Contractual clauses prohibiting the transferability or pledgeability of business claims could become void in the near future

Current situation

Currently under Dutch law, a claim on another party can in principle be transferred or pledged. This could be a means of obtaining (additional) credit. For instance, a supplier can pledge claims on its customers and by that use ‘unpaid bills’ as collateral for a loan. Another example is factoring unpaid bills.

The transferability and/or pledgeability of a claim can, however, be excluded by means of an agreement to that effect between the creditor (in the above example: the supplier) and the debtor (its customer). By agreeing on such a contractual clause, it becomes legally impossible to transfer the claim to another party or pledge the claim: the agreement has ‘law of property effect’. Note however that parties should make explicit that they intend so; otherwise a contractual clause is assumed to only have ‘law of obligations effect’. In that case transferring or pledging constitutes a breach of contract, but is still validly possibly under property law. Furthermore, the Dutch Supreme Court decided that claims that have been made non-transferable under property law in a contractual agreement between a creditor and a debtor cannot be pledged either (for more detail on these particularities, see our previous blog).

In practice, clauses excluding transferability and/or pledgeability are widely used, for instance in the construction and retail sectors. By excluding transferability and/or pledgeability of a claim, the debtor (in the above example, the customer) avoids being confronted with a creditor other than its initial counterparty (the supplier) with whom the debtor may have no commercial relationship at all. Furthermore, with these clauses the debtor (customer) avoids uncertainty as to who it can pay when discharging its debt (the supplier as original creditor).

The bill

If the bill would be adopted and becomes law, any clause excluding or otherwise seeking to prevent the transferability or pledgeability of business claims in whole or in part will be void. Only a limited number of business claims would be excluded, such as regarding banking accounts, clearing institutions / CCP and syndicate loans. This would not only apply to contracts concluded after the bill’s entry into force, but, after a waiting period of (only) three months, to existing contracts as well. Both contract clauses excluding transferability and/or pledgeability with (only) law of obligation effect, as well as with property law effect are void.

According to the Minister of Justice, the bill is justified to protect SMEs. They are increasingly confronted with debtors imposing clauses prohibiting the transferability and/or pledgeability of claims, thus limiting their financing possibilities as they cannot pledge these claims. The Minister considers this problematic and also an infringement of SMEs’ freedom of contract. This is to be ‘restored’ by declaring any contractual clauses excluding transferability or pledgeability void. 

Some remarks

From an international perspective, the bill may not be that remarkable. According to the Minister, at least, neighbouring countries already have statutory prohibitions on contractual clauses excluding transferability or pledgeability in place. Also, to avoid uncertainty as to who the debtor should pay, the bill includes that a creditor transferring or pledging its claim must give written notice to the debtor. This by the way does not preclude the existing possibility under Dutch law, under certain conditions, to transfer or pledge without notice to the debtor (“stille cessie” and “stille verpanding”). 

Nevertheless, the bill has been criticised in the literature. It could be considered quite an intervention in the freedom of contract. With the bill the legislator deliberately ‘abolishes’ a specific kind of contractual clause that is currently being widely used in practice. The bill also affects contractual clauses in agreements that do not involve SMEs. Furthermore, it ignores the fact that the SMEs it seeks to protect may also be adversely affected in their position as debtors (in case the SME is, in the above example, not the supplier but the customer). As debtors, SMEs may be confronted with creditors with whom they have no commercial relationship, possibly making it (amongst others) more difficult to reach payment agreements. In addition, bankruptcy trustees have expressed their concern this will negatively impact the size of bankruptcy estates as more claims will be subject to the right of pledge of secured creditors, leaving less for unsecured creditors.

As important as enhancing financing abilities of SMEs may be, this does not seem such a pressing societal issue or matter of public order justifying all this. Also because the bill is estimated to result in €1 billion in additional financing opportunities for SMEs. This is, of course, a substantial amount, but relative to all SMEs in the entire Netherlands does not seem to make a decisive difference. However, the bill is supported by organisations representing SMEs and financing parties and whether or not to adopt it is of course a political choice. 

Reconsidering temporal scope?

That being said, one could have imagined that the bill would at least be limited to clauses agreed after its entry into force and not apply to existing contracts, jeopardising legal certainty. Even more so because the bill seems at odds with the general tendency to restrict (the impact of) nullities in contract law. For instance, the Financial Supervision Act (Wet op het financieel toezicht) provides that contracts in violation of this act as a rule are not void on that ground with only specific exceptions. In case law, the Dutch Supreme Court also generally seems reticent to declare a contract clause that is in violation of a statutory provision void, in case the legislator has not explicitly provided so. Perhaps the Dutch Senate, which is up next to debate and vote on the bill, could therefore at least reconsider the bill’s temporal scope.