notice of assignment under english law

Assignments: why you need to serve a notice of assignment

Catherine phillips.

PSL Principal Associate

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 of assignment.

What issues are there with serving notice of assignment?

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.

Best practice for serving notice of assignment

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.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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• Insights & events

Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

Contact our experts for further advice

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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What is a notice of assignment?

An assignment takes place when one party is holding a right to property, claims, bills, lease, etc., of another party and wishes to pass it along (or sell it) to a third party. As complicated as that sounds, it really isn’t. Strangely enough, many assignments can be made under the law without immediately informing, or obtaining the permission, of the personal obligated to perform under the contract. An example of this is when your mortgage is sold to another mortgage company. The original mortgage company may not inform you for several weeks, and they certainly aren’t going to ask your permission to make the sale.

If a person obligated to perform has received notice of the assignment and still insists on paying the initial assignor, the person will still be obligated to pay the new assignee according to the agreement. If the obligated party has not yet been informed of the assignment and pays the original note holder (assignor), the assignor is obligated to turn those funds over to the new assignee. But, what are the remedies if this doesn’t take place? Actually, the new assignee may find themselves in a difficult position if the assignor simply takes off with their funds or payment. They are limited to taking action against the person they bought the note from (assignor) and cannot hold the obligator liable. Therefore, it is important to remember that if any note or obligation is assigned to another party, each party should be well aware of their responsibilities in the transaction and uphold them according to the laws of their state. Assignment forms should be well thought out and written in a manner which prevents the failure of one party against another.

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• Does your Agreement Require an Assignment Legal Form?
• Why Every Landlord and Tenant Needs a Lease Agreement
• Why you need a Power of Attorney and How to Assign One

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English law assignments of part of a debt: Practical considerations

United Kingdom |  Publication |  December 2019

Enforcing partially assigned debts against the debtor

The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).

While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.

This note considers whether this requirement may be dispensed with in certain circumstances.

Can you assign part of a debt?

Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot. 1  This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.

Joining the assignor to proceedings against the debtor

While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.

An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate. 2

Kapoor v National Westminster Bank plc

English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.

In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan 3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.

The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.

Application of Kapoor

It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.

This analysis is limited to English law and does not consider the laws of any other jurisdiction.

Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.

Legal title cannot be assigned in respect of part of a debt. A partial assignment would not satisfy the requirements for a legal assignment of section 136 of the Law of Property Act 1925.

If an assignor does not consent to being joined as a plaintiff in proceedings against the debtor it would be necessary to join the assignor as a co-defendant. However, where an assignor has gone into administration or liquidation, there may be a statutory prohibition on joining such assignor as a co-defendant (without the leave of the court or in certain circumstances the consent of the administrator).

[2011] EWCA Civ 1083

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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FAQs on assignments in finance transactions

This note aims to provide brief and practical answers to common questions on the law of assignment in English law finance transactions.

1.  Are   all   notified   assignments   legal   assignments?

No, while all legal assignments must have been notified to the debtor, notice to the debtor is not enough by itself to make an assignment a legal assignment. The full requirements for a legal assignment are set out in the answer to question 2.

2.  What   are   the   requirements   for   a   legal   assignment?

A legal assignment must comply with section 136 Law of Property Act 1925 (the  LPA ) in that it is:

a. in writing and signed by the assignor;

b. expressly notified to the debtor in writing – notice can come from the assignor or the assignee;

c. not a charge;

d. of the whole of the assigned right(s) – and not of a fraction or a percentage of the assigned right(s);

e. a present assignment of existing property – rather than of future property, such as future rights to claim under an existing insurance policy or rights under a contract that has yet to be concluded;

a. of legal rights, rather than of equitable interests (such as interests under a trust); and

b. not conditional – including, because the assignee is entitled from the date the assignment is notified to the debtor to collect/receive and enjoy the assigned rights as they fall due for payment or performance.

3.  What   practical   difference   does   it   make   to   the assignee whether an assignment is a   legal   assignment,   or   a   notified   equitable   assignment?

