ANTI-ASSIGNMENT PROVISIONS: ARE THEY ENFORCEABLE AND WHAT TO DO IF YOUR CLIENT’S CONTRACT CONTAINS ONE

While many Account Debtors recognize the value of services provided by Factors and will gladly comply with Notices of Assignment in exchange for smooth transactions with the Client, some Account Debtors have negative views of Factors and have included language in their underlying contracts prohibiting the assignment of the Client’s receivables. Our clients have expressed concern as to how such language affects their factoring agreement with the Client and the effectiveness of the Notice of Assignment sent by the Factor to the Account Debtor. This article explains why these restrictive clauses are unenforceable and what to do if your Client has one of these provisions in their contract.

Factors should review their Client’s contracts.

Far too often, Factors do not review the contract between their Client and the Account Debtor, assuming that its relationship with the Account Debtor is separate and apart from the Client’s. Unless a Factor is confident that it will receive an executed Estoppel Letter from the Account Debtor, the Factor should be familiar with the terms and conditions of the contract between the Client and the Account Debtor because the Factor takes the assignment of the receivables subject to the terms and conditions of that contract. These contracts contain important information that the Factor needs to be aware of such as payment terms, jurisdictional clauses, attorneys’ fees provisions and Anti-Assignment Clauses. Factors should include a detailed review of their Client’s contracts into any due diligence performed on the Client and should consult with their attorney if they have any questions or concerns.

What is an Anti-Assignment Clause?

Generally, there are two types of Anti-Assignment Clauses: (i) one that prohibits the assignment of the contract or the work or services to be provided pursuant to the contract; and (ii) one that prohibits the assignment of the right to payment under the contract. The first type of restriction on assignments is valid, enforceable and generally unimportant to a Factor. If an Account Debtor hires the Client to dig a hole, the fact that the Client cannot assign the right to dig that hole to someone else is immaterial to the Factor. However, the second type of restriction on assignments is much more important to Factors deciding whether or not to purchase a prospective Client’s receivables. Here is an example of this type of Anti-Assignment Clause that our clients have come across:

[CLIENT] shall not factor or assign any sums claimed due under this Agreement without the express written authorization of an officer of [Account Debtor]. Any such attempt to factor or assign payment obligations without such express written authorization shall be considered null and void; such purported assignee shall be charged with knowledge of this prohibition and deemed to have waived the right to receive such payment from [Account Debtor].?

Are Anti-Assignment Clauses that prohibit assigning receivables enforceable?

Anti-Assignment Clauses that restrict the Client’s right to assign payment obligations are unenforceable. Pursuant to Section 9-406 of the Uniform Commercial Code, contract terms that restrict the assignment of payment obligations are ineffective. By including this language into Section 9-406, the Uniform Commercial Code has voided contractual attempts to limit assignability of payment.

What should a Factor do if its Client’s contract contains this type of Anti-Assignment Clause?

Understandably, Factors are wary about entering into a factoring relationship with a Client whose contract contains this type of Anti-Assignment Clause. However, Factors can simply ignore this contractual language and proceed to purchase the receivables and deliver a Notice of Assignment to the Account Debtor as it normally would. Nevertheless, the inclusion of these Anti-Assignment Clauses should alert the Factor that the Account Debtor may not be comfortable or want to deal with a Factor, despite the Account Debtor’s legal obligations. The Factor should be aware that the Account Debtor may choose to ignore the Notice of Assignment, believing that its Anti-Assignment clause negates the Account Debtor's obligations to comply with such a Notice. To be safe, if a Factor sees such a clause in the Client’s underlying contract, it should reach out to the Account Debtor to discuss the assignment, why the Factor will be helpful, and if necessary, explain the legal ineffectiveness of such language. At that point, the Factor can determine whether it is comfortable proceeding with the underlying transaction and factoring the Client’s receivables. No matter what the Account Debtor says, the Factor should always deliver a Notice of Assignment to the Account Debtor prior to making any advancements to the Client.?

While Anti-Assignment Clauses will not ultimately inhibit the Factor’s ability to be paid from the Account Debtor if there is a valid Notice of Assignment, the Factor should decide whether or not the potential aggravation in dealing with an unfriendly Account Debtor is worth the expected profit. As always, a signed Estoppel Letter from the Account Debtor avoids almost all of the defenses that an Account Debtor can legitimately raise.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 25 years, Mr. Loren has focused his practice on construction law and factoring law.? Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at [email protected] or [email protected] or 561-615-5701.