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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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• United Kingdom

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• assignments basic law

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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• 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

Hall Ellis Solicitors

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
• Increasing Liability for Breach of Contract: Indemnities 

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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?

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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.

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 is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates 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 ”.

(1) Assignment 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, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her 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 him/her.  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.

            (2) 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.  That is, 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. However, 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 to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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Book contents

• Frontmatter
• Table of cases
• Table of statutes
• Table of statutory instruments
• Part I Introduction
• Part II Formation
• Part III Consideration and intent to create legal relations
• Part IV Third parties and assignment
• 7 Third parties
• 8 Assignment
• Part V Vitiating elements
• Part VI Terms and interpretation
• Part VII Breakdown and liability
• Part VIII Remedies for breach
• Part IX Illegality and public policy
• Part X The future
• Appendix: A who's who of contract law
• Bibliography

8 - Assignment

from Part IV - Third parties and assignment

INTRODUCTION

Summary of main points

(1) The holder of certain contractual rights (the promisee and assignor, B) can transfer the right to a third party (the assignee, C) without the promisor's (A's) consent. Thus, where A owes B a debt or other chose in action, the right-holder, B, can assign the benefit of this right to C.

(2) In the case of a statutory assignment, the assignment by B to C must be in writing, and B or C must notify A of the assignment.

(3) Such notice is also desirable in the case of equitable assignments.

(4) Certain rights are intrinsically incapable of being assigned because they are personal to the A/B relationship.

(5) A can preclude an assignment by inserting a prohibitory clause in his contract with B.

M. Smith, The Law of Assignment (Oxford, 2007)

EFFECTS OF ASSIGNMENT

Assignment has four effects (here, A is the promisor, B is the promisee, and C is the assignee):

(1) A, once notified, is obliged to pay C.

(2) To enforce the obligation created by the assignment in C's favour, C can sue A directly, without joining B as a party to the claim. This is true of statutory assignment (8.04) and of equitable assignment (8.05) of equitable choses in action. In the case of equitable assignment of a legal chose in action, such as a debt, the assignee must join the assignor as party to the claim (although there might be exceptions, where such joinder becomes unnecessary or it has been waived).

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• Neil Andrews , University of Cambridge
• Book: Contract Law
• Online publication: 05 June 2012
• Chapter DOI: https://doi.org/10.1017/CBO9780511973567.009

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Assignment of contract

This article is written by Neha Dahiya, a law student at Dr. B.R. Ambedkar National Law University, Sonipat. This article explains the meaning, types, and conditions of the assignment of contract. It also seeks to explain the judicial opinion about assignment by the means of a case study. 

This article has been published by Sneha Mahawar .

Table of Contents

Introduction

A contract binds the involved parties to fulfil their obligations. Non-fulfillment of the obligations results in the breach of the contract. Thus, the rights and obligations arising from the contract are owned by the contracting parties. However, in certain cases, these contractual rights and obligations can be transferred to a third party. This is known as the assignment of contract. In a world where the complexity of transactions is increasing continuously, such assignments have become very common. 

Basics of a contract 

Section 2(h) of the Indian Contract Act, 1872 defines a contract as “an agreement enforceable by law”. It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise. The formation of a contract results in rights and obligations for both parties. A lawful contract binds both parties to fulfil their obligations. In case they are not fulfilled, the aggrieved party can avail of the remedies provided by the law. 

Thus, Contract= (Offer + Acceptance) Agreement + Enforceability of law 

For example: ‘A’ promises to sell his house to ‘B’ for a consideration of Rs. 50 lakhs. Here, there was an offer to sell the house by ‘A’ and acceptance by ‘B’ for consideration of a fixed sum. It is a lawful agreement and hence is a contract. Here, ‘A’ has the obligation to give the house to ‘B’ and ‘B’ has an obligation to pay the amount. If either of them fails to fulfil their respective obligation, it will result in a breach of the contract. 

