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ASSIGNMENT OF CONTRACTUAL RIGHTS IN SHIPBUILDING CONTRACTS
English and Norwegian Law Compared
Marie Efpraxiadis & Linn Hertwig Eidsheim
Sjørettsforeningen - 13 November 2006
Oslo • Bergen • London • Singapore • Kobe • Shanghai
PART 1
English Law Perspective
PART 2
Norwegian Law Comparison
2
PART 1: English Law Perspective - index
1.
ASSIGNMENTS DEFINED AND DISTINGUISHED
1.1 Definition
1.2 Assignment vs. Novation
1.3 Assignments “by way of sale” vs. assignments “by way of security”
2.
CREATION AND EFFECT OF ASSIGNMENTS
2.1 Creation of Legal and Equitable Assignments
2.2 Effect
(a) Effect between the assignee and assignor
(b) Effect between the assignee and obligor
(c) Difference between legal and equitable assignment
3.
ASSIGNMENT IN THE CONTEXT OF SHIPBUILDING CONTRACTS
3.1 Assignment of Buyer’s Benefit under the Building Contract
3.2 Assignment of Refund Guarantees
3.3 Assignment of Builder’s Warranties
3
1. Assignments Defined and Distinguished
1.1 Definitions
–
Assignment: A present transfer of personal property of an intangible nature ( a right ) by the assignor
to the assignee
–
Assignor: the party assigning the right
–
Assignee: the party receiving the assigned right
–
Debtor / Obligor: the party bound to perform the obligation in relation to the assigned right
4
1. Assignments Defined and Distinguished
1.2 Assignment vs. Novation
–
“Assignment” can only involve the transfer of rights, not obligations
–
A transfer of both contractual rights and obligations is a “novation”
–
Novation: a tripartite agreement between the original parties to the contract and a third party, where
the original contracting parties agree to extinguish the contract and one of them enters into a new
contract with the third party. The new contract replaces the extinguished contract
–
–
Novation may result in the discharge of guarantees given in respect of the novated contract
Guarantees should be reissued if they are intended to apply to the contract as novated
5
1. Assignments Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security”
•
1.3.1 Assignment by way of sale (or “outright assignment”):
•
A permanent transfer of the assigned rights to the assignee
•
No implicit or explicit intention to have the rights re-assigned to the assignor
•
Examples:
– assignment of buyer’s rights under the shipbuilding contract to its affiliate or subsidiary
– assignment of the shipbuilder’s warranty of quality by the buyer to an on-purchaser of the
vessel
6
1. Assignments Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security” (cont.)
•
1.3.2 Assignment by way of security:
•
Given by the assignor (or by a third party) for the purpose of securing repayment of a loan or
other obligation
•
Includes an implicit or explicit right by the assignor to have the rights re-assigned once the
secured debt is repaid
•
Example:
– assignment by the buyer to the lender of all its benefit under the shipbuilding building
contract, as security for repayment of the loan advanced to finance payment of the predelivery instalments
– unclear whether this is possible under Norwegian law
7
2. Creation and Effect of Assignments
2.1 Creation of Legal and Equitable Assignments
•
2.1.1 Legal assignment (or “statutory assignment”)
–
S. 136 of the Law of Property Act 1925: The assignment must be:
(i) in writing and signed by the assignor
(ii) “absolute”
– must involve a present transfer of rights by the assignor
– cannot apply to only a part of the debt
– must be unconditional
(iii) notified in writing to the obligor
– there is no legal assignment unless notice is given
– notice can be sent either by the assignee or the assignor
– not necessary to present the memorandum of assignment
– no time limit for giving notice, but notice cannot be given before the assignment memorandum is
executed
– notice should identify the assignee and the assigned property
8
2. Creation and Effect of Assignments
2.1 Creation of Legal and Equitable Assignments (cont.)
•
2.1.2 Equitable assignment
•
Can arise if:
1. the obligor manifested a clear intention to make an irrevocable transfer of an identifiable
right, and
2. there was consideration given by the assignee
•
Will be valid as between the assignee and the assignor from the date that it was made, even
without notice to the obligor.
•
Obligor will only be affected by the assignment as of the time he receives notice.
•
Can be used to assign future rights.
