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Walker Morris / News & Insights / Receivables Finance: the prohibition on assignment is now in force
18th January 2019
The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.
As we reported in December 2017 , draft regulations were laid before Parliament in September of that year which proposed to make any term in a business contract that prohibited or restricted the assignment of receivables automatically ineffective. Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.
The main areas of concern were that:
However, the government has since revisited the legislation and on 24 November 2018 the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations ) came into force. The Regulations apply to contracts (with a few exceptions described below) created after 31 December 2018 and mean that parties will no longer be able to prohibit the assignment of receivables in the UK. The Regulations make it clear that the prohibition is not retrospective and so the Regulations only apply to new contracts. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.
The Regulations also render unenforceable any terms which prevent a person who has been assigned the receivable from being able to enforce the contract, or determine its validity or value (for example by preventing the disclosure of the information required to commence court proceedings for its collection).
The Regulations are aimed at improving access to invoice financing for small and medium-sized enterprises and the government speculates that this will provide a £1 billion, long-term, boost to the economy. Invoice financing allows businesses to assign their right to be paid by a customer to a finance provider. In return the finance provider provides the business with up-front funds, thereby speeding up the business’ working capital cycle (provided the debtor ultimately pays the assigned invoice). Before 1 January 2019, smaller businesses would usually be forced to engage with larger customers on those customers’ standard terms, which often contained non-assignment clauses. As a result, some smaller businesses were restricted from engaging with invoice financing opportunities. This should now change.
The Regulations apply to contracts for the supply of goods, services or intangible assets where the supplier has the right to be paid under the contract. There are, however, a number of exceptions including:
The Regulations will lead to the need for certain changes to the drafting and implementation of commercial contracts:
Many commercial arrangements will be unaffected by this change in legislation. However this will depend, in relation to contracts entered into this year and beyond, on the terms of the contract and the nature of what is being supplied under it. A key point to note is that the Regulations will not nullify the contract as a whole or, indeed, the whole of the clause restricting assignment, but only to the extent applicable to receivables.
Providers of invoice finance will still need to carry out due diligence, at least for now, on taking on any new invoice discounting client to ascertain the extent to which the debtor book may still contain debts which are subject to restrictions on assignment or are otherwise subject to rights of set off.
Small and medium sized companies seeking to avail themselves of the new rules should seek advice before doing so. Invoice discounting products can be an extremely effective way of assisting a growing business meet its working capital needs. However, lumpy cash flow, or bad debt experience (including habitual slow payers in the customer base) can lead to disaster if not properly managed.
If you need advice on how the Regulations may affect your business please get in touch.
United Kingdom | Publication | November 2018
At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.
One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.
The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:
The Regulations provide that “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.”
A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.
More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.
Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.
Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.
The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.
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Written by: Brittainy Boessel
July 22, 2020
8 minute read
Contracts, in general, are freely assignable, which means that either party can transfer its contractual obligations or rights to a third party. But sometimes contracts include anti-assignment clauses to limit or prohibit assignment. Read on to discover the basics of assignment and anti-assignment clauses, what makes them unenforceable, and learn how to negotiate them.
An assignment is like a transfer. If an agreement permits assignment, a party could assign — or transfer — its obligation to another party. The second party — the one to whom the contract was assigned — would then be required to provide the products or services.
Assignments don’t necessarily relieve liability for the party who transfers the agreement. Depending on the contract, the party who assigned its obligations may remain a guarantor of— or responsible for—the performance of the third party assigned the work. In other words, the party to the contract (the assignor) would be responsible for breaches committed by the party to which it assigned its performance (the assignee). To remove itself from the liability of the agreement, the assignor would need to seek a novation , which cancels the first contract and creates a new contract between the party that is the assignee and the original counterparty to the contract.
Anti-assignment clauses—also sometimes referred to as assignment clauses or non-assignment clauses—can appear in various forms. Essentially, they prevent one or both contracting parties from assigning some or all of their respective contractual obligations or rights to a third party.
