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Prohibition of assignment and
the law
28/09/2006
Article By Nicholas Chang
Chen Seng
Without making any detailed elucidation of the laws pertaining to assignment
in this country, as it is assumed that all who are considering this short
work would possess the minimum knowledge of the law pertaining to
assignment, it is proposed that this short work would leap straight to the
question at hand: Prohibition of Assignment and the Law.
A. The law prohibitive clauses against assignment
1. Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994) 1 AC 85
(1993) 3 All ER 417 [House of Lords]
It was held that there was no reason of public policy not to give effect to
the prohibition clause against assignment of the subject contract, the
legitimate commercial purpose of which was to ensure that the original
parties to the contract were not brought into direct contractual relations
with third parties.
page 430
“In the face of this authority, the House is being invited to change the law
by holding that such prohibition is void as contrary to public policy. For
myself I can see no reason for doing so. Nothing was urged in argument as
showing such prohibition was contrary to public interest beyond the fact
that such prohibition renders the choses in action inalienable. Certainly in
the context of rights over land law does not favor restrictions on
alienability. But even in land law a prohibition against the assignment of a
lease is valid. ¦In the case of real property there is a defined and limited
supply of the commodity and it has been held contrary to public policy to
restrict free market. But no such reason can apply to contractual right:
there is no public need for a market in choses in action.” [emphasis added]
It is advocated that perhaps the wisdom of the state of law as adumbrated by
the House of Lords in Linden Gardens Trust Ltd’s case can be better
appreciated under the illuminating light of section 41 of the Contracts Act
1950. Although in the pari materia provisions of section 40 of the Indian
Contracts Act 1872 the provision appears to have generally been interpreted
to apply to contracts requiring personal skill
It is submitted that:
i. Any dealings related to any choses in action that would eventually
manifest in a registrable right in land is of the nature where the intention
of the parties is that, the obligation should be performed by the Vendor in
the favour of the identified Purchaser only unless otherwise provided.
ii. That if the contract unequivocally expresses the intention that the
obligations and rights contained in the contract is to be executed and
enjoyed by the stated parties, there is no reason including any public
policy reason not to give effect to such expressed intention.
It is also argued that the promise of the creditor of a choses in action to
abstain from assigning the choses in action in question without the consent
of the debtor can be perceived as a form of valuable consideration for the
promise of the debtor to deliver the obligation forming the choses in
action. The basis of this observation finds footing in section 2(d) of the
Contracts Act 1950 where is reads: “when at the desire of the promisor, the
promisee promises to abstain from doing something such act or abstinence is
called a consideration for the promise.”
As a corollary where the creditor is the promisee his agreement to abstain
shall be deemed reciprocal promise as provided in section 2(f) of the
Contracts Act 1950.
It follows therefore such a condition subsequent undertaking in a contract
to restrain from acting in a particular manner or fashion that is not
tainted with the objection of public policy would be valid and can be
strictly enforced.
2. Hendry v Chartsearch Ltd (The Times) September 1998 [Court of Appeal]
It was held that where there is a clause requiring consent, consent should
not be unreasonably withheld. It was a fatal consequence to the validity of
the assignment at hand as the consent of the debtor was not sought. It was
irrelevant that on the facts the consent could not have been unreasonably
withheld.
3. Tom Shaw & Co v Moss (1908) 25 TLR 190 at 191 Darling J
(a prohibition clause) “could no more operate to invalidate the assignment
than it could interfere with the laws of gravitation.”
4. “If a contract provides that the rights arising under it shall not be
assigned, a purported assignment of such rights is not only a breach of that
contract but is also ineffective in the sense that it does not give the
assignee any rights against the debtor". an assignment of the benefit of a
contract which is expressed to be not assignable may be binding as a
contract" (The Law of Contract, G.H. Treital (10th Edition) at page 639
5. “If there is a provision in a contract prohibiting the assignment of the
rights arising there under, it appears that any purported assignment of such
right will be in valid as regards the other party to the contract” paragraph
90-200 Halsbury’s Law of England Vol. 6 (Fourth Edition- Reissue 1991)
6. Isabela Madeline Roy & Ors V Sarimah Low bte Abdullah & Ors (2005) 2 MLJ
521 [High Court] Faiza Tamby Chik J at paragraph [5] at page 525
“There is no complete documentation of such assignment and there is no
approval of such transaction from the Datuk Bandar. Section 6.04 of the
agreement provides that the agreement is binding upon the permitted
assigns.”
at paragraph [6] at page 526
Therefore there was no valid assignment as the Datuk Bandar had not given
consent. In the present case, the solicitors conveyed a premature request to
the Datuk Bandar for an assignment to be created. That request was rejected.
