the goods,
the right of revocation of acceptance is limited to instances where the lessee
had no knowledge of the nonconformity and the lessor induced the lessee
to take the nonconforming goods through additional promises or assurances.
In addition, the nonconformity must be serious enough that it substantially
impairs the value of the goods to the lessee. 0 This rather high standard
for rejection is deemed equitable because in a financial lease, the lessee has
a direct claim against the supplier for defects in the equipment." Moreover,

INTERNATIONAL SALE OF GoODS: DUBROVNIK LECTURES 133, 187, 193-96 (Petar ar~evid
& Paul Volken eds., 1986).

66. CISG, supra note 65, art. 48(1). Even if the seller cures, the buyer nevertheless
retains the right to claim damages arising out of the breach. Id. Note that if the buyer declares
the contract avoided under Article 49 of the CISG, the seller loses the right to cure under Article
48(l). Enderlein, supra note 65, at 193.

67. U.C.C. § 2A-516(2).
68. In fact, in a finance lease, if the lessee has accepted equipment with knowledge of

the nonconformity, acceptance cannot be revoked because of it. id.
69. U.C.C. § 2A-515.
70. U.C.C. § 2A-517(l)(b). See also U.C.C. § 2A-516 cmt. 1. As with the Convention,

a financial lessor that chooses to do more than merely provide funds increases its potential
for liability. See, e.g., Leasing Convention, supra note 4, art. 8(l)(a), art. 12(5).

71. U.C.C. § 2A-516(2) cmt. 1. Comment 10 to Section 2A-508 states that:
Absent supplemental principles of law and equity to the contrary, in the case
of most finance leases, following the lessee's acceptance of the goods, the lessee
will have no rights or remedies against the lessor, because the lessor's obligations
to the lessee are minimal. Since the lessee will look to the supplier for
performance, this is appropriate.

(Internal citations omitted.) See also U.C.C. § 2A-209(1); Leasing Convention, supra note
4, art. 10(L).

[Vol. 5:2



UNIDROIT CONVENTION

the right of the lessor to cure a defective tender arises only prior to the
expiration of the time for the lessor's performance,72 or if the lessor or supplier
tenders nonconforming goods that they have reasonable grounds to believe
are acceptable.73

A fundamental difference in the U.C.C. and the Leasing Convention
concerns the right of the lessee to withhold payments until the lessor cures
a nonconforming tender. Under the Convention, the lessee is permitted to
withhold payments until the lessor cures the defective tender or the lessee
has lost the right to reject the equipment.74

Unlike the Leasing Convention, the Code does not permit the lessee
to withhold rental payments in the event of a nonconforming performance
by the lessor or supplier. Section 2A-407 of the Code restates the traditional
"hell or high water" leasing clause by providing that in a commercial finance
lease, the lessee's obligation to pay under the terms of the rental contract
"becomes irrevocable and independent" upon the lessee's acceptance of the
goods.75 The U.C.C. emphasizes that "due to the function of the lessor"
in financial leasing, the lessee should be required to pay the lessor
notwithstanding the nonconforming tender because the lessee looks to the
supplier to honor the equipment warranties.76 Moreover, the Code places
such emphasis on this principle that if a lease qualifies as a finance lease under
Section 2A- 103(1)(g), then the "hell or high water" clause of Section 2A-407
becomes a self-executing statutory provision of the lease, without the need
to consciously include it in the draft. 77 This obligation to pay "come hell
or high water" is subject only to the obligation of good faith and the ability
of the lessee to revoke acceptance.7 8

Article 12 of the Leasing Convention, while constituting a choice of
law reference rather than a "uniform rule[ ] relating [to] international financial

72. U.C.C. § 2A-513(l).
73. U.C.C. § 2A-513(2).
74. Leasing Convention, supra note 4, art. 12(3). Note that the drafting of Article 12

is somewhat less than ideal. Paragraphs (1) and (2) explicitly invoke domestic sales law in
determining the right of the lessee to reject the equipment or terminate the leasing agreement
and the right of the lessor to cure the nonconforming tender, while paragraphs (3) and (4)
make no such reference. Query if this would permit the withholding of payment in circumstances
where it would not be allowed under the applicable sales law.

75. See Breslauer, supra note 4, at 326-27.
76. U.C.C. § 2A-407 cmt. 1. Comment 3 to U.C.C. § 2A-209 makes clear that in a

commercial financial lease, the "hell or high water" clause of U.C.C. § 2A-407 is the price
that the lessee pays to gain the benefits of the supplier's promisesto the lessor under the supply
agreement.

77. U.C.C. § 2A-407 cmt. 1. Breslauer, supra note 4, at 327.
78. U.C.C. § 2A-407 cmt. I.

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IND. INT'L & COMP. L. REV.

leasing," '79 represents a non-mandatory provision which may be varied
contractually"0 and therefore is unlikely to alter actual commercial leasing
practices. The financial lessor does not want the lessee to raise claims against
it arising out of the equipment after it has already paid the supplier.
Consequently, as a matter of sound business practice, the lessor will require
the lessee to verify in writing prior to the payment of the supplier that it received
and accepted the equipment, that the equipment is conforming as specified,
and that the lessee agrees to be bound by its normally absolute obligation
to pay under the leasing agreement."'

C. Lessor's Remedies if Lessee is in Breach

The rights and remedies available to the lessor upon default by the lessee
under the Leasing Convention and the Uniform Commercial Code are largely
in accord.

