13.Nov.2018

Upping the 'anti' on anti-assignment clauses in business contracts?

On 31st October 2018, The Business Contract Terms (Assignment of Receivables) Regulations 2018 ("the Regulations") were approved by both the House of Commons and the House of Lords. The Regulations are due to come into effect on 31 December 2018.

Before looking at the Regulations themselves it is useful to understand the historical position as to how the Regulations came about.

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 

In this case from 1994, two parties entered into a construction contact which included a clause stating: "[the] employer shall not without written consent of the contractor assign this contract". Despite this clause, the employer assigned the contract without the permission of the contractor.

The question came before the House of Lords to determine whether:

a) the clause prohibiting the assignment was valid;

b) whether anti-assignment clauses are contrary to public policy; and

c) whether the purported assignment was effective, despite the prohibition.

The House of Lords held that:

a) the clause prohibiting the assignment was valid;

b) anti-assignment clauses are not contrary to public policy; and

c) the purported assignment was not effective.

Criticism of the Linden Gardens case and the draft Regulations

The introduction of a legislative prohibition on anti-assignment clauses was discussed in a 2005 Law Commission report (Company Security Interests). The proposals in the Law Commission report lay dormant until 2014 when the UK Parliament discussed a prohibition on anti-assignment clauses to facilitate the sale of invoices by UK small businesses to invoice finance companies.

In 2017 a first draft of the Regulations was issued. This first draft of the Regulations aimed to:

a) nullify anti-assignment of receivables clauses in all contracts other than excluded contracts; and

b) nullify certain restrictions on what information can be passed to an assignee in respect of receivables.

The draft Regulations included a list of ten forms of excluded contract. The list of excluded contracts included, amongst others:

contracts for financial services;

contracts for the sale of land;

contracts for the sale of shares or a business;

contracts relating to national security interests; and

petroleum licences.

The first draft of the Regulations was criticised by the legal and business community on the basis of it being disproportionate to its aims, and potentially damaging to English law on the basis that it applied to all contracts and not only those that it was intended for (contracts entered into by small businesses).

The Regulations

These criticisms were considered by the government and a further draft of the Regulations was issued on 4 July 2018. 

Whilst the current draft of the Regulations has retained the original structure, two additional classes of exclusions were included and the list of excluded contracts was expanded.

The two additional classes of exclusions in the Regulations are contracts entered into by:

a) large enterprises; and

b) special purpose vehicles.

The addition of these two classes brings the Regulations closer to their initial purpose and importantly resolves some of the main criticisms levelled at the original draft of the Regulations.

The list of excluded contracts class was also expanded to include:

a contact which is an option, future, swap, forward, contract for differences or other derivatives contract; and

contracts entered into for public-private partnership projects and utility projects.

Unfortunately, as the Regulations have not taken on the main criticism from the legal community (that the prohibition should target the sale of invoices by small businesses only, rather than a blanket prohibition with carve-outs for other contract types), the Regulations require careful reading to determine whether a contract falls within the ambit of the Regulations.

Extent of the Regulations

The Regulations apply to contracts governed by the laws of England and Wales or the law of Northern Ireland. As at the date of this note, no instruments have been placed before the Scottish Parliament to create an equivalent prohibition for contracts governed by Scot law.

However, it should be noted that the Regulations include a provision stating that the Regulations have effect where the contract is governed by Scot law (or the law of another country) where the choice of law is wholly or mainly for enabling a party to evade the operation of the Regulations.

 
With additional reporting by James Bulpitt. 

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