The condition precedent had not been fulfilled. If an assignment is a
conditional one, it is unenforceable (see Malayawata Steel Berhad v
Government of Malaysia & Anor (1977) 2 MLJ 215)
7. Lam Hong Hardware Co Sdn Bhd v Incacon Sdn Bhd & Ors (EON Bank
Intervener) 4 MLJ 531 [Court of Appeal]
Mokhtar Sidin JCA at paragraph [35]:
“Di dalam rayuan ini sekarang, fasal 17 Articles of Documents jelas melarang
responden pertama menyerahhak apa-apa bayaran kepada pihak ketiga tanpa
kebenaran bertulis daripada responden ketiga. Dengan itu, suratikatan
serahhak di antara responden pertama dan pencelah tanpa kebenaran bertulis
adalah tidak sah.”
The learned judge sustained his lordship’s finding by referring to:
i. Chitty on Contracts (26th Edition) Vol 1 para 1413
ii. Legal Problems of Credit and Security (2nd Edition 1998) RM Goode at
page 123
iii. The case of United Dominions Trust (Commercial) Ltd v Parkway Motors
Ltd (1955) 2 All ER 557.
It is imperative when considering this case that the dissenting judgment of
Abdul Aziz Mohamad JCA be considered in the proper light. His lordship at
paragraph [59] at page 553 argued that the fact of the assignment preceded
in date the contract to be assigned; the deed purporting the assignment was
not restricted by the prohibition clause in the contract to be assigned.
It is submitted with respect the argument advanced by his lordship should be
considered in the following light: the deed purporting the assignment is a
contingent contract and will not be enforceable until the condition
precedent event upon which the contingent contract rests materializes (see
section 33 of the Contracts Act 1950). This means that despite the fact that
the deed in question being dated prior to the contract being the subject
matter of the assignment, it became enforceable and as a corollary in
existence only after the subject matter of the deed crystallizing. In such
instance the purported assignment must be subjected to the prohibition
contained in the main contract to be assigned. It is believed that it would
be most persuasive to argue that if the subject matter of a contingent
contract represents the conditions precedent for the enforceability of the
contract, that contingent contract cannot be deemed to be in existence until
the complete formation of the subject matter.
In short this means that the assignment in this case came into operation
upon the making of principal contract to be assigned. In this regards, the
assignment must be subjected to the prohibitions contained in the principal
contract meaning consent is required for the proper and legal completion of
the purported assignment.
B. Consent for assignment in non-commercial housing development contract
It is humbly believed that there are practical necessities to retain the
prohibitive provisions in non-commercial housing development contracts
against assignment of rights contained therein by the a purchaser. The
asserted practical necessities are as follows (which is not represented in
anyway to be exhaustive list):
1. When a deed of assignment is duly endorsed as consented by the Vendor of
a non commercial housing development contract the Purchaser would accrue the
following benefits:
a. If the deed purports an absolute assignment the Vendor cannot attempt by
way of their letter of undertaking issued in the favor of the sub
purchaser’s financiers to contract out of some of their statutory enforced
contractual obligations. It is a well known fact that there are recalcitrant
developers who are of the stand and believe that they are not obligated to
apply and secure the state’s consent to transfer in the favor of the
assignee (where the parent title upon which such property is erected is
subjected to restriction in interest of the consent to transfer being
secured from the state authority) as provided in non commercial housing
development contract which are statutorily prescribed by the Schedule G and
H of the Housing (Control & Licensing) Regulations 1989. Such obstinate
developers would merely undertake to apply for the state’s consent in the
favor of the assignee and not obtain or secure However with an absolute
assignment being 'consented’ by the developer any purport by the developer
to contract out of such or similar obligations would be dismissed for a want
of direct knowledge of the absolute assignment. However it is also conceded
that any purport by developers to rest their consent conditional to the
agreement by the assignee to vary the contract to the extent as envisaged in
the above would be void for being affront to public policy. The logic is
simple the statutorily prescribed sale and purchase agreements are the
creation legislation that is intended to protect the public from
irresponsible developers and therefore any attempt to circumvent such intend
will be an attempt to fly by the face of parliament and probably summarily
reject by the courts.
