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Pandemic special

As with everything else about the pandemic, the legal position remains both fluid and uncertain; the best we can do at present is to highlight some of the issues which are likely to arise both in terms of:

(1) the relationship between invoice financiers and their clients; and

(2) supply contracts between suppliers using invoice finance and their debtors.

Before considering some issues which may arise in each of these situations, it may be helpful to set out some general high level comments on various parts of contract law which may be relevant in these circumstances, and which include terminology which may be misunderstood and is likely to be discussed amongst financiers and clients in the coming months.

Interpretation of contracts

In general terms the courts seek to interpret contracts to give the meaning which the parties at the time of making the contract appear to have intended. Neither party to a contract is allowed to go back in time and seek to change the meaning of ordinary words on the basis of some unforeseeable event, unless that is covered by concepts such as force majeure, frustration or illegality (as to which see below).

The basic test for contractual interpretation can be summarised in the words of the leading case as follows:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.

In the event of ambiguity or uncertainty as to the meaning of contractual terms, there is a general rule that contracts are interpreted against the party who proffered the contractual terms and in favour of the party who signed up to them.

Contractual discretion

In recent years the courts have been increasingly prepared to construe contractual terms which confer discretion on one party as being limited, so that such terms must be read subject to a requirement that their operation be justified in the sense of not being used irrationally or capriciously. In the recent case of BHL v Leumi ABL Ltd [2017] EWHC 1871 (QB) (more commonly known as the “Cobra case”) involving the power of an invoice financier to impose termination charges the court expressed the position as follows:

“In my judgment, this is a case where (whether as a matter of construction or the implication of a term) a discretion such as this must be exercised in a way which is not arbitrary, capricious or irrational in the public law sense. See the Supreme Court decision in Braganza v BP Shipping [2015] 1 WLR 1661 at paragraphs 27-31, 52-53 and 102-103. For ease of reference I shall refer to these limitations on the exercise of the discretion as ” the Braganza Duty “. The fulfilment of that duty will entail a proper process for the decision in question including taking into account the material points and not taking into account irrelevant considerations. It would also entail not reaching an outcome which was outside what any reasonable decision-maker could decide, regardless of the process adopted. However, the duty does not mean that the Court can substitute what it thinks would have been a reasonable decision”.

In that case although the court did not strictly speaking substitute its own view of a reasonable charge, its decision had the same effect for all practical purposes.

Force Majeure

The expression “force majeure clause” is normally used to describe a contractual term by which one (or both) of the parties is entitled to cancel the contract or is excused from performance, in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, upon the happening of a specified event or events beyond his control.

English law contains no general rule of force majeure, so if the contract lacks a force majeure clause, no particular relief will necessarily flow from situations the parties might consider force majeure.

Act of God

The language of “Act of God” is said to mean:

“such a direct and violent and sudden and irresistible act of Nature as the defendant could not, by any amount of ability, foresee would happen, or, if he could foresee that it would happen, he could not by any amount of care and skill resist, so as to prevent its effect.”

The current pandemic is not likely to be foreseeable in the relevant sense, save in the case of contracts entered into after developments in China began to be reported in the international media.

However, Act of God is only relevant if the contract contains a term which uses that phrase, most commonly in a force majeure clause. As with force majeure itself, in the absence of a specific contract term there is no general principle applying the concept in English law.


The common law doctrine of frustration may apply, if, as a result of the pandemic, performance of the contract has become legally or physically impossible through no fault of the parties. During World War II, many contracts were frustrated when it became legally impossible to trade with the enemy. It is unusual nowadays to see a contract frustrated. A frustrated contract ends automatically and immediately, without any action by the parties, who then have only limited rights to redress.

The most well-known of the frustration cases in English law is the case of Krell v Henry which arose as a result of the postponement of the coronation procession in London in June 1902 due to the illness of King Edward VII. Here the defendant agreed to hire rooms in a flat in Pall Mall over the two days during which coronation processions were expected. When they were cancelled as a result of the King’s illness the Hirer refused to pay and the Court upheld this refusal on the ground that the processions were the foundation of the contract and their cancellation prevented its performance in any meaningful sense.

More recently, the European Medicines Agency (“EMA”) unsuccessfully sought to escape a 25-year lease on a Canary Wharf skyscraper by arguing that the lease would be frustrated when the UK ceased to be an EU member state. Brexit, it claimed, represented a frustration of common purpose. But the lease itself contemplated that the EMA’s headquarters might not remain in Canary Wharf for the duration of the lease. That was because, subject to (albeit onerous) conditions, the lease expressly permitted the EMA to assign or sublet the property in part or in its entirety. Thus the EMA took the risk of its purpose for taking the lease vanishing, because it bargained for the right to transfer it to another party.

In the present context, a contract to supply office stationery is not likely to be frustrated because the debtor’s premises are closed and so they do not need or want the stationery, but may still be frustrated because delivery has become impossible or illegal from either the supplier’s or debtor’s point of view.


