notice of assignment under english law

What is a notice of assignment?

An assignment takes place when one party is holding a right to property, claims, bills, lease, etc., of another party and wishes to pass it along (or sell it) to a third party. As complicated as that sounds, it really isn’t. Strangely enough, many assignments can be made under the law without immediately informing, or obtaining the permission, of the personal obligated to perform under the contract. An example of this is when your mortgage is sold to another mortgage company. The original mortgage company may not inform you for several weeks, and they certainly aren’t going to ask your permission to make the sale.

If a person obligated to perform has received notice of the assignment and still insists on paying the initial assignor, the person will still be obligated to pay the new assignee according to the agreement. If the obligated party has not yet been informed of the assignment and pays the original note holder (assignor), the assignor is obligated to turn those funds over to the new assignee. But, what are the remedies if this doesn’t take place? Actually, the new assignee may find themselves in a difficult position if the assignor simply takes off with their funds or payment. They are limited to taking action against the person they bought the note from (assignor) and cannot hold the obligator liable. Therefore, it is important to remember that if any note or obligation is assigned to another party, each party should be well aware of their responsibilities in the transaction and uphold them according to the laws of their state. Assignment forms should be well thought out and written in a manner which prevents the failure of one party against another.

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

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Assignments: why you need to serve a notice of assignment

Catherine phillips.

PSL Principal Associate

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the potential change in his contractual position is brought about by a person who is entitled, and whom he can see to be entitled, to bring about that change".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

• If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
• If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
• Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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THE NOTICE OF ASSIGNMENT: A REFRESHER COURSE

Allen J. Heffner Nov 20, 2023

The Notice of Assignment is probably the single most important document for a Factor. Understanding what needs to be included in the Notice of Assignment, how to send it, and who to send it to can mean the difference between getting paid and not. Despite the fact that every Factor is (or should be) familiar with legal requirements relating to Notices of Assignment, we still find that many of our factoring clients who end up in litigation make basic mistakes relating to their Notices of Assignment. The article focuses on what information needs to be included in the Notice, who the Notice should be sent to, and how the Notice should be delivered.

What needs to be included in the Notice of Assignment?

To be effective, there is certain information that must be included in the Notice of Assignment. The Uniform Commercial Code (“UCC”) requires that the notice must:

• Notify the Account Debtor that the amount due or to become due has been assigned;
• Notify the Account Debtor that payment is to be made to the Factor;
• Reasonably identify the rights assigned; and
• Be signed by the Factor or its client.

The Notice of Assignment should also include a remittance address so the Account Debtor is informed how and in what manner the Factor should be paid.

Additionally, while not explicitly required under the current version of the UCC, Factors should include language in their Notice of Assignment that: (i) the Client has assigned all of its present and future accounts receivable to Factor; (ii) the Factor holds a first priority security interest in all of the client’s accounts receivable; and (iii) all payments owing to the client must be paid to the Factor.

Who should the Notice of Assignment be sent to?

Notices of Assignment should not be sent directly to individuals with an Account Debtor. Sending the Notice to a specific individual may lead to issues relating to the authority of that individual to receive documents on behalf of the Account Debtor. Moreover, Factors that direct Notices of Assignment directly to individuals open themselves up to arguments that the Notices of Assignment was not properly delivered. For instance, our clients that have sent Notices of Assignment to individuals have ended up in situations where the individual to whom the Notice of Assignment was addressed no longer worked with the Account Debtor or the individual was located at a different office and the Notice of Assignment was not sent to the proper location. To be safe and to avoid unnecessary issues, Factors should send the Notice of Assignment to the Account Debtor’s accounts payable department.

Additionally, some states have specialized definitions for what constitutes “notice” on behalf of a company. If there is any question as to where a Notice of Assignment should be sent, Factors should check with their attorney to determine where these should be sent.

How should the Notice of Assignment be delivered?

The crucial issue for the enforceability of a Notice of Assignment is proof of receipt by the Account Debtor, not proof of delivery. Therefore, it is good business practice to send the Notice of Assignment either certified mail or other method that provides for proof of delivery.

Many of our clients have asked about whether it is proper to deliver the Notice of Assignment via e-mail asking the Account Debtor to confirm receipt or with “read receipts” turned on. Some Factors prefer this method because it is more cost efficient.

While sending Notices of Assignment via e-mail is enforceable, we would not recommend it as a general business practice. Sending the Notice in this manner requires delivering the Notice to a specific individual, which we have discussed above can be problematic. Sometimes officers and directors of companies have assistants or other personnel manage their e-mail accounts, raising the possibility that the individual to whom the Notice was sent, never saw the e-mail, even though the e-mail was “read.”

