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Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Out-law / your daily need-to-know.

Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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• Practical Law

Assessing Assignability: Transferring Contractual Rights or Obligations

Practical law legal update 5-546-6326  (approx. 7 pages).

• An intended transfer is of the type that is prohibited by law or public policy (see Practice Note, Assignability of Commercial Contracts: Statutory and Public Policy Exceptions ).
• The parties expressly agree to restrict transferability (see Practice Note, Assignability of Commercial Contracts: Contractual Anti-assignment and Anti-delegation Clauses ).
• Breaching the contract.
• Making an ineffective and invalid transfer.

Distinguishing Between Assignment and Delegation

• The assignment of rights to receive performance.
• The delegation of duties to perform.

Characteristics of Assignments

• The right to receive performance from the assignor.
• Its remedies against the assignor for any failure to perform.

Characteristics of Delegation

The general rule governing assignment and delegation.

• Most assignments of contractual rights.
• Many delegations of contractual performance.
• Assignments and delegations that violate public policy or law.
• Assignments of rights or delegations of performance that are personal in nature.
• Contracts with anti-assignment or anti-delegation clauses.

Contracts That Present the Greatest Challenges

• Personal services contracts (see Personal Services Contracts ).
• Non-exclusive intellectual property licenses (see Intellectual Property Licenses ).
• Contracts with anti-assignment and anti-delegation clauses (see Contracts With Anti-assignment and Anti-delegation Contract Clauses ).

Personal Services Contracts

Intellectual property licenses, contracts with anti-assignment and anti-delegation clauses, is a change of control an assignment.

• Contains an anti-assignment and anti-delegation clause expressly restricting a change of control.
• States that a change in management or equity ownership of the contracting party is deemed to be an assignment.

When Does an Involuntary Transfer Trigger a Restricted Transfer?

• A contractual anti-assignment and anti delegation clause applies to a specific type or transfer.
• The transfer is permissible, with or without a contractual anti-assignment and anti-delegation provision.

Drafting and Negotiating Anti-assignment and Anti-delegation Clauses

• Directly addressing assignment of rights and delegation of performance.
• Clarifying the universe of restricted transfers.
• Designating the non-transferring party's consent rights.
• Specifying any exceptions to non-transferability.
• Requiring notification of a permitted transfer.
• Including a declaration that impermissible transfers are void.
• Adding a novation to the anti-assignment and anti-delegation provision.
• General Contract and Boilerplate
• General Commercial

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assignment of contract rights, novation and assignment clauses

Assignment of contract rights .

There is no such thing as an assignment of a contract.

It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1993 UKHL 4 (22 July 1993):

It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation. Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.

In short, contracts are not assigned:

• ownership of assets is assigned.
• Contractual rights are transferred. They're novated.

So when it comes to “assigning” (ie transferring or novating) contracts, there are 3 possibilities:

• Transfer all or part of the burden of the contract to another person. This is novation
• Assign all or part of the benefit of the contract to another person
• Transfer the whole of the benefit and the burden to another person. This is also novation.

The general law does not require any particular formality to novation.

Where a supplier notifies a contracting partner that they will be replaced by another supplier, and then starts to receive supply from the new supplier without objection or complaint, there's a good chance the contract has been novated.

That's acceptance of a new contract (and termination of the old contract) by conduct.

When businesses enter administration or liquidation, potential purchasers might express an interest in “acquiring the contracts” of the business. That requires novation of each contract, individually.

Novation is a fundamental principle of contract law, and is closely related to privity of contract . It's pretty difficult to understand one without the other.

What do "Assignment Clauses" in Contract do then?

Assignment clauses either:

• confirm the general operation of the law - ie no transfers of contractual rights. It expressly prohibits or enables transfers of the burden or the benefit of the contract.
• displace or override the general rule of law of novation, in favour of one party or both parties.

Do you need one or not?  That depends.

Context of Assignment Clauses

Contracts impose strict liability on the contracting parties to perform their legal obligations. 

It means this: if a seller does not perform what they are required to do under the contract to the standard fixed by the contract, they’re in breach of contract , and liable to make good on a legal remedy for breach.  Likewise, if a buyer does not do what they are legally required to do, they’re in breach of contract, and facing the same consequences .

For example, take a company supplying SaaS related services:

The SaaS supplier hosts its SaaS solution in the cloud for its customers.  The SaaS supplier doesn't own its own infrastructure for the hosting. It subcontracts the hosting to a dedicated hosting company, such as Rackspace. That subcontracting doesn't relieve the SaaS supplier from its obligations to perform the contract: in this example, host the SaaS solution in the cloud to its own customers. Using Rackspace to host the SaaS solution is just a delegation of the contractual duty of the SaaS supplier to provide services to the customer. If the hosting fails, the SaaS supplier is liable to its customers for the breach of contract. Not Rackspace.

Assignment clauses permit transfer of contractual obligations to perform the burden of the contract to third parties. So, where the obligation to perform is assigned to a third party and it's not performed, it will be the party that has taken over the burden of the contract (ie the assignee) that will be liable to the customer. Not the original contracting party (which would be the SaaS supplier in the example above).

The end result is that one of the original contracting parties is no longer a party to the contract: that’s novation. 

Example: Assignment Clause

A boilerplate provision to prevent assignment of the benefit and burden in a contract might be:

Neither party may without the prior written consent of the other party assign a benefit or obligation imposed in this Agreement.

The reference to “obligation” is usually redundant, because it can't be transferred without the consent of the other party in the first place.

Contract Assignments vs Subcontracting

Assignment clauses shouldn't be confused with subcontracting clauses .

The general law provides that a contracting party is entitled to subcontract works to a third person, unless there is a contractual restriction preventing it.

