The Bank to Which Rights Are Assigned Becomes the Direct Holder of the Right, and No Payment May Be Made to Any Other Party Once the Assignment Is Known.

Practice Area

Banking & Finance, Commercial Litigation , Assignment of Receivables , Commercial Contracts

Judicial Principle

The Court of Cassation reaffirmed that an assignment of rights transfers the assigned right itself from the assignor to the assignee upon the valid conclusion of the assignment, together with all associated guarantees and ancillary rights. Once the assigned debtor has knowledge of the assignment, it becomes directly obliged to perform in favour of the assignee, and any payment made to the assignor or another creditor thereafter does not discharge that obligation. The Court further distinguished an assignment of rights from an assignment of debt, holding that the former transfers ownership of the right, whereas the latter transfers the obligation itself to a new debtor, each producing distinct legal consequences.

 

In a recent commercial judgment, the Court of Cassation addressed a fundamental issue in banking and commercial transactions concerning the distinction between the assignment of rights and the assignment of debt, as well as the legal effects of transferring rights and obligations between parties. The Court confirmed that an assignment of rights transfers the right itself from the original holder to the assignee upon its conclusion, and that the assigned debtor becomes obliged to perform in favour of the new right holder once it is established that the debtor had knowledge of the assignment.

First: Facts of the Case

A bank granted banking facilities to a contracting company. As security for the repayment of those facilities, the company executed an assignment of rights in favour of the bank, under which it assigned all of its financial receivables arising from a construction contract concluded with another company. Pursuant to the assignment, the latter company undertook to transfer all amounts payable under the project directly to the bank's account.

The assigned debtor acknowledged the assignment and transferred part of the project's receivables to the bank. However, it subsequently ceased transferring the remaining receivables and instead paid part of those amounts to another creditor of the assignor in the course of separate enforcement proceedings, despite having knowledge of the assignment of rights in favour of the bank.

The bank considered this conduct to constitute a breach of the assigned debtor's obligation to honour the assignment, since the project's receivables had become the bank's property from the date of the assignment. Accordingly, it commenced proceedings seeking an order compelling the company to pay the outstanding balance of the assigned receivables together with legal interest.

The Court of First Instance ordered the company to pay substantially the entire amount claimed by the bank. However, the Court of Appeal reduced the amount awarded, prompting both parties to file separate appeals before the Court of Cassation. The company maintained that the bank was not entitled to recover the amount awarded, while the bank argued that it was entitled to all receivables covered by the assignment.

As neither party was satisfied with the appellate judgment, each appealed to the Court of Cassation, albeit on different grounds:

• The company (the assigned debtor) argued that it was liable only to the extent of the actual indebtedness of the assignor to the bank, and that the bank could not claim an amount exceeding that indebtedness. It also challenged the expert report relied upon by the Court of Appeal.
• The bank (the assignee) likewise appealed, seeking judgment for the full amount claimed from the outset. It asserted that all project receivables had been transferred to it by virtue of the assignment of rights, and that the company had acted unlawfully by transferring part of those receivables to another creditor of the assignor despite knowing that such funds had become the property of the bank under the assignment.

The Court of Cassation heard both appeals together due to their connection with the same underlying facts and then ruled on each appeal separately.

Second: The Legal Issue

The legal issue was to determine the nature of the legal relationship arising from the assignment:

Was the transaction an assignment of rights whereby the receivables were transferred from the original creditor to the assignee bank? Or was it an assignment of debt whereby a new debtor became liable for the company's debt to the bank?

Furthermore, was the assigned debtor entitled to challenge the financial relationship between the assignor and the assignee?

Third: The Judicial Principle

The Court of Cassation held that an assignment of rights is an agreement between the assignor and the assignee whereby the assignor transfers to the assignee an existing right against the assigned debtor. Such an assignment is concluded by mutual consent without the need for any particular formality, and the assignee's acceptance may be express or implied.

Once validly concluded, the assigned right itself, together with all associated guarantees and ancillary rights, passes from the assignor to the assignee. The assignment becomes effective against the debtor and third parties once it is established, by any legally admissible means of proof, that the assigned debtor had knowledge of it.

The Court further held that an assignment of debt differs from an assignment of rights. An assignment of debt transfers the debt itself from the original debtor to a new debtor, subject to the consent of the relevant parties. Once validly concluded, the new debtor becomes directly liable to the creditor.

Fourth: The Court's Application of the Principle

The Court confirmed that the bank's claim was not based on the debt owed to it by the assignor, but rather on an independent right that had been transferred to it pursuant to the assignment of rights.

Accordingly:

• The project receivables became the property of the bank from the date of the assignment.
• The assignor ceased to have any rights in those receivables.
• The respondent became directly indebted to the bank in respect of those assigned rights.
• The respondent was not entitled to make payment of those amounts to the assignor or to any of its other creditors after acquiring knowledge of the assignment.

The Court further explained that the respondent's argument that the assigned amount should not exceed the debt owed by the assignor to the bank had no legal basis, as that dispute concerned the internal relationship between the assignor and the assignee rather than the assigned right, which had already become the bank's property.

Fifth: The Error Committed by the Court of Appeal

The Court of Cassation found that the challenged judgment relied on an expert report that failed to adequately address the legal effect of the assignment of rights.

The report treated certain amounts paid to another creditor of the assignor as payments relating to the project, despite the fact that those amounts had already been assigned and had therefore become the property of the bank.

Furthermore, the judgment failed to sufficiently address the bank's fundamental argument that any payment made to a person other than the assignee after knowledge of the assignment is ineffective against the assignee.

Sixth: The Court's Judgment

The Court of Cassation concluded that the challenged judgment suffered from inadequate reasoning, erroneous inference, and a violation of the right of defence.

The judgment failed to examine the legal consequences of the assignment of rights and the transfer of the receivables to the bank, and did not properly address the bank's fundamental defence concerning the amounts paid to parties other than the rightful holder of the assigned rights.

Accordingly, the Court partially quashed the judgment and remitted the case for reconsideration in light of the correct legal principle.

Eighth: The Legal Effect of the Judgment

This judgment constitutes an important affirmation of the legal force of assignments of rights in commercial and banking transactions. Upon the conclusion of the assignment, the assignee becomes the actual holder of the assigned right, and the assigned debtor cannot avoid its obligation to perform in favour of the assignee by relying on disputes between the assignor and the assignee.

The judgment further clarifies that:

• An assignment of rights transfers the right itself, not the debt.
• The assigned debtor must deal directly with the new holder of the right.
• Payment to a party other than the assignee after knowledge of the assignment may not discharge the debtor's obligation.
• An assignment of rights must not be confused with an assignment of debt, as each produces different legal consequences.

The Court of Cassation thus confirmed that an assignment of rights is not merely an internal arrangement between the assignor and the assignee. Rather, it is a legal mechanism that transfers the right itself to its new holder and reshapes the legal relationship between the parties, such that the assigned debtor becomes directly obliged towards the assignee. By contrast, an assignment of debt involves the transfer of an obligation from one debtor to another.

In doing so, the Court established an important principle for the stability of commercial transactions: once a right has been assigned, the assignee becomes its lawful holder, and any debtor who has knowledge of the assignment may discharge its obligation only by making payment to the new holder of that right.