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Hong Kong Law Contract Guide

Our team in Hong Kong recently developed a Hong Kong Law Contract Guide. The guide discusses relevant legal principles that inform the most common contractual clauses in Hong Kong. The guide offers practical points to consider in drafting a contract, and sample clauses that may be a useful reference when preparing or reviewing a contract. The guide also addresses Hong Kong principles related to implied terms, privity of contract, and resolution of disputes. As activity into Hong Kong grows, we hope this resource helps to facilitate the agreement process.

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New interpretation of non-assignment clauses relevant for securitisation and factoring.

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Supreme Court 21 March 2014, ECLI:NL:HR:2014:682 (Coface/Intergamma)

On 21 March 2014, the Supreme Court ruled that a breach of a non-assignment clause results in a breach of contract, but is unlikely to affect the valid transfer (and pledge) of the assigned rights.

The judgement is relevant to parties involved in various types of financing, such as securitisations, factoring and reverse factoring, in which the assignment of rights is an essential requirement. Rights governed by Dutch law subject to a non-assignment clause were traditionally considered unsuitable for these types of financing. This judgement challenges that traditional thinking. The judgement has the potential to significantly expand the number of claims that are suitable for securitisations, factoring and reverse factoring.

Since 2005, Intergamma had been purchasing electronics from the AFK group on Intergamma's general terms and conditions of purchase. The non-assignment clause in these terms and conditions prohibited the vendor (AFK Group) from transferring all or part of its rights and obligations to third parties without Intergamma's prior written consent. In violation of that prohibition, AFK Germany, the entity in the AFK group to which Intergamma made payments, assigned its claims against Intergamma to Coface in 2008 under a factoring agreement without seeking Intergamma's consent.

When Intergamma made payments early in 2009 to AFK Holland, another part of the AFK group, Coface invoked the assignment and asserted that the payments to AFK Holland did not release Intergamma from its payment obligations. Intergamma refused to pay Coface, and relied on the non-assignment clause which, according to Intergamma, meant that the assignment of AFK Germany's claims to Coface in 2008 was void.

Interpretation of the non-assignment clause: presumption that it only affects contracting parties

The key issue before the court was the effect of the non-assignment clause. Did it have the effect of invalidating the entire transfer of rights to Coface (ie did it have proprietary effect)? Or did it merely mean that AFK Germany was in breach of contract, but that the rights remained with Coface (ie that the clause had only contractual effect)?

The Supreme Court ruled that, in principle, there is a presumption that a non-assignment clause only takes effect under the law of obligations:

" A clause like the one at issue, which is also intended by its nature to affect the legal position of third parties that have no knowledge of the intention of the contracting parties, and which serves to uniformly govern their legal position, must be construed according to objective standards, with due observance of the Haviltex standard. 1

The point of departure when interpreting clauses that exclude assignment of a claim must be that they only have effect under the law of obligations, unless their wording - construed according to objective standards – indicates that they were also intended to have effect under the law of property as referred to in Article 3:83, paragraph 2, of the Dutch Civil Code. "

The case will now be referred back to the Hague Court of Appeal for it to decide whether the non-assignment clause in Intergamma's general terms and conditions was intended to have effect only under the law of obligations, or to have proprietry effect too.

Implications

A non-assignment clause which prohibits a party from assigning its rights (eg "the Seller shall not assign its rights") will, if breached, generally result in a breach of contract but will not affect the assignee's rights. The rights subjected to the clause are still transferred. Should a proprietary effect, ie actual non-transferability, be required, the non-assignment clause will need to explicitly state this (eg "The rights under this agreement are non-transferable").

The Supreme Court's ruling places increased emphasis on the precise wording of a non-assignment clause. Obligors who want a non-assignment clause to have absolute effect vis-à-vis third parties and contracting parties should review their contracts or general terms and conditions and make changes if necessary. The text must either explicitly state that an assignment prohibition has effect under the law of property. A clause must state that the claim itself cannot be transferred.

The ruling also affects finance parties. Before this judgment, it was generally assumed that every non-assignment clause took effect under the law of property unless the text of the clause contained indications that the prohibition only had consequences under the law of obligations. This judgment suggests the opposite, thus potentially widening the pool of rights suitable for securitisations, factoring etc.

Under Dutch law, if there is a dispute about the meaning of a contract provision, a Dutch court will ascertain this meaning by applying the following standard: what could the parties reasonably have understood that provision to mean and what could they reasonably have expected from each other? For this "Haviltex standard", all facts and circumstances are relevant, including the conduct of the parties before and after entering into the contract. For more information, please see our article "Plain Meaning of the Words Not Always Determinative for Commercial Contracts" in the EFLR of June 2013.

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Non-assignment clauses and the transfer of rights to arbitrate

There is no presumption in English law that transfers of rights by operation of law are exempt from contractual clauses prohibiting the assignment of rights. The important recent case of Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm) established that the relevant distinction is whether the transfer of rights is truly voluntary or involuntary.

A transfer that is given effect by operation of law may be the culmination of a series of purely voluntary acts within the control of the assignor. In such cases, the transfer may have the “ taint of voluntariness ” and may be caught by a non-assignment clause and invalidated. For those reasons, the Commercial Court held that Mitsui Insurance Co (Mitsui) had not acquired the right to bring an arbitration claim under a contract between its insured Mitsui Butsan Aerospace (MBA) and Dassault Aviation (Dassault).

Dassault contracted to manufacture two aircraft for MBA (the Sale Contract) for onward supply by MBA to the Japanese Coast Guard. The Sale Contract was governed by English law and contained an ICC arbitration clause in which London was the seat of arbitration. It also contained confidentiality provisions and a clause prohibiting the assignment or transfer of any right or interest under the contract “ in whole or in part by any Party to any third party, for any reason whatsoever ” without prior written consent (the ‘Non-Assignment Clause’). Two years into the contract, MBA became concerned about delays in manufacture and obtained insurance from Mitsui against its potential liability to the Japanese Coast Guard. The insurance policy was governed by the Japanese Insurance Law (JLA). Article 25 of the JLA provides that, once it has indemnified a loss, an insurer is subrogated “ by operation of law ” to the insured’s recovery claim against any third party. The JLA permits parties to contract out of Article 25, but MBA’s policy with Mitsui in fact contained a clause which had the same effect as Article 25, by providing for the transfer of claims to Mitsui following payment of any loss.

