Proposed laws to remove legal effect of contractual restrictions on invoice receivables

News Article

Proposed legislation presented to Parliament this month will stop large organisations placing unfair contractual restrictions on smaller suppliers.

The new laws relate to the provision of assigning receivables on invoices, which enable businesses to subcontract work to a third party or borrow against unpaid invoices.

However, in many sectors, it is common for larger organisations to place contractual restrictions on receivables to maintain a hold over suppliers.

While these terms can be negotiated, it is often not to the smaller supplier’s benefit to do so, particularly when a larger organisation can take their business elsewhere.

But the new laws will change the way these contractual restrictions are viewed by finance providers, meaning small businesses will gain unobstructed access to invoice finance.

Under the proposed new legislation, any such contractual restrictions entered into after 31 December 2018 would have no effect and could be disregarded by small businesses and finance providers.

The report adds that restrictions on invoice finance for SMEs in contracts agreed after this date will “simply not have any legal effect” in relation to raising finance, so the changes introduced involve no compliance or reporting burden to businesses.

The legislation contains exceptions for certain types of contracts, such as contracts for financial services, contracts with consumers and contracts connected with the sale of a business.

Commenting on the proposals, Small Business Minister Kelly Tolhurst said: “These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.”

Matthew Johnson, an Associate with Palmers, who specialises in commercial contract law, said: “This simplification of the legislation which currently affects smaller companies will certainly be welcomed by many as it should remove a layer of red tape and make trading easier.

“However, I suspect that as these rule changes have so far not been widely promoted, some SMEs may still be invited to enter into burdensome contractual restrictions after the December deadline. This could lead to a great deal of unnecessary paperwork and administrative time.

“My advice to any company asked to enter into an agreement of this type is to check with us first, as a quick phone call may be all that’s needed to confirm whether or not such a contract is required.”

For help and advice on all aspects of contract law, please contact us.

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