Factoring is a valuable financial management tool for companies wishing to optimise their cash flow by transferring their trade receivables to a specialised institution, the factor. When the company's customers are located abroad, the operation becomes more complex and takes on an international dimension. International factoring and its general legal framework are faced with a patchwork of national legislation, a source of legal uncertainty. To harmonise practices and facilitate these exchanges, the Ottawa Convention on International Factoring was signed on 28 May 1988. This international agreement proposes a set of uniform rules designed to remove the legal obstacles specific to these transactions. Understanding its scope and mechanisms is essential for any economic player operating internationally. Our firm, with its expertise in banking and finance lawWe take a closer look at this fundamental text.
Background and scope of the 1988 Ottawa Convention
The Ottawa Convention is the result of a growing awareness on the part of the international community. The diversity of national laws and the complexity of conflict-of-laws rules were holding back the development of international factoring. To remedy this, work was carried out under the aegis of Unidroit, the International Institute for the Unification of Private Law, to create a common legal framework.
Genesis and entry into force of the convention
After several years of preparatory work by committees of experts, a draft convention was submitted to a diplomatic conference in Ottawa. The final text, adopted on 28 May 1988, aimed to establish uniform substantive rules to specifically govern international factoring contracts. France played a leading role in this process, being one of the first countries to ratify the text. The convention officially entered into force internationally on 1 May 1995, after the necessary number of ratifications had been obtained. In addition to France, countries such as Italy, Germany, Belgium and Russia have adopted it, giving it a significant impact on European and global trade.
Material applicability: definition of factoring and receivables
The Ottawa Convention establishes its own criteria for defining the transactions it governs, independently of the legal qualifications of national laws. For a contract to fall within its scope, it must provide for a supplier to transfer its receivables to a factor, who undertakes to provide at least two of the following four services:
- financing the supplier, in particular by advance payment ;
- keeping accounts relating to receivables (accounts receivable) ;
- debt collection and recovery;
- protection against the risk of non-payment by debtors.
This definition is broad and may include arrangements that would not qualify as factoring under certain domestic laws. The agreement also specifies that the receivables concerned must arise from contracts for the sale of goods or the provision of services. An important condition is that these contracts must be concluded on a professional basis. This excludes receivables arising from transactions where the goods or services are acquired for personal, family or household use.
Geographical applicability and international character
For the convention to apply, the transaction must be of a proven international nature, meeting a number of cumulative conditions. Firstly, the contract for the sale or provision of services giving rise to the claim must have been concluded between a supplier and a debtor whose places of business are in different States. Secondly, a condition of connection to Contracting States must be met. The Convention applies if :
- the supplier, the debtor and the factor have their places of business in States which have ratified the Convention;
- or if the contract of sale and the factoring contract are both governed by the law of a Contracting State.
This second hypothesis makes the convention frequently applicable in French export operations, where contracts are often subject to French law. The concept of place of business is clarified: in the case of multiple places of business, the one with the closest link to the contract is used.
Optional nature: exclusion clauses and their limits
Application of the Ottawa Convention is not mandatory. The parties involved in the transaction may decide to exclude it. This exclusion may be stipulated either in the factoring contract, by agreement between the supplier and the factor, or in the commercial contract, by agreement between the supplier and the debtor. However, to protect the factor, who legitimately relies on the application of the text, if the exclusion stems from the commercial contract, it must be notified to the factor in writing in order to be enforceable. Without such notification, the agreement continues to apply to the relationship between the supplier and the factor. Furthermore, the agreement prohibits the "carving up" of its provisions: the parties cannot choose to apply only certain articles and exclude others. The exclusion must be total, or the agreement applies in its entirety.
Essential substantive rules of the Ottawa Convention
Beyond its scope, the convention's main interest lies in the substantive rules it lays down. These aim to make international factoring transactions more secure and fluid by providing uniform solutions to legal issues that are often dealt with differently from one country to another.
Transferability of future receivables and global assignments
The Ottawa Agreement expressly validates the assignment of future receivables, i.e. receivables that have not yet arisen at the time the factoring contract is concluded. It also authorises global assignments, where a set of receivables, present and future, is transferred en bloc. The only condition is that these receivables, even if not individually designated, must be "determinable" at the time they arise. This approach is much more flexible than that of certain national laws, such as French law, which traditionally, via contractual subrogation, required that the claim had already arisen in order to be transferred. This flexibility is a considerable advantage for companies, which can thus obtain financing on the basis of their future business flow. It comes close to the spirit of certain legal mechanisms of factoring under french law such as cession Dailly, while offering an international scope.
