Factoring, assignment of progress payments as loan security, sale of receivables in supply chains: in commercial life, claims change hands all the time. What is needed for a valid assignment, whom should the debtor pay, and how do a contractual ban on assignment and an arbitration clause affect the assignee? This article starts from the Majalla’s book on hawala, then covers the rules on assignment of claims in the Turkish Code of Obligations, assignment under English law, and whether an assignee is bound by an arbitration clause.
The Majalla: hawala and the transfer of debt
The fourth book of the Majalla is devoted to hawala (Kitab al-Hawala). Hawala is the transfer of a debt from one person’s liability to another’s (Article 673). Under the majority Hanafi view, hawala releases the original debtor; the Majalla instead adopted the view of Imam Zufar that the original debtor is not released (Article 690).
In today’s terms, the Majalla’s hawala is closer to a transfer of debt and to the contract of assignment by order (havale) in the Turkish Code of Obligations. Selling a claim on its own like a piece of property was treated restrictively in classical Islamic law. The modern assignment of claims puts receivables into circulation as independent assets; but the Majalla’s concern that the positions of debtor and creditor be clear after the transaction lives on in today’s rules on notice and debtor defences.
Turkish law: writing, notice and defences
- Freedom to assign and bans on assignment (TCO Art. 183): a creditor may assign a claim without the debtor’s consent unless the law, the contract or the nature of the obligation prevents it. Where the contract bans assignment, an assignment generally has no effect; but the debtor cannot rely on the ban against a third party who acquired the claim relying on a written acknowledgement of debt that did not mention the ban.
- Form (TCO Art. 184): an assignment is valid only if made in writing; simple written form is enough. A promise to assign is not subject to form.
- Notice and good-faith payment (TCO Art. 186): until the assignment is notified to the debtor, the debtor is discharged by paying the original creditor in good faith. The assignee’s most important step is to notify the debtor promptly and provably.
- Debtor’s defences (TCO Art. 188): the debtor may raise against the assignee the defences it had against the assignor when it learned of the assignment. A counterclaim not yet due at that moment can be set off only if it falls due before or at the same time as the assigned claim.
- Arbitration clause: the prevailing view in Turkish legal writing is that the arbitration clause in the underlying contract passes to the assignee with the claim and applies between the debtor and the assignee. The debtor’s right to raise its defences against the assignee (Art. 188) supports this result.
In practice, disputes usually arise at three points: late notice to the debtor, so that the debtor pays the old creditor; a ban on assignment overlooked in the underlying contract; and defects or delay defences raised by the debtor after the assignment. See also our article on suretyship and guarantees.
The English perspective: assignment
Under English law, a legal assignment under section 136 of the Law of Property Act 1925 must be absolute, in writing signed by the assignor, and notified to the debtor in writing. Where one of these requirements is missing, the assignment will often still take effect in equity; the assignee then generally has to join the assignor as a party when suing.
- Dearle v Hall (1828) 3 Russ 1: where the same claim has been assigned to more than one person, priority generally goes to the assignee who first gives notice to the debtor. Read alongside TCO Art. 186, the rule shows that notice sits at the centre of both systems.
- Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85: the House of Lords held that an assignment made in breach of a contractual prohibition does not transfer the claim to the assignee. In First Abu Dhabi Bank PJSC v BP Oil International Ltd [2018] EWCA Civ 14, the Court of Appeal considered itself bound by the decision while expressing doubts about its scope.
- Business Contract Terms (Assignment of Receivables) Regulations 2018: in qualifying business contracts made on or after 31 December 2018, terms that prohibit or restrict the assignment of receivables for goods and services have no effect. The aim is to protect access to invoice finance, especially for smaller businesses.
- Schiffahrtsgesellschaft Detlev von Appen GmbH v Voest Alpine Intertrading GmbH (The Jay Bola) [1997] 2 Lloyd’s Rep 279: an assignee takes the assigned right with both the benefit and the burden of the arbitration clause; to enforce the right, it must arbitrate.
Comparison: Turkish law ties assignment to simple written form and notice to the debtor; English law also requires writing and notice, but keeps a defective assignment alive in equity. On bans on assignment, England has neutralised them for trade receivables through the 2018 Regulations, while in Turkish law a contractual ban generally has effect against the assignee as well.
Examples from international arbitration
When an assignee claims a receivable in arbitration, the first question for the tribunal is often jurisdiction: has the assignee actually become a party to the arbitration agreement?
- ICC arbitration seated in Zurich and Swiss Federal Supreme Court 4P.32/2007: the tribunal held that a party suing as assignee must prove the existence and validity of the assignment at the jurisdictional stage, and declined jurisdiction because the assignment was not proved. The Swiss Federal Supreme Court dismissed the challenge, holding that a tribunal may examine the assignment and the arbitration agreement attached to the assigned claim as a preliminary question.
- The Jay Bola (1997): insurers who acquired rights by subrogation sued in a foreign court despite a London arbitration clause in the charterparty. The English court held that the right passed together with the arbitration clause and granted an anti-suit injunction; the dispute belonged in arbitration.
The practical lesson is clear: when taking an assignment of a receivable, review not only the assignment agreement but also the arbitration clause, governing law and any ban on assignment in the underlying contract. The assignment agreement should be drafted so that it can be proved in arbitral proceedings.
Frequently asked questions
I assigned my receivable. Do I need the debtor’s consent? No. Under TCO Art. 183 the debtor’s consent is not required. But if the debtor is not notified, it may be discharged by paying the old creditor in good faith.
What if the contract says “claims may not be assigned”? Under Turkish law, a contractual ban generally makes the assignment ineffective. The exception is an assignee who relied on a written acknowledgement of debt that did not mention the ban. In contracts governed by English law, the ban has no effect for trade receivables within the 2018 Regulations.
Which defences can the debtor raise against the assignee? All defences it had against the assignor when it learned of the assignment, such as defects, performance, delay or set-off. The assignee takes the claim subject to those defences.
For general information only; not legal advice. The validity and effects of an assignment depend on the contract and the facts. Sources: Majalla, Book of Hawala, Arts. 673, 690 (as reported in secondary sources); Turkish Code of Obligations Arts. 183, 184, 186, 188; Law of Property Act 1925 s.136; Dearle v Hall (1828) 3 Russ 1; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; First Abu Dhabi Bank PJSC v BP Oil International Ltd [2018] EWCA Civ 14; Business Contract Terms (Assignment of Receivables) Regulations 2018; The Jay Bola [1997] 2 Lloyd’s Rep 279; Swiss Federal Supreme Court 4P.32/2007.