82

1. "Expectation Damages"

The theory of damages under both the Leasing Convention and the U.C.C.
is that the party who is injured by the other party's failure to perform its
obligations has the right to receive monetary compensation, effectively gaining
the benefit of its bargain. Section 1-106 of the U.C.C. states that the purpose
of damages is to put the aggrieved party in "as good a position as if the other
party had fully performed .... ""

Article 13(1) of the Leasing Convention states the basic rule that where
the lessee is in default, whether or not such default would be considered
"substantial" under the terms of the contract,84 the lessor is entitled to accrued

79. Leasing Convention, supra note 4, pmbl. See alsosupra note 59 and accompanying
text.

80. Leasing Convention, supra note 4, art. 5(2).
81. Charles W. Mooney, Jr., Report on UNIDROIT Convention on International Financial

Leasing 7 (1990) (manuscript on file with the State Department). See also Cuming, supra
note 5, at 58.

82. Compare Leasing Convention, supra note 4, art. 13 (lessor's remedies under the
Convention) with U.C.C. § 2A-523 (index of lessor's remedies under the Code).

83. U.C.C. § 1-106.
84. The drafters of the Leasing Convention felt that because the "essential factor" in

determining what constitutes a "substantial default" in a given transaction is the creditworthiness
of the lessee, establishingthe threshold at which a default would be deemed "substantial" was
best left to the parties in their agreement. See Secretariat Report, supra note 1, at 70.

[Vol. 5:2



UNIDROIT CONVENTION

unpaid rentals, together with interest and damages upon default by the lessee. 5

Similarly, Section 2A-523(3)(b) of the Code provides that where the lessee's
default does not "substantially impair the value of the lease contract," the lessor
may recover for its loss arising from the lessee's default "as determined in
any reasonable manner." 6

Unlike the U.C.C., Article 13 of the Leasing Convention requires the
election of remedies by the lessor in the event of substantial default by the
lessee. 7 If the lessee's fault is indeed "substantial," the lessee must first be
given notice of the default and a reasonable opportunity to remedy it, 8 unless
such notice would be futile.s9 Cure by the defaulting lessee returns the parties
to status quo ante.

Where notice has been given and the lessee's default is not remedied,
the lessor has the option to terminate the lease, repossess the equipment,9"
and recover "expectation-type" damages.9l In the alternative, Article 13(2)
of the Leasing Convention permits a lessor to elect to keep the leasing agreement
in force, leave the lessee in possession of the equipment, and accelerate
payments of future rentals if permitted under the leasing agreement.9 2

However, as a practical matter, a lessee who is in substantial default because
it cannot make rental payments as they come due in the ordinary course of
business will not likely be able to pay accelerated future rentals in order to
retain possession of the equipment for the original term of the leasing
agreement.

93

The comparable Code provision, Section 2A-529(1), permits the lessor
to recover accelerated rentals, discounted to present value as of the date of
judgment, plus incidental expenses, less expenses saved where a lessee is in
substantial default and the goods are "not repossessed by or tendered to the

85. Leasing Convention, supra note 4, art. 13(l).
86. U.C.C. § 2A-523(2), (3)(b).
87. Cf U.C.C. § 2A-523 cmt. 4 ("This Article rejects any general doctrine of election

of remedy.").
88. Leasing Convention, supra note 4, art. 13(5). In contrast, U.C.C. Section 2A-502

states that a "lessee in default.. . is not entitled to notice of default or notice of enforcement

89. For example, notice and an opportunity to remedy a substantial default would be
futile where the lessee is bankrupt. Secretariat Report, supra note 1, at 71.

90. Leasing Convention, supra note 4, art. 13(2)(a). Accord U.C.C. §§ 2A-523, -525(2).
91. Article 13(2)(b) of the Leasing Convention provides that the lessor may "recover

such damages as will place the lessorin the position in which it would have been had the lessee
performed the leasing agreement in accordance with its terms." Leasing Convention, supra
note 4, art. 13(2)(b).

92. Id. art. 13(2).
93. Cuming, supra note 5, at 62.

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IND. INT'L & COMP. L. REV.

lessor."94 Under the Uniform Commercial Code, a clause permitting the
lessor to accelerate payments "at will" is enforceable if the lessor has a good
faith belief that the prospect of payment is "impaired."95  Good faith is
presumed, and the lessee has the burden of demonstrating that a commercial
lessor is not acting in good faith.96 Note that damages available to the lessor
under the Convention, whether the default by the lessee is substantial or not,
are subject to a duty of mitigation by the lessor.97

2. Liquidated Damages Clauses Enforceable

One of the key objectives of the Leasing Convention was to ensure the
enforceability of liquidated damages clauses.9" Article 13(3) of the Leasing
Convention permits the parties to determine damages in advance through an
enforceable liquidated damages clause subject to the mandatory rule that such
damages cannot be substantially in excess of the amount that would have been
due the lessor if the lease had been fully performed.99 Similarly, Section
2A-504(1) of the Uniform Commercial Code provides that damages may be
liquidated "only at an amount or by a formula that is reasonable in light of
the then anticipated harm caused by the default ......

Article 13(5), one of the few mandatory provisions of the Convention,
states that the lessor may not accelerate future rentals after termination of
the leasing agreement; however, the same result may be achieved contractually
by an enforceable liquidated damages clause that "take[s] into account" the
value of future rentals.'00

94. U.C.C. § 2A-529(I). The other instances where a lessor has the statutory right to
accelerate rentals under Section 2A-529(1) include where conforming goods have been lost
or damaged within a commercially reasonable time after the risk of loss passed to the lessee,
or where the goods were identified to the contract and the lessor is unable to dispose of them
at a reasonable price after reasonable effort, or where circumstances reasonably indicate such
effort will be unavailing. See also New Developments, supra note 36, at 134.

