Anushi Amin Commercial Law James Fagan Group: B

How effective is a clause in a contract that prohibits the transfer of rights arising under the contract? Clauses that prohibit assignment of rights are often included in contracts as a means of preventing the transfer of rights arising under the contract. The are valuable in circumstances where an obligor !can have a genuine commercial interest in see"ing to ensure that he is in contractual relations onl with a person whom he has selected as the other part to the contract.# $ The law is re%uired to stri"e a balance between recognising the practical interests of the obligor& together with the principle of freedom of contract that led to a prohibition of assignment clause in a contract& and the commercial importance of maintaining the alienabilit of propert . ' argue that ultimatel the efficac of a non(assignment clause rests on its construction) however& the *udiciar has reduced its effect through creative interpretation. +espite the prohibition of the assignment of the benefit of the contract being upheld as effective in Linden Gardens2& Lord Browne(,il"inson in the -ouse of Lords ma"es a number of obiter remar"s& which signal the first indications of limits to such a clause. 'n considering whether the clause prohibits the assignment of accrued rights of action& he considered the Court of Appeal.s distinction between an assignment of the right to ac%uire future performance of a contract b the other part and an assignment of the benefits arising under the contract. Although his dominant concern in precluding this distinction was to insulate the obligor from contractual dealings with an one other than the obligee& he does concede that it is h potheticall possible to construe a prohibitor term so !as to render invalid the assignment of rights to future performance but not so as to render invalid assignments of the fruit of performance.#/ -e subse%uentl clarifies that his remar"s are confined to prohibitions of assignment that have the effect of engaging the debtor into direct contractual relations and do not detract from Goode.s view that !if the
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Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd & St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd 0$1123 $ AC 45 6-L7 per Lord Browne(,il"inson& at $89 : 'bid 0$1123 $ AC 45 6-L7 / 'bid 0$1123 $ AC 45 6-L7 at pg $85

Anushi Amin Commercial Law James Fagan Group: B

prohibition see"s to prevent the assignor from binding himself to pa over such fruits to the assignee& such prohibition is pro tanto void.# 2 ;ot onl does this wea"en the efficac of the non(assignment clause but it also paves the wa for the law to develop a dut on the assignor to account to the assignee for the proceeds received of a chose in action purportedl assigned. ;otabl & in St Martins5 the court held that the obligor 6who suffered no loss from breach of contract b the obligee7 could claim against the obligee and account for the proceeds of litigation to the assignee for losses incurred. B using the e<ception to privit of contract developed in previous case law& 9 the -ouse of Lords has circumvented the prohibition on the assignment of rights of action. Finall & ' must also submit here that Lord Browne(,il"inson.s view that the restraints doctrine was limited to land because it is a finite resource is problematic and not applicable to contractual rights. =ar"et economies need credit and there is a ver real need for a mar"et in debts& which encompasses both conditionall prohibitions.> ?%uit pla s an important role in reducing the effectiveness of prohibition as $444& 4 Cotton LJ had interpreted a prohibition on and unconditionall accrued rights to pa ment. Thus& such international conventions have e<press provisions overriding an

clauses. As earl

assignment as onl intended to prevent legal assignments but not e%uitable assignments. Thoughts of e%uitable assignment naturall led to thoughts of declarations of trust with Cotton LJ stating that a person could declare a trust over the proceeds of a contract that are in his hands. Lightman J reaffirms this approach to non(assignment clauses in Don ing! when he holds that !a declaration of trust in favour of a third part of the benefit of the contract is different in character from an assignment of the benefit of the contract to that third part @ and a clause prohibiting assignments is prima facie restricted to
2 5

'bid 0$1123 $ AC 45 6-L7 at pg $8> St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd 0$1123 $ AC 45 6-L7 9 The AlbaAero 0$1>>3 AC >>2) +unlop v Lambert 6$4/17 9 ClBF988 > Tolhurst& G.& !The Assignment of Contractual Cights# 6:8897 -art 4 Ce Turcan 6$4447 28 Ch + 5 1 +on Ding Eroductions 'nc v ,arren 0:8883 Ch :1$& Ch +

Anushi Amin Commercial Law James Fagan Group: B

assignments of the benefit of the obligation and does not e<tend to declarations of trust of the benefit.# $8 Building on Lord Browne(,il"inson.s statement that !in the absence of the clearest words 6a prohibition clause7 cannot operate to invalidate the contract as between the assignor and assignee&#$$ Lightman J held that !if one part assignment& he should e<pressl wishes to protect himself against the other part declaring himself a trustee& and not merel against an so provide#. 'n other words& if the non( assignment clause does not formall e<clude declarations of trust the will be upheld& even if substantivel & the obligee accounting to the assignee under a trust for the fruits of the contract creates an e%uivalent outcome to that of assignment. Fince courts are onl concerned with !the validit of the restriction of an assignment which would have the effect of bringing the assignee into direct contractual relations with the other part to the contract&# the trust appears to be the perfect mechanism to achieve the same effect as an assignment but without disturbing the intention of the obligor to account onl to the trustee. The latter ma not be entirel true& since if a trust is created and if the trustee refuses to enforce an obligation& the beneficiar ma sue for enforcement& *oining the trustee as a defendant under the well(established "andepitte procedure. Lightman J e<pressed concern as the procedure would allow a beneficiar !to abrogate the fullest protection that the parties to the contract have secured for themselves under the terms of the contract from intrusion into their contractual relations b third parties.# $: The combination of the declaration of trust and the "andepitte procedure would act to circumvent the contractual provision that the benefit not be transferred. The "andepitte procedure was considered further in obiter statements in #arbados Trust$%& ,aller J contends that formall spea"ing under the procedure !albeit will then hold for Barbados Trust is the claimant& it is as if Ban" of America were claimant see"ing to recover that which is due in law which the
$8 $$

'bid at /$1(/:8 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd G$1123 $ AC 45 at pg $84 $: +on Ding Eroductions 'nc v ,arren 0:8883 Ch :1$& Ch + at pg /:$ $/ #arbados Trust Co v #an' o( )a*bia 0:88>3 ?,CA Civ $2

Anushi Amin Commercial Law James Fagan Group: B

Barbados Trust. Thus there is no interference b

Barbados Trust.# $2 B

turning a blind e e to the practicalities of the procedure and focusing on the formalities of the procedure ,aller LJ.s *udgment reflects the e<tent of the courts. desire to enable rights to be established or brought to fruition !if the beneficiar has an unanswerable right under a trust and the trustee has an unanswerable claim.#$5 'n conclusion& *udicial construction of the declaration of trust over the proceeds of the contract combined with the Handepitte procedure of enforcing such a trust have diminished the effectiveness of prohibition clauses considerabl . Iltimatel & whether or not a prohibition on assignment prevents a declaration of trust is an issue of construction& and it could be argued that the efficac of prohibition clauses can be strengthened b e<panding them to include declarations of trust. -owever& this is onerous as well as problematic because a declaration of trust does not give the beneficiar direct rights against the obligor so the public polic restrictions on such prohibitions are li"el to be wider than those affecting prohibitions on assignment. $9 ' foresee *udges continuing to interpret facts and the law creativel in order to create devices to circumvent prohibition clauses. 'ndeed& Lightman J has stated that !even if for some technical reason there could not be created a trust relationship@' would reach the same practical result b another means.# $>

$2 $5

'bid per ,aller LJ at pg 22/ 'bid. $9 EG Turner& !Charges of Inassignable Cights# 6:8827 :8 JCL 1> $> +on Ding Eroductions 'nc v ,arren 0:8883 Ch :1$& Ch + at pg /::