When reading through your contract, you can typically find a separate paragraph entitled “Assignment,” “Non-assignment,” or “Anti-assignment.” Sometimes you’ll find the assignment language buried within a “Miscellaneous Provisions” section, which contains all the boilerplate language of a contract, such as severability and waiver provisions.
Contracts include two primary types of anti-assignment clauses. The first type categorically precludes all assignments of rights and duties. It usually reads something like this: “Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”
The second type prohibits assignments unless the assigning party obtains the prior written consent of the other party. It usually reads something like this: “Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written permission of the other party, and whose consent may be withheld for any reason.”
Some clauses may state that a change of control, such as a merger, consolidation, or acquisition, is considered an assignment. Read carefully , because you want to ensure that you won’t be in breach if you transfer the contract to an affiliate.
Additionally, check the termination section of your agreement. Some termination clauses may state that a non-assigning party may terminate the contract in the event of a non-permitted assignment. Or a termination clause may state that the agreement automatically terminates upon such a transfer.
Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts.
Still, courts normally enforce anti-assignment clauses that are negotiated and agreed upon by both parties, depending on the applicable law, the jurisdiction governing the contract, and the language agreed upon in the contract. Be aware though that courts tend to narrowly interpret anti-assignment clauses. For instance, an anti-assignment clause may prohibit assignment but fail to state that an assignment in violation of the contract will be invalid. In this case, a party may be able to file a suit for breach of contract, but the court may not permit it to invalidate the assignment.
Even without a solid anti-assignment clause, there may still be an opportunity to prevent certain assignments. Courts may not enforce assignments to which the counterparty did not consent, even in the absence of a valid anti-assignment clause, especially if the contract is personal in nature. Some obligations can be performed equally well by a third party, such as a requirement to make payments. But a personal obligation involves a special relationship between parties or requires special levels of expertise, discretion, or reputation. For example, personal service contracts, including employment agreements, are personal enough in nature that they’re not transferable unless the non-transferring party consents.
In general, assignment is not enforceable when:
As discussed above, contract provisions can prohibit and void an assignment.
If the assignment would significantly impact the performance of the contract — for instance, if it greatly increases the risks or burden imposed on the other party — then a court would likely not enforce the assignment.
Certain laws prevent assignments. For example, some states legislate that an employee cannot assign its future wages to a third party.
If the assignment would harm public policy interests, it will be void. For instance, victims may not assign their personal injury claims to third parties to discourage excessive litigation.
In certain situations, the inclusion of an anti-assignment clause may not be in a party’s best interests. If a party depends on a unique service provider or a specific person to perform, then it must make sure that that service provider or person can’t assign work to an unknown third party without its consent. For instance, if you pay a premium to hire a renowned jazz band to perform at your charity gala, you don’t want a local high school garage band to show up instead. In any situation involving unique services or providers, make sure you have the right to consent prior to any assignment under the agreement.
Another example of the importance of assignability is in mergers and acquisitions. When a company purchases another business, the acquired business’s existing customer base and supplier contracts make it more valuable . Consequently, if a party hopes to eventually sell its business, it would want the right to assign its existing contracts to the buyer. Otherwise, potential buyers may be scared off because of the time and money it will take to transfer the existing agreements. Plus, the existence of anti-assignment clauses may heavily impact the selling price. If it’s possible you may sell your business, ensure that you have the right to assign your contracts and that consent is not solely within the discretion of the counterparty.
If you want the right to assign the contract, but your agreement does not permit assignments, you’ll need to negotiate with your counterparty on this point. If the clause in your agreement prohibits all assignments, try to include a carve out by allowing assignment of your rights and obligations upon the prior written consent of the other party. Add that the counterparty shall not unreasonably withhold or delay consent. You may also want to carve out an exception to the anti-assignment clause by excluding assignments between affiliates or necessitated by change of control transactions, such as mergers or acquisitions.
Courts tend to construe anti-assignment and anti-delegation clauses narrowly. As mentioned, a number of courts have held that an anti-assignment clause does not remove the power of a party to assign the contract and invalidate the contract unless the provision explicitly states that such assignments will be invalid or void. Thus, if you want to make an assignment that violates your agreement, rather than creating an opportunity for a breach of contract case, explicitly state in your contract that such assignments are invalid or void.
