Prohibiting restrictions on assignment of receivables

Publication | September 2017

Section 1 of the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate clauses in certain contracts which prevent the assignment of receivables. The Business Contract Terms (Assignment of Receivables) Regulations 2017 have now been laid before Parliament for approval by resolution of each House of Parliament. It is expected that they will come into force in November or December 2017.

The purpose of this note is to discuss the implications of the new law.

What types of contract does it apply to?

This question can be broken down into three issues:

  • the nature of the contract
  • the law governing the contract
  • the time the contract was entered into.

As far as the nature of the contract is concerned, the new law will apply to all contracts except those excluded. The exclusions are:

  • Financial services contracts (Regulations, clause 1(2)(a)). The meaning of “financial services” is set out in clause 1(2) of the Regulations and section 2 of the Act. It means “any service of a financial nature”, and then there is a long inclusive list of specifics.
  • Contracts which concern any interest in land (Regulations, clause 1(2)(b)).
  • Contracts where one or more of the parties is acting for purposes which are outside a trade, business or profession (Regulations, clause 1(2)(c)).
  • Certain energy and petroleum contracts (Regulations, clause 1(2)(f)-(h)).
  • Contracts concerning national security interests (Regulations, clause 1(2)(e)).

Despite the title of the Act, the new law does not only apply to small companies.

Parties will need to consider the precise scope of these exclusions in the light of the types of transactions they see in practice.

The new law applies to contracts which are governed by English law (this is not explicit, but it is implicit in clauses 1(2)(d) and 1(3) of the Regulations). But it does not apply where English law has been chosen by the parties and, apart from that choice, the governing law would be the law of another country (Regulations, clause 1(2)(d)). The dividing line between these two may not be straightforward.

It follows that the new law does not generally apply to contracts governed by foreign laws. But there is an anti-avoidance provision in the Regulations (clause 1(3)), which provides for the prohibition to apply where the parties have chosen a foreign law wholly or mainly for the purpose of evading the operation of the Regulations. So, for instance, it would not be possible to have a contract which was governed by English law generally, but where the prohibition on assignment was governed by, say, Irish law.

Once the law comes into effect, it reads so that it covers all contracts, including those in existence at the time the new law comes into effect. That is not what one would normally expect.

What types of clause does it apply to?

In general terms, the new law invalidates a clause which purports to prohibit the assignment of a receivable.

A “receivable” is “a right… to be paid any amount under a contract (other than an excluded contract) for the supply of goods, services or intangible assets” (Regulations, clause 1(2)).

The new law (Regulations, clause 2) provides that a “term of a contract has no effect to the extent that it –

  1. prohibits the assignment of a receivable arising under that contract or any other contract,
  2. prevents a person to whom a receivable is assigned (“the assignee”) from determining its validity or value (including determining their ability to enforce the receivable), or
  3. hinders the assignee’s ability to enforce the receivable.”

It is not entirely clear what (b) and (c) in Clause 2 are getting at. They are presumably intended only to deal with clauses which are specifically aimed at restricting the rights of the assignee. That is the natural meaning of the words, and it is also consistent with section 1(2) of the Act which allows the Regulations to deal with “a term which prohibits or imposes a condition, or other restriction, on the assignment… by a party to the contract of the right to be paid any amount under the contract or any other contract between the parties.”

Assignments, charges and trusts

“Assignment” is not defined.

The new law clearly applies to outright assignments of receivables, but it is not entirely clear to what extent it covers security interests.

On the face of it, the new law extends to security assignments but not charges (or, indeed, trusts). But this might have the result that the parties cannot prevent a security assignment but can prevent a lesser interest such as a charge. There will no doubt be differing views on this point.

Protection of the payer

One of the reasons why restrictions on assignment are included in contracts is to protect the payer from having to pay more to an assignee than it would have to pay to the assignor. The assignee’s claim against the payer derives from the assignor’s claim, and therefore the contractual amount owing by the payer cannot be any greater if it is payable to the assignee than it would have been if it had been payable to the assignor. But, where an assignment can prejudice the payer, is by reducing its defences to a claim under the contract.

It is common for parties to enter into a series of contracts with each other over time. In the absence of an assignment, this means that the payer may have a defence to a claim by its counterparty if it has a cross-claim against that counterparty under another contract. A set-off would be available if there were express provisions in the contract to that effect, or if the cross-claims were liquidated, or if they were so closely connected that it would clearly be unfair for one to be paid without taking account of the other.  And what is particularly important in practice is that the payer would have a set-off in the insolvency of the counterparty as a result of the insolvency legislation.

But, if the counterparty assigns its claim against the payer, and if the assignee then gives notice of the assignment to the payer, the payer’s rights of set-off are restricted to those which existed at the time it received notice of the assignment. If it subsequently enters into a separate contract with the counterparty, it will not be able to set off an unconnected claim arising under that contract, even if the counterparty enters into insolvency proceedings. The claims are no longer mutual – they are owed between different parties.

The result of all this is that the payer can find itself in a worse position as a result of the assignment than it would have been if no assignment had been effected.

There is nothing in the new legislation to protect the payer. It can rely on its rights under the general law, which are extensive but not as good as an effective prohibition on assignment. Payers will doubtless consider the extent to which they can be protected by appropriate drafting – not to prevent the assignment but to limit its adverse effect on the payer.