If the customer agreement is the invoice, what happens when the invoice is wrong?

Receivables purchase agreements need a defined term for the contract the receivable comes from. A convention has grown up in the market of defining it as the invoice, usually in a form approved by the agent at closing:

It is easy to see where it comes from. In marketplace and small-ticket factoring there frequently is no negotiated supply contract; there is a purchase order, a delivery and an invoice, and the invoice really is the closest thing to terms. The precedent then travels into transactions where a substantive underlying contract does exist, and it stops working.

Test it against the representations

The definition is not a standalone problem. It becomes one when the same agreement's representations are read against it, because those representations are almost always drafted on the assumption that the customer agreement is a contract.

The seller is required to have performed its obligations under the customer agreement. A representation will typically say the receivable arises under a customer agreement in respect of which the seller has performed all obligations required to make the receivable due and payable. An invoice imposes no obligations on the party issuing it. You cannot perform under an invoice; you perform under a contract and then issue one.

Another representation says the receivable arises from the underlying services. Facilities in this market routinely include a representation that the receivable arises from the relevant services, generated in the ordinary course of the seller's business and at arm's length. Both statements cannot be true at once. Either the receivable arises under the customer agreement, in which case the customer agreement is not the invoice, or it arises from the services, in which case the definition is wrong.

The customer agreement is said to be capable of termination and frustration. A standard representation confirms that the customer agreement under which the receivables arise has not been terminated or frustrated, and that no event has occurred that would make it subject to force majeure or a right of rescission. Termination, frustration, force majeure and rescission are doctrines that operate on contracts. None of them can sensibly be applied to an invoice.

The consequence nobody intends

Two further representations make the practical cost obvious.

The first requires that the terms of the customer agreement do not prohibit the seller from assigning the receivable. The second requires that the customer agreement contains no confidentiality provision restricting the exercise of rights under it. Both are entirely standard and both are important; anti-assignment clauses are among the most common reasons a receivables purchase turns out to be less effective than the parties believed.

Neither restriction lives in an invoice. They live in the supply agreement, the framework agreement or the interconnect agreement. If the defined term points at the invoice, the representation is satisfied trivially and tells the lender nothing. The diligence that the representation exists to compel is never performed, and the risk it was drafted to catch sits unexamined in a document nobody has been required to look at.

The timing problem, which is the serious one

Everything above is a drafting tidy-up. This one is a credit point.

If the receivable arises on invoice issuance, then service delivered and not yet invoiced is not a receivable. It is a future receivable, an expectation of one, contingent on a document that has not been produced. That is the category of asset behind several of the largest failures in this market over the past decade, and the category many credit committees have a written policy against.

If instead the receivable arises on performance under the underlying agreement, then delivered service is a present obligation from the moment it is delivered, and the invoice is the record of it and the demand for payment. Nothing about the economics changes. What changes is that the lender is funding something that exists rather than something expected to come into existence, and can say so with a definition to point at.

For any programme that funds against delivery rather than against billing, this is not a preference. The definition either supports the model or contradicts it.

Errors become existential

There is a second-order effect worth spelling out for anyone running a portfolio rather than papering one.

Facilities define a modified receivable, usually as one where the terms of the customer agreement have been amended, varied or extended, and exclude modified receivables from eligibility. If the customer agreement is the invoice, then correcting an invoice is amending the customer agreement. A transposed figure, a wrong reference, a re-issued document following a routine reconciliation, all become amendments to the contract, and an otherwise perfectly good receivable becomes ineligible for a clerical reason.

The same logic distorts dilution. A credit note against an invoice, when the invoice is the source of the obligation, reads as a reduction of the obligation itself rather than an adjustment to the record of it. That is a materially different thing to report, to reserve against and to explain.

What to do instead

• Define the customer agreement as the underlying contract, including any framework, master or interconnect terms that govern the supply, and any confirmation or acknowledgment given under it.
• Define the invoice separately, as the document recording amounts due in respect of services delivered under the customer agreement, and keep the standard-form requirement there, where it belongs, as a condition on format rather than as the definition of a contract.
• State when the receivable arises. Ideally in terms: on performance of the relevant services under the customer agreement, whether or not an invoice has been issued.
• Confine the modified receivable concept to amendments of the customer agreement, with an express carve-out for administrative correction or re-issue of an invoice that does not change the amount, the payer or the due date.
• Keep the assignment and confidentiality representations pointed at the contract, so they continue to compel the diligence they were written for.

None of this is controversial once it is set out, which is exactly why it is worth raising early. It is a definitional alignment rather than a commercial concession, and it costs one drafting round at the beginning or a great deal of argument at the point of a dispute.

The honest counterpoint

There is a reason a lender's counsel reaches for the invoice, and it is not laziness. An invoice is a single document, in a form the agent has approved, that can be produced instantly for every receivable in the pool. An underlying supply contract is bespoke, sometimes long, occasionally missing, and no agent wants an eligibility test that requires reading one per receivable at the point of purchase.

That concern is legitimate and it is solvable. The contract is diligenced once per counterparty relationship at onboarding, not once per receivable; the invoice remains the per-receivable artefact and the per-receivable test. What is not solvable is a definition that makes the invoice the contract, because that does not remove the underlying agreement from the transaction. It only removes it from view.