Out-Law News 3 min. read
07 Sep 2015, 4:43 pm
The UK government is expected to pass regulations nullifying 'bans on assignment' in certain commercial contracts shortly, to enter into force early in 2016. The new regulations will give legal effect to a power contained in the 2015 Small Business, Enterprise and Employment Act ('the Act') and will apply to English contracts only at this stage. Separate legislation will be required in Scotland to extend the ban to contracts governed by Scots law.
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 the businesses that they supply, offering a much-needed new source of finance to small and medium-sized enterprises (SMEs) in particular.
What is changing?
Ban on assignment clauses are typically used to prevent a supplier from sub-contracting work. However, these clauses often have the unintentional consequence of blocking invoice finance arrangements, which allow businesses to apply for finance using invoices for money owed to them as security. According to the Asset Based Finance Association, which represents the UK invoice finance industry, more than 44,000 businesses receive over £19 billion of funding this way at any one time.
The government's intention is to nullify those clauses that block invoice finance, while retaining the customer's right to prevent the supplier from sub-contracting the work in the traditional way.
The regulations applying to English contracts will:
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, with the regulations set to come into force in early 2016.
Edward Sunderland and Lucy Shurwood are banking law experts at Pinsent Masons, the law firm behind Out-Law.com.