What's in an assignment - are pre-existing claims included
08 May 2023
08 May 2023
Subject to limited and defined exceptions, the law does not usually permit a party to assign a 'bare right of action' to another party. For example, where Party B breaches the terms of its contract with Party A, Party A cannot usually assign to a third party (Party C) its right to sue Party B for unliquidated compensatory damages for that breach. This prohibition is presently justified by the public policy interest of avoiding otherwise unrelated and uninterested third parties meddling in litigation and propagating disputes.
One of the well-recognised exceptions to this prohibition arises where the purported assignee of the right of action (i.e. Party C) can establish that it has a genuine and substantial interest, or a genuine commercial interest, in enforcing the claim to be assigned (with that interest being distinct and separate from the interest merely derived from the assignment itself). In that situation, Party C is not an unrelated or uninterested third party and the policy reasons justifying the prohibition against assignment do not arise.
Against that background, WA's Court of Appeal in Billabong Gold Pty Ltd v Vango Mining Ltd [No 2]  WASCA 58 (Billabong Gold) concluded that the relevant commercial interest did not need to arise or exist prior to the assignment. This decision suggests broader availability of the ability to assign rights of action, and should be borne in mind by parties taking assignments of contracts where there may be existing or potential claims or causes of action connected with those contracts that have not yet been made or litigated.
In the primary proceedings, Billabong Gold Pty Ltd (Billabong) sued Vango Mining Ltd (Vango) and Dampier (Plutonic) Pty Ltd (Dampier) in relation to alleged breaches of an Ore Treatment Agreement dated 23 September 2014 (OTA).
Importantly, Billabong was not a party to the OTA when it was formed. Rather, the OTA was originally between Northern Star Resources Ltd (Northern Star), on the one hand, and, on the other hand, Vango and Dampier who were joint venture partners under the Plutonic Dome JV. The Plutonic Dome JV held a number of tenements, including tenements from which gold was produced at a deposit. The OTA relevantly granted Northern Star a 'right of first refusal' in relation to any transfer of the tenements subject to the Plutonic Dome JV.
On 11 May 2016, Vango and Dampier executed an agreement under which Vango agreed to acquire all of Dampier's interest in the tenements held by the Plutonic Dome JV (May 2016 Vango/Dampier Sale Agreement).
On 12 August 2016, Northern Star entered into an asset sale and purchase agreement with Billabong (Billabong Sale and Purchase Agreement) under which Northern Star agreed to sell its gold mining operations, including its tenements, to Billabong. As part of this process, Northern Star and Billabong also entered into a General Deed of Assignment and Assumption dated 11 October 2016 (Billabong Assignment Deed) which included an assignment by Northern Star to Billabong of its rights under the OTA.
Subsequently, on 24 August 2016, Vango acquired all of the shares in Dampier, and Dampier became a wholly owned subsidiary of Vango.
Relevantly, two important questions arose in the primary proceedings:
With respect to those two questions, the trial judge found that:
On appeal, among other things, Billabong challenged the primary judge's conclusion that Northern Star's right of action in respect of Vango/Dampier's breach of the first refusal clause under the OTA could not be assigned to Billabong by the Billabong Assignment Deed.
The Court commenced its analysis by noting that the rule prohibiting the assignment of bare rights of action is justified by the public policy notions related to the doctrines of maintenance and champerty. Maintenance refers to an unconnected third-party assisting to maintain litigation, commonly by providing financial assistance. Champerty is a form of maintenance whereby the third-party provides financial assistance in return for a share of the proceeds.
(It is worth noting that legal causes of action are assignable at law under s 20 of the Property Law Act 1969 (WA) and its equivalents in the other States. However, a bare right of action is not considered to be a legal chose in action, even though it is sometimes confusingly referred to as one.)
A number of well-recognised exceptions to this general rule were then identified.
The appeal was focussed on the second exception. The Court noted that in every case, the totality of the transaction must be considered and the concept of a genuine commercial interest is to be applied in a broad and practical way.
The Court looked at a number of earlier cases which appeared to suggest that the relevant commercial interest must exist prior to the assignment.
The Court found there was no such requirement and set out five reasons why the commercial interest need not pre-date the assignment.
For those reasons, the court held that the relevant commercial interest need not be pre-existing to the assignment of the cause of the action.
Notwithstanding the analysis outlined above, the Court also concluded that, in any event, Billabong did hold a pre-existing commercial interest sufficient to support the assignment of the causes of action for breach of the OTA.
In summary, this was because the Billabong Sale and Purchase Agreement (which was dated 12 August 2016 and pre-dated the Billabong Assignment Deed, which was dated 11 October 2016) gave Billabong a genuine and substantial interest or a genuine commercial interest in enforcing the relevant breaches of the OTA, beyond the assignment of the OTA itself.
This decision is relevant to parties taking assignments of contracts (or who are counter-parties to a contract under which rights are being assigned) where there may be existing or potential claims or causes of action connected with those contracts that have not yet been made or litigated.
Parties looking to take an assignment of rights under a contract should actively consider whether the proposed assignment will include rights to sue or enforce pre-existing or potential claims under or in connection with the contract.
Unless the rights fall into one of a number of well‑recognised categories of cases which are exceptions to the general rule prohibiting the assignment of a bare right of action, the rights will not 'follow the assignment'.
In cases where the proposed assignee is looking to rely on the exception involving a separate and distinct commercial interest in suing or enforcing the claim, this decision helpfully confirms that a pre-existing commercial interest is not strictly required.
On the other hand, counterparties to contracts which have been assigned who are facing claims by the assignee should carefully consider whether the assignee can still enforce or sue on such claims, especially in respect of claims which arose before the assignment occurred.
As the Court of Appeal noted, the rule prohibiting the assignment of bare rights of action has historically been justified by the public policy notions related to the doctrines of maintenance and champerty.
For those State jurisdictions where the tort of maintenance and champerty have been abolished (including, recently, Western Australia by virtue of s 36 of the Civil Procedure (Representative Proceedings) Act 2022 (WA) although the abolishment only applies to causes of action accruing after the provision came into operation), the underlying justification has now fallen away.
It remains to be seen whether courts will revisit the continued application of the rule prohibiting the assignment of bare rights of action. If the rule is also abolished, it will remove the need for contracting parties to grapple with the complexities of the exceptions to the rule.
Authors: Adrian Chai, Partner; Charles Dallimore, Senior Associate and Max Evangelisti, Graduate.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.