This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC. 

The High Court of Singapore has recently decided that a non-assignment clause in a contract did not prohibit the assignment of non-contractual (or tortious) rights arising out of or in connection with the contract. This article considers the practical implications of that decision.

Introduction

Can a party to a contract assign non-contractual rights arising out of the contract to a third party, notwithstanding the existence of a non-assignment clause in the contract?

The validity and enforceability of such an assignment were recently considered by the Singapore High Court (“HC”) in Re Ocean Tankers (Pte) Ltd (in liquidation) [2023] SGHC 330 (“Ocean Tankers”).

Contractual vs non-contractual rights

First, it is useful to understand the difference between “contractual” rights and “non-contractual” (or “tortious”) rights.  We will use the terms “non-contractual” and “tortious” interchangeably in this article to refer to the latter category of rights.

“Contractual” rights are rights which are set out in the provisions of the contract, reflecting the express agreement of the parties to the contract. Conversely, “non-contractual” rights are rights which arise as a matter of law and which are connected with (or which arise from) that contract, but are not specifically provided for in the text of a contract.

Background

Ocean Tankers (Pte) Ltd (the “Company”) was placed under judicial management in August 2020. In the interim period between Company’s judicial management and its subsequent winding-up, the judicial managers of the Company (the “JMs”) brought actions concerning purported assignments of claims made by a creditor of the Company (the “Assignor”) in favour of a third-party debtor of the Company (the “Debtor”).

One of the issues the HC had to consider concerned the validity of an assignment of non-contractual claims made by the Assignor in favour of the Debtor, and whether that assignment was enforceable against the Company.

The assignment in question sought to assign the Assignor’s rights, title, interests and benefits in and to (amongst other things):

1. a storage agreement (the “Storage Agreement”) made between the Assignor and the Company;
2. a document (the “Document”) issued by the Company evidencing the existence and transfer of certain cargo; and
3. any and all causes of action the Assignor had or may have had against the Company in connection with or arising from (amongst other things) the Document.

As indicated above, there were various assignments which were purported to be made by the Assignor which were being challenged by the Company.  However, for the purposes of this article, the salient assignment was the purported assignment of the Assignor’s causes of action against the Company in connection with or arising from the Document, as referred to in paragraph (3) above (which the HC referred to as the “Vessel [B] Document Claim”).

The court had to consider if the assignment of the Vessel [B] Document Claim was valid in light of the non-assignment clause set out in the Storage Agreement (the “Non-Assignment Clause”).  The HC held that the Document was “not separate and independent from the Storage Agreement”, implying that the Document was subject to the provisions of the Storage Agreement, including the restrictions on assignment set out in the Non-Assignment Clause.

Did the assignment of the Vessel [B] Document Claim breach the Non-Assignment Clause?

The Non-Assignment Clause was in the following terms:

The HC noted that the text of the Non-Assignment Clause required the Company’s consent for the assignment and novation of rights under the Storage Agreement (and, by extension, the Document), and the parties did not dispute that no such consent was obtained.

The HC was of the view that there were “clear indications in the [Non-Assignment Clause] itself that it relates to contractual rights but not tortious rights”. Three reasons were given by the HC in reaching this conclusion.

First, the Non-Assignment Clause referred to “novation”, which the HC noted is a process “by which a contract between the original contracting parties is discharged through mutual consent and substituted with a new contract between the new parties”. In the HC’s view, when the Non-Assignment Clause referred to the novation of “rights and obligations”, this must be understood to mean contractual rights and obligations, and the Non-Assignment Clause did not prohibit the assignment or novation of tortious rights and obligations.

Second, the heading of the Non-Assignment Clause – “TRANSFER OR ASSIGNMENT OF AGREEMENT” (emphasis added) – indicated the intention of the parties for the clause to cover only contractual rights.

