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United Arab Emirates: Receivable Financing With A Prohibition

Against Assignment – A Possibility?
21 February 2018

by
Liew Kai Zee
Shook Lin & Bok

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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
ARTICLE assignments. However, it does
not restrict other alternative methods of transferring the economic
attempted
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:

a. FADB would be subrogated to

BPOI's rights against SAMIR;
b. BPOI would take legal proceedings
against SAMIR for amounts unpaid by SAMIR;
c. BPOI would hold on trust for FADB the
proceeds of 95% of the receivable; and
d. 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:

a. What, on its true construction, was

BPOI contractually prohibited from doing under the section 34
clause?
b. What, as a matter of law, was the
effect of such a restriction on BPOI's ability to dispose of
the
receivable?
c. 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:

a. Paying to FADB all payments received

from SAMIR in connection with the receivable;
b. Where an assignment was unable to
take place, subrogating FADB to its rights against SAMIR;
c. Holding the proceeds of the
receivable on trust for FADB; and
d. 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.

AUTHOR(S)

Liew Kai Zee

Shook Lin & Bok

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