Contractual Prohibitions on Assignment – Favouring the Commercial Intent?

by Alex Monk & Iliana Stefa

The Court of Appeal’s judgment in First Abu Dhabi Bank PJSC (formerly National Bank of Abu Dhabi PJSC) v BP Oil International Limited [2018] EWCA Civ 14 provides useful guidance on the interpretation of prohibition of assignment clauses, which are commonly used in commercial agreements. The question that arose was whether the interpretation of non-assignment clauses requires them to extend to rendering ineffective equitable as well as legal assignments. In the Court of Appeal’s view, the answer to that question seems to be no. It remains to be seen whether the Court of Appeal’s judgment is the last word on the subject, or whether the case will be heard by the Supreme Court.

Factual Background

• On 9 December 2013, BP Oil International Limited (“BPOI”) and Société Anonyme Marocaine de L’Industrie de Raffinage (“SAMIR”) entered into an agreement for the sale and purchase of crude oil (the “SAMIR Agreement”) whereby the parties agreed to enter into a series of sales and purchases.

• The SAMIR Agreement incorporated BPOI’s General Terms and Conditions (2007 Edition) (“BPOI’s General Terms and Conditions”). Clause 34 of the BPOI’s General Terms and Conditions (“Clause 34”) limited both parties’ ability to assign their respective rights and obligations under the SAMIR Agreement. It provided that neither of the parties could, without the prior written consent of the other, assign the SAMIR Agreement or any rights or obligations thereunder. Clause 34 further provided that an assignment not made in accordance with the terms of Clause 43 would be void.

• One individual transaction which took place under the umbrella of the SAMIR Agreement was the sale by BPOI to SAMIR of 100,000 metric tonnes of Russian Export Blend crude oil pursuant to an addendum to the SAMIR Agreement dated 16 January 2014 (the “Addendum”).

• On 12 August 2014, BPOI and the First Abu Dhabi Bank PJSC (“NBAD”) entered into a Payment Guarantee Agreement in relation to the Addendum (the “Guarantee”).  The undertaking provided by BPOI under the Guarantee stipulated that, if assignment was not possible or effective for any reason, NBAD shall be subrogated to BPOI’s rights. The Guarantee also made provision for a possible assignment in the Form of Demand annexed to it.

• On 3 September 2014, BPOI and NBAD entered into a Purchase Letter whereby NBAD purchased from BPOI, on a non-recourse basis, a proportion of a receivable evidenced by BPOI’s commercial invoice addressed to SAMIR at a discounted value (the “Purchase Letter”). Clause 3(iv) of the Purchase Letter provided that BPOI will assign, as at the date of receipt of payment from NBAD, its rights, title, interest and claims against the buyer in respect of the percentage of the receivable discounted and the rights and benefits of the relevant transaction arising from the Addendum. Clause 3(v) of the Purchase Letter further provided that by selling the receivable BPOI assigned to NBAD the percentage of the receivable discounted “in equity irrevocably … subject to the terms hereof”. By Clause 5(b) of the Purchase Letter, BPOI represented and warranted that it is not prohibited by any security, loan or agreement to which it is a party from disposing of the receivable and that such sale does not conflict with any agreement binding on BPOI.

• BPOI had not requested or obtained SAMIR’s consent to assignment as required by Clause 34.

• In November 2015, SAMIR took steps to file for insolvency protection in Morocco and NBAD contacted BPOI to discuss assignment under the Purchase Letter. BPOI replied by stating it needed to obtain SAMIR’s consent to the assignment and that, once it had been confirmed by NBAD would seek SAMIR’s consent. NBAD did not request that BPOI seek to obtain SAMIR’s consent and instead issued proceedings in the Commercial Court arguing that the representation and warranty made by BPOI at clause 5(b) of the Purchase Letter was false due to Clause 34.

The facts are summarised in the flowchart below:

Commercial Court Decision

In the Commercial Court, the judge agreed with NBAD and held that by reason of Clause 34, the representation and warranty made by BPOI at Clause 5(b) of the Purchase Letter was incorrect because the Purchase Letter provided for an equitable assignment by BPOI of its rights against SAMI And that, because such assignment was not possible without SAMIR’s consent, BPOI was prohibited by another agreement from disposing the receivable. BPOI appealed to the Court of Appeal.

