The questions
- Can we charge a government contract, or the money owed under it, to our lenders?
- The government can terminate our contract for convenience. How do lenders deal with that?
- A foreign buyer wants to acquire us. Which clearances and consents should legal plan for?
- Do banks' ESG policies still stop them lending to defence companies?
- Who owns the IP we develop under a defence contract?
Can we charge a government contract, or the money owed under it, to our lenders?
It depends on the buyer. MOD standard terms prohibit assignment without the other party's prior written consent, so lenders to UK suppliers usually rely on security over the proceeds, or ask the MOD for consent on larger contracts.
In the US the position is set by statute. Under the Assignment of Claims Act and FAR 52.232-23, payments under a contract can be assigned once, to a financing institution or to an agent for a syndicate. A no-setoff commitment in the contract protects the assignee against government claims.
Across the EU it is set by national law and the contract, and the contracting authority's consent is the norm. Whatever the buyer, ask early: consent takes time and can come with conditions.
Assignment and financing consents · Government contract receivables as collateral · Is this contract financeable?
A starter question from the editor
The government can terminate our contract for convenience. How do lenders deal with that?
Lenders size debt around what the government pays if it walks away, not the headline contract value. A contract that can be ended on notice is worth what the termination payment covers.
MOD standard terms give a break right on notice, with an indemnity for unavoidable loss capped at the contract price. In the US, the FAR termination clauses pay costs plus a reasonable profit on work done, again capped at the contract price. In the EU it is not harmonised and turns on national law and the contract.
The negotiation is over the notice period and the heads of recoverable cost, such as committed sub-contracts and stranded investment, and whether capital spent on the contract is recovered. That matters most for a new production line.
Termination for convenience · Defence financing checklist
A starter question from the editor
A foreign buyer wants to acquire us. Which clearances and consents should legal plan for?
In the UK, MOD terms require notice of any change of control and let the Authority terminate within six months, and the National Security and Investment Act requires a mandatory notice for acquisitions in the defence, military and dual-use sectors.
In the US, a share purchase needs no novation, but a transfer of the contracts themselves does (FAR 42.12). CFIUS reviews foreign acquisitions, and ITAR registrants must notify ownership changes. In the EU, national foreign investment screening applies, coordinated under Regulation (EU) 2019/452, alongside consent rights in the contracts.
Build the timetable around the slowest of these, and size the long-stop date and conditions precedent to match.
Change of control and novation · Deal clearance navigator · National security screening in defence M&A
A starter question from the editor
Do banks' ESG policies still stop them lending to defence companies?
The rules do not. The European Commission says EU sustainable finance law sets no limits on financing defence and that excluding the sector as a whole would not be consistent with it. The FCA says nothing in its rules prevents investment in or finance for defence companies.
What decides it is each institution's own published policy, and those differ, above all on nuclear weapons: some exclude them outright, others finance only where a treaty or a named government test is met. Public lenders have moved furthest.
Check the policies of the banks you want in the syndicate before launch, and keep the exclusion definitions in the facility agreement fixed rather than tied to each lender's policy from time to time.
Defence ESG and lender policy tracker · ESG exclusions and defence lending
A starter question from the editor
Who owns the IP we develop under a defence contract?
In the UK it usually stays with you. The MOD's research and technology condition, DEFCON 705, leaves results with the contractor and gives the Authority use rights. DEFCON 703, which vests results in the Authority, is used only exceptionally.
In the US the answer turns on who paid. DFARS gives the government unlimited rights where development was funded by the government, limited rights where it was at private expense, and government purpose rights for mixed funding.
Record what was developed at private expense before the contract starts, with the accounting records to back it. Lenders and buyers will ask.
IP and technical data · Contract library
A starter question from the editor
Answers are general and drawn from the official texts and public documents behind the key terms. Starter questions are the editor's own; reader questions are marked with the Weekly issue that answered them. Please share public information only. General information, not legal advice.