Assignment of claims: Are there any constraints to assigning claims or seeking cost guarantees?

The following article discusses session three in the IR Global Virtual Series on 'Litigation Funding: Handling commercial and financial disputes

Germany – FW The
assignment of claims to a third party for the purpose of their recovery is
allowed without further ado, if the assignee bears the full financial risk of
recovering the claims and acts for his own account (e.g. factoring).

If an assignee collects debts for the account of the
assignor and if the debt collection is conducted as a stand-alone business, this
is considered a collection service (Inkassodienstleistung) under the Legal
Services Act (Rechtsdienstleistungsgesetz).

Pursuant to the latter, persons who provide such collection
services (collection service providers) have to seek the permission of competent
authorities and have to be registered with the Legal Services Register
(Rechtsdienstleistungsregister). The assignment of claims to a collection
service provider which is not registered is null and void; the unauthorised
collection service provider lacks the capacity to sue.

With regard to certain types of litigation, e.g. consumer
actions, the assignment of claims (to registered collection service providers)
is common. In general, such assignments appear reasonable to pool small claims
in order to benefit from synergy effects and to create a certain ‘balance of
power’ vis-à-vis more financially powerful counter-parties. With regard to
bigger claims, however, litigation funding will usually be the better, or even
only, option to get financial support from third parties.

Spain – DJ The
situation is similar in Spain, because the Spanish civil courts were inspired
by the Napoleonic French Code. A lot of opportunistic funds arrived in Spain
following the economic crisis, to buy bad credits and assets from banks. This
has led to a lot of assignments of claims and the courts have established that
they are valid and enforceable.

France – MCC
Contractual assignment of claims is valid under French law with a condition and
a limit. As a condition, the claim has to be fundamentally legitimate and
conform to the public order. The debtor’s consent is not required unless the
right was provided to be non-assignable.

Unless the debtor has already agreed to it, the assignment
may be set up against him only if it was previously served to him by a Bailiff,
or he has acknowledged it. The debtor may set up against the assignee defences
inherent to the debt itself, such as nullity, the defence of non-performance,
termination or the right to set off related debts.

He may also set up defences which arose from the relations
with the assignor before the assignment became enforceable against him, such as
the grant of a deferral, the release of a debt, or the set-off of debts which
are not related. The assignor and the assignee are jointly and severally liable
for any additional costs arising from the assignment which the debtor did not
have to advance. Subject to any contractual term to the contrary, the burden of
these costs lies on the assignee.

As a limit, if the claim subject to assignment is litigious,
the debtor may obtain a release from the assignee by reimbursing him the actual
price paid for the assignment, plus costs and reasonable expenses, plus
interest calculated from the date on which the assignee paid the price of the
assignment made to him. The claim then disappears.

Because of this rule called ‘retrait litigieux’, assignees
have to be very careful and research what happened before the assignment.

US – ES There is
no prohibition in the US against assigning a claim, or part of a claim, to a
third party, but, of course, any third party taking an assignment of all or
part of the claim is subject to all potential offsets and defences that exist
against the primary holder of the claim.

Assigning claims is done fairly often, mostly in the
intellectual property patent world. Patent trolls are big in the US, buying up
patent claims and aggressively litigating and pursuing those claims.

Sweden – DE
Almost any claim can be assigned in Sweden, the main rule is that the original
claimant must have initiated a lawful claim, then it can be assigned. Claims
based on unlawful contracts (Pactum Turpe) can neither be enforced by the first
holder of the claim, nor its successor. Apart from that, there are no
restrictions of any kind, or any constraints to assigned claims.

As far as cost guarantees are concerned, we have the same
situation as any other European country in that EU citizens or companies
founded in another country within the EU cannot be forced to provide a
guarantee for legal costs in litigation proceedings in Sweden.

The same applies for claimants in a country that has entered
into an international agreement with Sweden, such as The Hague Convention.

