Despite some controversy, the new legislation prevents the prohibition or restriction of assignment of receivables under certain contracts. Our team at EM Law can help you understand how the new Regulations may impact on your business.
What are the Business Contract Terms (Assignment of Receivables) Regulations 2018?
Under English law, parties are generally free to provide for the terms and conditions that will govern their relationship. This concept is known as freedom of contract. Commercial contracts, for example, routinely contain provisions that prohibit or restrict the ability to assign or transfer rights created under a contract. Parties limit assignments by the other party for various legitimate reasons. Such reasons include preserving business relationships, preventing receivables coming into the hands of an aggressively hostile party or competitor, ensuring that an incoming party is bound by obligations, or preserving confidentiality.
Under the new Business Contract Terms Regulations, any terms that prohibit or restrict the assignment of receivables shall have no effect. A receivable, effectively, is a right to be paid. Regulation 2(1) states that “a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.” In theory, this means that parties to contracts will be able to freely assign rights to the receivables of a contract to a third party without consulting the other contracting party or parties.
What types of contract do the Regulations apply to?
Broadly speaking, the Business Contract Terms Regulations will apply to business contracts entered into on or after 31 December 2018. However, there are several types of contract to which the Regulations will not apply.
Regulation 3 states that the Regulations will not apply if at the time of the assignment the supplier is a large enterprise or special purpose vehicle. A supplier is a large enterprise if it satisfies one of the conditions in Regulation 3(3), such as being a company which qualifies as medium-sized within the meaning given by sections 465 to 467 of the Companies Act 2006. A supplier is a special purpose vehicle if it carries out a primary purpose in relation to the holding of assets or the financing of commercial transactions and in either case involved incurring a liability of £10 million or more.
Regulation 4 sets out various other situations in which the Regulations will not apply. In these situations the government has recognised that some contracts rely on non-assignment for sound commercial reasons and that freedom of contract in these instances should be preserved. Such situations include where the contract concerns any interest in land, where the contract is for prescribed financial services and where the contract is entered into for the purpose of, or in connection with, the acquisition, disposal or transfer of an ownership interest in a firm. For the latter exclusion to apply, the corporate acquisition contract must include a statement to that effect.
Why have these changes been made?
According to the Department for Business, Energy and industrial Strategy, the main objective of the Business Contract Terms Regulations is to facilitate access to finance for businesses.
Businesses depend upon having adequate cash flow to meet their liabilities and often need access to external finance in order to invest and grow. For growing businesses, invoice finance is an important way of securing the working capital that they need. Invoice finance is particularly valuable in those sectors where businesses have to wait a long time between issuing an invoice and receiving payment because it allows businesses to borrow money against the amounts due from customers.
Where assignment has been prohibited or restricted by a term in a contract, finance providers have to use other means to offer finance, such as requesting the debtor to allow assignment or using a work around such as a separate trust account or power of attorney. This increases the cost of providing invoice finance and may lead to a refusal of invoice financing. Under the Regulations, such terms will have no effect. According to the government, this will enable more businesses to access invoice finance and in turn diversify finance markets and encourage competition.
Do I need to amend my current contracts?
Although uncertain at the moment, it is unlikely that major changes will need to be made to current standard documents. In relation to corporate share purchase and asset purchase agreements, and transitional service agreements, it should not be necessary to make any amendments to benefit from the exception for corporate acquisition contracts.
In relation to supply contracts, the government has said that businesses do not need to incur costs redrafting their standard contractual terms, as the Regulations do not make bans on assigning invoices illegal, they simply make them unenforceable. Where there is term prohibiting or restricting assignment, the Regulations will simply override the contractual provision.
Despite this, where practicable, it would be sensible to reflect the underlying law in new contracts. Over time, it is likely that contracts will expressly refer to the Business Contract Terms Regulations in order to do this.
If you have any questions around the new Business Contract Terms Regulations or you would like advice on how they may impact your business please contact Neil Williamson.