International factoring: legal framework and practical aspects

International factoring meets the growing needs of exporting companies. It secures their cross-border transactions while optimising their cash flow. Its legal framework is more complex than that of domestic factoring, and requires in-depth analysis to master its subtleties and risks.

Legal framework for international factoring

The 1988 Ottawa Convention

The Ottawa Convention of 28 May 1988 is the founding text of uniform international factoring law. It came into force in France on 1 May 1995 and defines its scope of application in terms of two criteria:

1. Material criteria Article 1 defines a factoring contract as one in which the supplier assigns receivables arising from contracts for the sale of goods or the provision of services, and in which the assignee assumes responsibility for at least two of the following functions:
   • Supplier financing
   • Bookkeeping
   • Collection of receivables
   • Protection against debtor default
2. Internationality criterion The Convention applies only to transactions where the supplier and the debtor have their places of business in different States, provided that these States are contracting States or that the contract is governed by the law of a contracting State.

Article 3 of the agreement stipulates that it is not binding. The parties may therefore set it aside or amend it by agreement.

For an overall understanding of this mechanism, our guide to factoring presents the fundamental principles of this financing technique.

The UNCITRAL Convention on the Assignment of Receivables

The UNCITRAL (United Nations Commission on International Trade Law) Convention on the assignment of international receivables, adopted on 12 December 2001, completes the legal framework. It aims to harmonise international law on the assignment of receivables and applies to factoring.

Its main innovations concern :

• The validity of bulk assignments of future receivables
• Automatic transfer of security interests
• The validity of non-transferability clauses

These uniform substantive rules reduce the legal uncertainty inherent in cross-border transactions. They thus facilitate the development of international factoring.

European law and national legislation

European law has not specifically harmonised factoring. Each country applies its own national rules. This diversity creates legal difficulties when the transaction involves several countries.

The main differences concern :

• Debt transfer mechanisms
• Formalities for notifying third parties
• The extent of the transfer of accessories
• The treatment of non-transferability clauses

These disparities require particular attention when drafting international contracts, as explained in our article on factoring framework agreements.

Mechanisms specific to international factoring

The interfactor chain system

International factoring is generally based on collaboration between two factors:

• The export factor, located in the supplier's country
• The import factor, established in the debtor's country

This bipartite organisation, known as the "interfactor chain", ensures an efficient distribution of roles:

1. The export factor contracts with the seller and provides the financing
2. The import factor assesses the creditworthiness of local buyers and manages debt collection.

This structure offers a number of advantages:

• Knowledge of the local market and debtors
• Mastery of the legislation of the importing country
• Reduced collection costs
• Optimising risk management

The main interfactor chains are grouped together in international networks such as Factors Chain International (FCI).

Specific contractual formulas

International factoring offers several options tailored to the needs of exporters:

1. Two-factors system Export factor: Involves an export factor and an import factor, each assuming the risks for their own market.
2. Direct export factoring The factor in the exporting country manages the entire operation without a local intermediary.
3. Import factoring The factor in the importing country carries out the operation alone.
4. International confidential factoring The buyer is not informed of the assignment, which is useful for preserving certain sensitive commercial relationships.

These formulas have different legal implications, particularly in terms of the enforceability of exceptions, as detailed in our article on the enforceability of exceptions in factoring.

Operational and financial issues

International factoring poses specific practical challenges:

1. Higher cost The two-factor structure and the additional risks increase commissions (generally between 0.5% and 3% of the amount of receivables).
2. Processing times : Communication between factors can lengthen financing times.
3. Complex documentation Contracts involve more parties and must take account of several legal systems.
4. Currency management Currency risk is an additional variable to consider.

Our firm regularly assists companies in setting up tailored international factoring solutions to their specific needs.

Specific legal issues

Applicable law and jurisdiction

Determining the applicable law and the competent court is of crucial importance. In the absence of an applicable international convention, the rules of private international law apply.

There are several solutions:

• Express choice of applicable law in the contract
• Application of conflict of laws rules (Rome I Regulation in Europe)
• Recourse to international arbitration

The multiplicity of contracts (sale, transport, factoring) complicates the issue. Each contractual relationship may be subject to a different law.

Transfer of securities and guarantees

The transfer of security interests attached to assigned receivables is a major issue. The UNCITRAL Convention provides for the automatic transfer of security interests, unlike the Ottawa Convention, which requires an express stipulation.

This issue remains largely dependent on national law and can raise significant practical difficulties. A prior analysis of the applicable legal mechanisms is necessary, as explained in our article on the legal mechanisms of factoring.

Enforceability of exceptions in an international context

The enforceability of defences takes on a particular dimension in international factoring. Article 9 of the Ottawa Convention allows the debtor to invoke :

• All defences arising from the contract of sale
• Any right to compensation existing prior to notification of the transfer

This rule differs from national solutions and can lead to legal surprises. Debtors generally retain more rights than in a purely domestic context.

International commercial disputes add a further layer of complexity, with issues of cross-border notification and proof under different national laws.

Impact of international insolvency proceedings

The bankruptcy of one party considerably complicates the legal situation. Insolvency rules vary greatly from one country to another concerning :

• The validity of transfers of claims during the suspect period
• The rights of foreign creditors
• Recognition of foreign judicial decisions
• Payment priorities

These questions fall under the insolvency law in an international contextThis is a particularly complex area requiring specific expertise.

Potential conflicts with other legal mechanisms

International factoring may conflict with :

• Documentary credits
• Export credit insurance
• First demand guarantees
• International property reserves

These conflicts require careful analysis and coordination between the various legal instruments used. Resolving these disputes between the factor and third parties often requires a tailored legal approach.

Conclusion

International factoring offers a secure framework for export transactions, but involves significant legal complexities. The multiplicity of legal systems, the interplay between international conventions and national laws, and the two-factor structure create a demanding legal environment. To secure your international factoring operations and benefit from expert support, our firm is at your disposal.

Sources

• Ottawa Convention of 28 May 1988 on international factoring
• UNCITRAL Convention of 12 December 2001 on the Assignment of International Receivables
• Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I)
• French Commercial Code, Articles L. 313-23 to L. 313-35