In an English law-governed contract, a contract is discharged if its performance becomes illegal by English law.

This doctrine requires the illegality clearly to prohibit performance. Hindering performance, or making it more inconvenient, is not good enough. This means for many contracts affected by the pandemic that they will not fall within the scope of supervening illegality doctrine.

Likewise contracts with a foreign element may become illegal under emergency legislation (for example as applied in Italy in respect of some matters) and if so the parties may be excused from performance as a result.

Material adverse Change

Material adverse change (“MAC”) (or material adverse effect) is a “catch-all” concept designed to capture unpredictable and unforeseen events or circumstances which would otherwise be difficult to cater for specifically in documentation. It is used as a threshold to measure the effect of an event or circumstance.

The interpretation of a material adverse change representation was considered by the High Court in Grupo Hotelero Urvasco SA v Carey Value Added SL & Anor [2013] EWHC 1039 (Comm) (26 April 2013). Although the clause was interpreted against a specific factual matrix, the decision provides useful guidance on interpreting a fairly standard MAC clause (specifically, a representation that there has been no material adverse change in the financial condition (consolidated if applicable) of obligors since a particular date). The court held in relation to the material adverse change clause that:

  • Financial condition should be determined primarily by reference to a company’s financial information, although other compelling evidence may be considered. For example, Blair J suggested that ceasing to pay bank debts might be highly relevant to the question of whether a material adverse change had occurred in the company’s financial condition. Blair J also drew a distinction between a MAC clause that referred to the “financial condition” of an obligor and one that referred to the “business or financial condition” of an obligor. He said that the inclusion of events that had a material adverse effect on the company’s business covered a broader scope than the MAC that was limited to a company’s financial condition.
  • A change is only material if it affects a company’s ability to perform its obligations under the relevant agreement.
  • The financier cannot trigger an event of default on the basis of circumstances of which it was aware at the outset.
  • In order to be material, a change must not be merely temporary.

Whether the pandemic could trigger a MAC clause will depend on the drafting of the clause, the specific circumstances and the impact that this has on the relevant party. There is no useful precedent based on the impact of a previous pandemic so key issues to consider will include:

  • Is the impact temporary or permanent?
  • Do the circumstances affect businesses across the sector or are there additional factors that are specific to the party in question?
  • What is the extent of the impact of the pandemic on the individual party or its group?

Financiers entering into new deals after the start of the outbreak are unlikely to be able to establish that a MAC event has occurred as it will be difficult to show that they were unaware of the circumstances when they entered into the facility.


The ability of either party to a contract to vary its terms depends upon either:

(1) the express provisions of the contract, which may require a notice period; or

(2) the consent of both parties.

In the current climate there have been frequent requests for variations, and before considering the consent route it is important to carefully review contractual provisions dealing with variations to see the extent to which variations can be made without the consent of the other party.

Suspension of a contract

There is no general right to suspend performance of a contract because the other party is failing to perform its obligations. Some contracts will include express contractual terms allowing one or other of the parties to suspend performance in specific circumstances. Other contracts rely on a more generic force majeure clause (as discussed above).

The exercise of statutory powers by a government or government entity may also have the effect of “suspending” performance of the works.

It is of course open to the affected party to approach the other to request a suspension by way of a contract variation.

Breach of Contract

Depending on the correct interpretation of the contract, a party who is now unable to perform may be in breach of contract. If the obligation to perform is absolute, then a failure to perform according to its terms can be a breach, even if the party is not morally to blame. Fault is not a requirement for breach, unless the contract says it is. If the failure to perform is a breach, it will normally give the other party the right to claim damages, and possibly also the right to terminate.

Termination Provisions

Most contracts will provide specific reasons for termination and set out the consequences of termination, but some general points are worth bearing in mind:

(1) if a party evinces an intention no longer to be bound by a contract, then irrespective of the absence of moral blame or fault this would normally give rise to a repudiation entitling the other party to declare itself no longer bound to perform its side of the contract;

(2) the normal rule is that a party who has been the victim of a breach of contract is entitled to recover all damages or losses which naturally flow from the breach, subject only to its obligation to take reasonable steps to mitigate that loss.


Invoice Financiers and their clients

In the light of the above we suggest that following high-level points are worth considering:

(1) invoice financiers using “offer and acceptance” facilities or selective facilities which confer an absolute discretion upon them as to whether to accept an offer of assignment should still have the ability to decide whether to accept assignments entirely in their own interests and without regard to the interests of the client, since this is not a situation in which the Braganza Duty would normally apply;

(2) however, when it comes to the question of approval or disapproval of assigned invoices for funding purposes, it is much more likely that the court would find that this is in effect a discretion to which the Braganza Duty principles would apply; however, provided that financiers give some thought to the position of individual clients rather than taking a blanket position it should be reasonably easy to justify funding positions taken in the light of the general economic uncertainty pertaining at present;

