equitable assignment in english law

• Practical Law

Equitable assignment

Practical law uk glossary 2-107-6540  (approx. 3 pages).

• The assignor can inform the assignee that he transfers a right or rights to him.
• The assignor can instruct the other party or parties to the agreement to discharge their obligation to the assignee instead of the assignor.
• General Contract and Boilerplate
• Breach of Lease Covenants
• Security and Quasi Security

Equitable Assignment: Everything You Need to Know

An equitable assignment is one that does not fulfill the statutory criteria for a legal assignment, but is binding and upheld by the courts in the interest of equability, justice, and fairness. 3 min read updated on February 01, 2023

An equitable assignment is one that does not fulfill the statutory criteria for a legal assignment, but is binding and upheld by the courts in the interest of equability, justice, and fairness.

Equitable Assignment

An equitable assignment may not appear to be self-evident by the law's standard, but it presents the assignee with a title that is protected and recognized in equity. It's based on the essence of a declaration of trust; specifically, essential fairness and natural justice. As long as there is valuable consideration involved, it does not matter if a formal agreement is signed. There needs to be some sort of intent displayed from one party to assign and the other party to receive.

The evaluation of a righteous equitable assignment is completed by determining if a debtor would rationally pay the debt to another party alleging to be the assignee. Equitable assignments can be created by:

• The assignor informing the assignee that they transferred a right to them
• The assignor instructing the other party to release their obligation from the assignee and place it instead on the assignor

The only part of an agreement that can be assigned is the benefit. Generally speaking, there is no prerequisite for the written notice to be received or given. The significant characteristic that separates an equitable assignment from a legal assignment is that most of the time, an equitable assignee may not take action against a third party. Instead, it must rely on the guidelines governing equitable assignments. In other words, the equitable assignee must team up with the assignor to take action.

The Doctrine of Equitable Assignment in Wisconsin

In Dow Family LLC v. PHH Mortgage Corp ., the Wisconsin Supreme Court issued in favor of the doctrine of equitable assignment. The case was similar to many other foreclosure cases, except this one came with a twist. Essentially, Dow Family LLC purchased a property and the property owner insisted the mortgage on the property had been paid off. However, in actuality, it wasn't. 

Prior to the sale, the mortgage on the property was with PHH Mortgage Corp. When PHH went to foreclose on the mortgage, Dow Family LLC contested it. There was one specific rebuttal that caught the attention of the Wisconsin Supreme Court. The official mortgage on record was with MERS, an appointee for the original lender, U.S. Bank.

Dow argued that PHH couldn't foreclose on the property because the true owner was MERS. Essentially, Dow was stating that the mortgage was never assigned to PHH. Based on this argument, PHH utilized the doctrine of equitable assignment.

Based on a case from 1859, Croft v. Bunster, the court determined that the security for a note is equitably assigned when the note is assigned without a need for an independent, written assignment. Additionally, Dow contended that the statute of frauds prohibits the utilization of the doctrine, mainly because it claimed every assignment on a property must be formally recorded.

During the case, Dow argued that the MERS system, which stored the data regarding the mortgage, was fundamentally flawed. According to the court, the statute of frauds was satisfied because the equitable assignment was in accordance with the operation of law. Most importantly, the court avoided all consideration regarding the MERS system, concluding it was not significant in their decision. 

The outcome was a major win for lenders, as they were relying on the doctrine specifically for these types of circumstances.

Most experts agree that this outcome makes sense in the current mortgage-lending environment. This is due to the fact that it is still quite common for mortgages to be bundled up into mortgage-backed securities and sold on the secondary market.

Many economists claim that by not requiring mortgages to be recorded each time a transfer is completed, the loans are more easily marketed to investors. Additionally, debtors know who their current mortgage company is because the new lender must always notify the current borrower in order to receive payment. It was determined that recording and documenting the mortgage merely provides a signal to the rest of the world that the property owner secures a debt.

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Equitable assignment definition

What does equitable assignment mean.

Assignments can occur in equity when any of the requirements of legal assignment are not satisfied.

The assignor can inform the assignee that he transfers a right or rights to him or instruct the other party or parties to the agreement to discharge their obligations to the assignee. Only the benefit of an agreement may be assigned. There is no requirement for written notice to be given or received. The position of a party who wishes to be able to make an equitable transfer of obligations under the contract is the same as described under legal assignments.

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Equitable assignment

Practical law uk glossary 2-107-6540  (approx. 3 pages).