Last, there is no requirement that the Notice be signed by the Account Debtor and returned to the Factor. Often, we see our client’s Notice include a “confirmation of receipt” line for the Account Debtor to sign and return. Sometimes, the Factor will have proof of delivery to the Account Debtor but the Notice was not signed and returned by the Account Debtor. This adds unnecessary ambiguity as to whether the Notice was actually received by the Account Debtor. Therefore, we instruct our clients not to include such requests for proof of receipt.

Who should send the Notice of Assignment?

Some of our clients that have had bad experiences with Account Debtors after delivering a Notice of Assignment have chosen to have their Client be the one to deliver the Notice of Assignment. There is no legal requirement as to whether the Factor or the Client is the correct party to deliver the Notice of Assignment. However, we recommend the Factor be the one to deliver the Notice of Assignment. This way, the Factor is in complete control of the contents of the Notice of Assignment, how it is delivered, and receives confirmation of its delivery. We have been in situations in which the Factor allowed the Client to deliver the Notice of Assignment, but the Client did not deliver the Notice of Assignment in accordance with the law, leading to avoidable litigation.

Should a Factor respond to an Account Debtors questions regarding a Notice of Assignment?

Absolutely, yes. If requested by an Account Debtor, pursuant to the UCC, a Factor must furnish reasonable proof of the assignment for the Notice of Assignment to be valid. Too often we see situations in which requests are made or questions are posed by Account Debtors that the Factor ignores, thinking that because the Account Debtor received the Notice of Assignment, nothing else needs to be done. The Factor should respond to the Account Debtor and provide reasonable proof of the assignment. These communications can also provide invaluable insight as to the relationship between the client and the Account Debtor, how and when payments will be made, and can provide the Account Debtor a sense of trust with the Factor.

A Notice of Assignment is crucial for Factors because it provides legal protection, establishes priority of interest, prevents confusion, facilitates legal recourse, and enables effective communication with Account Debtors. Without this notice, Factors may encounter difficulties in asserting their rights and collecting payments from Account Debtors, potentially jeopardizing the financial transaction.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 25 years, Mr. Loren has focused his practice on construction law and factoring law.  Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at [email protected] or [email protected] or 561-615-5701

Bruce E. Loren · Michael I. Kean · Allen J. Heffner · Kyle W. Ohlenschlaeger · Frank Sardinha, III

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Delivering valid notices of assignment: s 136 in 2024

INTRODUCTION

The Law of Property Act 1925 (LPA 1925) was enacted 99 years ago in April 1925. A few years before the first commercial radio and telephone service. Historians might argue about the comparative economic and social significance, and value, of the ability to assign debts and/or the right to sue now and then. No one could argue that the form and content of commercial documentation and communications has not changed dramatically in those 99 years. Yet the wording of s 136(1) of the LPA 1925 has not changed at all. Electronic communications are now the norm in the commercial world. They have brought with them less formality and less time to think than pen and paper afforded us in the past. This article focuses principally on how we should understand that 1925 provision today in order to ensure valid, legal (or statutory) assignments that bind the debtor, or third parties are effected. This article is confined to the legal position in England and Wales.

Debts or other choses in action (intangibles) were not assignable at common law. As is so often the case equity intervened and where equity intervened statute followed. A general ability to assign such assets and interests was first introduced in 1873. Since 1 January 1926 there have been two ways to assign debts and choses in action: a legal or statutory assignment under s 136 of the LPA 1925 or an assignment taking effect in equity. Equitable assignments may arise because that is what the parties intended or had to do or because, although they intended to effect a legal assignment it was defective.

SECTION 136 LPA 1925

The advantage of a legal assignment is that there is no need to consider whether it is necessary to sue in the name of the assignor or join the assignor to any proceedings to enforce the assigned debt or chose in action. It follows compliance with s 136 streamlines the business of such enforcement.

Section 136(1) of the LPA 1925 is in these terms:

“Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice-

(a) the legal right to such debt or thing in action;

(b) all legal and other remedies for the same; and

(c) the power to give a good discharge for the same without the concurrence of the assignor:

Provided that, if the debtor, trustee or other person liable in respect of such debt or other thing in action has notice-

(a) that the assignment is disputed by the assignor or any person claiming under him; or

(b) of any other opposing or conflicting claims to such debt or other thing in action; he may, if he thinks fit, either call upon the persons making the claim thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the Trustee Act 1925.”

It follows to secure the benefit of s 136 and effect a legal assignment, the assignment must be:

• absolute and not by way of a charge;
• in writing;
• under the hand of the assignor; and
• express notice in writing, of the assignment, must be given to the debtor or trustee.

The essence of a legal assignment as described in s 136(1) is that the assignee is themself entitled to enforce the right and give discharge for its satisfaction and the debtor can confidently pay a new person, the assignee, without fear of the assignor seeking to enforce and rejecting the payment to the assignee as discharge. Seen in that way the need for both the assignment itself and the notice is unsurprising.

