An assignment under UAE law is the transfer of certain
obligations or rights from one party to another. In the UAE,
assignments are often used as a security arrangement under which a
party (the assignor) who is entitled to receive certain benefits
(arising from a contract, payment arrangement or receivables),
assigns those benefits to a financial institution as security for a
It is important not to confuse the elements of a UAE assignment with its common law counterpart. Being a civil law jurisdiction, assignments in the UAE are subject to certain peculiarities and have different implications. For example, the UAE does not recognize the concept of a floating charge, and technically does not distinguish between an assignment by way of security and an absolute assignment. Under a UAE assignment, the assignor relinquishes all its rights in respect of the assigned property from the outset (albeit that perfection, in respect of the third party, may be deferred). Hence, even the term assignment by way of security may be a misnomer.
It is also important to note that the UAE does not maintain a public companies register in which records relating to security (including assignments) are kept and made available to the public. While implications of these are too extensive to be discussed in this article, this generally means that the assignee must make a commercial decision on whether it is comfortable that the assignor has not assigned, and will not assign, the subject matter to any other third party other than the assignee.
The laws of the UAE in relation to assignments are not fully developed. The UAE Civil Code only prescribes for an assignment of debts/obligations, but is silent on the procedural aspect of an assignment of rights. From a banking/lending perspective, an assignment of rights has commercial value as security, and this is what will be discussed in this article.
Please note that the following is not an exhaustive list of the issues to be considered when entering into an assignment, hence prior legal advice should be sought.
Based on market practice and case law the following are the main conditions to be satisfied when assigning rights to an asset:
- The subject matter of the assignment, or the specific agreement creating the subject matter of the assignment, must be in existence at the time the assignment is entered into and be identifiable. For example, if the assignment is over receivables, where the relevant contract of which has not been signed or where the assignment relates to future unidentifiable receivables, this condition is not fulfilled;
- The assignor owns the subject matter of the assignment as at the date of the assignment. In other words, if the assignor wishes to assign certain rights to a contract, the contract must be signed first before the relevant assignment is executed;
- The subject matter of the assignment is free from encumbrances
and other restrictions. For example, if assigning the rights to a
contract, the contract must not contain any prohibitions against
assignments. If the contract contains specific pre-requisites to an
assignment (for example, the consent of certain parties), these
conditions must be complied with.
It is not suitable to create an assignment over the following types of assets:
- Land, where specific land laws of the relevant Emirate prescribe that the interest in such land should be registered with the relevant land registration department. In such an instance, the land laws will apply;
- Interest over assets which are capable of being pledged or mortgaged under statute (most relevant being the UAE Civil Code). In such cases, the statutory pledge or mortgage is a more suitable mechanism to create a security interest over the asset;
- Interest over an asset or contract which has not yet materialized and/or cannot be identified or specified;
- An asset which has already been assigned by the assignor, i.e. the assignor is not allowed to create more than one assignment over the same asset.
Common types of assigned assets include assignments over performance bonds and guarantees, insurance policies and agreements which relate to a specified and identifiable income flow (i.e. receivables).
Procedure and Notice Requirements
Once the suitable subject matter of the assignment has been ascertained, the parties can enter into either of the following agreements:
- Assignment agreement between the assignor and the assignee. The assignment may be subject to notification and consent requirements (as discussed below); or
- A tripartite assignment agreement between the assignor, the assignee and the third party (being the counterparty to the original contract). While this is a cleaner option, it may not be preferable for the third party to actively participate or be aware of all the terms and conditions of the assignment, as some of these terms may be confidential.
The participation and consent of the third party is required under the following circumstances:
- Where the underlying contract specifically provides for the consent of the third party;
- Where the participation of the third party will assist in notifying the public that the assignment has occurred. For example, pending registration of ownership of property under construction at the relevant land registration department, it is best the assignment be noted in the internal registry of the property developer, and hence the participation and consent of the property developer is required ; or
- Where the participation of the third party is essential for enforcement proceedings, for example, the cooperation of the property developer in the case of an eviction.
Apart from the above examples, since an assignment of rights is not expressly covered under the UAE Civil Code, one would therefore have to be guided by UAE case law to ascertain the position of an assignment of rights. While the Civil Code provides that an assignment of debts/obligations require the consent of third parties, the courts in Abu Dhabi and Dubai have had differing views on whether third party consent is required in relation to assignment of rights, or whether third party notification will suffice. Although it is best to err on the side of caution and obtain third party consent for all assignments, this may sometimes prove to be administratively difficult. The courts have also applied different criteria in establishing whether consent may be implied from the action of the third party.
It is also essential that the assignee take possession of or control over the assigned rights, especially in relation to the assignment of receivables. This is a common step that is often overlooked.
Although a commonly used method of transferring rights and creating security in the UAE, one should be careful of the potential legal risks and requirements in respect of assignments. It is therefore best to seek legal advice as assignments in the UAE can be minefield, each matter having to be dealt with on a case to case basis.
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.