What is assignment of contract 

When the rights and obligations in a contract are transferred to a third party, who is not a party to the contract, it is called the assignment of contract. For example, in the case where there was a contract between ‘A’ and ‘B’ where ‘A’ was supposed to pay ‘B’ some amount, ‘A’ had an obligation to pay ‘B’ the amount and ‘B’ had the right to receive the amount. Along with this, if ‘B’ had to pay the same amount to ‘C’ and he asked ‘A’ to pay the money directly to ‘C’, it can be called an assignment of the obligation by ‘B’ to ‘A’. It is covered in Section 37 of the Indian Contract Act, 1872. The Section provides that a party can dispense the performance of the contract by the assignment of it to a third party. This concept can also be found in the Transfer of Property Act, 1882 . The use of assignments has increased tremendously in recent times owing to the financial and contractual complexities of the transactions. Usually, it is employed in high-risk transactions that are secured by assigning the contractual rights along with the securities (like hypothecation or mortgage).

The party currently holding the rights and obligations of the existing contract is called the ‘assignor’ and the party to whom they are assigned and taking over the position is called the ‘assignee’. The transfer takes place from the assignor to the assignee. Also, it is pertinent to note that assignment does not affect the rights and responsibilities of the parties involved in any way. These rights and duties remain the same. And even after the transfer, the assignor remains liable if any problems arise unless there was an agreement to the contrary. Thus, the assignment of the contract involves an incorporeal transfer of the rights and obligations. And as per the laws of India, these transfers must be brought onto paper.  

How does assignment of contracts work 

The assignment depends upon several factors including the provisions of the contract entered into by the parties. The original contract may contain a clause that does not permit the assignment or make the consent of the other party necessary before the assignment. The contract can also contain a stipulation that states that the liability of the agreement would lie with the original parties, even after the assignment. This happens in situations where the assignor acts as a guarantor for the performance of duties as per the contract by the assignee. Acting as a guarantor makes the assignor liable. It is also possible that a contract may permit an assignment without any formal notification to the other party. But in this case, it is important for that party to create a ‘Letter of Assignment’ containing the details to notify all other contracting parties. The letter must be signed by both outgoing and incoming parties. 

For example: If ‘A’ and ‘B’ enter into a contract and include a clause that does not allow the assignment of the contract, neither of them can transfer their rights and liabilities to a third party. And if the contract contains a clause that necessitates the requirement of consent, then neither of them can transfer the rights and obligations without the other party’s consent. Also, if ‘A’ decides to assign his obligations to ‘C’ and acts as a guarantor for ‘C’, then also ‘A’ will continue to hold the liability. 

Enforceability of the assignment

Usually, assignments of contract rights and obligations are enforceable. However, under some circumstances, they are not enforced. These are as follows:

• If the provisions of the contract prohibit the assignment of the contract explicitly and it still happens somehow, it will be considered to be void. Such a clause is called an ‘anti-assignment clause’. 
• Sometimes, due to the assignment of contractual rights and obligations, the basics of the contract are altered. In such circumstances, it cannot be considered enforceable. For example, if performance is affected by the assignment, it will probably not be enforced by the court. 
• The assignment will not be enforced if it is illegal or contrary to the law in some or the other way. 

Contracts that can be assigned 

As per Indian law, any kind of contract can be assigned, provided it conforms to the provisions of the contract and is carried out with the consent of the parties involved. Also, for any contract whose foundation lies upon the ‘personal skills’ of the promisor, such a contract cannot be assigned under any circumstances. This is because such a contract depends upon the qualities or qualifications of the promisor only and cannot be found in someone else, thus, the obligations cannot be assigned in such a case. This has also been highlighted by our judiciary that two types of contracts can never be assigned, that are:

• Where the contract is personal in nature.
• Where the assignment of rights is prohibited either by the law or by the contract.

Thus, it is prudence that is followed while deciding the assignability of a contract. It is prudent to explicitly state the conditions regarding assignment in the contract itself, taking due care of the limits placed by the law.  

