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IS ALL THAT IS LEGAL ALSO MORALLY RIGHT?

In light of the so-called “Panama-papers”, the question arises if everything that is legal is necessarily thus also morally right.
I have not examined the issue if the banks, companies, lawyers, auditors, other advisers and individuals who have had, or otherwise been involved with so-called “letterbox-companies” in Panama, have acted in accordance with applicable law. That is not what is in question here. However, I can say that a large part of the media, at least in Sweden, and the public reacted with surprise and disappointment at the phenomenon. The fact that the wealthiest individuals and companies try to minimize their taxes, while ordinary people do not have these opportunities but had to pay full taxes on their earnings, has raised some indignation.
The same anger and disappointment can be discerned regarding Vattenfall’s sale of their coal plants in Germany, when companies use child labor in poor countries, or otherwise behave in a way that ordinary people think is morally reprehensible.
To make the question even more clearly it’s easy to mention the racial laws in 1930s Germany, the apartheid laws in South Africa or in modern times Sharia laws in Saudi Arabia and Iran. Many lawyers, judges, prosecutors and other lawyers applied and applies the laws accurate in itself, but the question is whether this is also morally right.
The answer to the last question is for most of us quite obviously no, but as the Panama –papers show, there are other issues where the answer does not seem as obvious.
My opinion is that lawyers as advisors have a responsibility to ensure not only that what we propose are within legal limits, that is obvious, but that our advice is also morally right. As the Panama-papers show, no one is yet proven guilty of anything, it is sufficient to do what is morally questionable to arouse public anger and thus also irritate and maybe lose customers and suppliers.
In addition to keep within the framework of law and professional ethics, every lawyer must also be equipped with a “moral compass”.

The question is however, what this “moral compass” should contain?

A moral compass is for me the basic theoretical values ​​and rules that govern my morals in each case, thus my ethics.

For my part, this represents, firstly, that the morals I apply shall be guided by reason and be independent of all religion (secular). As the application of Sharia law shows, religious beliefs may lead very wrong. Secondly, I believe that the moral compass should contain a large measure of empathy, and not just for the people as I can see, but also defenseless people on the other side of the world, such as child laborers in Asia, but even to future generations. Thirdly, my actions should be guided by its sustainability.

This does not mean that companies and individuals will not be able to do good business. On the contrary. Truly good business creates long-term prosperity for all. It does mean, hopefully, a moral compass of the lawyer to the companies and individuals who receive advice from the lawyer, as far as possible avoid falling out of favor with the public, customers and suppliers.

Arlanda April 29, 2016

Michael Pålsson

 

 

ARE NON-ASSIGNMENT-CLAUSES WITH RESPECT TO RECEIVABLES VALID AGAINST THE TRANSFEREE?

A general- and important principle of civil law in Sweden, is the freedom of contract. Swedish law contains very few legal formalities, although there are exceptions with respect to, for example, property purchase[1]. Accordingly it is normally enough that there are consistent declarations of content to form an agreement.

An issue that sometimes is agreed are so-called “non-assignment-clauses”. That a non-assinment-clause normally is valid between the parties of an agreement, is accepted within the principle of freedom of contract. The situation is thus that (A) and (B) agree on something and as a part of their agreement it is agreed that each party’s rights and obligations are not allowed to be transferred to a third party. If B, not withstanding the non-assignment-clause, transfer his rights and obligations regarding the agreement to a third party, (C), (B) runs the risk to be liable for damages against (A) because of the non-assignment clause in the agreement with A.

A variation on the same theme that appears in order to protect the parties to an agreement[2]  from getting unwanted counterparties are so-called “change-of-control” clauses. The change-of-control clasuses means that if the ownership or control of the other party (B) changes, the first party (A) has the right to terminate the agreement, and vice versa.

There is therefore no doubt that non-assignment-clauses in Sweden as a main rule are fully valid between the parties. For example, consulting agreements, shareholder agreements, licensing agreements, etc. are agreements where non-assignment-clauses are widely used because it might cause concerns for a party to get a new counterpart. A licensor may have a legitimate interest that the license cannot be transferred to a competitor, and a client may have an interest that the assignment is performed by a particular consultant personally etc. A party (A) should not run the risk that the other party (B) transfer its’ part of the agreement to another (C), whether it is a right or an obligation. Thus a a transfer of the agreement would breach against the non-assignment clause that may result in liability for damages for B, and that A does not have AN obligation to accept the new party (C).