There are two differences. The first is that an assignee suing the debtor under a legal assignment before the English courts has the right to sue the debtor in its (the assignee’s) own name and without having to join the assignor

in those proceedings as a co-claimant or as additional defendant. By contrast, in equivalent proceedings under an equitable assignment, the judge has a discretion to compel the assignee to join the assignor in those proceedings as a co-claimant or a defendant. However, this discretion is not always exercised in favour of joining the assignor.

The second practical difference is that a legal assignment is prima facie capable of being fully enforceable against the assignor as a property transaction and, as such, good against third parties, even if the assignee gave no value for its assignment. Again, by contrast, certain types of equitable assignment (e.g. assignments of future property) are not fully enforceable as property transactions that are good against third parties if the assignee gave no value for its assignment. This is because of the principle that “equity will not assist a volunteer”. Here, equity requires actual value and this requirement is not satisfied by the assignee providing purely nominal consideration, or the assignment being made in a deed.

The other main practical benefits of having a legal assignment are broadly equally available to an assignee under a notified equitable assignment for value. These benefits are:

a. once the debtor has received notice of an absolute assignment, it must pay or perform the assigned rights in favour of the assignee;

b. notice to the debtor is capable of establishing the priority of the assignment over later notified or non-notified assignments under the rule in  Dearle   v.   Hall   (discussed   in   questions   13   and   14   below) ;

c. notice to the debtor is capable of protecting the assignee from legal set-offs (a.k.a. mutual debt litigation set-offs) that the debtor has against the assigned rights from its dealing with the assignor and which arise after the debtor receives notice of assignment; and

d. notice to the debtor deprives the assignor and the debtor of their legal ability to terminate or amend the assigned rights to the detriment of the assignee.

4.  Will a security assignment be a legal   assignment if the notice to the debtor   instructs it to continue to pay or perform in   favour   of   the   assignor   pending   a   later   notice   that   an   event   of   default   has   occurred?

No, the ability of the assignor to continue to collect/receive and enjoy the assigned property pending the occurrence of a later event makes this sort of assignment conditional rather than “absolute”. Conditional assignments do not come within section 136 LPA.

5.  Our   security   document   refers   to   a   security   assignment   as   an   “absolute   assignment”.   Is   this   correct?

A security assignment can and will be absolute if:

a. it is of the whole of each assigned right, and not of a portion, fraction or percentage of any assigned right;

b. the assignment is not conditional, because the overall effect of the assignment and the notice of assignment is that the assigned rights are the assignee’s property from day-one and do not only become the assignee’s property upon the later fulfilment of a condition (such as a notice from the assignee to the debtor that an event of default has occurred);

c. (as an aspect of the assignment not being conditional under b above) neither the assignment nor the notice of assignment allows for the debtor to pay or perform the assigned rights in favour of the assignor rather than the assignee; and

d. the assignment is not conditional in some other way.

6.  Can a security assignment be re-   characterised   as   a   floating   charge   (and   does giving   notice   to   the   debtor   make   any   difference)?

Yes, a conditional security assignment, and some other security assignments, can be re- characterised as floating charges. Giving a notice of assignment to the debtor would not, by itself, prevent this re-characterisation.

More specifically, in  Re   Spectrum   Plus   Ltd   (In   Liquidation)   [2005] 2 A.C. 680, Lord Scott said that a security document would create floating security if, despite its other features, it had the third feature of a floating charge identified by Romer LJ in Re Yorkshire Woolcombers   Association  [1903] 2 Ch. 284. This third feature is:

“if   you   find   that   by   the   charge   it   is   contemplated that, until some future step is   taken   by   or   on   behalf   of   those   interested   in   the   charge,   the   company   may   carry   on   its   business   in the ordinary way as far as concerns the   particular   class   of   assets   until   some   future   step   is   taken   by   or   on   behalf   of   those   interested  in the charge, the company may carry on its   business   in   the   ordinary   way   as   far   as   concerns   the   [assigned/charged]   assets”.

Applying this statement, where a security assignment allows the debtor to continue to collect or receive, and use and enjoy, the assigned property for its own purposes (rather than exclusively for the discharge of the secured obligations) that security assignment may be re-characterised as a floating charge.

