Date: 23/02/2018 | Commercial Property, Infrastructure & Projects, Construction
The case related to an agreement that Edinburgh Schools Partnership (“ESP”) entered into with the City of Edinburgh Council (“CEC”) in 2004 in connection with the design and construction of a number of schools in Edinburgh. Having contracted with CEC to deliver the project, ESP then entered into a building contract with Galliford Try Construction (“Galliford”) for the design and construction of the project. Subsequently, ESP entered into an arrangement with their funder, the Bank of Scotland, in terms of which, as is fairly common practice, the Bank required ESP to assign its rights under the building contract to the Bank in security for the debt. A dispute later arose between ESP and Galliford under the building contract, which was referred to adjudication. Following the issue of the adjudicator’s decision and enforcement action taken by ESP, Galliford sought to resist enforcement of the adjudication decision on several grounds, one of which was that ESP had no title to refer the dispute to adjudication on the basis that they had assigned their rights under the building contract to the Bank.
After consideration, Lord Bannatyne found that ESP had not assigned all of its rights to Bank, as there had only been an "assignation in security" and accordingly this entitled ESP to sue and pursue an adjudication under the building contract. Under Scots law, an assignation results in the assignor transferring its interest in the contract to the assignee, but the court in this case drew a distinction between an ‘absolute’ assignation and an ‘assignation in security’, noting that when rights are assigned in security the assignor (i) does not divest itself of all of its rights and (ii) retains an interest in the contract assigned. In this case, that retained interest was a financial interest, giving ESP title to sue under the contract notwithstanding that it had been assigned in security to the Bank, and accordingly Galliford’s jurisdictional challenge to the enforcement action failed.
So, an assignation is therefore not an assignation when it’s granted in security for a debt - in which case it’s not to be treated as an assignation of all of the assignor’s rights but rather as an assignation of only some of the assignor’s rights. Professional indemnity insurers may now therefore look to restrict the right of a party to assign a contract in security, in order to avoid a situation where an original party to a contract and a funder to whom they have assigned the contract in security both have rights under the same contract.
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