It would be quite a mistake to regard that as an "assignment" of the obligations under the contract.

It isn't a transfer of the contract, or any part of the burden of the contract.

It's a delegation .

Subcontracting performance of contractual obligations:

• is permitted where personal performance is not required to produce the result intended by the contract
• means performance by the subcontractor will discharge the principal contracting party's obligations.
• The principal contracting party remains liable if the subcontractor does not complete performance on behalf of the principal contracting party. 
• Boilerplate Clauses
• Who are you actually contracting with? Separate Legal Entities
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Contract law can be tricky. Sometimes it's matter of seeing what has happened before when parties have tried to transfer a contract to ascertain what is likely to happen in the case at hand.

Transferring contract rights and obligations can be a serious business. Getting it wrong can mean a party is in breach of contract,  leading to termination and damages claims. 

If you're in business and need legal advice on a contract, call +44 20 7036 9282 to speak for an initial chat with one of our contract law solicitors or email your enquiry to [email protected] .

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14.1 Assignment of Contract Rights

Learning objectives.

• Understand what an assignment is and how it is made.
• Recognize the effect of the assignment.
• Know when assignments are not allowed.
• Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment The passing or delivering by one person to another of the right to a contract benefit. , an obligee One to whom an obligation is owed. (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor One who owes an obligation. (the one who has a duty to perform) to a third person ( assignee One to whom the right to receive benefit of a contract is passed or delivered. ); the obligee then becomes an assignor One who agrees to allow another to receive the benefit of a contract. (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.” Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights" ). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor A person who pays money to receive another’s executory contractual benefits. is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of An assignee takes no greater rights than his assignor had. the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course (covered in detail Chapter 23 "Negotiation of Commercial Paper" ). Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor. Uniform Commercial Code, Section 9-206. While a waiver of defenses Surrender by a party of legal rights otherwise available to him or her. makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions A contract for household or domestic purposes, not commercial purposes. . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment.

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right The right or duty of a particular person to perform or receive contract duties or benefits; cannot be assigned. that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.” Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments" ). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 (see Chapter 28 "Secured Transactions and Suretyship" ), the first assignee to file will prevail.

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties Promises, express or implied, made by an assignor to the assignee about the merits of the assignment. to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

Key Takeaway

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

• If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
• Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
• Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
• Why are leases generally not assignable? Why are insurance contracts not assignable?

What is assignment in contract law?

30 January 2023

The long-term benefits of a contract may provide security; however, conditions may transform. If one of the parties decide to end the contract, the risks of not adhering to it or terminating it could result in legal action against them. 

As a safer option, transferring the contract to another person or company is possible. 

To ensure a secure transition and understanding of rights and obligations, it’s essential to become familiar with the relevant laws related to the contract assignment.

What does assignment of a contract mean?

In business contracts, assignment refers to transferring an agreement's rights, obligations, and property to another party. 

For example, most commercial tenancy agreements include a clause allowing the tenant to assign their lease to a third party, and that third party becomes the new tenant.

Unfortunately, assigning a contract does not provide you with complete security. You remain responsible for obligations and liabilities incurred before the assignment. 

Let's look at the assignment of a commercial property. The person assigning the contract (the assignor) will be liable to pay the rent owed under the tenancy agreement if the new tenant (the assignee) defaults on payment.

Can the burden of a contract be assigned?

The burden of the contract cannot be assigned. If the assignee fails to perform any of the contractual obligations, the other party can turn to you and demand you undertake any outstanding performance responsibilities.

If you want to transfer the burden of the contract along with its benefits, the agreement must be novated. Novation extinguishes the original contract and replaces it with another, under which a third party takes up rights and obligations, duplicating those of one of the parties to the original contract. 

The outgoing party surrenders its rights and is released from its obligations.

Learn how to novate contract

How do I assign a contract?

Contracts are normally assigned to a subsidiary, a business owned by another business, or a successor, the business that emerges from a sale, merger, or acquisition. 

Say you run a catering business that merges with a small hotel. The contracts held by the party may be assigned to the new business arising from the catering company/hotel merger.

A clause providing the right to assign a contract can be inserted into a commercial contract or real estate, as can a term prohibiting assignment, called an anti-assignment clause. The assignor and the assignee must carefully read the assignment's terms and follow the agreement's process.

Can a contract be assigned without consent?

If the contract is silent on whether or not the benefit of the agreement can be assigned, then in principle, assignment can take place without the other contracted party’s consent. 

However, certain contracts cannot be assigned, for example, contracts with personal rights, such as an agreement between an author and a publisher or a sportsperson and their agent. 

You must obtain consent from all parties to the original contract and the third party agreeing if you want to novate a contract.

Can you assign part of a contract?

You cannot assign part of a contract if the benefit is a ‘chose in action’. 

A ‘chose in action’ refers to the personal rights over property that can only be claimed or enforced via legal action. For example, you cannot assign only the intellectual property rights of a contract, as these can only be enforced by bringing a claim to court. 

A ‘chose in action’ is sometimes called the ‘right to sue’. This is a highly complex area of law, and you must speak to one of our Contract Law Solicitors before making any attempt to assign a contract.

Does the assignment of contracts need to be notarised?

No, the assignment does not have to be notarised to be a valid assignment.

Can I leave a contract assignment early?

Technically, you can leave early, as the burden of the contract cannot be assigned; you could walk away, leaving the assignor to carry out their remaining responsibilities under the original agreement. 

However, the other party to the contract and the assignor may bring a claim against you for other breaches related to the original agreement or the assignment.

Get legal assistance from LawBite

When considering the risk associated with assigning a contract, seeking professional legal advice is highly recommended. 

