Useful civil law concepts to understand the assignment rules in the Luxembourg contractual business practice

Business practice in Luxembourg is largely based on Civil Law and especially contract laws. Although derogatory rules apply to business and commercial transactions, a thorough understanding of certain Civil Law concepts is particularly important. This is especially true for concepts like the assignment of receivables, the assignment of debts and the assignment of contracts which can easily be mixed up with related concepts such as the delegation of payments or the novation.

Based on the Napoleon Civil Code, Luxembourg contracts laws have always been closed to French contracts laws. However, it is worth noting that the French law of obligations was deeply reformed in 2016 (Ordinance No. 2016-131 of 10 February 2016). This reform has, inter alia, clarified in France the legal regimes of the said operations.

The purpose of the following is not to explore in detail the entire regime applicable to these concepts, but rather to review the definitions of, and conditions that apply to them under Luxembourg law. In particular, rules related to the defences that the assignee/debtor can raise against the defendant have not been considered here.

 

The assignment of a receivable

Definitions

A receivable is a right held by a person called the “creditor” against another person called the “debtor” who has an obligation either to give, to do or to refrain from doing towards the creditor. The receivable is very often in practice the right to obtain from the debtor a cash payment.

The assignment of a receivable is a contract by which the assigning creditor transfers, for a consideration or free of charge, all or part of his receivable against the debtor to a third party called the assignee.

It should be noted that the assignment of a receivable can relate to a future claim, provided that it is determined or determinable at the time of the assignment. However, the case law does not seem to accept the assignment of a receivable which is merely a possible receivable.

The assignment of a receivable has been ruled upon and is part of the rules governing the sale contract (Articles 1689 et seq. of the Civil Code).

In French law, the 2016 reform moved the concept of assignment of a receivable away from the contract of sale by removing the application of Articles 1689 and subs and creating a specific and lighter regime in Articles 1321 to 1326 of the French Civil Code.

Conditions

For the assignment of a receivable to be valid, the contract must comply with the general rules on the validity of contracts.

The assignment of a receivable involves an agreement between the assignor and the assignee. The consent of the debtor is not required unless the receivable has been stipulated as non-transferable.

It should be pointed out here that the need (or not) for a written agreement arises from the general rules on evidence depending on whether the assignment is civil or commercial.

The assignment of the receivable will be enforceable towards the debtor and third parties by either (i) the notification thereof to the debtor pursuant to article 1690 of the Civil Code or (ii) the acceptance thereof by the latter. The notification and acceptance can be made in an authentic form or under private seal but must clearly inform the debtor of the assignment.

If the assignment has not been notified to, or accepted by, the debtor, the latter will be validly discharged from any payment made in the hands of the assignor. It is crucial to notify the debtor with no delay. In practice it is recommended that the assigned debtor be involved in the assignment contract.

Unless otherwise provided in the assignment agreement, the assignment of a receivable includes all the accessories attached to the receivable, which is the subject of the contract, in accordance with the adage: the accessory follows the principal (eg guarantees, privileges or mortgages – Article 1692 of the Civil Code).

It should be noted that the assignor must guarantee the existence of the receivable at the time of the assignment. He is not a guarantor of the future solvency of the debtor, unless otherwise provided in the assignment agreement (articles 1693 and subq of the Civil Code). While assessing the conditions of the transfer of a receivable one need to pay attention to the following restrictions.

Contractual restrictions

Most of the time, the receivable which is the subject of the transfer arises from a written agreement between the creditor and the debtor, the terms of which must be complied with. This original contract may include a clause preventing the transfer of the receivable, or otherwise provide that the receivable cannot be assigned without the prior agreement of one or both of the parties to the original contract.

Legal prohibitions/special regimes

There are legal prohibitions to the transferability of specific receivables eg legal or judicial alimony - an assignment agreement relating to such a receivable will therefore be void.

Special rules apply to the transfer of negotiable and financial instruments which shall be complied with.

Finally, in the context of international transactions the law governing the receivable which is the subject of the assignment must be ascertained. Indeed, the transfer formalities and conditions of the assignment shall comply with the law governing the receivable so that only the assignment of a receivable governed by Luxembourg law will follow the rules outlined above.

 

Assignment of debt

Definitions

A debt is an obligation which a debtor is due to perform towards his creditor, often the obligation to pay a sum of money. It should be noted that the assignment of debt is not defined in, nor ruled by the Luxembourg Civil Code and that it has been created by practice. Some mechanisms (such as the novatory delegation) are close to the assignment of debt but are not the same and must be distinguished.

Assignment of debt is the operation whereby a debtor (the assignor) transfers his debt to a third-party assignee.

Given the importance of this transaction in practice, and its acceptance in domestic law by the doctrine and case law, it appeared essential to introduce and confirm the principle in the French Civil Code by the 2016 reform.

