Assignment by way of security – beware of giving away more than you bargained for
30 / 01 / 2018
Assignment by way of security is a concept that comes up on many construction projects; typically as a condition of providing finance a funder will require an assignment by way of security of key construction documents, including building contracts and appointments, with the intention that if the borrower defaults on the loan, the assignment will be perfected and the funder will be entitled to enforce its rights under the constructions documents. How and when exactly such assignment takes place and the interplay with an employer’s rights under its contracts on a project was brought into focus in last year’s case of Mailbox (Birmingham) Limited v Galliford Try Construction Limited ( EWHC 67 (TCC)).
Mailbox (Birmingham) Limited (“Mailbox”), the claimant special purpose vehicle set up to develop the Mailbox in Birmingham (“the Property”), a high-end mixed used development, boasting a Harvey Nichols and the base for BBC Birmingham, engaged Galliford Try Construction Limited (“Galliford”) for refurbishment works at the Property under a building contract dated 23 December 2013. A dispute arose between the parties regarding responsibility for delay, the final account, liquidated damages and Mailbox’s termination which was referred to adjudication, where Galliford were ordered to pay Mailbox £2,477,152.86 plus 75% of the adjudicator’s costs. Galliford did not pay the sums ordered, so Mailbox sought enforcement of the adjudicator’s decision in the High Court.
Did Mailbox have a right to bring an adjudication?
Galliford’s primary defence to the enforcement was that Mailbox had no right to bring the claim, as it had assigned the benefit of the building contract with Galliford to Aareal Bank AG Wiesbaden (“Aareal”) in accordance with the requirements of a debenture dated 10 May 2011. Mailbox raised three defences:
- The building contract was not in existence at the time of the assignment referred to in the debenture. Therefore there could be no assignment;
- Alternatively, any assignment was by way of charge rather than a legal assignment; or
- The contract had been re-assigned from Aareal to Mailbox before Mailbox commenced adjudication proceedings.
Mailbox failed on the first two defences, but won on the third so was able to enforce the adjudicator’s award. However, it was the analysis of the first and second defences and Mrs Justice O’Farrell’s review of the requirements for legal assignment under Section 138 of the Law of Property Act 1925 that are of particular note.
It was held that the wording of the debenture covered future contracts, including the building contract in question. The wording “each chargor with full title guarantee assigns absolutely by way of security in favour of the security trustee” amounted to a full legal assignment rather than an assignment by way of charge and/or a conditional assignment. Further, there was a requirement for notice of the assignment to be served and specific reference to rights being re-assigned, both of which were more akin to an absolute assignment. Express notice was given to Galliford, again consistent with an absolute assignment. Thankfully for Mailbox, on the day it commenced the adjudication, Aareal had re-assigned the rights under the building contract to Mailbox. If it had not done so, or done so after the adjudication had been commenced, Mailbox would not have been entitled to commence the adjudication.
When obtaining finance for a project it is crucial to understand what the funder really requires in relation to security over construction documents. If all rights are assigned, the employer no longer has the ability to enforce such rights and may have given away more than he bargained for.
It may be that the use of collateral warranties or third party rights together with a charge will suffice but if not (which is unfortunately still the common position), it is important that any such rights are re-assigned before the employer commences an adjudication or any other proceedings.