If you don’t want the counterparty to be able to assign its rights or obligations, state your preference clearly in your agreement with one of these options.
Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, and any assignment or delegation that violates this provision shall be void.”
Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party owns greater than 50 percent of the assets; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will receive an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”
Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”
Note that you will not be able to prevent assignments resulting from court orders or by operation of law, such as those ordered through a bankruptcy hearing.
When you enter a contractual relationship, make sure to clearly determine your rights and obligations, as well as those of the other party. If it may be important for your business to have the right to assign all or parts of the contract, negotiate for the removal of the anti-assignment clause, or request changes to it to provide sufficient flexibility for you to assign.
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What does ban on assignment mean.
Clause in a contract of sale which prohibits a client from assigning the performance of the contract or just the right to receive payment.
Small business, enterprise and employment act 2015 (sbeea 2015) for finance lawyers [archived].
ARCHIVED: This Practice Note has been archived and is not updated. It is for background information only.IntroductionDespite its name, the provisions of the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) are of general application to companies in the UK and not only to small-to-medium enterprises. While the SBEEA 2015 relates mostly to corporate matters and companies' administration, some provisions may impact on certain aspects of financing transactions, which finance practitioners should be aware of. These include:•the abolition of bearer shares•empowering provisions to nullify any ban on invoice assignment•varying the powers of the Export Credits Guarantee Department (ECGD)•changes to the powers of administrators and liquidators which may have an effect on insolvency and restructuring practices•streamlining public procurement practices, and•changes to company administrationThe SBEEA 2015 received Royal Assent on 26 March 2015 and will be implemented in various stages. For a full timetable of the dates on which various provisions are coming into force, see Practice Note: The Small Business, Enterprise and Employment Act—company law reforms [Archived].Bearer sharesBearer shares (or...
Key concepts and terminology in receivables finance and asset-based lending This Practice Note explains the key concepts and terminology used in receivables finance and asset-based lending. It covers: • the terminology surrounding the key parties in receivables finance and asset-based lending • the types of facility and documentation used in receivables finance and asset-based lending transactions • the key terminology in receivables finance and asset-based lending • the key legal concepts in receivables finance and asset-based lending being assignment, fixed and floating charges, retention of title and cross border issues, and • the key cases which are relevant to taking security over receivables Parties—terminology In the UK, a receivables facility is typically structured as a receivables purchase facility which can either take the form of an invoice discounting facility or a factoring facility (see Practice Note: Invoice discounting and factoring). It is also possible to provide a loan secured against the value of receivables but this is much less common in the UK. There are fundamental differences...
Discover our 4 Practice Notes on Ban on assignment
The business contract terms (assignment of receivables) regulations 2018 and the construction industry.
Construction analysis: Stephen Rockhill, partner in the construction and engineering team at Stevens & Bolton, considers what impact the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) could have on the construction industry if passed into law.
Commercial analysis: Following a recent consultation, the government is to ban invoice assignment clauses in business-to-business contracts, whereby large businesses can exclude mainly small and medium-sized enterprise (SME) suppliers who use the alternative finance tool to manage their cashflow. Jeff Longhurst, chief executive officer of the Asset Based Finance Association (ABFA), examines the background to the consultation and the future legislative reforms.
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Beale, Hugh , Gullifer, Louise and Paterson, Sarah (2015) Ban on assignment clauses: views from the coalface. Butterworths Journal of International Banking and Financial Law, 30 (8). pp. 463-466. ISSN 0269-2694
Summarises the findings of two qualitative studies assessing the effect of ban on assignment (BoA) clauses in trade receivables financing. Reviews the law applicable to the assignment of receivables to a financier, noting uncertainty over the effect of a BoA clause. Considers whether BoAs in supply contracts adversely affect the availability of finance to small businesses and result in the use of workarounds, thereby increasing the cost of finance
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Read the full outcome, government response: nullification of ban on invoice assignment clauses.
Ref: BIS/15/441
PDF , 209 KB , 3 pages
We plan to stop bans on invoice assignment clauses in business to business contracts. These powers are granted to us through the Small Business, Employment and Enterprise Act 2015 .