If such an assignment were notified to the debtor, this would not prevent the assignment from being a floating charge, unless the notice had the effect of depriving the assignor of use of the assigned property on and from the assignment. In practice, such notices often instead provide for the debtor to continue to pay or perform the assigned rights in favour of the assignor pending a later notice from the assignee. This would be a notified security assignment, but liable to re-characterisation as a floating charge.

Alternatively, a security assignment might not be notified to the debtor, but provide that the assignor must remit all proceeds of all assigned rights to the assignee for those proceeds to be applied by the assignee exclusively to pay off the secured obligations. If the parties abide by this arrangement, this would be a non-notified security assignment, but it would not be a floating charge.

Even if a security assignment is drafted as an absolute, notified assignment it could still be liable to be re-characterised as a floating charge if, in practice, the assignee too readily and frequently releases some of the assigned rights or their proceeds from its security at the assignor’s request.

Finally, re-characterisation of an assignment as a floating charge will rarely be significant outside UK insolvency proceedings.

7.  Does   the   Assignment   Agreement   scheduled   to the LMA’s recommended form facilities   agreements (the LMA Assignment   Agreement) create a legal or equitable   assignment?

Where a lender uses an LMA Assignment Agreement to dispose of its entire participation in a loan facility documented on LMA terms, the assignment is capable of being a legal assignment that meets the criteria set out under question 2.

Subject to the proviso below, where a lender uses an LMA Assignment Agreement to dispose of part of its participation in a loan facility documented on LMA terms, the resulting assignment will technically be an equitable assignment. This is because an assignment of part of a contractual right is not absolute under section 136 LPA.

The proviso is:

a. partly because of the rule in  Dearle   v.   Hall  (discussed in questions 13 and 14);

b. partly because of the way the LMA facility agreements are drafted; and

c. partly because the incoming lender’s rights to collect or sue for payment direct from the obligors under the facility agreement do not just derive from the property law effects of its Assignment Agreement, but also derive from all relevant parties having agreed to the same contractual framework under the facility agreement and the incoming lender assuming obligations under that facility agreement, there will almost always be zero practical difference between the effects of a partial equitable assignment, and an entire legal assignment, under an LMA Assignment Agreement. In particular, the priority of the assignment, whom the debtor (or obligor) is obliged to pay and the ability of the assignee, as an incoming lender, individually to bring legal proceedings under the Assignment Agreement against an obligor without having to join the assignor in those proceedings, should almost always be the same under either assignment.

8.  Can   an   electronic   assignment   of   receivables   or other contractual rights effected via a   dedicated   online   platform   comply   with  the section 136 LPA requirements for an   assignment   to   be   in   writing,   signed   by   the   assignor   and   notified   to   the   debtor   in   writing?

In principle, yes. However, compliance with section 136 would depend in practice on how a particular electronic assignment were digitally documented, executed and notified in each case on the platform.

9.  Can   an   assignment   of   future   receivables   be   an   outright   or   true   sale   assignment?

Yes. An assignment of receivables that do not exist at the time of the assignment will always be an equitable assignment under English law. However, whether an assignment of receivables expressed as an outright sale is re-characterised as a secured loan does not depend on whether the sale is a legal assignment of existing receivables or an equitable assignment of future receivables. (Assignments of future receivables are not possible under the laws of some states.)

10.  If contractual rights cannot be assigned   without the counterparty’s consent, can   consent be requested and obtained in the   notice   of   assignment   and   acknowledgement   exchanged   with   the   counterparty?

No, if the assignment is to take effect as a property transaction that transfers title to the assigned rights to the debtor, it must do so when the assignment becomes effective.

An assignment in breach of a prohibition on assignment, or of a personal right, to which (in either case) the counterparty has not consented, is usually void against the debtor (unless the judge finds the failed assignment takes effect as a trust). This voidness means that the assignment does not transfer the assigned rights to the assignee, or oblige the debtor to deal with the assignee in respect of those rights. On general principle, it is very unlikely that this voidness can be cured at a later stage by obtaining the counterparty’s retrospective consent to assignment.

