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BAN THE BAN: PROHIBITING RESTRICTIONS ON THE ASSIGNMENT OF RECEIVABLES
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KEY POINTS
Restrictions on the assignment of receivables can create problems in practice in financing
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transactions.
The Government plans to prohibit them in most cases.
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This is the wrong approach. There are better ways to deal with the problem.
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Author Richard Calnan
Ban the ban: prohibiting restrictions on
the assignment of receivables
This article summarises the key points in the City of London Law Society’s response to
the Department for Business, Innovation and Skills’ consultation paper, Nullification of
Ban on Invoice Assignment Clauses.
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Receivables are an important element
in the wealth of businesses and, for
that reason, they are frequently financed.
Receivables can be used as security for a
loan, or they can be sold under a factoring
or securitisation arrangement. Either way,
the financing will involve an assignment
(statutory or equitable) or a charge over the
receivables. This is relatively straightforward.
But most receivables are created by
contract, and contracts frequently contain
restrictions on assignment. Take, for instance,
a simple contract under which a payer has
an obligation to pay money to the payee as
consideration for goods or services supplied
by the payee from time to time. If the contract
prohibits the assignment of the receivables
without the consent of the payer, then no valid
assignment can be created unless the payer
consents. Whether or not the particular clause
in the contract does prohibit the proposed
transaction is a matter of the interpretation
of the contract as a whole, read in the context
of the background facts at the time the
contract was entered into. But if, on its proper
interpretation, the intended transaction is
prohibited by the contract, then it is ineffective.
This can be an important issue in financings
in practice. It is not often a problem in relation
to large contracts which it is known have to be
financed – because they tend to be drafted with
an eye on the need for financing. But, where the
financing is over a number of smaller contracts,
the financier needs to check the terms of the
contracts in order to decide whether they
prohibit what is intended; and, if they do, it
needs to obtain the consent of the payer –
which may, or may not, be forthcoming.
It is for this reason that, when the Financial
Law Committee of the City of London Law
March 2015
Society (CLLS) produced a discussion paper
on secured transactions reform in November
2012,1 the paper contained a section on
restrictions on assignment. A working party of
the CLLS is continuing to consider the issues
concerned. In particular, it is considering how
contracts should best be drafted in order to
protect the legitimate interests of the payer,
whilst at the same time enabling the payee to
finance the receivable.
And then the Government entered the
debate. In 2014, it published a Small Business,
Enterprise and Employment Bill which would,
in most cases, have overridden prohibitions
on assignment. Then, in December 2014, the
Department for Business, Innovation and
Skills (DBIS) published the consultation
paper Nullification of Ban on Invoice Assignment
Clauses. At the same time, it published a
draft statutory instrument – The Business
Contract Terms (Restrictions on Assignment
of Receivables) Regulations 2015. The effect of
these regulations would be to override a term
of a contract to the extent that it prohibits
or restricts the assignment of receivables. It
would apply to all contracts unless specifically
excluded.
In February 2015, the CLLS responded
to the consultation paper.2 It made two
key comments. First, it considered that the
proposed legislation approaches the issue in the
wrong way, and that there are preferable ways to
deal with it. It is not an answer to the problem
caused by restrictions on assignment simply to
invalidate them. Secondly, it argued that, if the
legislation is to proceed, it needs to protect the
payer properly and more thought needs to be
given to the extent of its application.
This article summarises the key points in
the CLLS response.
FREEDOM OF CONTRACT
It is axiomatic that the parties to a commercial
contract can decide its terms, and therefore
whether or not it can be assigned. No-one
has expressed the importance of freedom of
contract better than Sir George Jessel MR in
Printing and Numerical Registering Company v
Sampson (1874-75) LR 19 Eq 462 at 465:
“It must not be forgotten that you are not
to extend arbitrarily those rules which
say that a given contract is void as being
against public policy, because if there is
one thing which more than another public
policy requires it is that men of full age
and competent understanding shall have
the utmost liberty of contracting, and that
their contracts when entered into freely and
voluntarily shall be held sacred and shall
be enforced by courts of justice. Therefore,
you have this paramount public policy
to consider – that you are not lightly to
interfere with this freedom of contract.”
Of course, that statement was made
during the glory days of Victorian free trade.
Freedom of contract suffered a setback in
the 20th century, largely because of concerns
about consumer protection. But, since Photo
Production v Securicor [1980] AC 827 in the
1980s, the pendulum has swung back in
commercial cases in favour of freedom of
contract. Now that consumers are catered
for by legislation, there is no reason why
freedom of contract should not prevail in the
commercial sphere.
Parties from all over the world choose
English law to govern their contracts. They do
this because English law gives effect to what
the parties have agreed. Apart from the penalty
doctrine – which is now an historical anomaly
– a court can very rarely override what the
parties have agreed.
Freedom of contract should only be
restricted in commercial transactions in
Butterworths Journal of International Banking and Financial Law
exceptional circumstances – where there is
clear evidence that allowing the parties to
decide for themselves materially damages the
UK economy. We have not seen such evidence
in relation to restrictions on assignment. And
if there is a problem in particular sectors, this is
best dealt with by competition and regulatory
law in a manner proportionate to the risks
involved, not by a blanket ban.
