Lessons from a tome in the dome on the assignment of suits’ fruits

Cruelly, the Legal Services Commissioner prosecuted my client recently for disbursing monies from his trust account to the wrong person, albeit without the slightest dishonest intent, which he said would be regarded by competent and reputable peers as disgraceful or dishonourable.  I say ‘cruelly’ because he made me go to the Supreme Court Library, and read impenetrable equity texts in its dome for hours.  I read the most obscure article I can ever remember reading: P G Turner’s ‘Assignment by Way of Charge’ (2004) Australian Bar Review 280.

The Commissioner said the solicitor’s client had assigned in equity the proceeds of their claims against negligent drivers for the cost of repairing their vehicles.  The assignee was said to be the repairer’s factor.  When the monies came into my client’s trust account, they were said to be ‘charged in equity’ (‘charged in law’ as well in fact, which I never got to the bottom of), such that the solicitor was obliged to pay them not to his client but to the assignee-chargor.  The Commissioner backed down from this claim in the end, but not before I had burrowed into the law.  Harsh.

In this post I gather together some law about assignment of choses in action.  Nothing new.  Just a summary of the law in case you are as ignorant of its nuances as I was before I hit the equity tome in the dome.  The most thorough texts are Heydon, Leeming and Turner Equity Doctrines and Remedies (2015, Lexis) and the superbly written The Law of Assignment by Marcus Smith and Nico Leslie (2013, OUP).

The reason this post is easier to understand and a great deal shorter than either book is that it does not deal with the many exceptions and uncertainties associated with the below propositions, and looks only at the law of Victoria.  And it ignores the Personal Properties and Securities Act 2009. You’d better look up the law yourself if you need to.  What follows might help you make sense of it though.

Choses in action There are things you can own which you can hold in your hands or stand on.  Land, chattels.  And there are things you can own but which are intangible: shares, the right to be paid under an agreement, a right to compensation for negligently inflicted property damage, intellectual property: choses in action.

Assignment is the law which governs the transfer, and the issuing of security interests over, choses in action.  Since choses in action are rights, assignment is about the transfer of rights, not obligations, though some obligations on which the right is conditional may be said to be assigned (no obligation to perform the burden is required to be performed absolutely: the assignee chooses whether to perform the burden in order to obtain the advantage of the assigned conditional right). There is statutory assignment which is referred to as ‘legal assignment’ and there is equitable assignment.  By either route, rights recognised by common law and rights enforceable only in equity (e.g. a beneficiary’s right under a trust, and rights under an equitable charge: ‘equitable property’) may be transferred.  In an equitable assignment of legal property, only the beneficial interest in the chose in action is assigned, with the assignor retaining the legal title.

Language Debts are most often assigned.  Factoring involves the sale of a debt at a proportion of the face value of the debt.  The assignor-creditor trades the right to full payment in the future for the certainty and immediacy of partial payment.  The factor (assignee) buys the possibility of full payment at a reduced price, but wears the risks of non-payment and delayed payment.  In this case, the person to whom notice of the assignment is given would be the debtor: ‘the person you owe this debt to has assigned it to me and you must now pay it to me’.  Where what is assigned is not a debt (e.g. the proceeds of a negligence claim), the person to whom notice would be given is described as the obligor.  Debtors are but one species of obligors.

So: the assignor assigns the chose of action to the assignee (who is sometimes a ‘factor’).  Notice is generally given to the obligor (who is sometimes a ‘debtor’).

Things assignable only in equity Special rules apply to the assignment of future property, sometimes described as ‘mere expectancies’.  As we will see below, the entitlement to receive the fruits of a tortious law suit not yet adjudged is probably future property.  Principally, the assignment of future property’s validity is conditional on consideration; it must be assigned ‘for value’.  And future property cannot be assigned by the statutory procedure.

You can even assign part of a debt: Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385 at 397, but only in equity: Norman v FCT (1963) 109 CLR 9 at 29-30.

Writing There are writing requirements for statutory assignments: s. 134 Property Law Act 1958  and writing requirements for equitable assignments of equitable interests: s. 53(1)(c).

Other requirements for validity The requirements for statutory assignment are spelt out in the statute.  Absoluteness of the assignment, writing and notice to the obligor are required.