Who can handle assignment of a contract 

The most competent person to handle the assignment of contract is an attorney. An attorney is a licensed court practitioner who acts as a deputy or the agent of the party he/she is representing in the court of law. Such contracts need professional expertise as they contain some very technical and intricate details that are crucial for the correct and beneficial assignment. 

Types of assignable contracts

As per the common law, the assignment was done by the way of  three kinds of transactions:

• Novation- In simple words, it is an agreement wherein both contracting parties permit the substitution of an existing party with a new one in the contract. Thus, there is a novation of contract where the original party is discharged of its obligations and they are transferred to a new party. This can be called the assignment of contractual obligations. However, there is an essential difference between both. In the assignment, the rights and obligations are transferred from one party to another. But in novation, instead of a transfer, one party substitutes another.  
• Acknowledgment – Where both the parties acknowledge that the interests in the contract can be assigned to a third party in the contract, then the assignment can take place with the consent of both. 
• Power of attorney – It is a legal document that allows a person to appoint someone to organise or manage various affairs including personal and financial. Thus, in a way it is like appointing an agent to conduct professional transactions, settle claims and cater to business demands.

As per the existing laws in India, there are broadly two types of assignment. 

• Legal – A legal assignment is the one that is carried out as per Section 130 of the Transfer of Property Act, 1882 . it is characterised by all the formalities, intention to assign, communication to the assignee, and notice to the debtor. In this, a proper formal agreement is drafted giving assent to the assignment, as per the procedure laid down by the law. The consent of the party is sought first and a notice is sent. Proper communication is sent to the assignee as well. Finally, with all the formalities done, the assignment is carried out. 
• Equitable – An equitable assignment holds good only in equity and not in the eyes of law. It can be related to a transfer of future benefits which is not enforceable by law. In respect of equitable charges attached to a property, the courts are bound to follow the laws laid down. Thus, as held in B.N. Railway Employees’ Urban Bank v. Seager (1941), an equitable assignment can be created only by a written document as per the provisions of the Transfer of Property Act, 1882. 

Modes of assignment 

The assignment of contractual rights and liabilities has been covered under Section 130 of the Transfer of Property Act, 1882 under the heading of ‘actionable claim’. An actionable claim can be transferred simply by the execution of a written instrument. Nothing more is required. The contract permitting assignment must be clearly laid down, strictly adhering to the provisions of this Section. The intention to assign must be clear and certain. Under Indian property laws, a deed is required for the assignment. And this deed must be duly stamped. However, stamp duty is extremely high in India. Also, it is a subject that falls in the concurrent list. So when it is legislated on by both centre and states, it leads to variations and there is no uniformity. This acts as a hindrance in the way of assignment. 

Validity of part-assignment

In the case of Doraisami v. Doraisami (1924), following the English precedent, it was held that if there is an assignment of a debt, the transfer must be of the whole debt and not just a portion of it. Thus, part-assignment was not recognised. However, in the subsequent case of Rajamier v. Subramaniam (1928) , the previous judgement was overruled. It was recognized that even though part-assignment was not recognised in the English common law, part-assignment of debt was a valid transfer as it was held to be good in equity. However, it was also laid down that in such part-assignments, while enforcing a claim, it was necessary to implead the owner of the rest of the portion as well. It was observed that no such distinction was made in the Transfer of Property Act, 1882. Thus, both may be transferred under the term ‘actionable claims’. 

However, the only problem that persists is presented by Order 2 Rule 2 of the Code of Civil Procedure, 1908. As per this, a single cause of action cannot be allowed to be split into many. Thus, it may prevent the owner of a part of the debt from enforcing his rights. Thus, to avoid this, the lenders often submit a substitution claim or notice in the court so that this provision is not applied. 