Starting at just £180 + (VAT) for a small review, our expert contract lawyers will be able to look through your contract precisely to determine whether assigning it is possible. With our expertise, you can trust that your rights and interests will be safeguarded. Book a free 15 minute consultation  or call us on  020 3808 8314 .

Additional resources

• Breach of contract - a quick guide
• The Consumer Contracts Regulations 2013
• What is a construction contract?
• The essential contracts every business needs
• Contracts - what is consideration?
• What is the difference between RFI, RFQ, RFT and RFP?

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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Assignment of Contract

Jump to section, what is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Benjamin W.

Assignment of Contract in Real Estate

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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Contracts: assignment | Practical Law

Contracts: assignment

Practical law uk practice note 7-381-7509  (approx. 44 pages).

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Novation and assignment

Changing the parties bound to a contract

What is novation, is novation a new contract, what is a deed of novation, why novation can be difficult, when do you use an assignment agreement to transfer a debt or obligation, transfer of a debt, transfer of service contracts.

Novation and assignment are ways for someone to transfer their interest in a contract to someone else.

Whilst the difference between assignment and novation is relatively small, it is an essential one. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations.

In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Statute law has created a few exceptions but they apply rarely.

The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine.

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.

Novation in practice

Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.

Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties.

Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place.

Other examples

The seller of a business transfers the contracts with their customers and suppliers to the buyer. A novation process transfers each contract by the mutual agreement of all three parties.

A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary.

A novation agreement is a new contract that 'extinguishes' the old one.

Because it is a new contract, there can be new terms within it, giving additional rights and obligations.

There are times when and why you should use a deed explains exactly when you need to use one. Novation is not among them.

A Deed of Novation is a relic from long ago when lawyers were even more inclined to cloak their knowledge in obscurity.

One of the main purposes in using the deed format is that it provides the necessity for an unconnected witness to sign the document. So it is that much more difficult for one of the parties to say it was forged or signed a year later than the date shown.

But in a novation, there are at least three parties by definition; three parties who are most unlikely to be connected and each of whom has their separate interest. So you can be pretty sure the agreement has not been tampered with. A witness cannot improve on that. So you do not need a deed.

Another reason to use a deed could be when there is no 'consideration', that is when one of the original contracting parties receives no benefit - monetary or otherwise - in return fot the novation. However, in commercial circumstances you could nearly always argue that there is an advantage to each of the parties. The extinction of the old contract or subjectively more favourable terms within the new contract would both count as fair consideration.

Do you need a deed of novation for your situation? The answer is usually no, as an agreement is fine.

The exception to the rule is that if the original contract was signed as a deed, you need to use a deed to novate it. Real property transaction are by deed. That includes a consent to assign a lease, which has three parties. There are special reasons for that.

There are other examples too, which are more obscure.

When a contract is novated, the other (original) contracting party must be left in the same position as they were in prior to the novation being made.

Novation requires the agreement of all three parties. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

The other original party may not understand the benefit to them of having the original contract novated and require extra information about the process that is time consuming to provide.

They may need extra assurance to be persuaded that they won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).

It is possible that they could play up to delay the transfer and squeeze extra concessions from you.

The only way to transfer your rights or obligations is by an agreement signed by all three parties.

But what happens if you are a service provider selling your business with tens of thousands of customers? You can hardly ask every one of them to sign up to their own separate novation.

In practice, a well drawn original agreement will contain a provision which permits the service provider to assign (transfer its contract) without the permission of the customer.

But what happens if it does not?

In practice what happens is that the buyer 'takes a flyer'. The deal is done in the hope that the customers stay with the new owner.

Maybe the buyer obtains an indemnity from the seller to cover their loss if many leave. Maybe the buyer will write to the customers to encourage them to stay. Maybe the customers simply make the next payment and thereby confirm acceptance in law.

In each of those cases, the acquirer will be safe because the customers remain (or become) bound to the terms of the original contract.

Net Lawman offers an assignment agreement to cover that exact situation, together with a draft letter of the sort that might convince customers to stay with the new owner.

The other situation in which assignment is used is where the new party trusts the original party assigning the contract. For example, a subsidiary company may assign contractual obligations to a parent company confident that the parent will uphold the contract.

A construction company is a subsidary in a group. It is working in partnership with another business on several projects to build houses. The other business is a minor partner in the deal. The partnership has run out of money and the smaller partner is unable to inject any more funds. The parent business is unwilling to have its subsidiary fund the remainder of the projects by itself.

A solution may be for the parent to pay both its subsidiary and the third party for the construction contracts to be assigned to it (in other words, buy the contractual rights from the partnership). The assignment provisions would give the parent the obligation to finish the project, which it may be able to do without the third party.

Assignment transfers benefits only

Even if the assignee promises to take on the liability of the assignor to the third parties, the assignor remains personally liable if they fail to do so. An obligation to a third party cannot be assigned without their consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in construction contracts but can apply in any agreement. If you attempt to assign a contract that cannot be assigned, you risk invalidating the original contract.

Personal obligations and assignment

Be particularly careful of an assignment if your obligations can only be performed personally. A good example would be sale of a hair dressing business. Quite apart from the risk of the clients leaving, the actual forward appointments could be interpreted as contracts with the seller, even though they would have no way to fulfill them because they have sold the business.

Buying the right document

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties. We offer a number of novation and assignment agreement templates for different situations.

For example: You borrow from a lender and you later want to transfer the debt to someone else (maybe a friend, a business partner or a the buyer of your business) so that they become liable to repay the lender instead of you. In this situation you should use an agreement that novates the debt .

This is a common consideration when a business is sold and outstanding debts of the business are transferred to the new owner (perhaps loans of money but maybe also loans of goods for sale).

Alternatively, you could novate in order to change who should pay back a personal loan between individuals.