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2. Creation and Effect of Assignments
2.2 Effect
•
2.2.1 Effect between the assignee and assignor
–
Whether legal or equitable, will take effect as between the assignor and the assignee from the time it is
made
1. Assignor will be bound to hold for the benefit of the assignee any payments made by the obligor
2. Assignment will be effective against any creditors of the assignor, and
3. Assignor will remain the only party liable to the obligor for non-performance of outstanding
obligations
10
2. Creation and Effect of Assignments
2.2 Effect (cont.)
•
2.2.2 Effect between the assignee and the obligor
–
The assignment will affect the obligor only as of the time he receives notice. After notice is received:
1. obligor will not be able to get a good discharge by performing to the assignor
2. the obligor will not be able to set-off any new liabilities (but can still set-off liabilities arising from
the assigned contract)
3. the assignment will take priority over any other assignment of the same rights not notified to the
obligor
11
2. Creation and Effect of Assignments
2.2 Effect (cont.)
•
2.2.3 Difference between legal and equitable assignment
–
If notice of an equitable assignment has been given to the obligor, the only substantial difference
between an equitable assignment and a legal assignment is:
1. the assignee can enforce a legal assignment by suing the obligor in its own name; whereas
2. an equitable assignment will require the assignor to be made party to the action
12
3. Assignment in the Context of Shipbuilding Contracts
Notice of assignment of Refund Guarantees
Buyer’s Bank
(Assignee)
Refund Guarantor
(Obligor)
novation
Shipbuilding Contract
On-purchaser
(Assignee)
Sale of
vessel
post-delivery
Buyer 2
Post-novation
Payment of instalments
Buyer 1
novation
(Assignor)
(rights)
Construction and delivery
(rights)
warranties
Assignment of Warranties
Notice of assignment of Building Contract
Notice of Aassignment of Warranties
13
Builder
(Obligor)
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract
•
3.1.1 Does Norwegian law recognise a security assignment of “all rights under the contract”?
– It will be crucial to the bank financing the buyer’s pre-delivery instalments to obtain a security
assignment of the buyer’s benefit under the building contract.
• Title to the vessel under construction rests with the builder, so mortgage is not an option. Only
contractual rights are available.
– Unclear whether such a security assignment is valid under Norwegian law.
14
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract (cont.)
•
3.1.2 Notice of Assignment to the Builder
– Notice to the builder is required to constitute a legal assignment
15
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract (cont.)
•
3.1.3 Acknowledgement and/or Consent by the Builder
– Unless the contract prohibits assignment or requires builder’s consent to an assignment, builder’s
consent is not necessary to constitute a valid assignment
• Even so, it is common practice to require an acknowledgment
– evidence that notice was received
– indication that builder intends to comply with any special terms in the notice
– If the building contract does prohibit assignment without the prior consent, consent must be obtained to
constitute an assignment (whether legal or equitable, outright or for security purposes)
• Strictly construed. If consent is not to “not be unreasonably withheld”, consent must nevertheless
be sought even if it cannot be legitimately withheld if requested
• “not to be unreasonably withheld” means the decision to withhold the consent is one that “no
reasonable person could have reached in the circumstances”
16
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract (cont.)
•
3.1.4 Performance of obligations is required to make the assigned rights unconditional
– Assignment gives bank all of buyer’s rights but none of buyer’s obligations
– Builder will not be obliged to complete or deliver the vessel unless buyer’s corresponding obligations
have been performed
• Thus, the rights assigned to the bank are conditional rights
• Buyer remains responsible to perform the obligations required to make the rights unconditional
– In the event of buyer’s default, bank many need to step in and perform buyer’s obligations to make the
rights unconditional
• Bank should be entitled to make voluntary payments for the buyer without objection by the builder
• If buyer’s obligations are more complex, bank should obtain builder’s advance consent to step-in and perform
17
3. Assignment in the Context of Shipbuilding Contracts
3.2 Assignment of Refund Guarantees
•
3.2.1 Assignment of existing refund guarantees
– The assignment of the refund guarantees will be executed by the buyer shortly before the loan is
advanced
– Where the building contract provides that a separate refund guarantee will be issued for each
instalment, only the guarantee in respect of the first instalment (if that) will have been issued at that time
– Assignment of already issued refund guarantees follows the same principles discussed in relation to
building contracts
• Notice to refund guarantor is required
• If guarantee contains an assignment prohibition, guarantor’s consent must be obtained
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3. Assignment in the Context of Shipbuilding Contracts