Dassault delivered the aircraft late and Mitsui indemnified MBA under the insurance policy. Mitsui then commenced ICC arbitration proceedings against Dassault on the basis that MBA’s rights under the Sale Contract had been transferred to the insurer. The ICC panel made a partial award that, because the transfer to Mitsui occurred by operation of law, it was not invalidated by the Non-Assignment Clause so that accordingly the panel had jurisdiction to hear the claim. Dassault applied to the English Commercial Court to set aside the award.

The court’s decision

The court’s task was to construe the Non-Assignment Clause and apply it to the disputed transfer of rights to Mitsui. The court accepted that Article 25 of the JLA worked by transferring rights to an insurer by operation of law. By contrast, subrogation under English insurance law requires the claim to be brought in the insured’s name and is not thought to involve any transfer of rights (although there is a lack of certainty about the correct analysis, as the court acknowledged here).

The court began by rejecting Mitsui’s primary argument that there is a rule of English law that transfers of rights ‘by operation of law’ escape contractual prohibitions on assignment. The court found no such broad principle in the case law: the test does not focus on the immediate cause or legal mechanism of the disputed transfer, but rather whether it was truly voluntary or non-voluntary, in the sense of occurring contrary to the will of the transferring party and truly outside their voluntary control. Here, MBA chose to enter into the insurance policy, chose not to contract out of Article 25 of the JLA and chose to claim an indemnity from Mitsui.

The court then construed the Non-Assignment Clause by reference to the words used, the factual matrix and commercial purpose of the Sales Contract, and commercial common sense. The court found that the clear broad words of the clause supported a preliminary conclusion that it applied to the transfer to Mitsui. The court accepted Mitsui’s argument that the fact that the Non-Assignment Clause might not prohibit a subrogated claim by an English insurer (because it would not involve a transfer of rights), was part of the relevant factual matrix. However, the court found that there were reasons why contracting parties might treat subrogation differently and that a general prohibition on transfers of contractual rights to insurers would fit with the commercial purpose of the Non-Assignment Clause. The court concluded that no element of factual matrix/commercial purpose or public policy displaced the initial interpretation based on the words of the Non-Assignment Clause and held that it applied to invalidate the transfer of the right to arbitrate to Mitsui. Accordingly, the court set aside the ICC award on the grounds that the ICC did not have jurisdiction to hear Mitsui’s claim.

This decision will be of obvious interest to insurers and their advisers. Insurers’ rights to pursue recovery claims under their insureds’ contracts with third parties may no longer escape non-assignment clauses simply on the basis that insurers acquire those rights ‘by operation of law’ once they have indemnified the insured. Each case will turn on the specific words of the policy and the non-assignment clause in the underlying contract. The courts may now regard the more important factor as being the insured’s decision to enter into the policy and claim an indemnity, which may colour the transfer to insurers as ‘voluntary’ and potentially bring it within a non-assignment clause. The focus will then shift to the legal basis of the insurers’ right to bring a claim.

For insurers writing policies under systems of law where their title to bring a claim is acquired by means of a transfer of the insured’s rights (as with Japanese law in this case and in contrast to the English law of subrogation), those transfers may be caught by non-assignment clauses and invalidated. Indeed, the judgment leaves open the possibility that English law subrogation claims may one day be caught by non-assignment clauses if the classification problems with subrogation law are resolved in favour of an analysis of transfer of rights. Insurers are therefore now likely to insist that non-assignment clauses in the English law contracts which they insure have express carve-outs permitting transfers of rights to insurers.

The court acknowledged the dispute raised complex issues and that the decision had been reached “ with an unusual degree of hesitation ”. It will be interesting to see how the case law on this important issue develops.

This analysis was co-authored by Jeremy Collins and first published on Lexis®PSL on 21 February 2023 and can be found here (subscription required).

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Are Anti-Assignment Clauses Enforceable?

Written by: Brittainy Boessel

July 22, 2020

8 minute read

Contracts, in general, are freely assignable, which means that either party can transfer its contractual obligations or rights to a third party. But sometimes contracts include anti-assignment clauses to limit or prohibit assignment. Read on to discover the basics of assignment and anti-assignment clauses, what makes them unenforceable, and learn how to negotiate them.

What Is Assignment?

An assignment is like a transfer. If an agreement permits assignment, a party could assign — or transfer — its obligation to another party. The second party — the one to whom the contract was assigned — would then be required to provide the products or services.

Assignments don’t necessarily relieve liability for the party who transfers the agreement. Depending on the contract, the party who assigned its obligations may remain a guarantor of— or responsible for—the performance of the third party assigned the work. In other words, the party to the contract (the assignor) would be responsible for breaches committed by the party to which it assigned its performance (the assignee). To remove itself from the liability of the agreement, the assignor would need to seek a novation , which cancels the first contract and creates a new contract between the party that is the assignee and the original counterparty to the contract.

What is an Anti-Assignment Clause?

Anti-assignment clauses—also sometimes referred to as assignment clauses or non-assignment clauses—can appear in various forms. Essentially, they prevent one or both contracting parties from assigning some or all of their respective contractual obligations or rights to a third party.

Anti-Assignment Language to Look for in a Contract

When reading through your contract, you can typically find a separate paragraph entitled “Assignment,” “Non-assignment,” or “Anti-assignment.” Sometimes you’ll find the assignment language buried within a “Miscellaneous Provisions” section, which contains all the boilerplate language of a contract, such as severability and waiver provisions.