Assigning intellectual property 

Assignment of intellectual property implies the transfer of the owner’s rights in copyrights, patents, trade secrets, trademarks, and such other intangible properties. Many times, companies look to sell or transfer their intellectual property because an excess of these can prove to be a burden for them. Maintaining intellectual property requires continuous registrations, defending suits against third-party claims or marketing, and creating a finished product. Thus, such transfers can generate good profit for the company and save it from unnecessary expenditure. On the other hand, several companies look for purchasing such property to provide an impetus to their growth. Thus, when intellectual property is assigned, all the rights, titles, and interests with respect to it are transferred to the assignee from the assignor.  

Assignment of contract in real estate 

The use of assignments in real estate is known as ‘real estate wholesaling’ . As per this, the real estate dealers instead of going by the conventional way of buying and selling the house, enter into a contract and then reassign it to another buyer so as to avoid the additional costs and pocket the profit earned in doing so. This is possible because a real estate purchase agreement does not contain a binding obligation to actually buy the property. Such an agreement is called an ‘Assignment of Real Estate Purchase and Sale’ agreement. Thus, here the assignor merely acts as a middleman, selling their right to buy the property with an equitable interest, i.e. in exchange for an assignment fee from the assignee, who is the ultimate buyer of the property.

Alternatives to assignment of contract 

There are certain other types of transfers that operate as an alternative to assignment. 

They are as follows:

• Licensing- It is an agreement under which a party owning the rights over the property (for example – owning patent rights in case of intellectual property) leases those rights to another, without actually selling or assigning them. Thus, the second party gets a licence to use those rights owned by the first party, for its benefit.  
• Delegation- Delegation basically implies appointing someone else to do the work for you. For example, ‘A’ gets a contract to cut the grass from ‘B’s garden. ‘A’ might delegate the work to ‘C’ without actually assigning the contract to him. But ‘A’ will still control the work and receive the payment. 

Case laws on assignment of contract 

Kapilaben and ors. v. ashok kumar jayantilal sheth through poa gopalbhai madhusudan patel and ors., (2019), facts of the case.

In this case, the appellants here had executed an agreement to sell in 1986 in favour of some of the respondents. The respondents had paid only a portion of the consideration amount. Thereafter, the original buyers, i.e. the respondents executed another agreement to sell in 1987 in respect of the same property in favour of Respondent 1 who was not included in the agreement of 1986. Subsequently, a dispute arose among the parties, and Respondent 1 filed a petition against both the original sellers and buyers seeking specific performance of the 1987 agreement. The petition was dismissed by a trial court citing that the original buyers could not have transferred the contract and assigned their obligation to a third party without the written consent of the original seller. Additionally, there was no evidence suggesting that the seller’s consent was taken. However, the decision was overruled by the High Court of Gujarat. Later on, the matter went to the Supreme Court of India

Issue involved in the case

Was the assignment of obligations by the original buyers to Respondent 1 without the consent of the original seller valid? 

Judgment of the Court

The Supreme Court laid down the following principles in its judgment:

• Assignment of contractual liabilities, where the parties agree to substitute the old contract with a new one where the same responsibilities are transferred to another party is called novation. However, this assignment cannot occur without the consent of the other party to the contract. 
• The rights and obligations under a contract are freely assignable unless the contract is personal in nature or is prohibited by the law. 
• It was finally held that an assignment cannot be held valid just because it is not explicitly prohibited by the provisions of the contract. In order to classify an interest in the contract to be assignable, the terms of the contract and circumstances must be taken into consideration to infer whether the pirates intended to make the interests assignable.

Robinson v. Davison, (1871) 

In this case , the defendant’s wife had promised to play the piano at a concert. However, she failed to perform owing to her bad health. As a result, the plaintiff sued for compensation. 

Issues involved in the case

• Can the plaintiff seek compensation in the present case?
• Could assignment of contract be allowed to a third party?

The Court held that the performance of the present contract depended upon the personal skills of the defendant’s wife, which in turn depended on her good health. Thus, non-performance due to ill-health discharged the contract. Hence, no compensation could be claimed. Also, since the contract was based on the promisor’s personal skills and capability, it could not be assigned to a third party. 

