Irish Supreme Court ruling provides clarity over assignment of interest in litigation

In a significant development, the Supreme Court ruled that a director may be substituted to pursue litigation proceedings in place of a company, if that company assigns its interest in the dispute to them.

“This case is particularly interesting as it raises issues of third-party litigation funding, which is currently a matter subject to review by the Law Reform Commission,” Lisa Carty, commercial litigation expert at Pinsent Masons, said.

The case (31 pages / 289 KB) concerned proceedings issued by McCool Controls and Engineering Limited (MCE) against Honeywell Control Systems Limited (Honeywell) in 2005. MCE alleged that Honeywell had breached an exclusive distribution agreement by cutting MCE out of a lucrative project, resulting in estimated losses of €11 million.

Eugene McCool was previously the managing director and majority shareholder of MCE. During the course of the proceedings, McCool sought to be joined along with MCE in circumstances where MCE could no longer afford a legal team. McCool was not in a position to represent MCE due to the well-established ‘Battle rule’, named from the Battle v Irish Art Promotions Centre Limited case where the judge ruled that a company cannot be represented in court proceedings by a director or shareholder. Instead, a company must be represented by a lawyer.

In 2017 MCE executed a document assigning its interest in the proceedings to McCool. The High Court then granted an order substituting McCool for MCE in the proceedings. Honeywell subsequently brought a successful application in the High Court to have the substitution order discharged.

The High Court held that the assignment of MCE’s interest in the litigation was invalid and an abuse of process on two grounds. Firstly, because the assignment was not “absolute” - meaning not all of the interest was passed to Mr McCool - and secondly, because it was an “impermissible attempt” to circumvent the Battle rule. The ruling was appealed, and McCool made a second application for a substitution order. Both applications were refused and appealed again by McCool to the Court of Appeal.

While these appeals were unsuccessful, McCool was granted leave to appeal to the Supreme Court on the basis that the question of whether an assignee of an interest in litigation by a company may be permitted to pursue the action by being substituted as a party raised a matter of general importance concerning the right to access the courts.

The Supreme Court first considered the validity of the assignment to McCool. The judge found that, when determining validity, the starting point is the Supreme Court of Judicature Act (Ireland) 1877. This provides that the assignment must be for a debt or other legal action. There must also be an “absolute assignment,” meaning that the assignor - MCE in this case - must not retain any interest in the subject matter of the assignment. The assignment must also be in writing and the person liable for the cause of action, Honeywell in this case, must be given express notice in writing of the assignment. The Supreme Court’s view was that the purpose behind the assignment was irrelevant in determining its validity, subject to public policy considerations.

The Supreme Court then considered whether the assignment ought to be treated as invalid or unenforceable for public policy reasons. It recognised that the assignment could be invalid if it involved maintenance and/or champerty, which prohibit, in most cases, the funding of litigation by third parties. However, the court found that these issues were not apparent and the primary public policy ground to consider was whether the assignment went against the purpose of the Battle rule.

The court concluded that this concern was only relevant where an individual seeks to represent a company as a non-party, which is a potential abuse of privilege of limited liability. The court found that where an order for substitution was made following an assignment, the rule in Battle was no longer engaged.

The Supreme Court ultimately allowed McCool’s appeal, ruling that the right to pursue a claim by a company could, in principle, be assigned to and continued by an individual, irrespective of the purpose behind the assignment itself. However, the court stressed that the validity of any such assignment would remain subject to compliance with the 1887 Act, as well as the maintenance and champerty rules and general company law principles.

The Law Reform Commission’s recent consultation on third-party litigation funding (207 page / 1.94MB) sought submissions on the legalisation and regulation of third-party litigation funding in Ireland and on the assignment of causes of action. These two issues were relevant to the Supreme Court’s judgment.

“Now that the consultation process has ended, the LRC intends to produce a final report setting out its recommendations. It therefore appears that legislative reform of these aspects of litigation is on the horizon,” Carty said.