Contracts include two primary types of anti-assignment clauses. The first type categorically precludes all assignments of rights and duties. It usually reads something like this: “Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”

The second type prohibits assignments unless the assigning party obtains the prior written consent of the other party. It usually reads something like this: “Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written permission of the other party, and whose consent may be withheld for any reason.”

Some clauses may state that a change of control, such as a merger, consolidation, or acquisition, is considered an assignment. Read carefully , because you want to ensure that you won’t be in breach if you transfer the contract to an affiliate.

Additionally, check the termination section of your agreement. Some termination clauses may state that a non-assigning party may terminate the contract in the event of a non-permitted assignment. Or a termination clause may state that the agreement automatically terminates upon such a transfer.

Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts.

Still, courts normally enforce anti-assignment clauses that are negotiated and agreed upon by both parties, depending on the applicable law, the jurisdiction governing the contract, and the language agreed upon in the contract. Be aware though that courts tend to narrowly interpret anti-assignment clauses. For instance, an anti-assignment clause may prohibit assignment but fail to state that an assignment in violation of the contract will be invalid. In this case, a party may be able to file a suit for breach of contract, but the court may not permit it to invalidate the assignment.

Even without a solid anti-assignment clause, there may still be an opportunity to prevent certain assignments. Courts may not enforce assignments to which the counterparty did not consent, even in the absence of a valid anti-assignment clause, especially if the contract is personal in nature. Some obligations can be performed equally well by a third party, such as a requirement to make payments. But a personal obligation involves a special relationship between parties or requires special levels of expertise, discretion, or reputation. For example, personal service contracts, including employment agreements, are personal enough in nature that they’re not transferable unless the non-transferring party consents.

In general, assignment is not enforceable when:

The contract prohibits and voids assignment

As discussed above, contract provisions can prohibit and void an assignment.

The assignment materially changes the contract

If the assignment would significantly impact the performance of the contract — for instance, if it greatly increases the risks or burden imposed on the other party — then a court would likely not enforce the assignment.

The assignment violates the law

Certain laws prevent assignments. For example, some states legislate that an employee cannot assign its future wages to a third party.

The assignment violates public policy

If the assignment would harm public policy interests, it will be void. For instance, victims may not assign their personal injury claims to third parties to discourage excessive litigation.

Negotiating Anti-Assignment Clauses

In certain situations, the inclusion of an anti-assignment clause may not be in a party’s best interests. If a party depends on a unique service provider or a specific person to perform, then it must make sure that that service provider or person can’t assign work to an unknown third party without its consent. For instance, if you pay a premium to hire a renowned jazz band to perform at your charity gala, you don’t want a local high school garage band to show up instead. In any situation involving unique services or providers, make sure you have the right to consent prior to any assignment under the agreement.

Another example of the importance of assignability is in mergers and acquisitions. When a company purchases another business, the acquired business’s existing customer base and supplier contracts make it more valuable . Consequently, if a party hopes to eventually sell its business, it would want the right to assign its existing contracts to the buyer. Otherwise, potential buyers may be scared off because of the time and money it will take to transfer the existing agreements. Plus, the existence of anti-assignment clauses may heavily impact the selling price. If it’s possible you may sell your business, ensure that you have the right to assign your contracts and that consent is not solely within the discretion of the counterparty.

If you want the right to assign the contract, but your agreement does not permit assignments, you’ll need to negotiate with your counterparty on this point. If the clause in your agreement prohibits all assignments, try to include a carve out by allowing assignment of your rights and obligations upon the prior written consent of the other party. Add that the counterparty shall not unreasonably withhold or delay consent. You may also want to carve out an exception to the anti-assignment clause by excluding assignments between affiliates or necessitated by change of control transactions, such as mergers or acquisitions.

Courts tend to construe anti-assignment and anti-delegation clauses narrowly. As mentioned, a number of courts have held that an anti-assignment clause does not remove the power of a party to assign the contract and invalidate the contract unless the provision explicitly states that such assignments will be invalid or void. Thus, if you want to make an assignment that violates your agreement, rather than creating an opportunity for a breach of contract case, explicitly state in your contract that such assignments are invalid or void.

If you don’t want the counterparty to be able to assign its rights or obligations, state your preference clearly in your agreement with one of these options.

Require consent always

Don’t require consent for affiliates or successors

Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party owns greater than 50 percent of the assets; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will receive an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”

Require consent to be given reasonably

Note that you will not be able to prevent assignments resulting from court orders or by operation of law, such as those ordered through a bankruptcy hearing.

When you enter a contractual relationship, make sure to clearly determine your rights and obligations, as well as those of the other party. If it may be important for your business to have the right to assign all or parts of the contract, negotiate for the removal of the anti-assignment clause, or request changes to it to provide sufficient flexibility for you to assign.

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Assignment of Contract Rights

LEARNING OBJECTIVES

Understand what an assignment is and how it is made.
Recognize the effect of the assignment.
Know when assignments are not allowed.
Understand the concept of assignor’s warranties.
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UK: Case Review: Non-assignment Clauses And Transferring The Right To Arbitrate By Operation Of Law (Court Of Appeal Decision)

Introduction

Does a non-assignment clause that prohibits assignments "by any party to any third party, for any reason whatsoever" prevent an assignment (akin to subrogation) to an insurer where such assignment takes effect by operation of law? The Court of Appeal had to consider this question in the recent case of Dassault [2024] EWCA Civ 5 .

Overturning the High Court's decision, the Court of Appeal found that the assignment in question did not fall foul of the non-assignment clause as the assignment had not been effected "by" a party because the transfer had occurred by operation of law. That being said, the judgment does not establish a general principle as to the relationship between non-assignment clauses and assignments arising by operation of law; rather the Court of Appeal's decision was heavily focussed on the interpretation and the wording of the non-assignment clause in the contract.

Factual Background

Dassault Aviation SA (" Dassault ") had entered into an English law sale contract with Mitsui Bussan Aerospace Co., Ltd (" MBA ") for the sale of two maritime surveillance aircraft (the " Sale Contract "). MBA had agreed to onward sell those aircraft to the Japanese Coast Guard pursuant to a Japanese law governed contract (the " Sub-Sale Contract ").