IN WRITING AND UNDER THE HAND OF THE ASSIGNOR: 1  THE FORM

Section 136 does not require an assignment to take a particular form.  Chitty on Contracts  (35th Edition para 23-016) has long described what is required as:

“A direction in writing by a creditor to his debtor to pay the assignee, handed to the assignee, may amount to an assignment, but such a direction handed to the debtor will not by itself constitute an assignment unless there is evidence that the assignee has requested or consented to it … .”

That description highlights the bilateral nature of the assignment itself in that both assignee and assignor must agree. However, the requirement for writing relates to the debtor.

The words “under the hand of” is understood to simply mean written and signed. It does not require a document to be executed as a deed:  Trustee Solutions Ltd v Dubery  [2006] EWHC 1426.

The addition of the words “of the assignor” after “under the hand” have been applied strictly by the courts in both  Technocrats International Inc v Fredic Limited  [2004] EWHC 692 (QB) and  Frischmann v Vaxeal Holdings SA & ors  [2023] EWHC 2698 (Ch). In both cases it was successfully argued that the wording of s 136(1) requires the signature authenticating the written assignment to be that of the assignor themselves, and not an agent or attorney of the assignor. The fact that elsewhere in the LPA 1925, for instance s 40 (now repealed) and s 53, provisions expressly refer to the signatures of a person  or their agent  as being required and sufficient was a strong reason for the different language in s 136 to be construed as confined to the assignor. Accordingly, both Field J in  Technocrats  at paras 53-55 and Master McQuail in  Frischmann  at 61 conclude the assignor themselves must sign an assignment for it to comply with s 136 and so amount to a legal assignment.

That strict interpretation is helpful for practitioners against the background of the recent decision suggesting ordinary email signatures are signatures for the purpose of other formalities. In  Neocleous v Rees  [2020] 2 P.&C.R. 4 an automatic email signature of a solicitor was found to be sufficient for compliance with s 2 of the Law of Property (Miscellaneous Provisions) Act 1989 on a compromise involving a disposition of an interest in land. It follows for that purpose emails exchanged between solicitors, with their automated signatures, might all else being equal bind their clients (as s 2 permits signature by agents). An email signature that is automatically applied to authenticate a communication can be a signature for the purposes of most formalities. As a result,  Neocleous  sent shivers down the spines of many solicitors concerned that rapid email exchanges result in binding agreements they did not intend to make or have instructions for.

It follows, in the sphere of assignments, thanks to the words “under the hand of the assignor” solicitors are not at risk of unintentionally binding their clients. However, creditors and potential assignees communicating directly by email may effect a binding assignment without being clear that is what they meant to do.

ABSOLUTE ASSIGNMENT:  THE CONTENT

The words “any absolute assignment” suggest the transfer of rights away from the assignor to the assignee so that it is the assignee who has the entire benefit of, and can enforce the rights, not the assignor. Indeed, that is likely to be the layperson’s view as well. A purchaser of leasehold property would have no doubt that the transaction they engaged in, which the lawyers refer to as an assignment, was an absolute transfer of the rights in and to the property and the contract (the lease) from the seller to them, as purchaser and the new proud owner.

At a high level that is the conventional modern view of both a legal and equitable modern assignment. The alternative view, at least in relation to equitable assignments is that there is no assignment of the rights, rather there is a carving out of new rights for the assignee which encumber the assignor’s rights, not unlike a declaration of trust.

However, that does not mean that in order for there to be an absolute assignment the assignor must relinquish all interest or possible benefit from the asset for all time. Transactions may involve the provision of security in some circumstances and/or an ability to require a further transaction by which assets are transferred back.

The concept of an absolute assignment, be it legal or equitable, involves a transaction that is complete in the sense of not being conditional and not by way of charge. The meaning of those concepts was considered by Waksmann J in  USAF Nominee No 18 Ltd & ors v Watkin Jones & Son Ltd  [2023] EWHC 1880 (TCC).

The court heard detailed arguments and carefully analysed the previous authorities including  The Halcyon  [1984] 1 Lloyds Rep. 283 and  Bexhill v Razzaq  [2012] EWCA Civ 1376. Waksmann adopted Aikens LJ’s characterisation of the nature of an assignment in  Bexhill  at paras 44 and 45:

“The assignee becomes either the legal or beneficial owner of the thing in action and its benefits. He does not become a party to any contract or deed which contains or gives rise to the right. The assignee will only become a party to the contract (or deed) if there is a novation of the instrument containing or giving rise to the right.”

And he then went on to approve the description of an absolute assignment given by Mathew J in  Hughes v Pump House Hotel Co  [1902] 2 KB 190 as:

“… if, on consideration of the whole instrument it is clear that the intention was to give a charge only, then the action must be in the name of the assignor; while on the other hand, if it is clear from the instrument as a whole that the intention was to pass all the rights of the assignor in the debt or chose in action to the assignee, then the case will come within section 25 and the action must be brought in the name of the assignee.”

Waksmann concluded at para 196 with the following observations:

“First, it is clear that the exercise of determining whether there has been an absolute assignment or not is highly fact sensitive. Further, … it may be that on a proper analysis, Clause 2.1(c) operates as an absolute assignment in relation to some of the relevant interests and not others. Further, there may be circumstances where, within a particular class of interests purportedly assigned, some would be the subject of an absolute assignment and others would not. It all depends on the exercise of contractual interpretation in the relevant context. In other words, this is not a ‘one size fits all’ exercise.”

It follows that the question whether there has been an absolute assignment or assignments for the purpose of s 136 is a multiple layered question which involves careful interpretation of the particular contract that effects the assignment and the subject matter. If the assignment is subject to satisfaction of a condition it is not an absolute assignment and it is not in compliance with s 136.

NOTICE IN WRITING TO DEBTOR: THE CONTENT, FORM AND MEANS

As discussed above the purpose of notice to be given to the debtor is that it enables the debtor to pay a new person (the assignee) without fear of the assignor seeking to enforce the debt against them, rejecting the payment to the assignee as discharge.

Consistent with that purpose as demonstrated by the Court of Appeal in  Van Lynn  Developments Ltd v Pelias Construction Co Ltd  [1969] 1 QB 607 approving Atkin J in  Denney, Gasquert and Metcalfe v Conklin  [1913] 2 KB 177 even before the LPA 1925, no particular form of notice is required. In  Denney  Lord Denning was clear that instead what was required was simply writing that brings “… to the notice of the debtor with reasonable certainty the fact that the deed does assign the debt due from the debtor so as to bind the debt in his hands and prevent him from paying the debt to the original creditor”.

In  Van Lynn  the Court of Appeal agreed that that continued to be the case so that the notice must expressly state three things. First that there had been an assignment, second the names and addresses of the assignees and finally what was assigned. Other details were not necessary. If other details are added and are erroneous in a way that undermines the three pieces of information that are required, then the notice is not valid. The notice must fulfil the obvious aim of ensuring that the debtor knows they should pay someone other than the assignor (who in most cases will be the person with whom the debtor has had all relevant dealings). That analysis was recently relied upon in  Bedford Investments Ltd v Sellman & ors  [2021] EWHC 799 (Comm).

Bedford  is an important modern case where notice of assignment was challenged. The notice which the court concluded contained the necessary information was sent by email. The judgment does not suggest the email had a formal notice attached to an email and makes no reference to notice being sent by any other means. There was no defence based on an allegation that the email was not in fact received.

It is clear that s 196(1) of the LPA 1925 applies to notices of assignment under s 136 of that Act:

“Any notice required or authorised to be served or given by this Act shall be in writing.”

Sub-sections 196(2), (3) and (4) contain provisions deeming certain forms of delivery as sufficient service. Sub-sections (5) allows parties to contract out of those deeming provisions.

Section 196 was not addressed in  Bedford , nor did it need to be.

It is clear that an email is “writing” so whether the email was a covering email with a notice attached or the body of the email contained the information needed to give notice it would have complied with s 196(1).

Sub-sections 196(2), (3) and (4) contain deeming provisions relating only to “notices required or authorised by this Act to be served”. They do not refer to notice being given as opposed to served. However, the court have been consistent in concluding giving notice is service.

The view of most commentators as detailed by Hugh Sims KC previously in this Journal (2020) 8 JIBFL 523 is that the requirement under s 136(1) of the LPA 1925 for written notice of assignment will be satisfied by an electronic communication. That was clearly the position adopted in  Bedford .

Arnold J in  E.ON UK plc v Gilesports Ltd  [2012] EWHC 2172 (Ch); [2013] 1 P & CR 4; [2013] 3 EGLR 23 came to a view about the effect of s 196 and its deeming provisions in the context of an application for consent to assign a lease that calls the view that written notice of assignment will be satisfied by an electronic communication into question. Arnold J rejected the argument that the deeming provisions in s 196 were sufficient means of service as opposed to the required means of service. In other words, on the basis the lease expressly incorporated s 196, the judgment concluded that notice of the assignment had to be served on the landlord by one of the two methods in ss 196(3) and (4) and as neither method had been used, the relevant application had not been served. It appears from the judgment that s 196 was expressly incorporated in a clause dealing with notices without any other means of service or delivery of an application for consent being provided for.

It appears Arnold J had not referred to the earlier decision of Nicholas Strauss KC sitting as a Deputy High Court Judge  in Michael Gerson Leasing Ltd v Greatsunny Ltd  [2010] Ch 558. In  Gerson  the court took a very different view as to the effect of the deeming provisions in s 196. Strauss J concluded:

“Section 196(2) to (4) contains a series of provisions, the general import of which is to provide a liberal regime as to the contents and mode of service of any notice required or authorised by this Act to be served. It is to be noted that these provisions do not say “to be served or given”, but this makes no difference, since there is no difference, as regards a written notice, between serving and giving it. As shown by the authorities cited above, both mean putting a written notice before the party to whom the notice is to be given.  …

The purport and effect of subsection (5) is not, in my judgment, to impose a stringent requirement for writing, where this is not required by the contract or other instrument affecting property. Rather, it is to relax the requirements as to the mode of service and contents of notices, where the notices are already, by the terms of the instrument, required to be served or (which is the same thing) to be in writing.”