Transfer of a right to receive the repayment of a debt

For example: You make a loan to someone (it could be money or goods) and later you want to change who receives the repayment (an agreement to change who the creditor is ).

The transaction might relate to the sale of a business where the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

For example: You provide a service to someone and you want to transfer the obligation of providing that service to another person or company.

Again, a common use for a service contract novation agreement is where a business is sold and the buyer takes on the service contracts of the seller. The service could be in any industry, from a fixed period gardening contract to an on-going IT or website maintenance. Novation changes who is providing the service.

Transfer of an architectural or building contract

For example: You buy a building or property development that is still under construction and you want the existing contractor to continue work despite the original contract being between the contractor and the seller.

In this situation you should use a novation agreement for a building contract .

Our standard assignment agreement can be used for most assignments (exceptions given below). It is not specific to circumstances.

Assignment of a business lease

If you wish to transfer a commercial property lease to another business tenant during the fixed term, Net Lawman offers an agreement to assign a lease .

We have an article specifically about assigning a business lease that may be useful further reading.

It is not advisable to assign a residential tenancy agreement. We would suggest that you cancel the original agreement and draw up a new agreement with the new tenants.

Assignment of copyright

We have  number of assignment agreements for intellectual property rights .

They are effectively sale or transfer agreements where some rights are retained by the seller (such as to buyback the assigned work, or for the work only to be used in certain locations).

They relate to IP in media (such as a film or a music score) and to inventions.

Assignment of a life insurance policy or endowment policy

These agreements allows you to transfer the rights to receive payments from a life insurance policy or endowment policy. We offer both a deed of assignment of a policy on separation or divorce and a deed of assignment to gift or sell the policy to someone else .

Assignment and collateral warranties in the construction industry

Probably the most common use of assignment in the construction industry today is in relation to collateral warranties.

The collateral warranties given by consultants, contractors and sub-contractors in construction contracts are often assigned to subsequent owners or leases. Assignment can do no more than transfer rights available to the assignor. It is not capable of creating new rights and obligations in favour of an assignee.

So while the client can, in theory, assign the right to have a building adequately designed, it is unclear what right would be transferred to sue for damages in the event of breach. If the developer (who would usually be the assignor) has sold the building or created a full-repairing lease, then their right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

Primary tabs

Assign is the act of transferring rights , property , or other benefits to another party (the assignee ) from the party who holds such benefits under contract (the assignor). This concept is used in both  contract  and property law . 

Contract Law  

Under contract law, when one party assigns a  contract , the assignment represents both: (1) an assignment of rights; and (2) a delegation of  duties . 

• For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C. 
• Here, A has both: (1) assigned A’s rights under the contract to the $50; and (2) delegated A’s  duty  to teach guitar, to C. 
• In this example, A is both the “assignor” and the “delegee” who delegates  the duties to another (C), C is known as the “ obligor ” who must perform the  obligations  to the  assignee , and B is the assignee who is owed duties and is liable to the obligor.

Assigning of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law. 

First, if an individual has not yet secured the contract to perform duties to another, they cannot assign their future right to an assignee. 

• That is, if A has not yet contracted with B to teach B guitar, A cannot assign their rights to C. 

Second, rights cannot be assigned when they  materially change the obligor’s duty and rights. 

Third, the obligor can sue the assignee directly if the assignee does not pay them. 

• Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor. It can only be delegated if the promised  performance  is more commonplace. Further, an obligee can sue if the  assignee  does not perform.  However, the delegee is  secondarily liable  unless there has been an  express   release  of the delegee. 

• Meaning if B does want C to teach guitar but C refuses to, then B can sue C. If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is  novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. Novation requires an original obligee’s  consent . 

Property Law

Under  property law , assignment typically arises in landlord-tenant situations.

• For example, A might be renting from landlord B but wants another party (C) to take over the property. 
• In this scenario, A might choose between  assigning  and  subleasing  the property to C. 
• If  assigning , A would give C the entire balance of the term , with no reversion to anyone; whereas if  subleasing , A would give C the property for a limited period of the remaining term.
• Under assignment, C would have  privity  of  estate  with the landlord while under a sublease, C would not. 

[Last updated in June of 2022 by the Wex Definitions Team ]

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The key English contract law cases of 2020

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It has been a most unusual year. In response to the global pandemic, the Cabinet Office issued Guidance in the summer, encouraging contractual parties to act “responsibly and fairly” in the performance and enforcement of their contracts.

In a similar vein, the British Institute of International and Comparative Law (“ BIICL ”) has published three Concept Notes, the first of which noted that a plethora of disputes from the pandemic would be destructive to good contractual outcomes and the effective operation of markets. However, the BIICL also recognised that there are some cases which do require the involvement of the courts.

Inevitably then, there have been disputes which have made it to the courts this year: some which started before the pandemic hit; some borne of the pandemic itself (notably, the recent insurance business interruption case, which you can read about here   1 , and a case concerning material adverse effect clauses, which you can read about here ); and others that presumably just could not be resolved consensually. What can we learn from the decisions in these disputes? In this briefing we review this year’s important contract cases and consider what commercial parties can learn from them.

1. At the time of writing, we note that the Supreme Court heard a leapfrog appeal from the decision of the High Court from 16-19 November 2020. The judgment is pending.

Implied duties of good faith: plead at your peril.

Last year we noted that the law was still in a state of flux. One year on, is it any clearer when a contract will be subject to an implied duty of good faith? It’s fair to say the law still “has not yet reached a stage of settled clarity” ( Cathay Pacific Airways Ltd v Lufthansa [2020] EWHC 1789 ) with a continuing split between the two visions of this duty, namely:

• that there is a class of “relational contracts” that are subject to a duty of good faith as a matter of law ( Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581 ), or
• that such a duty will only arise where the strict tests for the implication of terms in fact are satisfied ( Taqa Bratani Ltd & Ors v Rockrose UKCS8 LLC [2020] EWHC 58 ).