The Sub-Sale Contract provided for liquidated damages in case of delayed delivery of the aircraft to the Japanese Coast Guard. MBA had entered into a Japanese law contract of insurance with its insurer (the " Insurer ") to insure the risk of MBA being held liable to the Japanese Coast Guard for such late delivery (the " Insurance Contract ").

The aircraft were delivered late by Dassault to MBA, which led to a consequent late delivery of the aircraft by MBA to the Japanese Coast Guard. MBA was therefore liable to pay liquidated damages to the Japanese Coast Guard under the Sub-Sale Contract. Following the payment of such damages, MBA claimed against the Insurer under the Insurance Contract and the Insurer paid out the insured amount to MBA.

Under Japanese law (the law of the Insurance Contract), when an insurer pays out an insurance claim it is automatically assigned, by operation of statutory law, the assured's rights of recovery against third parties in respect of that claim. Having been assigned MBA's rights, the Insurer accordingly commenced (in its own name) ICC proceedings against Dassault, pursuant to the arbitration agreement found in the Sale Contract.

Dassault challenged the Tribunal's jurisdiction to hear the Insurer's claim. It argued that the assignment to the Insurer was in breach of the non-assignment clause found in the Sale Contract, and that as a result the assignment was null and void. Accordingly, the Insurer was not entitled to rely on the arbitration agreement to bring its claim and the Tribunal lacked substantive jurisdiction. In response, the Insurer contended that the non-assignment clause did not on its proper construction apply to an assignment effected by operation of law. Since the Insurer's rights arose by operation of law, the Insurer contended that it was not an assignment caught by the non-assignment clause.

The Tribunal considered the jurisdictional issue as a preliminary issue and the majority (Lord Collins of Mapesbury and Joe Smouha KC) found in the Insurer's favour (Mr Crookdenden KC dissenting). Dassault challenged the Tribunal's decision pursuant to section 67 of the Arbitration Act 1996, bringing proceedings before the High Court.

The High Court's Decision

The High Court found in Dassault's favour and ruled that the Tribunal had no jurisdiction to hear the Insurer's claim. Mrs Justice Cockerill (the " Judge ") reached this decision by considering the two following issues:

Was there a general rule/presumption under English law that transfers "by operation of law" would not fall foul of a prohibition on assignment clause (the " First Issue ")?
If there was no such rule, as a matter of interpretation of the Sale Contract, did the non-assignment clause prohibit the assignment of MBA's rights to the Insurer, notwithstanding this was an assignment to an insurer akin to subrogation (the " Second Issue ")?

On the First Issue, the Judge took the view that the caselaw did not support the proposition that an assignment by "operation of law" would be outside the scope of a non-assignment clause. Instead, the Judge noted that the authorities (mainly old insolvency cases) supported a narrower distinction between transfers which can be said to be willing/voluntary (in the sense of consented to/ within the control of the transferor) and those which were truly unwilling/involuntary. On that basis, the Judge considered that a non-assignment clause could apply to an assignment with the sufficient "taint of voluntariness".

Turning to the Second Issue, the Judge noted that an iterative process of interpretation had to be followed that gave due weight to the words and commercial purpose of the non-assignment clause, as well as the factual matrix and commercial common sense. The Judge noted that the wording of the non-assignment clause was intentionally broad with the only limitation imposed being the following words which required the assignment to be: " by any party to any third party" (emphasis added). That wording, the Judge reasoned, invited one to consider the cause of the assignment rather than the mechanism by which it took place – this, the Judge said, was in line with the approach outlined by the authorities.

Since MBA had, amongst other things, chosen of its own volition to take out insurance, to do so under a system of non-English law which provided for assignment instead of subrogation, and to make a claim under that insurance, the Judge concluded that MBA had voluntarily caused the assignment, thereby falling provisionally within the scope of the wording of the non-assignment clause.

The Judge then considered the context/commercial purpose indications. Whilst accepting the logic of the Insurer's argument – that if an English subrogation is not caught by a non-assignment clause then it is inherently unlikely that the parties intended for the subrogation-equivalent of another legal system to be caught by such clause (not least because the only difference would be the name of the claimant on the arbitration documents) – she ultimately concluded that the context/commercial purpose indications were not weighty enough to displace the position indicated by a consideration of the words.

The Judge accordingly held that the Tribunal had no jurisdiction to hear the Insurer's claim, but did so with an "unusual degree of hesitation". The Insurer appealed the Judge's findings on both issues.

The Court of Appeal's Decision

Overturning the Judge's decision, the Court of Appeal (consisting of Sir Geoffrey Vos, Master of the Rolls, Lord Justice Coulson, and Lord Justice Phillips) unanimously held that the Tribunal did have jurisdiction to hear the Insurer's claim.

On the First Issue, following a close consideration of the authorities, the Court found that "the old insolvency cases d[id] not enunciate a general principle applicable to the interpretation of non-assignment clauses in commercial contracts." Those cases simply turned on the nature of the insolvency under which the transfer in question took place.

Turning to the Second Issue, that of interpretation, the Court noted that the words of the non-assignment clause were clear and unambiguous. The key words that had to be considered were the words: "by any party". The Court of Appeal rejected the causal analysis taken by the High Court and Dassault, and noted that "[t]he correct question was whether the transfer was made by MBA, not whether the transfer was caused as a consequence of certain actions taken by MBA."

The Court of Appeal found that the non-assignment clause therefore prevented any assignment which was effected by a party to the sale contract, but not a transfer that was effected by operation of law. As it was common ground between the parties (and had been unanimously decided by the Tribunal) that MBA's claims against Dassault had been assigned to the Insurer pursuant to Japanese statutory law, that was an assignment by operation of law and not within the scope of the non-assignment clause.