Conditions

Again, the contract must comply with the general rules on the validity of contracts and of course, the consents of both the original debtor and the new debtor are required pursuant to the rules governing contracts set out in Article 1101.

What about the creditor’s consent? The French Civil Code now clearly states that the creditor’s consent is required. This caution on the part of the French legislator may seem excessive to the extent that the French rules also provide that the assignment of a debt does not, in principle, have the effect of releasing the initial debtor. The assignment only provides the creditor with a new debtor who is jointly and severally liable with the old one.

Under Luxembourg law, in the absence of a text governing the assignment of debt, the creditor’s agreement should not be a condition for the validity of the assignment. Nevertheless, there is no doubt that the assignment of the debt will only discharge the original debtor if the creditor has expressly agreed to such discharge. In the absence of such specific consent, the assignment only provides the creditor with a new debtor who is jointly and severally liable with the old one.

Thus, the creditor’s participation in the assignment agreement is the safest option and it is crucial to pay attention to the drafting of the assignment contract or in the original clause to provide for an express discharge of the original debtor if this is the intention of the parties. The creditor’s agreement to the assignment is not sufficient to discharge the initial debtor.

The creditor could give his consent in advance (eg by a clause in the contract which creates the debt) or after the original debtor and the new debtor have agreed on the assignment. In the case the creditor has agreed in advance to the assignment of the debt and does not intervene in the act of assignment, the debt assignment will only be enforceable towards the creditor when it has been notified to him. Thus, in the case of an assignment of debt accepted in advance by the creditor, a prudent approach would be to notify him of the assignment of debt as soon as possible.

As regards the transfer of security interests, it should be reminded that the risk incurred by the creditor on the payment of the debt by the debtor depends on the person of the debtor. Thus, we can easily understand that security interests granted by third parties only survive with their consent when the original debtor is discharged by the creditor. If the original debtor is not expressly discharged by the creditor, he remains jointly and severally liable with the assignee debtor, which may in a sense improve the situation of the guarantor. In this case, the risk borne by the guarantor decreases, so there is no reason to discharge him, and the guarantees provided by the original debtor are not extinguished by the assignment of the debt.

Difference between assignment of debt and delegation

As indicated above, the assignment of debt is close to the novatory delegation. It is therefore necessary to go back to the definition of delegation. Delegation is not defined in the Luxembourg civil code. However, Article 1275 of the Civil Code states that the delegation by which a debtor gives to the creditor another debtor who is obliged to the creditor does not operate as a novation, unless the creditor has expressly declared that he intends to discharge the debtor who has made the delegation.

The French Civil Code since the 2016 reform gives a clear definition of delegation: Delegation is an operation by which one person, the delegator (délégant), obtains from another, the delegate (délégué), that he obliges himself towards a third party, the delegatee (délégataire), who accepts him as debtor.

There are three essential elements in the delegation:

• First, the delegation is always a tripartite contract, which therefore requires the consent of the delegator, the delegate, and the delegatee.
• Secondly, delegation always creates a new obligation between the delegate and the delegatee. The delegation is therefore not comparable to an assignment of debt: any debt owed by the delegator to the delegatee is not transferred to the delegate, the latter is liable for a new debt.
• Thirdly, the pre-existence of an obligation between the delegator and the delegatee and/or between the delegator and the delegate is not required. It is therefore perfectly possible to have a delegation concluded between three parties, none of which is initially a creditor or debtor of the other. It is true, however, that this case would imply a liberal intention and is not common in practice.

In practice, thus, there is a pre-existing obligation between the delegator and the delegatee and between the delegator and the delegate: the delegator asks the delegate to commit himself to the delegatee because he (the delegator) himself is committed to the delegatee and the payment by the delegate to the delegatee will discharge his (the delegator) own debt to the delegatee; the delegate agrees to commit himself to the delegatee because he is already committed to the delegator and the payment he (the delegate) will make to the delegatee will also discharge his (delegate) debt to the delegator.

There is a distinction between the so-called “perfect delegation which is novatory” and the imperfect delegation. If the delegation maintains the pre-existing obligation between the delegator and the delegatee, the delegation is said to be imperfect. If the delegation contract expressly releases the delegator, then the delegation is said to be perfect or novatory. Perfect or novatory delegation is a form of novation by change of debtor. Novation cannot be implied, which is why the release of the delegator must be “expressly” provided for in the agreement.

 

Assignment of a contract

Definition

The conventional assignment of a contract is a legal technique developed by practice and which does not have its own legal regime in Luxembourg law. It should be noted, however, that there are assignments of contracts regulated by law such as assignments of employment contracts, insurance, or commercial leases. Are also excluded from this analysis the assignment ipso jure provided by law in the case of a merger, demerger, and assimilated operations.

