Over Taylor Biggs

There are sometimes restrictions in the contract with regard to assignability of any rights under that documentation which should always be checked.

There are certain circumstances where, even if there is no contractual restriction on assignment of the benefits or rights of a contract, it is not possible to assign those rights.  An example is where the obligations are personal (this includes contracts such as publishing contracts and recording contracts). 

The Court of Appeal have recently had to consider in detail an assignment of rights under a contract on a business sale.

Background

The Court of Appeal in Shaw v Lighthouse Express Limited had to determine whether a contract (including an indemnity clause) had been validly assigned to the purchaser of a business under a business sale agreement, and whether the purchaser could claim repayment by way of indemnity from the other party to the contract of a liability the purchaser had suffered the subject of the indemnity.  Chris Over of Over Taylor Biggs acted for Lighthouse Express Limited who were represented at the trial by Stefan Ramel of Counsel.

This is a helpful case which has set out the Court of Appeal's thought process in considering whether a contract has been validly assigned.

The Facts

The case in question involved an independent financial adviser and an indemnity that he had provided in an appointed representative contract in connection with certain liabilities that may be suffered by the practice for which he was working arising, in essence, out of his conduct. 

One of the main points to come out of the judgment of the Court of Appeal was that indemnities were in themselves not sufficiently personal to the parties concerned such that they were incapable of assignment, which was one of the arguments raised by Mr Shaw's legal Counsel. 

The Court of Appeal also had to consider the terms of a limitation clause.  The Court did not consider the drafting of the clause to be particularly clear and they were required to decide whether a clause limiting the time within which claims must be brought had been breached. 

The relevant provisions of the clause stated that :

"The Enterprise and its registered individuals shall each be joint and severally liable for the debts and liabilities of the Enterprise for a period not exceeding six calendar years following resignation or termination from any part of this Contract".

It was not clear from the terms of this clause whether this meant that a claim had to be notified, detailed and resolved before the end of the six year period or whether or not it simply meant that proceedings or even notification of a claim had to be provided in such period.  The Court decided that it was necessary to imply some terms in order to give the clause commercial effect.  The Court decided that it was necessary to simply notify the other party of a potential claim within the relevant six year period, rather than having to settle it or otherwise litigate it to its conclusion, as to do the latter would encourage delay and prevarication. 

A further area that the Court had to consider was whether or not in a business purchase agreement where reference was made to contracts "outstanding at the relevant effective time" of the transfer of the business, this included situations where those contracts were not "active" in a strict sense, but where the contracts included provisions where there were rights subsisting under them.  For example, restrictive covenants, indemnities, guarantees, warranties and the like, where rights could subsist where, for example, provisions of the relevant contracts included clauses which caused the rights to survive termination of the contract in question.

They concluded that the phrase "current contract, agreement or engagement" should be given its widest meaning and that meant that rights under contracts that may not be strictly "active" would nonetheless pass to the purchaser and this included the benefit of indemnities.

Comment

It is important in business sales to clearly set out what assets are being sold.  The safer course of action when a purchaser of a business wishes to ensure it has the benefit of all rights under any relevant contracts is to expressly list the contracts, and ensure the purchaser knows what rights and, if appropriate, liabilities it is taking on.  If the purchaser knows that certain contracts contain rights but that otherwise the obligations and other active provisions have been fulfilled, or, the contract has ended but with rights surviving termination, the purchaser should expressly state the benefit will pass to the purchaser and ensure it carries out proper due diligence to identify any such contracts.

This briefing note is not intended to be a comprehensive guide and does not cover every aspect of the topic and is not intended to provide legal or other advice.

Over Taylor Biggs

April 2010