A warranty in a receivables financing contract that BP was not prohibited from disposing of the receivable was not breached by a clause in the underlying oil sale contract prohibiting assignment without the other party’s consent. The decision usefully interprets common clauses found in commercial agreements and receivables financing contracts – namely non-assignment clauses and warranties concerning ability to dispose of a receivable. Non-assignment clauses are the subject of proposed law reform that would nullify their effect in business contracts. Allen & Overy’s Global Intelligence Unit report on the proposed regulations can be read here: First Abu Dhabi Bank PJSC (formerly National Bank of Abu Dhabi PJSC) v BP Oil International Ltd [2018] EWCA Civ 14, 18 January 2018

BP contracted to supply oil to the Société Anonyme Marocaine de L’Industrie de Raffinage (SAMIR). First Abu Dhabi Bank (FAB) guaranteed payment for up to 95% of the sums due from SAMIR to BP, in exchange for a commission fee (the guarantee). This was cancelled and replaced a month later by a purchase letter (purchase letter), under which FAB agreed to purchase BP’s economic interest in the contract with SAMIR (the Contract) at 95% of its value. FAB advanced payment to BP, and BP was to pay to FAB all sums it received from SAMIR under the Contract.

Restrictions on assignment

The Contract expressly incorporated BP’s general terms and conditions for sales and purchases of crude oil, including a non-assignment provision (s34) which stated that “Neither of the parties to the Agreement shall without the previous consent in writing of the other party (which shall not be unreasonably withheld or delayed) assign the Agreement or any rights or obligations hereunder. […] Any assignment not made in accordance with the terms of this Section shall be void.”

However, the purchase letter provided that:

- BP would assign its rights under the Contract to FAB “if legally possible under applicable laws and the Contract”;

- in the event that any assignment was not able to take place or was invalid or unenforceable, FAB would be subrogated to BP’s rights under the Contract and would be entitled to a funded sub-participation in BP’s rights to receive payment from SAMIR;

- any amounts paid by SAMIR to BP would be held on trust for FAB; and

- BP represented and warranted that it was “not prohibited by any security, loan or other agreement, to which it is a party, from disposing of the Receivable evidenced by the Invoice as contemplated herein”. The Receivable was defined as the invoice issued by BP to SAMIR under the Contract.

No consent to assignment

BP had neither requested nor obtained SAMIR’s consent to the assignment to FAB as at the date of the purchase letter. SAMIR subsequently filed for insolvency in Morocco, and FAB asked BP for an assignment of its rights under the Contract. BP then informed FAB that it needed SAMIR’s consent to an assignment. FAB did not request that BP seek SAMIR’s consent, but instead commenced proceedings for damages for breach of the representation and warranty in the purchase letter.

At first instance – warranty breached

At first instance, Carr J found for FAB, holding that the inclusion of s34 of BP’s general terms in the Contract meant that the representation and warranty in the purchase letter was false.

Court of Appeal – no breach

The Court of Appeal found that there had been no breach of the representation and warranty by BP. Giving the leading judgment, Lady Justice Gloster analysed the question in three stages.

What was BP prohibited from doing under s34 of its general terms and conditions?

Clauses such as s34 of BP’s general terms and conditions prohibit parties from legally or equitably assigning their existing or future rights under contracts (without their counterparty’s consent). BP was therefore contractually prohibited from effecting a legal or equitable assignment of its rights under the Contract to FAB. However, BP was not prohibited from taking the other steps contemplated by the purchase letter, including paying sums received from SAMIR to FAB, holding such sums on trust for FAB or granting FAB subrogated rights or a funded sub-participation.

What was the effect of such a restriction on BP’s ability to dispose of the Receivable?

Following Linden Gardens Trusts Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, it was common ground between the parties that the effect of s34 was that any purported legal or equitable assignment by BP of its rights under the Contract to FAB (without SAMIR’s consent) would be ineffective.

Did BP breach the warranty? – No

The representation and warranty had to be interpreted against the commercial context and overall scheme of the purchase letter. Assignment was not the primary method of transferring to FAB sums received by BP under the Contract; that was payment of the amounts received by BP to FAB and the imposition of a trust over those sums. Assignment was a secondary method of FAB receiving the relevant sums. Further, the clause in the purchase letter which required assignment expressly contemplated that assignment may not be possible, and provided FAB with alternative remedies such as subrogated rights or a sub-participation if assignment were impossible for any reason. The payment guarantee agreement which preceded the purchase letter also expressly provided for alternative means of transferring the economic benefit of the Contract if assignment were not possible. That it might not be possible to assign the contract therefore formed part of the factual matrix in which the purchase letter was to be construed.

Against this background and in light of the other terms of the purchase letter, the phrase “from disposing of the Receivable evidenced by the Invoice as contemplated herein” in the representation and warranty did not refer exclusively to an assignment, but envisaged a wider restriction preventing the disposal by BP of its economic interest in the Contract. Section 34 of BP’s general terms and conditions did not prohibit BP from disposing of its economic interest in the Contract by all the means contemplated in the purchase letter, it only prohibited legal or equitable assignment, which the relevant terms of the purchase letter expressly contemplated may not be possible in any event. Therefore, on the proper construction of the purchase letter, BP had not breached the representation and warranty.

COMMENT

This case is a useful clarification of the meaning of terms, iterations of which are commonly found in receivables financing contracts. It is also interesting for what was not decided. Gloster LJ’s judgment analyses whether clauses prohibiting assignment are capable of rendering ineffective a subsequent equitable (as opposed to legal) assignment, and whether the Linden Gardens case can in fact be distinguished on this point. No finding was made as “with a considerable degree of intellectual disappointment” the question was not before the Court of Appeal. However, the space Gloster LJ devoted in her judgment to this question indicates that it is one considered ripe for review by the Supreme Court should an appropriate case arise.

The commercial rationale of Linden Gardens is that it preserves the legitimate commercial purpose of non- assignment clauses by ensuring that contracting parties do not have to deal with third parties that they have not consented to deal with. Gloster LJ’s analysis argues that non-assignment clauses only need to render ineffective legal assignments to satisfy this commercial purpose, and to go further and render equitable assignments ineffective is an illegitimate constraint on the freedom of commercial parties to alienate their property.

Similarly, although BP accepted in the Court of Appeal that the effect of s34 of its general terms and conditions was to prohibit it from effecting a legal or equitable assignment (accepting that the Court of Appeal was bound by two of its previous decisions on this point), it reserved its position as to the correctness of those prior decisions should the case proceed to the Supreme Court.