Around these central themes, there have been various clarifications to the law. For example, in Morley v Royal Bank of Scotland Plc [2020] EWHC 88 (Ch) the High Court rejected a borrower’s argument that the bank had an implied duty to act in good faith towards it under a loan agreement. The Court held that this was not a relational contract of any kind but an ordinary loan facility agreement. The bank’s decision to call in the loan was the exercise of a contractual right, not a discretion (subject to the Braganza duty). The bank’s power to obtain a revaluation of the charged assets and its power to charge a default interest rate were discretions which had to be exercised for purposes connected to the bank’s commercial interests and not so as to vex the borrower maliciously (following Property Alliance Group Ltd v Royal Bank of Scotland plc [2018] EWCA Civ 355 ). On the facts, they had been exercised properly.

Similarly, the courts continue to treat references to good faith in some clauses as evidence that a wider overarching duty of good faith should not be implied into the agreement (see Russell v Cartwright [2020] EWHC 41 (Ch) ).

Perhaps most important is the nature of any duty of good faith. While this is sometimes described in broad terms, for example to “adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently with the justified expectations of [the other party]” ( CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 ), the courts have recently made it very clear that the assertion that a party has not acted in good faith is a serious allegation.

In Essex County Council v UBB Waste (No. 3) [2020] EWHC 2387 (TCC) the courts suggested this was, put colloquially, an allegation of “sharp practice” . To make such an allegation without proper foundation was out of the norm and justified an order for costs on an indemnity basis.

What does this mean for you?

Good faith is still an evolving area in English law. Until we have greater clarity, it is worth considering whether your contract might be classified as “relational” or whether a duty of good faith might arise under the rules for the implication of terms in fact. In either case, you might want to address the matter expressly. Finally, allegations of a breach of good faith are serious and should not be made without foundation, so plead at your peril.

Excusing liability

In times of crisis, contractual parties may have even greater reason to examine those parts of their contracts which may exclude or limit liability or offer defences to breach (such as force majeure provisions).

Force majeure and a variety of limitations

A recent dispute concerning the 2011 riots in London put all of these provisions under the spotlight. The High Court found that a warehouse operator had failed to use reasonable skill and care to protect the contents of the warehouse (CDs and DVDs), which were destroyed by fire during the riots. Could the operator rely on any contractual terms to excuse or limit its liability?

It was not able to rely on the force majeure clause since the fire was not a circumstance “beyond [its] reasonable control” . The Court found that, if it had acted reasonably, it could and should have prevented the fire.

Since the claims (for loss of profits, business interruption costs and increased cost of working, suffered as a result of the fire) were all direct (in that they were exactly the type of loss that one would expect to result from the breach), the clause excluding liability for “indirect and consequential loss” did not apply. A cap on liability for damage to goods was no protection either as the claims were not for damage to the goods themselves. However, an overall – aggregate – cap on all liability (of £5 million) was effective.

What does this mean for you? These types of clauses are very topical in the current uncertain times and always need to be drafted carefully. This case reminds us that the position of commercial parties will depend upon the exact terms of the contracts, applied to the facts of the situation.

Where can you read more? See 2 Entertain Video Ltd & Ors v Sony DADC Europe Ltd [2020] EWHC 972 (TCC) .

Indirect and consequential loss

Another recent case highlights just how useful an exclusion of “indirect and consequential loss” could have been, if only it had been included.

A contractor terminated a construction contract for breach by its employer (on the basis that the latter had failed to provide a prepared site for the water treatment plant that was to be built). The Board of the Privy Council held that the contractor was entitled to recover, as damages for breach, the loss of profits that it would have made under an operation and maintenance contract for the same plant had it been built. These losses were not too remote (and fell within the second limb of Hadley v Baxendale [1854] EWHC Exch J70) as they were within the reasonable contemplation of the parties to the construction contract when that contract was entered into (on the same day as the operation and maintenance agreement).

What does this mean for you?  When entering into related contracts, it is vital to consider the exact relationship between them, including the consequences of a termination, breach or force majeure scenario arising under one of them and the knock-on effects this might have. Exclusion of liability under a related contract might be achieved by an exclusion of indirect and consequential loss (depending upon the specific drafting) or expressly.

Where can you read more? See AG of the Virgin Islands v GWA [2020] UKPC 18 . 

Loss of goodwill

It is also relatively common to see clauses exclude liability for “loss of goodwill”. The Court of Appeal decided that, in a commercial context, the ordinary legal meaning of “goodwill” was the good name and public reputation of the business concerned. If a contract intends the term to have an unusual or technical meaning (such as the accounting concept of goodwill) then that should be spelt out expressly.

This decision highlights how important it is to agree the meaning of (and clearly define) terms in agreements, particularly where something different from the ordinary legal meaning is intended.

Where can you read more? See Primus International v Triumph Controls [2020] EWCA Civ 1228 .

What is a reasonable condition of consent (and what is not)?

In a recent decision, the High Court considered the case law on contractual consent provisions, which often state that one party “shall not unreasonably withhold consent” to whatever is being requested.

If we call the party asking for consent, Party A; and the party being asked to give consent, Party B, the Court found that the authorities drew the following distinction:

• while it may be legitimate for Party B to impose a condition to protect or compensate it for the impairment of a benefit it enjoys under the contract which would result from giving consent,
• that is completely different to imposing a condition which would impair a right which Party A currently enjoys under the contract.

