Practical Law

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

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

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

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

The decision in Mailbox

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

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

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

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

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

Alphabet soup

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

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

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

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

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

A U-turn

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

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