assignment by way of security definition

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Bulletins | January 30, 2018

Assignment by way of security – beware of giving away more than you bargained for.

Construction

Assignment by way of security is a concept that comes up on many construction projects; typically as a condition of providing finance a funder will require an assignment by way of security of key construction documents, including building contracts and appointments, with the intention that if the borrower defaults on the loan, the assignment will be perfected and the funder will be entitled to enforce its rights under the constructions documents. How and when exactly such assignment takes place and the interplay with an employer’s rights under its contracts on a project was brought into focus in last year’s case of Mailbox (Birmingham) Limited v Galliford Try Construction Limited ([2017] EWHC 67 (TCC)).

Mailbox (Birmingham) Limited (“Mailbox”), the claimant special purpose vehicle set up to develop the Mailbox in Birmingham (“the Property”), a high-end mixed used development, boasting a Harvey Nichols and the base for BBC Birmingham, engaged Galliford Try Construction Limited (“Galliford”) for refurbishment works at the Property under a building contract dated 23 December 2013. A dispute arose between the parties regarding responsibility for delay, the final account, liquidated damages and Mailbox’s termination which was referred to adjudication, where Galliford were ordered to pay Mailbox £2,477,152.86 plus 75% of the adjudicator’s costs. Galliford did not pay the sums ordered, so Mailbox sought enforcement of the adjudicator’s decision in the High Court.

Did Mailbox have a right to bring an adjudication?

Galliford’s primary defence to the enforcement was that Mailbox had no right to bring the claim, as it had assigned the benefit of the building contract with Galliford to Aareal Bank AG Wiesbaden (“Aareal”) in accordance with the requirements of a debenture dated 10 May 2011. Mailbox raised three defences:

• The building contract was not in existence at the time of the assignment referred to in the debenture. Therefore there could be no assignment;
• Alternatively, any assignment was by way of charge rather than a legal assignment; or
• The contract had been re-assigned from Aareal to Mailbox before Mailbox commenced adjudication proceedings.

Mailbox failed on the first two defences, but won on the third so was able to enforce the adjudicator’s award. However, it was the analysis of the first and second defences and Mrs Justice O’Farrell’s review of the requirements for legal assignment under Section 138 of the Law of Property Act 1925 that are of particular note.

It was held that the wording of the debenture covered future contracts, including the building contract in question. The wording “each chargor with full title guarantee assigns absolutely by way of security in favour of the security trustee” amounted to a full legal assignment rather than an assignment by way of charge and/or a conditional assignment. Further, there was a requirement for notice of the assignment to be served and specific reference to rights being re-assigned, both of which were more akin to an absolute assignment. Express notice was given to Galliford, again consistent with an absolute assignment.  Thankfully for Mailbox, on the day it commenced the adjudication, Aareal had re-assigned the rights under the building contract to Mailbox. If it had not done so, or done so after the adjudication had been commenced, Mailbox would not have been entitled to commence the adjudication.

Practical Tips

When obtaining finance for a project it is crucial to understand what the funder really requires in relation to security over construction documents. If all rights are assigned, the employer no longer has the ability to enforce such rights and may have given away more than he bargained for.

It may be that the use of collateral warranties or third party rights together with a charge will suffice but if not (which is unfortunately still the common position), it is important that any such rights are re-assigned before the employer commences an adjudication or any other proceedings.

Taking security over contractual rights

Published by a lexisnexis banking & finance expert.

Contractual rights are a type of chose in action , ie something that is recoverable by legal action as opposed to something that is physically possessed.

Security over contractual rights is typically taken by an assignment by way of security though it can also be taken by way of charge. Specific considerations apply to taking security over contractual rights. It is important to review the terms of the contract that is to be assigned from both the assignor and assignee's perspective. The assignee will also want to provide notice of the assignment to the contract counterparty because this has several important advantages.

This Practice Note deals with taking security over contractual rights in general. It explains:

the nature of contractual rights

typical methods of taking security over contractual rights

common provisions to check in the contract which is to be assigned, including governing law, restrictions on assignment and contractual rights of set-off

key terms to be included in the security document

issues relating to serving notice of the security on the contract counterparty,

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Related legal acts:

• Law of Property Act 1925 (1925 c 20)
• Small Business, Enterprise and Employment Act 2015 (2015 c 26)

Key definition:

Chose in action definition, what does chose in action mean.

A right to something such as a payment of a debt or other contractual right that can be recovered through legal action

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction , on the assignment of a receivable arising under that contract or any other contract between the same parties.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

• Financial institutions

Practice area:

• Banking and finance

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