8 March, 2016
Underlying Customer Contracts: do they stand up to scrutiny?
In the previous instalment, we looked at the importance of capturing all “related rights’ when purchasing debts. In this instalment, we examine the importance of reviewing the terms of the underlying sales contracts.
Contract review
In the lead-up to nancial close, the nancier will typically carry out a review of the seller’s standard suite of customer contracts (or a sample of existing customer contracts) to ensure that the contract terms:
- are consistent with the level of sophistication expected by the financier;
- comply with any applicable law (such as consumer law);
- permit a transfer of the seller’s rights to third parties such as a nancier; and
- otherwise, appear enforceable against the customer on their terms.
This is important because, following a default scenario, a nancier may nd itself enforcing those terms against a debtor. In some cases, the nancier may require that the seller update or improve its standard contract terms to reflect the financers expectations.
Restrictions on transfer
As mentioned above, the nancier should check whether the seller’s standard customer contracts restrict the seller from transferring its rights under that contract to the nancier. Ideally, there will be no restrictions on transfer. If any restrictions do appear, the nancier should require that those restrictions be removed.
In some cases, however, the seller may not be in a positon to vary the transfer terms in an underlying customer contract, particularly with respect to contracts that are already on foot, or the contract has been entered into on the debtor’s terms. In this scenario, the terms of the restriction should be considered by the nancier and its legal counsel in the context of the overall transaction.
Helpfully, s 81 of the PPSA renders contractual restrictions or prohibitions on the transfer of trade debts unenforceable against third parties (such as receivables nanciers). As such, contractual restrictions or prohibitions on the transfer of trade debts should not prevent a transfer. However, the parties should bear in mind that the PPSA does not relieve the seller of its obligation to the debtor and, as such, the seller may be sued by the debtor for damages if a transfer is made in breach of a term that restricts or prohibits that transfer.
Execution of Customer Contracts
As part of its diligence, the nancier should also check how the seller and its customers actually enter into the customer contracts. That is, do the customers sign the contract under hand, or do the parties enter into the contract electronically?
In many instances, sophisticated sellers have implemented on-line platforms for entry into contracts with its customers, such as “clickwrap” agreements. In these types of arrangements, it is the act of “clicking” a button which indicates acceptance of the relevant terms and conditions, rather than the application of a signature.
Financier should familiarise themselves with these procedures, and where necessary, engage legal counsel to review the processes adopted by the seller. This is important because a nancer should be con dent that the seller has procedures in place to ensure that its customers contracts have been properly entered into by its customers (and, as such, are enforceable against them).
In Part 4 of the series, we examine the importance of considering other security interests in the receivables of a seller that may compete with the interests of the financier.
For further information, please contact:
Tim Brookes, Partner, Ashurst
tim.brookes@ashurst.com