3.2 Assignment of Refund Guarantees (cont.)
•
3.2.2 Assignment of future refund guarantees.
– Refund guarantees to be issued after the date of the assignment are “future rights”; - mere expectancies
– Not possible to “absolutely” assign a future right, therefore not possible to make a legal assignment of
future refund guarantees
– Purported assignments of future rights will be given effect in equity as “agreements to assign” provided:
• given for valuable consideration and
• property is sufficiently well defined so as to be identifiable when it comes into existence
– Notice of the assignment of future guarantees must be given to the refund guarantor
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3. Assignment in the Context of Shipbuilding Contracts
3.3 Assignment of Builder’s Warranties
– On-purchaser will want an outright assignment of the post-delivery warranty of quality given by the
builder in the building contract
• Usually a 12-month warranty against defects in design, materials and workmanship
• Particularly important because the sales contract terms will usually preclude any claims being brought against
the seller
20
3. Assignment in the Context of Shipbuilding Contracts
3.3 Assignment of Builder’s Warranties
•
3.3.1 If no prohibition of assignment
– A written assignment by the buyer to the on-purchaser and receipt of notice by the builder will legally
suffice
– Nevertheless, on-purchaser should require a builder’s acknowledgment for commercial reasons
• Cost of legally enforcing a warranty claim may exceed the sums being claimed, so it is comforting to see that
builder is not negatively predisposed to the assignment
•
3.3.2 If consent is required
– consent must be obtained for the assignment to be constituted (whether as an equitable or a legal
assignment)
21
3. Assignment in the Context of Shipbuilding Contracts
3.3 Assignment of Builder’s Warranties (cont.)
•
3.3.3 If assignment prohibited
– Until recently, was thought to create a “legal black hole”, where the on-purchaser cannot enforce the
builder’s warranty and the buyer can also not enforce the builder’s warranty because the loss was
suffered by the on-purchaser not the buyer
– However, a narrow exception has been recognised:
• Provided builder has not extended a direct contractual warranty to on-purchaser, buyer may bring a claim of
breach of warranty for the benefit of on-purchaser
– Therefore, if builder refuses consent, on-purchaser should require buyer’s undertaking to bring suit
against the builder if required
22
3. Assignment in the Context of Shipbuilding Contracts
3.3 Assignment of Builder’s Warranties (cont.)
•
3.3.4 Timing
– Buyer will not want to give outright assignment of vessel warranties before it is certain on-purchaser will
accept delivery
– Prior to taking delivery, on-purchaser will want to ensure there is a legal assignment
– Therefore, if possible, the assignment, the notice and the acknowledgment/consent should all be signed
and exchanged at the delivery closing
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Part 2:
Linn Hertwig Eidsheim, Wikborg, Rein & Co.
ASSIGNMENT OF CONTRACTUAL RIGHTS IN SHIPBUILDING CONTRACTS
English and Norwegian Law Compared
Norwegian law comparison
Oslo • Bergen • London • Singapore • Kobe • Shanghai
24
Part 2 Norwegian Law Perspective - index
1.
Assignments Defined and Distinguished
2.
Creation and Effect of Assignments
3.
Assignment in the Context of Shipbuilding Contracts
25
1. Assignment Defined and Distinguished
1.1 Definitions and Legal Terminology
–
English law assignment: A present transfer of rights by the assignor to the assignee
Assignee
Obligor/
Debtor
–
Assignor
English law assignment vs novation:
•
•
Assignment as transfer of rights and
Novation as transfer of both rights and obligations
26
1. Assignment Defined and Distinguished
1.1 Definitions and Legal Terminology (cont.)
–
Norwegian law practice: ”one term applies to all”
•
•
”Transport” or ”Overdragelse” (or ”Cesjon”)
”Transportavtale”
Erverver/
Cesjonar
Overdragelse/Cesjon
Cessus/
Debitor Cessus
Krav / Fordring
Transportavtale
Overdrager/
Cedent
–
“Novasjon”: fornyelse, rettshandel som går ut på å bringe et gammelt rettsforhold ti opphør og samtidig
erstatte det med et nytt.
