Guarantee of validity and attribution of knowledge in factoring in the focus of case law

Only a few decisions in 2023 were significant for factoring in practice.

Attributing knowledge when challenging payments by debtors in an insolvency situation

Factoring contracts often include extensive duties on the part of the client to inform and support the factor, which specify section 402 of the German Civil Code (Bürgerliches Gesetzbuch). According to a decision by Schleswig-Holstein Higher Regional Court (Schleswig-Holsteinisches OLG) (see Schleswig-Holstein Higher Regional Court, judgment dated 23 June 2021 – 9 U 109/20), when an insolvency is challenged, if a client knows that a debtor is unable to pay, then payments made by the debtor to the factor could give rise to the question of whether the factor must allow the client’s knowledge to be attributed to it in analogous application of section 166 of the German Civil Code due to the client’s duty to inform. The German Federal Court of Justice (Bundesgerichtshof) (FCJ) (judgment dated 25 May 2023 – IX ZR 116/21 = BB 2023, 2256) has rejected this argument and emphasised that a client’s duty to inform and support alone cannot form the basis for attributing such knowledge to the factor.

Standard-form assignment clauses

In two decisions, the sixth civil panel of the FCJ addressed a breach of section 307(1) of the German Civil Code by standard-form assignment clauses. The two decisions have no direct link to factoring, but reveal the guidelines that are to be observed when wording assignment provisions, including in factoring:

In the first decision (FCJ, judgment dated 10 October 2023 – VI ZR 257/22), the court addressed the validity of a standard-form assignment of claims by an injured party against the injuring party in a contract for an expert opinion on estimating repair costs. The expert opinion contract included a clause according to which the assignee was entitled but not obliged to assert the assigned claim against the injuring party. The FCJ held that the clause was invalid due to a breach of section 307(1) of the German Civil Code because it did not include a provision regarding the occurrence of the event of loss or damage; in particular the wording that entitled but did not oblige the assignee to assert the claim permitted the interpretation that asserting the claim was intended to be independent of the occurrence of the event of loss or damage. The decision is significant, primarily for recourse factoring, in which the assignment is similar to an assignment for security and the loan granted by the factor is usually repaid by collecting the assigned receivable by way of performance.

In some cases, the requirements for an assignment for security established by the FCJ could necessitate a corresponding adjustment of the assignment mechanism where recourse factoring takes place. Even in contracts involving non-recourse factoring, there may be situations in which it is necessary to make a clearer distinction between collecting claims assigned as security for the purpose of realising them and collecting them as a service (collection agency claims).

The second decision (FCJ, judgment dated 17 October 2023 – VI ZR 27/23) deals with the invalidity of a standard-form assignment clause with which a person who had rented a vehicle assigned his damages claim for reimbursement of the costs of renting the car against the injuring party to the car rental company by way of performance. The FCJ was of the opinion that, under the transparency imperative found in the second sentence of section 307(1) of the German Civil Code, the assignment clause must make it clearly recognisable when the assignor would receive the claim back upon fulfilment of the claim to payment of the renting fee. In many factoring models there are situations in which the factor reassigns an individual claim to a client (e.g. if the purchase of the receivable is reversed or refused in a final manner). The FCJ decision shows that, under certain circumstances, a non-transparent contractual clause on reassigning receivables can invalidate the previous assignment to the factor itself. The decision also provides an example of a valid option for wording such a clause.

Clients’ no-fault guarantee of validity of receivables

No-fault guarantees of the validity of the receivables in receivables purchase agreements are very common. If the factor asserts a claim against the client based on the breach of such a clause, the client’s line of defence can be to question the validity of the clause because no-fault guarantee liability tends to constitute a breach of section 307 of the German Civil Code. This situation was presented to Frankfurt Higher Regional Court (OLG Frankfurt) for adjudication (Frankfurt Higher Regional Court, order dated 21 June 2023 – 10 U 85/22 = BKR 2023, 873). The Tenth Civil Senate emphasised that no-fault guarantee liability within the meaning of the first sentence of section 276(1) of the German Civil Code cannot necessarily be deemed to have been tacitly agreed. However, it made it just as clear that an expressly agreed no-fault guarantee of the validity of receivables does not breach section 307 of the German Civil Code. Its reasoning included the fact that a client is in a much better position than a factor to evaluate the validity of the receivable it is assigning. The Senate also referred to the FCJ’s case law that a no-fault guarantee of a receivable’s validity issued by a client’s managing director is effective. This viewpoint expressed by Frankfurt Higher Regional Court concurs with the prevailing opinion regarding no-fault guarantees of the validity of purchased receivables.

 

This article is part of the "Update Commercial 2024". All insights and the entire report as a PDF can be found here.