The Court of Appeal considered that the meaning of the non-assignment clause was clear and unambiguous and that the High Court had erred in thinking that there were two possible meanings to the non-assignment clause. As such, it was not "necessary to consider whether the commercial matrix of fact points in favour of one of two possible meanings of [the clause]", but the Court did note in obiter that it was "far from clear" that the non-assignment clause was intended to "catch transfers arising from insurance payouts, by whatever law those insurance contracts might be governed".

The Court of Appeal accordingly allowed the appeal and reinstated the Tribunal's award.

Dassault has sought permission to appeal to the Supreme Court.

Key Takeaways

The Court of Appeal's decision should bring some comfort to insurers that an assignment to an insurer by operation of law is unlikely to fall foul of a prohibition on assignment clause. However, the Court did not go so far as to say that there is a general principle to that effect. Parties will therefore be well advised to closely scrutinise any non-assignment clauses and to ensure that they have been drafted in as clear terms as possible (given the Court of Appeal's emphasis on the interpretation and wording of the individual clause).

Where the parties envisage insurance being taken out, an express carve out, if possible, should be provided in the non-assignment clause in favour of insurers. Furthermore, when insuring under a non-English law and seeking to rely on subrogation or analogous rights, parties should make enquiries as to the mechanism of transfer under that non-English law to ensure it does not fall foul of any non-assignment/transfer clause.

Ultimately, the Court of Appeal's rejection of the Judge's causal analysis (voluntary vs involuntary) and its application to non-assignment clauses in commercial contracts is welcomed as it avoids an approach that would be replete with practical difficulties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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What to Know About Hong Kong’s Controversial New National Security Law

The Hong Kong skyline in on Feb. 27, 2024

A long-shelved security law that once kindled fear of eroding rights and galvanized Hong Kong’s pro-democracy movement has made a successful comeback. The city’s lawmakers unanimously passed local legislation to protect the Chinese state on March 19. That marked a long-awaited victory for the authorities, whose 2003 attempt to make the law prompted the largest demonstrations the former British colony had seen since it returned to Chinese rule.

Those protests became an annual tradition drawing tens of thousands of democracy advocates and helping opposition parties raise funds. That stopped only after Beijing imposed a national security law in 2020 , silencing dissent and wiping out many activist groups, including the one coordinating the annual march. Approval of the new domestic security legislation wasn’t in doubt as the government took steps to ensure only “patriots” could be lawmakers .

What is the new security law?

The new local legislation is known as Article 23, which refers to the section of Hong Kong’s mini constitution that requires the city to make its own law to protect national security. The city’s leader in January announced a proposal to fulfill that obligation with a new law called the Safeguarding National Security Ordinance. It created new offenses such as insurrection and external interference, and update colonial-era laws concerning state security.

It also expanded the definition of key ideas such as state secrets. Previous laws protecting such information mostly concern defense and intelligence matters, but the new ordinance expanded the term to include information relating to the economic and social development of the city, as well as major policy decisions and scientific technology, mirroring mainland China’s language on state secrets. People and companies handling sensitive documents should pay attention.

Why draft this law now?

Chief Executive John Lee, Hong Kong’s leader, cited increasingly complex geopolitics and rising threats of foreign spying in justifying the legislation. A footnote in the proposal cited the CIA’s establishment of a China Mission Center to focus on the Asian giant and remarks by the chief of the U.K.’s MI6 on recruiting more agents to spy on China. The document also alleges “barbaric and gross interference” from foreign governments and gives examples of overseas politicians threatening to impose sanctions on city officials. At a press conference, Lee said the city couldn’t afford more delay. “For 26 years we have been waiting,” he said, referring to the number of years since Hong Kong’s 1997 handover. The conditions for its passing were ripe. With the China-imposed security law having wiped out dissent, Lee faced little opposition.

What about the previous national security law?

Beijing imposed the national security law in Hong Kong in June 2020 in response to anti-government unrest the previous year. That law continues to exist and will work in tandem with the new local legislation. The domestic law, for example, doesn’t deal with secession and subversion, offenses already covered by the NSL.

What are the new offenses?

The new law created several new crimes, including:

Treason: The previous treason law punishes anyone who harms or levies war against “Her Majesty”—language that’s clearly out-dated. The new offense will include the use or threat of force with the intention to endanger national sovereignty or territorial integrity. This applies to residents who commit acts of treason outside the city.

Insurrection: The government says Hong Kong needs an “insurrection” offense to address events such as the citywide protests of 2019, which it claims existing riot laws are inadequate to handle. The new offense elevates civil disturbance to a national security crime.

Sabotage: Vandalism of public infrastructure and damage to transport facilities with intent to endanger national security is a crime under the new security law. Digital acts, such as hacking the city’s financial systems, are now considered more severe crimes. The government said previous laws on abusive use of computers don’t reflect the seriousness of such acts. Authorities also look to address future security risks from artificial intelligence with the new legislation.

External interference: Collaborating with external forces to influence policy making, lawmaking and elections has become a crime. The proposal of the law says Hong Kong has been used as a “a bridgehead for anti-China activities” and emphasizes the risks of foreign forces harming national security through local non-governmental groups. The government considered setting up a system to require foreign agents to register, as the U.S. does, but decided instead to create a new offense to deal with the issue.

How was the law passed?

The city’s Legislative Council convened on March 19 to resume final debate of the bill and approved it in a fast-tracked legislative process. Lawmakers completed a clause-by-clause scrutiny of the 212-page bill on March 15 after the draft law was published just a week earlier, several days after a one-month public consultation period ended.

All members of the city’s “patriots-only” legislature voted in favor of the law in a specially arranged session. Their approval of the measure within an 11-day window marked the fastest passing of a law in the city since 1997.

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Non-signatories to arbitration agreements

‘Group of companies’ beware

Global | Publication | May 2016

Where a non-signatory is involved in performing a contract it may be bound by the arbitration agreement. ‘Good faith’ will play a role, as case law concerning the ‘group of companies’ doctrine reveals. The solution is to be absolutely clear in your arbitration agreement as to whether you wish it to extend to non-signatories involved in a project.