There is no doubt that restrictions on
assignment can cause practical problems in
financing transactions. That is why a working
party of the CLLS is looking at them at the
moment. But the problem is not so grave that
it warrants overriding the rights of one party to
a contract in order to give an advantage to the
other party.
The draft regulations exclude from their
scope certain types of contract (such as
contracts for financial services) where it is
considered that the parties should be free to
restrict assignment. It is recognised – quite
rightly – that a payer may have a perfectly good
reason why it wants to restrict the assignability
of a receivable in a financial services contract.
But this is also true of other types of contract.
It is impossible to specify all those types of
contract where the payer may have a legitimate
commercial reason for restricting the identity
of its payee. In a commercial context, this
should be left to the parties to decide.
It is for this reason that the best way to
deal with the problem is consensually – by
explaining the issues to the parties and
encouraging them to agree restrictions on
transfer which allow receivables to be sold
or charged by the payee whilst at the same
time protecting the legitimate interests
of the payer. The right approach is very
much dependent on the particular contract
concerned. The issues are too nuanced to be
solved by legislation which simply prohibits
certain contractual provisions.
There is no doubt that, in many contracts,
restrictions on assignment are inserted
with very little thought being given to their
purpose and effect. But there are other cases
where these provisions are carefully drafted to
serve a particular purpose, or are negotiated
between the parties in order to reflect the
agreement they have reached. What is needed
in practice is a better understanding of the
types of restriction, and their effects. This
process can be assisted by the drafting of
model clauses and commentaries. But what
is totally unhelpful is legislation which rides
roughshod over the parties’ agreement.
PROTECTING THE PAYER
The payer should not suffer as a result of its
contract being overridden. If legislation is to be
passed, it should make it clear that the payer’s
economic obligations will not be increased
as a result of the payee assigning receivables
to a third party in breach of the terms of the
contract.
For instance, the payer should be able
to exercise the same rights of set-off which
it would have had in the absence of the
assignment. This would not be the case under
the general law. Once notice of assignment
is given, the payer is unable to exercise new
rights of set-off which it obtains against the
assignor. The payer ought to be able to exercise
these rights against the assignee, even though
there has been an assignment. If the contract
prevents assignment, it would be unfair on the
payer to require it to pay more than it would
have had to pay if the terms of the contract had
been complied with.
THE SCOPE OF THE LEGISLATION
The draft regulations override restrictions on
assignment in any contract to which they apply.
There are three elements of uncertainty here.
The first is the type of transaction which
the legislation is intended to override. It
is expressed to apply to assignments of
receivables. This is presumably intended
to cover security assignments as well as
to outright assignments, but there is no
reference to charges. Are they intended to be
covered, or not?
The second concern relates to the identity
of the companies which can benefit from the
regulations. It appears from the consultation
paper that the key driver for the legislation
is the protection of small businesses. But
there is nothing in the draft legislation which
restricts its application to small businesses.
The regulations outlaw restrictions on
assignment in any relevant contract, even if
it is made between two large multi-national
companies. Is that really the intention?
Butterworths Journal of International Banking and Financial Law
Indeed, even if it were restricted to small
companies, it should not be forgotten that,
for every small company which is owed a
receivable, there is another small company
which owes one. Is it appropriate to override
the interests of a small company payer in favour
of a large company payee?
The final concern involves the territorial
scope of the legislation. There is no indication
in the regulations as to the extent of its
territorial application. Is it intended to apply to
all contracts governed by English law, regardless
of where the parties are situated? Or is it meant
to apply to contracts between parties situated
in the UK, regardless of the law which governs
them? Or is there to be some combination of
these two tests? These are crucial questions,
and there is nothing in the draft regulations
which deals with them. There is potential here
for significant damage to the use of English law
by parties to international contracts.
CONCLUSION
There is no doubt that restrictions on
assignment can cause problems in practice.
But that is not a reason to cut across the basic
principle of freedom of contract in commercial
transactions. What is needed is an approach
which understands the legitimate reasons why
parties impose restrictions and which helps
the parties to agree provisions which recognise
that they both have an interest in achieving a
sensible outcome.
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BAN THE BAN: PROHIBITING RESTRICTIONS ON THE ASSIGNMENT OF RECEIVABLES
Feature
Biog box
Richard Calnan is a partner in Norton Rose Fulbright LLP and Visiting Professor at
University College London. He is the author of Taking Security (3rd ed, Jordans, 2013).
Email: richard.calnan@nortonrosefulbright.com
1 CLLS Financial Law Committee Discussion Paper
on Secured Transaction Reform, 22 November
2012. See www.citysolicitors.org.uk; select “City
of London Law Society”, then “Committees”
and then “Financial Law”.
2 CLLS Response to DBIS on Nullification on
Ban on Invoice Assignment Clauses, 2 February
2015. See www.citysolicitors.org.uk as above.
Further reading
Prohibitions on assignment: Contract
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or property? [2014] 11 JIBFL 692
Fixed and floating charges: the Great
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British Fund-Off? [2015] 1 JIBFL 3
LexisNexis Loan Ranger blog: Real
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impetus for reform and research into
English law on secured transactions
March 2015
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