First Abu Dhabi Oil Bank v BP Oil(1) considered the interaction between a warranty in a receivables financing contract that specified that one of the parties was not prohibited from disposing of the receivable, and a clause expressly prohibiting assignment without the other party's consent in an underlying sale and purchase agreement. It raises important issues relating to the effect and interpretation of non-assignment clauses generally and, particularly by means of its comments on Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd,(2) suggests that this is an area ripe for further consideration by the Supreme Court.
On 9 December 2013 BP entered into an agreement with a customer, Société Anonyme Marocaine de L'Industrie de Raffinage (SAMIR), for the sale and purchase of crude oil ('the SAMIR agreement'). The SAMIR agreement incorporated BP's general terms and conditions, Section 34 of which included a non-assignment provision preventing either party from assigning rights without the other party's consent (not unreasonably to be withheld).
One transaction which took place under the umbrella of the SAMIR agreement was the sale by BP to SAMIR of 100,000 metric tonnes of Russian export blend crude oil ('the contract'). The contract expressly stated that it was agreed further to the SAMIR agreement, with respect to which "all other terms and conditions [were] to remain unchanged".
On 12 August 2014 BP and First Abu Dhabi Oil Bank entered into a payment guarantee agreement in relation to the contract. On 3 September 2014 BP and First Abu Dhabi Oil Bank entered into a purchase letter which was said to cancel and replace the payment guarantee agreement. Under the terms of the purchase letter, First Abu Dhabi Oil Bank agreed to purchase BP's economic interest in the contract for 95% of its value, and BP would pay any sums it received from SAMIR to First Abu Dhabi Oil Bank after the latter had advanced payment to BP. BP had not sought SAMIR's consent to the terms of the payment guarantee agreement or the purchase letter.
The terms of the purchase letter stated that BP would assign its rights under the SAMIR agreement to First Abu Dhabi Oil Bank ("if legally possible under applicable laws and the Contract"), and in the event that such assignment was ineffective:
- First Abu Dhabi Oil Bank would be subrogated to BP's rights after payment of the price to BP;
- BP would take proceedings against SAMIR for any proceeds owing in order to provide these to First Abu Dhabi Oil Bank;
- BP would hold any amounts received from SAMIR on trust for First Abu Dhabi Oil Bank; and
- First Abu Dhabi Oil Bank would be entitled to a funded sub-participation in the rights to receive payment from SAMIR on terms equivalent to those of the receivables purchase agreement.
BP further represented and warranted to First Abu Dhabi Oil Bank (under Section 5(b) of the purchase letter) that BP was not prohibited by any security, loan or other agreement from "disposing of the Receivable evidenced by the Invoice [between SAMIR and BP] as contemplated herein" and such sale did not conflict with any agreement binding on BP.
On 4 September 2014 First Abu Dhabi Oil Bank made payment to BP of approximately $68 million pursuant to the terms of the purchase letter.
In late November 2015 SAMIR took steps to file for insolvency protection in Morocco and First Abu Dhabi Oil Bank contacted BP to arrange assignment under the purchase letter. BP responded that:
- BP needed to obtain SAMIR's consent to the assignment; and
- ?once it had been confirmed that doing so was the best option (noting that there were ongoing discussions between BP and National Bank of Abu Dhabi as to the best course of action), BP would seek SAMIR's consent.
However, First Abu Dhabi Oil Bank did not request that National Bank of Abu Dhabi seek SAMIR's consent to the assignment and instead issued proceedings in the Commercial Court.
At first instance, the judge found that by reason of Section 34 of BP's general terms and conditions, the representation and warranty made by BP under Section 5(b) in the purchase letter was false. The judge reached this finding on the basis that:
- the purchase letter provided for equitable assignment by BP of its chose in action against SAMIR; and
- because assignment was impossible without SAMIR's consent, BP was prohibited by another agreement from disposing of the receivable as contemplated in the purchase letter.
The judge concluded that such sale conflicted with the contract as "any agreement binding on [BP]".
On appeal, counsel for BP argued that in broad summary there had been no breach of the representation and warranty in Clause 5(b) of the purchase letter. It was necessary to determine what the terms of the purchase letter contemplated in relation to the disposal of the receivable. In this regard, it was contended that 'disposal' should encompass all methods of transferring benefit of the receivable so that as long as the economic benefit of the receivable could be transferred in one of the ways contemplated, that would be sufficient. The parties had clearly contemplated that assignment of the debt (both equitable and legal) might be impossible.
