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Choses in action and the problem of unassignable property Prof Cameron Stewart Legal Choses in Action • • • • • • • • • • • • Debts Contractual rights Copyright Patents Company Shares Bank accounts Designs Trademarks Legal Charges and security interests Business Names Reputation Goodwill Equitable Choses in Action • Beneficial interest in a trust fund • Rights of partnership • Rights of a beneficiary under a fiduciary relationship • Equitable securities over funds • Confidential information? Assignment of choses in action • Traditionally the law forbade the assignment of choses on action • Only equity would allow it • Why? – Distrust of the nature of choses in action – Creation of over-litigiousness – Problem of forcing a person into servitude • New procedures created during the Judicature Act reforms Rights and liabilities not capable of assignment – public pay • An assignment of pay by the holder of a public office is prohibited on the basis that such pay is made to enable the office holder to maintain his or her office with decorum and propriety. Rights and liabilities not capable of assignment Arbuthnov v Norton (1846) 4 Moore 219; (1846) 13 ER 474 Norton, a judge, assigned the equivalent of six months pay to which he was entitled to his legal personal representative upon death. The entitlement was assigned as security for an advance. The Privy Council ruled, after Norton’s death, that the assignment was valid. This was so because the pay that was assigned only fell due upon Norton’s death, that is, when Norton no longer held public office. Because the pay was not payable during his life, the assignment in no way diminished Norton’s ability to maintain the dignity of his office. Rights and liabilities not capable of assignment - Bare rights to litigate Bare rights to litigate include rights to sue in tort, rights to sue for unliquidated damages in contract and bare rights to sue in equity. None of these rights are rights of property and therefore they are not assignable. Debts and rights to sue for liquidated sums in contract are assignable because they are regarded as rights of property. Bare rights to litigate Why? In Prosser v Edwards (1835) 160 ER 196 it was said that a bare right to litigate was unassignable because it, in effect, encouraged litigation of matters which the assignor was not disposed to prosecute. In terms of legal principle, bare rights to litigate could not be assigned on public policy grounds because such assignments savoured of maintenance or champerty: Glegg v Bromley [1912] 3 KB 474, at 489–90. Glegg v Bromley [1912] 3 KB 474 • Mrs G sued B for defamation. • By a deed, Mrs G assigned ‘all that the interest, sum or money, or premises to which she is or may become entitled under or by virtue of any verdict, compromise …’ to her husband, Mr G. • She later won • A creditor of Mrs G sought (as a garnishee) to take the verdict • Mr G claimed that he was entitled to the verdict Vaughan Williams LJ said: I know of no rule of law which prevents the assignment of the fruits of an action. Such an assignment does not give the assignee any right to interfere in the proceedings in the action. The assignee has no right to insist on the action being carried on … There is in my opinion nothing resembling maintenance or champerty in the deed of assignment. Bare rights to litigate – genuine commercial interest If the assignee has a genuine commercial interest in taking the assignment of a bare right to litigate, then the assignment is valid Trendtex Trading Corporation v Credit Suisse [1982] AC 679 • Trendex was a Swiss coy who contracted to sell cement to an English coy for sale in Nigeria which went bad. Tye sale was to be paid by a letter of credit from the Central bank of Nigeria but the bank refused to pay. • Credit Suisse was a creditor of Trendex which helped Trendex fund the legal action against the Bank • Trendtex purported to assign its cause of action against Central Bank of Nigeria to Credit Suisse for $800,000. • Central Bank agreed to pay Trendtex $8m in settlement. • Trendtex sought a declaration that the assignment was void for being a bare right to litigate savouring of maintenance. • Court of Appeal found against Trendtex on the basis that the assignment was not of a bare right to litigate. Trendtex then appealed unsuccessfully to the House of Lords • In Trendtex Trading Corporation v Credit Suisse [1982] AC 679, at 703; [1981] 3 All ER 520, at 531, Lord Roskill said: • [I]t is today true to say that in English Law an assignee who can show that he has a genuine commercial interest in the enforcement of the claim of another and to that extent takes an assignment of the claim to himself is entitled to enforce that assignment unless by the terms of that assignment he falls foul of our law of champerty, which, as has often been said, is a branch of the law of maintenance … The court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee has a genuine commercial interest in taking the assignment and enforcing it for his own benefit, I see no reason why the assignment should be struck as an assignment of a bare cause of action or as savouring of maintenance. Maintenance, Champerty and Barratry Abolition Act 1993 • Section 3: crime of maintenance abolished • Section 4 : "[a]n action in tort no longer lies on account of conduct known as maintenance (including champerty)". • Section 6: "This Act does not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal, whether the contract was made before, or is made after, the commencement of this Act.