The requirements for equitable assignment are few indeed. Writing is only rarely required. So too consideration. Generally, as Kitto J said in Norman v FCT (1963) 109 CLR 9 at 32:

‘all that is required for an equitable assignment is a manifestation by the assignor of an intention to transfer the chose in action to the assignees in a manner binding upon himself, as distinguished from an intention merely to give a revocable mandate while retaining ownership of the chose in action.’

The manifested intention may be implied.  Indeed, an assignment may occur without the assignor even understanding the concept so long as they into to transfer the relevant right.  The assignor need not advise even the assignee of the assignment in order for it to be valid, subject to the assignee’s right to disclaim the assignment upon learning of it.  The assignee need not advise the obligor in order for the assignment to be valid as between the assignor and the assignee.

Consequences If the debtor pays the original creditor (the assignor) then:

(a)  the original creditor (the assignor) holds the money received on trust for the new creditor (the assignee), even if no notice of an equitable assignment was given to the debtor: GE Crane Sales Pty Ltd v Commissioner of Taxation (1971) 126 CLR 177 at [8] per Menzies J, with whom McTiernan J agreed; and

(b)  the assignee can force the debtor to pay the assignee (i.e. pay again): Heydon, Leeming and Turner, Equity: Doctrines & Remedies (2015) at [6-435], fn 432.

Mind you, Heydon et al say at [6-525] that in the case of equitable assignment, the obligor cannot safely pay the assignor but neither can he obtain a good discharge from the assignee unless the assignee is especially empowered to give him one. This means that where the equitable assignment does not especially empower the assignee to give a good discharge, the only safe course for the debtor or fundholder is to interplead.

Who sues? What if the obligor does not perform the duty associated with the assigned right? What if the debtor fails to pay the assignee? What if the defendant to the suit whose fruits have been assigned does not honour the judgment?  Who can commence litigation to vindicate the right, and in whose name? Assignor? Assignee? Both?  There seem to be three cases:

(a) The assignee under a statutory assignment obtains all remedies in respect of the assigned right, and the assignee may sue in his own name.

(b) Where legal property has been assigned in equity, the assignor must generally sue or at least be joined to the suit where the assignee sues.  But the assignee may obtain an order from a court requiring the assignor to permit the assignee to sue in the assignee’s name, upon the assignor being protected against costs of the suit by an indemnity given by the assignee.  See Heydon, Leeming and Turner, supra at [6-515] et seq.

(c) If equitable property has been assigned absolutely rather than by way of charge, the assignee may sue for its recovery in her own name.

Trafficking in litigation Traditionally, you could not transfer a ‘bare right of action’, ‘bare’ in the sense of not being incidental to some property right.  Negligence claims (a species of legal rather than equitable choses in action) and other tortious claims, could not be assigned: Poulton v Commonwealth (1953) 89 CLR 540 at 571 and 602, because of the public policy against maintenance. (Maintenance is the meddling by a legally disinterested party in another’s litigation. Champerty is maintenance on condition that the assisted litigant share the litigation’s fruits with the champ.)

The House of Lords relaxed that law in 1982 in Trendttex Trading Corporation v Credit Suisse [1982] AC 679 so that a plaintiff in a tort claim could assign the cause of action to a person with a pre-existing genuine commercial interest in the claim’s enforcement.  There was doubt about the law in Australia for a while afterwards, but in In EWC Payments Pty Ltd v Commonwealth Bank of Australia [2014] VSC 207, Elliott J decided that the law of Victoria was as stated in Trendtex.

Insolvency has always been a sphere in which assignment has been tolerated.  Recently, liquidators were granted more explicit rights to assign, and not just to creditors it seems, causes of action such as unfair preference claims. See the Insolvency Law Reform Act 2016 which received royal assent on 29 February 2016 and comes into operation next year. Litigation funders are licking their lips.  Liquidators have rarely been ordered to give security for costs.  What though of an assigned cause of action? We will have to wait and see.

Obscure exceptions Thoroughly obscure was (is?):

(a) The work-around at common law to the prohibition on the assignment of causes of action and the non-recognition by the common law of ‘future property’: ‘the grant by the assignor of a power of attorney to the assignee to sue the debtor at law in the assignor’s name and retain the fruits of the action without having to render an account’ (see Heydon, Leeming and Turner Equity Doctrines and Remedies (2015) at [6-160] citing Norman v Federal Cmr of Taxation (1963) 109 CLR 9 at 26-27).

