Last edited 29 Dec 2013

Restrictions on assignment

Contents

[edit] Statute

The right to assign may be governed by specific statutory provisions; for example, section 53(l)(c) of the Law of Property Act 1925 provides that equitable assignments of interest in a trust must be in writing. Other examples are bills of lading, copyright, patent rights and life insurance policies. If there is a statutory code this will over-ride the general provisions of section 136 of the Law of Property Act 1925 and also the rules of equity.

[edit] Future choses in action

Future choses in action cannot be assigned either by a legal assignment or by an equitable assignment. The distinction between an existing chose and a future chose is not as obvious as it sounds and can often lead to complex forensic analysis. For example, a right to future payment under an existing contractual right will be an existing chose not a future chose. In comparison, the benefits which are likely to flow from a contract not yet entered into will be a future chose. Further difficulties arise in respect of accrued contractual obligations which may be defeated by a subsequent breach of the contract by the party otherwise entitled to the accrued benefit.

In Hughes v Pump House Hotel Company Ltd, it was held that a contractor's right to be paid under a building contract was an existing chose even though the right of payment might be defeated by the contractor's subsequent failure to perform his contractual obligations.

The vital difference between an existing chose and a future chose is that the latter can only be enforced if there is an agreement supported by adequate consideration.

In Re McArdle (deceased), McArdle v McArdle, M and his wife lived in a dwelling house forming part of the estate of M's father in which M and his brothers and sisters were beneficially interested expectant on the death of the tenant for life. In 1943 and 1944, Mr and Mrs M carried out certain improvements and decorations in and on the house, the cost of which, amounting to £488, was borne by Mrs M. In April 1945, M and his brothers and sister signed a document addressed to Mrs M, which provided:

'In consideration of your carrying out certain alterations and improvements to [the dwelling house] at present occupied by you, we the beneficiary under the Will of [the father] hereby agree that the
executor... shall repay to you from the said estate when so distributed the sum of £488 in settlement of the amount spent on such improvements.'

In 1948 the tenant for life died and Mrs M claimed payment of the sum of £488. The court held that the consideration for the execution of the document in April 1945 was past consideration and the document could not operate as an equitable assignment for valuable consideration. Further, whilst an equitable assignment could be valid without consideration the document did not constitute such an assignment because, as it contemplated future action by Mrs M to the satisfaction of the signatories, it did not render her title complete and so was not complete and perfect. In other words, the court found that the document purported to be an assignment of a future chose in action, therefore it would not be binding unless it constituted an agreement supported by adequate
consideration.

[edit] Bare rights of action

Legal or equitable assignments of bare rights of action, that is to say litigation, are void and unenforceable. This is because the courts consider such transactions to be trading in litigation, or to use the lawyer's terminology 'offending against the rules of maintenance and champerty'. In Prosser v Edmonds, Lord Abinger CB stated:

'It is a rule not of our law alone, but of that of all countries, that the mere right of purchase shall not give a man a right to legal remedies. The contrary doctrine is nowhere tolerated and is against good policy. All our cases of maintenance and champerty are founded on the principle that no encouragement should be given to litigation by the introduction of parties to enforce those rights which others are not disposed to enforce.'

Maintenance is an agreement to fund litigation, and champerty (a species of maintenance) is an agreement to divide the proceeds of the litigation.

Prior to the Criminal Law Act 1967, maintenance and champerty were both criminal acts and torts. Section 14(2) of the Act abolished the criminal offence and also the tort of maintenance and champerty; however it preserved the rule of law that agreements that tended to either maintenance or champerty would be void and unenforceable. (The Jackson/civil litigation reforms now mean that damages-based agreements are now permitted for civil litigation)

Clearly the benefits arising under a contract do not offend against the above rule. What is the position however if prior to a purported assignment of the benefits of a contract, those benefits have crystallised into rights of action for damages for breach of contract, for example latent construction defects? The courts had to consider a similar situation in Dawson v Great Northern and City Railway Company. The Railway Company constructed under statutory powers a tunnel under or near certain houses in which D was interested and in which she carried on business and she claimed to be entitled to compensation on the ground that her interest in the houses had been injuriously affected by structural damage to the houses and by damage to trade stock. The structural damage had occurred prior to the acquisition of her freeholder interest and also the acquisition of her leasehold interest, though both transactions purported to assign rights to recover compensation from the railway company in respect of the structural damage, these rights being statutory rights under the Land Clauses Consolidation Act 1845. The court held that whilst an assignment of a mere right of litigation is bad, an assignment of property is valid even though that property may be incapable of being recovered without litigation. Sterling LJ stated:

'Even if the assignment be regarded apart from the conveyance of the lands and buildings... it appears to us that it is good; but we think that great weight must be given to the circumstances that this assignment is incidental and subsidiary to that conveyance and is part of a bona fide transaction the object of which was to transfer to the plaintiff the property of [the vendor] with all the incidents which attach to it in his hands. Such a transaction appears to be very far removed from being a transfer of a mere right of litigation.'

