Francis Ho warns that legislation permitting the assignment of payment rights could do more harm than good

The Business Contract Terms (Assignment of Receivables) Regulations 2017 were recently laid before parliament. All that remains to see them into law is a resolution from each house.

Trade receivables are rights to payment for work carried out. The legislation would nullify any clauses prohibiting their transfer between businesses where they arise from agreements for the supply of goods, services or intangible assets, some exceptions aside.

Under English law, contract rights may be assigned freely. However, suppliers are routinely compelled by employers to surrender this privilege. That severely limits their borrowing power, according to the Department for Business, Energy & Industrial Strategy (BEIS). It wants to improve suppliers’ cash flow by enabling them to have better access to receivables finance through the new regulations.

The practice of imposing non-assignment provisions on payees throughout the supply chain allows each to trust that payments will cascade down rather than be diverted elsewhere 

Specifically, BEIS has one variant in mind: invoice discounting. This is where the payee assigns unpaid bills to a lender as collateral in return for an advance against their face value. The balance is released when the invoices are settled, less a fee. The loan is off-balance sheet. Receivables could also be sold on (“factored”) to legal claims buyers or other entities experienced in recovering debts. Under the legislation, a supplier could be both payee and payer if, for example, it has liability for liquidated damages.

It seems a progressive step but the reality is less straightforward in construction, with its reliance on supply chains. The practice of imposing non-assignment provisions on payees throughout the supply chain allows each to trust that payments will cascade down rather than be diverted elsewhere. Likewise, developers can be sure funds are applied for project purposes. Unquestionably, industry practice has advanced in recent decades, aided by the Construction Act and recent initiatives such as the Construction Supply Chain Payment Charter.

Supply chain controls would be harder to enforce under the legislation. If worried about factoring by main contractors, developers could arrange to pay key subcontractors themselves through bespoke direct payment guarantees or project bank accounts rather than under the main contract sum. They could also demand enhanced performance security. Subcontractors could insist on payment guarantees or increase their trade credit insurance. None of these options is problem-free.

Although receivables finance may ease cash flow or offer respite to struggling firms, construction’s tight margins may make it unsustainable in the longer term. Tier one contractors, with large revenues, may gain the most.

As the City of London Law Society has flagged up, the regulations are riddled with ambiguities. They are certainly pithy. How the government felt that 500 or so words were adequate when a comparable instrument, the UN Convention on the Assignment of Receivables in International Trade, fills 26 pages, one will never know.

Although receivables finance may ease cash flow or offer respite to struggling firms, construction’s tight margins may make it unsustainable in the longer term  

Some of the uncertainties, such as whether the legislation covers existing contracts, have been answered in other departmental publications, but why did it not simply amend the regulations?

Similarly, the anti-avoidance measures could benefit from refinement. Recognising the popularity of English law in cross-border agreements, the regulations exclude arrangements where the applicable law is that of England and Wales or Northern Ireland only through choice. However, this may lead to conflict of laws issues in other situations.

The regulations outlaw provisions not only to the extent they prohibit the assignment of receivables arising under the contract concerned, but also those of the payee under other contracts. The aim was to catch call-off agreements issued under a framework contract, but it may leave banks sweating over the efficacy of negative pledges. These covenants prevent borrowers from creating security over other assets without lender approval.

Remarkably, doubts surround the very meaning of assignment and the prohibitions under the regulations. Are conditions precedent to assignment acceptable, such as requiring a notice period, the payment of a fee or even NEC4’s imperative that the assignee must look to act in a spirit of mutual trust and co-operation?

How is it that the regulations stand on the brink of becoming law? The plain reason may be that their shortcomings were not widely discussed. While covering all business-to-business arrangements, when first mooted they were intended to help those involving small and medium-sized enterprises. The consultation period for the legislation then garnered few responses, none from the construction sector.

With many industries facing a tough time over Brexit, this is not the moment to introduce further upheaval with these regulations. At the very least, they should be withdrawn and assigned to the drawing board while further market feedback is obtained. Let’s stay silent no longer.