(b) The possibility of mortgaging a cause of action for the purpose of raising funds to prosecute the action, an early form of litigation funding: Heydon et al at [6-480(f)].

Assignment of suits’ fruits Besides these two tantalising bits of weirdness, which are the kind of thing I learnt under the dome, there was always a thoroughly orthodox exception to the prohibition on trafficking in litigation which, it seems to me, is and always has been much less well appreciated than the prohibition itself. Though a right to sue a tortfeasor could not be assigned, the right to the proceeds of such a claim could be assigned, even before judgment: Glegg v Bromley [1912] 3 KB 474.

Mrs Glegg was the successful plaintiff in a slander case and the unsuccessful plaintiff in a second case against a different defendant for misrepresentation.  The successful defendant in the misrepresentation case got costs against her.  He sought to garnish the judgment in her favour which had by then been given in the slander case in order to satisfy her costs liability.  She answered that she had assigned those fruits to her husband in advance. The rather wordy instrument assigned:

“all that interest, sum of money or premises to which she is or may become entitled under or by virtue of the said action of Glegg v. Bromley or under or by virtue of any verdict compromise or agreement which she may obtain or to which she may become party in or consequent upon the said action or otherwise howsoever under or by reason of the same To hold the same …. subject to redemption on payment of all moneys due to him”.

Mrs Glegg still owed her husband money, so the equitable charge over the fruits still subsisted and the successful defendant’s attempt to garnish the fund failed.

‘What is the difference between assigning a cause of action and assigning its fruits?’ I hear you ask. Nothing, Lord Denning thought. But in the former case, the assignee gets to run the case.  In the latter case (if it is to be kosher), the assignor still controls the case and the assignee gets whatever it produces, which explains why the public policy against maintenance did not get in its way.  To complicate matters, litigation funding, which probably sits somewhere between the two sets of circumstances just referred to, is now kosher: Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386.

In Glegg, Ralph (‘The Lark Ascending’) Vaughn-Williams’s uncle held that the assignment of the proceeds of a slander claim was of future property at 484 as did Parker J at 490, which is how Heydon, Leeming and Turner treat it: [6-190], fn 239, though the cases and commentators suggest confusion on this point.  A leading Australian case on the assignment of future property is Palette Shoes Pty Ltd (in liq) v Krohn [1937] HCA 37; (1937) 58 CLR 1.  For a recent case, see Lotteries Pty Ltd v Volteas [2015] VSCA 226.

As already mentioned, future property may only be assigned for value.  The assignee must give consideration. See Norman v FCT (1963) 109 CLR 9 at 31.

The law of assignment in equity for value of future property is not actually the law of assignment at all.  It is just treated together with the law of assignment for convenience.  It is a unique equitable doctrine.  For starters, future property is not a chose in action.  It is not even property.  It is ‘not assignable, except in the inexact sense, into which, … to use Maitland’s words, lawyers slipped when it is said to be assignable in equity for value’: Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 26.

What actually happens is explained by Heydon et al, supra:

‘equity will treat it as a contract to assign and, because equity regards as done that which ought to be done, “the contract would, in equity, transfer the beneficial interest to the mortgagee or purchaser immediately on the property being acquired’: … Peldan v Anderson (2006) 227 CLR 471 at [27].’

But it is not as simple as that.  As Dixon J said in Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 at 27:

‘although the matter rests primarily in contract, the prospective right in property which the assignee obtains is a higher right than the right to have specific performance of a contract, and it may survive the assignor’s bankruptcy, because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein.’

Even Justice Heydon can’t tell us how this law actually works (see Heydon et al, supra, at [6-320]):

‘the assignment operates automatically, immediately the property is acquired, and without further act on the part of the assignor.  Therefore it is not merely a matter of contract, or a matter of a “liability” to which the assignee is subject … What is the exact nature of the assignee’s rights before the property comes into existence?  Authority establishes that it is more than a right of contract.  But it cannot at that stage be an interest in property because there is no property in existence, or in the hands of the assignor, to which it can attach. That problem remains unresolved.’

