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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.


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