b. With the act of endorsement of the consent of the developer the assignee
of the non commercial housing development contract can rest assured that his
interest in the property would survive the insolvency of the developer or
the appointment of a receiver and manager of the developer. In such instance
the assignee would not have to bear the onerous burden to establish the deed
purporting the assignment was duly served on the developer. Any service of a
copy of the deed duly endorsed by the developer would be undisputable
documentary evidence of service and consent. Such documentary evidence would
also be corroborated by the ordinarily letters of consent issued by the
developer and the various steps undertaken to comply the various conditions
imposed by the developer.
2. The procedure of the assignment requiring the consent of the developer
accords a developer of a stratified development to seek the regularization
of the maintenance fund and sinking fund accounts of defaulting purchasers.
The continual diminishing of the quality of maintenance and up keeping
services of stratified development in Malaysia must be perceived as a
genuine concern. The hitherto general chorus of dissatisfaction of the up
keeping of stratified development has primarily emanated from the residents
of such stratified development without the self reflection by the same
residents that a developer is merely a quasi trustee of the management
corporation prior to its statutory incorporation pursuant to the provisions
of the Strata Titles Act 1985. Without sufficient collection and payment by
the residents to the maintenance and or sinking fund, the developer appears
to bear no burden to incur the cost and debt of such maintenance out of
their pocket. In such instance it is therefore wise to fervently utilize
every instrument or means that is available to ensure the coffers of the
developer to maintain, up keep and repair a stratified development is
sustained at a healthy level.
It is conceded that at this juncture there would exist the irresistible
temptation to jettison the entire submission contained here with the
argument of the existence of deceitful developers manipulating of the
available funds for their benefit. Such developers do exist and perhaps many
may be tempted to suggest rampant but alas this is not the focal point of
this work.
3. If the purported assignment were 'perfected’ without the prior consent of
the developer (subjected to the final act of deliver of a copy to the
developer) and the developer having applied and secured the consent to
transfer in the favor of the assignor of the non-commercial housing
development contract; What would be the position of the parties? On the one
hand the developer after having completed its executory obligation under the
contract of securing the state’s consent, would place the developer in a
position to be prepared deliver a 'valid and registrable’ instrument of
transfer (I too like Mr. SY Kok frown upon the use of the word memorandum
when the recognized dealings in land contained in the National Land Code
1965 are in fact instruments to effect the relevant dealings) in compliance
with the statutorily prescribed sale and purchase agreement in the favor of
the assignor and therefore under no further similar obligation to the
assignee (as it has been executed in the favor of the assignee prior to the
assignment).
On the other hand the assignor would be probably advised that he has
assigned all rights to the statutorily prescribed sale and purchase
agreement to the assignee and therefore all rights in the property that
would manifest into registered proprietary right in land should be pursued
as against the developer. This complex prospect envisaged here is only
applicable to parent titles subjected to restriction in interest, but
certainly it must be considered from the point of view that as a matter of
the state’s policy all present alienation of land are leasehold and
generally subjected to the restriction in interest against transfer, sale
and or lease without the state’s approval.
In short if the consent of the developer were prior secured before the any
steps are initiated to purport finality in the assignment save service to
the developer, such vexing instances would not arise. It would also be most
prudent to apply this concern with equal credence to the interest of
financiers-assignee in the context of the subsequent right to a legal charge
over the land in question.
4. Firstly it is submitted that the ratio of the case of Hendry v
Chartsearch Ltd (The Times) September 1998 [Court of Appeal] being that
where a contract contains prohibitions of assignment; such consent to allow
a purported assignment cannot be in all instance unreasonably withheld would
find similar support favor or footing in the local common law. Therefore
this would mean that a purchaser of a non-commercial housing development
contract would not encounter any unreasonable objection to the proposed
assignment..
It is conceded that there are recalcitrant developers who elect to impose
unreasonable conditions to 'permit’ the proposed assignment but such
elections would probably fall within the limits of reasonability.
This would mean to accrue the benefits that would be secured if the right of
assignment of a non-commercial housing development contract is subjected to
prohibitions, can only be repetitively enjoyed if such prohibitions is
maintained. Many may label this perverse presentation of fact but a fact it
is nonetheless.