‘Mortgaging’ choses in action Apparently, you can assign in equity by way of an equitable charge rather than absolutely (but not under the statute which requires absolute disposition, which is why I’m still coming to terms with the Commissioner prosecuting my client on the basis that the fruits of my client’s clients’ causes of action were ‘charged in law’, whatever that might actually mean).  According to Halsbury’s Laws of Australia at [295-5890], a purported assignment of part of a debt takes effect as a charge.  That encyclopaedia also treats assignment of future property under the heading ‘Mortgage of future chose in action’ which does not seem helpful to me.  Glegg was in fact a case of the assignment by way of a charge of the fruits of the slander claim so long as the wife-assignor remained indebted to the husband-assignee.  Presumably what all this means is that the assignment takes effect only during the subsistence of the principal obligation which the assignment secures.  But I never quite got to the bottom of all that, and frankly, I don’t think too many other people have either.

There is a modern Victorian application of this law.  In Bacaral Pty Ltd v Bodnar Pty Ltd [2000] VSC 523 Hansen J considered this clause in an agreement for the sale of a business with a very long settlement period:

‘In the event of any future sale of Jasmine Lodge, Business Leasehold by [the purchaser] … then all monies due under the contract agreement between [the vendor and the purchaser] shall be paid in full on settlement of such sale.’

The clause contemplated the possibility of the purchaser of the business selling it before it had finished paying for it.  Needless to say, that is exactly what happened.  His Honour concluded that the original vendor had established that at all relevant times it held a valid equitable assignment by way of charge upon the settlement proceeds payable under the second contract, illustrating the proposition that an assignment may be implied.  His Honour arrived at that conclusion having reasoned as follows (footnotes omitted):

26. No particular form of words is required for an equitable assignment. It need not be in writing. “Equity has always looked to the intent rather than the form, and all that is needed is a sufficient expression of intention to assign”. In William Brandt’s Sons & Co v Dunlop Rubber Co Ltd, Lord Macnaghten said:

“But, says the Lord Chief Justice, “the document does not, on the face of it, purport to be an assignment nor use the language of an assignment.” An equitable assignment does not always take that form. It may be addressed to the debtor. It may be couched in the language of command. It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is plain.”

Thus it is not fatal to the [original vendor’s] case that the 28 November 1997 document did not speak of charge or assignment and did not expressly state that the amount owing to the plaintiff was to be paid out of the amount paid on settlement of the future sale.

27. In my view, the intendment of the arrangement between the [original vendor] and the [original purchaser] was that in the event of the [original purchaser] selling the business the settlement proceeds were to be applied to discharge any indebtedness which the [original purchaser] then had to the [original vendor] under the first contract. I am of that view having regard to the language of the document dated 28 November and the overall context, including the document signed on the previous day.

28. … That [no lawyers were involved] was relevant in considering the likelihood of legal accuracy and aptness of the language employed to express the parties’ agreement. The agreement was made in circumstances in which the [original purchaser] required a reduced level of instalments and extra time for payment in order to undertake the purchase and the value of the business represented an immediate source of payment of any balance of the purchase price should the [original purchaser] on-sell the business. For if the [original purchaser] on-sold but the [original vendor] was not paid out of the proceeds of sale, the business would be gone and the sole source of payment would be the [original purchaser], for whatever it might be worth in the wash-up. The commercial consideration that would have directed a terms vendor in the position of the [original vendor] to require that settlement monies from the on-sale be applied in discharge of its debt was obvious and preferable as an option.

29. …The document is clearly not the work of a lawyer. It is attempting to express the substance of an agreement. … there is a clear intention that in the event of a future sale the unpaid monies be paid to the [original vendor]. …

30. Then there is the fact that the document does not state that the payment is to be “from” the proceeds of settlement and distinct from merely being paid “on” settlement. This seems to me to be a narrow and artificial construction in the context of the commercial situation obtaining between the parties on 27 November. To speak of payment “on settlement of such sale” is in context to speak, in my view, of the amount to be paid on settlement being then and there applied to the extent necessary in discharge of the debt to the [original vendor]. I am of the view that the intention of the [original vendor] and the [original purchaser] was not merely that any indebtedness of the [original purchaser] to the plaintiff be discharged at the time of settlement of a future sale by the [original purchaser]. The intention was that the settlement proceeds of a future sale be assigned to the [original vendor] for the purpose of being applied to the extent required to discharge that indebtedness. When regard is had to the written evidence it is clear beyond question that the parties agreed on an assignment to operate as a charge on the proceeds of sale.’

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