UNIDROIT Model Law onFactoring

Model Law on Factoring

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UNIDROIT Launches Model Law on Factoring at FCI's 55th Annual Meeting

At the FCI 55th Annual Meeting in Marrakech, the International Institute for the Unification of Private Law (UNIDROIT) unveiled the Model Law on Factoring, marking a significant advancement in receivables finance. This new law builds on UNIDROIT’s earlier work, including the UNIDROIT Convention on International Factoring. It aims to address legal and institutional gaps in countries lacking a robust framework for secured factoring transactions.

The Model Law on Factoring is designed to assist states in introducing or updating their factoring legislation. Initiated in 2018 by World Bank representatives who recognised the need for a dedicated model law, particularly in emerging markets, the project received strong backing from FCI. This initiative traces its roots to FCI's foundational efforts, which partly inspired the development of the Ottawa Convention on International Factoring in 1988, followed by the UNCITRAL Receivables Convention in 2001, and the UNCITRAL Model Law on Secured Transactions in 2016.

The absence of a specific Model Law on Factoring was identified as a significant barrier to the growth of the factoring industry, particularly in developing countries. By providing legal clarity across a wide range of factoring transactions, the new law is expected to boost investor confidence and facilitate easier access to credit, which will greatly benefit SMEs. The official launch of the Model Law in Marrakech on 30 October was led by UNIDROIT’s Secretary General, Mr. Ignacio Tirado, alongside Mr. William Brydie-Watson.

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UNIDROIT Launches Model Law on Factoring at FCI's 55th Annual Meeting

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The UNIDROIT Model Law on Factoring is available in two official languages: English and French. Several unofficial translations of the instrument are also being developed.

Download the UNIDROIT Model law on Factoring

The UNIDROIT Model Law on Factoring (MLF) was adopted by the UNIDROIT Governing Council at its 102nd session (Rome, 10-12 May 2023).

The MLF provides a complete, self-standing legal regime that facilitates factoring transactions. The instrument comprises of a set of black-letter law rules that is primarily aimed at States that have not yet fully implemented a modern, comprehensive secured transactions legal framework. For States that have undertaken prior secured transactions reforms, the MLF provides rules that could further strengthen their legal framework and encourage factoring, the assignment of receivables, and trade finance.

The UNIDROIT Model Law on Factoring is available in two official languages: English and French. Several unofficial translations of the instrument are also being developed.

The purpose of the Model Law is to provide an instrument for States that want to introduce a new factoring law or update existing laws. The MLF was first initiated in 2018 by certain World Bank representatives, who recognized the importance of a standalone Model Law on Factoring, especially for those emerging markets considering factoring in their countries.

FCI sent a letter in 2018 to the UNIDROIT Secretary General, Mr. Ignacio Tirado, to offer FCI’s full support and backing. The genesis of this model law can be traced back to the establishment of FCI. The very first attempt at developing a global legal framework on cross-border factoring was initiated in 1964 with the founding of Factors Chain, which named the first cross-border interfactor agreement after our founding member, Shield Factors, UK (hence the Shield Agreement was introduced, and Freddy Salinger, a significant architect in the earlier projects at the UNIDROIT and UNCITRAL was employed there). Shield Factors (later to be acquired by HSBC), together with five others in Northern Europe and the US, would create FCI in 1968, and the association would develop the Code of International Factoring a few years later.
Since adopting the FCI Code, international private law organisations have begun to adopt various uniform instruments in receivable financing. The Code partly inspired the UNIDROIT to develop the Ottawa Convention on International Factoring in 1988. The UNCITRAL Receivables Convention was released in 2001, followed by the UNCITRAL Legislative Guide on Secured Transactions (2007) supplemented in 2010 by the Guide on Security Rights in Intellectual Property. A Guide on the Implementation of a Security Rights Registry followed in 2013. And in 2016, the UNCITRAL Model Law on Secured Transactions was created to provide a functional, integrated, and comprehensive approach to all types of transactions that fulfil security purposes of all kinds of tangible and intangible movable property. However, there was a recognition that lacking an MLF would hinder the factoring growth, especially in developing countries.
The FML is envisioned to provide legal clarity to a comprehensive spectrum of factoring transactions, which would boost investor’s confidence and thus promote easier and greater access to credit, significantly benefiting SMEs.

Those efforts show the importance of unification of international law for the enhancement of credit in order to make financing of international trade easier and more accessible.

Based on the ideas developed by international experts and expressed in the documents mentioned above, IFG’s Legal Committee had developed a Model Law for Factoring in 2015, reducing the scope to only cover factoring transactions. While a wider scope extending to secured transactions may generally be preferable, but will require longer periods of intense discussions in the legislative bodies, the Model Law strives to be shorter, less complex and easier to handle.

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