Termination of Factoring Contracts

General Overview

Factoring contracts are legally bilateral contracts that impose obligations on both parties and create a continuous debt relationship. Like all other contracts, factoring contracts have multiple modes of termination. If the parties have specified a term in the factoring contract, the contract terminates upon the expiration of that term.

Factoring contracts for which no term has been specified (indefinite-term) may be terminated through ordinary or extraordinary termination. Furthermore, the parties to a factoring contract always have the right to terminate the contract by mutual agreement. The death or dissolution of the legal personality of one party, loss of capacity, or bankruptcy also constitute other grounds for termination of a factoring contract.

Termination Due to Expiration of the Contract Term

Where the parties have determined a specific term for the validity of the contract, the expiration of that term (provided there is no notice of termination clause in the contract) results in the automatic termination of the contract.

In other words, if the parties to a factoring contract have determined a lifespan for the legal validity of the contract, the obligations arising from the factoring contract also terminate upon the expiration of the agreed term. The parties may use a specific calendar period for the term of the factoring contract or may fix the end date as a specific date. In this regard, the parties may agree on a determinable calendar period such as 1 month or 1 year, or may establish a precise end date such as "10 June 2022." Upon the passage or expiration of the term determined by any of these methods, the factoring contract terminates automatically, regardless of whether the parties have fulfilled the obligations they assumed under the factoring contract.

When factoring contracts were first implemented in Turkey, they were typically made for one year or shorter periods. Subsequently, with the growth of the market and the widespread adoption of factoring, longer-term contracts began to be concluded. In current market conditions, parties generally do not prefer to impose any time limit when drafting factoring contracts.

When the parties choose to make a factoring contract for a specific term, they can terminate the contract at the earliest at the end of this term. If they do not terminate it at the end of this term, the contract is considered to continue as an indefinite-term contract.

Termination by Mutual Agreement

As a rule, since continuous debt relationships do not inherently contain a termination outcome, they must be terminated by external intervention if no performance period has been determined. This external intervention may take the form of mutual agreement between the parties. As a consequence of freedom of contract, individuals are free not only to enter into or refrain from entering into contracts but also to eliminate or refrain from eliminating an existing contract.

The fundamental principle of contract law known as "freedom of contract" also manifests itself in factoring contracts. The parties are free to modify or completely eliminate the contract they have entered into by mutual agreement. Consequently, in factoring contracts as well, the parties may eliminate the contract they have arranged between themselves by mutual agreement and may regulate the rules of termination within the contract text.

The new agreement that the parties make to terminate the existing factoring contract between them is called a rescission agreement or dissolution agreement. In legal literature, rescission or dissolution agreements are common terminology used not only for factoring contracts but for all contracts within the scope of obligations law.

In other words, as a result of the conclusion of a bilateral legal transaction, the parties become bound by this contract. Unless a party has been granted a destructive constitutive right by law or by contract, they cannot terminate this contractual relationship through a unilateral declaration of will. However, due to freedom of will, the parties may agree to eliminate the provisions of a contract they have previously concluded, as long as they have the authority to dispose.

It should be particularly noted that a rescission agreement differs from unilateral termination of a contract because it arises from the convergence of mutual declarations of will aimed at eliminating the factoring contract. On the other hand, unlike a release agreement that eliminates obligations arising from the contract, a rescission agreement terminates the contract itself rather than the debt. Therefore, a rescission agreement does not eliminate debts that have already arisen as a release agreement does. Consequently, it is possible for a debt arising from a factoring relationship to continue despite the termination of the factoring contract.

Through this agreement, the parties mutually waive the receivables and debts arising from the contract they wish to terminate, thereby eliminating their creditor and debtor statuses. On the other hand, it is possible for the parties to agree that the rescission agreement shall produce its effects not on the date of its conclusion but at a future date. Although it is debated in doctrine whether the rescission agreement is subject to a formal requirement, in our view the rescission agreement should be in writing.

Since the validity of factoring contracts is subject to ordinary written form requirements pursuant to Article 38/2 of the Financial Leasing, Factoring, and Financing Companies Act, a rescission agreement relating to a factoring contract should also be subject to the ordinary written form requirement.