Third, the HC noted that the Storage Agreement itself referred to rights other than contractual rights. For example, the Storage Agreement made references to claims “in tort, under contract or otherwise at law” as well as obligations or liabilities “under or arising from [the Storage] Agreement or at law”. 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] Document Claim was a tortious claim and, consequently, held that the assignment of the Vessel [B] Document Claim was outside the ambit of, and did not breach, the Non-Assignment Clause.

In reaching its conclusion, the HC considered the judgment of the English High Court in Burleigh House (PTC) Ltd v Irwin Mitchell LLP (“Burleigh House”)[1] which held that the non-assignment clause in that case prohibited both assignments of contractual and tortious rights.  However, the HC declined to follow Burleigh House for the following reasons:

1. first, Burleigh House concerned assignments in the context of a former client’s claim against a law firm for professional negligence. The HC was of the view that the implications that such an assignment would have on the solicitor-client relationship were a significant consideration for the English High Court in its interpretation of the non-assignment clause in the law firm’s retainer. The HC was quite clear that this concern did not apply in the context of the case before it and, accordingly, distinguished Burleigh House;
2. second, Burleigh House sought to apply the approach taken towards the construction of arbitration clauses, as set out in Fiona Trust & Holding Corp v Privalov[2] (“Fiona Trust”). That case held that rational businesspeople who agree to such clauses, regardless of whether they refer to disputes “arising under”, “in connection with” or “under” a contract, intend any dispute arising out of their relationship to be decided by the same tribunal. While noting that Fiona Trust had been found by the Singapore Court of Appeal to apply to jurisdiction clauses generally[3], the HC did not agree that the approach towards the interpretation of arbitration clauses as set out in Fiona Trust should ipso facto apply to other clauses in a contract or to non-assignment clauses generally. In the HC’s view, a non-assignment clause is not a dispute resolution clause and is intended to perform a very different function.

Implications for the drafting of non-assignment clauses

Ocean Tankers illustrates the potential limits of a non-assignment clause under Singapore law and provides valuable guidance as to what type of rights and obligations parties can assign – or can prohibit the assignment of.

The judgment does, however, indicate that appropriate drafting can extend non-assignment clauses to prohibit or restrict the transfer of non-contractual rights. Such a prohibition on the assignment of non-contractual rights would work in tandem with the prohibition of an assignment of contractual rights under the agreement, such that any rights related to the agreement can be prevented from being assigned.

Ocean Tankers has practical implications. For example, some industry standard form documents use language which is similar to that of the Non-Assignment Clause, in prohibiting assignments of rights or obligations “under” certain specifically identified documents. Ocean Tankers indicates that a Singapore court would construe this as applying only to contractual rights, and not to non-contractual/tortious ones.

Prior to Ocean Tankers, parties to a contract would not have considered that such a clause would treat contractual and non-contractual rights differently and would have assumed that such drafting would apply to both categories of rights; there now appears to be a need to re-look and re-draft these clauses to reflect the contracting parties’ intentions.

Epilogue

Having expended considerable effort to explain why the assignment of the Vessel [B] Document Claim did not breach the provisions of the Non-Assignment Clause, the HC ultimately found that the assignment of the Vessel [B] Document Claim was a “champertous assignment of a bare right to litigate and therefore void and/or ineffective against the Company, the JMs and the liquidators [of the Company]”.

This, however, does not have any bearing on (and should not distract us from) the HC’s conclusion that the Non-Assignment Clause did not prohibit the assignment of non-contractual rights.

Link to the full article: Assigning rights where a contract contains a non-assignment clause (cms-lawnow.com)

Co-authored by: Kerith Cheriyan, Practice Trainee, Holborn Law LLC

Footnotes

[1] Burleigh House (PTC) Ltd v Irwin Mitchell LLP [2021] EWHC 834

[2] Fiona Trust & Holding Corp v Privalov [2007] Bus LR 1719

[3] Bunge SA and another v Shrikant Bhasi and other appeals [2020] 2 SLR 1223