However, where the counterparty has given its consent before the assignment takes place, we would usually record in the counterparty’s acknowledgement of the notice of assignment that the counterparty had given that consent before the assignment took place.

11.  Will an   assignment   in   breach   of a   prohibition   on assignment contained in the contract   generating the assigned rights always take   effect   as   a   trust?

No, an English court will not automatically interpret such an assignment as instead taking effect as a trust – particularly where there is no express, specific mention of a trust in the assignment. This is one reason why well-drafted security assignments tend expressly to provide that where an assignment is ineffective because of a prohibition on assignment, the assignment will take effect as a trust in favour of the secured party.

12.  Does   a   notice   of   assignment   to   the   debtor   prevent the debtor from asserting post-   notice set-off rights it had against the   assignor   against   the   assignee   instead?

No, notice of an assignment to the debtor only prevents the debtor from invoking one category of post-notice set-off that the debtor has against the assignor against the assignee. This type of set-off is known as legal or statutory set-off, or (more descriptively) mutual debt litigation set-off.

Broadly, a mutual debt litigation set-off may arise when:

a. the assignor and the debtor each have a debt claim against each other that is mutual;

b. these debt claims arose before any notice of the assignment mentioned below;

c. the assignor assigns its debt claim to the assignee;

d. the assignee then sues the debtor for payment of the assigned debt;

e. the debtor asserts a set-off against the assignee in the same action on the basis of the debtor’s debt claim against the assignor

f. both debt claims are due for payment at the start of the litigation and immediately before judgment; and

g. both debt claims succeed at the end of the litigation.

In this situation, the judge has a discretion to give the assignee a single net judgment for its debt claim, less the amount of the debtor’s debt claim. Importantly, the judge has this discretion to set off the two claims even though there may be no connection between the two debt claims.

Among the post-notice set-offs  not  cut-off by notice to the debtor are:

a. contractual set-offs arising by agreement between the assignor and the debtor (for example, arising under a credit note issued by the assignor to the debtor as compensation for a previous breach of contract by the assignor);

b. equitable set-offs that are so closely connected to the assigned right that it would be manifestly unjust to allow enforcement of the assigned right without taking into account the debtor’s set-off; and

c. abatement rights that reduce the amount of the price payable under the assigned right under section 53(1)(b) of the Sale of Goods Act 1979, or at common law.

13.  What is the rule in Dearle v. Hall on the   priority of assignments and does this rule   determine the   priority of   both legal   and   equitable   assignments?

The rule in Dearle v. Hall is that the priority of multiple assignments of the same right follows the order in which the debtor under the assigned right receives notice of those assignments.

Under this rule, subject to exceptions, an earlier notified assignment will have priority over later-notified assignments and non- notified assignments, regardless of when each assignment was created.

Yes, the rule in  Dearle   v.   Hall  determines the priority of both legal and equitable assignments. For example, under the rule, an equitable assignment taken a week after a legal assignment can have priority over that earlier legal assignment as long as the equitable assignment is notified to the debtor before notice of assignment is given under the legal assignment.

14.  Are there any exceptions   to the rule in   Dearle  v.   Hall?

Yes, the rule in  Dearle   v.   Hall  does not enable the assignee under an earlier notified assignment to gain priority:

a. over an earlier created, but later notified or non-notified assignment, if the assignee under the earlier notified assignment did not give value for its assignment;

b. over an earlier created, but later notified or non-notified assignment, if the assignee under the earlier notified assignment had actual or constructive notice of the earlier created assignment when it took its own assignment or gave value for that assignment;

c. over a prior trust over the assigned rights; or

d. over a prior created but later notified assignment, where the assignee who first gave notice is a trustee in bankruptcy or a judgment creditor.

15.  Following   the   Mailbox   case,   should   security   assignments of construction and project   documents   now   be   avoided?

