The Business Contract Terms (Assignment of Receivables) Regulations 2018 - back for good?

In an illustration that if at first you don’t succeed, you should try and try again, the UK government has published a revised draft of the regulations designed to prohibit contractual clauses which prevent one party from assigning its right to payment to a third party.

The first iteration of these regulations, designed to open up invoice finance to smaller businesses by removing contractual restrictions, was published back in December 2014. However they were viewed as having various flaws and the government went back to the drawing board. Last September saw the publication of The Business Contract Terms (Assignment of Receivables) Regulations 2017 only for the same to be withdrawn before year-end because of a perception that they still required further work.

Below we provide a summary of the key features of The Business Contract Terms (Assignment of Receivables) Regulations 2018. However before we continue it’s worth highlighting two specific exemptions from the draft legislation.

Two key exemptions

Firstly, the regulations do not apply to contracts to acquire a business or an interest in a firm. This removes the previous uncertainty as to whether or not the general prohibition outlined below would apply to restrictions on assignment contained in share and business sale agreements. Under the draft of the regulations, it will not.

Secondly, contracts entered into by a project company of a project which is a public-private partnership project, a utility project or a financed project are also exempt from the draft regulations. This may be in response to previous feedback on the earlier draft of the regulations. In particular, in its response to The Business Contract Terms (Assignment of Receivables) Regulations 2017, The City of London Law Society (CLLS) noted that prohibitions and restrictions on assignment (including assignment of receivables) are common in construction contracts, such as the JCT suite of contracts, because developers wish to ensure that the money they spend goes to the subcontractors and suppliers undertaking the work on a given project.

The CLLS expressed the view that the previous draft of the regulations had the potential to create uncertainty and market disruption in a wide range of transactions in the building infrastructure and energy construction markets in the UK. Whether the revised draft of the regulations adequately address such concerns remains to be seen (as at the date of this alert, the CLLS has not yet published any response to the latest regulations). 

Overview of The Business Contract Terms (Assignment of Receivables) Regulations 2018

If approved by Parliament, the regulations would provide as follows:

• General prohibition: regulation 2 of the draft regulations sets out a general prohibition which says 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 broad terms, this means that a term contained in a contract between parties A and B, under which party A pays sums to party B in return for the supply of goods or services by party B to party A, but which prevents party B from assigning that payment right to non-party C, will have no effect.
• Anti-avoidance: the draft regulations also include provisions which are designed to prevent contract parties from circumventing the general prohibition outlined above by preventing an assignee of a payment right from determining the validity or value of the receivable or their ability to enforce the receivable. To this end, the draft regulations list 13 different categories of information which, if the assignee is unable to obtain such information by reason of a restriction in a contract, then such contractual restriction will also be of no effect. These categories of information include (among other things) the names of the contract parties, the relevant goods, services or other assets which give rise to the receivable, the amount payable (including any VAT chargeable), any applicable discount and the credit period applicable to the receivable. So, using the previous example, if a contract entitled party B to assign its receivable to non-party C but did not allow party B to disclose any of the foregoing details regarding such receivable to non-party C, then under the draft regulations such contractual restriction would also be of no effect.
• Exception for suppliers which are large enterprises or SPVs: regulation 3 of the draft regulations provides that the general prohibition outlined above does not apply, and accordingly contractual restrictions which prevent the assignment of a receivable shall continue to have effect, if at the time of the assignment the supplier (i.e. the creditor) is a large enterprise or a special purpose vehicle. In practice, this will allow smaller businesses to continue to impose restrictions on assignment when contracting with large businesses. The regulations go on to clarify what is meant by a “large enterprise” which, in broad terms, includes any company or limited liability partnership unless it is a small or medium-sized business and is not a member of a large group. So, the regulations would apply if, using our previous example, party B (the supplier) is a company to which the small companies regime (within the meaning of sections 381-384 of the Companies Act 2006) applied in the last financial year (before the date on which the receivable is assigned) in respect of which the supplier filed accounts. The opposite would be true if party B failed to satisfy any one or more of the conditions which mark out a small or medium-sized business from a large one in regulation 3 of the draft regulations.   
• Exempt contracts: as with previous iterations of the proposed regulations, the draft regulations continue to exempt certain kinds of contracts from their scope. As well as those highlighted under the first heading above, the regulations do not apply to contracts for prescribed financial services, contracts concerning any interest in land, consumer contracts, petroleum licences, contracts concerning a matter of national security, securities options, forwards, swaps and other derivatives.
• Territorial application: the draft regulations would only apply to contracts governed by English law. There are deeming provisions which provide that the regulations would still apply where parties deliberately adopt the governing law of a country outside of the United Kingdom in order to evade the operation of the regulations.      

If the draft Business Contract Terms (Assignment of Receivables) Regulations 2018 do receive Parliamentary approval, they would apply to contracts entered into on or after 31 December 2018. Watch this space to see if they do finally make it past the finishing post in their latest guise.