Yes, ban on assignment clauses can prevent receivables financiers from claiming compensation for breach of warranty. But they need not prevent the creation of a trust in the financier’s favour or their clients from paying them the proceeds of the assigned debts.
The invoice finance world has long had issue with contracts that include a ban on assignment. After all, a receivables financier wants to ensure that the receivable it is purchasing will be readily collectable.
Receivables financiers will typically verify this in two ways. Firstly, they look at the underlying contracts that give rise to the receivables to make sure that the receivables can be assigned and to identify those contracts where the assignment is prohibited. However, that is time consuming, laborious and can change from contract to contract and over time. Therefore, and secondly, receivables financiers will also look to its client to support the receivable and ask the client to warrant (by making a representation) that the receivables are freely assignable and not subject to a prohibition on assignment.
In this way, all other issues aside, should the receivable be assignable the receivables financier will be able to receive payment of it directly from the debtor. Should the receivable not be assignable then the receivables financier will not be able to directly enforce payment of that debt from the debtor. But if the debt is not collectable because of a ban on assignment then the receivables financier would ordinarily have a claim against its client for breach of its warranty that the debt is freely assignable. Or so it was thought.
The case of First Abu Dhabi Bank PJSC (formerly National Bank of Abu Dhabi PJSC) v BP Oil International Ltd  has cast some doubt on whether the receivables financier will be able to bring such a warranty claim but, for the reasons set out below, that is not necessarily all bad news.
In this case, BP had entered into an agreement for the sale of crude oil with a company known as SAMIR. BP then entered into an agreement for sale of the SAMIR receivable to First Abu Dhabi Bank (FADB) on a non-recourse basis. In that receivables sale agreement BP made a representation that ‘it was not prohibited … from disposing of the receivable … and such sale does not conflict with any agreement binding on’ it.
Contrary to this representation, the crude oil sale agreement contained a prohibition on the assignment of ‘the agreement or any rights or obligations hereunder’ except with the prior written consent of the other party (SAMIR), which was not obtained.
While the parties agreed that this meant that BP could not assign the receivable without the consent of SAMIR, nevertheless the Court of Appeal found, reaffirming the position set out in Barbados Trust Company Ltd v Bank of Zambia , that BP was not in breach of its representation.
The logic for this is that the Barbados Trust case decided that a restriction (ban) on assignment in the underlying contract does not prevent a trust being created over the assigned receivables, nor does it prevent the money received by the assignor in respect of those receivables being paid over to the financier.
In the BP case the same logic was applied and it was determined that whilst BP was not able to assign the receivables due to the ban on assignment clause in the underlying contract, it had not breached the representation that it was able to dispose of the receivables because that restriction on assignment did not prevent BP from paying the sums received by it in respect of the assigned receivables to FADB (the financier) nor from creating a trust over those proceeds in favour of FADB. The essence of the agreement between BP and FADB was, in the overall scheme of things, attained, albeit in a different manner, and the court applied the principals from the recent case of Wood v Capita Insurance Services  in assessing the construction of the contract. This case emphasised the importance of considering the overall scheme of a contract when construing its individual clauses.
So, what does that mean for receivables financiers, and should they be concerned?
The implications of this decision are that the financier may not so easily be able to rely on the breach of warranty argument to either raise a claim on its client or seek to act on this as a default of the financing facility because, like BP, while there may be a ban on assignment in the underlying contract the assignor may still be able to pass the benefit of the receivables to the financier.
However, by the same token, receivables financiers should take comfort that despite there being a ban on assignment in the underlying contract between its client and the debtor, provided their own finance agreements are correctly drafted that ban on assignment will not prevent a trust in its favour being created in respect of the proceeds of assigned debts nor will it prevent the client from actually paying the proceeds of those debts to the financier.
Arrangements to monitor and ensure those proceeds do flow through to the financier are common-place in receivables finance arrangements and so in the normal operation of a receivables facility this case should not be of great concern.
While the benefit of the warranty taken by financiers may be of less use now, the clarity on the effectiveness of the assignment of receivables, despite a ban or restriction on assignment in the underlying contracts, gives greater comfort. Therefore, in this instance, what is lost on one hand appears to have been gained on the other.