A recent case has demonstrated the need to serve a formal notice when undertaking a contract assignment from one party to another.

Given the complex nature and structure of construction projects, contracts will often need to be assigned from one party to another.

Assignments are useful, as they allow the transfer of one party’s rights under a contract to a new party.

For the new party to take any legal benefit under the assigned contract, a notice of assignment must be served so the other contracting party knows to whom it owes its contractual duties.

If a notice is not served, then the assignment will be considered to be equitable (rather than legal), as highlighted in the recent case of General Nutrition Investment Company v. Holland and Barrett International Ltd & Anor [2017] EWHC 746.

In this case, the High Court considered whether a trademark licence agreement was validly assigned in the absence of a notice of assignment.

What is assignment?

An assignment can be legal or equitable.

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 other contracting party.

As well as the requirement to give notice, the main difference between legal and equitable assignments is that, with a legal assignment, the assignee can usually bring an action against the other contracting party 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 as a result of liquidation or dissolution, among other things, or no longer interested in participating in such proceedings.

The facts of the case

GNIC Arizona Oldco and Holland and Barrett entered into a trademark licence agreement. During the term of this agreement, GNIC Arizona was dissolved as part of a restructuring of the GNIC group.

Through a series of written agreements, GNIC Arizona assigned its rights under the licence agreement to General Nutrition Investment Company (GNIC). However, H&B was not given written notice of the assignment of the rights under the licence agreement to GNIC.

“The court found that the identity of the entity which was entitled to terminate the licence agreement had not been made clear to H&B”

he licence agreement conferred certain termination rights on the ‘licensor’, which GNIC believed it could exercise as the new licensor. GNIC subsequently served a number of termination notices on H&B for material breach of the original contract.

&B contested the termination and issued a counterclaim seeking declaratory relief on the basis that it had not received notice of the assignment of the licence agreement from GNIC Arizona to GNIC, and so none of the termination notices was valid.

The decision

The High Court considered whether there had been a valid assignment of the licence agreement between GNIC Arizona and GNIC.

Relying primarily on the principles established in Warner Bros Records Inc v. Rollgreen Ltd [1976], the court concluded that the basic conditions of legal assignment had not been fulfilled, namely written notice to be given to H&B of the assignment. There had, however, been an equitable assignment of GNIC Arizona’s rights to GNIC.

“This case provides an example of the potential dangers that can arise where a formal notice of assignment is not served on the other contracting party”

The court held that, as equitable assignee, GNIC could not exercise the licensor’s rights under the licence agreement, including the right to terminate, unless and until H&B had been given notice of the assignment.

The court found that the identity of the entity which was entitled to terminate the licence agreement had not been made clear to H&B.

The decision is based on the court’s view that, unless the other contracting party has had notice of the assignment, it does not know whether the entity claiming it is the new assignee that has the contractual right to enforce the contract.

Guidance for contractors

It is all too easy to fall into the trap of equitable assignment, particularly in the midst of an ongoing construction project where there are numerous documents in existence. However, this case provides an example of the potential dangers that can arise where a formal notice of assignment is not served on the other contracting party.

For an effective legal assignment, it is essential to ensure a written notice of assignment is promptly given to the other contracting party.