General Nutrition Investment Company(GNIC) vs Holland & Barrett (HBIL)
Many transactions feature an assignment of contractual rights, either in the context of a sale or a security interest. Over the years, English law has developed rules to resolve the many arguments that can arise between assignor, assignee and obligor in these transactions. General Nutrition is the latest in a long line of cases that have helped develop those rules.
Section 136 of the Law of Property Act 1925 (the "Act") sets out the requirements for what is often called a legal assignment but is more accurately referred to as a "statutory assignment". The Act requires the assignment to be in writing, signed by the assignor and notice of the assignment must be given to the obligor. The Courts have held that it is a necessary consequence of Section 136 that the assignment must be of all of the claim, not just part of it, thus adding in effect a fourth requirement to the three statutory ones.
An assignment that does not comply with all of these requirements is described as an "equitable assignment" because the courts of equity would enforce the assignment even though it did not comply with the Act. However, an equitable assignee does not have all the rights that a statutory assignee would have.
One of the key benefits of a statutory assignment is that the assignee is entitled to exercise all of the rights under the contract against the obligor. General Nutrition provides some useful guidance on the limitations imposed by an equitable assignment resulting from a failure to give notice of assignment.
GNIC was the assignee of certain licencing agreements entered into by HBIL. The licence agreement gave the licensor the right to terminate the licence by giving notice to HBIL if certain events occurred. The licensor assigned its rights under the licence to GNIC, but neither the original licensor nor GNIC notified HBIL of the assignment. GNIC served a termination notice on HBIL.
HBIL argued that the notice of termination was ineffective since GNIC could not exercise any rights against HBIL under the license agreement until HBIL had been notified of the assignment.
There is much to recommend that argument, without knowing any of the law relating to the subject. Why should HBIL be expected to respond to a notice of termination received from a person who, as far as HBIL knew, had no rights under the licence agreement? As far as HBIL knew, the licence agreement was between it and the original licensor and any notice of termination would need to come from the original licensor in order to be of any effect.
GNIC argued that it should be entitled to serve the notice of termination merely by virtue of the assignment without needing first to notify HBIL that the assignment had occurred.
The Judge considered first whether an equitable assignee could bring legal proceedings in his own name and noted that it is not a universal requirement that the assignor be made a party to the proceedings in order for the equitable assignee to enforce his claims against the obligor. In other words, an equitable assignee could bring proceedings under the assigned contract without first notifying the obligor of the assignment.
However, the Judge distinguished the ability to bring legal proceedings from the ability to exercise rights under an assigned contract. He held that the fact that an equitable assignee of a debt may be able to recover that debt does not mean that the assignee can exercise rights under the contract under which that debt arises, such as the right to serve a termination notice. He was influenced in this decision by the fact that the validity of a notice, which may well be time-sensitive, should not depend on who may or may not subsequently be made a party to any subsequent legal proceedings.
The Judge observed that an obligor has a right to see that any potential change in his contractual position is "brought about by a person who is entitled and whom he can see to be entitled, to bring about that change". The Judge also noted that the requirement to serve a notice of assignment was not an onerous one and would not have been difficult either for the original licensor or for GNIC.
The Judge concluded that in the absence of a notice of the assignment, GNIC did not have the power to serve a termination notice and so the notice served by GNIC did not terminate the licence.
The decision would seem a very sensible one. It would be unfair to the obligor if its contractual position could be affected by a termination notice apparently coming from someone who, so far as the obligor was aware, had no interest in the contract.
The requirement to serve notice of assignment is not an onerous one. Unfortunately, the Judgment does not cast any light on why GNIC (or the original licensor) did not serve a notice of assignment. It may be that GNIC did not wish to alert licensees, such as HBIL, of the assignment. This is also suggested by the fact that GNIC was incorporated with the same name as the original licensor. The Judgment also does not cast any light on why GNIC did not simply serve a notice of assignment and then a new termination notice once the issue was raised: it may be that the time for serving termination notices had passed or that the grounds for serving a termination notice no longer exists.
Serving a notice of assignment on the obligor does not of itself convert an equitable assignment to a statutory assignment, unless the only reason that the assignment was equitable was the failure to give notice. For example, the assignment of part of a debt will remain an equitable assignment whether or not notice is given. In other words, General Nutrition is about the importance of serving a notice of assignment, rather than about the limitations inherent in an equitable assignment.
GNIC obtained the benefit of the licence agreement under a document that described GNIC as the assignee of the rights under the licence agreement. The Court therefore did not have to consider whether a person who obtains the benefit of contractual rights by virtue of universal succession would need to serve a notice. In universal succession there is no "assignment" but the successor will be recognised by the English Courts as entitled to the benefit of the rights.
However, it would seem that the public policy reasons concerning protection of the obligor would apply to a succession in the same way as an assignment. A Court may well expect the successor to give notice to the obligor that the successor has become entitled to the benefit of all rights under the contract before the successor can exercise those rights.
General Nutrition provides a further useful example of the importance of serving a notice of assignment, but will not be the last case on the topic.
David Lacey, the author of this article, will be presenting at BCR Event Receivables Finance Masterclass 2017.