–
Norwegian law: variation of terms availiable but not used in practice
27
1. Assignment Defined and Distinguished
1.1 Definitions and Legal Terminology (cont.)
–
Norwegian law: Determine whether rights and / or obligations transferred by interpretation of the
agreement or transfer itself
–
Observation
•
Difference in use of legal terminology to indicate variations
28
1. Assignment Defined and Distinguished
1.2 Language and Translation (Confusion)
– Translation of ”Transportavtale” =) ”Assignment Agreement”
•
Creates English confusion
–
•
Assume no obligations transferred
Norwegian intention
– Transfer of both rights and obligations
– ”The Contract is assigned to [Assignee]”
29
1. Assignment Defined and Distinguished
1.2 Language and Translation (Confusion)
–
Standard Norwegian Shipbuilding Contract 2000 (”Skip 2000”).
•
The Norwegian version: ”Transport”
Artikkel XIII: Transport
Ingen av partene kan transportere kontrakten til en tredje part med mindre forutgående samtykke fra
den annen part er gitt skriftlig, og slikt samtykke skal urimelig tilbakeholdes.
•
The English version: ”Assignment”
Article XIII: Assignment
Neither of the parties hereto shall assign the Contract to a third party unless prior written
consent of the other party is given in writing, such consent not to be unreasonable withheld
30
1. Assignment Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security”
–
Assignment by way of sale (outright assignment)
•
Norwegian law: “Overdragelse/transport til eie” =) Outright (definite) Assignment
– Transfer of right to take delivery under the shipbuilding contract from parent to subsidiary
–
Assignment by way of security (security assignment)
•
Norwegian law: ”Overdragelse til sikkerhet” / ”Pantsettelse” =) Security Assignment
– sikringscesjon or pantsettelse etter sikringscesjonssmodellen
– Pantsettelse
– in practice under shipbuilding contracts; pledge / assignments on the concept of pledge of receivables
pursuant to § 4-4 of the Norwegian Pledge Act
31
1. Assignment Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security” (cont.)
– Norwegian law Security Assignment / Pledge
•
•
•
•
No immediate transfer of rights
Pledge of rights =) passive until enforced
No re-assignment
“Discharge notice”
Acknowledgement
Buyer’s Bank/
Assignor/
Panthaver
Assignment Agreement /
Pledge Agreement
Builder/
Debtor
32
Shipbuilding Contract
Notice of Assignment /
pledge
Buyer/
Assignor/
Pantsetter
1. Assignment Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security” (cont)
–
Is it possible to create a valid and enforceable assignment/pledge of all contractual rights under a
shipbuilding contract under Norwegian law
•
Norwegian Pledge Act § 1-2(2) (Det panterettslige legalitetsprinsipp):
“By agreement a lien may be validly created only where authorised by this Act or by other statute”
“Ved avtale kan panterett bare stiftes rettsgyldig hvor dette er hjemlet i denne lov eller i annen
lovbestemmelse.
•
Receivables – specific legal authority
– Norwegian Pledge Act § 4-4
33
1. Assignment Defined and Distinguished
1.3 Assignments “by way of sale” vs. assignments “by way of security” (cont)
–
Is it possible to create a valid and enforceable assignment/pledge of all contractual rights under a
shipbuilding contract under Norwegian law (cont.)
•
Other contractual rights under the shipbuilding contract
– No explicit legal authority in the Pledge Act
– No other explicit statuatory legal authority (other than scattered provisions)
– Legal theory differs
– Doubtful if it is possible to create a legal and valid assignment of other contractual rights
under the shipbuilding contract under Norwegian law; may not be upheld by the courts
– In practice: more or less standard practice in financing of both newbuildings and second
hand vessels
34
Part 2 Norwegian Law Perspective - index
1.
Assignments Defined and Distinguished
2.
Creation and Effect of Assignments
3.
