Notice of assignment and discharge by performance Chee Ho Tham * “A debtor (A) who makes payment to the creditor (B) after having been given notice of its assignment to an assignee (C) is at risk of having to make payment again.” This appears to be a “well settled” aspect of the “transfer” of the legal rights to a debt effected by either equitable or statutory assignment. Yet it contradicts the common law rules as to invariability of a contractual obligation and the automatic discharge of an obligation when it is precisely performed. It is suggested that neither the doctrine underlying equitable assignment nor the legislative framework for statutory assignment provides any basis for abrogating these two common law rules. It may therefore be time to upset this “well settled” rule. I. INTRODUCTION Notice plays an important role in the equitable assignment of legal choses in action, such as a contractual debt. 1 As noted in a recent treatise, 2 once the debtor is given notice of the equitable assignment: (i) should she pay the sum owed to her creditor, she is not discharged from her obligation but will have to make payment again to the assignee [the “no discharge after notice” rule]; (ii) the assignee’s right against the debtor has priority against subsequent assignments by the assignor, in order of precedence of notice [the rule as to priorities]; and (iii) the debtor is no longer entitled to assert such equities as may arise between herself and the creditor post-notice to reduce her liability to the assignee by way of set-off [the rule as to equities]. Leaving aside discussion of the second and third of these rules for another day, this paper will focus on an examination of the “no discharge after notice” rule. This is prompted because the rule as applied in the context of equitable assignment of a debt presents a contradiction: it does not explain how it is that the common law rules as to discharge by precise performance and the invariability of contractual obligations are displaced by what appear to be equitable doctrines relating to assignment and notice thereof. By examining the mechanics and subject matter of an equitable assignment of a chose in action, this paper will demonstrate that the rule may, perhaps, have been too broadly stated and that the true position is quite otherwise: that a debtor is discharged from her obligation to make payment so long as she precisely performs her obligations as set out in the contract, even if the rights under that contract have been assigned to a third party to that contract, the equitable assignee, and even if she has been notified of such assignment. The paper will then examine whether the same may be true in the case of a statutory assignment. II. “NO DISCHARGE AFTER NOTICE” Say A owes B £1,000; but B owes £1,000 to C. It would not be unusual for B to wish for C to be “paid”, not directly by himself, but by A. One way to achieve this involves B’s assigning the debt owed to him by A over to C, the assignment being in consideration of C’s releasing B’s indebtedness to him upon receipt of the £1,000 from A. 3 The assignment of the legal 4 chose in action may be statutory if all the requirements in the Law of Property Act 1925, s 136(1) are complied with. If not, it may be equitable should the intention to make such an assignment be sufficiently made manifest. Should C not be paid, as a statutory assignee, C is entitled to bring legal proceedings against A on the debt 5 directly in his own name. Should C be an equitable assignee, similar proceedings 3. Others would include: appointing C as B’s agent or attorney for the purposes of accepting payment from A, coupled with a mandate that C need not account to B for such receipts; promising to permit C to use B’s name (on an indemnity for costs) to bring legal proceedings against A on the debt, if unpaid; entering into a tripartite agreement wherein in consideration for A’s obligation to make payment to B being discharged, A promises to make payment to C (ie, a novation); or where, following a request by B that A make payment of the debt owing to B to C, A “acknowledges” to C that A will pay to C the sum otherwise payable to B on account of the loan agreement between them, eg, Shamia v. Joory  1 QB 448. 4. The chose in action arising from the debt owed by A to B is legal and not equitable, since such chose in action would have been recovered or enforced by an action at law, prior to the enactment of the Judicature Act 1873. References to choses in action hereafter should be taken to refer to legal and not equitable choses , unless indicated otherwise. 5. For ease of exposition, this paper will concentrate on the question as to whether a debtor is entitled to claim to be discharged by precise performance of her contractual obligation to pay her creditor. The same arguments may be applied in relation to other contractual obligations, as the doctrine of precise performance does not discriminate between obligations to pay money and obligations to perform other acts. So the arguments set out below may apply, mutatis mutandis , to assignments of legal choses in action arising out of contract other than debt. LLOYD’S MARITIME AND COMMERCIAL LAW QUARTERLY 40
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Gosh, O’Farrell J’s judgment in Mailbox (Birmingham) Ltd v Galliford Try Construction Ltd is enough to make your head hurt.
While the adjudication enforcement principles appeared relatively simple, the court had to grapple with the question of whether Mailbox had the right to refer a dispute to adjudication in the first place. That means there is a lot in the judgment about legal and equitable assignment (had Mailbox assigned the benefit of the building contract to its funder, and then taken a re-assignment of those rights, or not), so reading it was a bit like being back studying law!