The contract was for the onshore pipeline transportation of hydrocarbons produced in the North Sea. The producer (Party A in our analogy) requested consent to amend its estimated production profile for transportation for the period from January 2021 to December 2040. The pipeline owner (Party B) stated that it was only willing to consent to the amendment if Party A agreed to an increase in the tariff payable under the agreement. Contractually, Party B was not entitled to “unreasonably withhold” its consent to the amendment. Was Party B therefore acting contractually or non-contractually by seeking to impose a tariff rise as a condition to giving consent?

The Court found that Party A was both entitled and obliged to tender its hydrocarbons for transportation at the contractual tariff for the duration of the agreement, which would continue until terminated on one of the contractual bases set out in the agreement. The terms did not limit that entitlement and obligation to the period up to 2020. In those circumstances, it would be inconsistent with the terms and scheme of the agreement if Party B was entitled to make its consent to the amendment conditional on a fundamental revision of the parties’ bargain in the form of a new tariff. Party B was acting non-contractually.

This decision clarifies that a condition might be reasonable as a prerequisite to giving consent (e.g. to make up for something lost by the consenting party as a result of the change). However, a party cannot use a consent request as an opportunity to renegotiate terms or impose an unrelated change on the other party. It may be preferable to make this clear in the drafting of any relevant provision, by stating that consent cannot be unreasonably withheld or delayed, or made subject to additional conditions.

Where can you read more? See Apache North Sea v INEOS FPS Limited [2020] EWHC 2081 (Comm) .

How will the Courts determine the law applicable to an arbitration clause?

The Supreme Court recently provided the answer to this question in a landmark decision.

An arbitration clause is generally regarded as legally distinct from the main agreement in which it is contained (and the Rome I Regulation excludes arbitration and choice of court clauses from its scope). In England, therefore, common law conflict of laws rules apply to determine the law applicable to the arbitration agreement. Under those rules that will be: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law “most closely connected” to the arbitration agreement.

Where the parties have not specified the law applicable to the arbitration agreement, but they have chosen the law to govern the contract as a whole, this choice will generally also apply to the arbitration agreement, rather than the law of the seat of the arbitration (as the Court of Appeal had held). But where the parties have made no choice of law to govern the arbitration agreement, either specifically or by choosing the governing law of the contract, the closest connection test will, in general, lead to the arbitration agreement being governed by the law of the seat of arbitration.

The potential for issues regarding what the applicable law of an arbitration clause is arise most frequently where the law governing the main contract and the place of the seat do not “match”. To remove the room for debate, parties, where the seat of arbitration is in England and the law of the contract is not English, therefore frequently consider using an express choice of law to govern the arbitration clause. Often, this is in favour of the law governing the main contract (the benefits of consistency with that law being something touched upon by the Supreme Court in its judgment). That approach should not change. The Supreme Court’s clarification of this area is welcome but is a general interpretative approach. Therefore, in such cases, an express designation still carries the value of some increased certainty (it will, of course, always be necessary to ensure the clause is properly drafted and works under the chosen law).

Where can you read more? See Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38 , and, for our ArbitrationLinks coverage see here .

What stays and what goes in assignment and novation?

The High Court held that an assignment by a contractor to an employer of “ the subcontract ” was an assignment of both (a) accrued rights, and (b) future rights under the subcontract. This meant that when the employer claimed damages in the sum of £133 million from the contractor, the contractor was left without a contractual right to seek a direct remedy from the subcontractor (in principle, it would be able to claim contribution from the subcontractor under the Civil Liability (Contribution) Act 1978, but this would have to be considered, alongside the effect of any relevant limitation or exclusion provisions, at full trial). The Court also held that the assignment did not amount to a novation, so that the contractor’s obligations under the subcontract had not been transferred to the employer.

It’s imperative to think – in advance and before agreeing to do so – what the possible effects of a transfer of rights might be, so that you are not left without a clear remedy, should that be needed. The decision also contains a handy summary of some of the key aspects of assignment and novation:

Assignment:

• Subject to any express restrictions, a party to a contract can assign the benefit of a contract without the consent of the other party to the contract.
• The burden of a contract (the obligations under it) cannot be assigned but the principle of conditional benefit can apply so as to impose on the contractual assignee a positive obligation where such obligation is inextricably linked to the benefit assigned.
• In the absence of any clear contrary intention, reference to assignment of the contract by the parties is understood to mean assignment of the benefit of both accrued and future rights.
• It is possible to assign future rights only, but clear words are needed for that.
• Novation occurs when the original contract between A and B is extinguished and replaced by the creation of a new contract between A and C.
• Novation requires the consent of all parties to the original and new contract. Consent can be given in the original contract, but clear words are needed.
• The terms of the new contract must be sufficiently certain to be enforceable.
• In every case the court must construe the contractual arrangements to give effect to the expressed intentions of the parties, using the established rules of construction.

Where can you read more? See Energy Works (Hull) Limited v MW High Tech Projects UK Limited and another [2020] EWHC 2537 (TCC) .

Notices: the devil in the detail

A share purchase agreement provided that the sellers would pay the buyer an amount equal to any tax liability which arose in certain circumstances, provided that, when making a claim, the buyer provided written notice stating “ in reasonable detail ” the matter which gave rise to the claim, the nature of such claim and (so far as reasonably practical) the amount claimed. The buyer gave notice of a claim to the sellers, referring to an investigation begun by the relevant tax authorities and gave a chronology of key milestones. Was this enough?

The High Court noted that the “reasonable detail” requirement amounted to an obligation to provide sufficient information so that the sellers, acting reasonably, knew what matter gave rise to the claim as well as the nature of the claim and, if reasonably practical, the amount. On the facts, the notice was insufficient. It contained no indication of the relevant facts, events or circumstances giving rise to the claim. Reference to the tax investigation was insufficient, and did not import all the tax authority’s comments and allegations, even if they were known to the sellers’ representatives. There had to be some indication of how the claim arose out of the facts identified.