(3) certainly any attempt to reduce the initial percentage under any discretionary power relying on words such as that the IP will be paid “up to” a stated percentage (as opposed to using an express contractual power to vary) would be subject to the Braganza Duty principles;

(4) attempts by financiers to invoke MAC provisions in finance agreements are likely to be scrutinised carefully by the courts;

(5) it will probably be very difficult if not impossible for clients to bring the concepts of force majeure, frustration or illegality into play in seeking to excuse or modify their performance under invoice finance agreements;

(6) as for variations, it is worth remembering that even if these are expressed to be required to be by way of deed and therefore normally requiring to be witnessed, it is always open to the parties to agree mutually that variations can be done by hand, and in the current lockdown this can easily be done by solicitors as opposed to the parties themselves if necessary.


Suppliers and debtors

The situation here is very much a moving feast and much will depend upon the nature and extent of the lockdown and in particular of any government regulations which emerge, but at present we suggest the following points are worth considering:

(1) we expect a very large number of contractual disputes to arise between suppliers and their debtors, but it is important to realise that save in relation to set off (as to which see (6) below) the focus should very much be upon whether the debtor has any legitimate excuse for refusing delivery of ordered goods or services or refusing or delaying payment of assigned debts;

(2) terms of business imposed upon suppliers by powerful debtors such as the Department stores and supermarket chains may confer important rights upon debtors both in terms of cancelling deliveries and seeking to invoke force majeure;

(3) subject to this, in the vast majority of cases the position will remain that suppliers and their debtors have contracted on the basis of terms and conditions imposed by the supplier, so force majeure provisions should not assist the debtor and nor will the debtor normally be entitled to refuse delivery where orders have been accepted;

(4) there will no doubt be many attempts by debtors to plead frustration of contracts but it remains to be seen to what extent these arguments will succeed;

(5) in general terms if debtors refuse delivery without lawful justification then the financier is entitled to bring an action for the price of the goods or services involved, (as “related rights” to the assigned debt itself) and it is no defence for the debtor to argue that the goods or services could have been supplied elsewhere to an alternative buyer;

(6) where failure of performance by the supplier is an issue giving rise to a claim by the debtor, then unless such failure can be excused using doctrines such as force majeure, frustration or illegality then financiers need to be aware of potential set off arguments impeaching their ability to recover debts in respect of goods or services which have been supplied.


Impact of the pandemic upon the courts

As would be expected the civil court system is under considerable strain and whilst practice has tended to vary between different parts of the country, it is fair to say that both administrators and judges have made serious efforts to accommodate the needs of litigants in general and the business community in particular.

Time Limits

The most significant issue affecting invoice financiers relates to time limits in relation to existing litigation, and in this regard The Ministry of Justice has published a new PD 51ZA (Extension of time limits and clarification of PD 51Y) with effect from 2 April 2020.

PD 51ZA provides for parties to agree extensions of time for complying with time limits in the court rules and court orders and provides guidance to the court when considering applications for extensions of time and adjournments during the pandemic. It introduces the following changes:

  • parties can agree an extension of up to 56 days (rather than 28 days) without formally notifying the court, provided that does not put a hearing date at risk, but any extension of more than 56 days requires the permission of the court. An application for such permission will be considered on the papers. Any order made on the papers must, on application, be reconsidered at a hearing.
  • The court must take into account the impact of the pandemic when considering applications for extensions of time for compliance with directions, the adjournment of hearings and relief from sanctions.

PD 51ZA will cease to have effect on 30 October 2020 but may be extended if circumstances dictate.

Other practical issues

Provision has been made to amend court rules relating to matters such as the issue of proceedings, urgent applications and telephone hearings (although it is worth mentioning that BT has just indicated that it is no longer able to support any new legal hearings bookings). However, these are matters which impact the lawyers rather than invoice financiers themselves.


Dealing with Prohibitions on assignment

In current circumstances where resources are stretched and communication is impaired it is worth remembering that whilst it remains best practice to obtain waivers from debtors who still retain prohibitions on assignment in their terms and conditions of purchase, nevertheless the legal position is now clear in that paragraph 2 of The Business Contract Terms (Assignment of Receivables) Regulations 2018 provides that for business contracts entered into on or after 31 December 2018: –

“2(1)…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.

(2) A term in a contract which imposes a condition or other restriction on the assignment of a receivable includes a term which prevents a person to whom a receivable is assigned from determining the validity or value of the receivable or their ability to enforce the receivable”.

There are anti-avoidance provisions in the Regulations to prevent a debtor from inserting contractual provisions which would make it difficult or impossible for an assignee to assess or enforce a receivable, for example by imposing a duty of confidentiality on financial particulars or names and addresses.

There is an exemption from the Regulations where the supplier is within the category of medium and large companies as defined by the accounting regimes applicable to SMEs under the Companies Act 2006, details of the definition of which are set out in paragraphs 3(2) and (3) of the Regulations which can be found at: