knowledge 1 March 2024 |

Trading Places: Assignment of Litigation Rights

Background

The case arose after the plaintiff company McCool Controls and Engineering Ltd. issued proceedings against the defendant company (Honeywell) on foot of losses suffered after it was allegedly denied a contractual right to take part in a tendering process. The proceedings issued in 2005 and were delayed for various reasons.

In 2017 the former managing partner and majority shareholder of the company (the appellant) sought to be joined as a co-plaintiff to the proceedings before the Master of the High Court. The basis for this application was that the company could no longer afford a legal team. In advance of this the plaintiff company sought to assign its interest in the proceedings to the appellant by Board resolution (since he had no personal claim against the defendant company himself). The appellant intended to pursue the action against the defendant at his own costs but with any damages recovered being passed to the company. The order was made by the Master to substitute the appellant on the above basis.

Appeal

The defendant company appealed successfully to the High Court where it was held the assignment was invalid as an abuse of process. The High Court found the assignment was not absolute (being one of the requirements for a legal assignment under the Judicature Act 1877) since it permitted the appellant to reassign the transferred rights at any time. Furthermore, the assignment violated the rule in Battle (Battle v Irish Art Promotions Centre Ltd. [1968] IR 252) that a company must be represented by a lawyer and not directly by a shareholder or director of the company.

The appellant appealed to the Court of Appeal and, in the meantime, brought a second application to be substituted as a plaintiff in the proceedings but this time on foot of a non-transferable assignment. The appellant was unsuccessful on appeal on both these fronts with the Court of Appeal finding that the rule in Battle was still being violated.

Supreme Court

In accepting to hear the appeal the Supreme Court noted the question of whether an assignee of a corporate body’s interest in litigation can pursue an action as a substituted plaintiff was of general public importance in respect of the constitutional right of access to the Courts.

The Supreme Court (Charlton J dissenting, Woulfe, Hogan and Murray JJ in agreement) allowed the appeal. The Court found that the purpose behind an assignment of a cause of action by a company is irrelevant in determining the validity of the assignment subject to public policy considerations.

In his judgement Murray J noted such an assignment most involve an assignee with a genuine commercial interest in the proceedings, that pre existed the assignment and was independent of it. He found that to be present in this case. Murray J also set out parameters around the degree of shareholding required in a company to render such an assignment legitimate. He held that the Court of Appeal erred on the narrow basis that the assignment did not violate the rule in Battle.

In the judgment of Woulfe J found that an order for substitution made following an assignment such as this meant the rule in Battle was not engaged (that rule relates to representation of a limited company by someone who is not a party to proceedings). Post assignment the company is no longer a party to proceedings requiring representation. The Court noted that on foot of the assignment, and by virtue of the substitution, the appellant was fully exposed to all the personal rights associated with litigation.

Hogan J held there was no public policy grounds which would preclude an assignment of this nature and found the assignment was not a champertous arrangement especially in light of the appellant’s legitimate interest in receiving the assignment of the cause of action. In his dissenting judgment Charlton J raised a number of concerns that companies may attempt to avoid various rules of law by means of assigning a right to sue another party which could “validly undermine the central pillar of incorporation whereby corporations should remain responsible for their own issues”.

Conclusion

The rationale of the Supreme Court in permitting the assignment of the company’s interest in litigation is significant for a number of reasons. Firstly, the decision makes it clear that a company can assign its interest in litigation and that such an assignment is not in and of itself a violation of any public policy considerations notwithstanding the dissenting judgment Charlton J.

Secondly, the decision and its underlying reasoning point to an indirect acceptance that third party funding - such as the model employed in the UK - may find favour with the Irish Courts if tested in the future (provided the necessary statutory reform is present). On that point we await the final outcome of the Law Reform Commission on the potential of third party funding in this jurisdiction though any such move would be contingent on amending the Supreme Court of Judicature Act (Ireland) 1877 and any associated rules of champerty and company law.

Thirdly, the decision limits the scope of the rule in Battle. The Court held that rule in Battle is only relevant where an individual seeks to represent the company as a non-party - the position of an individual seeking to be substituted in place of the company is markedly different. This could potentially allow for other circumstances where a representative of a company would not strictly speaking be limited to external legal practitioners.