The E.ON approach if applied to notice under s 136 leads to a very curious situation. The need to give written notice under s 136 is a statutory requirement. The statute refers to two methods of sending the required written notice. There is no express wording providing that those two methods are the only methods or media by which notice can be sent or given. The two sub-sections are deeming provisions. They deem sufficient service to have happened so that the method of sending is deemed to have achieved delivery to the debtor, whether or not notice reaches the debtor. That means the sender can send the necessary written notice by one of those methods safe in the knowledge that, whether or not it is actually delivered to the debtor, notice will be treated as given. The E.ON approach operates to treat the debtor to whom notice was in fact given as if the required notice did not reach the debtor, because a different method of sending succeeded in delivery to the debtor. Much of the argument in favour of s 196 imposing methods of service or giving notice rest on the requirement for “writing”. The court historically understood something that was writing to be a physical item that would necessarily be delivered to the receiving party’s location by hand or by post. However, since we are now in a world where emails are accepted by the courts to be writing that logic is flawed.

In reality, until the point is taken to the Court of Appeal notice given by email for the purpose of s 136 of the LPA 1925 cannot be treated as sufficient “giving” with certainty. However, it would be surprising if the Court of Appeal came to a different conclusion faced with that question now.

With the introduction of company registered email addresses under s 29 of the Economic Crime and Corporate Transparency Act 2023 another opportunity and another risk arise. A registered email address for a company should not be mistaken for an electronic version of the company’s registered physical address. Rather it equates to the requirement for directors’ addresses to be recorded. The purpose of the registered email address for the company is to facilitate communications between Companies House and the company. It should not be assumed by third parties that communications via that address will be sufficient communication or come to the attention of the company for other purposes. However, it is always open to parties when contracting, given the required existence of that address, to expressly provide for notice to be given or served by being sent by email to that address.

DEFECTIVE NOTICES AND EQUITABLE ASSIGNMENT

Where assignor and assignee have effected a valid assignment but no valid notice has been given to the debtor, as required by s 136 of the LPA 1925, the assignment takes effect in equity as between assignor and assignee.

An equitable assignment arises where there is the intention to assign, the subject matter is described so that it can be identified, and the assignor does something showing he is transferring the debt or chose in action to the assignee. Writing is not required until the chose in action (the contract) requires it. If the chose in action is a future right rather than an existing one consideration is necessary.

When a statutory assignment fails to take effect in law simply because the requirements of s 136 were not complied with the first question should be has the assignment taken effect in equity.

Where the non-compliance is confined to the giving of notice to the debtor the answer will be that the assignment is equitable. The failure to notify the third party to the assignment, the debtor, is not a requirement for the creation of a binding assignment as between assignor and assignee.

The consequence of the failure to give valid notice to the debtor is that it is arguable that the assignee can bring a claim in its own name as assignee but it may be necessary to join the assignor. 2  The easier course is to give notice, or further notice if there is a challenge to the validity of the alleged prior notice. It is clear from decisions such as  Van Lynn , discussed above, that a demand or letter of claim sent on the basis notice has already been given can amount to notice itself.

Article by Brie Stevens-Hoare – first published by LexisNexis (JIBFL)

Brie Stevens-Hoare KC

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Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

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Introduction

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

What is a Deed of Novation?

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

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What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Key Differences Between Novation and Assignment Deeds

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Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

Need a Deed of Novation or Assignment? Key Factors to Consider

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Selecting the Right Assignment Clause for Your Contract – Helping You Make the Right Choice

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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Deed of Assignment and the Notice of Assignment -What is the Difference?

In this article, Richard Gray barrister takes a brief look at the differences between a Deed of Assignment and a Notice of Assignment and the effect of the assignment on the contracting party

At the end of 2020, Elysium Law were instructed to act for a significant number of clients in relation to claims made by a company known as Felicitas Solutions Ltd (an Isle of Man Company) for recovery of loans which had been assigned out of various trust companies following loan planning entered into by various employees/contractors.

Following our detailed response, as to which please see the article on our website written by my colleague Ruby Keeler-Williams , the threatened litigation by way of debt claims seem to disappear. It is important to note that the original loans had been assigned by various Trustees to Felicitas, by reason of which, Felicitas stood in the shoes of the original creditor, which allowed the threatened action to be pursued.

After a period of inertia, Our Clients, as well as others, have been served with demand letters by a new assignee known as West 28 th Street Ltd . Accompanying the demand letters is a Notice of Assignment, by reason of which the Assignee has informed the alleged debtor of the Assignees right to enforce the debt.

