An invitation to challenge Linden Gardens? (First Abu Dhabi Bank v BP Oil)

This case considers the effect of a prohibition on the assignment of a contract right as between the assignor and purported assignee and the possibility that a long standing authority of the House of Lords which held an assignment made in breach of a no assignment clause was of no effect as between assignor and assignee might now be ripe for overturning.

Original news

First Abu Dhabi Bank PJSC (formerly National Bank of Abu Dhabi PJSC) v BP Oil International Ltd [2018] EWCA Civ 14

Why is the case of interest?

The House of Lords held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd that an assignment of contractual rights in breach of a contractual restriction on assignment was ineffective to transfer the contractual rights even as between the parties to the assignment. This element of the decision has been roundly criticised as going too far in protecting a contractual counterparty with the benefit of a no assignment covenant from the consequences of an assignment made in breach of such a prohibition.

In First Abu Dhabi Bank v BP the Court of Appeal in analysing a receivables financing arrangement and the underlying contract, which contained a prohibition on assignment of rights without consent, made it clear that they thought the criticisms of the Linden Gardens decision were justified. However, the Court of Appeal reluctantly accepted it was bound by the decision and so could do nothing about it.

The case also makes it clear that a claim for breach of warranty to the effect that the contract can be assigned “as contemplated” by the relevant agreement is not easy to establish where the agreement contemplates the proposed assignee may end up with the fruits of the contract (ie the relevant funds) through some other mechanism such as a trust of the proceeds or a funded participation.

What were the facts?

BP had entered into a contract to deliver oil to SAMIR. That contract contained a term stating that:

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.

BP later entered into a receivables purchase agreement with First Abu Dhabi Bank (the bank). At no time did it ask for or receive SAMIR’s consent to its disposal of its rights to the bank.

The receivables purchase agreement contained the following warranty:

[BP] 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 [BP]

The receivables purchase agreement also provided that if no assignment was able to take place:

  • the bank would after payment of the price to BP be subrogated to BP’s rights to payment from SAMIR;
  • BP would take proceedings against SAMIR for any proceeds owing with a view to handing these over to the bank;
  • BP would hold any receipt from SAMIR on trust for the bank; and
  • the bank would instead be entitled to a funded sub-participation in the rights to receive payment from SAMIR on terms equivalent to those of the receivables purchase agreement.

After the bank had paid BP the purchase price of $US 68m SAMIR took steps to file for insolvency protection in Morocco with the full amount of the debt still outstanding.

The bank brought a claim for $US 68m plus interest and costs against BP on the basis of breach of the warranty set out above. The bank regarded any claim against SAMIR (whether direct or through BP) as worthless and wanted to effectively reclaim its purchase price.

Issue before the court

There were three issues considered by the court:

  • what was BP contractually prohibited from doing under its contract with SAMIR?
  • as a matter of law what was the effect of such a restriction?
  • was BP in breach of the representation and warranty relating to its ability to assign?

In the High Court the judge found that BP had been in breach of the warranty and that the bank was entitled to $US 68m to compensate it for that breach.

Decision

The Court of Appeal decided that the judge at first instance was wrong and allowed BP’s appeal.

In relation to the first issue the Court of Appeal decided that BP was prohibited from making any legal or equitable assignment without the consent of SAMIR. However, it went on to hold that the clause did not prevent BP from agreeing to hold any receipts from SAMIR on trust for the bank or doing any of the other things mentioned in the receivables purchase contract to put the bank in a position to enjoy the fruits of the receivable—see the list of fallbacks above.

On the second issue the Court of Appeal made it clear that it was bound by the higher authority of the House of Lords decision in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and that it could not override that decision. The earlier case held that any assignment in breach such as that between BP and the bank was of no effect because of the prohibition.

The Court of Appeal went out of its way to make it clear that it thought there was great force in the argument that on this issue the House of Lords had gone too far. The Court of Appeal thought that there was no policy reason to decide that an assignment was rendered void as between assignor and assignee if it was made in breach of a prohibition provision. The beneficiary of the contractual prohibition could effectively ignore the assignment and that conferred sufficient protection upon it without interfering further with rights created by the assignment between the assignor and assignee.

In assessing whether BP was in breach of the warranty the court held that it was necessary to look at the contract as a whole. In particular the words “from disposing of the Receivable evidenced by the Invoice as contemplated herein” qualified the warranty. It held that it was clearly contemplated in the receivables purchase agreement that an assignment might not be possible and that was why the other mechanisms for ensuring the fruits of the receivable were enjoyed by the bank were included in the contract. On that basis the Court of Appeal decided there had been no breach of warranty by BP.

Comment

The Court of Appeal decision is interesting for two reasons.

First, the decision on the breach of warranty claim shows that where a receivable purchase (or similar) contract includes (usually as a fallback) mechanisms other than assignment to ensure the fruits of the receivable are enjoyed by the assignee any similar warranty may afford only limited protection to the purchaser. It is likely that the drafting of warranties such as the one discussed in this case will need to be much tighter. Using language such as “ disposing of the Receivable…as contemplated herein” in a warranty that no impediment exists to allow assignment qualifies the protection afforded by the warranty in a way most lenders will now find unacceptable.

Secondly, it seems the Court of Appeal sides with Professor Goode and other critics of Linden Gardens when it comes to the effect at law of a breach of a no-assignment clause as between the assignor and assignee. His analysis contractual prohibitions against assignment [2009] LMCLQ 300, at 3096 was cited with approval by the Court of Appeal. This article makes a compelling case for the view that allowing a no assignment clause to interfere with the rights of the assignor and assignee goes too far. Lady Justic Gloster had this to say of Linden Gardens at para 28:

Speaking for myself, and if this Court were not constrained by authority, I can see strong arguments in favour of Professor Goode's proposition that “it is necessary to keep in mind the central principle: bars to assignment or other dealing are relevant only to the relationship with the debtor, not to the relationship between the parties to the dealing in question”; and that, accordingly, 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.”

All that is now needed is for someone brave (or motivated) enough to take the point to the Supreme Court.

Case details

  • Court of Appeal, Civil Division
  • Judges: Gloster VP, Patten LJ and Lord Briggs
  • Date of judgment: 18 January 2018

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