Introduction

Parties’ consent is the foundation of any international arbitration. Usually, this consent is expressed in an arbitration agreement, binding the formal signatories to the contract.

There are circumstances where non-signatories to the original agreement may be bound by it and benefit from it. The New York Convention states that international arbitration agreements are binding on the parties involved (article II). It provides no guidance as to how those parties are to be determined. National laws are also almost universally silent on this matter. The non-signatory position is therefore developed through case law across jurisdictions: this can cause difficulties when drafting arbitration clauses.

The arbitration clause is binding on the basis of assignment, succession or agency: no surprises there. In certain circumstances, however, the court or tribunal may extend the arbitration clause to include a party other than a signatory to the arbitration clause, in particular if that party has corporate ties with the original signatory.

‘Group of companies’ and ‘piercing the corporate veil’

Two well-known doctrines which allow extension of the arbitration agreements to non-signatories are ‘group of companies’ and ‘piercing the corporate veil’. These two theories are often mixed up.

Essentially, both are justified by considerations of fairness and good faith, both of these general principles of contract law (although these general principles are not applicable under English law, they are relevant in Australia and many civil law jurisdictions). Veil piercing focuses on fraud or abuse of right where the real party is shielded from liability by the corporate structure. The ‘group of companies’ doctrine addresses the (presumed) intention of the parties to arbitrate.

Drafting the arbitration agreement

“The ‘group of companies’ doctrine addresses the (presumed) intention of the parties to arbitrate.”

It may not be unusual for companies within the same group to be involved in carrying out various parts of a project, even without contracts formally setting out their roles. If there is no wish to allow extension of an arbitration agreement to nonsignatories involved in a project, this has to be very clearly indicated in the agreement. Companies may otherwise find themselves drawn into arbitration proceedings with related companies and find that the circumstances justify that. In order to ensure the effectiveness of corporate structures created with the intention of allocating profit, cost and risk between different entities, companies will need to review all transactions and associated arbitration agreements to check where and how best to put the necessary express provisions in place.

Case law on ‘group of companies’

The dow chemical company and others v isover saint gobain.

A prominent case covering ‘group of companies’ is the Dow Chemical v ISOVER ICC arbitration. The dispute arose out of several contracts executed by various Dow Chemical Company subsidiaries (but not Dow Chemical Company itself) and Isover. Dow Chemical Company together with its subsidiaries commenced arbitration. Isover objected to jurisdiction over the claims asserted by Dow Chemical Company on the ground that the latter was not a party to the contract. The tribunal upheld its jurisdiction.

The award is often misinterpreted as suggesting that the corporate ties within the group were sufficient to establish the tribunal’s jurisdiction, and has thus been subject to criticism. In fact the reasoning was more nuanced, taking into account the role of the non-signatory ‘in the conclusion, performance, or termination of the contracts’.

Government of Pakistan, Ministry of Religious Affairs v Dallah Real Estate and Tourism Holding Company

The ICC analysis based on the non-signatories’ involvement with the contract was supported by the French courts in the 2010 case of Pakistan v Dallah . The Paris Court of Appeals dismissed the challenge of an ICC award which upheld the jurisdiction against Pakistan arising out of the contract signed by Dallah and a trust established by Pakistani presidential in negotiations, performance and termination of the agreement showed that it (and not the trust) was the ‘true party’ to the agreement and, hence, to arbitration.

The UK Supreme Court had earlier refused to enforce the award in England on the basis that the Government of Pakistan was not a proper party to the arbitration.

Case No. 4A_450/2013

In 2013, the Swiss Supreme Court applied a similar test. The facts of this case are a little complicated. It involved three contracts between Iranian company A and Italian company B1 (part of B Group of companies). The project was suspended and parties sought to resolve the dispute by negotiation. During the negotiations the parties agreed that the project would be carried out by a specific division of B1’s parent company – B2 – instead of B1, and that a member of this division would become responsible for the project. It was also agreed that B2 was to provide a guarantee for performance of the contract.

The division responsible for the project was later acquired by B3 (also a company within B Group). Subsequently, B1 started arbitration against A, and A brought a counterclaim against B1 and B3. The tribunal upheld B3’s objection against jurisdiction, but the Swiss Supreme Court set aside this part of the award and remitted the case to the tribunal.

In its decision, the Swiss Supreme Court relied not only on the involvement of B1, B2 and B3 in carrying out the project, but also on the principle of good faith: the court considered that the confusion that existed among the B Group of companies was a valid reason for A’s inability to identify the actual contracting party.

Hazel Brasington is a partner in our Sydney office and Andrey Panov is a senior associate in our Moscow office.

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Litigation and disputes
International arbitration

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What is an Anti-Assignment Clause?

When business owners are negotiating contracts to gear up for the sale of their business, they are rightly concerned with key questions such as the sale price for the business including assets such as how much the sale will cost them and what happens if something goes wrong. At the end of the contracts, there are usually several pages of type that usually look like boilerplate. Inside those clauses is usually something called an assignment clause, or more accurately, an anti-assignment clause.

It’s one of those clauses that everyone glosses over – after all, it’s just standard legal text, right?

For a business owner hoping to sell their business, an anti-assignment clause can dissuade potential buyers and play a crucial role in the selling price of a business. If this sounds familiar and you’re in the process of negotiating the merger or acquisition of your business, read on – we’ve put together a practical guide to anti-assignment clauses and what to look out for.

Looking for legal help? feel free to get in touch with our commercial lawyers for matters related to contracts.

What is an assignment clause?

The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense – after all, if you sign a contract with a specific party, you don’t expect to be entering into an agreement with a third party you didn’t intend to be.

However, when you sell your business, you will want to transfer ownership of those contracts to the buyer. If your contracts all contain an anti-assignment clause, they effectively restrict you from transferring ownership to the interested party. Now, you’re presented with a new challenge altogether – before you can focus on the sale of your business, you must first renegotiate the terms of your contracts with each party.

