Jurisdictional issues in factoring contract disputes

By Hua Ping, Anli Partners

Since the implementation of the Civil Code on 1 January 2021, factoring contracts have been recognised and regulated as nominate contracts within the legal framework. However, disputes around factoring contracts with recourse have arisen in judicial practice, necessitating the establishment of unified adjudicative principles. This article aims to provide a concise exploration and analysis of the jurisdictional issues arising in disputes concerning factoring contracts with recourse.

Parties to be sued

Hua Ping
Hua Ping
Anli Partners

The controversy surrounding whether a factor can sue the accounts receivable creditor and the debtor simultaneously, and whether the court can hear both cases concurrently, has been resolved within the Civil Code and the Interpretation of the Supreme People’s Court on the Application of the Security Part of the Civil Code of the People’s Republic of China (Interpretation of Security).

According to article 766 of the Civil Code, a factor with recourse may claim the return of the principal and interest on factored financing from the creditor, or the repurchase of the creditor’s right of accounts receivable, or claim the right of accounts receivable from the debtor. Article 66(2) of the interpretation of security further states that if the factor with recourse sues the accounts receivable creditor or the debtor, the court shall accept it; if the factor simultaneously sues both of them, the court may accept it. However, the ensuing jurisdictional issues remain to be resolved.

Determining jurisdiction

When the factor sues against the accounts receivable creditor as the sole defendant, the competent court to handle the dispute is generally agreed on in the factoring contract. If the factoring contract lacks such an agreement, in accordance with article 24 of the Civil Procedure Law, the court with jurisdiction is determined based on the defendant’s domicile or the place of contract performance.

Concerning the performance place of a factoring contract, article 18 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law stipulates that the location of the factor – the party receiving monetary funds – constitutes the performance place of contract.

Given that the factoring contract dispute is a new type of financial and commercial dispute, whether these cases might be subject to centralised jurisdiction by specialised financial courts needs further consideration. Currently, three financial courts have been established, namely, the Beijing financial court, the Shanghai financial court and the Chengdu-Chongqing financial court.

Jurisdictional rules

When the factor sues the debtor of the receivable as the sole defendant, the debt transfer rules typically prevail, indicating that the agreement of the underlying transaction contract determines the competent court.

If there is no agreement on the jurisdiction or the performance place of the contract in the underlying transaction contract, the determination of the performance place remains contentious in practice.

The author believes that, for the sake of safeguarding the accounts receivable debtor’s expectations at the time of contract formation, and preventing parties from strategically establishing jurisdictional ties through debt transfer, it is advisable to base the determination of the performance place on the accounts receivable creditor, who is essentially the creditor of the underlying transaction contract.

In addition to the geographical and contractual jurisdictional provisions mentioned above, specific exclusive jurisdictional provisions may also apply to the jurisdiction of the underlying transaction contract. For example, if the underlying transaction contract pertains to a construction agreement, exclusive jurisdictional provisions for immovable property may be applicable.

Inconsistencies on jurisdiction

A significant dispute arises when a factor sues both the accounts receivable creditor and the debtor simultaneously, and the agreement on jurisdictions in the factoring contract and the underlying transaction contract are not consistent. Which contract’s agreement on jurisdiction should determine the court of jurisdiction? In practice, two distinct approaches exist due to different interpretations by judicial authorities.

In Qingdao Metro Commercial Factoring v Qingdao Metro Runzhi Investment and Jiangsu Construction Engineering Group (2023), the Qingdao Shibei court argued that factoring with recourse is essentially a debt transfer with recourse. For this factor, acquiring the debt also implies accepting the constraints of the underlying contract.

Since the debtor was not a party to the factoring contract, the jurisdictional provision in the factoring contract does not bind them. Therefore, determining jurisdiction according to the factoring contract when the debtor is sued as a defendant would unfairly affect the debtor’s jurisdictional expectations. In Haitong Unitrust International Financial Leasing v Ao Yongyuan et al (2021), the Shanghai Huangpu court deemed the main contract to be the factoring contract and the underlying transaction contract as a part of the legal relationship of the factoring contract.

Therefore, the factor’s lawsuit and subsequent determination of jurisdiction based on the factoring contract were seen as appropriate. Evidently, this determination by the Shanghai Huangpu court is grounded in considering the factoring contract with recourse as a financing contract of non-traditional security. In cases where a factor simultaneously sues both the accounts receivable creditor and the debtor, the agreement of the factoring contract, the main contract, works as the basis for jurisdiction.

It’s fortunate that the Supreme People’s Court has taken notice of the above-mentioned issues. In article 9 of the Minutes of the National Courts’ Work Conference for Financial Trials (Draft for Comment) issued in April 2023, the Supreme People’s Court has indicated its stance on this matter.

Specifically, when a factor sues both the accounts receivable creditor and the debtor simultaneously, the general principle is that the court of jurisdiction should be determined based on the agreements of the underlying transaction contract, unless there exists a separate agreement on jurisdiction between the accounts receivable debtor and the factor. In cases where the underlying transaction contract has no, or only an unclear, agreement on jurisdiction, the competent court will be determined by the relevant provisions of the Civil Procedure Law.

If the minutes are formally enacted without alteration, the jurisdiction issues discussed in this article will be uniformly regulated. However, until that happens, to avoid potential disputes, it is advisable for the factor, the accounts receivable creditor, and the debtor to clearly agree on the court of jurisdiction or at least pay attention to jurisdictional matters when creating and signing documents such as the factoring contract, the underlying transaction contract, and the notification and acknowledgement of accounts receivable transfer.

Hua Ping is a partner at Anli Partners

Anli-Partners 安理律师事务所

Anli Partners

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E-mail: phua@anlilaw.com