Common Scenario

A developer enters into a finance agreement with a funder. As part of that finance agreement, and as a condition precedent to funding, the funder requires construction documents to be assigned by way of security. The developer then enters into a building contract with a contractor and assigns the benefit of that building contract to the funder to comply with his obligations under the funding agreement. The effect of this arrangement is, that whilst the developer still has to fulfil its own obligations to the contractor (e.g. it still has to pay for the works), it is no longer is able to enforce any of the contractor’s obligations: this right has been assigned to the funder instead. So what happens when something goes wrong and the developer needs to enforce a provision under the contract? This is what occurred in the following case…

Background

Mailbox entered into a funding arrangement under which it was required to assign to the funder “absolutely by way of security” its rights “from time to time” in assets including:

  • the Specific Contracts (as set out in the agreement) and
  • “all rights under any agreement to which it is a party and which is not mortgaged or charged under Clause 3.1 (Mortgages and Fixed Charges) together with all Related Rights in respect of such Charged property provided that [Mailbox] is entitled until the occurrence of an Event of Default which is continuing to exercise all rights assigned under this Clause 3.3 (Assignments)… and the [Funder] will reassign any such rights to the extent necessary to enable [Mailbox] to do so.” (emphasis added).

Mailbox was entitled to redeem the assignment upon the full payment or discharge of the secured liabilities. Mailbox entered into a building contract with Galliford Try (“GT”) whereby GT agreed to carry out refurbishment works to mixed-use retail and office space. The contract sum was circa £18m.

Most of the works were complete when on 1 March 2016 Mailbox purported to terminate the contract. A dispute between the parties followed, relating to delay, liquidated damages, the final account and whether or not termination was lawful.

The dispute was referred to adjudication and Mailbox was successful. The adjudicator decided that:

  • Mailbox was entitled to liquidated damages of a gross sum of £4.62m
  • GT was to pay Mailbox circa £2.477m
  • Mailbox was entitled to interest on the sums awarded.

GT refused to pay and Mailbox issued enforcement proceedings. GT argued that Mailbox had legally assigned the building contract to the funder therefore could not bring the adjudication in its own name; the adjudicator had no jurisdiction, his decision was a nullity and should be ignored.

Mailbox’s case was that there was no legal assignment. It argued that: The contract was not even in existence at the time of the assignment; you cannot assign future rights.

Whilst there may have been a charge in respect of the benefits under the building contract, there was no legal assignment and the parties had operated the building contract on the basis that Mailbox was entitled to the benefit (so raised the issue of conduct).

If there was an assignment, it had been reassigned before or on the day Mailbox commenced adjudication proceedings against GT.

The Court therefore had to consider the following points:

  • Was there a valid legal assignment?
  • If so, was it reassigned before the adjudication?

Decision

In relation to the Mailbox’s first point, the building contract was not included within the Specific Documents listed to be assigned. However, it did fall within the definition of “any agreement to which Mailbox is a party”.

The relevant clause in the funding agreement referred to Mailbox’s rights and interests “from time to time” which the judge said included future rights. He found that the parties must have intended this clause should operate as an effective assignment of existing rights and an agreement to assign future rights.

The second point raised by Mailbox was whether there was an absolute assignment or merely a charge in favour of the funder. The judge found that even though the language of the funding agreement was not the clearest, the express wording of the clause (“assigns absolutely its right, title and interest”) demonstrated the intention to operate as an absolute assignment.

The fact that Mailbox was required to give notice of assignment also supported this and indeed notice was validly given. Further, the fact that the document then referred to the rights being capable of reassignment supported the view that legal assignment was intended and indeed occurred.

On the final point of reassignment, the Court agreed with Mailbox. There was a valid reassignment of the building contract on or just before the Notice of Adjudication was served.

This meant that Mailbox was able to bring proceedings in its own name and the adjudicator’s decision was upheld.

What is not clear from the judgment is why the reassignment occurred. Did Mailbox discharge its debt in order to get the reassignment or did if the funder re-assign the documents given the situation which arose?

Mailbox got the result it needed but the process was unnecessarily complicated and the concern is that this is something that needs to be addressed more generally. This is not a new issue but this case raises the question: why does the funder need the benefit of the construction documents at the beginning of the project when it would already have the benefit of collateral warranties?

The response seems to be “because that’s what always happens”, or it’s the “market position”. That’s all well and good, but the fact remains that funders are unlikely to want to be involved in the day to day matters of the project or indeed want to have to enforce provisions against the contractor; typically funders simply want security.

Therefore it is important to strike a balance between providing sufficient security for a funder and enabling a developer to get on with the developer without constant recourse to the funder.