OF PROHIBITIONS ON ASSIGNMENTS, RESTRICTIVE COVENANTS AND NEGATIVE PLEDGES IN COMMERCIAL LAW: CLOGS ON COMMERCE

• Citation: (1994) 6 SAcLJ 159
• Date: 01 December 1994
• Published date: 01 December 1994
• Author: TJIO HANS

This article examines the efficacy of contractual clauses which seek to prohibit or encumber the commercial movement of personal property. It is suggested that such clauses be subject to a strict cost - benefit analysis before effect is given to them.

I. INTRODUCTION

The interfacing of contract and property has always been a fascinating sphere of study. One reason is that traditional notions of property as a thing have given way to relational concepts which lay stress on the legal significance of the rights that the owner has over its property. It has been said that “Property could mean either the res, the subject of ownership, or the rights exercisable over that res.”1 While land and chattels could come within the former definition, intangible property like choses in action sit more comfortably under the second.2 This, though, is a slippery slope to take since property then risks losing its elevated identity, with its borders blurring into contract, which itself is also a bundle of rights, albeit created voluntarily. If so, it is sometimes difficult, if not impossible, to distinguish property rights from mere contractual rights. The importance of the distinction is evident: capitalistic societies accord far greater protection to private property. Additionally, because commercial law is in large measure concerned with personal property, both in its transmission through the economy, as well as its service as collateral for raising finance, it is also interesting to see how far contract has been able to impinge on the liquidity of such property. Generically we shall refer to such contractual clauses as clogs on commerce.

II. EFFECT OF A CONTRACTUAL TERM BETWEEN THE DEBTOR AND ASSIGNOR PROHIBITING THE ASSIGNMENT OF THE CHOSE IN ACTION

In Helstan Securities Ltd v Hertfordshire County Council,3 a county council employed a contractor to carry out building works. The terms of the contract stipulated that the contractor was not to “assign the contract or any part thereof or any benefit or interest therein or there under without the written consent” of the council. Being in financial difficulties, the contractor assigned the amount alleged to be outstanding to the plaintiff. The plaintiff argued

that the prohibition clause worked only so far as the contract and certain choses in action arising under it were concerned, but not with the fruits of the contract, the debts which arose under it. Croom-Johnson J held though that a “debt is but one instance of a chose in action”4 The case is not strong authority for the dearth of relevant precedent then available for the consideration of the court.

Helstan has however been fully vindicated by the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd.5 Here two appeals regarding the effect of a clause prohibiting the assignment of a building contract were consolidated. In the first case, the lessors of a piece of property entered into a contract with the first defendants under which the latter were to remove blue asbestos from the property. Clause 17 prevented both the employer and the contractor from assigning the contract without the written consent of the other party. The first defendants did not do a good job and the lessors had to employ other contractors, the second defendants. The latter also failed to clear the property. An action was commenced against the defendants. The lessors then assigned the right of action to the plaintiffs who had also bought over part of the lease. There was thus clearly a good reason or sufficient proprietary right for the assignment,6 so that it did not savour of maintenance or of champerty.

In the second case, the first plaintiff entered into a building contract with the defendants, which also contained a similar clause 17 for the development of shops, offices and flats. The first plaintiff assigned both its interest in the property and the benefit of the contract, while the development was still uncompleted, to the second plaintiffs. As in the first case, the consent of the contractors was not sought. After the site was completed, part of it was found leaking. The plaintiffs sued the defendants for breach of contract. The case also raises issues of privity in the context of damages with which we are not presently concerned.