Following two conferences we held last week and a number of phone call enquiries which we have received, we have been asked to comment upon the purport and effect of the Notice of Assignment, which the alleged debtors have received. Questions such as what does this mean (relating to the content) but more importantly is the ‘Notice’ valid?

Here I want to look briefly at the differences between the two documents.

There is no need for payment to make the assignment valid and therefore it is normally created by Deed.

 The creation of a legal assignment is governed by Section 136 of the Law of Property Act 1925:

136 Legal assignments of things in action.

(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a) the legal right to such debt or thing in action;

(b) all legal and other remedies for the same; and

(c) the power to give a good discharge for the same without the concurrence of the assignor:

Some of the basic requirements for a legal assignment are;

• The assignment must not be subject to conditions.
• The rights to be assigned must not relate to only part of a debt, or other legal chose in action.
• The assignment must be in writing and signed by the assignor.
• The other party or parties to the agreement must be given notice of the assignment.

Notice of assignment

To create a legal assignment, section 136 requires that express notice in writing of the assignment must be given to the other contracting party (the debtor).

Notice must be in writing

Section 136 of the LPA 1925 requires “express notice in writing” to be given to the other original contracting party (or parties).

 Must the notice take any particular form?

The short answer is no. Other than the requirement that it is in writing, there is no prescribed form for the notice of assignment or its contents. However, common sense suggests that the notice must clearly identify the agreement concerned.

Can we  challenge the Notice?

No. You can challenge the validity of the assignment assignment by ‘attacking the Deed, which must conform with Section 136. In this specific case, the Notice sent by West 28 th Street in itself is valid. Clearly, any claims made must be effected by a compliant Deed and it is that which will require detailed consideration before any right to claim under the alleged debt is considered.

Can I demand sight of the assignment agreement

On receiving a notice of assignment, you may seek to satisfy yourself that the assignment has in fact taken place. The Court of Appeal has confirmed that this is a valid concern, but that does not give an automatic right to require sight of the assignment agreement.

In Van Lynn Developments Limited v Pelias Construction Co [1969]1QB 607  Lord  Denning said:

“After receiving the notice, the debtor will be entitled, of course, to require a sight of the assignment so as to be satisfied that it is valid…”

The Court of Appeal subsequently confirmed this  stating the contracting party is entitled to satisfy itself that a valid absolute assignment has taken place, so that it can be confident the assignee can give it a good discharge of its obligations

The important document is the Deed of Assignment, which sets out the rights assigned by the Assignor. The Notice of Assignment is simply a communication that there has been an assignment. The deed is governed by Section 136 of the LP 1925. It should be possible to obtain a copy of the Deed prior to any action taken in respect of it.

For more information on the claims by West 28 th Street or if advice is needed on the drafting of a Deed, then please call us on 0151-328-1968 or visit www.elysium-law.com .

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English law assignments of part of a debt: Practical considerations

United Kingdom |  Publication |  December 2019

Enforcing partially assigned debts against the debtor

The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).

While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.

This note considers whether this requirement may be dispensed with in certain circumstances.

Can you assign part of a debt?

Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot. 1  This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.

Joining the assignor to proceedings against the debtor

While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.

An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate. 2

Kapoor v National Westminster Bank plc

English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.

In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan 3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.

The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.

Application of Kapoor

It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.

This analysis is limited to English law and does not consider the laws of any other jurisdiction.

Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.

Legal title cannot be assigned in respect of part of a debt. A partial assignment would not satisfy the requirements for a legal assignment of section 136 of the Law of Property Act 1925.

If an assignor does not consent to being joined as a plaintiff in proceedings against the debtor it would be necessary to join the assignor as a co-defendant. However, where an assignor has gone into administration or liquidation, there may be a statutory prohibition on joining such assignor as a co-defendant (without the leave of the court or in certain circumstances the consent of the administrator).

[2011] EWCA Civ 1083

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Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

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Contracts: The critical difference between Assignment and Novation

Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the “Lidl Contract”). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the “ Trustee Contract”) and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones’ obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones’ obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don’t take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants’ contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164.

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The Interrelationship Between Set-off and Assignment

Louise Gullifer QC (Hon) Rouse Ball Professor of English Law, University of Cambridge

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A recent decision in the Court of Appeal, Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908 , concerns the extent to which an assignee of debts is bound by set-offs arising between the assignor and the debtor. 

The law in this area is reasonably clear, but somewhat complicated, and was summarised succinctly and accurately by the Court of Appeal in paragraphs [30] to [32] of the decision:

‘First the debtor may show that the money claimed is not due, in whole or in part, either because of some substantive defence or some right of abatement.

Second, the debtor may have a contractual right of set off.