A similar issue arose in Ellis v Torrington. The facts were somewhat complex but illuminating. The property in question was subject to three leases: a head lease expiring on 25 December 1917, an underlease expiring on 18 December 1917 and a sub-underlease expiring on 15 December 1917. All these three leases contained onerous covenants to repair. The defendant T was the tenant pursuant to the sub-underlease and E the plaintiff was a sub-tenant of T, although E's covenants to repair were far less onerous than those imposed on T. On 18 December 1917, E purchased the freehold interest of the premises which was subsequently conveyed to him together with the benefits of the covenants to repair in the head lease. At the expiration of all these leases the premises were substantially out of repair. T threatened E with proceedings on the basis of E's covenant to repair in his sub-tenancy from T. Faced with this threat E, who could not pursue T under the head lease, obtained an assignment of the benefits of the covenants in T's sub-underlease and then commenced proceedings against T for breach of covenant as assignee of the sub-under lessor. The court held that the assignment was free from objection on the ground of maintenance or champerty, the right of action on the covenants being so connected with the enjoyment of property as to be more than a bare right to litigate. Banks LJ stated:

'the Respondent is seeking to enforce a right incidental to property, a right to a sum of money which theoretically is part of the property he has bought.’

More often than not with construction projects, the assignments of benefits arising under collateral warranties or collateral contracts even though they have crystallised into rights of action will be incidental to property and therefore falling within the principles set out in Dawson and Ellis. In any event, in recent years the courts have become more relaxed about the issue of maintenance and champerty. In 1968, Lord Denning stated

'Much maintenance is considered justifiable today which would in 1914 have been considered obnoxious' (Hill v Archbold).

The leading case is the House of Lords decision in Trendtex Trading Corporation and Another v Credit Suisse. Again the facts of this case were somewhat complex involving proceedings in England in respect of an agreement made in Switzerland containing a purported assignment by a Swiss Corporation to a Swiss Bank of its rights of action against the Central Bank of Nigeria in respect of a dishonoured letter of credit for the sum of US$14,000,000. The Bank had assigned to an undisclosed third party all the rights of action against the Central Bank of Nigeria (CBN) for the sum of US$1,100,000. Less than five weeks from the date of the assignment the third party had settled the claim against CBN upon payment by the Bank of US$8,000,000. One of the issues in the case was the validity of the intermediate assignment to the Swiss Bank and the subsequent assignment to the third party. The court held that in determining the validity of an assignment of a cause of action it was the totality of the transaction that was to be looked at and if the assignment was of a property right or interest and the cause of action was ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and enforcing it for his own benefit, the assignment would not be struck down as an assignment of a bare cause of action or as savouring of maintenance.

Accordingly if no parties other than Trendtex and Credit Suisse had been involved the intermediate assignment would have been valid (even though it involved an assignment of Trendtex's residual interest in the CBN litigation) as Credit Suisse had a genuine and substantial interest in the success of that litigation. However, the introduction of the third party rendered the agreement void under English law because the agreement clearly showed on its face that its purpose was to enable the cause of action against CBN to be sold to an anonymous third party with the likelihood of that third party, which had no genuine commercial interest in the claim, making a profit out of the assignment. Thus Trendtex introduced a further qualification to the rule against the validity of assignments of bare rights of action, namely where there is a genuine commercial interest in taking the assignment which of course does not necessarily have to be an interest incidental to the use of property.

In Norglen Ltd v Reeds Rains Prudential Ltd, the Court of Appeal held that there was a genuine commercial interest in:

  • Shareholders and former directors of a company in liquidation taking an assignment from the liquidator of the company's causes of action against a third party.
  • A shareholder and director of a company in administrative receivership, who was also a guarantor, taking an assignment from the administrative receiver of the company, of causes of action against a third party.

Nor did the fact that these assignments were made to enable the individuals concerned to make applications for legal aid to pursue the assigned causes of action and also avoid the potential liability for an order to provide security for an opponent's costs, affect the validity of the assignments. The House of Lords subsequently confirmed the Court of Appeal's findings on these points.

[edit] Personal contracts

If the contract is a personal contract then the benefits of that contract cannot be assigned either by a legal assignment or by an equitable assignment. The test, which is an objective test, is whether 'it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it' (Tolhurst v Association Portland Cement Manufacturers Limited). It will be noted that the test is not concerned with the personal skill of the debtor. For example, if an architect gives a collateral warranty relating to his design work whilst the design work will involve personal skill on his part and will not be assignable by the architect to a third party, the benefits of the undertakings arising under the collateral warranty given to, say, a tenant will be assignable to a future tenant because, applying the objective test, it can make no difference to the architect whether its obligations lie to the first tenant or to the future tenant. It could however make a difference if a subjective test was the proper test, for example the future tenant could be more litigious than the existing tenant and more likely to bring proceedings against the architect in the event of breach.