Counsel for First Abu Dhabi Oil Bank supported the judgment and the judge's construction of the purchase letter.
The questions for the Court of Appeal were as follows.
What, on its true construction, was BP contractually prohibited from doing under Section 34 of BP's general terms and conditions? As the judgment sets out, it appears to be settled law that such a restriction as that under Section 34 of BP's general terms and conditions imposes – as a matter of construction – a contractual obligation on BP in favour of SAMIR not to assign BP's rights under the SAMIR agreement without consent. The judge concluded that in order for BP to effect either a legal or equitable assignment, BP would have to seek SAMIR's consent. This was common ground between the parties.
However, the judge concluded that such prohibition did not operate to restrict BP from agreeing to undertake any one of the alternative actions set out in Paragraph 4 above. As a matter of construction, the prohibition on assignment could not be construed as preventing:
- the disposal to First Abu Dhabi Oil Bank of any amounts actually received by BP from SAMIR, since they would not be "rights under" the SAMIR agreement;
- the creation of any trust over:
- the proceeds of the receivable; or
- the receivable itself; or
- the creation of rights of subrogation or sub-participation.
What, as a matter of law, was the effect of such restriction on BP's ability to dispose of the receivable? The judge underlined that counsel for BP had not sought to argue that, as a matter of law, the prohibition against assignment in Section 34 did not have the effect of preventing an equitable (as opposed to legal) assignment. This would be on the basis that while Section 34 operated to prevent any demand, action or claim by the assignee (First Abu Dhabi Oil Bank) directly against SAMIR, it would constitute a restraint on BP's powers of alienation of its own property (and would therefore be contrary to public policy) if its contract with SAMIR purported to declare such an assignment void and prevent it from assigning in equity a percentage of BP's rights in the receivable.
In support of this, the judge cited a passage from an article by Professor Sir Roy Goode which provided some "illuminating analysis" on the point. In this regard, the judge went to some lengths to emphasise the court's opinion that the House of Lords decision in Linden Gardens had gone too far in holding that any assignment in breach of a contractual non-assignment clause was of no effect because of the prohibition.
The judge stated that there were strong arguments in favour of Professor Sir Roy Goode's analysis, as it was necessary to bear in mind that bars to assignment or other dealings are relevant only to the relationship with the debtor, not to the relationship between the parties to the dealing in question. In other words, it should not be open to the debtor to exclude by contract the proprietary effects of an assignment between assignor and assignee or the creation of a trust between trustee and beneficiary. The judge stated that "all [the debtor] can do is to insist that he will not recognise the title of the beneficiary or the ability of the beneficiary to bring proceedings in his own right".
In the circumstances, and as a matter of construction of the purchase letter, was BP in breach of the representation and warranty contained in Clause 5(b)? In assessing whether BP had breached the representation and warranty, the court held that it was necessary to look at the contract as a whole. The judge concluded that on the proper construction of the purchase letter BP was not in breach of the representation and warranty contained in Clause 5(b).
The judge referred specifically to the words in the warranty which qualified it and which stated that BP was not prohibited "from disposing of the Receivable evidenced by the Invoice as contemplated herein". Importantly, it was quite clear to the judge that it was contemplated in the purchase letter that an assignment may well be impossible, and was not the primary method by which First Abu Dhabi Oil Bank was intended to receive funds transferred by BP (which was payment of those amounts and a trust over such funds).
Further, the purchase letter provided other mechanisms by which BP could transfer or dispose of the economic benefit of the receivables (eg, subrogation or sub-participation). In other words, the judge concluded that there was no basis for construing the words "disposing" or "sale" as referring exclusively to assignment, as the judge at first instance appeared to have done. Section 34 of BP's general terms and conditions restricted only legal or equitable assignment, not the other methods set out in the purchase letter. As such, there had been no breach of the representation and warranty.
Notably, the judge in this case stated with "a considerable degree of intellectual disappointment" that it was not available to the court to consider whether non-assignment clauses should be deemed to render ineffective equitable assignment as was the decision reached in Linden Gardens. Clearly, the judge in this case thought that it should not – and that in this respect, Linden Gardens went too far. This is an issue which should be considered by the Supreme Court if and when the opportunity arises.
It is also notable that non-assignment clauses such as the one contained within BP's general terms and conditions will not be effective to prevent other means of transferring economic interests (ie, those stipulated in the alternative to assignment). In order to prohibit other such methods, non-assignment clauses will need to be formulated so as to ensure that they are prohibited.
For further information on this topic please contact Sarah Shaul or Simon Hart at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