Language to look out for in anti-assignment clauses

If you’re thinking about selling your business or even have potential buyers interested, it’s better to know in advance if you’ve got anti-assignment clauses in your contracts. There are generally two types of anti-assignment clause to look out for. The first relates to the complete bar on assignment of rights and responsibilities and is typically worded in this way, or similar:

“Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”

The second type prevents the transfer of rights or duties without prior written consent of the other party. This will read along the lines of:

“Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written consent of the other party, and whose consent may be withheld for any reason.”

So, where the first prohibits assignment altogether, the second prohibits assignment unless permission is sought in advance. Some clauses may even explicitly state that a change of control such as a merger or acquisition is an assignment. The last thing you want is to cause a dispute by breaching the contract, but if you’ve already agreed to these terms, you’ll have to open a fresh set of negotiations with the contracting party before you sell the company.

Assignment clauses in M&A: what’s the problem?

Due diligence is the bread and butter of any merger or acquisition. Rather than a leap of faith, due diligence ensures the purchase of a business is a calculated decision with minimal risk to the buyer. Typically carried out by specialist lawyers, the process is designed to lift the hood on the target business to determine the valuation of assets and liabilities and identify any glaring issues that could leave the buyer open to risk.

During the due diligence process, the buyer will look through all of the major contracts the business has open, and specifically keep a close eye out for assignment clauses.

Despite the virtual environment that many businesses have been forced to operate in in 2020, most companies will have commercial leases for the premises from which they typically work. Almost all leases have an anti-assignment clause, and this is a perfect example of an instance that is often overlooked by commercial tenants when selling a business which includes a leasehold property. This transfer of ownership may well be prohibited under an anti-assignment clause so that prior to the sale of the business, you would be required to ask permission from your landlord. The issue here is that the landlord may well see this as the perfect opportunity to renegotiate and secure a better deal for themselves. What’s worse, if they don’t sign off on the transfer, you’ll have an obstruction on your hands that will stand in the way of the sale.

In any case, an unexpected anti-assignment clause usually winds up being a last-minute hitch in the sale, and it never comes at a good time. Whether it delays the sale or obstructs it altogether, overlooking an anti-assignment clause can cost you considerably in an M&A transaction.

What makes anti-assignment clauses enforceable?

Generally speaking, an anti-assignment clause will be enforced by the courts if it was agreed upon by both parties to the contract. Many contracts exclude or qualify the right to assignment – according to the courts, a clause that states that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract.

Courts won’t always enforce assignments to which the counterparty did not give permission, even where there is no anti-assignment clause that specifies this provision.

How to negotiate anti-assignment clauses

The best practice for business owners is to be vigilant when negotiating new contracts and ensure that any anti-assignment clauses still allow for the transfer of ownership when they decide to sell the business.

Remember, even though the buyer is purchasing the assets of the business, this usually means that all of the contracts of the business go with it because the business remains intact. Therefore, the best way forward is to negotiate these clauses upfront from the outset of the relationship, so that when you do decide to sell your business, you automatically have permission to transfer the ownership without having to delay the sale by entering into fresh negotiations.

If your agreement does not permit assignments, it’s worth seeking the advice and support of a specialist lawyer who can help protect your interests through negotiation with your counterparty on this point. You may be able to include a provision that allows for assignment of your rights and obligations upon the prior written consent of the other party. Your lawyer will likely advise you to carve out a specific provision to prohibit the counterparty from unreasonably withholding or delaying consent or making it subject to unreasonable conditions – an issue which, if not provided for within the contract, can cause serious delay and disruption to the sale of your business. Further, it may be beneficial to add an extra element to the contract that makes exceptions to the clause for assignments between affiliates. If you’re planning to sell your business, this would be the right place to carve out an exception within the clause to the change of control via a merger or acquisition.

It’s important to bear in mind that anti-assignment clauses tend to be viewed narrowly by courts, and that there have been several instances whereby anti-assignment clauses have not been enforced since the clause itself did not explicitly state that the assignment of rights, duties or payment would render the contract void or invalid. So, if you’re in the process of negotiating an agreement and wish to protect your interests through the addition of an anti-assignment clause, it’s critical that you include the consequences of assignment within the clause itself and state that assignments would invalidate or be in breach of the contract.

If you do not wish for the counterparty to be able to transfer the legal obligation to perform their duties as stated in the contract to a third party, this must be explicitly stated in one of three ways:

Specify the need for consent

There’s no need to be unreasonable – you can protect your interests while still giving the counterparty the space to re-negotiate should they wish to assign rights by including a clause that asks for consent.

Provide an exemption to consent for affiliates, successors or new owners

Ask your lawyer to draft an exception into the clause that permits assignment to affiliates or successors to the counterparty, such as:

“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party will own greater than 50 per cent of the shares or other interests; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will relieve an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”

Require reasonable consent

Just as you would not wish for consent to be held back from you unreasonably in the renegotiation of contract terms prior to a sale, your assignment clause should make clear that you will not unreasonably withhold or delay consent should the third party request permission to assign their legal obligations. This may read something like this:

“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”

Whatever the circumstances, we strongly recommend calling upon a contract law specialist, whether you’re undergoing due diligence in the run up to an M&A transaction, are considering selling your business or are negotiating new contracts with customers and suppliers. Our lawyers bring in-depth expertise in the area of anti-assignment clauses and will work closely with you to protect your interests and ensure no clauses in your contracts negatively impact the sale of your company.

For a free consultation, get in touch with our team through the contact form below or using our online chat service.

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Non-Assignment Contract Clauses (50)

Grouped into 3 collections of similar clauses from business contracts.

