Factoring is a commercial necessity for many and can sometimes present particular problems for those on the buying side of the contract.
Commonly, problems arise when the purchaser of a service whose invoice has been assigned under a factoring arrangement, seeks to set off a debt that may be due from the supplier of the service. Invariably (and, when you think about it, for obvious reasons), factoring agreements provide that the factor will not allow a set off and, over the years, it has been a difficult issue when the factor relies on that point but the purchaser feels that a credit is due. As long as the supplier is around to deal with the matter, it’s something that gets sorted out in the usual run of the business relationship. The supplier agrees the credit, enters it on the running balance between the parties and informs the factor.
The problem comes to the surface, however, when the supplier gets into financial difficulties and ceases trading. If, at that stage, there are outstanding credits claimed by the purchaser which have not previously been agreed by the supplier, the factor has always relied on the presence in its contract with the supplier of a “no set off” clause.
In such circumstances, factoring companies adopt a very blinkered and intransigent view and, faced with determined resistance and possibly a modest amount in issue, many an SME has shrugged its shoulders and paid the factor rather than risk expensive and time consuming litigation.
However, the time comes when the sum of money involved is sufficient to make a serious fuss about it and the law in this respect underwent a thorough review in the Court of Appeal when, in December 2015, their Lordships considered the case of Bibby Factors Northwest Limited ~v~ HFD Limited. In that case, HFD was looking for a credit of approaching £300,000 after its factored supplier ceased trading. Bibby adopted the standard factor’s response and pointed to the clause in its contract that said it would not suffer a claim for a set off.
As happens in many of these cases, there were issues about what might, or should, have transpired in correspondence (an interesting aspect was that although Bibby couldn’t produce copy letters, the judge accepted that such had been computer generated and sent) but HFD was sufficiently incensed to stand its ground and, when it was sued by Bibby, cross claimed the set-off. The facts were clear enough to allow a judge to deal with the matter on a summary application for judgement. When he held in favour of HFD, Bibby took the case to the Appeal Court.
They fought hard even arguing that much abused allegation of last resort: estoppel, but their lordships, after carrying out a lengthy review of the law on the topic of assigned debts and rights of set-off, upheld the learned judge. Simply put, it was held that HFD was not a party to the contract between Bibby and its client and was not therefore bound by a provision in that contract which forbade a set-off.
So the next time you’re faced with a bankrupt supplier and its factor coming after you for a substantial trading debt, don’t be bullied if you feel there’s a debt the other way to be set-off. But, and here’s the rub, check the small print in the seller’s terms and conditions first. Most standard terms and conditions of sale provide that the sale price will be paid “…without any discount, deduction, set-off or counterclaim whatsoever…”and, as an assignee stands in the shoes of its assignor, the outcome in this case might have been different had Bibby been able to take advantage of such a provision. Always read the small print!