95. U.C.C. § 2A-109(l).
96. U.C.C. § 2A-109(2) & cmt.
97. Article 13(6) of the Leasing Convention states that "[tihe lessor shall not be entitled

to recover damages to the extent that it failed to take all reasonable steps to mitigate its loss."
Leasing Convention, supra note 4, art. 13(6).

98. R.M. Goode, Conclusion of the Leasing and Factoring Conventions-I, J. Bus. L.

347, 349 (1988) (U.K.). Professor Goode served as Deputy Chairperson of the United Kingdom's
Committee to the Leasing Convention and was Chairperson of the Drafting Committee.

99. Leasing Convention, supra note 4, art. 13(3)(b).
100. Id. art. 13(4).

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UNIDROIT CONVENTION

D. Subleases-Rights of Assignment-Transfers of Interests

Both the Leasing Convention and Section 2A of the U.C.C. provide
for subleases, assignments, and transfers of interest. Article 2 of the Leasing
Convention states that the Convention continues to apply to subleases and
that the original supplier and supply agreement maintain the same relationship
with the sublessee as they had vis a vis the original lessee. Similarly, the
Code defines the term "lease" to include subleases.'

Article 14 of the Leasing Convention sets forth the rights of the parties
to transfer or assign their interests under the leasing agreement. Paragraph
(1) provides that the lessor may transfer "or otherwise deal with" its rights
in the equipment or its rights under the leasing agreement. Significantly,
paragraph (1) makes clear that such a transfer "shall not relieve the lessor
of any of its duties" under the leasing agreement, nor will the transfer itself
remove the leasing agreement from the application of the Leasing Convention.
Therefore, a transferring lessor remains liable to the lessee for its promises
under the leasing agreement, and ifthe lessortransfers its interest in the leasing
agreement to a party whose principal place of business is not in a Contracting
State, 1"2 the Convention continues to govern the leasing agreement as if
the transferee's place of business was within a Contracting State. 0 3

Under Section 2A-303(3) of the U.C.C., the lessor may transfer its duties
under the lease to a transferee who effectively assumes a duty to perform
the obligations of the lessor.04 Consistent with the Leasing Convention,
such a transfer of the lessor's interest does not relieve the lessor of its
contractual obligations to the lessee absent agreement of the parties. 5

Article 14(2) of the Leasing Convention states that the lessee may only
transfer the right to use the equipment or any other rights under the leasing
agreement with the consent of the lessor and subject to the rights of third
parties. Similarly, lessor consent is required under the Code. Section 2A-303
of the U.C.C. provides that the transfer by the lessee of the right to possession
or use of the equipment may be deemed contractually to constitute an event

101. U.C.C. § 2A-103(1)(j).
102. Leasing Convention, supra note 4, art. 3(1). See alsosupra text accompanying note

39.
103. The second sentence in Article 12 was intended by the drafters to prevent the use

of transfers by the lessor of its interests under the leasing agreement in order to either defeat
the applicability of the Convention or to "internationalize" a purely domestic leasing transaction,
thereby supplanting domestic law with the Convention. Secretariat Report, supra note 1, at
75.

104. U.C.C. § 2A-303(3) & cmt. 1.
105. U.C.C. § 2A-303(7).

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IND. INT'L & COMP. L. REV.

of default' 06 giving the lessor the range of rights and remedies set forth
in Section 2A-501. Of course, the lessor may permit such assignment, provided
that both it and any interested third parties have given prior consent.' °7

E. Lessee's Standards for Use of the Leased Equipment

Article 9 of the Leasing Convention requires the lessee to take proper
care of the leased equipment, "use it in a reasonable manner," and maintain
the equipment in its original, as-delivered condition "subject to fair wear and
tear. ' O't0 Any modification must be agreed to by the parties.0 9  Under
Section 2A-219(1) of the U.C.C., the lessee in a finance lease bears the risk
of loss arising out of the equipment.

III. SUPPLIER-LESSEE RELATIONSHIP

Essential to the tripartite relationship in a financial leasing transaction
is the concept that it is the supplier who provides the equipment. Therefore,
the supplier is the proper party to whom the lessee should look for problems
arising out of the equipment,"' despite the absence of contractual privity.
Both the Leasing Convention and the U.C.C. formalize this relationship.

Article 10(1) of the Leasing Convention provides that the supplier owes
the same duty to the lessee as it does to the lessor under the supply agreement,
"as if [the lessee] were a party to that agreement and as if the equipment were
to be supplied directly to the lessee."'.. It also protects the supplier by
providing that the supplier is not exposed to liability to both the lessor and

106. Note that if the leasing agreement does not specifically provide that a transfer of
the lessee's interest constitutes an event of default-but only bars such transfer-the lessormust
prove and is limited to the recovery of actual damages. U.C.C. § 2A-303(5)(b). In rare occasions
where the transfer would materially increase risk, the court could issue an injunction. Id. &
cmt. 9; New Developments, supra note 36, at 138.

107. Taylor, supra note 1, at 1260.
108. Leasing Convention, supranote4, art. 9(1). Paragraph (2) statesthat the equipment

is to be returned to the lessor by the lessee in the same condition described in paragraph (1).
Id. art. 9(2). The drafters of the Convention elected to define a uniform obligation of the lessee
to keep the leased equipment in good working order. Secretariat Report, supra note 1, at 61.