Requirements to provide details usually mean that more, rather than less, should be included. It might help to consider what the purpose of the notification is and what it is that the recipient will need to know in order to respond or take a matter forward.

Where can you read more? See Dodika Ltd & Ors v United Luck Group Holdings [2020] EWHC 2101 (Comm) .

Waiver by election: understanding the boundaries

Rights can sometimes be lost by waiver by election: where a party has alternative, inconsistent rights, has knowledge of the facts which give rise to them and acts in a way which is only consistent with its having chosen to rely on one of them, it will be taken to have waived the other right ( Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 ). This explains why a party who communicates unequivocally an intention to continue with performance thereby loses the right to terminate a contract (instead, it is taken to have affirmed the contract).

A recent decision of the Privy Council is an important, and topical, illustration of the boundaries of the concept of waiver by election and highlights that it isn’t always applicable.

The parties entered into a fuel supply agreement against the backdrop of a potential closure of a refinery which supplied petroleum to the seller. The seller had a specific contractual right in a “Performance Relief” clause (effectively, a force majeure clause) to withhold, reduce or suspend deliveries to the extent it thought fit where necessitated by, amongst other things, the closure of the refinery.

When the refinery gave notice to the seller that it was closing, the seller notified the buyer but carried on supplying fuel, purchased and shipped from elsewhere while negotiations took place between the parties (as the seller sought a price increase to offset its higher costs). When these negotiations broke down, the seller sought to rely on the clause. The buyer argued that the seller’s rights had been “exhausted” after the seller had continued making deliveries. The Board of the Privy Council disagreed: waiver by election did not apply here. The seller’s right to claim performance relief did not present the seller with a binary, all-or-nothing choice between, on the one hand, putting an end to all the parties’ obligations or, on the other hand, treating all those obligations as still binding. Instead, it had a range of options: at one end of the scale, the seller might merely delay a delivery of fuel; at the other extreme, the seller might decide to cease all further deliveries under the contract, as eventually happened.

In situations where a party is faced with deciding whether to exercise a contractual right or not, whether taking one course of action will constitute a “waiver” of its other right(s) will ultimately turn on whether the rights are truly inconsistent with each other. Parties who want to make it clear that any action they are taking is to be without prejudice to their other rights should say so expressly, in writing. It should also be kept in mind that in these types of situations, estoppel can be relevant  – for example, if the seller had unequivocally represented it would not withhold deliveries under the supply agreement despite the closure of the refinery, it might have lost its right to performance relief by waiver by estoppel. There was no argument, however, that this was so in this case.

Where can you read more? See Delta Petroleum v BVI Electricity Corporation [2020] UKPC 23 .

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Contracting under English law - the key principles

Form of contract under english law.

It is advisable to have a written contract to ensure clarity, however there is no legal requirement for a commercial contract to be in writing – it is still enforceable if it isn’t written down, although of course much harder to evidence what has been agreed and there is a greater chance that terms you do not want will be implied into the contract. A contract is only properly formed when there is an offer, acceptance of that offer, intention to create legal relations and consideration between the parties.

General requirements for English law contracts

In most contracts, parties are free to contract on the terms that they agree. It is always advisable to have a clear operative part to your contract, setting out clear performance and payment obligations, limitations and exclusions, detailing how risk is apportioned between the parties and the limits of liability of one party to another party as well as termination rights. Certain “boilerplate” clauses are important (e.g. non-assignment of rights and which law and jurisdiction the agreement will be subject to) so these clauses should not be ignored.

Key provisions required for certain English law contracts

There are some important exceptions to the rights of parties to freely choose the content and form of their contracts. These include, but are not limited to:

Contracts with certain agents:

The Commercial Agents (Council Directive) Regulations 1993 impose specific requirements on certain types of agency contracts which include the requirement to have certain specific topics covered in your contract.

Contracts with consumers:

There is a raft of rules governing dealings with consumers. These include the Consumer Rights Act 2015 (CRA) and the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. Both acts prescribe certain specific provisions that cannot be derogated from in your contracts with consumers as well as listing specific and general practices that are prohibited.

Implied terms in contracts:

The UK courts can imply certain terms into contracts, certain types of contracts have terms implied into them (e.g. sale of goods contracts and agency contracts) as a matter of law and certain types of relationship (e.g. lawyer and client) create specific implied obligations.

Provisions applicable to all contracts:

General rules under the Contracts (Rights of Third Parties) Act 1999, the Late Payments of Commercial Debts (Interest) Act 1998, Unfair Contract Terms Act 1977 (UCTA), and General Data Protection Regulations will prescribe certain specific or general requirements and/or prohibitions into all contracts.

Certain specific specialist areas in regulated sectors (e.g. chemicals or construction) will have specific requirements and should be checked by relevant specialist advisers.

Changing or ending English law contracts

A contract can be varied, amended or updated, if both parties recognise the need for this. Often a variation clause in the contract is used stating that the contract can be amended if both parties agree to it in writing.

Commercial contracts should be drafted with express clauses relating to termination.

If you are considering terminating an English law contract, it’s important to check the whole contract to understand the correct termination procedure and requirements for successfully giving notice (and having that termination notice accepted by the other party). If the terminating party fails to give valid notice, then it’s possible that the party who wanted to terminate could continue to be contractually bound and that party may have committed a ‘repudiatory breach’ of the contract.

Time periods for English law contracts

A commercial contract can be expressed to be for a fixed term (with automatic termination at the end of this period), an initial fixed term (requiring notice of termination at some point after expiry of that term), on subscription (a fixed period which automatically renews for consecutive fixed periods unless terminated) or of no fixed term (which can be terminated at any time by giving notice).