Conclusion 

Assignment of contracts has become a common phenomenon in recent times. However, it is important that the assignments conform to the provisions laid down by the law. It must be carried out with the consent of the contracting parties. There are certain cases where the assignment is not possible like the contracts which are personal in nature, where there is an explicit provision in the contract to prohibit it, or when the law does not allow it in particular cases. These conditions must be adhered to. In fact, our law recognises both legal and equitable assignments. These assignments are covered under the provisions of the Transfer of Property Act, 1882, and the Indian Contract Act, 1872. Thus, all the contracts where the contractual rights and obligations are transferred to a third party are valid, provided all the conditions laid down by law are followed. 

References 

• http://docs.m anupatra.in/newsline/articles/Upload/E915DA6B-361C-493B-91D1-96D8EB703128.pdf
• https://www.thebalancesmb.com/what-is-an-assignment-of-contract-in-a-business-agreement-4587747
• https://www.nolo.com/legal-encyclopedia/assignment-of-contract-basics-32643.html
• https://www.contractscounsel.com/b/assignment-of-contract  

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Contract Assignments

(This may not be the same place you live)

  What is a Contract Assignment?

In a contract assignment, one of the two parties to a contract may transfer their right to the other’s performance to a third party. This is known as “contract assignment.” Generally, all rights under a contract may be assigned. A provision in the contract that states the contract may not be assigned usually refers to the delegation of the assignor’s (person who assigns) duties under that contract, not their rights under the contract. 

In modern law, the phrase “assignment of contract” usually means assignment of both rights and duties under a contract.

Who are the Various Parties Involved in a Contract Assignment?

How is a contract assignment created, when is a contract assignment prohibited, which parties are liable to each other in a contract assignment, are there issues with multiple assignments, should i hire a lawyer for contract assignments.

In a contract, there are two parties to the agreement, X and Y. The parties may agree to let X assign X’s rights to a third party . Once the third party enters the picture, each party has a special name. For instance, suppose X, a seller of bookmarks, contracts with Y, a purchaser of bookmarks. Y desires to have Y’s right to X’s performance (the sale of bookmarks on a monthly basis) to another person. 

This third person, Z, is called the assignee. X is called the obligor , and Y is called the assignor , since Y has assigned its right to X’s performance . X, the obligor, is obligated to continue to perform its duties under the agreement.

There are no “magic words” needed to create an assignment. The law simply requires that the would-be assignor have an intent to immediately and completely transfer their rights in the agreement. In addition, writing is typically not required to create an assignment. As long as X and Y both adequately understand what right is being assigned, an assignment is created. 

Words that indicate a transfer is to take place suffice, such as “I intend to transfer my rights under this agreement,” or, “I intend to give my rights to Z,” or “I intend to confer an assignment on Z.” In addition,consideration,which is a bargained-for exchange required for a contract to be valid, is not required for assignment.

In certain instances, an assignment of contract rights can be prohibited. If the contract contains a clause prohibiting assignment of “the contract,” without specifying more, the law construes this language as barring only delegation of the assignor’s duties, not their rights. If the assignment language states “assignment of contractual rights are prohibited,” the obligor may sue for damages if the assignor attempts to assign the agreement. If the contract language states that attempts to assign “will be void,” the parties can bar assignment.of rights.

Under modern contract law, the phrase “I assign the contract” is usually interpreted to mean that one is assigning rights and duties. What is an assignment of duties? An assignment of duties occurs where Y, called the obligor or delegator, promises to perform for X, the obligee. Y then delegates their duty to perform to Z, the delegate. Under the law, most duties can be delegated. 

