Factoring exposes the factor to a major legal risk: the enforceability of defences. This mechanism allows the assigned debtor to raise defences against the factor that could have been raised against the original creditor. This legal reality complicates collection and can compromise the effectiveness of the financing.
The principle and limits of the enforceability of exceptions
Legal basis for enforceability
The principle nemo plus juris ad alium transferre potest quam ipse habet (no person may transfer more rights than he possesses) is the basis for the enforceability of defences. The factor, whether subrogated or assignee, acquires the claim with its qualities but also its defects.
This principle derives directly from the texts governing the mechanisms for transferring receivables:
- For subrogation: articles 1346 et seq. of the Civil Code
- For Dailly sales: Articles L. 313-23 et seq. of the French Monetary and Financial Code (Code monétaire et financier)
Case law constantly confirms this principle. In a ruling dated 9 May 1977, the Court of Cassation clearly established that the factor remains exposed to the defences that the debtor could invoke against his original creditor.
Categories of enforceable exceptions
Exceptions fall into two main categories according to their relationship to the claim:
- Exceptions inherent in the claim They relate to the existence, validity or scope of the claim. They remain enforceable regardless of when they come to light.
Examples:
- Invalidity of a commercial contract
- Hidden defect in the goods
- Total or partial non-performance of the seller's obligations
- Legal compensation prior to transfer
- Exceptions outside the claim The time at which they are enforceable depends on when they occur.
Examples:
- Set-off for related receivables
- Payment made to the original creditor
- Discounts granted after disposal
To fully understand the underlying transfer mechanisms, consult our detailed analysis of the legal mechanisms of factoring.
Time limits on enforceability
Enforceability is assessed from the precise moment of transfer. This moment corresponds to :
- Delivery of the subrogated receipt for subrogation
- The date shown on the slip for the Dailly transfer
Only defences arising prior to this frontier date are normally enforceable, except in special cases such as related claims.
Notification to the debtor also changes the situation. In the case of a Dailly assignment, once the debtor has been notified, only defences relating to related claims remain enforceable.
Frequently encountered exceptions
The defence of non-performance
The defence of non-performance is the most common. The debtor refuses to pay on the grounds that the supplier has failed to perform:
- Non-conformity of goods
- Partial or late delivery
- Hidden defects
- Non-compliance with contractual specifications
Case law widely accepts that this exception is enforceable against the factor. A ruling by the Court of Cassation on 19 November 2003 confirms that a lack of conformity is still enforceable against the subrogated factor.
This is a specific issue in the international context, as explained in our article on international factoring.
Compensation
Set-off is a major exception. It extinguishes reciprocal debts up to the amount of the smaller debt.
There are three possible scenarios:
- Legal compensation prior to transfer Always enforceable because the claim has already been extinguished
- Legal compensation after the transfer In principle not enforceable
- Set-off for related debts Enforceable even after transfer
The Cour de cassation (French Supreme Court) has consistently ruled on related-party claims. In a ruling of 7 May 1987, it accepted that a set-off for related claims remains enforceable notwithstanding any subrogation.
Payment to the original creditor
Payment made to the original creditor (member) after notification of the transfer does not discharge the debt. The debtor will have to pay a second time.
Case law remains strict on this point. A Court of Cassation ruling of 15 October 1996 confirms that payment to the member after notification does not release the debtor, who must pay the factor.
Notification therefore plays a fundamental role, as underlined by our analysis of factoring agreements.
Exceptions linked to collective proceedings
Insolvency proceedings generate additional complications:
- Suspension of individual proceedings
- Ban on payments
- Specific rules for declaring claims
These mandatory rules apply to the factor as they do to other creditors. Our article on factoring and insolvency proceedings explores these issues in greater detail.
Legal protection strategies
Contractual protection for members
The factor can protect himself by contractual stipulations allowing him to take action against the member:
- Right of recourse for non-existent or disputed claims
- Retention period
- Current account reversal
- Directors' personal guarantees
These clauses compensate for the risk of opposability of exceptions without eliminating it. They shift the risk to the policyholder.
The retention guarantee plays a decisive role. In a ruling dated 10 October 2000, the Court of Cassation stated that the existence of such a guarantee does not release the debtor from his fundamental obligation to pay his debt.
Protection against debtors
A number of techniques can be used to reduce the risk of defences by debtors:
- Use of accepted bills of exchange If the drawdown and acceptance take place before subrogation, the factor acquires the status of a bona fide third party bearer. This status protects him against the assertion of defences.
- Acceptance of the Dailly assignment The act of acceptance provided for in article L. 313-29 of the French Monetary and Financial Code has a radical effect: the debtor waives the right to raise objections.
- Acknowledgement of debt Obtaining an IOU from the debtor may neutralise certain exceptions.
Our firm regularly assists companies with the implementation of these measures. legal protection solutions for factoring.
Preventive audits and risk monitoring
Prevention is the best protection. The factor can :
- Analyse the quality of receivables before approval
- Check the financial soundness of debtors
- Monitor the effective performance of commercial contracts
- Set up alert procedures in the event of a dispute
These preventive measures considerably reduce the risk of enforceable exceptions.
For an overview of factoring and its legal implications, our complete guide to factoring provides a clear summary of the main issues.
Use of commercial mediation
Mediation is often used to unblock unpaid bills linked to exceptions:
- Intervention by a neutral third party
- Seeking a negotiated solution
- Preserving commercial relations
- Avoidance of legal costs
This approach effectively resolves disputes relating to the performance of the underlying commercial contracts.
Conclusion
The enforceability of exceptions is a risk inherent in factoring. It can compromise the effectiveness of the mechanism and generate complex disputes. Effective protection combines preventive measures, contractual safeguards and specific legal tools. To secure your factoring operations and prevent the risks associated with the enforceability of exceptions, our firm offers personalised legal support.
Sources
- Civil Code, articles 1346 to 1348-2
- Monetary and Financial Code, articles L. 313-23 to L. 313-35
- Cour de cassation, commercial chamber, 19 November 2003 (lack of conformity)
- Court of Cassation, Commercial Division, 10 October 2000 (retention of guarantee)
- Court of Cassation, Social Division, 7 May 1987 (compensation)
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