Mailbox v Galliford Try
Mailbox (Birmingham) Ltd (the developer) is an SPV set up to develop a mixed use site in Birmingham. It looks rather swanky now, with its Malmaison hotel and high-end shops and restaurants. However, clearly there were issues on site because, in March 2016, Galliford Try’s (the contractor) employment under the contract was determined. It sounds like what followed was a rather typical construction dispute, with issues such as who was responsible for delay, liability for liquidated damages, lawfulness of the termination and the proper valuation of the contractor’s final account.
This all led to an adjudicator’s decision dated 6 November 2016. In it, Mr Curtis (the adjudicator), ordered the contractor to pay to the developer just under £2.5 million in liquidated damages. He also decided that the developer was entitled to interest on that sum. There is nothing unusual in that, except he awarded interest under the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payments Act). I’ll come back to this point later.
Enforcement proceedings followed when the contractor failed to pay. In those proceedings, the contractor argued that the adjudicator’s decision should not be enforced because of its jurisdictional argument: the adjudicator did not have jurisdiction because the developer had assigned the benefit of the building contract to its funder. Therefore, it did not have the right to start an adjudication when it issued the notice on 19 August 2016.
Did the adjudicator have jurisdiction?
It seems to me that the court had to answer two distinct questions:
- Was there an effective assignment to the funder of the rights under the building contract (a JCT Design and Build, 2011 Edition), which was entered into with the contractor in December 2013?
- Was there an effective re-assignment of those rights in time for the notice of adjudication to be issued on 19 August 2016?
I guess if the answer to the first part was no (which is what the developer argued), then the re-assignment issue fell away.
To reach a conclusion on this, the court had to address the detail of the various documents that the parties had entered into and the notices that were served. It also looked at section 136(1) of the Law of Property Act 1925. As I’m sure it isn’t often than any of us need to consult that provision, it is perhaps worth setting out what it says:
“Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice –
(a) the legal right to such debt or thing in action;
(b) all legal and other remedies for the same; and
(c) the power to give a good discharge for the same without the concurrence of the assignor…”
What I found helpful from the judgment is how it identifies the conditions that need to be satisfied for there to be a legal assignment (which are set out in paragraph 19-008 of Chitty on Contracts), and then looked at three questions:
- Were the rights under the building contract capable of being the subject of an assignment under clause 3.3 of the debenture (which the developer had executed in favour of the funder)?
- What was the nature of any assignment under clause 3.3? (That is, was it an absolute assignment or an assignment by way of charge?)
- Were the rights under the building contract the subject of an assignment under clause 3.3 and, if so, what was the nature of the assignment?
In turn, the court answered these questions yes, absolute and yes, there was a legal assignment because the contractor had been given notice of it by 2 January 2014.
To my mind, this is a really clear and helpful example of how to approach the analysis of this type of issue.
When it came to the re-assignment, the issue the court had to decide was much more straightforward. The evidence suggested that the re-assignment occurred when the funder executed the deed of assignment, which was “on or before 17 August 2016”. That meant there had been an equitable assignment before the notice of adjudication was given on 19 August. That assignment took effect as a legal assignment when notice was given to the contractor on 26 August. Consequently, the developer was the beneficial owner of all rights and benefits under the building contract and was in a position to refer the dispute to adjudication.
Pausing there, I think the assignment point is a good example of how complex identity issues can be in adjudication and how important it is for adjudicators to understand the law and relevant legal principles. Some might argue that this is reason enough why certain disputes should be referred to a lawyer-adjudicator, rather than a construction professional-adjudicator. All I would say in response to that is those of us who are dual-qualified are well placed to deal with these issues.
No Late Payment Act interest on liquidated damages
Although the adjudicator’s decision was held to be valid, it was not enforced in its entirety. That is because the parties agreed that liquidated damages are not a “qualifying debt” under the Late Payments Act, and therefore asked the court to determine the question of Mailbox’s entitlement to interest on the liquidated damages. After some discussion as to the appropriate interest rate to apply, the court opted for the Commercial Court rate of 2% over base from the date the cause of action accrued, which was when the adjudicator’s decision was not complied with (Lord Mance in Aspect v Higgins).
Two thoughts spring to mind about this:
- I liked the way the court dealt with interest even though there was no formal Part 8 application before it. It was a pragmatic approach from all concerned.
- It is a reminder that an adjudicator’s power to award interest are more limited than, say, an arbitrator or the court.
MCMS Ltd Matt Molloy