First meeting of the working group of the Scientific Advisory Council at the Supreme Court held

The event, which brought together judges – representatives of the commercial and civil jurisdictions of the Supreme Court – as well as scholars in the relevant fields, was dedicated to discussing the legal nature of the assignment of a claim right and the issues of distinguishing between factoring contracts and cession (assignment) contracts.

“Communication between judges and scholars is extremely important. Discussions within the working group give participants the opportunity to express their views on a particular issue, hear responses, and reflect on the validity and correctness of their own legal position. Of course, scientific views evolve over time and legal positions are refined. Our joint work is aimed at ensuring that judicial practice is clear and fair for those who turn to the court for protection of their violated, unrecognized, or disputed rights and interests,” noted the Scientific Secretary of the Scientific Advisory Council, Judge of the Grand Chamber of the Supreme Court Oleh Tkachuk.

He also informed that the Supreme Court has begun publishing the conclusions of the Scientific Advisory Council on its official website. According to Oleh Tkachuk, this will promote the unification of their presentation format and the development of legal doctrine, since the Council’s conclusions provide answers to questions that are important for law enforcement practice.

“Furthermore, the publication of scientific conclusions will make the procedures for their preparation more transparent and understandable, and will contribute to the formation of legal awareness and legal culture in society. People will not only better understand the powers and tasks of the Supreme Court, but will also be able to assess the effectiveness of the Scientific Advisory Council itself. At the same time, judges and other legal practitioners will have a reference point regarding the position of scholars on certain issues of legal theory,” the judge added.

During the discussion, Supreme Court Judge of the Civil Cassation Court Vasyl Krat drew attention to the fact that, depending on the method of financing and the function performed by the assignment, there are two types of factoring contracts. The function of a “security” factoring contract is that the factor provides or undertakes to provide financing (a corresponding sum of money) for a fee, while the client assigns or undertakes to assign a monetary claim that secures the return of the financing. The assignment of the monetary claim to the factor serves as security for the client’s obligation to repay the financing to the factor. The essence of a “purchase” factoring contract is that the factor provides or undertakes to provide financing (a corresponding sum of money) for a fee, while the client assigns or undertakes to assign a monetary claim. The method of financing the client is the factor’s purchase of the monetary claim. The assignment of the monetary claim effectively serves as payment for the financing.

According to the judge, it is important in the context of which specific claims the need to distinguish between factoring and cession arises. In most cases, this issue arises when the debtor (who is not a party to the contract) files a claim to declare invalid the contract of assignment of claim rights, the factoring contract, or the contract for the sale and purchase of the claim right. In other words, it concerns the debtor filing an action for rescission in order to nullify the transfer of the monetary claim from one party to another.

If the entity to whom the monetary claim is sold is not a “special” entity (a financial institution), then such a contract should be qualified as a sale and purchase contract, taking into account the principle of favor contractus (interpretation of the contract in favour of its validity — doubts regarding the validity, enforceability, and effectiveness of the contract must be interpreted by the court in favour of its validity, enforceability, and effectiveness). Obviously, in such cases, there are no grounds for declaring the contract invalid.

Vasyl Krat noted that the imperative norms of private law do not prohibit the assignment (sale and purchase, exchange, or donation of property rights) of a claim right that arose under a loan agreement to any person. The assignment of a claim right arising from a loan agreement does not result in any violation of the debtor’s subjective civil rights or interests, which is a necessary condition for applying the legal construction of contesting a transaction.

Associate Professor of the Department of Civil Law No. 1 at the National Law University named after Yaroslav the Wise, Bohdan Karnaukh, noted that one of the criteria for distinguishing between factoring and the sale and purchase of a claim right, according to some scholars, is systematicity (regularity). However, the key detail is the special subject, since the sale and purchase of a property claim right is a version of the contract available to everyone, while factoring is its commercial version.

