Restrictions on assignment in contracts

It may be of marginal relevance to many IP-related contracts. But there will be some situations where, in future, a contract term that prohibits assignment of the benefit of the contract is not enforceable.

The Business Contract Terms (Assignment of Receivables) Regulations 2018 apply to any term in a contract entered into on or after 31 December 2018. In the words of the explanatory memorandum which accompanies the Regulations:

These Regulations deal with terms in contracts to which the law of England and Wales or the law of Northern Ireland applies which prohibit or restrict the assignment of receivables. A receivable is a right to be paid under a contract for the supply of goods, services or intangible assets. Various types of contract are excluded from the scope of the Regulations.

The main purpose of the Regulations is to make is easier for SMEs to enter into debt financing arrangements. If you are an SME, you may want to “sell” to a finance house the right to recover debts you are owed by your customers. The finance house will give you a percentage of the amount of the debt and they will then take on responsibility for recovering the debt. IP Draughts understands that Lloyds Bank is, or has been, a market leader in this sector.

As an aside, this only really works for the sale of routine products. For anything more complicated, a customer who doesn’t want to pay would likely raise allegations that the product or service had not been provided correctly, and the result would be a messy dispute.

Unfortunately, the drafter of the legislation has tried to address much more than this simple situation, and in doing so has ended up with an unlovely mess of detailed definitions, terms, and exceptions, which (in IP Draughts’ view) raise too many questions of interpretation.

Summary of the Regulations

At the heart of these Regulations is Regulation 2(1), which provides:

…a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.

Thus, if you have a boilerplate assignment clause in your contract that prevents a party from assigning the benefit of the contract, this may in some situations be unenforceable.

Regulation 2(3) lists the situations in which a party is so prevented, and they include terms that prevent the supplier from disclosing certain details about the contract, e.g. the names of the contracting parties and the amount owed. Thus, some confidentiality terms in contracts could potentially be unenforceable to the extent they prevent disclosure of information about the contract itself.

There are some restrictions in the Regulations on when the above-quoted provision applies. They include:

  • “Receivable” is defined as a right (whether or not earned by performance) to be paid any amount under a contract …for the supply of goods, services or intangible assets.
  • “Intangible assets” are defined as including electricity and data which are produced and supplied in digital form. IP Draughts’ initial reaction is that many software supply agreements should be treated as being for the supply of intangible assets. He also wonders whether research agreements would be treated as contracts for the supply of a research report (if it is supplied in digital form). Alternatively, these may be contracts for services.
  • However, Regulation 4 sets out a long list of excluded categories that are not within the scope of the Regulations. This includes, at item (m): “a contract, not falling within paragraph (a), entered into wholly or mainly for the purpose of granting by one person of a right to possession or control of an object to another person in return for a rental or other payment.” IP Draughts speculates that the drafter had in mind things like photocopier leasing agreements. Object is not defined in the Regulation. (Is it defined elsewhere?) Is software an object? IP Draughts’ instinctive view is not, but applying common sense doesn’t always lead to the right legal answer (!)
  • The Regulations don’t apply if the supplier is a “large enterprise”. Confusingly, large enterprise is defined as anything other than organisations that fit within the categories in Regulation 3(3).
  • Regulation 3(3) sets out a long list of non-large enterprises, which includes: (b) a company to which the small companies regime (within the meaning given by sections 381 to 384 of the Companies Act 2006) applied in the relevant financial year and which was not a member of a large group in the relevant financial year;(c) the supplier is a company which qualified as medium-sized (within the meaning given by sections 465 to 467 of the Companies Act 2006) in respect of the relevant financial year and which was not a member of a large group in the relevant financial year;
  • Some other categories are excluded from the Regulations, including, under Regulation 4(c): “a contract where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession”. Might this conceivably cover some university research contracts?

Comments

The Regulations form part of the present UK government’s initiatives to support small businesses, e.g. when faced with large customers who don’t pay on time. The drafter was presumably mainly focused on simple contracts for the sale of stock items of goods, which is where debt financing is most likely to be available.

As to whether the Regulations cover niche topics like software supply, IP licensing or academic research contracts, it is probably too soon to give a definitive answer – we need to see some case law from the senior courts. IP Draughts looks forward to being instructed to bring such a case to the UK Supreme Court!

There doesn’t appear to be any sanction for including an unenforceable restriction on assignment in your contract. The consequence of doing so is simply that the term “has no effect to the extent that” it includes such a restriction. Drafters may want to think about the severance clauses in their contracts, with a view to mitigating the possibility that an unsympathetic court might strike out the entire assignment clause. And you might want to think about including wording such as “to the extent permitted by applicable law” in your assignment clause.

This is an other example of politicians eroding the principle of freedom of contract in support of political objectives, here to support the “nation of shopkeepers” who run SMEs. The previous article on this blog, about new EU-derived terms in trade mark agreements, is another example, though in that case the political objective is removing national barriers to trade within the EU.

Back in the 1970s, we had lots of new legislation to protect consumers and workers, such as unfair dismissal legislation and the Unfair Contract Terms Act 1977. Now the focus is on protecting SMEs. In both cases, they create work for lawyers, particularly when the legislation raises as many questions as it answers. So, perhaps IP Draughts should be glad of the government’s latest lawyer-job creation scheme.

 

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