Warranties in receivables finance agreements: how to avoid surprises

5 minute read
16 February 2018

The Court of Appeal has decided that a company was not in breach of a warranty which stated that it was not restricted from disposing of an invoice, despite a 'no assignments' clause being contained in the underlying agreement. On the face of it this is a surprising result.

Parties entering into receivables finance facilities should be aware of the reason for this decision in order that they avoid surprises of this kind.

The background

BP Oil International Limited (BPOI) sold 95% of a receivable to First Abu Dhabi Bank PJSC (the "Bank") and gave a warranty to the Bank that it was not prohibited from disposing of the receivable as contemplated by the invoice finance agreement. The warranty specifically included a statement that 'such sale does not conflict with any agreement binding on [BPOI]'. It also included:

  • an obligation for BPOI to pay over all payments received in respect of the invoice (up to the amount that had been funded by the Bank);
  • a requirement to hold on trust the proceeds of the invoice (up to the amount that had been funded by the Bank); and
  • rights of sub-participation and participation available to the Bank in the event that the assignment was invalid or unenforceable.

The total invoice was for approximately USD $72.5 million.

The underlying contract incorporated BPOI's general terms and conditions for sales and purchases of crude oil which contained a clause stating that neither of the parties could assign the agreement, or any rights or obligations thereunder without the other parties' consent.

No consent was sought.

The Court of Appeal held that BPOI were not in breach of the warranty.

Key points

  1. The restriction on assignment did not prevent BPOI from agreeing to pay over all amounts received in respect of the invoice to the Bank and creating a trust over those sums until paid or from creating rights of subrogation or sub-participation. Sums received in respect of the agreement were not 'rights under' the agreement and so BPOI could dispose of them as they saw fit.
  2. The restriction on assignment was effective in preventing any purported legal or equitable assignment without the contract counterparty's prior consent. This was common ground between the parties and in line with existing authorities on the topic such as Linden Gardens Ltd v Lenesta Sludge Disposals Ltd ​[1994] 1 AC 85. However, the judgment goes on to state that the Court felt constrained by these authorities. Strong arguments were noted in favour of a new position where a restriction on assignment would not prevent a party from disposing of its equitable rights in the contract and instead the restriction would only affect the relationship between the parties (and as such, the contract counterparty would not have any duties to the assignee).
  3. BPOI was not in breach of the warranty stating that it was not prohibited from disposing of the receivable evidenced by the invoice and that the sale did not conflict with any agreement binding on them. This is because the agreement contained clauses which envisaged that there could be contractual restrictions (i.e. the assignment took place subject to any contractual restrictions then existing) and provided a method of transferring the economic benefit of the invoice in a situation where there were limitations on the ability to assign. It was only to the extent that sums were not received or paid over that the assignment took effect.

Protect yourself

The weight placed on saving provisions incorporated into invoice finance agreements or other assignments is important. This is particularly the case if the mechanism to pay over proceeds represents the primary method of transferring the economic benefit of the contract. In these situations, be aware that there is a risk that the associated warranty protection will fall away and remedies linked to breach of contract (such as the ability to claim contractual damages or invoke default interest or costs provisions) will not be available. Protect against this risk by:

  • ensuring that parties to the contract are clear what it is intended;
  • carrying out due diligence on any standard terms incorporated into receivables of significant value; and
  • tightening up drafting of the relevant warranties so that they refer to the assignment mechanism rather than any method of disposing of a receivable 'as contemplated' by the agreement, if that is what is intended.

If you would like to discuss any of the issues raised in this case or review the contractual position in respect of existing facilities please contact our experts.

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