Moreover, on otherwise freely negotiable securities, such as shares in a private limited company, non-assignment undertakings even are sanctioned by law, such as pre-emption clauses, right-of-first refusal clauses etc.[3]

However, it shall also be mentioned that the opposite occurs. For instance regarding rental legislation, under certain conditions, there is a right for the tenant to transfer the lease-contract to another lessee.

Another generally accepted legal principle in Sweden is that obligations are not freely transferable, but requires the other party’s explicit approval[4]. If A and B agree that B shall sell copper to A’s factory, then B cannot transfer the obligation to deliver copper to C without A’s explicit approval.  B may use a subcontractor, but is still fully responsible against A. Within this principle, therefore, regardless of an agreed non-assignment clause, a change of debtor from B to C requires the creditor’s (A) approval.

On the other hand, it is a general rule that a transfer of creditors (B transfer its’ invoice against A to D) is valid unless otherwise agreed. The factoring industry would hardly exist without this principle.

But even the rule that creditors generally have the right to assign its receivables, has exeptions. If the contractual relationship is such that it has a real meaning for the debtor to retain the same creditor, it has been said in the literature that the debtor’s consent may be required[5]. The question is, however, under what conditions a debtor may require to retain the same creditor.

The question I shall try to answer here is thus if an expressly agreed non-assignment clause in respect of receivables, not expressly sanctioned by law, under certain conditions, will have effect against third parties.

Non-assignment clauses which also expressly include pecuniary receivables are common in some industries. The reasons for the use of the non-assignment clause can sometimes be obscure and purely perfunctory, but in some business relationships, there are obvious reasons why the parties have chosen to use a non-assignment clause.

Whether such agreed non-assignment clauses of receivable are also valid against third parties, is not regulated by law in Sweden. That question has not yet been clearly answered in Swedish modern case law. In NJA 1949 page 645 it is implied that a non-assignment clause as a main rule should have no effect against third parties. The case, however, don’t answer the question clearly, but gives room for that non-assignment clauses under certain circumstances, could be valid against third parties. A somewhat clearer case is NJA 1966 page 97, where a claim, despite an express non-assignment clause was not considered to prevent a person to transfer his right to payment under the contract. It should be noted, however, that the foregoing cases are dated relatively far back in time, so the relevance of them could therefore be questionded regarding current contractual relationships.

However, in NJA 2008 page 733 the former member of the Supreme court, Mr. Torgny Håstad (obiter dictum), added a statement that speaks in the same direction as NJA 1949 page 645 and NJA 1966 page 97. Torgny Håstad argued, among other things, that it is doubtful whether a non-assignment clause could be enforceable against a third party, especially if the third party was in good faith about the non-assignment clause, but also without such knowledge of the acquirer the non-assignment clause would have no effect against third parties.

 

The issue has also been discussed but received no clear answer in the literature. Mr. Hugo Tiberg, for example, has argued that a non-assignment clause should be “fully effective against the assignee”[6], while Stefan Lindskog argues that a non-assignment clause generally would be ineffective[7].

In other European countries apparently a non-assignment clause as a main rule is not enforceable against third parties, DCFR III.-5:107[8] and UNIDROIT Principles 9.1.9.

After having asked about the validity of non-assignment clauses in different countries on LinkedIn, I have (in short) received the following answers:

In France, the French Commercial Code prohibits any clause that prevents a creditor from assigning its claim to a third party (Code de Commerce L-442-6), accordingly the assignee is not obliged to double-check whether the assignor is allowed to assign the claim. (Mr. Erik Verbraeken).

For India Mr. Shankar Jha reports that in case of absolute transfer of interests in any goods, a non-assignment clause may not be enforceable. However, if the contract does not provide for absolute transfer like lease etc. the non-assignment clause would be enforceable.