Summary of responses to the nullification of ban on invoice assignment clauses.
PDF , 201 KB , 13 pages
We received 20 responses to the consultation. These mainly came from:
We also had some responses from large businesses in the retail and construction industry. A full list of respondents is available in Annex A of the summary of responses.
We’re asking for views on our proposals to nullify bans on invoice assignment terms in business to business commercial contracts.
This consultation ran from 9am on 6 December 2014 to 11:45pm on 11 February 2015
Invoice finance allows a business to give the right to future payment to a finance provider in exchange for a loan up to the full value of the invoice. It can provide a vital source of finance if a business has to wait a long time between completing a job and receiving payment.
The ban on invoice assignment is often part of a more general ban on an assignment clause in the contract to stop a supplier from sub-contracting. As a result, a business’ access to invoice finance is often unintentionally restricted.
In December 2013, we published our discussion paper Building a responsible payment culture . This asked whether removing contractual barriers to selling invoices would be helpful to small businesses by increasing their access to different finance options. The majority of respondents agreed that it would be helpful.
We announced in the government response that we would legislate to remove these barriers to financing. Clauses 1 and 2 of the Small Business, Enterprise and Employment Bill provide the broad legislative power to do this.
We propose to introduce a regulation that would nullify any bans on invoice assignment terms in business to business commercial contracts. We want to know your views on our proposals, the draft regulations and the costs and benefits of the measure on both companies and the invoice finance market.
Ref: BIS/14/1232
PDF , 240 KB , 19 pages
Ref: BIS/14/1232/AN1
PDF , 181 KB , 2 pages
Ref: BIS/14/1233
PDF , 982 KB , 47 pages
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Added government response.
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Recruitment Business directors, you find me on the verge of getting professionally excited again
Newsdesk Legal News , Friday 07 June 2019 Jump to Comments (1) 564 Views
Yes, this draft bill proposes that ban on assignment clauses become ineffective. This can only be good news to agency recruiters, RPOs, clients, solicitors, and Invoice Discounters.
For anyone out there who hasn’t had the delight of reviewing one of these clauses in a client contract for agency recruitment, it currently means that if the Recruitment Business uses an Invoice Discounting (“ID”) facility, any invoice raised as a consequence of a contract with a ban on assignment clause in it won’t be assigned to their ID facility provider.
The big RPOs are the worst culprits for using ban on assignment clauses. Most of the time the requirement for these clauses is passed down from the client, which can determine how negotiable they are. If the RPO and/or the end client won’t remove the clause, it can mean the Recruitment Business can’t raise finance against any invoices raised under that contract.
Obviously this will impact on cash flow if the Recruitment Business has to pay the contractor before the client has paid the RPO who has paid the Recruitment Business. Add a “pay when paid” clause into that mix and you’re in for a whole lot more fun, but that’s the subject of another blog on another day.
Recently I’ve reviewed some pretty reasonable clauses that do ban assignment but not to the extent that assignment of the invoices is to an ID provider. I thought that was pretty progressive, but this bit of proposed legislation is going to make life so much easier. It will be one less thing for Recruitment Businesses to push back on in what is, let’s face it, a very typical way of funding agency contracting.
So watch this space, & I’ll let you know as soon as ban on assignment clauses are banned.
By Lucy Tarrant
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November 2015
'Ban on Assignment Clauses: Views from the Coalface (2015) 30 Butterworths Journal of International Banking and Financial Law 463
H Beale, S Paterson
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on the assignment of receivables arising under a Contract. Consequently, not only do the Regulations render ban on assignment provisions as ineffective, but their scope also extends to related clauses, such as confidentiality clauses, to the extent such clauses prevent the assignment of a receivable.
On 9 August 2015, the Government responded to its consultationand announced that a ban on anti-assignment clauses would be brought in under the Act early next year. The Asset Based Finance Association and the National Federation for Small Businesses have spoken in support of the move. As of the 31st December 2018, the Business Contract Terms ...
Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition, or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it ...
