Receivables financings, non-assignment clauses and breaches of warranty in the trade finance sector

Facts

Société Anonyme Marocaine de l'Industrie de Raffinage (

SAMIR

), Morocco's sole petroleum refinery business, contracted to buy crude oil from BP Oil International Limited (BP) under a sale and purchase agreement dated 9 December 2013 (the S&P Agreement). This contained the following "Limitation on Assignment" provision:

"Neither of the parties to the Agreement shall without the previous consent in writing of the other party…assign the Agreement or any rights or obligations hereunder…Any assignment not made in accordance with the terms of this Section shall be void".

On 3 September 2014, BP entered into a receivables financing agreement with First Abu Dhabi Bank PJSC (AD) (the Purchase Letter). It did not obtain SAMIR's consent prior to this.

The Purchase Letter included the following provision, at Clause 5(b):

"[BP] further represents and warrants to [AD] that…[BP] is not prohibited by any…other agreement, to which it is a party, from disposing of the Receivable…as contemplated herein and such sale does not conflict with any agreement binding on [BP]"

On 4 September, in accordance with the terms of the Purchase Letter, AD advanced 95% of the value of a particular shipment. Shortly afterwards, SAMIR began experiencing financial difficulties. The refinery shut down in August 2015; three months later, SAMIR filed for insolvency protection.

Given that SAMIR was now insolvent, AD sought to recover the monies advanced - approximately USD 68 million - from BP. The commercial deal represented a particular form of non-recourse receivables financing, where in return for 5% of the shipment's value, BP transferred all the credit risk of contracting with SAMIR to AD. AD had no right to oblige BP to repurchase the receivable.

Consequently, AD's case was that:

• the "Limitation of Assignment" provision in the S&P Agreement restricted BP's right to assign its receivables
• the representation made by BP on the Purchase Letter was therefore false
• AD was therefore entitled to compensation for this breach of representation.

It was common ground that under the terms of the Purchase Letter, breach of this representation permitted AD to reclaim all the sums it had paid out and to retain the premium it had received.

Accordingly AD sued for USD 68 million, interest and costs and won in the High Court. BP appealed to the Court of Appeal.

Decision

The Court of Appeal was required to determine:

• the meaning and effect of the "Limitation of Assignment" in the S&P Agreement
• the meaning and effect of Clause 5(b) in the Purchase Letter
• in particular, whether BP had breached the Clause 5(b) representation.

Gloster LJ gave the leading judgment. The Court of Appeal found in favour of BP, deciding that:

• BP was in breach of the "Limitation of Assignment" provision, having failed to obtain SAMIR's consent prior to entering into the Purchase Letter.

In accordance with the House of Lords decision in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, "an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer the contractual rights" (Browne-Wilkinson LLJ). The Court of Appeal, "constrained by authority" i.e. the earlier House of Lords decision, decided that BP's assignment to AD was void and of no effect.

However, this did not invalidate the other provisions in the Purchase Letter, e.g. obliging BP: to pass over all payments received from SAMIR to AD within 2 Business Days of receipt; to hold various monies received by SAMIR on trust for the bank; to give the bank rights of subrogation and the benefit of a sub-participation in the prescribed circumstances and so on

• BP was not in breach of the Clause 5(b) representation. The Court reiterated the general principle that it was important to look at the terms of a contract as a whole when construing its meaning. It interpreted the words "as contemplated herein" as meaning "in the manner contemplated by the Purchase Letter"
• BP was not prohibited from "disposing of the Receivable" in the manner contemplated by the Purchase Letter. The parties had clearly envisaged that an assignment might be ineffective. Consequently, the Purchase Letter contained the usual armoury of other protections as detailed in the previous paragraph, over and above the assignment provision. None of these other protections were barred by the terms of the S&P Agreement.

Comment

The decision proved unfavourable for AD, which tried and failed to get BP 'on the hook' for the advance. However, given that the commercial reality of non-recourse financings is that the bank accepted 'SAMIR risk' in return for its 5% fee, perhaps the outcome is not surprising.

Whilst compelled to follow the House of Lords decision in Linden Gardens v Lenesta Sludge, Gloster LJ spoke highly of Professor Goode's argument that bars to assignment should only be relevant to the relationship with the debtor ("it is not competent for the debtor to exclude by contract the proprietary effects of an assignment as between assignor and assignee").

In this case, as SAMIR was not worth pursuing for the money, the validity of the assignment would have made little practical difference to the end result for the bank.