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COMMENTS

The Government restricts bans on assignment
Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition, or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.
Case review: non-assignment clauses and transferring the right to
What is the effect of a non-assignment clause which prevents assignments "by any party to any third party, for any reason whatsoever" in the context of an assignment to an insurer that is effected by foreign statutory law and is akin to subrogation? The Court of Appeal had to consider this question in the recent case of Dassault Aviation SA v Mitsui Sumitomo Insurance Co., Ltd.
Non-assignment clauses
The University of Hong Kong. Info More info. Academic year: 2021/2022. Uploaded by: Anonymous Student. ... Non-assignment clauses are essential to the effectiveness of certain types of contract, such as where mutual obligations are to be discharged by way of contractual netting: see e., Goode [2009] L.M.C.L. 300 at 302. ...
Hong Kong Law Contract Guide
Hong Kong Law Contract Guide Contents Introduction Formation of contract Terms, representations, and warranties Best endeavours/ reasonable endeavours Limitation and exclusion of liability clauses ...
Assigning rights where a contract contains a non-assignment clause
The HC was accordingly of the view that the Assignor and the Company (i.e., the original parties to the Storage Agreement) intended to refer specifically to contractual rights and obligations where the Non-Assignment Clause specifically referred to rights "under" the Agreement. On the facts, the HC found that the assignment of the Vessel [B ...
PDF LegCo Panel on Planning, Lands and Works Supplementary Information
He may also apply for removal of non-assignment clause under Items 4 or 5 if he wishes to sell his Small House within the non-assignment restriction period. If he wishes to partition the non-building portion of his lot, he needs to obtain consent from the respective New Territories District Land Office (DLO) under Item 6
New Interpretation of Non-Assignment Clauses Relevant for
The Supreme Court's ruling places increased emphasis on the precise wording of a non-assignment clause. Obligors who want a non-assignment clause to have absolute effect vis-à-vis third parties and contracting parties should review their contracts or general terms and conditions and make changes if necessary. The text must either explicitly ...
Non-assignment clauses and the transfer of rights to arbitrate
There is no presumption in English law that transfers of rights by operation of law are exempt from contractual clauses prohibiting the assignment of rights. The important recent case of Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm) established that the relevant distinction is whether the transfer of rights is truly voluntary or involuntary.
Case review: non-assignment clauses and transferring the right to
The disputes team have written an article discussing an interesting recent Court of Appeal decision. The Court considered the impact of non-assignment clauses and the transfer of the right to arbitrate in the context of assignment to an insurer by operation of law. Norton Rose Fulbright acted for the appellant.
A Guide to Understanding Anti-Assignment Clauses
In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non-assigning party. See Peterson v.
Non-Assignment Sample Clauses: 6k Samples
Non-Assignment. This Agreement shall not be assigned by either party without the written consent of the other party. Sample 1 Sample 2 Sample 3 See All ( 170) Non-Assignment. The Company shall not transfer or assign all or any of its rights, obligations or benefits hereunder in whole or in part to any third party, without the prior written ...
Are Anti-Assignment Clauses Enforceable?
Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts. Still, courts normally enforce anti-assignment clauses that are ...
Assignment, Delegation, and Commonly Used Contracts Clauses
Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpatory clauses are often ...
Assignment of Contract Rights
Open Textbooks for Hong Kong. ... Understand what an assignment is and how it is made. Recognize the effect of the assignment. ... Early Commerce Clause Cases. From the New Deal to the New Frontier and the Great Society:1930s-1970 . The Substantial Effects Doctrine: World War II to the 1990s ...
Case Review: Non-assignment Clauses And Transferring The Right To
That being said, the judgment does not establish a general principle as to the relationship between non-assignment clauses and assignments arising by operation of law; rather the Court of Appeal's decision was heavily focussed on the interpretation and the wording of the non-assignment clause in the contract. Factual Background
Non-assignment clauses, subrogation rights and transfers by ...
The seller refused to reimburse the insurers, arguing that the non-assignment clause prohibited any transfer of the buyer's rights to the insurers without the seller's prior written consent ...
Hong Kong National Security Law: What to Know
Lawmakers completed a clause-by-clause scrutiny of the 212-page bill on March 15 after the draft law was published just a week earlier, several days after a one-month public consultation period ended.
Non-signatories to arbitration agreements
The arbitration clause is binding on the basis of assignment, succession or agency: no surprises there. In certain circumstances, however, the court or tribunal may extend the arbitration clause to include a party other than a signatory to the arbitration clause, in particular if that party has corporate ties with the original signatory.
What is an Anti-Assignment Clause?
What is an assignment clause? The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense - after all, if you sign a contract with a specific party, you don't expect to be entering into an agreement with a third party you didn't intend ...
Assignment of Sale Proceeds Not an Interest in Land, Hong Kong Court
The legal documentation for this type of loan, which involves an immovable property subject to non-alienation covenant, commonly may comprise three components: a loan agreement, an assignment of the sale proceeds of the immovable property, and an irrevocable power of attorney given by the owner in favour of the lender granting power of sale.
Beware of Non-Assignment Clauses
While in theory the job of a non-assignment clause is to prevent you from turning the entire contract over to someone else and moving on, in practice the language will sometimes prevent you from even contracting out part of the job. If you rely heavily on sub-contractors or if your business involves sub-licenses, make sure that the non ...
THE EFFECT OF A NON-ASSIGNMENT CLAUSE
The High Court held that the Plaintiff did not satisfy the preliminary issue of requisite standing to bring the claims. In doing so, the High Court considered the non-assignment clause and the effect of a purported assignment contrary to the clause. Facts. The Plaintiff, Gravitas International Associates Pte Ltd, commenced a suit based on two ...
Non-Assignment Contract Clause Examples
Non-Assignment. Employee warrants and represents that Employee has not assigned or transferred in any manner, or purported to assign or transfer in any manner, to any person or entity, any claim or interest that is the subject of this Agreement. Non-Assignment. (a) The Company shall not assign this Agreement or any rights or obligations ...

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UK: Case Review: Non-assignment Clauses And Transferring The Right To Arbitrate By Operation Of Law (Court Of Appeal Decision)

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Non-Assignment Contract Clauses (50)

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