Last month the draft Business Contract Terms (Assignment of Receivables) Regulations 2018 were published. The main objective of the draft Regulations is to further facilitate access to finance for businesses by allowing them to assign receivables (i.e. the right to be paid under a contract) to a finance provider; in other words, to extend the use of invoicing financing. If implemented in their current form, the draft Regulations will apply to any term in an applicable contract entered into on or after 31 December 2018. Louise Fegan, Partner in the Corporate and Commercial team delves into this topic in more detail.
Why are the draft Regulations important?
It is estimated that, currently, around 40,000 businesses in the UK make use of invoice finance. Figures suggest that this is around 10% of the number of businesses that could make use of it.
Small and medium sized businesses without collateral have traditionally found cash flow difficult. One obstacle is due to the fact that business contracts very often contain barriers that inhibit them from assigning receivables to others.
The Regulations seek to prevent this practice by providing that a term in a business contract will have 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. It should be noted that this also captures terms, such as confidentiality provisions, which prohibit the assignee of the receivable from determining its validity or enforceability.
What kind of contracts does it apply to?
The Regulations will apply to most business contracts (e.g. contracts to supply goods and services, lease and hire contracts, joint venture and collaboration agreements and outsourcing agreements).
The Regulations will not apply to contracts for financial services, land or for the sale of shares or assets.
Without doubt the intentions behind the Regulations are honourable and can be seen to allow small and medium sized business to access finance and expand. However, the scope of the Regulations may well have unintended consequences such as:
- encouraging businesses to use the governing law of other jurisdictions to prevent interference with their ability to contract freely; and
- the current draft Regulations appear to operate so as to retrospectively invalidate prohibitions on assignment and certain other contract terms.
It is important to note that the draft Regulations will need to be approved by a resolution of each House of Parliament. Furthermore, if approved, the Regulations will be reviewed after 5 years to assess their impact on businesses and the wider economy.
Other articles from August's newsletter
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.