There is a presumption in favour of commercial contracts that the benefits arising under such contracts are assignable. However the presumption is rebuttable. In Kemp v Baerselman, B contracted with K, a cake manufacturer, to supply him with all the eggs of a specified quality 'that he
shall require for manufacturing purposes for one year'. K undertook not to purchase eggs from any other merchant during the year so long as B was ready to supply them. During the relevant year K transferred his business to a company whereupon B claimed to be discharged from his contract and refused to supply any more eggs to K or to the new company. The court held that B's contract was with K personally and that the benefit of the contract was not assignable. The court considered that the personal characteristics of the contract were two-fold: that B's obligations were defined by reference to K's manufacturing purposes and further that K had undertaken not to purchase eggs from any other merchant.

In Tolhurst v Association Portland Cement Manufacturers Limited, the owner of land had contracted with a company to supply them for 50 years with at least 750 tonnes of chalk per week and so much more as they might require for their manufacture of cement. The original company was a small business, which went into voluntary liquidation and transferred all its assets, including an assignment of the benefit of the supply contract to Associated Portland Cement. Associated Portland
Cement was a much larger concern than the original company and carried on business at various places. The court held that the assignment was effective. In Kemp, Lord Alverston CJ distinguished Tolhurst on the basis that in the latter case the House of Lords had 'treated the contract as a supply to a given cement making place and not as a personal contract'.

[edit] Conditions of contract

Often the contract between the assignor and the original debtor will include an express term purporting to prohibit or restrict the right of assignment. Are such conditions effective? Some earlier cases appear to suggest that the right of assignment cannot be prohibited or restricted by the contractual arrangements between the assignor and the original debtor. In Tom Shaw & Co v Moss Empires (Ltd) and Bastow, B was a comedy artist who appeared on stage for a season at the Moss Empires Theatre. His contract with Moss Empires provided by clause 13 that he should not assign his salary which should be paid direct to him and to no other person except in the case of his death. His booking at the Moss Empires Theatre was obtained through his agents Tom Shaw & Co with whom B agreed that ‘I hereby agree to pay you or your assigns 10% commission on (my) salary and on all monies which should accrue under the said engagement or a prolongation of the same... and hereby authorise Moss Empires to deduct and pay the said commission from my salary in any manner which you may deem expedient.’ Notice of this letter was given by Tom Shaw to Moss Empires. The court held that despite the restriction in B's contract with Moss Empires, B's letter to Tom Shaw & Co constituted a valid equitable assignment. Darling J stated:

‘The strongest ground for the defence was in the contract... clause 13. But though Moss Empires might bring an action for breach of that contract, if they could show any damages... it could no more operate to invalidate the assignment than it could to interfere with the laws of gravitation.’

The strange thing about the Tom Shaw case was that the judge awarded damages and costs against B and not Moss Empires. Also Moss Empires admitted that they were liable to pay the plaintiff.

In Spellman v Spellman, there were conflicting obiter dicta. Danckwerts LJ considered that 'the fact that there is a prohibition in the document creating the chose in action against assignment is not necessarily fatal to such claim'. However in the same case, Willmer LJ considered that any prohibitions should be binding, as 'it would be quite impossible for this court to make an order to the contrary because such an order would in effect require the husband to break his contract with the hire purchase corporation'.

It is suggested that the better view is that expressed in Helstan Securities Limited v Hertfordshire County Council where the court held that if the parties to a contract, the subject matter of which was a chose in action, agreed that the chose in action was not to be assigned, any purported assignment was invalid. In this case, Hertfordshire County Council entered into a civil engineering road works contract with a contractor. The contract was the ICE Condition of Contract, Fourth Edition. Condition 3 provided 'the Contractor shall not assign the contract or any part thereof or any benefit or interest therein or thereunder without the written consent of the employer'. The contractor got into financial difficulties and without obtaining the Council's consent assigned to Helstan the amount of £46,437 allegedly owing by the Council to the contractor. The Council refused to discharge the amount to Helstan who brought proceedings against the Council for payment.

Croom Johnson J stated:

'If the reported cases are not a sure guide, one is thrown back in this case on the agreement. There are certain kinds of choses in action which, for one reason or another, are not assignable and there is no reason why the parties to an agreement may not contract to give its subject matter the quality of un-assignability.’

The judge distinguished the Tom Shaw case on its own peculiar facts and also on the basis that if that case was good authority for the proposition that a contractual prohibition against an assignment was not effective, the principle was limited to the relationship between assignor and assignee and not between assignee and original debtor.