Court of Appeal Decision

According to the Court of Appeal, there were three issues that had to be determined:

(1) What was BPOI contractually prohibited from doing under Clause 34? (“Issue 1”)

(2) What, as a matter of law, was the effect of such a restriction on BPOI’s ability to dispose of the receivable? (“Issue 2”)

(3) Was BPOI in breach of the representation and warranty contained in clause 5(b) of the Purchase Letter? (“Issue 3”)

Issue 1

With regard to issue (1), the Court of Appeal held that, as a matter of construction, the restriction contained in Clause 34 imposed a contractual obligation upon BPOI in favour of SAMIR not to assign the former’s existing or future rights under the SAMIR Agreement. Clause 34 did not impose any contractual restriction on BPOI vis-à-vis SAMIR from agreeing with NBAD that it would pay to NBAD all payments received from SAMIR in connection with the invoice, pass onto NBAD any amounts recovered from the buyer; pass onto NBAD any interest on any late payment recovered by it from SAMIR (inter alia). Therefore, the prohibition on assignment contained in Clause 34 could not be construed as preventing:

• the disposal to NBAD of any account actually received by BPOI from SAMIR, since they would not be rights under the SAMIR Agreement;

• the creation of any trust over the proceeds of the receivable or indeed over the receivable itself;

• the creation of any rights of subrogation or sub-participation.

Issue 2

BPOI did not seek to contend that, as a matter of law, the prohibition of assignment as contained in Clause 34, could not have the effect to prevent there having been an equitable assignment as between BPOI and NBAD. Such an argument would have involved the court considering whether the binding decision in Linden Gardens Trust v Lenesta Sludge disposal Ltd [1994] 1 A.C. 85 (“Linden Gardens”) could be distinguished. Linden Gardens was followed and the Court of Appeal concluded, “with a considerable degree of intellectual disappointment” that any purported equitable assignment without SAMIR’s prior consent was ineffective to amount to an equitable assignment of BPOI’s contractual rights under the contract to the debt represented by the discount percent of the receivable (although not the proceeds once received by BPOI). The commercial rationale behind the decision in Linden Gardens is that it serves the purpose of non-assignment clauses. However, the Court of Appeal (in obiter dictum or non-binding comments) expressed its view that non-assignment clauses should be limited to rendering ineffective legal assignments only and not extend to equitable assignments.

Issue 3

The Court of Appeal held that, on the proper construction of the Purchase Letter in its context, BPOI was not in breach of the representation and warranty contained in Clause 5(b) of the Purchase Letter.

For the above reasons the appeal was allowed.

Implications

This case is interesting for many reasons:

(1) It clarifies, to a certain extent, the meaning of terms which are commonly found in financing contracts and which are, normally, the subject of intense pre-contractual negotiations.

(2) Legal assignments require, among other things, notice of assignment to be given to the debtor and this is a requirement that cannot be satisfied where, because of the prohibition against assignment, no effective notice can be given. Subject to effective notice, legal assignments ensure that the assignee takes priority over any subsequent assignees. The existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights, because, the argument goes, if the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition: to ensure that the original parties to the contracts are not brought into direct contractual relationships with third parties without their agreement.

The part of the Judgment on Linden Gardens (“Issue 2”) focuses on whether prohibition of assignment clauses should be limited to rendering ineffective a legal assignment and not equitable assignments. It is common commercial practice to operate by way of undisclosed or confidential discounting, where no notice of assignment is given to the debtor, the assignor is left to collect in the assigned debts and the assignment takes effect only in equity. Contractually, bars to assignment are strictly relevant only to the relationship between the assignor and the debtor and, arguably, it is not appropriate for the debtor to exclude by contract the economic (as against legal title) effects of an equitable assignment as between the assignor and the assignee. Such economic effects are arguably a logical pre-cursor to the recognised commercial intention and effects described under Issue 1. In this case, the Judgment recognises that the parties did not seek to raise such an argument and noted that any precedent on this point would inevitably involve reconsideration of the House of Lords decision in Linden Gardens by the Supreme Court if the case is taken further. The Judgment suggests that on that basis, Linden Gardens could be distinguished. “With a considerable degree of disappointment”, the Court of Appeal reluctantly accepted that this question was not at issue.

If you have any queries about this article, please get in touch with Alex Monk or Iliana Stefa, whose details appear below.

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About the contributors

  • Alex Monk Partner

    Alex has a wide finance transaction experience with a particular focus on trade and commodity finance transactions acting for banks, financial institutions and corporates.

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  • Iliana Stefa Solicitor

    Iliana is a member of the Marine and Commercial Litigation Group.

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