Luxembourg case law, has developed both a dualistic analysis of the assignment of contract, considered as the sum of assignments of claim and of a debt (eg Court of Appeal, 10 February 2010) and a monistic analysis consisting in assimilating the transfer of contract to a transfer of the status of a party to the contract (eg, Court of Appeal, 21 December 2016). Now, the monistic analysis seems to be privileged (which is also the case in Belgium case law), especially after the French reform of 2016 which includes the monistic vision in its new articles defining the regime of the assignment of contract.

Thus, the assignment of contract can be seen as a tripartite contract involving an assignor and its contracting party (both parties to the original contract) and an assignee who becomes a party to the original contract in the place of the assignor. The transfer therefore implies a transfer effect (the third party becomes a party to the contract). The assignment of contract does not lead to the disappearance of the initial contract and the creation of a new contract but operates a transfer of the quality of party while maintaining the contract (thus the terms of and conditions of the initial contract remain effective).

Conditions

The consent of the assigned contracting party is required for all conventional assignments of contract, whether or not the contract is concluded intuitu personae.

The contracting parties could give their consent in advance in their original agreement or limit this right to specific assignees (eg affiliates) or to specific rights and obligations. In this case, the assignment will be binding when it is notified to the assigned contracting party. This mechanism has been formalised in the new French Civil Code.

The French law reform of 2016 also made the assignment of contract a solemn contract by including the requirement of a written agreement as a condition of validity of the assignment of contract in the new article 1216 of the French Civil Code. Under Luxembourg law, in the absence of any legal provision governing the assignment of contract, there is no reason why a written agreement should be a condition for the validity of the assignment. The need (or not) for a written agreement arises from the general rules on evidence depending on whether the assignment is civil or commercial. However, in the latter case, in practice, unless the parties have agreed in advance to a possible assignment, the consent would be more difficult to prove without a written agreement.

New article 1216-1 of the French Civil Code provides that if the assignee has expressly consented to it, the assignment of the contract releases the assignor for the future.

Failing this, and unless otherwise provided, the assignor is jointly and severally liable for the performance of the contract. This has also been confirmed by the Luxembourg Courts (eg Luxembourg Court of Appeal 15 February 2012).

In view of the above, the assignment contract or the original clause allowing for the transfer, should provide for an express discharge of the assignor if this is indeed the intention of the parties and it should be specific enough about the rights and obligations so transferred and discharged.

As regards the transfer of security interests, like for the transfer of debt, it should be reminded that the risk incurred by the creditor on the obligation of its contracting party depends on the person of that contracting party. We can easily understand that security interests granted by third parties only survive with their consent when the assignor is discharged by its contracting party. If the assignor is not expressly discharged, he remains jointly and severally liable with the assignee, which may in a sense improve the situation of the guarantor. In this case, the risk borne by the guarantor decreases, so there is no reason to discharge him. This has been included in the new French Civil Code.

 

Novation

Definition

Article 1271 of the Luxembourg Civil Code provides that the novation can take place in three ways:

• when the debtor contracts with his creditor a new debt which is substituted for the old one, which is extinguished; it should be noted that only the substantial changes between the old and new obligation should lead to a novation;
• when a new debtor replaces the previous one, who is discharged by the creditor; and
• when, following a new commitment, a new creditor replaces the previous one, towards which the debtor is released.

Conditions

The novation cannot be implied; the intention of the parties to operate a novation shall clearly result from their agreement.

Indeed, the consequences of the novation differ from the mere transfer of debt or receivables. The novation by change of debtor differs from the assignment of debt insofar as novation does not transfer the debt; it extinguishes the original debt and creates a new one for the new debtor. The reasoning is the same for the novation by change of creditor as this does not lead to a transfer of receivable but creates a new receivable for the benefit of a new creditor.

These differences are crucial to the extent that the extinction of the original obligation leads in principle to the extinction of all the accessories, including the privileges and guarantees, unless otherwise agreed by the guarantors.

Finally, it should be noted that the novation shall be distinguished from the delegation. All delegations do not lead to a novation, imperfect delegation by which a debtor gives to his creditor another debtor does not operate as a novation unless the creditor has expressly declared that he intends to discharge his debtor who has made the delegation. The simple fact that the debtor indicates that another person must pay his debt does not constitute a novation. To be novatory the contract must expressly release the delegator (debtor). All novation by change of debtor is not necessarily a perfect delegation. The delegation is a tripartite agreement while the novation by change of debtor can take place without the participation of the first debtor (article 1274 of the Civil Code).

 

Conclusion

Assignment clauses are contained in all or almost all corporate and transactional agreements. In view of the above and on the risk which lies on the assignor if not properly drafted, particular attention should be given to the assignment clauses contained in transactional agreements and these should not be seen as ancillary clauses only. Although in intra group transactions and reorganization these clauses may seem more theoretical they should also be reviewed carefully as the accounting books and records of the companies involved should reflect the content of the agreements (eg a debt of a given company can only be removed from its balance sheet if it has been properly assigned and the assignor/company fully discharged).