Director of the Scientific Research Institute of Lawmaking and Scientific-Legal Expertise of the National Academy of Legal Sciences of Ukraine, Corresponding Member of the National Academy of Legal Sciences of Ukraine, Oleksii Kot, remarked that there is no unanimous answer to the question of how exactly a factoring contract differs from the assignment of a claim right. The scholar also added that if the criterion of systematicity is applied, it should be specified and its limits defined. At the same time, from the point of view of legal certainty, it is better to use the subjective criterion.

Vice President, Academician of the National Academy of Legal Sciences of Ukraine, Professor of the Department of Civil Law at the Educational and Scientific Institute of Law of Taras Shevchenko National University of Kyiv, Nataliia Kuznietsova, drew attention to the legal consequences of factoring contracts and claim assignment contracts, as well as the grounds for declaring such contracts invalid, emphasizing the practical importance of these issues.

Professor of the Department of Civil Law No. 1 at the National Law University named after Yaroslav the Wise, Corresponding Member of the National Academy of Legal Sciences of Ukraine, Inna Spasibo-Fatieieva, emphasized that the sale and purchase of a property claim right belongs to the group of contracts aimed at acquiring ownership of property, whereas factoring is a contract for the provision of services by a financial institution. The purpose of a sale and purchase contract is to obtain property into ownership, i.e., to acquire the claim right to assigned debts. In contrast, the purpose of a factoring contract is for the client to receive monetary funds in the form of financing. The subject matter of a sale and purchase contract may be any things, while the subject matter of factoring is only monetary funds. The object of legal relations in a sale and purchase contract consists of actions to transfer property into ownership, whereas in the case of factoring, it consists of financing services, in exchange for which the client transfers the claim right.

Professor of the Department of Civil Law and Procedure at Donetsk National University named after Vasyl Stus, Olena Belianevych, in her speech examined factoring as a type of activity in the context of the Law of Ukraine “On Banks and Banking”.

Head of the Department of Commercial Law and Procedure at the National University “Odesa Law Academy”, Corresponding Member of the National Academy of Legal Sciences of Ukraine, Oleh Podtserkovnyi, noted that distinguishing between cession and factoring contracts based on a large number of specific features is practically impossible. According to him, the key criterion is the presence of a special subject (a specialized entity). Only this approach allows for clear and uniform differentiation between these contracts. In addition, factoring has special conditions, a particular procedure for declaring it invalid, and specific rules for the performance of mutual rights and obligations of the parties.

Vice-Rector for Scientific Work of the Kharkiv Institute of Personnel Management, Yurii Mytsa, also supported the position on using the criterion of the presence of a special subject. According to the scholar, this approach can reduce the level of tension surrounding the issue of distinguishing between the contracts and decrease the number of bad-faith lawsuits seeking to declare such contracts invalid.

Judge of the Supreme Court in the Commercial Cassation Court Oleksandr Banasko summarized that the majority of positions expressed by the participants of the working group boil down to the application of the subjective criterion when distinguishing between factoring contracts and cession (assignment) contracts. When resolving issues regarding the invalidity of a contract in relevant disputes, the court should first establish the existence of a violated right or interest of the plaintiff, and if there is none, there is no need to determine the qualifying features of the contested transaction.

The judge also drew attention to a problem in the law enforcement practice of the cassation courts within the Supreme Court, which consists of different approaches to the qualification of a factoring contract and other contracts for the assignment of claim rights, in particular, a contract for the sale and purchase of a monetary claim right depending on the presence or absence of a discount in various variations between the nominal value of the monetary claim and the price of its sale.

Judge of the Supreme Court in the Commercial Cassation Court Yurii Chumak noted that one of the criteria is also the presence of a discount, which is characteristic specifically of a factoring contract. At the same time, in the judge’s opinion, the subjective criterion is also not sufficiently clear.

Following the results of the working group meeting of the Scientific Advisory Council, an information note on the judicial practice in cases of this category will be prepared.