In  Mailbox   (Birmingham)   Limited   v.   Galliford   Try   Construction   Limited   [2017] EWHC 67, a contractor argued that a developer should not be able to sue it under a building contract between them because the developer had assigned its rights under the building contract to a security trustee under a debenture.

Although the contractor lost the case, it did so on the basis that the security trustee had validly assigned the contractual rights back to the developer before it made the claim. On the face of it, this might suggest that developers and project companies should avoid granting security assignments over rights that they may wish to enforce themselves at a later point, and instead only agree to grant a charge over such rights. Our experience is that some law firms are now advising their borrower clients to this effect on real estate development finance and project finance transactions.

However, in  Mailbox:

a. the debenture required the security assignment to be notified to the contractor immediately following the assignment; and

b. both the debenture and the notice made clear that the security trustee became the party entitled to exercise all the assigned rights immediately on and from delivery of the notice (see paragraph 26 of the judgment).

Where such a notice has been given, it is not surprising that the counterparty would object to the assignor subsequently exercising those rights.

This is not how most security assignments of construction and project documents, nor the notices deliverable under them, are drafted. Some do not even require the assignment to be notified to the counterparty pre-default. Where they do require notice to be given immediately following the assignment, that notice usually expressly provides that the assignor may continue to exercise the rights under the assigned contract until the security holder gives notice to the counterparty that the security has become enforceable. In our view, provided a security assignment and notice are drafted on this basis, the assignment would not prevent the assignor from enforcing any rights under the contract before the security holder has given notice to the counterparty that the security has become enforceable.

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THE NOTICE OF ASSIGNMENT: A REFRESHER COURSE

Allen J. Heffner Nov 20, 2023

The Notice of Assignment is probably the single most important document for a Factor. Understanding what needs to be included in the Notice of Assignment, how to send it, and who to send it to can mean the difference between getting paid and not. Despite the fact that every Factor is (or should be) familiar with legal requirements relating to Notices of Assignment, we still find that many of our factoring clients who end up in litigation make basic mistakes relating to their Notices of Assignment. The article focuses on what information needs to be included in the Notice, who the Notice should be sent to, and how the Notice should be delivered.

What needs to be included in the Notice of Assignment?

To be effective, there is certain information that must be included in the Notice of Assignment. The Uniform Commercial Code (“UCC”) requires that the notice must:

• Notify the Account Debtor that the amount due or to become due has been assigned;
• Notify the Account Debtor that payment is to be made to the Factor;
• Reasonably identify the rights assigned; and
• Be signed by the Factor or its client.

The Notice of Assignment should also include a remittance address so the Account Debtor is informed how and in what manner the Factor should be paid.

Additionally, while not explicitly required under the current version of the UCC, Factors should include language in their Notice of Assignment that: (i) the Client has assigned all of its present and future accounts receivable to Factor; (ii) the Factor holds a first priority security interest in all of the client’s accounts receivable; and (iii) all payments owing to the client must be paid to the Factor.

Who should the Notice of Assignment be sent to?

Notices of Assignment should not be sent directly to individuals with an Account Debtor. Sending the Notice to a specific individual may lead to issues relating to the authority of that individual to receive documents on behalf of the Account Debtor. Moreover, Factors that direct Notices of Assignment directly to individuals open themselves up to arguments that the Notices of Assignment was not properly delivered. For instance, our clients that have sent Notices of Assignment to individuals have ended up in situations where the individual to whom the Notice of Assignment was addressed no longer worked with the Account Debtor or the individual was located at a different office and the Notice of Assignment was not sent to the proper location. To be safe and to avoid unnecessary issues, Factors should send the Notice of Assignment to the Account Debtor’s accounts payable department.

Additionally, some states have specialized definitions for what constitutes “notice” on behalf of a company. If there is any question as to where a Notice of Assignment should be sent, Factors should check with their attorney to determine where these should be sent.

How should the Notice of Assignment be delivered?

The crucial issue for the enforceability of a Notice of Assignment is proof of receipt by the Account Debtor, not proof of delivery. Therefore, it is good business practice to send the Notice of Assignment either certified mail or other method that provides for proof of delivery.

