Many standard contracts include a prohibition of assignment clause that either restricts assignment as a whole or requires permission, as a condition of assignment, from the other contracting party before an assignment can take place. For example, standard construction JCT contracts include such provisions. From next year, however, new regulations will apply to most commercial contracts which seek to remove some of the current restrictions.
The introduction of the Business Contract Terms (Assignment of Receivables) Regulations 2018 means that, in theory, parties to contracts will be able to freely assign rights to the receivables of a contract to a third party without consulting the other contracting party or parties. A receivable is defined as a right to be paid any amount of money under a contract for the supply of goods, services or intangible assets such as payment for construction contracts or a service provided where payment is yet to be received.
Regulation 2(1) states that (subject to Regulation 3 and Regulation 4) any term in a contract that seeks to impose a restriction or condition on the assignment of a receivable has no effect. Regulation 3 sets out an exception for suppliers that are large enterprises or special purpose vehicles. An entity will be a large enterprise if it satisfies one of the criteria set out in Regulation 3(3) such as being classed as a medium-sized business under the Companies Act 2006. An entity is a special purpose vehicle if its primary purpose is the holding of assets or the financing of commercial transactions where it incurs liability of £10 million or more. Regulation 4 sets out other exceptions, which amongst others, includes, contracts for financial services, interests in land and parties acting outside its trade, business or profession.
A benefit of the Regulations is that a party in financial difficulty will be able to assign its rights and benefits of a contract to a third party, raising cash for the assignment of a receivable before any such receivable is due and payable, regardless of any clause purporting to restrict assignment. The Regulations will also bring a further degree of commerciality to some types of contracts that previously did not exist.
The introduction date for the Regulations of 31 December 2018 is fast approaching and if you have any concerns about the Regulations, or you want to know more about them, how they might impact your business, and how they might impact existing or future contracts, please do get in touch.