Dealing with transferred claims: common pitfalls

Understanding the process of assignation can be crucial to successfully bringing or defending claims. If one party (A) has a right against another party (B), for example to claim damages, he or she can often transfer that right to another party (C). Assignation is the process by which ownership of such a right is transferred under Scots law. The party transferring the right (A) is usually referred to as the ’assignor‘, the party receiving it (C) as the ‘assignee’, and the party by whom debt is owed (B) as the ’debtor’. The following is intended to highlight some helpful issues and considerations worth bearing in mind when dealing with assigned claims.

The need for intimation

Assignation is a two stage process. First, the assignor (A) and assignee (C) enter into a contract to transfer the relevant right / debt. Second, this contract must then also be formally intimated to the debtor (B). The requirement for intimation is intended to protect the debtor from paying the wrong party. Until an assignation is intimated, it has no legal effect on the debtor (B) who is still obliged to pay the assignor (A).

What is intimation?

The rules regarding intimation are neither clear nor concise. Mere knowledge of the assignation on the part of the debtor is not sufficient. The main recognised methods of intimation are: (1) by post and thereafter written acknowledgement by the debtor; (2) formal intimation by a notary public; (3) where there have been certain actings of the debtor which recognise the intimation, for example an undertaking to pay the assignee; and (4) lodging the assignation in judicial proceedings i.e. as a production.

What right is being assigned?

The right(s) being transferred must each be specifically provided for. It is important to correctly identify the right being assigned in order to in turn identify the debtor(s) to whom intimation must be made.

A failure to intimate to the correct debtor before raising court proceedings is likely to lead to an increase in cost and delay. It may even lead to the claim becoming time barred if fresh proceedings are required.

For example, a common scenario is the transfer of multiple loans between lenders. The purchasing lender will acquire the right to receive the loan repayments from the borrower. This must be intimated to the borrower. The purchasing lender will generally wish to acquire the right to pursue any professional advisors (e.g. solicitors, surveyors) who acted for the original lender, should anything go wrong. This is a separate obligation with a different debtor. Intimation of this transfer must be made to the professional advisor.

The risks of not intimating timeously

The existence of separate obligations with different debtors is often overlooked. Until intimation is made to the relevant debtor, the purchasing lender has no title and interest to raise court proceedings against him. Normally lenders remember to intimate to the borrowers but overlook the need to intimate to the professional advisor. It is unclear whether this defect can be cured by intimation after proceedings have been raised. The failure to intimate will lead to greater cost and delay, and may even result in the right being lost entirely – either (i) through time bar or (ii) if the debtor pays the original creditor in the meantime.

Taking on the good and the bad

The assignee is ’clothed‘ with the rights of the assignor. The practical effect is that the debtor (B) has the same defences available in an assigned claim (i.e. by C) that it would have had in a claim by the original right holder (A). If A’s claim had prescribed or would otherwise have been compromised (e.g. through personal bar or contributory negligence) then these arguments will remain available to the debtor.

Claims Based Upon Direct Reliance

Claims based upon assignation should be distinguished from situations where a third party claims to have relied directly upon advice given to another. The claimant in this situation will face entirely different challenges (e.g. establishing that a duty of care was owed and that there was direct and reasonable reliance). These issues are beyond the scope of this article save to note the importance of the distinction.

What Rights can be assigned?

If assignation is expressly prohibited in a contract then the relevant right cannot be assigned. Otherwise, most rights are capable of being assigned, including the right to pursue claims against third parties. The rare exceptions are where rights are deemed to be personal to the parties e.g. a contract to paint a portrait.

Further practical guidance for parties to assignations and claims

If a debtor pays an assignor in error, he may still face a claim from the assignee for the same sums. Debtors should therefore maintain accurate records of any intimations received.

Those facing claims by assignees should check whether assignation has been properly executed and intimated. If it appears that the assignee has failed to intimate the assignation, then there may be an argument that the claim is incompetent. This may prove a useful argument in any settlement negotiations.

Finally, given that a claimant can assign their rights to pursue a claim, when agreeing settlement best practice dictates that defenders obtain a discharge in exchange for settlement sums which includes a warranty that the claimant has not assigned his rights to pursue the claim to any third party (albeit strictly speaking, the debtor should already be aware of an effective assignation by reason of intimation).