The matter has been clarified by the House of Lords in the case of Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd. The court held in respect of a prohibition on assignment without consent (under clause 17 of the JCT Standard Form of Building Contract 1963 Edition) that the contractual prohibition effectively prohibited the assignment of any benefit of the contract, including not only the assignment of the right to future performance but also (reversing the Court of Appeal decision) the assignment of accrued rights of action, and an attempted assignment of contractual rights in breach of the contractual prohibition was ineffective to transfer any such contractual rights to the assignee. The court expressed the opinion that the prohibition on the assignment of accrued rights of action was not void as being contrary to public policy since a party to a building contract could have a genuine commercial interest in seeking to ensure that he was in contractual relations only with a person whom he selected as the other party to the contract and there was no public need for the law to support a market in choses in action.

The decision in Lenesta Sludge turned upon the wording of clause 17(1) which provided that ‘The Employer shall not without the written consent of the Contractor assign this Contract'. Lord Browne-Wilkinson accepted that at least hypothetically it was possible that there might be a contractual prohibitory term so worded as to 'render invalid the assignment of rights to future performance but not so as to render invalid assignments of the fruits of performance', i.e. accrued causes of action. He stated, 'The question in each case must turn on the terms of the contract in question .

The contractual prohibition in the FCEC form of sub-contract is unusual in that it has a proviso to the general prohibition. The relevant clause is clause 2(3), which is worded as follows:

‘The Sub-Contractor shall not assign the whole or any part of the benefit of this Sub-Contract… without the previous written consent of the Contractor provided always that the Sub-Contractor may without such consent assign either absolutely or by way of charge any sum which is or may become due and payable to him under this Sub-Contract.’

In Yeandle v Wynn Realisations Ltd (in administration), the Court of Appeal held that the proviso in clause 2(3) of the FCEC sub-contract was confined to sums which were or may become due and payable, i.e. liquidated sums, and did not extend to the benefit of the sub-contract, i.e. did not include sums which remained to be ascertained by using the contractual machinery nor the contractual machinery itself. Some commentators find this decision a little surprising bearing in mind the wording of section 136 sub-section (b) of the Law of Property Act 1925 providing for the transfer of all ancillary remedies. Nevertheless, Yeandle was followed by the Court of Appeal in David Charles Flood v Shand Construction and Others where the court held that the proviso only applied to claims which could be expressed simply as a present or future claim for a fixed amount due under the sub-contract. Evans LJ stated:

'I would hold that "sum" in the proviso ... means a fixed or liquidated amount. The amount either "is" due and payable at the time of assignment, in which case there is an existing claim in debt, or "may become" due and payable at some future date. In that case, in my judgment, the assignment is of the future anticipated right to claim that amount as a debt, rather than the existing claim or cause of action which may result in the debt becoming due and payable thereafter. If there is a claim for additional remuneration, therefore, as in Yeandle that right cannot be assigned, but there could be an assignment of the future right to recover the sum awarded by an arbitrator or a judgment debt. Similarly, in my view, a claim for damages cannot be assigned until such time as the amount is fixed and there is a finding or an admission that the sum is due. This will probably mean that the claim for damages is replaced by a claim in debt (c.f. a judgment debt) but even if the cause of action continues technically as a claim for damages, I would hold, when liability and amount are both established, that that amount is a "sum due and payable" under the sub-contract ... Again the clause permits a present assignment of the future right to recover that amount.’

In Bawejam Ltd v MC Fabrication Ltd the Court of Appeal held that a prohibition against assignment at law does not necessarily prevent an assignment operating in equity.

The Court of Appeal had to consider the effect of a qualified contractual prohibition in the case of Hendry v Chartsearch Ltd. The relevant clause prohibited the assignment of the agreement in whole or in part without the prior written consent of a party, which consent should not be unreasonably withheld. The court held that in the absence of the prior written consent any purported assignment was invalid and it did not matter that the consent could not have reasonably been withheld. Per Henry LJ: 'prior consent never applied for is never withheld or refused (whether reasonably or otherwise)'. Also note that Evans LJ considered that the fact that the assignee would not be subject to an order for security for costs could be a reasonable ground for withholding consent though probably not the fact that the assignee could make an application for legal aid. Further, such contractual prohibitions continued after the relevant trading relationships had come to an end. If consent was applied for but refused, the party requiring the consent could then seek a declaration of the court that the consent had been withheld unreasonably (per Henry LJ).

The emphasis is therefore to be placed on the meaning of the particular contractual prohibition being considered. It also follows that such prohibitions are matters of contract and must satisfy the requirements of an enforceable contract. Accordingly, clauses in collateral contracts which give an unconditional right to a first assignment but then seek to restrain or restrict further assignments, may well fail for lack of consideration. Also, there is the difficulty that the assignee 'steps into the shoes’ of the assignor who has, as a consequence of the assignment, an unfettered right to assign.

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