On The Limit Of Consensual Rescission Of The Underlying Contract In Factoring Transactions

A new chapter on “Factoring Contracts” has been added to the Civil Code to regulate issues related to commercial factoring,of which Article 765 provides for the validity of the discharge of the underlying transaction to the factor by agreement of the parties to the factoring contract.The rule takes the protection of the factor’s interests as a logical starting point and considers that once the notice of assignment has reached the debtor,in principle the parties to the underlying contract should be restricted in their authority to rescind it consensually,i.e.the consensual rescission should have no effect on the factor.Only if the rescission is “justified” or does not adversely affect the factor will the parties be allowed to rescind the underlying contract.This involves a conflict between the negative contractual freedom of the parties and the interests of the factor,and the proper identification of the elements of the application of Article 765 can promote a balance between the interests of the parties.To resolve this issue,it is necessary to first argue the justification of the provision of Article 765 to restrict the authority of the parties to the underlying contract to voluntarily rescind,with the protection of the factor’s interests as the core,and on this basis,to analyze the scope of “just cause” in Article 765 and the meaning of “adverse effect”.Finally,we will distinguish whether the consensual rescission is effective for the factor or not,and analyze the specific rights and obligations of the parties.Firstly,the general view is that a consensual rescission of the underlying contract is a disposition of the right of the assignee of the account and should be restricted to the parties to the underlying contract as it infringes on the interests of the assignee.However,such an effect-oriented allocation of rights is questionable.With regard to the allocation of the rights of the assignor and the assignee,there is still room for further discussion on the revised theoretical view,and the allocation of rights based on the true intention of the parties,supplemented by the inherent evaluation of the legislation,can respond to the needs of the allocation of rights in different situations.In the relationship between debtor and assignee,the debtor should not be protected only unconditionally,and it should be assessed in each case whether the interest of the assignee in the circulation of the account is important enough to sacrifice the debtor’s negative contractual freedom.In the field of factoring,Article765 of the Civil Code justifies the fact that the assignor of an account should be subject to the principles of good faith and estoppel and that the debtor should also be subject to the values reflected in our legal system that provide special protection for the interest in the circulation of factored accounts.Secondly,although the normative attitude of Article 765 of the Civil Code is justified on the whole,it should be recognized that in some cases the protection of the factor’s interests should not unduly restrict the freedom of consensual rescission of the parties to the underlying contract.A consensual rescission may still be effective against the factor when the factor provides collection and management services for the receivables and when the consensual rescission is an alternative to the exercise of the legal or contractual right of rescission by the debtor of the underlying contract.After excluding such types of releases of the underlying contract,a consensual rescission may naturally be effective against the factor if,in the course of the performance of the underlying contract,the release of the underlying contract is consented to by the assignee or should be consented to by the assignee according to reasonable commercial standards under the principle of good faith.These situations should be covered by the “justification” of Article 765.Thirdly,the meaning of “adverse effect” in Article 765 of the Civil Code should be limited.In view of the purpose of the regulation and the commercial nature of factoring transactions,the negative contractual freedom of the parties to the underlying contract should only be restricted if the consensual rescission has rendered the purpose of the factoring contract unfulfilled.When the underlying contract is rescinded,the factor may retain the payment received and should not be considered to have suffered a detrimental effect to the extent of the retention interest.Under a functionalist view of security,the recourse factor’s security interest may extend to the claim of the assignor against the assignee of the account for the return of the payment already made.“Adverse effect” within the meaning of Article 765 occurs when the value of the assignor’s account after the rescission is clearly insufficient to realize the security interest to which the factor would otherwise be entitled.In a registered factoring transaction with recourse,the security interest attached to the claims for return and damages may constitute a “legal claim quality” as a matter of legal construction.Finally,in terms of legal effect,if the consensual rescission is effective against the factor,the debtor should not,in principle,be obliged to notify the factor of the consensual release,other than by promising in the acknowledgement letter not to vary or release the underlying contract or by undertaking to inform it in a timely manner.In a factoring transaction with recourse,the factor has the right to ask for the return of the payments made by the factor to the debtor and the right to claim damages.The factor shall be liable for damages for breach of contract in the context of the factoring contract for any disadvantage suffered by the factor as a result of the consensual rescission of its validity.If,however,the interests of the factor are to be specially protected in accordance with Article 765 of the Civil Code,it shall be deemed that the entire act of consensual rescission is ineffective against the factor,who may still claim to the debtor according to the agreement between the parties to the underlying contract or in the event of unjust enrichment,for settlement and recovery.The factor has the right to choose whether the consensual rescission is effective against him or her depending on the state of interest.