6 March 2014

Assignments Finance & Adjudication – Beware the Pitfalls? Beware the Primrose Path?

It is a common feature of the commercial world and the construction sector that contracts entered into between parties may be assigned. However the assignment of a contract can have some very unpleasant consequences and it is always important to check whether a contract can be assigned and for what purpose.

The commercial purpose behind an assignment may vary; commonly it is the assignment of the benefit of contracts and collateral warranties to funders or third parties who will subsequently obtain an interest the building or project of which the works form part. Sometimes the assignee is interested in the income stream arising from the contractual arrangements.

Assignment as between group companies or affiliated companies is also a common and necessary commercial use of assignment. Finally, assignment of the benefit of a contract may be a vehicle for financing the pursuit of sums due under a contract though adjudication. The case of Devon County Council v Celtic Composting Systems Ltd [2014] EWHC 552 (TCC) is a welcome reminder that not all purposes of assignment are supported by the courts and those who misuse it will be given little sympathy.

The position under English law is that commercial contracts are not seen as personal to the parties and unless any restraint upon assignment is included in the contract, the contracts may be freely assigned without consent.

Standard forms of contract used in the construction sector will contain provisions dealing with the assignment of the contract. In the context of negotiating and reviewing contract documentation the circumstances in which the contract may be assigned and the number of assignments that might be made will generally form part of the negotiation.

The NEC3 form of contract drafted for both international and domestic use does not contain any restriction upon assignment of the contract. This is to be contrasted with the JCT standard forms of contract which contain a restriction upon assignment and prevent assignment by either the employer or the contractor without the consent of the other except in permitted circumstances set out in the contract.

There are good reasons why the question of whether a contract can be assigned is a significant matter for the parties. Firstly, the identity of the other party may be of importance to a party. Their financial standing and ability to perform the work may be of importance. However, the law will not presume that in the case of most construction contracts. It is therefore incumbent on the party who wishes to restrict the benefit of performance of the contract to the original contracting party to include the restriction upon assignment.

Furthermore, even if the identity of the other party is not important there are some unsatisfactory consequences of assigning the benefit of the contract which can leave the original contracting party at a commercial disadvantage. The most common of these is that although an assignee does not escape liabilities which have arisen as between the assignor and the other contracting party, any cross claim that arises(other than out of the transaction to which the assignment relates and which arises after the date upon which notice of assignment is given) cannot be relied upon.

The effect is to deprive the original party of a claim or defence it would have been able to raise against the assignor.
A further prejudicial consequence of assignment can arise in circumstances where the benefit of the contract is assigned and under the assignment the right to pursue the action under the contract is retained by the assignor.

In such circumstances the original party can be faced with the possibility of an interim decision in the context of an adjudication which on the face of it would require the benefit of the contract i.e. any sums ordered to be paid in the adjudication, to be paid to the assignee. This has the effect of removing the interim nature of that transfer as in the event of any final determination of the dispute that required those funds be repaid that outcome might be defeated as those funds would no longer be held by the original party to the contract.

Such a structure was the subject of the decision of the TCC in the case of Devon County Council v Celtic Composting Systems Ltd [2014] EWHC 552 (TCC). In that case, the contractor, Celtic Compositing Systems Ltd, had assigned the benefit of the contract that it had entered into with the employer, Devon County Council, to Knowles Ltd. The assignment in the form of a deed assigned the benefits of the contract to Knowles Ltd whilst reserving the right to pursue any action for recovery of sums under the contract with the assignor Celtic and also reserving any liabilities in respect of costs or other orders that were made in the course of pursuing such proceedings with Celtic.

Celtic launched an adjudication conducted by Knowles Ltd in which the remedies sought required that any monies due should be paid not to Celtic but to Knowles. This was consistent with the terms of the assignment, the legality of which was contested by Devon. The question arose as to whether or not the context of the adjudication process an adjudicator would have jurisdiction to order such a remedy.