Assignments in the Context of Shipbuilding Contracts
35
2. Creation and Effect of Assignments
2.1 Creation of (Legal and Equitable) Assignments
–
No similar concept under Norwegian law
–
Creation of an Assignment (Agreement)
• No requirements as to form
”An assignment need not be in writing and is not subject to any other requirement as to form. It may be proved
by any means, including witnesses.” (PECL)
•
Outright Assignment (overdragelse til eie)
– Assignment Agreement with notice to obligor/debtor
– Tripartite Agreement
•
Assignment by way of security (overdragelse til sikkerhet)
– Assignment Agreement or Pledge Agreement (agreement or form)
– Notice to the obligor / debtor to create legal perfection
– Acknowledgement (evidence purposes)
36
2. Creation and Effect of Assignments
2.2 Effect (assignment of rights)
•
Effect between
–
–
•
The assignee and the assignor
The assignee and the obligor
2.2.1 Effect between the assignee and assignor
–
Outright Assignment (overdragelse til eie / cesjon);
•
–
mainly as under English law
Acknowledgement
Security Assignment (pantsettelse)
•
Buyer’s
Bank /
Assignee
Assignment Agreement /
Pledge Agreement
Conceptual difference
Builder/
Obligor
Shipbuilding Contract
Notice of Assignment
37
Buyer/
Assignor
2. Creation and Effect of Assignments
2.2 Effect (assignment of rights)
Acknowledgement
•
Buyer’s
Bank /
Assignee
2.2.2 Effect between the assignee and the obligor
Shipbuilding Contract
–
Outright Assignment (overdragelse til eie)
•
•
–
Builder/
Obligor
mainly as under English law
Obligor may set off claims under the contract against the assignee
Buyer/
Assignor
Notice of Assignment
Security Assignment (pantsettelse)
•
Affect the obligor only as of the time he receives notice:
– Obligor will be able to get a good discharge by performing towards the assignor, until enforced
– Obligor’s position remains the same as prior to receipt of the notice in terms of rights under the
shipbuilding contract, unless the notice contains restrictions to which the obligor consents
– Obligor may set off claims under the contract also against the assignee
38
Part 2 Norwegian Law Perspective - index
1.
Assignments Defined and Distinguished
2.
Creation and Effect of Assignments
3.
Assignments in the Context of Shipbuilding Contracts
39
3. Assignment in the Context of Shipbuilding Contracts
Notice of assignment of Refund Guarantees
Buyer’s Bank
(Assignee)
Refund Guarantor
(Obligor)
novation
Shipbuilding Contract
On-purchaser
(Assignee)
Sale of
vessel
post-delivery
Buyer 2
Post-novation
Payment of instalments
Buyer 1
novation
(Assignor)
(rights)
Construction and delivery
(rights)
warranties
Assignment of Warranties
Notice of assignment of Building Contract
Notice of Aassignment of Warranties
40
Builder
(Obligor)
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract
•
3.1.1 Does Norwegian law recognise a security assignment of “all rights under the contract”
– Unclear whether such a security assignment of other contractual rights than receivables is valid under
Norwegian law. Unproblematic under English law.
– Important to the financing bank of the Buyer
41
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract (cont)
•
3.1.2 Notice of Assignment to the Builder
– Required to obtain legal perfection: notice received by debtor/obligor
– Acknowledgement from Builder
42
3. Assignment in the Context of Shipbuilding Contracts
3.1 Assignment of the Buyer’s benefit under the Building Contract (cont.)
•
3.1.3 Performance of obligations is required to make the assigned rights unconditional
– Builder will not be obliged to complete or deliver the vessel unless buyer’s corresponding obligations
have been performed.
• Unless dependent on the Buyers performance, the bank would want to be able to perform
– Security Assignment: assignment of rights and obligations
• No pledge of obligations as security
• Obtain a right to step in and perform buyer’s obligations to make the rights unconditional.
–
–
–
Buyer’s obligation is primarily to pay money, not obligation calling for special skill.
Could be other obligations, consent can be withheld
Builder’s obligations require skill and facilities, consent may not be given
43
3. Assignment in the Context of Shipbuilding Contracts
3.2 Assignment of Refund Guarantees
•
3.2.1 Assignment of refund guarantees
– Assignment of refund guarantees
• Assignned or pledged by the same model as other rights under the contract
• Notice to refund guarantor is required
• Underlying claim must be assigned
• Is it neccessary to assign the Refund Guarantee if the underlying claim is assigned?
44
3. Assignment in the Context of Shipbuilding Contracts
3.3 Registration and Pledge of the Shipbuilding Contract in NOR as an alternative to
assignment of other contractual rights?
•
3.3.1 Norwegian Maritime Act and NOR practice
– Vessel under construction recorded in the Norwegian Shipbuilding Registry
• May be possible to record the shipbuilding contract (or buyers rights under the contract) as a lien
(heftelse) against the vessel
• If recorded as a lien against the vessel, possibly pledged and legal perfection obtained by
registration of the pledge in the Norwegian Shipbuilding Registry
• Based on the structure for Real Property and Purchase Agreements recorded and pledged in the
Norwegian Propert Register
• Discussions with the Norwegian Shipbuilding Registry, but no such registrations as of yet
45