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Assignments: why you need to serve a notice of assignment

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.

What's the issue?

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.

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.

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• United Kingdom
• Capital Markets
• Gowling WLG
• High Court of Justice (England & Wales)

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Practical Law

Construction blog, assignment: rights about turn.

• by Iain Suttie
• Associate director

A couple of years ago, in a post called Guilty as charged? Or how to get rights wrong , I queried the common practice of an employer assigning its rights under the project documents (building contract and appointments) to its funder. Surely the person who needs to enforce these rights is the employer? The interests of a funder (such as a bank) can be adequately protected by way of collateral warranties or third party rights , coupled with a charge over the employer’s rights under the project documents. There is simply no need for an assignment.

I compared this to buying a new car with a loan, only for the bank manager to take away the keys and steering wheel as security, and still insist that the borrower give him a lift back to his branch. Wouldn’t it be better to leave the steering wheel, if you want someone else to drive? The confused rigmarole of such assignments gives no-one what they really need.

Well, if only a blogger’s indignation solved problems. Sadly, funders and their lawyers are often still insisting on employers assigning rights, regardless of the attendant incoherence.

But at least we now have the TCC decision in Mailbox (Birmingham) Ltd v Galliford Try Construction Ltd . O’Farrell J’s judgment neatly analyses the effect of the kind of assignment provisions that funders are apt to insist on.

The decision in Mailbox

The question arose in the context of an adjudication. Did the employer, Mailbox, have the right to commence an adjudication in its own name against its contractor, Galliford Try, in relation to a dispute under the building contract? Or had Mailbox previously assigned its right to do so to its funder, Aareal Bank?

The funding arrangements entered into between Mailbox and Aareal in 2011 included a debenture , under which the bank took security for its loan. It was drafted in fairly usual terms. Among other things, it provided that Mailbox “assigns absolutely by way of security” its rights “from time to time” under a broad range of contracts “to which it is a party”. It also required notices of assignment to be served.

Shortly after execution of the building contract, Aareal’s solicitors sent a notice of assignment to Galliford Try. The notice was signed by Mailbox and stated that all Mailbox’s “rights, interests and benefits” under the contract “belong” to Aareal.

O’Farrell J had little difficulty in deciding that there had been a legal assignment of Mailbox’s rights to Aareal (that is, one satisfying the requirements of section 136(1) of the Law of Property Act 1925 ). In particular:

• Future rights : The assignment provisions in the debenture clearly covered rights under future contracts, as well as existing ones. As future rights could not be assigned immediately, the relevant clause was to be interpreted as an agreement to assign such rights, including those under the future building contract.
• Absolute assignment : The wording of the debenture, the requirement to give notice and the form of notice were all consistent with an absolute assignment, not a charge. The intention was fully to transfer ownership of rights under the contract, not merely charge them to Aareal.
• Legal assignment : An agreement to assign a future right for valuable consideration could operate in equity to transfer the right as soon as it came into existence. Aareal’s agreement to provide funding supplied the necessary consideration. Once the assignment took effect, the notice converted it into a legal assignment.

Alphabet soup

One issue with assignments under debentures and their associated notices (at least in the construction sphere) is their use of inconsistent language. So for example, references to charging rights mingle unclearly with words indicating assignment. This torrential approach to drafting is doubtless intended to protect a funder’s interests, but it does create something of an alphabet soup. The wording in Mailbox is typical.

But in resolving the issues before the court, O’Farrell J’s judgment helpfully reminds us of some basics:

• Weight of language and context : If the agreement between the parties repeatedly indicates that it is an absolute assignment, the court is likely to interpret it as such, regardless of “torrential” references to (say) charging.
• You can’t have your cake (or soup) and eat it : Similarly, the statement that Mailbox was nevertheless entitled “to exercise all rights assigned” under the debenture in respect of the building contract, and that Aareal would “reassign any such rights to the extent necessary to enable [Mailbox] to do so”, didn’t change anything. This kind of wording is often seen in notices of assignment, which require the contractor or consultant to continue at a day-to-day level much as before. Everyone is to pretend that the assignment to the funder hasn’t really occurred.

But it is mostly confusing, self-contradictory stuff. How can an employer exercise rights under a contract – for example, to issue instructions – if it has transferred them to its funder? I suppose an employer could be acting as the funder’s agent. But that argument wasn’t run in Mailbox. That isn’t surprising: a bank would hardly permit an employer to bind it under the law of agency. The doublethink inherent in the debenture in Mailbox (and in many notices of assignment) only reinforces the view that security assignments aren’t the correct tool. Certainly, O’Farrell J was not tempted to derive some sort of contorted assignment-that-is-not-an-assignment from the words.

• Assignment in security : The right of a borrower to a reassignment on repayment of the loan “does not preclude an absolute assignment”. On the contrary, the two are perfectly compatible. The “security” aspect does not make the assignment any less effective (or more like a charge) prior to reassignment occurring.

The upshot was that the transfer to Aareal was an effective legal assignment. But all was not lost for Mailbox. On (or just before) the day it commenced adjudication in August 2016, Aareal reassigned the building contract rights to it. So Mailbox once again had its hands on the steering wheel.

Perhaps all’s well that ends well. Or, like me, you may think the whole security assignment issue was a pointless detour. Isn’t it time that debentures are drafted to reflect the real world of construction, rather than stretching language and concepts to cover all cases and satisfying no-one?

3 thoughts on “ Assignment: rights about turn? ”

I’ve always thought these assignments were pretty pointless, whichever side of the fence I’ve been acting on, but it’s amazing how many lawyers are too frightened to step away from them. Interesting read.

Excellent blog post. Thanks for share

Excellent blog – clearly lays out the law of unintended consequences when the approach fails to consider repercussions of narrowly focused demands of funders – or funders’ lawyers.

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Contracts: assignment

Practical law uk practice note 7-381-7509  (approx. 44 pages), get full access to this document with practical law.

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• Increase efficiency
• Enhance productivity
• Improve response time
• General Contract and Boilerplate
• Substantive Law
• 1 Scope of this note
• 2 What is an assignment?
• 3 Effect of assignment
• 4 When is assignment used?
• 5 Types of assignment
• 6 Assignment formalities
• Personal contracts
• Assignments prohibited by public policy
• Construing non-assignment provisions
• Requirements for consent
• Circumventing restrictions on assignment
• Legal restrictions on non-assignment provisions
• "Conditional benefit" exception discredited for assigning contractual obligations
• Creating a legal assignment
• When are legal assignments used?
• Who must consent?
• Must a legal assignment be in writing?
• Who must sign the assignment?
• Is consideration required?
• Notice of assignment
• Notice must be in writing
• Must the notice take any particular form?
• Does the notice need to state the date of the assignment?
• When should notice be given?
• Who can give notice?
• To whom can notice be given?
• Can notice be given in advance of assignment?
• Can the other contracting party demand sight of the assignment agreement?
• Which methods of giving notice are valid?
• Effect of non-assignment provision on a notice of assignment
• What happens if notice of assignment is not given to the other contracting party?
• Creating an equitable assignment
• When are equitable assignments used?
• Must an equitable assignment be in writing?
• Is notice of assignment required?
• Subject to equities
• Recovery of loss by assignee
• 14 Assignment of a third party right
• Conditional fee agreements
• Construction agreements
• Consumer contracts
• Security arrangements
• General reading
• Assignment of other choses in action
• 17 Drafting assignment provisions
• 18 Section 136 of the Law of Property Act 1925

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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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Notice to third party of assignment | Practical Law

Notice to third party of assignment

Practical law uk standard document 3-107-4753  (approx. 8 pages).

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