23 January 2018 - Post by:Lucinda Critchley
In First Abu Dhabi Bank v BP, the Court of Appeal held that a warranty in a purchase letter that BP was not prohibited from disposing of a receivable was not breached by a no assignment clause in the underlying contract.
BP entered into a contract with SAMIR for the sale and purchase of crude oil, under which SAMIR would pay BP for crude oil two months in arrears. BP entered into a purchase letter with the First Abu Dhabi Bank (FAB) to pay 95% of the amounts due from SAMIR to FAB. In return, FAB would advance payment to BP of the sums due from SAMIR. The purchase letter required BP to assign the SAMIR contract to NBAD, or if that was not possible, to give NBAD rights of sub-participation and subrogation. It also contained a representation and warranty that BP was not prohibited “by any security, loan or other agreement” from disposing of the receivable. However the BP-SAMIR contract contained a prohibition on assignment without the consent of the other party. BP did not obtain SAMIR’s consent to the purchase letter.
SAMIR became insolvent, and FAB received no payment. FAB argued that the no assignment clause was a breach of the warranty in the purchase letter, and the High Court agreed.
The Court of Appeal found that BP had not breached the warranty. While BP were prevented from assigning the contract, BP were not prohibited from making payments to FAB or creating rights of sub-participation and subrogation. The purchase letter clearly contemplated the scenario in which assignment was impossible, and gave FAB alternative rights in that case. Assignment was not the primary method of transferring the money to FAB, but a secondary method, relevant only to the extent that any money was not received. The words “or other agreement” in the warranty included neither the SAMIR contract or the purchase letter itself, as these were defined terms which would have been mentioned specifically if that had been the parties intention.