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Prohibition against assignment proves expensive
A recent case between a foreign bank and BP Oil as assignor on somewhat unusual facts required the court to examine the principles of assignment of contract rights, and resulted in a very expensive lesson for the assignor.
In National Bank of Abu Dhabi PJSC v BP Oil International Limited [2016] EWHC 2892 (Comm) BP assigned 95% of the value of a debt arising from the supply of oil to a Moroccan company for a discounted payment of approximately $68 million.
The assignment was made on a non-recourse basis, but the detailed contractual terms provided for full repayment of the advance together with interest in the event inter alia of a breach of warranty by BP.
The letter of assignment contained detailed warranties, including to the effect that the debt was properly assignable.
In the event when the assignee Bank came to enforce payment against the debtor in Morocco it found that it was insolvent, and subsequent enquiries with BP led to the revelation that the contract between BP and the Moroccan debtor was subject to BPs Standard Terms and Conditions , section 34 of which provided: –
“Section 34 – Limitation on Assignment
Neither of the parties to the Agreement shall without the previous consent in writing of the other party (which shall not be unreasonably withheld or delayed) assign the Agreement or any rights or obligations hereunder. In the event of an assignment in accordance with the terms of this Section, the assignor shall nevertheless remain responsible for the proper performance of the Agreement. Any assignment not made in accordance with the terms of this Section shall be void.”
The court set out the basic principles of assignment as follows: –
“ a) A contractual term limiting or prohibiting assignment of a debt is valid and not contrary to public policy (see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 A.C. 85 );
b) An assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee (see Linden Gardens , per Lord Browne-Wilkinson at 109C-D);
c) Where assignment is prohibited without the prior consent of the debtor which is not to be unreasonably withheld, an assignment made before the debtor’s consent is sought is ineffective as regards the debtor and it is irrelevant whether or not the debtor could have reasonably withheld its consent if asked in time (see Hendry v Chartsearch Ltd [1998] C.L.C. 1382 per Henry and Millett LJJ at 1393-4);
d) Part of a debt cannot be the subject of a legal assignment but can be the subject of a valid equitable assignment (see Chitty at [19-015] and Williams v Atlantic Assurance Company Ltd [1933] 1 KB 81 at 100). Thus it is common ground that there could not have been a legal assignment of the Discount Percent of the Receivable;
e) An equitable assignee may (i) give notice to the debtor and such notice gives priority over subsequent assignees (whether legal or equitable) and over set-offs arising from other subsequent dealings between the debtor and the assignor; (ii) bring proceedings against the debtor in his own name. In the case of subject matter such as an existing debt, the only significant difference between the position of an equitable assignee and a legal assignee is that the equitable assignee may be required to join the assignor to the action (see Chitty , 32nd Ed, at [19-039] – [19-040], [19-069], [19-071])”.
The court then went on to point out that in the leading case of Linden Gardens Trust Ltd v Sludge Disposals Ltd [1994] 1 AC 85 in the House Lords Lord Browne-Wilkinson said at paragraph 108:
“…a prohibition on assignment normally only invalidates the assignment as against the other party to the contract so as to prevent a transfer of the chose in action; in the absence of the clearest words it cannot operate to invalidate the contract as between the assignor and assignee and even then it may be ineffective on the grounds of public policy.”
Notwithstanding this, BP tried to argue that on the proper construction of the assignment documents there had been no breach of warranty. The court dismissed this argument and found that BP was in breach and that as a result it was required to reimburse the Bank the full $68 million it had received for the receivable together with interest.
One interesting feature of the case is that what the court described as a “non-recourse” assignment resulted in the complete reimbursement of the Bank’s outlay for the receivable because BP was in breach of warranty. The fact that the Moroccan debtor was insolvent would in itself not have produced this result in a non-recourse agreement.
Another interesting feature was the fact that BP’s difficulties arose as a result of a provision in its own Standard Terms and Conditions rather than one imposed on it by the debtor, and one which could presumably have been easily overcome if BP had simply sought the debtor’s consent in advance since such consent could not have been “unreasonably withheld or delayed”.