Third, the debtor may have a cross claim which equity will regard him as entitled to set off against the debt such that only the balance may be claimed. If so, and subject to any question of estoppel, the factor, as assignee, can be in no better position than his assignor, whether the assignment takes effect as a statutory assignment or in equity. It is no matter that the cross claim had not accrued due before the debtor had notice of the assignment.

Fourth, the debtor may have a cross claim which is independent of the claim against him in the sense that it does not fall into the category of a claim which forms the subject of an equitable set off. In such a case the factor/assignee cannot successfully be met by a cross claim which arose after the Customer/debtor had notice of the assignment.’

Bibby deals with one matter of possible uncertainty in this area, but others remain, some of which were raised but not decided in Bibby .  One such matter is discussed later in this blog, and other matters, such as the interaction with insolvency set-off, will be discussed in a later blog.'

The Bibby case concerned a factoring agreement, which provided for the sale of all present and future debts.  The assignor, who had for many years supplied goods to the debtor, was in administration and the factor (Bibby) sued the debtor on outstanding invoices.  The debtor claimed to set off, inter alia, rebates to which it was entitled under its contracts with the assignor, which, it said, constituted equitable set-off, and therefore could be relied upon whether or not they accrued before notice of assignment (under the third principle set out above).    

The chief ground on which Bibby challenged this allegation was to argue that the degree of closeness between the claim (on the invoices) and the cross-claim (the rebates) was insufficient to establish equitable set-off (according to the test set out by Rix LJ in Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667 ).  This was because the debtor should have informed the factor about the rebates once they realised that the claims were assigned, and, therefore, it was not ‘manifestly unjust to allow [the factor] to enforce payment without taking into account the cross-claim’, despite the fact that the claims and cross-claims were otherwise closely connected.

The Court of Appeal upheld the judge’s decision that the test for equitable set-off was satisfied.  There was no duty on the debtor to inform the factor about the rebates, nor was there a sufficiently clear representation as to the absence of rebates to give rise to an estoppel.  The court confirmed what had been made clear in the Geldof case: that there was only one test, which had two elements:

• the ‘close connection’ part was the formal element to the test, which was ‘to ensure that the doctrine of equitable set-off is based on principle and not discretion’; and
• the ‘unjust’ part was the functional element and was ‘to remind litigants and courts that the ultimate rationality of the regime is equity’ ( Geldof [43]).  

In very many cases it will be the closeness of the connection which gives rise to the manifest injustice, but there are some situations in which this can be rebutted by other matters.  One (at least where the court is deciding whether to award summary judgment on the claim) is the strength and calculability of the cross-claim.  For example, in Star Rider Ltd v Inntrepreneur Pub Co [1998] 1 EGLR 53, the speculative quantum of the cross-claim was one reason for holding that it was just to award summary judgment on the claim.  Another is the conduct of the cross-claimant, who cannot rely on his own wrongful conduct to manufacture a cross-claim ( Bluestorm Ltd v Portvale Holdings Ltd [2004] EWCA Civ 289 ).   

This analysis shows that the relevant question is whether it is manifestly unjust as between the claimant and the cross-claimant not to allow the cross-claim to be set off.   The assignee, since he can be in no better position than the assignor, takes subject to any set-off.  The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel.  The decision of the Court of Appeal in Bibby confirms this reasoning (see paragraphs [38] and [48]. 

As a result, sensible receivables financiers who wish to know about potential cross-claims will both make enquiries themselves before making their advances and will make sure that their contracts with assignors include an obligation to inform them of such.  In the absence of a separate agreement, a factor assignee cannot oblige a debtor to pass on information about cross-claims.  While the assignment, once notice is given, creates a relationship between the assignee and the debtor in that the debtor must pay the assignee to obtain a good discharge, it cannot, of itself, impose any further obligations on the debtor.

Having come to this conclusion, there was no need for the Court of Appeal to consider independent set-off.  Tantalisingly, a point on this type of set-off that had been raised and considered at first instance is one on which there is little authority and considerable academic debate.  This rest of this blog is devoted to discussion of this point.

Under the fourth principle listed above, an assignee is not bound by an independent set-off between the assignor and the debtor which arises after notice of assignment has been given to the debtor.  The rationale for this rule is that once the debtor knows about the assignment he should not be able to erode the assignee’s rights by allowing further set-offs to accrue.  Bibby made the argument that the debtor had been notified ‘of the assignment’ at the time of the initial factoring agreement, and that all independent set-offs arising after that time could not be relied upon by the debtor.   

This raises the contentious question of whether a notice of assignment given in relation to future debts can prevent the debtor relying on independent set-offs which arise after the date of the notice but before the debt arises.  An assignment of a future debt takes effect immediately as a contract to assign, but the assignment does not take place until the debt comes into existence.  There is remarkably little modern authority on the effect of a notice of such an assignment which is given before the debt actually arises.  