While this is not an explicit risk of loss provision as stated in § 2A-219(1), it has much the
same practical effect by creating a minimum standard for acceptable use of the equipment
by the lessee. Note that the parties are free to include a more specific risk of loss provision
in their leasing agreement.

109. Leasing Convention, supra note 4, art. 9(1).
110. Stanford, supra note 5, at 5.
111. Leasing Convention, supra note 4, art. 10(1).

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UNIDROIT CONVENTION

the lessee "in respect of the same damage."112 Paragraph (1) should promote
legal predictability in leasing transactions involving jurisdictions that might
otherwise be reluctant to enforce the assignment of rights arising under the
supply agreement by the lessor to the lessee."' This is consistent with the
policy stated in U.C.C. Section 2A-209 to treat the lessee in a finance lease
as the beneficiary of the promises to the lessor in the supply agreement." 4

Article 10, paragraph (2) of the Leasing Convention further protects the lessor's
interest by providing that the lessee may not "terminate or rescind the supply
agreement without the consent of the lessor," notwithstanding the relationship
of the lessee and supplier recognized by paragraph (1). "'

Both the Leasing Convention and the U.C.C. provide comparable protection
for the lessee. Article 11 of the Leasing Convention states that the consent
of the lessee is required if any variation in the terms of the supply agreement
previously approved by the lessee are to effect the lessee's rights. Under
Section 2A-209(3) of the Code, modifications of the terms of the supply
agreement are ineffective if the supplier has received notice prior to the
attempted modification that the lessee has entered into a finance lease related
to the supply agreement. However, if the supplier has not learned of the lease,
the modification is nevertheless effective, and the lessor is deemed to have
assumed any obligations of the supplier benefitting the lessee arising in the
original supply agreement which were subsequently modified or rescinded.

IV. LESSOR-THIRD PARTY RELATIONSHIPS

A. Lessee's Judgment Creditors and Trustees in Bankruptcy

A major concern of a lessor in international commerce is the protection
of its rights in the equipment in the event of the insolvency of the lessee.' l 6

112. Id.
113. Mooney, supra note 81, at 6-7.
114. Section 2A-209(l) of the U.C.C. states:

The benefits of a supplier's promises to the lessor under the supply contract and
of all warranties, whether express or implied, including those of any third party
provided in connection with or as part of the supply contract, extends to the lessee
... under a finance lease related to the supply contract, but is subject to the
terms of the warranty and of the supply contract and all the defenses or claims
arising therefrom.

Further this concept is so central to the theory of the finance lease under the Code that "[a]s
a matter of policy, the operation of [2A-209(l)] may not be excluded, modified or
limited .... " U.C.C. § 2A-209 cmt. 1.

115. Leasing Convention, supra note 4, art. 10(2). Accord U.C.C. § 2A-407(2).
116. Stanford, supra note 5, at 5-6.

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IND. INT'L & COMP. L. REV.

Article 7 of the Leasing Convention therefore deals with the lessor's "real
rights"" " in the leased equipment as against the lessee's creditors and trustees
in bankruptcy." 8

Paragraph (1) provides that the lessor's "real rights" in the equipment
are protected against the lessee's creditors and trustees in bankruptcy, providing
for compliance with notice requirements, if any." 9 By negative implication,
where there are no rules regarding public notice under the applicable law,
the lessor's real rights are automatically protected against this class of
claimants. 2  The Leasing Convention purposefully does not attempt to
affect the priority of liens or security interests, excepting attachment or execution
creditors;' 2 ' nor does it affect the priority of any creditor having the "right
of arrest, detention or disposition" of ships or aircraft under applicable
international law.' 22

Protection for the lessor as owner is consistent with the general rule
of Section 2A-307(1) of the U.C.C. that "except [for statutory liens], a creditor
of the lessee takes subject to the lease contract." This provision of the
Convention should be particularly beneficial to financial lessors where the
equipment will be located in Contracting States that have not fully developed
a system of laws for personal property security and where a determination
of the lessor's property rights would be ambiguous at best.'

117. The Convention uses the term "real rights" rather than "title" in reference to the leased
equipment because the Convention also covers sub-leasing transactions (art. 2) under which
the lessor will not necessarily be the owner of the equipment. Id.

118. The Secretariat Report, discussing an earlier, substantially similar version of the current
Article 7, stated that the draft was only intended to address "those conflicts between the lessor
and third party creditors of the lessee arising in the limited context of the [lessee's] bankruptcy.
It does not attempt to deal with conflicts between the lessor and those third parties acquiring
the leased asset in good faith from the lessee." Secretariat Report, supra note I, at 51.

119. Generally, the applicable law which determines notice requirements will be the law
where the equipment is situated (art. 7(3Xd)), although special rules are provided for registered
ships (para. (3)(a)), aircraft (para. (3)(b)), and other mobile equipment including aircraft engines
(para. (3)(c)). Leasing Convention, supra note 4, art. 7(3)(a)-(d). In addition, paragraph (4)
subordinates the public notice rules of the Convention to "any other treaty under which the
lessor's real rights in the equipment are required to be recognised." Id. art. 7(4).

