United Arab Emirates: Receivable Financing With A Prohibition Against Assignment – A Possibility?

Last Updated: 21 February 2018
Article by Liew Kai Zee

First Abu Dhabi Bank PJSC v BP Oil International Limited [2018] EWCA Civ 14

The English Court of Appeal recently considered the effect of a contractual prohibition against assignment of receivable in receivable financing. The decision affirms that such a prohibition is effective to prevent any attempted assignments. However, it does not restrict other alternative methods of transferring the economic benefit of the contract, such as declarations of trust, subrogation, sub-participation and payments to the assignee after receipt by the assignor.

The case also cautions lenders on the need to tighten widely worded representations and warranties on the ability of the assignor to assign receivable in receivable financing.

Facts of First Abu Dhabi Bank

BP Oil International Limited ("BPOI") and Société Anonyme Marocaine de L'Industrie de Raffinage ("SAMIR") entered into an agreement for the delivery of crude oil ("the SAMIR Agreement"). The SAMIR Agreement incorporated the following clause ("the section 34 clause"):

"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."

BPOI subsequently entered into a receivables financing arrangement with First Abu Dhabi Bank PJSC ("FADB"), under which BPOI transferred to FADB the credit risk of SAMIR failing to make payment under the SAMIR Agreement. FADB would pay to BPOI 95% of the value of the receivable under the SAMIR Agreement in advance of the receivable being due; in exchange, BPOI would assign 95% of the value of the receivable to FADB and pay it a fee. It was further provided in the agreements between BPOI and FADB that if such assignment was not able to take place:

  1. FADB would be subrogated to BPOI's rights against SAMIR;
  2. BPOI would take legal proceedings against SAMIR for amounts unpaid by SAMIR;
  3. BPOI would hold on trust for FADB the proceeds of 95% of the receivable; and
  4. FADB would be entitled to a funded sub-participation in the rights to receive payment in respect of 95% of the receivable.

BPOI also represented and warranted to FADB that:

"BPOI is not prohibited by any security, loan or other agreement, to which it is a party, from disposing of the Receivable evidenced by the Invoice as contemplated herein and such sale does not conflict with any agreement binding on [BPOI]".

SAMIR's consent was not obtained in relation to the assignment of the receivable. Subsequently, after SAMIR took steps to file for insolvency before payment in respect of the receivable were made, FADB commenced proceedings against BPOI, claiming a breach of the representation and warranty.

Issues

The court had to determine three issues:

  1. What, on its true construction, was BPOI contractually prohibited from doing under the section 34 clause?
  2. What, as a matter of law, was the effect of such a restriction on BPOI's ability to dispose of the receivable?
  3. As a matter of construction, was BPOI in breach of the representation and warranty?

Decision

On the first issue, the Court held that the section 34 clause imposed a contractual obligation on BPOI not to assign its future or existing rights under the SAMIR Agreement without SAMIR's prior consent. This includes the attempted assignment of 95% of the receivable by BPOI to FADB. The prohibition on assignment did not, however, impose any contractual restriction on BPOI from:

  1. Paying to FADB all payments received from SAMIR in connection with the receivable;
  2. Where an assignment was unable to take place, subrogating FADB to its rights against SAMIR;
  3. Holding the proceeds of the receivable on trust for FADB; and
  4. Granting FADB a funded sub-participation in respect of the rights to receive payment of the receivable.

Payment by the assignor to assignee after receipt of sums due is not prohibited, since these are not "rights under" the underlying contract. The Court affirmed its 2007 decision in Barbados Trust Company Ltd v Bank of Zambia that prohibitions on assignment do not preclude declarations of trust by the assignor in favour of the assignee. Further, it was common ground between the parties that clauses prohibiting assignment also do not prevent the creation of rights of subrogation (any claim brought pursuant to the subrogation right must be brought by and in the name of BPOI) or sub-participation (this would result in a debtor-creditor relationship between BPOI and FADB without giving FADB an interest in the underlying debt).