Sample Clauses. Ban on Assignment upon renegotiating the terms of its commercial contracts with Can Pack, Crown, Rexam and Ball Packaging in 2010 and onwards, it undertakes to use its best efforts so that any "Ban on Assignment" clause be deleted from such contracts. Ban on Assignment upon renegotiating the terms of its commercial contracts ...
The first is that a clause only prohibiting an assignment of "the contract," without more, does not prohibit the assignment of rights arising from that contract; instead it only prohibits the delegation or assignment of a party's obligations. [4] Thus, depending on the continued performance required by a target under a contract and ...
A. First, it's important to understand the purpose of the assignment clause. "Assignment" occurs when a party transfers its rights and obligations under a contract to another party. Generally, unless the parties have agreed otherwise, each can assign its rights and obligations freely. Article 2 of the Uniform Commercial Code, a set of ...
This is what an assignment clause signifies. An assignment is a transfer of. Contracts, generally, are freely assignable i.e., either party can freely transfer one's obligations or rights to a third party. ... This is the case where there is a complete ban on assignment, however the same can be assigned if however, there are exemptions to non ...
Every corporate lawyer knows that there is a difference between an anti-assignment clause, which restricts a party from assigning its rights under the agreement in question (or triggers a default in the agreement if an assignment occurs), and a change of control provision, which triggers a termination or default of an agreement if there is a change of control of a party to the contract.
able to obtain without, in effect, breaching any confidentiality clause imposed on the client. They include details of the debtor, the goods, the invoice value, the wording of any ban on assignments, VAT, credit period and defences or set-offs8. Assignment This all important term is not defined, but the regulations are clearly
The Business Contract Terms (Assignment of Receivables) Regulations 2018 came into force on 31 December 2018 meaning that parties to a contract in the UK may no longer be able to prohibit the assignment of receivables arising in respect of supplies made under it, even if it is a long term supply contract providing for multiple deliveries.
Ban on Invoice Assignment Clauses. Receivables are an important element in the wealth of businesses and, for that reason, they are frequently financed. Receivables can be used as security for a loan, or they can be sold under a factoring or securitisation arrangement. Either way, the financing will involve an assignment
Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition, or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it ...
Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts. Still, courts normally enforce anti-assignment clauses that are ...
Abstract. Summarises the findings of two qualitative studies assessing the effect of ban on assignment (BoA) clauses in trade receivables financing. Reviews the law applicable to the assignment of ...
View the related practice notes about Ban on assignment Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) for finance lawyers [Archived] ... Invoice finance—nullifying the ban on invoice assignment contract clauses. Commercial analysis: Following a recent consultation, the government is to ban invoice assignment clauses in ...
Summarises the findings of two qualitative studies assessing the effect of ban on assignment (BoA) clauses in trade receivables financing. Reviews the law applicable to the assignment of receivables to a financier, noting uncertainty over the effect of a BoA clause. Considers whether BoAs in supply contracts adversely affect the availability of finance to small businesses and result in the use ...
The ban on invoice assignment is often part of a more general ban on an assignment clause in the contract to stop a supplier from sub-contracting. As a result, a business' access to invoice ...
The big RPOs are the worst culprits for using ban on assignment clauses. Most of the time the requirement for these clauses is passed down from the client, which can determine how negotiable they are. If the RPO and/or the end client won't remove the clause, it can mean the Recruitment Business can't raise finance against any invoices ...
3.2 Responses to this discussion paper are welcomed from 6 December 2014 to 11 February 2015. Process. 3.3 Submissions of evidence should be emailed to [email protected] clearly marked as a response to the 'Nullification of ban on invoice assignment clauses'. This mail box will be monitored on a daily basis.
terms where assignment has disadvantaged them which could surmount to considerable legal costs. For those firms who were previously able to include ban on assignment clauses for the purpose of commercial protection, this policy may lead to additional costs if they now need to sue for damages. BENEFITS (£m) Total Transition (Constant Price) Yea
Citation 'Ban on Assignment Clauses: Views from the Coalface (2015) 30 Butterworths Journal of International Banking and Financial Law 463