120. Secretariat Report, supra note 1, at 49.
121. Leasing Convention, supra note 4, art. 7(5)(a). This choice reflects the difficulty

of reconciling domestic laws concerning liens and security interests. Mooney, supra note 81,
at 3. For example, U.C.C. § 1-201(12) defines a "creditor" broadly to include: "a general
creditor, a secured creditor, a lien creditor, and any representative of creditors, including an
assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity and an executor
or administrator of an insolvent debtor's or assignee's estate." U.C.C. § 1-201(12) (1990).

122. Leasing Convention, supra note 4, art. 7(5)(b).
123. Mooney, supra note 81, at 3.

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UNIDROIT CONVENTION

B. Lessor/Persons having Interest in Land

Although the Leasing Convention is not designed to govern real estate
leasing, the definition of "equipment" may extend to situations where the
equipment "has become a fixture to or incorporated in land."' 24 Article
4 of the Convention states the general rule that the Convention continues to
apply whether or not the equipment has become a fixture to the land as
determined by the law of the State where the land is situated. It is state law
that determines the rights of the lessor and a person having real rights in the
land. 125

Section 2A-309 of the U.C.C. provides that, as a general rule, the perfected
interest of a lessor of fixtures has priority over the conflicting interests of
the owner or encumbrancer of the real estate.1 26 This interest is perfected
by filing a fixture filing statement. 27 However, the lessor's interest is
subordinate to a construction mortgage. 2 The Code leaves unenumerated
examples to be determined according to priority rules established by real estate
law.

129

C. Lessor's Liability to Third Parties in Tort

A major benefit to the international equipment lessor provided by the
Leasing Convention is a general immunity from liability arising out of the
equipment. 3 Article 8(1)(b) states the broad policy of the Convention
to protect lessors qua lessors from tort liability to third parties. This policy
reflects the fact that in a financial lease it is the lessee, not the lessor, that
assumes responsibility for the selection, quality, or use ofthe equipment which
is the subject of the lease.

American courts have reached similar holdings as a matter of public
policy. For example, the Pennsylvania Supreme Court in Nath v. National
Equipment Leasing Corp. '' stated:

We agree.., that the finance lease is suigeneris and that the policy
considerations justifying an extension of the concept of strict liability

124. Leasing Convention, supra note 4, art. 4. See also supra discussion accompanying
note 45. 0

125. Leasing Convention, supra note 4, art. 4(2).
126. U.C.C. § 2A-309(4), (5).
127. Id § 2A-309(9).
128. Id § 2A-309(6).
129. Id § 2A-309(7).
130. Stanford, supra note 5.
131. 497 Pa. 126, 439 A.2d 633 (1981).

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IND. INT'L & COMP. L. REV.

to the true lease are not present when the lessor is not "marketing"
or "supplying" the product, but is, in fact, merely a secured party,
or financier, whose collateral is the "product.' ' 32

Similarly, the Seventh Circuit in Abco Metals Corp. v. Equico Lessors, Inc. 3

held that strict liability was inapplicable to a lessor that had no control over
the production or use of a defective product.

Article 8, paragraph (1)(c) of the Leasing Convention states a limited
exception to this policy, providing liability for the lessor acting in any other
capacity, such as owner. This provision was included in order to avoid conflict
with international conventions that base liability on ownership. 134

V. CONCLUSION

The UNIDROIT Convention on International Financial Leasing represents
an important legal development for parties considering transborder leasing
transactions. It has the potential to promote legal certainty by clarifying the
positions of each party to the "distinctive triangular relationship" that is financial
leasing. It shifts responsibility from the lessor to the supplier, restricts the
lessor's liability to third parties, protects the rights of the lessor against the
lessee's creditors, and provides for the enforceability of liquidated damages
clauses. Moreover, it accomplishes these goals in a manner that is consonant
with Article 2A of the Uniform Commercial Code and which will be familiar
to American practitioners. The interests of American lessors and their legal
counsel will be greatly advanced by United States ratification of the Leasing
Convention, which should be facilitated as soon as possible.

0

132. Id. at 130, 439 A.2d at 635.
133. 721 F.2d 583, 585 (7th Cir. 1983).
134. See, e.g., International Convention on Civil Liability for Oil Pollution Damages,

done at Brussels, Nov. 29, 1969, as amended by Protocol of 1984, May 25, 1984, 23 I.L.M.
177 (1984). See also Council Directive 851374 of 25 July, 1985, on the approximation of
the laws, regulations and administrative provisions of the Member States concerning liability
for defective products.

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UNIDROIT CONVENTION

APPENDIX I

UNIDROIT CONVENTION
ON INTERNATIONAL FINANCIAL LEASING

THE STATES PARTIES TO THIS CONVENTION,

RECOGNISING the importance of removing certain legal impediments to
the international financial leasing of equipment, while maintaining a fair balance
of interests between the different parties to the transaction,

AWARE of the need to make international financial leasing more available,

CONSCIOUS of the fact that the rules of law governing the traditional contract
of hire need to be adapted to the distinctive triangular relationship created
by the financial leasing transaction,

RECOGNISING therefore the desirability of formulating certain uniform rules
relating primarily to the civil and commercial law aspects of international
financial leasing,

HAVE AGREED as follows:

CHAPTER I - SPHERE OF APPLICATION
AND GENERAL PROVISIONS

Article I

1.- This Convention governs a financial leasing transaction as described
in paragraph 2 in which one party (the lessor),

(a) on the specifications of another party (the lessee), enters into an
agreement (the supply agreement) with a third party (the supplier) under which
the lessor acquires plant, capital goods or other equipment (the equipment)
on terms approved by the lessee so far as they concern its interests, and

(b) enters into an agreement (the leasing agreement) with the lessee,
granting to the lessee the right to use the equipment in return for the payment
of rentals.

