Prohibitions and restrictions on the assignment of receivables - what employers and main contractors need to know
The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) came into force on 31 December 2018. The Regulations apply to any term in a contract entered into on or after this date; including any contracts which are novated. A receivable is a right to be paid under a contract for the supply of goods, services or intangible assets.
The purpose of the Regulations is to void any term in a contract which prohibits or imposes a condition or other restriction on the assignment of a receivable arising under any contract. The imposition of a condition or other restriction includes any term which prevents the assignee from determining the validity or value of the receivable or their ability to enforce the receivable.
There are specific exemptions to the Regulations, the first of which is where the supplier is a large enterprise or a special purpose vehicle. A large enterprise is, broadly speaking, a company which is not an individual, an unregistered partnership, an incorporated company or limited liability partnership which qualifies as a small or medium sized company under the Companies Act 2006. A medium sized company is one that satisfies 2 or more of the following criteria:
- Turnover is not more than £25.9m
- Balance sheet total is not more than £12.9m
- Number of employees not more than 250
The second exclusion to the Regulations is various types of contracts, such as prescribed financial services, interests in land and contracts for the sale of shares in a business. The reference to land contracts being excluded is very interesting, and indicates that the Regulations are unlikely to apply to development agreements being procured as turnkey deals, which may be of particular interest to local authorities and registered providers.
The explanatory note to the Regulations states that a debtor's existing contractual rights of set off are not fettered by the Regulations. This upholds the long standing legal principle that existing rights are not extinguished by an assignment and that the assignee cannot be placed in a better position than the assignor would have been in.
It has become increasingly common for Small and Medium Enterprises (SME) to, where permitted, assign the receivables payments to a finance company for immediate payment, subject to a reduction in the percentage of the receivables owed. This is sometimes referred to as factoring or invoice discounting. Whilst uncommon in the construction industry, there are niche providers who do offer this solution in this market.
The Regulations have been implemented in an attempt to combat poor payment practices within businesses, to improve cash flow for SMEs and to prevent large companies prohibiting factoring or invoice discounting by SMEs as a way of improving cash flow.
This is of particular importance to the construction industry, where it is extremely common for contracting parties to either impose an absolute prohibition on assignment on all or part of a contract, or to impose restrictions on assignment.
Employers and main contractors will typically wish to restrict assignments so that they know the entity that they are dealing with at all times, and have control over which entity that might change to on any assignment. A common example of a restriction on assignment is requiring the written consent of the employer/main contractor prior to any assignment being effected.
A primary issue of the implementation of the Regulations on parties is the fettering of their rights to freely negotiate their own contractual terms. This raises the further question of whether or not the current drafting of assignment clauses needs to be amended to reflect the changes in the Regulations.
The Regulations provide that a term in a contract '...has no effect to the extent that...' it prohibits or imposes a condition or other restriction. As a result of the drafting, our view is that existing assignment clauses need not be amended, as where the Regulations are applicable the prohibition or restriction on assignment in respect of the receivables will not have effect, whereas the prohibition or restriction will have effect in respect of non-receivables.
However, to avoid any potential arguments over the construction of a clause which prohibits assignment of any part of a contract, it may be prudent for businesses who deal with SMEs on a regular basis to expressly carve out receivables from any prohibition or restriction on assignment clauses in your standard contracts or terms and conditions.
Ultimately, if your supply chain comprises a large number of SMEs, there will be nothing your organisation can do to prevent factoring arrangements being put in place. Therefore quality assurance and management may need to be implemented for works which comprise of interim payments.
In particular, queries on invoices or the value of the works actually completed should be challenged at the earliest opportunity. This will ensure that you will prevent over payments to the factoring company, and prevent being required to go through a lengthy process to reclaim any monies overpaid.
This article is taken from Building Interest - Winter 2019.