Unenforceability of contractual non-transferability clauses
Commercial contracts, particularly those signed with large groups, often contain a clause prohibiting the supplier from assigning the receivables it holds from its customer. Such clauses, known as non-transferability clauses, represent a major obstacle to factoring. The Ottawa Agreement resolves this problem in favour of financing: Article 6 states that the assignment of the receivable to the factor is valid "notwithstanding any agreement between the supplier and the debtor prohibiting such assignment". The clause is therefore unenforceable against the factor, who can validly acquire the claim. It is important to note that this does not mean that the clause is null and void. It retains its effects as between the supplier and the debtor: by assigning his claim despite the prohibition, the supplier commits a contractual fault which could render him liable to his customer, if the latter proves that he has suffered damage. However, the contracting states have the option of making a reservation on this point. France has made use of this option, which means that for debtors established in France, an anti-assignment clause may, in certain cases, retain its effect.
Procedures for transferring claims and notifying the debtor
Under the agreement, the transfer of receivables from the supplier to the factor takes place as soon as they arise, without the need for a new act of transfer for each receivable. However, for this transfer to have full effect on the debtor, one step is essential: notification. Article 8 of the agreement requires written notification of the assignment to be sent to the debtor. Until such notification has been given, a debtor who pays his debt into the hands of his original supplier is validly discharged. After notification, the debtor can only be released by paying the factor. The agreement specifies the content of this notification: it must sufficiently identify the assigned receivables and clearly designate the factor as the new creditor. The written form is not subject to strict formalities; any means of communication that leaves a physical trace, such as a telex or e-mail, is acceptable.
Effects of the transfer: enforceability of defences and accessories to the claim
The transfer of the debt does not purge it of any defects. The factor cannot have more rights than the original supplier. This is the principle of the opposability of defences, enshrined in Article 9. The debtor may therefore raise against the factor all the defences he could have raised against his supplier under the original commercial contract (undelivered or defective goods, etc.). This rule protects the debtor and is an application of the more general principle of the enforceability of exceptions in factoring. The agreement also governs what happens to set-off: the debtor may set off its debt against a claim it has on the supplier, provided that its right to set-off arose before it received notification of the assignment. The agreement adopts a cautious approach to accessories to the debt (guarantees, security interests, retention of title clause). Unlike French law, where subrogation entails an automatic transfer, the text provides that these rights are only transferred to the factor if the factoring contract expressly so stipulates.
The debtor's recourse to recovery and its limits
What happens if the debtor pays the factor, but then discovers that his supplier's service or goods are defective? Article 10 of the agreement provides for recourse. The principle is that the debtor must take action for restitution (recovery of undue payment) against the supplier, and not against the factor. In principle, the factor is protected. However, there are two important exceptions to this principle: the debtor may take action against the factor if the factor has not yet paid the supplier at the time of the action, or if the factor has paid the supplier with knowledge of the non-performance or defective performance of the commercial contract. In the latter case, the factor's bad faith is sanctioned, and he will have to reimburse the debtor.
Assessment and limitations of the Ottawa Convention
More than thirty years after it was signed, the Ottawa Convention is a significant step forward, but it has not resolved all the problems of international factoring. Its record is mixed, marked by real progress and persistent shortcomings.
Advances in the development of international factoring
The convention's main contribution is undoubtedly the legal certainty and predictability it offers. By validating assignments of future and global receivables and neutralising non-transferability clauses, it has removed obstacles that made international factoring complex and risky. It has given companies easier access to financing backed by their international trade flows. By establishing a clear framework for notification of the debtor and the enforceability of exceptions, it has created a common set of rules that simplifies the drafting of contracts and the management of disputes. For factors, it represents an instrument for securing their operations, enabling them to assess more calmly the risks associated with receivables from foreign debtors.
Gaps and unresolved issues (enforceability against third parties, collective proceedings)
Despite its contributions, the Ottawa Convention remains silent on several crucial points. Its main shortcoming concerns the enforceability of the assignment of receivables against third parties. The text does not settle conflicts that may arise between the factor and other creditors of the supplier, such as another financial institution to which the same claim has been assigned, or distraining creditors. Similarly, the agreement does not deal with the consequences of the opening of insolvency proceedings (receivership or compulsory liquidation) against the supplier or the debtor. In these situations, it is necessary to turn to the rules of private international law of each State to determine the applicable law, which reintroduces the complexity that the Convention was intended to avoid. It is in this context that the general analysis of applicable law rules for the mobilisation of international receivables remains as relevant as ever.
Why solent avocats can help you with the Ottawa Convention and international factoring
The Ottawa Convention on International Factoring is a powerful legal instrument, but its implementation raises a number of technical issues. Its relationship with national law, other international conventions and European law requires rigorous analysis and in-depth expertise. The stakes for your company are high: securing your financing, managing your risks and optimising your export business relations.
Our law firm puts its expertise in banking and finance law at your service to guide you through every stage of your international factoring operations. Whether negotiating and drafting your factoring contracts, analysing the risks associated with a specific transaction or managing a dispute with a factor or foreign debtor, we provide you with strategic and pragmatic advice. Our aim is to turn legal complexity into an opportunity for your development. For an in-depth analysis of your situation and tailored advice, contact our team of lawyers.
Sources
- Ottawa Convention of 28 May 1988 on international factoring
- Civil Code
- Commercial code
- Monetary and Financial Code
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