2.- The financial leasing transaction referred to in the previous paragraph
is a transaction which includes the following characteristics:

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IND. INT'L & COMP. L. REv.

(a) the lessee specifies the equipment and selects the supplier without
relying primarily on the skill and judgment of the lessor;

(b) the equipment is acquired by the lessor in connection with a leasing
agreement which, to the knowledge of the supplier, either has been made or
is to be made between the lessor and the lessee; and

(c) the rentals payable under the leasing agreement are calculated so
as to take into account in particular the amortisation of the whole or a substantial
part of the cost of the equipment.

3.- This Convention applies whether or not the lessee has or subsequently
acquires the option to buy the equipment or to hold it on lease for a further
period, and whether or not for a nominal price or rental.

4.- This Convention applies to financial leasing transactions in relation
to all equipment save that which is to be used primarily for the lessee's personal,
family or household purposes.

Article 2

In the case of one or more sub-leasing transactions involving the same
equipment, this Convention applies to each transaction which is a financial
leasing transaction and is otherwise subject to this Convention as if the person
from whom the first lessor (as defined in paragraph I of the previous article)
acquired the equipment were the supplier and as if the agreement under which
the equipment was so acquired were the supply agreement.

Article 3

1.- This Convention applies when the lessor and the lessee have their
places of business in different States and:

(a) those States and the State in which the supplier has its place of business
are Contracting States; or

(b) both the supply agreement and the leasing agreement are governed
by the law of a Contracting State.

2.- A reference in this Convention to a party's place of business shall,
if it has more than one place of business, mean the place of business which
has the closest relationship to the relevant agreement and its performance,
having regard to the circumstances known to or contemplated by the parties
at any time before or at the conclusion of that agreement.

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UNIDROIT CONVENTION

Article 4

1.- The provisions of this Convention shall not cease to apply merely
because the equipment has become a fixture to or incorporated in land.

2.- Any question whether or not the equipment has become a fixture
to or incorporated in land, and if so the effect on the rights inter se of the
lessor and a person having real rights in the land, shall be determined by the
law of the State where the land is situated.

Article 5

1.- The application of this Convention may be excluded only if each
of the parties to the supply agreement and each of the parties to the leasing
agreement agree to exclude it.

2.- Where the application of this Convention has not been excluded in
accordance with the previous paragraph, the parties may, in their relations
with each other, derogate from or vary the effect of any of its provisions except
as stated in Articles 8(3) and 13(3)(b) and (4).

Article 6

I.- In the interpretation of this Convention, regard is to be had to its
object and purpose as set forth in the preamble, to its international character
and to the need to promote uniformity in its application and the observance
of good faith in international trade.

2.- Questions concerning matters governed by this Convention which
are not expressly settled in it are to be settled in conformity with the general
principles on which it is based or, in the absence of such principles, in
conformity with the law applicable by virtue of the rules of private international
law.

CHAPTER II - RIGHTS AND DUTIES OF THE PARTIES

Article 7

1.- (a) The lessor's real rights in the equipment shall be valid against
the lessee's trustee in bankruptcy and creditors, including creditors who have
obtained an attachment or execution.

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IND. INT'L & COMP. L. REv.

(b) For the purposes of this paragraph "trustee in bankruptcy" includes
a liquidator, administrator or other person appointed to administer the lessee's
estate for the benefit of the general body of creditors.

2.- Where by the applicable law the lessor's real rights in the equipment
are valid against a person referred to in the previous paragraph only on
compliance with rules as to public notice, those rights shall be valid against
that person only if there has been compliance with such rules.

3.- For the purposes of the previous paragraph the applicable law is
the law of the State which, at the time when a person referred to in paragraph
1 becomes entitled to invoke the rules referred to in the previous paragraph,
is:

(a) in the case of a registered ship, the State in which it is registered
in the name of the owner (for the purposes of this sub-paragraph a bareboat
charterer is deemed not to be the owner);

(b) in the case of an aircraft which is registered pursuant to the Convention
on International Civil Aviation done at Chicago on 7 December 1944, the
State in which it is so registered;

(c) in the case of other equipment of a kind normally moved from one
State to another, including an aircraft engine, the State in which the lessee
has its principal place of business;

(d) in the case of all other equipment, the State in which the equipment
is situated.

4.- Paragraph 2 shall not affect the provisions of any other treaty under

which the lessor's real rights in the equipment are required to be recognised.

5.- This article shall not affect the priority of any creditor having:

(a) a consensual or non-consensual lien or security interest in the
equipment arising otherwise than by virtue of an attachment or execution,
or

(b) any right of arrest, detention or disposition conferred specifically
in relation to ships or aircraft under the law applicable by virtue of the rules
of private international law.

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UNIDROIT CONVENTION

Article 8

1.- (a) Except as otherwise provided by this Convention or stated in
the lea-sing agreement, the lessor shall not incur any liability to the lessee in
respect of the equipment save to the extent that the lessee has suffered loss
as the result of its reliance on the lessor's skill and judgment and of the lessor's
intervention in the selection of the supplier or the specifications of the
equipment.

(b) The lessor shall not, in its capacity of lessor, be liable to third parties
for death, personal injury or damage to property caused by the equipment.

(c) The above provisions of this paragraph shall not govern any liability
of the lessor in any other capacity, for example as owner.