5. It is believed that the usual form of deed of assignment that is utilized
in Malaysian Conveyancers would invariably contain the element of novation
as envisaged in section 63 of the Contracts Act 1950. However it is not
known whether many who rely on such boilerplate clauses in deed of
assignment is able to comprehend the difference between an assignment and a
novation. The severely painful consequence of not be able to comprehend the
difference, when drafting an instrument of assignment, between the both is
best illustrated by the fairly recent cases of TT Martech Sdn Bhd v Wing
Construction Sdn Bhd (M) Sdn Bhd (2004) 8 CLJ 685. The formality for the
effect of a novation is that the agreement to novate must be a tripartite
agreement involving the original debtor and the creditor of the choses in
action and the intended party agreeing to substitute in the place of the
debtor to deliver the choses in action to the creditor (G Ramchand v Lam
Soon Cannery Co Ltd (1954) MLJ 239 at 241).
Hence it is advocated when the developer endorses its consent on the deed of
assignment that the developer becomes a party to the deed thus resulting in
the compliance with the formality of the novation.
Without the formality of the novation being complied with the purported
novation will not of legal validity and that would result in the assignor of
a non-commercial housing development contract to remain liable for the
obligations under the same. Imagine after selling of a property you remain
liable to the maintenance fee of the property! Shocking? But true. (Perhaps
for the doubters the wisdom of the effect of the case of Isabela Madeline
Roy & Ors V Sarimah Low bte Abdullah & Ors (2005) 2 MLJ 521 can and should
now be valued under a different light.) It is also important to consider
that present regime of provision of the statutory sale and purchase
agreement does implicitly impose the requirement of consent prior to an
assignment that would result in the legal effectiveness of the novation
implication of the proposed conveyance.
For the benefit for those who finds this argument difficult a simple manner
to comprehend this is that a in a non-commercial housing development
contract, especially more for stratified development, there are reciprocal
obligations that are imposed on the purchaser pending the formation of the
management corporation and expiry of the initial period, such as payment of
maintenance and contributions to the apportioned fire insurance policy and
other outgoings of the strata building. These are obligations that cannot be
assigned - obligations cannot be assigned.. obligations can only be novated.
C. Consent for assignment for other commercial contracts
Unless persuasive arguments are advanced to discover valid and prevailing
public interests to render any stated prohibitions in any specie of
commercial contract against assignment to be contrary to public interest,
there is presently no basis to suggest that the present state of the law
pertaining prohibitions against assignment should be overhauled.
The concept of laissez faire if accepted should be embraced without
limitation save and unless such freedom resulting in the encroaching of the
rights of the general public. And more importantly in private commercial
contracts made between two or more sui juris and consenting legal entities
there appears to be no public interest reason whatsoever why the parties
thereto cannot insist that the promises contained in the contract that is
made is to be performed specifically by the parties to the contract.
After all who can deny that in the modern world the majority commerce are
decided base on the bedrock of relationship or acquaintance. Even genuine
price orientated contracts would rest on the existence of a relationship. If
so then contracts constructed base on relationship of the parties
necessitates the performance of the parties to the contract. This is an
economical reality that again necessitates the finding of a legal standing
and consequence of such relationship.
D. A final word
One should always contract with his eyes wide open. Ignorance of the effect
so-called boilerplate clauses, which usually would include prohibition
clauses against assignment and novation would not rectify a invalid
assignment. Ill-conceived assignment is of the real probability of resulting
in significant financial losses. The cases of Incacon and TT Martech (above)
are frightening but nonetheless real and more importantly very recent
examples; there are likely many more; hidden and probably unknown cases of
such instance that is biding its time - waiting for the correct moment to
detonate. If all goes well then the folly would be forgotten and swept under
the carpet, however if the undesirable should occur then price would be paid
- a very heavy price which would usually be an arduous financial obligation
or loss.
Lastly in the cases of assignment of non-commercial housing development
contracts, it would be most prudent to ensure that the consent of the
developer is properly endorsed on the deed of assignment to ensure the
compliance of the formalities of the element of novation contained therein
failing which the legal consequence can be for a want of better words rather
unintentionally amusing.
Contract is not an easy subject being very much alike the game of “Reversi”
it may take the shortest of period to understand the basics but to tame this
great creature of the law it is an undertaking of a lifetime. |