Many of our clients have asked about whether it is proper to deliver the Notice of Assignment via e-mail asking the Account Debtor to confirm receipt or with “read receipts” turned on. Some Factors prefer this method because it is more cost efficient.

While sending Notices of Assignment via e-mail is enforceable, we would not recommend it as a general business practice. Sending the Notice in this manner requires delivering the Notice to a specific individual, which we have discussed above can be problematic. Sometimes officers and directors of companies have assistants or other personnel manage their e-mail accounts, raising the possibility that the individual to whom the Notice was sent, never saw the e-mail, even though the e-mail was “read.”

Last, there is no requirement that the Notice be signed by the Account Debtor and returned to the Factor. Often, we see our client’s Notice include a “confirmation of receipt” line for the Account Debtor to sign and return. Sometimes, the Factor will have proof of delivery to the Account Debtor but the Notice was not signed and returned by the Account Debtor. This adds unnecessary ambiguity as to whether the Notice was actually received by the Account Debtor. Therefore, we instruct our clients not to include such requests for proof of receipt.

Who should send the Notice of Assignment?

Some of our clients that have had bad experiences with Account Debtors after delivering a Notice of Assignment have chosen to have their Client be the one to deliver the Notice of Assignment. There is no legal requirement as to whether the Factor or the Client is the correct party to deliver the Notice of Assignment. However, we recommend the Factor be the one to deliver the Notice of Assignment. This way, the Factor is in complete control of the contents of the Notice of Assignment, how it is delivered, and receives confirmation of its delivery. We have been in situations in which the Factor allowed the Client to deliver the Notice of Assignment, but the Client did not deliver the Notice of Assignment in accordance with the law, leading to avoidable litigation.

Should a Factor respond to an Account Debtors questions regarding a Notice of Assignment?

Absolutely, yes. If requested by an Account Debtor, pursuant to the UCC, a Factor must furnish reasonable proof of the assignment for the Notice of Assignment to be valid. Too often we see situations in which requests are made or questions are posed by Account Debtors that the Factor ignores, thinking that because the Account Debtor received the Notice of Assignment, nothing else needs to be done. The Factor should respond to the Account Debtor and provide reasonable proof of the assignment. These communications can also provide invaluable insight as to the relationship between the client and the Account Debtor, how and when payments will be made, and can provide the Account Debtor a sense of trust with the Factor.

A Notice of Assignment is crucial for Factors because it provides legal protection, establishes priority of interest, prevents confusion, facilitates legal recourse, and enables effective communication with Account Debtors. Without this notice, Factors may encounter difficulties in asserting their rights and collecting payments from Account Debtors, potentially jeopardizing the financial transaction.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 25 years, Mr. Loren has focused his practice on construction law and factoring law.  Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at [email protected] or [email protected] or 561-615-5701

Bruce E. Loren · Michael I. Kean · Allen J. Heffner · Kyle W. Ohlenschlaeger · Frank Sardinha, III · Lucia E. DeFilippo

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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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Does an acknowledgement of a notice of assignment create enforceable obligations between the assignee and the recipient of the notice?

A simple acknowledgement of a notice of assignment of a contract or debt by the relevant contract counterparty of the assignor (the recipient ) when signed will not create binding obligations between the recipient and the assignee over and above those created by the subject matter of the assignment. Only if the notice seeks contractual undertakings from the counterparty and is supported by consideration can such additional obligations arise out of the signed acknowledgement. It will also be difficult for the assignee to establish a signed acknowledgement on its own constitutes a waiver of any right or forms the basis for a claim in estoppel.

Useful materials

For information in general on assignments by way of security and taking security over contractual rights, see Practice Notes:

Assignments by way of security, and

Taking security over contractual rights

Assignments and the need for notice

Under section 136 of the Law of Property Act 1925 (LPA 1925), an absolute

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Related legal acts:

• Law of Property Act 1925 (1925 c 20)

Key definition:

Assignment definition, what does assignment mean.

An assignment is 'an immediate transfer of an existing proprietary right, vested or contingent from one party to another'. Assignments can occur by consent or by operation of law.

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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