Regarding Japan, Mr. Masashi Nishikawa informs that under Japanese law, anybody can assign its right under the agreement to any third party, but the parties may freely prohibit it. Therefore, the non assignment clause is in general perfectly valid. In addition, the agreement is valid only between the parties. Therefore, the parties cannot claim its right under the agreement to any third party. However, there is an exception if A draws a draft to B, then B can sell it to anybody, and A cannot deny to pay against it. This is caused by the operation of law for negotiable instruments.

Nevertheless, I believe that sometimes the negotiability of receivables and other rights or securities pose problems. Moreover, that there could be problems to be able to freely assign certain rights have also been recognized in literature in Sweden and also the legislature, such as, for example, with respect to pre-emption of shares. There are therefore, in my view, situations where there is a legitimate and apparent interest to restrict securities or receivables to be negotiable in order to avoid unwanted effects. Is the contractual relationship such that it has a real meaning for the debtor to retain the same creditor, the debtor’s consent should be required[9].

Accordingly there are arguments both for and against non-assignment clauses, and in some businesscases there may be found legitimate reasons for a debtor to not have to accept that his debt is transferred to a third party.

In my experience, non-assignment clauses usuallt are used when two parties have mutual debts and long-term contractual relationships. For example it may be distributor agreements, freight managers and haulage contractors or clients and entrepreneurs (especially in complex assignments that sets specially qualified performance requirements). The reason for this is that by prohibiting the other party to transfer its receiveables and vice versa, they secure a right of set-off that might be useful in, for example, an insolvency situation or a warranty dispute. Non-assignment clauses are used thus in these cases as a relatively easy alternative to other security (for instance bank guarantee, mortgage, etc.). In these cases there are therefore, in my view, a legitimate and apparent interest for each party that the mutual creditor/debtor’s ratio is not broken. If we don’t accept this, and deny the parties to meet such an agreement, this would have far-reaching consequences in certain sectors and the parties would have to find new solutions.

My view is therefore that the law, if there is a legitimate interest of a non-assignment clause, should accept that non-assignment clauses are also valid against third parties.

An objection against that non-assignment clauses in respect of receivables should be valid against thord parties, is that the factoring business and trading with receivables would suffer. If some receivables would not be transferable and where this can be asserted against a third party, would put higher demands on for instance factoring companies to examine the underlying debt.

As a matter of principle, however, I can see no difference why a buyer of goods under the Swedish Sale of goods Act may claim damages from the seller if there is a defect in the goods, while in case of sale of invoices the risk should be taken by the debtor which in this case is the third party not involved with sale of its debts. Without having approved it, the debtor may lose the security it may have relayed on. The only requirement of the transferee of the claim (in most events factoring company or bank) is that it read through the underlying agreement, to avoid that the receivable is affected by a non-assignment clause.

To summarize I’m of the opinion that non-assignment clauses in which the debtor may relay on certain rights which hardly can be achieved by other equally efficient means, and where the debtor thus have a legitimate and visibly intereste in not getting the claim assigned to another creditor, the non-assignment clause should be valid against third parties.

Helsingborg 6 April 2016

 

Michael Pålsson

Partner

Juhlin & Partners

 

 

 

[1] The Landcode chapter 4,  § 1 (Sw. Jordabalken 4 kap 1 §)

[2] Refers only to legal entities

[3] The Companies Act, chapter 4, §§ 8,18, 27 (Sw. Aktiebolagslagen 4 kap 8, 18, 27 §§)

[4] Avtalsrätt I (Contract law I), Axel Adlercreutz, edition 11, year 2000, page 137

[5] Agell & Malmström, Civilrätt (Private law), 1:1 edition, 2010, page 150

[6] Tiberg & Lennhammer, ”Promissory notes, bill and checue” (Skuldebrev, växel och check), 7 edition, 1995, page 33[6]

[7] Stefan Lindskog, ”The Act on Partnerships and sole traders” (Lagen om handelsbolag och enkla bolag), 2001 page 208, note 139

[8] Principles, Definitions and Model Rules of European Private Law

[9] Private Law (Civilrätt) Agell & Malmström, 1:1Edition, 2010, page 150