Lloyd's Maritime and Commercial Law Quarterly
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 legal4
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 debt5 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 [1958] 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
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