Construction contracts and assignment of invoices: the future

With the festive season in full swing, thoughts invariably turn to the New Year and along with expectations and good intentions comes the prospect of regulatory changes. These include the Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015 (the Regulations), which are expected to come into effect in early 2016.

The Regulations aim to make it easier for small and medium sized business to access cheaper and alternative methods of finance, by nullifying any contractual provision which purports to prohibit or restrict a supplier’s right to assign their invoices.

Given that most construction contracts contain restrictions on assignment by suppliers of goods or services, awareness of these new measures for construction clients and suppliers alike is key.

Some background

The new Regulations, heralded by a December 2014 consultation and confirmed in August 2015, are intended to address the perceived inequalities and limitations of supply chain payments. Currently, small and medium sized businesses often have to wait for quite some time after they have delivered their goods or services before they are paid. While changes brought in by the Construction Act 1996 have gone some way towards providing certainty of payment timings, clients in strong commercial bargaining positions are still able to insist on long payment periods. This can jeopardise a supplier’s cash flow.

Traditional forms of finance generally do not look to invoices as a preferred form of collateral. However, invoice financing allows businesses to use the debt owed to them from invoices issued as collateral for finance. In exchange for a fee, which is assessed by reference to the creditworthiness of the assignor and, through them, their debtors, the supplier will receive earlier payment from the finance provider. Although this will be less than the original invoice amount, it will ease the pressure on a supplier’s cash flow. For such finance to be available to a supplier, it must be able to assign the relevant invoices to the finance provider. (Technically, what is assigned is not the invoice itself, but the right to receive payment under it. However, for the purposes of this blog I’ll refer to invoice assignment.) The finance provider will then seek to recover payment of the invoice in full from the debtor.

Do the new Regulations apply to construction contracts?

The new Regulations seek to open up access to this form of financing by nullifying clauses that prohibit, either directly or by extension, a supplier’s right to assign its invoices. The government has confirmed that the revised Regulations will:

  • Only apply to contracts put in place after the commencement of the Regulations.
  • Only apply to English law B2B contracts where one party carries on business within the UK.
  • Apply to businesses of all sizes.
  • Not create any special provisions for supply chain finance arrangements. This means a supplier can either access the supply chain’s finance or, alternatively, choose to assign its invoices to a finance provider.
  • Permit debtors to take action if, in assigning the invoice, the debtor’s confidentiality is breached.

Given their nature and the body of existing legislation, financial services contracts and contracts with an interest in land will not be caught by the Regulations.

In its August response to the December consultation, the government made clear that the new Regulations will only nullify terms that prohibit or restrict the assignment of invoices. Assignment provisions that seek to limit traditional sub-contracting arrangements or that deal with assignment of the contract itself will not be affected.

What do you need to do?

The new Regulations have not yet been published in their final form, so we do not know exactly what they will say nor how they will work in practice. However, certain steps can be taken now to mitigate any nasty surprises when the new legislation is finally unveiled.

Make it one of your New Year resolutions to revisit the assignment provisions in your construction contracts and ensure that they cannot be misconstrued to apply solely to the assignment of invoices. Ways of doing this include:

  • Expressly stating in clauses which purport to limit a supplier’s right to assign that this only applies to the contract itself and not to the assignment of invoices.
  • Revisiting the confidentiality clauses to make it clear that the obligations on the supplier extend to any assignee of its invoices.

These Regulations are intended to help small and medium sized businesses. However, we all know the adage about the proof of the (Christmas) pudding being in the eating, and this is very much the case here. The Regulations will need to come into force before we can tell whether they really do ring in the positive changes.

Berwin Leighton Paisner LLP Katie Parkinson

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