On the second issue, the Court admitted that the House of Lords' decision in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd was binding on it. In that case, it was held that contractual prohibitions on assignment are effective to prevent attempted assignments of contractual rights in breach of the prohibition. Nonetheless, the Court considered at great length Professor Goode's proposition that "a no-assignment clause is valid only so far as it operates as a matter of contract, conditioning the duty to perform, not as a restraint on alienation", and that "[i]f ... it purports to render a transfer void ... it invades the field of property law and is of no effect, both on the ground of repugnancy and on the ground of public policy". While clearly impressed with Professor Goode's analysis, the Court's remarks are ultimately obiter dicta since it observed that BPOI did not seek to argue this issue before it. The Court thus proceeded on the assumption that the section 34 clause was capable of rendering ineffective any purported equitable assignment of the receivable without SAMIR's consent.

In relation to the third issue, the Court held that BPOI was not in breach of the representation and warranty. It observed that the parties expressly contemplated the possibility of a contractual restriction against assignment, and thus provided for alternative means of transferring the economic benefit of the receivable to FDAB. Moreover, the primary means of transferring such economic benefit was for BPOI to make immediate payment of amounts received from SAMIR to FDAB, and to impose a trust over such amounts received in BPOI's hands. Only to the extent that such sums were not received or paid over to FDAB did the assignment take effect. Against this background, the Court considered that on true construction of the representation and warranty, the words "disposing" or "sale" did not refer exclusively to an assignment. Hence, even accepting that the section 34 clause was effective to prohibit assignment of the receivable, it did not prohibit other means of transferring the economic benefit of the receivable. There was accordingly no breach of the representation and warranty.

Implications for Banks

1. Clauses prohibiting assignment of debts do not prohibit other ways of transferring economic benefit of underlying contract

The case demonstrates that despite the existence of a clause in the underlying contract prohibiting assignment of receivables thereunder, there are other valid mechanisms by which banks may acquire the economic benefit of the contract may be transferred. Clauses prohibiting assignment do not, as a matter of construction, preclude payment of amounts received by the assignor to the assignee, declarations of trust, and the giving of rights of subrogation and sub-participation. Assignees would do well to strengthen their position by including such other means of transferring the benefit of the underlying contract in their agreements.

2. A potential relook at Linden Gardens?

Despite being bound by the House of Lords' decision in Linden Gardens, and the issue not being argued before it, the English Court of Appeal referred extensively to Professor Goode's analysis on the effect of contractual prohibitions on the assignment. This case has been roundly criticised for several years, and it was thus perhaps unsurprising that the English Court of Appeal took this opportunity to consider the "strong arguments in favour of Professor Goode's proposition" that "it is not competent for the debtor to exclude by contract the proprietary effects of an assignment as between assignor and assignee, or the creation of a trust as between trustee and beneficiary; and that 'all he can do is to insist that he will not recognise the title of the beneficiary or the ability of the beneficiary to bring proceedings in his own right.'" Notably, Professor Goode has suggested that Linden Gardens concerned the issue of whether the assignment was effective against the debtor, rather than as between the assignor and assignee. Thus, while the Court was bound by Linden Gardens, it could – if it so wished – adopted Professor Goode's characterisation of that decision in order to distinguish it from the present facts, had the issue been live before it. For now, at least, Linden Gardens remains authority from the apex court in UK, and is binding in the UK and persuasive in Singapore. But this decision now provides fresh ammunition to a future litigant wishing to challenge the correctness of Linden Gardens.

This decision, as noted above, already lends considerable support to lenders in the context of receivables financing by permitting various methods of acquiring the economic benefit of an underlying contract despite a contractual prohibition on assignment of the receivable. A potential reversal of Linden Gardens would go even further by holding that an equitable assignment is effective to transfer the receivable in respect of an underlying contract in the face of a contractual prohibition on assignment.

3. Representations and warranties should be tightened to expressly cover "assignment"

A representation and warranty employing general language that the assignor is not prohibited from "disposing" of, or effecting a "sale" of, the receivable may not be breached by the existence of a prohibition on assignment if other means of transferring the economic benefit of the contract were envisaged by the parties. Lenders will benefit from tighter drafting that expressly covers "assignment" of the receivable, in order to succeed in a claim against the assignor for breach of representation and/or warranty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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