2.- The lessor Nwarrants that the lessee's quiet possession will not be
disturbed by a person who has a superior title or right, or who claims a superior
title or right and acts under the authority of a court, where such title, right
or claim is not derived from an act or omission of the lessee.

3.- The parties may not derogate from or vary the effect of the provisions
of the previous paragraph in so far as the superior title, right or claim is derived
from an intentional or grossly negligent act or omission of the lessor.

4.- The provisions of paragraphs 2 and 3 shall not affect any broader
warranty of quiet possession by the lessor which is mandatory under the law
applicable by virtue of the rules of private international law.

Article 9

1.- The lessee shall take proper care of the equipment, use it in a
reasonable manner and keep it in the condition in which it was delivered,
subject to fair wear and tear and to any modification of the equipment agreed
by the parties.

2.- When the leasing agreement comes to an end the lessee, unless
exercising a right to buy the equipment or to hold the equipment on lease
for a further period, shall return the equipment to the lessor in the condition
specified in the previous paragraph.

Article 10

L.- The duties of the supplier under the supply agreement shall also be
owed to the lessee as if it were a party to that agreement and as if the equipment

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IND. INT'L & COMP. L. REv.

were to be supplied directly to the lessee. However, the supplier shall not
be liable to both the lessor and the lessee in respect of the same damage.

2.- Nothing in this article shall entitle the lesseeto terminate or rescind
the supply agreement without the consent of the lessor.

Article 11

The lessee's rights derived from the supply agreement under this
Convention shall not be affected by a variation of any term of the supply
agreement previously approved by the lessee unless it consented to that variation.

Article 12

1.- Where the equipment is not delivered or is delivered late or fails
to conform to the supply agreement:

(a) the lessee has the right as against the lessor to reject the equipment
or to terminate the leasing agreement; and

(b) the lessor has the right to remedy its failure to tender equipment
in conformity with the supply agreement,

as if the lessee had agreed to buy the equipment from the lessor under the
same terms as those of the supply agreement.

2.- A right conferred by the previous paragraph shall be exercisable
in the same manner and shall be lost in the same circumstances as if the lessee
had agreed to buy the equipment from the lessor under the same terms as
those of the supply agreement.

3.- The lessee shall be entitled to withhold rentals payable under the
leasing agreement until the lessor has remedied its failure to tender equipment
in conformity with the supply agreement or the lessee has lost the right to
reject the equipment.

4.- Where the lessee has exercised a right to terminate the leasing
agreement, the lessee shall be entitled to recover any rentals and other sums
payable in advance, less a reasonable sum for any benefit the lessee has derived
from the equipment.

5.- The lessee shall have no other claim against the lessor for non-delivery,
delay in delivery or delivery of non-conforming equipment except to the extent

[Vol. 5:2



UNIDROIT CONVENTION

to which this results from the act or omission of the lessor.

6.- Nothing in this article shall affect the lessee's rights against the supplier
under Article 10.

Article 13

I .- In the event of default by the lessee, the lessor may recover accrued
unpaid rentals, together with interest and damages.

2.- Where the lessee's default is substantial, then subject to paragraph
5 the lessor may also require accelerated payment of the value of the future
rentals, where the leasing agreement so provides, or may terminate the leasing
agreement and after such termination:

(a) recover possession of the equipment; and

(b) recover such damages as will place the lessor in the position in which
it would have been had the lessee performed the leasing agreement in accordance
with its terms.

3.- (a) The leasing agreement may provide for the manner in which the
damages recoverable under paragraph 2 (b) are to be computed.

(b) Such provision shall be enforceable between the parties unless it
would result in damages substantially in excess of those provided for under
paragraph 2 (b). The parties may not derogate from or vary the effect of the
provisions of the present sub-paragraph.

4.- Where the lessor has terminated the leasing agreement, it shall not
be entitled to enforce a term of that agreement providing for acceleration of
payment of future rentals, but the value of such rentals may be taken into
account in computing damages under paragraphs 2(b) and 3. The parties may
not derogate from or vary the effect of the provisions of the present paragraph.

5.- The lessor shall not be entitled to exercise its right of acceleration
or its right of termination under paragraph 2 unless it has by notice given
the lessee a reasonable opportunity of remedying the default so far as the same
may be remedied.

6.- The lessor shall not be entitled to recover damages to the extent that
it has failed to take all reasonable steps to mitigate its loss.

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IND. INT'L & COMP. L. REv.

Article 14

1.- The lessor may transfer or otherwise deal with all or any of its rights
in the equipment or under the leasing agreement. Such a transfer shall not
relieve the lessor of any of its duties under the leasing agreement or alter either
the nature of the leasing agreement or its legal treatment as provided in this
Convention.

2.- The lessee may transfer the right to the use of the equipment or any
other rights under the leasing agreement only with the consent of the lessor
and subject to the rights of third parties.

CHAPTER III - FINAL PROVISIONS

Article 15

I.- This Convention is open for signature at the concluding meeting
of the Diplomatic Conference for the Adoption of the Draft Unidroit
Conventions on International Factoring and International Financial Leasing
and will remain open for signature by all States at Ottawa until 31 December
1990.

2.- This Convention is subject to ratification, acceptance or approval
by States which have signed it.

3.- This Convention is open for accession by all States which are not
signatory States as from the date it is open for signature.

4.- Ratification, acceptance, approval or accession is effected by the
deposit of a formal instrument to that effect with the depository.

