Legal Update
Statutory disapplication of restriction on assignment of contracts
The Small Business, Enterprise and Employment Act 2015 (the Act) contains a power to nullify bans on
assignment of contracts. Section 1(1) provides that either the Secretary of State for Business, Innovation
and Skills or the Scottish Executive may issue regulations disapplying (either wholly or partly) restrictions
on the assignment of amounts receivable under a contract.
The Department for Business, Innovation and Skills (BIS) has
carried out a consultation exercise on the nature and scope of the
regulations applying to English contracts and has now published its
proposals for legislation. Separate legislation will be required in
Scotland to extend the ban to contracts governed by Scots law.
The regulations applying to English contracts will:
•apply to business to business contracts only (contracts with
consumers will not be included)
•extend to all businesses, regardless of size – there was a
suggestion when the Act was first published that the rules should
apply only to SMEs, for whom access to finance is a particular
concern, but this has not been carried forward into the regulations
•exclude financial services contracts. This is because the
functioning of some financial markets products rely on
assignment not being permitted beyond the original parties (for
example, in the case of bank loans or derivative products). The
proposed definition of financial services is very wide, extending to
“any service of a financial nature”, including lending, leasing,
derivative products and exchange rate and interest rate products.
It also includes insurance-related services including life
assurance, reinsurance and insurance intermediation
•exclude contracts relating to interests in land, including tenancy
agreements. There are specific rules applying to contracts relating
to land which should not be displaced by the regulations
•not create any special provisions for supply chain finance
arrangements – exclusivity provisions in supply chain finance
arrangements (which allow a supplier only to access the creditor’s
own supply chain finance scheme and prevent assignment of the
invoice to other providers of finance) will be nullified under the
regulations. This will allow suppliers to opt into supply chain
financing arrangements or seek alternative arrangements with
other invoice financers
•permit debtors to take action against suppliers if they breach
commercial confidentiality – the regulations will not override
confidentiality provisions. In practice this may prevent the
contract from being assigned if the information a supplier is able
to give about a contract it wishes to assign is limited by
confidentiality provisions
•begin from commencement of the regulations. This means it will
not apply to contracts retrospectively
•only apply to contracts governed by English law where at least
one of the parties carries on business within the UK. If suppliers
intend the regulations to apply to their contracts, they should
ensure that they contain a clause providing for English law as the
governing law to prevent any questions being raised about which
law governs the contract. It appears that Scottish companies may
be able to take advantage of the English ban on nullification
pending the introduction of equivalent legislation in Scotland by
selecting English law as the governing law of their contracts – this
will become clearer once the draft regulations are published.
The process of drafting and enacting the new regulations will begin
as soon as possible after the Parliamentary summer break, with the
regulations set to come into force in early 2016.
The invoice finance and factoring industry has welcomed the
proposed legislation, which follows similar bans in the US, Canada
and Australia. It is anticipated that the nullification of contractual
bans on assignment will promote the expansion of invoice financing
to businesses that are currently prevented from accessing funding
by restrictions in their contracts with businesses they supply,
offering a much-needed new source of finance to SMEs in particular.
Contacts:
Edward Sunderland
Partner
Banking & Restructuring
T: +44 (0)121 626 5772
M: +44 (0)7881 617774
E: [email protected]
Lucy Shurwood
Legal Director
Banking & Restructuring
T: +44 (0)20 7418 9571
M: +44 (0)7900 165082
E: [email protected]
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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