• The assignor can inform the assignee that he transfers a right or rights to him.
• The assignor can instruct the other party or parties to the agreement to discharge their obligation to the assignee instead of the assignor.
• General Contract and Boilerplate

Assignments: why you need to serve a notice of assignment

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the 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".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

• If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
• If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
• Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

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Legal and equitable assignments

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Financiers and lessors often take an assignment over debts or certain rights under contracts as part of their security package. Depending on how this is done, an assignment can either be characterised as a legal or equitable assignment under English law. Stephenson Harwood’s Dipesh Bharania explains

A key difference between a legal and equitable assignment is the ability of the assignee, be it a financier or lessor, to bring proceedings in its own name against the debtor for payment of the debt owed, or to enforce rights in the contract.

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A legal assignee has this right, but there is a question over whether an equitable assignee has this right or not.

In the case of General Nutrition Investment Company v Holland and Barrett International Ltd and another [2017] EWHC 746 Ch, the High Court held that the beneficiary of an equitable assignment did not have the right to bring proceedings in its own name, and had to do so jointly with the assignor which had assigned rights in the underlying contract.

This raises questions about the equitable assignment, as it appears to contradict other judgments which permit an equitable assignee to take proceedings in its own name. The predecessor company of General Nutrition Investment Company (GNIC) entered into a trade mark licence agreement in March 2003 with Holland and Barrett (H&B) allowing H&B to use certain trademarks in the UK.

After complex internal restructuring, the original contracting party had been dissolved and GNIC was the successor company, which as assignee had been assigned both the rights under the original trademark licence agreement, and the rights to the trademarks themselves. GNIC alleged that H&B was in breach of the licence agreement and served a number of notices of termination on H&B purporting to terminate the agreement.

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The court had to decide whether any of these notices of termination were effective, and whether GNIC had the right to serve such notices, and bring and maintain proceedings against H&B in its own name.

The formalities for a legal assignment are set out in Section 136 of the Law of Property Act 1925, including that the assignment must be:

In writing and executed by the assignor “Absolute” and unconditional, Not be expressed to be “by way of charge”, and Notified in writing to the person against whom the assignor could enforce the assigned rights – usually the other contracting party.

It can often suit the assignor, the assignee and the third party to allow the assignor to deal with the third party, for notice not to be given (certainly initially) and the assignee to remain a silent party. This method is frequently used in financing documents, with notice only being given at a later date (rather than at the time of assignment) when there is a possibility of enforcement on the horizon.

An equitable assignment tends to be created when an assignment does not meet one or more of the requirements for a legal assignment. The main differences between a legal and an equitable assignment are priority (and the established principle that the assignee who serves notice first takes priority over any other assignee (where notice is not given)) and an equitable assignee needing to join the assignor as a party in any legal proceedings it brings against the third-party debtor.

However, two recent cases have lessened the distinction in practice between the two. In the Bexhill case the Court of Appeal recognised that an equitable assignee could take action in its own name without joining in the assignor. In the Ardila case, where notice had been given to the contracting party, the High Court looked at the terms of the notice and decided that what had seemed to be a legal assignment was in fact an equitable assignment because the wording of the notice seemed to retain rights for the assignor. The court used this reasoning to declare it an equitable assignment, despite the notice having been given as required.

Returning to the case in point, after the internal reorganisation and subsequent assignment of the trade mark licence agreement to GNIC, no notices of such assignment were served on H&B by the assignor prior to the purported termination of the agreement or the issue of proceedings. GNIC maintained that as it took the place of its predecessor as the “Licensor”, it became the body entitled to exercise rights of termination under the agreement. H&B’s contention was that, as an equitable assignee, GNIC did not have the right to terminate the agreement or bring proceedings in its own name.

It is widely accepted that, until a notice of assignment is given, and (i) the third party can validly discharge its obligations under the contract to the assignor, and (ii) the third party may raise against the assignee any defence or set-off which he could have raised against the assignor (provided that the matter on which the defence is based arose before notice was received) and the contracting party and assignor can amend the terms of the contract without the assignee’s consent.

The High Court considered that previous case law on this issue was binding as it had not been overruled or materially distinguished in any subsequent cases heard, and held that notice to the contracting third party is necessary to perfect the right of the assignee. Additional weight was given to the fact that a substantive contractual right (in this case, the right to terminate the licence agreement) had been assigned rather than just the assignment of a debt. Consequently, the contractual relationship between the parties was seeking to be amended and therefore the third party was entitled to see that such change was being effected by a party which had the right to do so and whom it knew to have such rights. The Court maintained that H&B cannot be expected to accept a notice of termination from an entity which turns out to be an assignee when it had never been given notice of that assignment.

While the High Court accepted that this decision may be appealed, this has raised a question about equitable assignments and the rights of the equitable assignee under English law. In the meantime, in practice, parties will have to scrutinise what type of right they are seeking, whether in security or as a full legal assignment and opt for the method which provides the clearest outcome possible as the law stands when they take the assignment. Anyone taking an assignment of the benefit of a contract should clearly ensure that notice is served on the other contracting party if it wants to be sure it can act in its own name under that contract against the other contracting party if need be.

