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Shortfall Fees in Factoring Pact
As financial circumstances become more difficult, it is expected that many businesses will turn to funding solutions such as factoring agreements to weather the storm. These agreements typically involve the advance of money from a financial institution to a business against proceeds from the business's outstanding accounts receivables.
In a recent decision, Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York applied New Jersey law in ruling that a shortfall fee charged by a factoring company was enforceable, pursuant to an alternative fee structure under a certain factoring agreement.
In doing so, the court in Dessert Beauty, Inc. v. Platinum Funding Corp. 06 Civ. 2279 (SAS), Opinion and Order dated Oct. 1, 2007, rejected arguments that the fee in question constituted either an unenforceable penalty or an unreasonable liquidated damages clause, and in effect, reinforced the rights of the parties to freely chart the method of performance in the event of a certain potential contingency, which may not rise to the level of a contractual breach. [Note, at least two commentators have termed similar election of contractual performances 'embedded options.' See Robert E. Scott and George G. Triantis, 'EMBEDDED OPTIONS AND THE CASE AGAINST COMPENSATION IN CONTRACT LAW,' 104 Colum. L. Rev. 1428 (2004), for a much more in-depth analysis of contractual damages and embedded options.]
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