There are exceptions to this rule. Delegation can be prohibited when:

• The duties to be performed involve personal judgment and special skill (e.g., a portrait, creation of a custom-made dress). 
• “Personal judgment” is the exercise of some kind of superior judgment when it comes to determining how, when, or where to do something. Examples of individuals who exercise personal judgment include talent scouts and financial advisors.  Special skill is the unique ability to create a good or perform a service. A delegator can be prohibited from delegating duties when it is that specific delegator’s services are sought. For example, if the services of a specific famous chef are sought, and the original agreement was entered into on the understanding that the chef was hired for their specific talent, the delegator may not delegate the services;
• The assignment fundamentally changes risks or responsibilities under the agreement;
• The assignment is over future rights associated with a future contract that does not currently exist;
• Delegation would increase the obligation of the obligee. For example, if a shoe manufacturer contracts to deliver soles to a store in the same town as the shoe factory, the other party cannot assign the delivery to a different store in another state. Doing so would impose a greater obligation on the obligee than was originally contemplated;
• The obligee had placed special trust in the delegator. For example, assume that you have hired a patent attorney, based on that attorney’s significant skill and expertise, to obtain a valuable patent. You have placed special trust in this person, hiring them instead of other patent attorneys, because of their unique expertise. In such a situation, the attorney may not delegate his duties to another attorney (delegate), since the attorney was hired because of one person’s special capabilities;
• The delegation is of a promise to repay a debt; or
• The contract itself restricts or prohibits delegation. If the contract states, “any attempt to delegate duties under this contract is void,” a delegation will not be permitted.

In a contract involving assignment of rights, the assignee may sue the obligor. This is because the assignee, once the assignee has been assigned rights, is entitled to performance under the contract. If the obligor had a defense that existed in the original contract between obligor and assignor, the obligor may assert that defense against the assignee. Examples of such defenses include the original contract was not valid because of lack of consideration, or because there was never a valid offer or acceptance).

An assignee may also sue an assignor. Generally, if an assignment is made for consideration,it is irrevocable. Assignments not made for consideration, but under which an obligor has already performed, are also irrevocable. If an assignor attempts to revoke an irrevocable assignment,the assignee may sue for “wrongful revocation.” 

In circumstances involving delegation of duties,an obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the agreement. Therefore, the obligee may sue the delegator for nonperformance by the delegate. The obligee may sue the delegate for nonperformance, but can only require the delegate to perform if there has been an assumption by the delegate. An assumption by the delegate is a promise that the delegate will perform the delegated duty, which promise is supported by consideration. 

Assignments that are not supported by consideration are revocable. If an initial assignment is revocable, a subsequent assignment can revoke it. If a first assignment is irrevocable, because consideration was present,the first assignment will usually prevail over a subsequent assignment. This means the person who can claim the assignment was first made to them will prevail over someone who claims a subsequent assignment. 

If, however, the second person paid value for the assignment, and entered into the assignment without knowing of the first assignment, the “subsequent”assignee is entitled to proceeds the first judgment against the obligor (the original party who still must perform), in the event such a judgment is issued,

If you have an issue with assignment of rights or duties under a contract, you should contact a contract lawyer  for advice. An experienced business lawyer near you can review the facts of your case, advise you of your rights, and represent you in court proceedings.

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Prior to joining LegalMatch, Daniel worked as a legal editor for a large HR Compliance firm, focusing on employer compliance in numerous areas of the law including workplace safety law, health care law, wage and hour law, and cybersecurity. Prior to that, Daniel served as a litigator for several small law firms, handling a diverse caseload that included cases in Real Estate Law (property ownership rights, residential landlord/tenant disputes, foreclosures), Employment Law (minimum wage and overtime claims, discrimination, workers’ compensation, labor-management relations), Construction Law, and Commercial Law (consumer protection law and contracts). Daniel holds a J.D. from the Emory University School of Law and a B.S. in Biological Sciences from Cornell University. He is admitted to practice law in the State of New York and before the State Bar of Georgia. Daniel is also admitted to practice before the United States Courts of Appeals for both the 2nd and 11th Circuits. You can learn more about Daniel by checking out his Linkedin profile and his personal page. Read More

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New Saudi Labor Law Amendments: What Expats Need to Know

By Mohammed Ameen

Published on: August 7, 2024

The Saudi Council of Ministers recently approved significant amendments to the Labor Law, aiming to create a more attractive work environment and support sustainable development goals aligned with Saudi Vision 2030. These changes, announced by the Ministry of Human Resources and Social Development, are designed to enhance job stability, protect the rights of workers and employers, and develop the nation’s workforce.

