The case of First Abu Dhabi Oil Bank (“First Abu Dhabi”) and BP Oil (“BP”) (2018) examines the relationship between a non-assignment clause without the other party’s consent and a warranty in a receivable financing contract specifying that one of the parties is not prohibited from disposing of the receivable. The case raises issues in relation to the interpretation of non-assignment clauses in general, and in particular which constitutes a challenge to the case of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (“Linden Gardens”), a long standing decision of the House of Lords which held that an assignment made in breach of a no assignment clause was of no effect as between assignor and assignee.
In December 2013, BP entered into an agreement with Société Anonyme Marocaine de L’Industrie de Raffinage (“SAMIR”), for the sale and purchase of crude oil (‘the SAMIR Agreement”). The SAMIR Agreement incorporated BP’s general terms and conditions, including a non-assignment provision preventing either party from assigning rights without the other party’s consent (not unreasonably to be withheld).
One year later, BP and First Abu Dhabi entered into a purchase letter where under its terms First Abu Dhabi would purchase BP’s economic interest in the SAMIR Agreement for 95% of its value, and BP would pay any sums it received from SAMIR to First Abu Dhabi after the latter had advanced payment to BP. BP had not sought SAMIR’s consent to these terms. Under the terms of the purchase letter, First Abu Dhabi paid to BP approximately $68 million.
In the event that the assignment of BP’s rights under the SAMIR Agreement to First Abu Dhabi was ineffective:
- First Abu Dhabi would be subrogated to BP’s rights after payment of the price to BP;
- BP would take action against SAMIR for any proceeds owed, in order to provide them to First Abu Dhabi;
- BP would hold any amounts received from SAMIR on trust for First Abu Dhabi; and
- First Abu Dhabi would 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.
Under the purchase letter, BP represented and warranted to First Abu Dhabi that BP was not prohibited by any security, loan or other agreement from “disposing of the Receivable evidenced by the Invoice [between SAMIR and BP]” and that such sale did not conflict with any agreement binding on BP.
In late November 2015, SAMIR filed for insolvency protection in Morocco, and First Abu Dhabi contacted BP to arrange assignment under the purchase letter. BP responded that:
- BP needed to obtain SAMIR’s consent to the assignment; and
- once it had been confirmed that doing so was the best option (noting that there were ongoing discussions between BP and National Bank of Abu Dhabi as to the best course of action), BP would seek SAMIR’s consent.
However, First Abu Dhabi issued proceedings in the Commercial Court.
THE COURT CASE
In the first instance the court concluded that BP was prohibited from assigning its rights under the SAMIR’s contract by the non-assignment provision in Section 34 of BP’s general terms and conditions.
The Court of Appeal rejected this conclusion, stating the following three reasons:
- On the issue of what BP was prohibited from doing under Section 34 of BP’s general terms and conditions:
The judge argued that the common ground between the parties was that BP was restricted by Section 34 of its general terms and conditions from assigning its rights under the agreement without SAMIR’s consent, either in a legal or in an equitable assignment. However, this restriction did not prohibit BP from disposing of those rights by any of the alternative ways set out in BP’s general terms and conditions, such as: the disposal of the amounts received by BP from SAMIR, since they would not be “rights” under the agreement, the creation of a trust over the proceeds of the receivables, or the receivables themselves and the creation of rights of subrogation or sub-participation.
- On the issue of what was the legal effect of this restriction on BP’s ability to dispose of the receivables:
Whilst BP did not argue that Section 34 of the agreement did not prevent an equitable assignment, this would be the basis on which First Abu Dhabi, as the assignee, would be prevented from making any demand, action or claim directly to SAMIR. The existence of a total restriction would mean limiting BP’s right to alienate its own property, as such contrary to public policy. In support of this, the judge quoted an article by professor sir Roy Goode, and argued that the decision of the House of Lords in Linden Gardenswent too far in preventing any effect of an assignment, in virtue of the restrictions set in a non-assignment clause. As a matter of facts, restrictions to assignment and other dealings are relevant only to the relationship with the debtor, not to the relationship between the parties of these dealings. All the debtor can do is not recognise the title of the beneficiary, and the ability of the beneficiary to bring proceedings in their own right.
- On the issue on whether or not BP was in breach of the representation and warranty in Clause 5 (b) of the purchase letter:
The Court stated that the contract needed to be looked at as a whole and as such BP did not breach the representation and warranty in Clause 5 (b) of the purchase letter. Firstly, the wording of the warranty stated “that BP was not prohibited from disposing of the receivable” which, whilst contemplating that an assignment might be impossible, it was not intended as the primary method by which First Abu Dhabi was to receive funds by BP. Secondly, the letter provided other mechanisms for BP to transfer the economic benefit of the receivables, in other words, while legal or equitable assignment might be restricted, that was not the case for the other methods set out in the purchase letter.
The judge noted that it was not for the court to consider whether a non-assignment clause could render ineffective an equitable assignment, as Linden Gardens concluded. Therefore, a non-assignment clause will prohibit the effect of a legal assignment, whilst an equitable assignment might still be possible. Parties should therefore take into account the uncertainty still existing in judicial precedents over the matter.
When drafting a non-assignment clause, it is important to consider that non-assignment clauses, as those contained in BP’s general terms and conditions, would not be effective in preventing other methods of transferring interests that are mentioned within a contract between the parties.
Dealings between parties may contain references to other methods of transferring rights, such as: the disposal of the amounts received by the assignor from the assigned party, as technically speaking, they would not be “rights” under the agreement; the creation of a trust over the proceeds of the receivables, or the receivables themselves and the creation of rights of subrogation or sub-participation.Therefore, although there is still judicial uncertainty on the matter, in order to exclude the transfer of a contract despite a non-assignment provision, clauses have to be drafted in such a way to ensure that other possible methods of transfer are included in the restriction.
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