“ • Now found in Civil Liability Act 2002 – Sched 2 Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 • In Ha v State of New South Wales (1997) 189 CLR 465, the HC found that the tobacco licensing schemes of the states and territories were invalid • A class action was started to reclaim the fees from licensed wholesalers • Firmstone was a litigation funder who agreed to finance the action in exchange for one-third of the proceeds of the action • At trial Einstein J said the proceedings were an abuse of process • The Court of Appeal overturned these findings and said that champerty does not automatically mean an abuse of process – it is necessary to show a corruption of the court process • Some measure of control by the funder does not mean there has been an abuse of process • HC: appeal upheld but on other unrelated grounds. On the issue of policy and abuse of process the HC (Gleeson CJ, Gummow, Hayne, Crennan, Kirby JJ; Heydon and Callinan JJ in dissent) agrees with the Court of Appeal Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 • Gummow, Hayne and Crennan JJ: [90] Two kinds of consideration are proffered as founding a rule of public policy - fears about adverse effects on the processes of litigation and fears about the "fairness" of the bargain struck between funder and intended litigant. In Giles v Thompson[101], Lord Mustill said that the law of maintenance and champerty could best "be kept in forward motion" by looking to its origins; these his Lordship saw as reflecting "a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants". [91] Neither of these considerations, whatever may be their specific application in a particular case, warrants formulation of an overarching rule of public policy that either would, in effect, bar the prosecution of an action where any agreement has been made to provide money to a party to institute or prosecute the litigation in return for a share of the proceeds of the litigation, or would bar the prosecution of some actions according to whether the funding agreement met some standards fixing the nature or degree of control or reward the funder may have under the agreement. To meet these fears by adopting a rule in either form would take too broad an axe to the problems that may be seen to lie behind the fears. Rights and liabilities not capable of assignment - incidental to a right of property If there is an assignment of property with an incidental right to litigate it is valid. This is so because there is no assignment of a bare right to litigate, the right being incidental to a right of property. Accordingly, no issues of maintenance or champerty can arise. Thus, the right to rescind for undue influence in Dickinson v Burrell (1866) LR 1 Eq 337 was assignable because it was incidental to the real property assigned to the assignor. Rights and liabilities not capable of assignment - insurance An assignment by an insured to an insurer of the insured’s right to sue, in consideration of a payment made by the insurer to the insured in satisfaction of a claim pursuant to an insurance policy between the insured and insurer, is valid. This stems from the insurer’s right of subrogation: Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101 Assignment of contractual rights • The benefit (the right to receive performance) of a contract may be assigned, but its burden (the obligation to render performance), may not be assigned: Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • Assignable contractual rights are choses in action and hence property Queensland Insurance Co Ltd v Australian Mutual Fire Insurance Society Ltd (1941) 41 SR 195 • Jordan CJ said at 201-3: • As a general rule a person may assign to another any benefit to which he may be entitled under a contract, but cannot escape his contractual liabilities by purporting to assign them, although if the contract be not of a personal nature, he may procure someone else to perform them for him. If therefore a contract be assigned by one of the parties, the assignee may in general compel the other party to do for his benefit whatever he would have been liable to do for the assignor’s benefit, subject, however, to the obligations of the assignor being duly performed by the assignor or by someone else. What does the contract say?Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 • Two joined cases • Case 1: Lessee hires Lenmestra to remove asbestos. Contract states that any assignment of rights must be with the cntractors consent. Lease is assigned. The work was defective. • Could the new assignee sue? • No the clause was effective – there was no policy reason for striking it down as the contractor had a genuine interest in controlling who it owed contractual duties to Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 • Second case: • Lessee of 150 yr old lease gets building work done. Contract forbids assignment of rights without consent • Later the lease is assigned • Building work is defective • The original party sues – can they get substantial damages? • Yes – the contract intended for the original parties only to enforce the contract so it must have been envisaged that the parties could sue on behalf of successors in title for substantial damages. Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • • • • • • • Pacific Brands bought the Sara Lee business which included the licensing rights to King Gee and Stubbies Trade marks HW prior to the acquisition Sara Lee had granted an exclusive sub-license of these rights to Underworks (a rival coy) for 5 yrs with a 5 yrs option The contract bw PB and SL expressly purported to assign the license but the sublicense agreement was silent on the issue of assignment Underworks refused to consent to an assignment of the rights to Pacific Brands As part of the agreement with SL Underworks had to lodge marketing plans and reports. PB argued that they had failed to comply with this terms and they sought to terminate the sub-license Could they do this? At trial Justice Finkelstein said that the right to terminate could not be assigned as it was a personal privilege and not proprietorial. The requirement to submit plans was personal and confidential and so could not be assigned FFC - Finn, Sundberg JJ and Emmett JJ – upheld the trial decision but differed in approach Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • FFC – found that a party's contractual rights have a proprietary character for the purposes of assignment, and are ordinarily assignable. They are a bundle of rights • FFC rejected the approach of choosing between some rights and powers of a party, and of giving to some proprietary characteristics, while denying that character to others. • Once the bundle of rights is recognised the next issue is to examine any statutory, or public policy reasons for denying assignability Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • • Finn and Sundberg JJ 32 By way of background, it is appropriate to begin with a number of relatively non-contentious propositions. First, it is well accepted that assignable contractual rights are choses in action; are a species of personal proprietary right; and can be transferred to a third party at law or in equity in accordance with the formal rules governing the transfer of such rights: see Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9 at 26; Loxton v Moir [1914] HCA 89; (1914) 18 CLR 360 at 379. Secondly, while it is not legally possible to assign the burden of a contract (i.e. the obligation to render performance), it may be possible to assign (a) the entire benefit of a contract (i.e. the right to receive performance): Don King Productions Inc v Warren [2000] Ch 291 at 318 ("Don King"); (b) if a right under a contract is separate and severable, such a separate and severable right: cf Federal Commissioner of Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440 at 449-450; or (c) if some only of the rights under a contract are assignable, those rights. "[A]ssignability is not a matter of all obligations arising under a contract or none at all": Don King, above, at 319. Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • Thirdly, a contract may expressly or impliedly authorise assignment of rights in a contract which would not otherwise be assignable: Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 113 ALR 225 at 235 ("Devefi v Mateffy"); or, conversely, may expressly or impliedly prohibit assignment of rights otherwise prima facie assignable: Don King, above, at 319. "Such contractual provisions are legally effective" as between the contracting parties: Don King, ibid; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 at 103 ff ("Linden Gardens Trust"). Fourthly, while the product to be derived from a contractual performance (the "fruits of performance") may be assigned; Devefi v Mateffy, above, at 234; the right to that performance may, nonetheless, be unassignable because, having regard to the nature of the contract and the subject matter of the contractual right in question, that right is personal in the sense that the identity of the contractual obligee is material to the contractual relationship itself (i.e. it is a "personal contract": Peters v General Accident Fire & Life Assurance Corporation Ltd [1938] 2 All ER 267 at 270; Moore v Collins [1937] SASR 195; or to the contractual performance to be rendered: Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 BLR 57 at 77 (contract requiring a party to act on the other’s instructions); see generally Seddon and Ellinghaus, Cheshire and Fifoot’s Law of Contract (8th Aust ed, 2002), [8-6]; Furmston (ed), above, 6.299 ff; Chitty on Contracts, Vol 1 19-053 ff (29th ed, 2004); Farnsworth, above, SS11.4. A contractual right, though, will not be personal if, construed in its setting, "it can make no difference to the person on whom the [corresponding] obligation lies to which of two persons [i.e. assignor or assignee] he is to discharge it": Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 at 668. Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • Fifthly, seemingly, a contractual right may itself be of such a personal character that it cannot properly be characterised as property: cf Jack v Smail [1905] HCA 25; [1905] HCA 25; (1905) 2 CLR 684 at 704-705; but it is not clear whether this proposition has salience only in contexts other than assignment of such a right, e.g. insolvency, because of the proposition immediately preceding this which relates expressly to assignments of "personal" contractual rights. Sixthly, the assignee of a contractual right under a legal assignment is entitled, as owner of that right, to take action in respect of it: e.g. Conveyancing Act 1919 (NSW), s 12. Seventhly, a third party may become a "substituted contracting party" by novation of the original contract. Novation will, ordinarily, require the agreement of the original and the substituted party although the original contract itself may, on its proper construction, authorise a party to substitute a contracting party in its place without need for a further tri-partite agreement: see Harry v Fidelity Nominees Pty Ltd (1985) 41 SASR 458 at 460. On novation, though, there is no assignment of rights and obligations, but rather the creation of new rights and obligations in a new contract: Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at 388; Cheshire & Fifoot’s Law of Contract, above, [8.45] ff. Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • Eighthly, a contractual obligation cannot be assigned without the consent of the other contracting party: Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 at 668. This, for practical purposes, requires novation of the original contract; Furmston, "The Assignment of Contractual Burdens" (1998) 13 Jo Contract Law 42; see also Vickery v Woods [1952] HCA 7; [1952] HCA 7; (1952) 85 CLR 336 at 345; Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473 at 491-493. Ninthly, the delegation of performance of contractual obligations is permissible where the obligations assumed do not require personal performance but only the producing of a result: Bruce v Tyley [1916] HCA 34; (1916) 21 CLR 277; British Wagon Co v Lea & Co (1880) 5 QBD 149. In such cases perfect performance by the delegate will discharge the delegating contractor’s obligation, although that contractor will remain liable unless and until such performance is rendered. "Whether or not in any given contract performance can properly be carried out by the employment of a sub-contractor must depend on the proper inference to be drawn from the contract itself, the subject matter of it, and other material surrounding circumstances": Davies v Collins [1945] 1 All ER 247 at 250. Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 • Conclusion - the right to provide plans was based on the identity of Sara lee and personal to it • 67 Considered in its totality, we are satisfied that the Sub-Licence in its setting, while not of a type that was necessarily inherently personal in character...was nonetheless intended to create an enduring relationship in which the identity of Sara Lee as the SubLicensor was material and was made so by Sara Lee in particular. While acknowledging the legitimate interest the Sub-Licensor had in exercising control over the use of the mark and hence having contractual powers to that end, we consider that there are sufficient indications in the text of the Sub-Licence itself that the particular will to which the Sub-Licensee was asked to subject itself was Sara Lee’s, and that that was a state of affairs that Underworks agreed to • Underworks needed to give consent to the assignment Contracts for personal services • Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014; [1940] 3 All ER 549, • Noakes worked for Hickelton Main Co Ltd • The business was transferred to Doncaster Colleries. • Noakes went absent and was required to pay a fine on the basis that he had a contract of service with Doncaster • Noakes said he did not have a contract for service Nokes v Doncaster Amalgamated Collieries Ltd • Lord Atkin -My Lords, I confess it appears to me astonishing that apart from overriding questions of public welfare power should be given to a court or anyone else to transfer a man without his knowledge and possibly against his will from the service of one person to the service of another. I had fancied that ingrained in the personal status of a citizen under our laws was the right to choose for himself whom he would serve: and that this right of choice constituted the main difference between a servant and a serf... Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1903] AC 414 • Tolhurst agreed, for a term of up to 50 years, to supply chalk to a particular cement manufacturing company which later assigned this contractual right to another company who took over the first company’s business. • Tolhurst’s claim that the assignment was invalid was rejected because the House of Lords took the view that it could not make any difference to Tolhurst whether it supplied chalk to the assignor or assignee. Mid-City Skin Cancer & Laser Centre v Zahedi-Anarak (2006) 67 NSWLR 569 • Zahedi, a medical practitioner, was contractually bound by an implied obligation of confidence in relation to records on patients kept by a medical practice where he was employed. • A new owner took over the medical practice • Zahedi took records and then ended his employment to work elsewhere. • Could the new business owner sue on the original obligation? Mid-City Skin Cancer & Laser Centre v Zahedi-Anarak (2006) 67 NSWLR 569 • Yes: Campbell J • If one considers the contract between Dr Zahedi and [his former employer], it has now come to an end, so far as either side having ongoing obligations to provide services is concerned. However, the contractual obligation continues whereby lists of patient names and addresses which Dr Zahedi obtained … cannot be disclosed, and cannot be used except for the purposes of the [former employer]. The obligations of Dr Zahedi under that term of the contract do not require any personal interaction with the person to whom the obligation is owed, and the content of the obligation is not infl uenced by any action or decision of the person to whom the obligation is owed. It is not an obligation requiring Dr Zahedi to do things — it is an obligation requiring him not to do things. Dr Zahedi can perform it perfectly by total inaction. In my view, for these reasons no analogy can be drawn with the reasons whereby the benefit of a contract of service is unassignable.