Key Changes to the Labor Law

The new amendments affect 38 articles of the Labor Law, with seven articles being deleted and two new articles added. These updates are part of Saudi Arabia’s broader strategy to improve the employment market and align with international labor agreements. The amendments will take effect 180 days after their publication in the official Gazette.

Goals of the Amendments

The primary goals of these changes are to:

• Improve the labor market in Saudi Arabia
• Enhance job stability for workers
• Preserve the rights of both employees and employers
• Develop human resources through better training opportunities
• Increase job opportunities for Saudi citizens

Detailed Changes

The amendments considered the interests of all parties in the contractual relationship. They expanded provisions on vacations and labor contracts, defined “resignation” and “assignment,” and added an article specifying resignation procedures. Penalties were introduced for employing workers without a Ministry license, and employers are now required to create training policies to improve employee skills. Additionally, there were several amendments related to maritime work.

Key Amendments to Labor Law Articles

• Added Employer’s Duty : Employers must refrain from doing anything that would nullify or undermine the application of equal treatment in usage and professional matters.
• Paid Bereavement Leave : A paid leave of three days for workers in the event of the death of a spouse or close relative.
• Trainee Rights and Duties : Adding the rights and duties of the trainee and the employer during the training period.
• Increased Maternity Leave : Maternity leave for female workers has been increased to fourteen weeks.
• Overtime Compensation : Workers can agree to take paid leave instead of receiving additional overtime compensation.
• Contract Renewal Mechanism : Specifying the mechanism for renewing contracts for non-Saudi workers if not explicitly mentioned in the contract.
• Probation Period : The probation period must be specified in the labor contract and must not exceed a total duration of one hundred and eighty days.
• Definitions and Procedures : Adding definitions for “resignation” and “assignment,” along with an article specifying resignation procedures.
• Bankruptcy-Related Termination : Adding a case for the termination of the labor contract related to bankruptcy procedures, ending with a ruling or decision by the competent court.
• Notice Period for Contract Termination : Amending the notice period for the termination of a fixed-term contract to be thirty (30) days if the termination is from the worker’s side and sixty (60) days if the termination is from the employer’s side.

راعت تعديلات بعض مواد نظام العمل حقوق وواجبات أطراف العلاقة التعاقدية لضمان تحقيق سوق عمل جاذب ومتميز. للمزيد 🔗|| https://t.co/oOU38mJjVN pic.twitter.com/LbN5PRQJgb — وزارة الموارد البشرية والتنمية الاجتماعية (@HRSD_SA) August 6, 2024

Inclusive Process

The ministry explained that these amendments resulted from extensive studies and comparisons with labor laws in other countries. Over 1,300 participants provided feedback through the Istitlaa survey platform, operated by the National Competitiveness Center. The ministry also consulted with private sector establishments, government agencies, labor committees, and human resources experts through workshops and meetings.

Supporting Vision 2030

These amendments aim to support Saudi Vision 2030 by developing existing systems and regulations to strengthen the labor market, enhance production and service sectors, and provide a conducive legislative environment. They also focus on supporting small and medium enterprises, creating more job opportunities for Saudi citizens, and achieving sustainable development goals.

For More Information

For more details about the amendments to the Labor Law, visit the official website of the Ministry of Human Resources and Social Development.

By implementing these amendments, Saudi Arabia continues to make significant strides towards a more robust and equitable labor market, fostering growth and development in line with Vision 2030.

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