Business Contract Terms (Assignment of Receivables) Regulations 2018: implications for the oil & gas sector

The Business Contract Terms (Assignment of Receivables) Regulations 2018 (the “Regulations”) came into force on 24 November 2018. The aim of the Regulations is to make it easier for small and medium-sized enterprises to access invoice financing. To that effect, the Regulations provide that, under certain contracts, clauses purporting to prohibit the assignment of receivables will no longer work. The Regulations can be accessed here.

What prompted the Regulations?

Invoice financing is a way for businesses to borrow money against the amounts due from their customers, thereby releasing funds tied up in outstanding invoices. The right to be paid (the “receivable”) is assigned to a finance provider, who in turn provides funds upfront. This is a key financing option for businesses – particularly in sectors where companies may have to wait a long period between issuing an invoice and receiving payment.

Commercial contracts, however, often include a clause prohibiting the assignment of any rights under the contract – this would include receivables, thus preventing the parties from accessing this form of financing. Whilst that is rarely an issue for cash rich larger companies, smaller businesses (and therefore those with typically less contractual negotiating power) can be detrimentally affected by such a restriction.

What do the Regulations say?

Essentially, the Regulations prohibit reliance on terms in business contracts that prohibit or restrict the assignment of receivables, unless the relevant contract is exempt. The definition of “receivable” is very broad: it is “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” (Regulation 1(3)).

The Regulations also prohibit (Regulation 2(2)) any terms that would prevent a potential assignee from validating or valuing the receivable that may be assigned, or their ability to enforce the receivable once assigned. That may, for example, impact provisions such as confidentiality terms that would prevent a company from sharing the value of receivables that it may expect to receive under a contract.

It is also worth noting that the term “assignment” has not been defined under the Regulations. In practice, receivables can be transferred in various ways. A transfer could, for example, be outright by way of sale, or by way of security. The lack of definition of assignment may be taken to imply that all forms of assignment are intended to be caught by the Regulations but this is not certain.

What contracts do the Regulations apply to?

The Regulations apply to business contracts which are governed by the laws of England and Wales or Northern Ireland and are entered into on or after 31 December 2018, other than those contracts that fall within a number of different categories of exceptions, as explained further below. It is important to note here, that while contracts governed by the law of Scotland (or of a country outside of the UK) generally do not fall within the scope of the Regulations, the Regulations contain anti-avoidance provisions. This means the Regulations will apply to a contract which applies the law of Scotland or of a country outside of the UK where it appears that the law is being applied wholly or mainly for the party imposing it to avoid the operation of the Regulations.

When do the Regulations not apply?

The exclusions that delimit the application of the Regulations cover:

• Certain categories of contracts; and
• Certain types of companies.

There are a number of categories of contracts to which the Regulations do not apply, as listed under Section 4 of the Regulations, including:

• financial services contracts;
• contracts concerning any interest in land;
• business-to-consumer and consumer-to-business contracts;
• a contract not entered into for the purposes of doing business in the UK;
• a contract governing national security;
• contracts governed by Scots law or foreign law; and
• certain specialist contracts.

The Regulations also do not apply to contracts entered into “for the purposes of, or in connection with, the acquisition, disposal or transfer of an ownership interest in a firm, wherever it is incorporated or established, or of a business or undertaking or part of a business undertaking and which includes a statement to that effect” (Regulation 4(i)). A “firm” has an extended meaning and covers any body corporate or partnership or other unincorporated association. There is some uncertainty as to what is meant by “a statement to that effect” but the emerging consensus appears to be that it is intended to be a statement that identifies the contract as one that has been entered into for the exempt purposes, that is for the sale or transfer of the ownership interest. A discrete statement would not be required in a contract which self-evidently was for that purpose, such as a share purchase agreement, but would need to be included in any agreement ancillary to such a transaction, such as an intellectual property licence or transitional services agreement, for that document to come within the exemption.

As regards exclusions based on company types, the Regulations are intended to protect small companies, and so the Regulations do not apply where, at the time of assignment, the assignor is a “large enterprise” or a “special purpose vehicle”. Assignors will be considered to be a large enterprise unless they fall within certain specified categories such as partnerships, unincorporated associations, SME companies and LLPs. SME companies are given the same definition under the Regulations as those of small and medium sized companies under Part 15 of the Companies Act 2006. Special purpose vehicles are those with the primary purpose of holding assets or financing commercial transactions, which in either case involves the vehicle incurring a liability under an agreement of £10 million or more.

What does this mean for the oil & gas sector?

The following types of contracts relevant to the oil & gas sector are expressly excluded from the application of the Regulations:

• a petroleum licence (Regulation 4(g));
• “a contract where one or more parties to the contract is the licensee in respect of a petroleum licence whose terms would prohibit or restrict the assignment of receivables under that contract” (Regulation 4(h)); and
• Share sale and purchase agreements and sale and purchase agreements for the sale of a “business or undertaking or part of a business and undertaking” (Regulation 4(i) as discussed above).

However, beyond the clear exception for petroleum licences, it is not entirely clear precisely which contracts will fall within these exemptions. For example, they may not be sufficient to exempt many field agreements, apart from the actual licence, a transfer of any right under the licence and the transfer of interests in hydrocarbons before they reach the wellhead. It is particularly difficult to be certain what is the intended scope of the exception at Regulation 4(h) and it appears that the exemption in Regulation 4(i) would not cover sales or leases of equipment whether large (such as rig or FPSO sales and leases) or small, unless these can be considered a sale of (or part of) a separate business or undertaking.

What can you do?

Businesses will not necessarily require to redraft assignment provisions in standard form contracts purely by virtue of the Regulations coming into force. To the extent the Regulations apply, they will override any conflicting contractual provision. However, while the Regulations have not been designed to prohibit a restriction on assignment of any other assets or rights, depending upon the precise drafting an unintended consequence of the Regulations could be that the entirety of a general restriction on assignment clause is struck out due to the Regulations. Such general restrictions on assignment clauses are commonplace in commercial contracts and parties may therefore wish to consider expressly carving out “receivables” from such clauses under in-scope contracts going forward. Similarly, since the Regulations may also impact other clauses which would prevent an assignee from getting detailed information about the contract in order to permit an assignment of receivables (such as confidentiality terms), parties may also wish to expressly carve out the Regulations from the application of those types of clauses.

Businesses should also be mindful that the Regulations take effect at the time of assignment – not the time the contract is entered into. That leaves some scope for uncertainty regarding the application of the Regulations as at the time of entering into a contract. It may not be certain, for example, whether or not the supplier under the contract will qualify as a “large enterprise” and consequently, whether or not the Regulations will apply in the case of any future assignment of receivables under that contract.

Conclusion

While the Regulations are a long awaited and important introduction for small businesses wishing to raise finance on their receivables, there are a number of areas of uncertainty surrounding the application of the Regulations, so that parties should be careful to consider these when negotiating any potentially in-scope contracts going forward.