In the Court of Appeal it was held that the assignment in the first case was effective to transfer to the plaintiff the causes of action for subsisting breaches of contract by the defendant, this being a benefit that arose under the contract. In the second case, however, the Court of Appeal held that the assignment was invalid as there were no accrued causes of action at the time of assignment. In other words, the assignment of the benefit of the contract was prohibited, whereas any benefits arising under the contract were still assignable. In adopting this construction the Court of Appeal was very much influenced by Professor Goode who had expressed the view that a prohibition on assignment of the fruits of the contract was unenforceable, even if the prohibition on the assignment of the benefit of

the other contracting party’s future performance worked.7Helstan was distinguishable as the prohibition clause there was more widely drawn.8

The House of Lords allowed the first appeal and dismissed the second. It disagreed with the construction taken by the Court of Appeal. Lord Browne-Wilkinson thought that Professor Goode’s argument was more qualified than what the Court of Appeal had taken it to be. Indeed, Professor Goode appeared to talk about the prohibition only in the context of its effect as between the assignor and assignee. As a matter of privity, the clause should not govern the relationship between these two parties.9 Thus, at least as between the debtor and assignee, the House of Lords construed such a clause as a blanket prohibition unless it was expressly stated that it only applied to future performance of the contract and not to accrued causes of action; that is, the fruits of the contract.10

One could justifiably argue that such a prohibition clause should not bind a third party assignee for want of privity. The straightforward riposte is that if that were so, the benefit of the chose should itself not be assignable for want of privity, independent of any prohibition. Professor Goode for one was not troubled by its third party effects, merely the extent of it, that is, whether it could extend to the fruits of the contract.11 It goes to show that although Assignments of Choses is a neglected chapter in most conventional contract textbooks as an exception to privity, choses in action is something that properly belongs with the law of personal property.

If so, one might then justifiably feel that it is anomalous that prohibition clauses on assignments of leases are given short shrift so far as the subtenant is concerned, although it would clearly result in a breach of contract between the landlord and the first tenant.12 In Williams v Earle13 there was a covenant by a lessee not to assign the lease. The lessee purported to assign the lease in breach of the covenant. It was held that the assignment was valid, so that the lessor could sue the assignee directly. This assignment

is subject only to forfeiture, provided that there was also a forfeiture clause and relief is not granted.14 Prior to any such forfeiture, however, the lease is clearly vested in the assignee. This is because the legal conception of a lease brings with it a core of rights and obligations, so that a prohibition on its assignability is inconsistent with that conception and an affront to the law.

Indeed it was argued in Linden Gardens that it would be contrary to public policy to seek to render property inalienable, and that since contractual rights were a species of property, the prohibition was void as being illegal. In the United States, Article 9—318(4) of the Uniform Commercial Code treats such a prohibition on assignments as ineffective even if the assignee has knowledge of the clause. There the public policy argument is the economic need for liquidity,15 which the House of Lords in Linden Gardens expressly rejected. Lord Browne-Wilkinson thought that “there is no public need for a market in choses in action.”16

The stark distinction between choses in action and tangible property like the lease is also explained by the fact that choses in action have not quite removed its early status as a mere form of action, whereas leases have for a long time been recognised as proprietary. Croom-Johnson J in Helstan thought that “the law concerning covenants running with the land is not something which is readily adaptable to choses in action”17 The same phenomena of usage is evidenced in the priority rules of securities or shares, which although clearly a chose in action, is governed by the priority rules pertaining to chattels, rather than the rule in Dearie v Hall.18 Put differently, usage reifies property concepts. Choses in action are property in the modern sense, but we find it hard to shake off the orthodox preference for the subject matter, the res, as it were, so that there is a reluctance to grant pure choses the same independent existence as we do with reified property.

With the intangible chose it can thus be argued that the contract, including the prohibition clause, defines the property rather than delimits or removes its property status. The prohibition is so intertwined with the chose as to form a part of it. Another way of viewing it is to say that the prohibition clause prevents the contractual benefits from acquiring the status of a property right so that it remains a mere personal obligation. It would be very different with covenants not to assign book debts made not with the debtor but with a floating chargee when the creditor in turn borrows money from the chargee. This transparently is an attempt to inalienate property, here assignable book debts, which effects will be...