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If you contract with a supplier of goods or services who is an SME, you may want to re-evaluate the validity of certain contract terms in the light of the recent Business Contract Terms (Assignment of Receivables) Regulations 2018 (the "Regulations"). The Regulations are expected to facilitate SMEs' access to working capital through invoice financing (such as discounting or factoring) and thus reduce the dependency on customers' payment. To achieve such goal, these Regulations will invalidate clauses which, in effect, prohibit or restrict an eligible supplier from assigning their receivables (i.e. the right to payment) under commercial contracts. A key point to note is that the Regulations will not nullify the contract as a whole or the entire invalid clause, but only to the extent the Regulations are applicable to receivables.
Contractual terms entered into (including via novation) on or after 31 December 2018 will be subject to the Regulations, save for the specified exceptions. For example, the Regulations do not apply if the person to whom the receivable is owed is a large enterprise or a special purpose vehicle. Various types of contracts are also excluded, such as contracts relating to financial services, interests in land or sale of shares, etc.
These Regulations may lead to the need for certain changes to the drafting and implementation of relevant commercial contracts:
- No assignment. An eligible supplier will be able to assign their receivables to a debt purchaser without having to seek their customers' prior consent. This means a blanket no-assignment clause (such as "No party may assign, subcontract or encumber any right or obligation under this agreement, in whole or in part, without the other’s prior written consent") will no longer work for receivables. We recommend that any no assignment clause should be stated to be without prejudice to the Regulations, and will have no effect to the extent that any term of the agreement prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under the agreement.
- Confidentiality obligation can still be imposed on suppliers, save for any "essential information" that enables the identification of "receivables", as listed in the Regulations. This means information that enables the identification of "receivables" may be disclosed by a supplier to a third party purchaser for the purpose of receivables assignment or transfer without constituting a breach of confidentiality.
- Set-off. The Explanatory Note to the Regulations clarifies that a contractual right to set-off is not considered as a restriction on transfer of receivables for the purpose of the Regulations. Although the right to set-off is maintained, you may want to consider practical impact of the Regulations on the mechanism to exercise the right to set-off, such as how your cash flow will be affected if you are no longer able to consolidate future transactions to set-off against one original invoice that has already been assigned to a third party.
If you would like to have a further discussion about these Regulations and their impact on supply of goods and services contracts, please contact Brian Farrell.