The transcript at paragraph 25 sets out the nature of the arrangement:

“That leaves one point, which is that one of the remedies sought is – and I am just going to paraphrase – that any monies due should be paid not to Celtic, but to Knowles. I have come to the clear view that that is not a proper matter to refer to adjudication. If one looks at the Act, what is to be referred is a dispute arising under the contract. Similarly, if you look at the Scheme, what is to be referred is disputes arising under the contract. Indeed, under this contract itself (page 547) the contract provides that what may be referred to adjudication is disputes arising under the contract; To my mind, Celtic’s arrangements with Knowles about who will receive the money; although notice of that assignment was given to Devon is not something which arises under the contract within the meaning of the Act or the contract itself. To my mind, it is quite different from the sort of dispute which is to be referred to adjudication, which is matters arising as to entitlement under the contract and by that I mean substantive entitlement as a result of work carried out and any allegations of breach of obligation and so on. If the adjudicator directs that a payment s due and Devon have concerns at that point, first of all, Devon could apply for a stay of execution on the grounds of special circumstances if they felt so advised. Secondly, they could serve notice of dissatisfaction leading to an arbitration to ensure that what they regard as the lawful liability to pay money is preserved. Thirdly – although I am not giving an indication as to what I think would be the result of this they may raise the issue elsewhere if they are concerned that that something actually amounted to fraudulent preferences is being proposed. In the course of the hearing Ms Cheng said that her client was intending to revisit and review their position under the assignment. I welcomed that assurance; I think it is a wise step to take. But in those circumstances, apart from saying that the adjudicator does not have jurisdiction to deal with the question of whether the money should be paid to Knowles or to Celtic. I need say no more….”

Having established that the Court did not consider the adjudicator had jurisdiction to make such an order, the Court set out its view as to the options that would be open to Devon in the event that the adjudicator directed that payment was due to Celtic or to Knowles. The options were firstly, that Devon could apply for a stay of execution on the grounds of special circumstances or that Devon could serve notice of dissatisfaction leading to an arbitration to preserve what they regarded as the lawful liability to pay.

Finally, the Court referred to the possibility of objecting to the arrangements on the basis that they amounted to fraudulent preferences; this last point arising in view of the admitted insolvency of Celtic and the background set out by the Judge as follows:-

“One complicating feature of this ongoing saga is that Celtic is insolvent. It is not in administration or liquidation but it acknowledges that it cannot pay for its representation in these proceedings and the management accounts that are before the Court show that it is probably only able to continue in business at all given the forbearance of its immediate creditors. One of its present and prospective creditors is Knowles, who not only represent Celtic in their battles against Devon but also provide one of their directors to act as an expert witness. This financial stringency on Celtic’s part led to the execution on 19th November 2010 of a remarkable deed of assignment. That deed is remarkable because, although it assigns the right to receive money to Knowles, it reserves the right to enforce payment on monies to Celtic.”

In the circumstances, the Court considered that the arrangements were irregular and the judgment refers to the arrangement as the “aromatic assignment” an oblique reference to that irregularity.

The use of such deeds of assignment to finance litigation is not limited to this particular case although the circumstances of this case were more extreme in that the party receiving the benefit of the contract was also the party conducting the proceedings and acting as expert witness.

As a result of the judgment, it is now clear that an adjudicator could not direct payment to an assignee on the basis of such a deed and that structures which seek to circumvent the interim nature of the adjudication process will not be sanctioned by the Court.

In the context of a final determination of a dispute, whilst the legality of such arrangements might be challenged for example on the basis of champerty, the general objection in principle does not arise.

The case is a welcome reminder that complex arrangements that seek to unfairly disadvantage one party as against the other in an interim process are not viewed with favour by the Courts. Further, it is a reminder that the question of whether and for what purpose a contract may be assigned is an important matter and should be addressed whenever contracts are being entered into. In an employer context always check whether there are restraints on assignment and if not include them. From a contractor’s perspective be wary of clever funding mechanisms that appear to provide a ‘win win’ scenario for you at the expense of the other party. You could end up with no recovery and satellite litigation about your complex arrangements.

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About the Author
Andrew James, Partner, Head of Construction & Engineering Team
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