Otherwise, there is a risk that an equitable assignee will be unable to enforce substantive contractual rights without having to join in the assignor in proceedings. That said, it may still be commercially preferable to have an equitable assignment for particular financing and leasing structures where it is not thought difficult to join the assignor at a later date if need be. In this case it was not possible, as the assignor had been dissolved. Advice should be sought about the type of assignment to be taken in each transaction pending further clarification from the courts.

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UK – Legal Terms Explained: Assignment.

April 18, 2023 by Rohin Pujari

What is assignment?

An assignment is the transfer of an interest from one party (“ assignor ”) to another (“ assignee ”). Assignment allows the assignor to transfer the benefit of a contract to the assignee. For example, the tenant of recently built office premises may transfer the benefit of a collateral warranty originally granted in its favour to a subsequent tenant.

Without express words, assignment usually involves an assignment of accrued and future rights. Clear words are required to assign only future rights under a contract ( Energy Works (Hull) Ltd v MW High Tech Projects UK and others  [2020] EWHC 2537 (TCC)).

Assignment in a construction context typically refers to a legal or equitable assignment (although assignment can also occur by other means, e.g. operation of law). A key difference between legal and equitable assignments is that, in the case of a legal assignment, the assignee may enforce any assigned rights in its own name. In contrast, following an equitable assignment, the assignee would need to join the assignor in any action brought to enforce its rights.

To take effect as a legal assignment under English law, an assignment must comply with section 136(1) of the Law of Property Act 1925 (“ LPA 1925 “). This requires the assignment to be: (i) in writing; (ii) absolute; and (iii) expressly notified in writing to the other party to the contract (“ debtor “). In practice, parties tend to effect a legal assignment by way of an assignment agreement or deed of assignment to ensure that these requirements are satisfied.

However, if the parties fail to meet any of the requirements set out in LPA 1925 the assignment will usually have equitable effect. Equitable assignments may arise orally or in writing, and whilst recommended, there is no need to notify the debtor, provided a clear intention to assign can be established. Neither legal nor equitable assignments generally require the debtor’s consent.

  Assignment v novation

Although both terms are sometimes used interchangeably, assignment should be distinguished from novation. The most notable difference is that assignment only transfers the benefit of a contract (e.g. a warranty that works have been carried out to the required standard), whereas a novation transfers both the benefit and the burden (e.g. an obligation to pay for a service). As novation also requires the consent of all parties, it will typically be effected by a tripartite agreement between the novating party, the party to whom the contract is to be novated, and the counterparty to the relevant contract.

  Some issues concerning assignment

• Restrictions on assignment  – Unless there is an express prohibition in the contract, the parties will usually be free to assign the benefit of a contract. However, many standard form building contracts, including the JCT Design and Build Contract, prohibit assignment, or allow it only subject to certain conditions. In this regard, a developer may seek to amend the contract to reduce any restrictions on their ability to assign. In contrast, a contractor may seek to limit any rights to assign, for example by specifying the number of permitted assignments. This is often linked to the contractor’s professional indemnity insurance terms which may provide for restricted cover in respect of successive assignments.
• Ineffective assignment where prohibited  – If a party purports to assign a right in contravention of an assignment clause, the assignment will only be effective as between the assignee and the assignor, and will not be enforceable against the debtor.
• Means of assignment  – A clause in a contract permitting assignment is not sufficient to effect an assignment. There must be a separate document or oral agreement to show the assignor’s intention to assign ( Allied Carpets Group Plc v Macfarlane (t/a Whicheloe Macfarlane Partnership)  [2002] EWHC 1155 (TCC)).

* This is an updated version of an article originally published as part of the ‘Legal Terms Explained’ series of  Construction Law .

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English law assignments of part of a debt: Practical considerations

United Kingdom |  Publication |  December 2019

Enforcing partially assigned debts against the debtor

The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).

While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.

This note considers whether this requirement may be dispensed with in certain circumstances.

Can you assign part of a debt?

Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot. 1  This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.

Joining the assignor to proceedings against the debtor

While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.

An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate. 2

Kapoor v National Westminster Bank plc

English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.

In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan 3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.

The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.

Application of Kapoor

It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.

This analysis is limited to English law and does not consider the laws of any other jurisdiction.

Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.

Legal title cannot be assigned in respect of part of a debt. A partial assignment would not satisfy the requirements for a legal assignment of section 136 of the Law of Property Act 1925.

If an assignor does not consent to being joined as a plaintiff in proceedings against the debtor it would be necessary to join the assignor as a co-defendant. However, where an assignor has gone into administration or liquidation, there may be a statutory prohibition on joining such assignor as a co-defendant (without the leave of the court or in certain circumstances the consent of the administrator).

[2011] EWCA Civ 1083

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