Factoring framework agreement: legal analysis of obligations and guarantees

The factoring agreement forms the contractual basis of the relationship between the company and the factor. This framework contract sets out the rights, obligations and guarantees of the parties. Its legal analysis reveals a sometimes delicate balance between the protection of the factor and the interests of the member company. Let's take a look at its key features.

Legal features of the factoring agreement

Legal nature of the contract

The factoring agreement is an innominate, synallagmatic and successively executed contract. It is based on a strong intuitus personae, a determining factor in the relationship between the parties. This commercial contract is subject to the rule of free proof under article L. 110-3 of the French Commercial Code.

Its precise legal classification remains complex. Case law clearly distinguishes it from related contracts:

• It differs from discounting in that the factor generally has no recourse against the member if the debtor defaults.
• It differs from a mandate in that the factor becomes the owner of the receivables.
• It is not the same as credit insurance because the factor often pays 100% of the receivable and immediately

The Court of Cassation described this contract as sui generis, combining elements of credit, commercial management and payment guarantees.

Training and length of contract

The contract is concluded by signing a framework contract accompanied by an explanatory leaflet on the practical operation of the scheme. These documents form an indivisible contractual whole.

The agreement may be for a fixed or indefinite period. In the latter case, either party may terminate the agreement by giving notice. Article L. 313-12 of the French Monetary and Financial Code requires the factor to give at least 60 days' notice (article D. 313-14-1).

To understand how factoring works and the fundamental legal issues involved, our summary article on factoring provides an overview of this mechanism.

Contract formulas

In practice, several contractual variants have been developed:

1. Traditional factoring (full factoring): complete package including financing, accounts receivable management and performance guarantee
2. Due date factoring (maturity factoring): without advance financing, but with management and guarantee
3. Unsecured factoring (factoring with recourse): financing and management, but no guarantee against insolvency
4. Confidential factoring (undisclosed factoring): without notifying debtors, the member collects the receivables itself

These variants have a direct influence on the distribution of risks and the cover required. The choice of formula is an essential part of the negotiation process, which our firm supports carefully in order to secure your factoring operations.

Obligations of the parties to the contract

Obligations of the member

The member undertakes principally to :

1. Assign all receivables (globality clause). This exclusivity allows the factor to offset risks, but remains relative - the factor retains the right to select receivables.
2. Provide comprehensive information on your customers. This obligation of transparency is a prerequisite for the factor's proper risk management.
3. Notifying debtors of the transfer. Each invoice must state that only payment to the factor will discharge the debt.
4. Guaranteeing the existence of assigned receivables. Members may only transfer rights that they actually own.
5. Remunerating the factor in accordance with the agreed conditions and put in place the required guarantees.

Case law severely punishes breaches of these obligations, particularly the assignment of fictitious or disputed receivables. The factor then has recourse against its member.

Factor's obligations

The factor has a number of key obligations:

1. Paying approved claims as agreed (immediately or at maturity)
2. Guaranteeing the completion of receivables 100% for approved receivables
3. Manage customer accounts and ensure debt recovery
4. Providing complementary services commercial management and debtor information

The main distinguishing feature of factoring is that there is no recourse against the member in the event of default by the debtor (for approved receivables). On the other hand, the factor has the power to select receivables, which is its first line of defence against risk.

The legal mechanisms for the effective transfer of receivables from the member to the factor are explained in detail in our article on the legal mechanisms of factoring.

Guarantees and financial conditions

Remuneration of the factor

Remuneration generally comprises two elements:

1. Factoring commission (0.5% to 2.5% of the invoice amount) which remunerates management services and the guarantee
2. Interest charged for early payment of invoices, generally 2 points above the bank base rate

This remuneration is not subject to the usury rate restrictions because it concerns credit between professionals, unless the credit takes the form of an overdraft (C. cons., art. L. 313-1 and C. mon. fin., art. L. 313-5-1).

Current account and compensatory mechanism

A current account is opened between the parties to record their mutual remittances. This mechanism offers several advantages:

• Simplification of regulations
• Merger of reciprocal receivables into a single balance
• Novatory effect (entry in account is equivalent to payment)

This account in itself constitutes an initial guarantee for the factor thanks to the general allocation of receivables and the compensatory mechanism. The Court of Cassation has consistently ruled in favour of this system.

Collateral and additional guarantees

Factors generally require a number of additional guarantees:

1. Retention period A percentage (10-20%) of the transferred receivables blocked in a separate account, constituting a form of cash collateral. This reserve remains the property of the member but is unavailable.
2. Standard guarantees These include mortgages, pledges or personal guarantees by company directors, which are frequently required.
3. Conditional recourse clauses The factor can take action against the member in certain cases (non-existence of the debt, fraud).

These guarantees are analysed in detail by the courts, particularly in the event of insolvency proceedings. Their effectiveness can be called into question, as explained in our article on factoring and insolvency proceedings.

The accounting and tax treatment of these guarantees also deserves attention. The Conseil d'Etat has ruled that factoring transactions are exempt from VAT, but the option of tax liability remains available.

Limits and possible remedies

The factoring agreement may entail risks for the member, particularly as regards the enforceability of exceptions by assigned debtors. These risks are analysed in detail in our study on the enforceability of factoring exceptions.

The main difficulties arise when :

• The debtor refuses to pay, invoking exceptions relating to the commercial contract
• The factor has recourse against the member for a disputed claim
• Collective proceedings affect one of the parties

The courts have developed a nuanced body of case law on these issues, balancing the protection of the factoring mechanism with the legitimate rights of the parties.

Conclusion

The factoring framework agreement requires in-depth legal analysis. Its clauses determine the economic and legal balance of the transaction. Careful negotiation and precise drafting are essential to the security of the parties. For a personalised analysis of your factoring agreement and to optimise your guarantees, our firm offers you tailor-made support.

Sources

• Monetary and Financial Code, articles L. 313-12 to L. 313-14
• French Commercial Code, article L. 110-3
• Consumer Code, article L. 313-1
• Decree no. 2005-1743 of 30 December 2005 (notice period)
• Cour de cassation, commercial chamber, leading cases on current accounts