Author Name:   Poorva_Kachhwaha

As one of the important instruments of international financing, international financial leasing has been played an irreplaceable role nowadays.

Financial Leasing

International financial leasing has emerged as an important means of economic development in the global marketplace especially where capital intensive acquisitions such as aircraft, ships or machinery are involved. Of course, as an instrument of finance, international financial leasing has its potential advantages which distinguish it from other financing methods. It has broken through traditional legal relationships from many aspects and has made effective combination of various legal relationships, for example, lease, sale and assurance, etc. It is obvious that these unique features of international financial leasing have met the needs of the development of financial industry. During recent years, international financial leasing has become an important means of financing in international market. So having recognized 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, the International Institute for the Unification of Private Law (the UNIDROIT) discussed and introduced the UNIDROIT Convention on International Financial Leasing in 1988 Ottawa which governs certain types of financial leasing arrangements. This convention is still not so popular in fact but it does have some reference value in practice.

Financial leasing represents a “distinctive triangular relationship” requiring three discrete parties: (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. 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.

International Financial Leasing means at least there are one or more international elements in a transaction. Basically, in a finance lease transaction, if the supplier, lessor and lessee are all have their places of businesses in different countries; or regardless of the place of business of the supplier, the lessee and the lessor have their places of business in different countries, the contract of the financial leasing can be thought as an international financial leasing contract.

International financial leasing has its typical characteristics which distinguish it from both domestic finance leasing and the traditional operating leasing:-

· Firstly, the most obvious feature is the international element of the parties. As analyzed above, only the lessor and the lessee have their places of businesses in different countries can a financial leasing is international.

· Secondly, the subjects are usually large equipments or heavy machineries and so on. Equipments that used for Non commercial purposes or equipments for family use do not often prefer this type of transaction.

· Thirdly, since international financial leasing is a combination of two agreements, parties involved (especially the lessor) always ask all the documents in the transaction be signed in a package deal in order to exclude the possibility of dealing with different agreements separately. The purpose of this is to ensure the efficiency and security of the transaction. That is to say, international financial leasing is a comprehensive transaction which combines both the sale of goods, leasing and financing. Contracts of an international financial leasing must be of certain linkage between themselves and the transaction.

· Lastly, the period of international financial leasing is always longer than domestic financial leasing and so on.

Recently, international financial leasing has developed at a high speed all around the world. Using international financial leasing to expand production is an ideal means of financing. This is a good way to enhance production capacity and at the same time ensure companies use the up-to-date equipments without facing the risk of purchasing. Meanwhile, it could be of great help for reducing operating costs of companies and improving economic performance especially for those companies that need equipments with a shorter useful life than their life span, for example, engineering and construction machineries, etc. Consequently, considered as a whole, there are least two reasons for the financers and equipment users to choose international financial leasing as a method of financing in addition to these benefits mentioned above. On one hand, compared with traditional methods of financing, international financial leasing is more flexible for the lessor to establish and protect the ownership rights. On the other hand, international financial leasing can be a good way to exchange controls or import or export restrictions on equipment can be circumvented. Both these benefits have been promoting the development of international financial leasing in a wider scale than ever before.

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.

The Leasing Convention is limited to international financial leasing transactions. The definition of a financial leasing transaction gave rise to much difficulty and debate. There is a well established business distinction between financial lease and operating leases. The former are viewed in business terms as a means of financing the acquisition of equipment by a single lessee, and it is the latter who is economically the owner. The equipment and the supplier are selected by the lessee and are purchased by the lessor at the lessee’s request. The rent is designed to amortize the capital cost of the equipment and give the lessor its desired return on capital, taking tax benefits into account and squarely on the lessee.

The Convention governs a transaction which includes the following characteristics:
a) The lessor buys the equipment from the supplier to be let on lease to the lessee. This excludes transactions in which the manufacturer itself acts as lessor.

b) The lessee specifies the equipment and selects the supplier without relying primarily on the skill and judgment of the lessor.

c) 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.

d) The rentals payable under the leasing agreement are calculated so as to take into account, in particular, the amortization of the whole or a substantial part of the cost of the equipment.

Under Financial Leasing

The substantive rights and obligations of the parties are set out in Chapter II of the Convention. It should be remembered here that the Convention’s purpose is not to lay down an exhaustive set of detailed rules, but rather to establish a framework, leaving most of the detailed matters to be dealt with in accordance with the parties’ contracts and the applicable law.


In international financial leasing, the lessor always has these following rights.

a) The lessor has the right of having the legal title of the leased property. Since the lessor purchases the leased property from the supplier, he has gain the full title of the property. Then the property is leased to the lessee with the right of using or occupying it but not the legal title and the lessee has no right to disposing the property.

b) The lessor has the right to collect the rental from the lessee.

c) Article 7(1) (a) of the Convention provides that 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.

Along with the rights the lessor also has some obligations under the Convention. Article 8(2) of the Convention expressly provides that the lessor warrants 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, unless the disturbance arises from the lessee’s act or omission. The Convention allows the parties to derogate from or vary the effect of the obligation, perhaps having considered the possibility that the lessee might insist on his choice of the supplier and/or the asset despite the lessor’s suspicion of the title to the asset. According to Article 8(3), if the parties want to, they can agree that the lessor is excluded from this obligation, as long as the title paramount is not derived from an intentional or grossly negligent act or omission of the lessor. Article 8(4) does not permit exclusion of any broader mandatory obligation of the lessor in relation to quiet possession under the law applicable by virtue of the rules of private international law.