A ‘cooling off period’ (a time during which a person can withdraw from a binding contract without any serious penalties) does not apply automatically in business-to-business commercial contracts. As a result, any rights to cancel or return goods should be clearly set out in the contract. In certain types of business-to-consumer contracts, however, a “cooling off period” is required, allowing the consumer the right to return goods and/or cancel contracts.

For more information about how Burges Salmon can help, please contact Helen Scott-Lawler.

Key contact

Helen Scott-Lawler Partner

• Head of Food and Drink
• Intellectual Property and Media

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The third category conundrum: Digital assets as objects of personal property rights: the Law Commission’s supplemental report and revised draft bill

Key takeaways

• The Law Commission has published a draft Bill recognising certain types of digital asset as objects of property rights under English law.
• The Bill also extends to certain other assets e.g. voluntary carbon credits.
• This post discusses the context of the Bill and how it may benefit digital assets markets if enacted.

The UK digital assets community has widely welcomed the 29 July 2024 publication by the Law Commission of a supplemental report on digital assets and a revised draft bill. The draft bill is intended to support the development of the English common law in recognising certain types of digital asset, as well as other assets such as voluntary carbon credits, as objects of property rights under English law.

This is intended to provide greater legal certainty for those transacting in these assets, as well as those looking to raise finance against them, thereby supporting the growth of the digital assets industry.

The bill would provide that a “thing” is not prevented from being the object of personal property rights merely because it is neither (a) a thing in possession; nor (b) a thing in action.

This article discusses the context to the bill, why it takes this approach, and whether and to what extent it would benefit digital asset markets if enacted.

Why do property rights matter?

To the extent an asset can be subject to property rights, it would benefit from a more certain legal regime, opening up opportunities for market participants to invest in or finance the asset. The more comfortable a lender can get with the rights attaching to an asset, the more likely the lender is to finance that asset class. Accordingly, this bill may present opportunities both for digital asset owners looking to raise capital against digital assets, and for investors looking to deploy capital against alternative and non-correlated assets.

The two categories of personal property

English law has traditionally recognised two categories of personal property:

• Things in possession: in broad terms any object the law regards as capable of possession, e.g., tangible commodities such as a barrel of oil or a bar of gold.
• Things in action: any form of personal property that can only be claimed or enforced through legal action or legal proceedings. Examples of such objects of property include debts, rights of action for breach of contract, or shares or bonds issued by a company.

Which category a thing falls into is important for various reasons, including to determine how property interests may be transferred and how security is taken. For example, things in possession are typically secured by a security interest such as a charge or pledge, whereas things in action are usually secured by an assignment by way of security.

Digital assets do not fit easily into either category. They are not tangible in any traditional sense, so it is hard to see them as things in possession. At the same time, unlike things in action, they are not claimable or enforceable only through legal action. They continue to exist irrespective of whether the law recognises them as property or even prohibits their existence.

Some older authorities indicated that the only forms of personal property recognised under English law are things in possession and things in action. In other words, there is no “third category” of personal property.

Expanding the scope of what constitutes an object of property

Developments in English law over many years have called those older authorities into question. Developments in technology, regulation and policy have created various new things which the courts have been quite prepared to recognise as being objects of property rights. These include:

• milk quotas;
• EU emissions allowances (EUAs);
• waste management licences; and
• various types of digital asset.

The basis on which the courts have concluded that such assets are property has varied. In the case of waste management licences and EUAs, which provide exemptions from statutory prohibitions or from fines, the analysis was based on the characteristics of objects of property traditionally recognised by English courts. In particular, these assets: 3

• can be defined;
• can be identified by third parties;
• can by their nature be assumed by third parties; and
• offer some degree of permanence and stability.

When considering Bitcoin as an object of property rights, the Court of Appeal also noted that Bitcoin is “rivalrous”, i.e., that the holding of that thing by one person necessarily prevents another person from holding that thing at the same time. This is a feature most associated with things in possession, but it is also a feature of many digital assets, as well as of voluntary carbon credits, and is regarded by the Law Commission as indicative of an object of property rights.

In these cases, the courts have tended to refrain from making any ruling regarding whether such objects constitute things in possession or things in action, but have indicated that they are not strictly things in action. In one case, the High Court went further in saying that cryptocurrencies are neither things in action nor things in possession but nonetheless constitute a form of property.

Most respondents to the Law Commission’s original consultation said that these developments indicate that a third category of personal property, which are neither things in possession or things in action, has already emerged in England and should be recognised by legislation.

If the common law is doing this anyway, why do we need a bill?

The adaptability and practicality of the common law as evidenced by the cases discussed above raise a question: why should Parliament pass an act providing that things can be objects of property rights when the courts are well capable of making rulings relating to this in any event?

The Law Commission points out several benefits:

• It would confirm the existing law and remove any lingering uncertainty.
• It would save time because in cases where these issues are relevant, courts could focus on substantive issues rather than considering doctrinal issues relating to the exact category that a particular asset falls into.
• It would demonstrate the flexibility and forward-looking nature of English law in this field.

These are all fair points, but they show that the bill would represent a small incremental change rather than a radical transformation.

It will be for the UK Government to determine whether to implement the Report and introduce the draft Bill into Parliament.

Reed Smith is a dynamic international law firm dedicated to helping clients move their businesses forward. With an inclusive culture and innovative mindset, we deliver smarter, more creative legal services that drive better outcomes for our clients. Our deep industry knowledge, long-standing relationships and collaborative structure make us the go-to partner for complex disputes, transactions, and regulatory matters. For more information, please visit  reedsmith.com .

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