The Business Contract Terms (Assignment of receivables) regulations 2018 came in to force on the 24th November 2018 and applies to contracts entered into on or after 31st December 2018. The regulations only apply to England, Wales and Northern Ireland.
What are they?
The regulations make unenforceable any term in a business contract entered into on or after 31st December 2018 which prohibits or imposes a condition or other restriction on the ability of a party to assign a receivable under that contract or any contract between the same parties.
In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.
The regulations also make unenforceable terms which prevent a person who has been assigned the receivable being unable to enforce the contract, or determining its validity or value.
The objective of the Regulations is to give access to different methods of financing for businesses, by allowing them to assign receivables to a finance provider and receive capital sooner than they would otherwise if they had to wait for the payment of an invoice.
A receivable is defined as a right to be paid under a contract for the supply of goods, services or intangible assets. The government considers that the regulations will affect contract provisions restricting assignment generally only in so far as they relate to receivables.
Why have they been introduced?
The regulations were first proposed with a view to helping small and growing businesses have a way of accessing external sources of finance so that they are able to invest and grow.
Allowing for businesses to assign their payment rights means that party A is able to receive payment from a third party finance provider for the provision of goods and services prior to receiving the payment from the Party B, with the payment from party B being paid to the third party finance provider eventually.
Commercial contracts often contain provision prohibiting the assignment of invoices due under the contract, which leads to finance providers refusing to provide invoice financing.
The regulations will allow for businesses to use invoice financing and hopes to diversify finance markets and encourage competition.
Are there exemptions?
The regulations contain a number of exemptions.
- The regulations do not apply to contracts which have as their purpose the acquiring, disposing or transferring of ownership in a firm (as defined in the Companies Act 2006) whether incorporated or established, or of a business or undertaking. For this exemption to apply, the contract must include a statement to that effect.
- There are also a number of other types of contracts which the regulations do not apply to, including consumer contracts, real estate contracts, public-private partnership contracts and rental contracts.
- Another exception is where the party assigning the receivable is a large enterprise or a special purpose vehicle, with assets or financing commercial transactions involving it incurring a liability under an agreement of £10 million or more.
- The regulations also do not apply to services of a financial nature. The definition of ‘financial nature’ is construed widely and includes leasing, loan relationships, insurance, banking and all types of securitisation and derivative transactions, amongst other services of a financial nature.
- The regulations generally do not apply to contracts that relate to non-UK businesses. However, parties cannot contract out of the regulations by changing the contract’s governing law, if the only reason for doing so is to circumvent the regulations.
What should I do?
Many contracts will be unaffected by this change in legislation, however this will depend on the terms of the contract and the nature of what is being provided.
If you have a contract which has been entered into on or after the 31st December 2018 and you are concerned about whether it will be affected by this legislation, please contact Mark Chapman on 01276 854928.
This is written as a guide, it is not intended to contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.