Austria – KO If
you are representing a client from outside the EU, the opponent may ask the
court to order a cost deposit covering all the procedural costs of the
defendant.

US – ES Is there
a limit on that?

Austria – KO No,
if you have a multi million-dollar dispute, your client pays the court fees of
1.2 per cent, plus also the estimated court-related fees including legal fees
for the defendant. The policy is clear – if someone is suing us from somewhere
in the world and we, as a defendant in Austria, end up winning the case, we
might not be able to enforce our cost award against this claimant. As a result,
there is an interest of security deposit which has to be paid upon request by a
claimant outside the EU.

US – ES Do you
find that a successful application by a defendant to require a large security
deposit will often end a case?

Austria – KO Yes,
it’s one of the best strategies to fend off a claimant or to make them reduce
the claim, and a common strategy for the defendant’s lawyer to ask for a huge
security deposit. It’s at the discretion of the judge, but overall you will
have to deposit a huge amount of money to get the case going. There is discussion
going on about legislation to reduce that, but there are two interests to be
weighed against each other.

It’s another argument for why third-party funding can be
crucial to get cases going.

As to assignments, one single action containing several
claims is permitted if the claims get assigned to another legal entity; such
legal entity acts as the sole claimant if the claims rely on the same or
similar legal and factual basis. The concept has been approved by the Supreme
Court.

Hong Kong – NG An
order for security for costs in litigation offers protection to a party from
the risk of their opponent not being able to pay the party’s litigation costs
if ordered to do so.

Applications for security for costs are a common feature of
civil litigation before the first-instance courts in Hong Kong. Sometimes
liability for security for costs and the amount can be agreed between the
parties. As for the form of the security for costs, the most common method to
give security is to make a payment into court. Other methods included an
undertaking to pay, a bond, a bank guarantee or a charge.

Despite their abolition in some other common law
jurisdictions, the crimes and torts of maintenance and champerty are still part
of Hong Kong law. Third party funding is considered to infringe the doctrines
of champerty and maintenance, so it is not generally permitted for litigation
in the Hong Kong courts (except for specific cases).

Litigation funding is allowed in some insolvency cases,
because debtors often siphon away assets when insolvent, yet liquidators or
trustees in bankruptcy often find themselves without sufficient funds to
recover assets or pursue other legitimate claims in the name of the debtor.

In light of this, the Hong Kong law has accepted litigation
funding arrangements as a legitimate practice in liquidation proceedings. Such
arrangements may include the sale and assignment by a liquidator or trustee in
bankruptcy, of an action commenced in the bankruptcy, to a purchaser for value.

As far as arbitration is concerned, the Arbitration
Ordinance or AO (Cap. 609) has recently been amended, such that the common law
tort and offence of champerty and maintenance no longer apply to third party
funding of arbitration and mediation.

Under the AO, a Code of Practice sets out the standards with
which third party funders are ordinarily expected to comply in connection with
arbitration funding. It states the requirements for funding agreements, the
minimum amount of capital a third-party funder is required to have, the
procedure for addressing conflicts of interest and whether third party funders
will be liable to funded parties for adverse costs.

Contributors

Klaus Oblin (KO) Oblin Melichar – Austria www.irglobal.com/advisor/dr-klaus-oblin

Marie-Christine Cimadevilla (MCC) Cimadevilla Avocats –
France www.irglobal.com/advisor/marie-christine-cimadevilla

Daniel Jimenez (DJ) SLJ Abogados – Spain www.irglobal.com/advisor/daniel-jimenez

Erwin Shustak (ES) Shustak Reynolds & Partners – US –
California www.irglobal.com/advisor/erwin-shustak

Nick Gall (NG) Gall Solicitors – Hong Kong www.irglobal.com/advisor/nick-gall

Dan Engström (DE) Advokatfirman Nova AB – Sweden www.irglobal.com/advisor/dan-engstrom

Florian Wettner (FW) METIS Rechtsanwälte – Germany www.irglobal.com/advisor/florian-wettner

More from IR Global