It seems that such a notice will not be sufficient to make the assignment a statutory one, on the grounds that the section itself does not refer to agreements to assign, but only assignments.  Further, there are a number of (mainly nineteenth century) cases which establish that a notice given of a ‘mere expectancy’ is ineffective to establish priority under Dearle v Hall , so that another notice must be given after the debt arises to protect the priority position of the assignee.  Many of these cases were in the context of an army officer’s expectancy of a fund were he to be gazetted out of the army: the fund was a mere expectancy until the day the notice in the Gazette appeared, at which point it was held on trust for the officer by the army.  Not surprisingly, army officers often raised money on the strength of this expectancy, but the incumbrancer(s) had to keep serving notices daily on the army agents to try and be the first to give notice on the day of the Gazette (see Re Dallas [1904] 2 Ch 385)!     

The only case to mention the effectiveness of a notice of an assignment of a future debt in the context of set-off is also an army officer case ( Roxburgh v Cox (1881) LR 17 Ch D 520).  Here, the set-off arose the moment the Gazette notice appeared, and the notice of assignment was not given until the next day, so the point was not in issue (the assignee clearly took subject to the set-off).   Thus, Baggally LJ’s dictum that ‘any notice given by [the assignee] before the money came into the possession of [the army agents asserting the set-off] would have been ineffectual’ was obiter.    

The point is therefore an open one.  Opinion is divided.  Oditah (at 8.3 of Legal Aspects of Receivables Financing ) supports the view of Baggally LJ, as did the judge in Bibby at first instance.  However, Derham (at 17.29 of his magisterial book on set-off) and Philip Wood (at 16-119 of English and International Law of Set-Off , where he describes the view of Baggally LJ as ‘arbitrary and out of accord with realities’) support the view that notice given of an assignment of future debts marks the moment after which the accrual of independent set-offs do not bind the assignee.

There are also some obiter judicial remarks: Andrew Smith J at first instance in Dry Bulk Handy Holding Inc v Fayette International [2012] EWHC 2107 (Comm) [66] firmly supports Philip Wood’s view.  Mance J in Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLC 460 at 466-467 appears to implicitly accept the Oditah’s view in relation to true future receivables (where the contract under which the receivable arises has not yet been entered into), but his discussion is focused on the fact that English law has a wide interpretation of ‘present receivables’ which includes any debts arising from existing contracts, even though they have not yet accrued.

The view that notice of an assignment of future debts is enough to prevent further independent set-offs being asserted against an assignee certainly accords with common sense, given the rationale for the rule mentioned earlier (that it is unconscionable for the debtor to reduce the assignee’s rights once he knows about the assignment).  It also accords with the practice of taking an assignment or a security interest over present and future debts: any notice would normally not differentiate between the two categories.

Further, as mentioned, the category of present debts is very wide, including debts which are payable, but also unearned rights to payment arising out of present obligations.  To distinguish between these and debts arising under future contracts seems perverse.  There is one qualification: the notice has to be of an ‘assignment’ (albeit inchoate, under the principle in Holroyd v Marshall ) rather than of a general agreement to assign, or of a floating charge.   There is authority establishing that it is only after the floating charge has crystallised (and notice given) that the debtor can no longer set off independent set-offs against the charge ( Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93).

The position argued for is also that which pertains under UCC Article 9 (9-404(a)(2) , the Canadian and New Zealand PPSAs, and the UNCITRAL draft Model law .  Under those instruments, notice (or knowledge) is of the ‘assignment’ or ‘security interest’ which can be given over future property.  Only under the Australian PPSA is the position potentially different, since section 80(1) provides that the cut-off point is ‘before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under subsection (8) to the extent of the payment’.  Presumably this point cannot arise until the relevant account has accrued, since only at that point can payment be made.

While it is a shame that the Bibby case did not prove a vehicle for deciding this point, the fact that it has not arisen directly for decision in an English law case shows that it does not cause all that many problems in practice.  This is, probably, partly because of the wider definition of ‘present debts’ and also partly because many set-offs relied upon in are equitable set-offs, which can be asserted against an assignee irrespective of the timing of notice.

In the context of notification receivables financing, notice of a facultative master agreement is unlikely to have any effect on set-off, as this would be merely a general agreement to assign (if that: it may be unilateral and therefore only binding if under seal) and not an assignment of future debts, that is, it would not have immediate effect once a debt came into existence.

Notice of a ‘whole turnover’ agreement, however, is more likely to raise the issue discussed above, as this agreement would be seen as an assignment in equity, taking effect as soon as the debts come into existence.  Of course, the terms of the contract are likely to be determinative.

Where financing is based on a fixed charge over receivables, this is likely to cover future debts, but notice to the debtors is unlikely to be given, except as a prelude to enforcement.

The issue discussed, therefore, is not an everyday problem, but a definitive answer (as provided in the codified systems mentioned) would improve certainty for assignees of debts (in whatever context) who wish to protect their value from future set-offs.

This article was first posted on the Commercial Law Centre blog. The original post can be found here .

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