Article 16

1.- This Convention enters into force on the first day of the month
following the expiration of six months after the date of deposit of the third
instrument of ratification, acceptance, approval or accession.

2.- For each State that ratifies, accepts, approves, or accedes to this
Convention after the deposit of the third instrument of ratification, acceptance,
approval or accession, this Convention enters into force in respect of that State
on the first day of the month following the expiration of six months after
the date of the deposit of its instrument of ratification, acceptance, approval
or accession.

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UNIDROIT CONVENTION

Article 17

This Convention does not prevail over any treaty which has already
been or may be entered into; in particular it shall not affect any liability imposed
on any person by existing or future treaties.

Article 18

I.- If a Contracting State has two or more territorial units in which
different systems of law are applicable in relation to the matters dealt with
in this Convention, it may, at the time of signature, ratification, acceptance,
approval or accession, declare that this Convention is to extend to all its
territorial units or only to one or more of them, and may substitute its
declaration by another declaration at any time.

2.- These declarations are to be notified to the depository and are to
state expressly the territorial units to which this Convention extends.

3.- If, by virtue of a declaration under this article, this Convention extends
to one or more but not all of the territorial units of a Contracting State, and
if the place of business of a party is located in that State, this place of business,
for the purposes of this Convention, is considered not to be in a Contracting
State, unless it is in a territorial unit to which the Convention extends.

4.- If a Contracting State makes no declaration under paragraph 1, the
Convention is to extend to all territorial units of that State.

Article 19

1.- Two or more Contracting States which have the same or closely related
legal rules on matters governed by this Convention may at any time declare
that the Convention is not to apply where the supplier, the lessor and the lessee
have their places of business in those States. Such declarations may be made
jointly or by reciprocal unilateral decisions.

2.- A Contracting State which has the same or closely related legal rules
on matters governed by this Convention as one or more non-Contracting States
may at any time declare that the Convention is not to apply where the supplier,
the lessor and the lessee have their places of business in those States.

3.- If a State which is the object of a declaration under the previous
paragraph subsequently becomes a Contracting State, the declaration made
will, as from the date on which the Convention enters into force in respect
of the new Contracting State, have the effect of a declaration made under

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IND. INT'L & CoMP. L. REv.

paragraph 1, provided that the new Contracting State joins in such declaration
or makes a reciprocal unilateral declaration.

Article 20

A Contracting State may declare at the time of signature, ratification,
acceptance, approval or accession that it will substitute its domestic law for
Article 8(3)if its domestic law does not permit the lessorto exclude its liability
for its default or negligence.

Article 21

1.- Declarations made under this Convention at the time of signature
are subject to confirmation upon ratification, acceptance or approval.

2.- Declarations and confirmations of declarations are to be in writing
and to be formally notified to the depository.

3.- A declaration takes effect simultaneously with the entry into force
of this Convention in respect of the State concerned. However, a declaration
of which the depositary receives formal notification after such entry into force
takes effect on the first day of the month following the expiration of six months
after the date of its receipt by the depositary. Reciprocal unilateral declarations
under Article 19 take effect on the first day of the month following the
expiration of six months after the receipt of the latest declaration by the
depositary.

4.- Any State which makes a declaration under this Convention may
withdraw it at any time by a formal notification in writing addressed to the
depositary. Such withdrawal is to take effect on the first day of the month
following the expiration of six months after the date of the receipt of the
notification by the depositary.

5.- A withdrawal of a declaration made under Article 19 renders
inoperative in relation to the withdrawing State, as from the date on which
the withdrawal takes effect, any joint or reciprocal unilateral declaration made
by another State under that article.

Article 22

No reservations are permitted except those expressly authorised in this
Convention.

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UNIDROIT CONVENTION

Article 23

This Convention applies to a financial leasing transaction when the leasing
agreement and the supply agreement are both concluded on or after the date
on which the Convention enters into force in respect of the Contracting States
referred to in Article 3 (1)(a), or of the Contracting State or States referred
to in paragraph I (b) of that article.

Article 24

1.- This Convention may be denounced by any Contracting State at any
time after the date on which it enters into force for that State.

2.- Denunciation is effected by the deposit of an instrument to that effect
with the depositary.

3.- A denunciation takes effect on the first day of the month following
the expiration of six months after the deposit of the instrument of denunciation
with the depositary. Where a longer period for the denunciation to take effect
is specified in the instrument of denunciation it takes effect upon the expiration
of such longer period after its deposit with the depositary.

Article 25

1.- This Convention shall be deposited with the Government of Canada.

2.- The Government of Canada shall:

(a) inform all States which have signed or acceded to this Convention
and the President of the International Institute for the Unification of Private
Law (Unidroit) of:

(i) each new signature or deposit of an instrument of
ratification, acceptance, approval or accession, together with
the date thereof,

(ii) each declaration made under Articles 18, 19 and 20;

(iii) the withdrawal of any declaration made under Article
21 (4);

(iv) the date of entry into force of this Convention;

(v) the deposit of an instrument of denunciation of this

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Convention together with the date of its deposit and the date
on which it takes effect;

(b) transmit certified true copies of this Convention to all signatory States,
to all States acceding to the Convention and to the President of the International
Institute for the Unification of Private Law (Unidroit).

IN WITNESS WHEREOF the undersigned plenipotentiaries being duly
authorised by their respective Governments, have signed this Convention.

DONE at Ottawa, this twenty-eighth day of May, one thousand nine hundred
and eighty-eight, in a single original, of which the English and French texts
are equally authentic.