The lessee has the right of quiet possession of the leased asset in accordance with Article 8 of the UNIDROIT Convention and also has the following obligations:

a) The Lessee’s Obligation To Pay The Rentals
In the international sphere, the 1988 UNIDROIT Convention provides the lessee’s obligation to pay the total rentals to the lessor. By making this obligation independent of the underlying contract, the UNIDROIT approach ensures that there would not be disputes as to the lessor’s right to recover the total rentals and therefore provides good protection to the lessor’s interests as a financier.

Article 12(1) of the Convention provides that, where the asset is not delivered or is delivered late or fails to conform to the supply agreement, the lessee has the right as against the lessor to reject the equipment or to terminate the leasing agreement.

According to Article 12(3) of the Convention, the lessee has a right to withhold rentals payable under the lease agreement until the lessor has remedied his failure to tender the asset in conformity with the supply agreement or the lessee has lost the right to reject the asset.

However, the Convention does not clearly state that the obligation of the lessee’s payment is irrevocable and independent, although it is implicit in Article 12(3), which requires that, once the lessee has lost the right to reject the asset, he cannot withhold rentals payable under the lease agreement.

b) The Lessee’s Obligation To Maintain And To Return The Asset

It is commonly agreed in a finance lease agreement that the lessee should use the asset for the agreed purpose with care and return it at his cost by the end of the lease or at the termination of it. Being a beneficial owner of the asset, the lessee rarely disputes with the lessor about his obligation to take proper care of the asset at his cost and often he obtains services of maintenance and repair from the supplier directly and separately. It is also indisputable that the lessee should return the asset to the lessor at the end of the lease period or at his default. The lessor usually excludes obligations as to maintenance and repair.

The Convention in Article 9 requires the lessee to take proper care of the asset, 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 asset agreed by the parties, and to return the asset to the lessor at the end of the lease unless otherwise agreed.

The Leasing Convention has four key objectives: a) To Remove Responsibility From The Lessor To The Supplier

The underlying conception is that since it is the lessee, who selects the supplier and the equipment, and the lessor’s role is essentially financial, responsibility for non-delivery, late delivery or delivery of non-conforming equipment should rest primarily on the supplier, not on the lessor. To that end Article 10 provides that 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 were to be supplied directly to the lessee, whilst Article 12(5) largely excludes claims by the lessee against the lessor except to the extent to which the failure in performance results from the act or omission of the lessor. This is reinforced by Article 8, which provides that except as otherwise provided by the Convention or stated in the leasing 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.

However, for the protection of supplier and lessee certain qualifications are made to the general principle shifting liability from the lessor to the supplier:

· First, the supplier cannot be made liable both to the lessee and to the lessor in respect of the same damage.

· Secondly, the lessor will incur liability for loss resulting from a combination of reliance on the lessor’s skill and judgment and the lessor’s intervention in the selection of the supplier or the specification of the equipment.

· Thirdly, the lessee cannot be compelled to pay for equipment which he does not have. Accordingly, if the equipment is not delivered or if the lessee exercises a right of rejection and the lessor fails to sure the non-conforming tender, the lessee may, on terminating the leasing agreement, recover rentals and other sums paid in advance. Prior to such termination the lessee may withhold payment of rentals so long as he has not lost the right to reject. The lessee’s right to reject equipment and terminate the leasing agreement and the lessor’s right to cure a failure in performance are now expressed to be exercisable on the same conditions and in the same manner as if the lessee had agreed to buy the equipment from the lessor under the terms of the supply agreement.

b) To Restrict The Lessor’s Liability To Third Parties
For similar reasons the Convention seeks to restrict the lessor’s liability to third parties by providing that 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. This is an important provision designed to ensure that the spread of products liability does not catch a financial lessor. But the lessor’s liability in any other capacity e.g. as owner, remains unaffected. So where legislation or a Convention imposes liability on owners as such, e.g. for ground damages by aircraft or for oil pollution by ships, the Leasing Convention confers no immunity. This point is reinforced by article 15, which provides that the Convention not to prevail over any treaty which has already been or may be entered into.

c) To Safeguard The Lessor’s Title On The Lessee’s Insolvency
Another important benefit to the lessor under an international financial lease is conferred by Article 7(1), under which the lessor’s real rights in the equipment are to be valid against the lessee’s trustee in bankruptcy and creditors, including creditors who have obtained an attachment or execution.

d) To Ensure The Effectiveness Of Provisions For Liquidated Damages
One of the major problems confronting a financial lessor in common law jurisdictions is to make a provision for liquidated damages on default by the lessee which will withstand attack under the rule against penalties. Article 13, which contains a useful catalogue of remedies for the lessor, enjoins the court to uphold such provisions unless they would result in damages substantially in excess of the amount that would place the lessor in the position in which it would have been had the lessee performed the leasing agreement in accordance with its terms.

Conclusion
As one of the important instruments of international financing, international financial leasing has been played an irreplaceable role nowadays. With the competition intensify and the increasing trend of globalization in trade, no doubt it will be used in more business activities. International financial leasing contracts always involve very large sum and multiple parties between two or more legal jurisdictions.

There are many problems which need further exploration. At the present time, due to the different financing situation of every country, even though the UNIDROIT Convention can be used as a reference, there has been no consensus on the parties‟ rights and obligations in an international financial leasing contract.

There are still many articles in the Convention remain controversial. For example, does the lessee has the right to refuse to accept the leased asset when the supplier makes a late delivery or delivers the asset which is not comply with the supply contract. The UNIDROIT Convention gives out a positive attitude of this question but the truth is a lot of countries have the opposite view. Moreover, the provisions in the Convention cannot reach every detail of an international financial leasing contract, all of them and disputes require every state’s own provisions of substantive law.

Generally speaking, international financial leasing has a potential to be of popular among international businesses but it still needs to develop and be more mature. The UNIDROIT Convention on International Financial Leasing represents an important legal development for parties considering trans-border 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.

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