Privity Contract Assignment Letter

"Assignee" redirects here. For the racehorse, see Assignee (horse).

An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party, the assignor, to another party, the assignee.[1] It can also be a transfer of a benefit, including an equitable interest, according to established rules (at common law or in equity).[2] The rights may be vested or contingent.[3] The details of the assignment determines some additional rights and liabilities (or duties).

Typically a third party is involved in a contract with the assignor, and the contract is, in effect, transferred to the assignee. For example, a borrower borrows money from a local bank. The local bank receives a mortgage note and can thereafter transfer that note to a financial institution in exchange for a lump-sum of cash, thereby assigning the right to receive payment from the borrower to another entity. Mortgages and lending contracts are relatively amenable to assignment since the lendor's duties are relatively limited; other contracts which involve personal duties such as legal counsel may not be assignable.

The related concept of novation is not assignment. Rather than assigning only the rights to another party, novation involves the replacement of the original party with a new party or the replacement of the original contract with a new contract. Since novation creates a new contract, it requires the consent of all parties, but assignment does not require the consent of the nonassigning party, but in the case of assignment, the consent of the nonassigning party may be required by a contractual provision.[4]

Procedure[edit]

The assignment does not necessarily have to be in writing; however, the assignment agreement must show an intent to transfer rights. The effect of a valid assignment is to extinguish privity (in other words, contractual relationship, including right to sue) between the assignor and the third-party obligor and create privity between the obligor and the assignee.

Liabilities and duties[edit]

Unless the contractual agreement states otherwise, the assignee typically does not receive more rights than the assignor, and the assignor may remain liable to the original counterparty for the performance of the contract. The assignor often delegates duties in addition to rights to the assignee, but the assignor may remain ultimately responsible.

However, in the United States, there are various laws that limit the liability of the assignee, often to facilitate credit, as assignees are typically lenders.[5] Notable examples include a provision in the Truth in Lending Act[6] and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.[5]

In other cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except that issues, such as lack of performance, by the assignor may not be a valid defense for the obligor.[7] As a response, the United States Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses", which "effectively abolished the [holder in due course] doctrine in consumer credit transactions".[7] In 2012, the commission reaffirmed the regulation.[8]

Assignment of contract rights[edit]

Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if Party A contracts with Party B to sell Party A's car to Party B for $10, Party A can later assign the benefits of the contract - i.e., the right to be paid $10 - to Party C. In this scenario, Party A is the obligee/assignor, Party B is an obligor, and Party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that Party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting Party C. When an assignment is made, the assignment always takes place after the original contract was formed. An Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner. Compare Novation.

When assignment will be permitted[edit]

The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, the assignment of a legal malpractice claim is void since an assignee would be a stranger to the attorney-client relationship, who was owed no duty by the attorney and would imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.

Torts are not assignable as public policy, and various statutes may prohibit assignment in certain instances.[9] In addition, the Restatement (Second) of Contracts lists prohibitions in §317(2)(a) based upon the effect to the nonassigning party (obligor),[9] with similar prohibitions in the Uniform Commercial Code §2-210.[10] For example, UCC §2-210 states the following:[11]

Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreementotherwise [sic].

Requirements for an effective assignment[edit]

For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.

A contract may contain a non-assignment clause, which prohibits the assignment of specific rights and some various rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".

Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.

Requirement of a writing[edit]

There are certain situations in which the assignment must be in writing.

  1. Assignment of wages; additionally, statutes may prohibit this assignment[9]
  2. Assignment of any interest in real property
  3. Assignment of choses in action worth over $5,000

Delegation[edit]

A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause may also bar delegation.

Remedies[edit]

Legal remedies may be available if the nonassigning party's rights are affected by the assignment.

Revocability[edit]

Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another. There are some exceptions to the revocability of a donative assignment:

  1. The assignment can not be revoked if the obligor has already performed
  2. The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
  3. The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token.
  4. Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment.

Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.

Breach and defenses[edit]

A cause of action for breach on the part of the obligor lies with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee "stands in the shoes" of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor. Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B's house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A's work. If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected.

When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.

Successive assignments[edit]

Occasionally, an unscrupulous assignor will assign exactly the same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions.

In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies. In some countries, the rights of the respective assignees are determined by the old common law rule in Dearle v Hall.

  1. Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever.
  2. Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee.
  3. Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above.

See interpleader.

Special rules for assignment of certain rights[edit]

Property rights[edit]

See also: Rule in Dumpor's Case and Privity of estate

Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of the right to possess property. With an assignment, the assignor transfers the complete remainder of the interest to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. The assignee's interest must abut the interest of the next person to have the right to possession. If any time or interest is reserved by a tenant assignor then the act is not an assignment, but is instead a sublease.

The liability of the assignee depends upon the contract formed when the assignment takes place. However, in general, the assignee has privity of estate with a lessor. With privity of estate comes the duty on the part of the assignee to perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor retains the obligations to perform on covenants to maintain or repair the land.

If the assignor agrees to continue paying rent to the lessor and subsequently defaults, the lessor can sue both the assignor under the original contract signed with the lessor as well as the assignee because by taking possession of the property interest, the assignee has obliged himself to perform duties under covenant such as the payment of rent.

Unlike a Novation where consent of both the lessor and lesse is required for the third party to assume all obligations and liabilities of the original lessee, an assignment does not always need the consent of all parties. If the contract terms state specifically that the lessor's consent is not needed to assign the contract, then the lesee can assign the contract to whomever the lesee wants to.

Absent language to the contrary, a tenant may assign their rights to an assignee without the landlord's consent. In the majority of jurisdictions, when there is a clause that the landlord may withhold consent to an assignment, the general rule is that the landlord may not withhold consent unreasonably unless there is a provision that states specifically that the Landlord may withhold consent at Landlord's sole discretion.

Partnership rights[edit]

A person can also assign their rights to receive the benefits owed to a partner in a partnership. However, the assignee can not thereby gain any of the assignor's rights with respect to the operation of the partnership. The assignee may not vote on partnership matters, inspect the partnership books, or take possession of partnership property; rather, the assignee can only be given the right is to collect distributions of income, unless the remaining partners consent to the assignment of a new general partner with operational, management, and financial interests. If the partnership is dissolved, the assignee can also claim the assignor's share of any distribution accompanying the dissolution.

Intellectual property rights[edit]

See also: transfer (patent)

Ownership of intellectual property, including patents, copyrights, and trademarks, may be assigned, but special conditions attach to the assignment of patents and trademarks. In the United States, assignment of a patent is governed by statute, 35 U.S.C. § 261. Patent rights are assignable by an "instrument in writing." Title in a patent can also be transferred as a result of other financial transactions, such as a merger or a takeover, or as a result of operation of law, such as in an inheritance process, or in a bankruptcy. An assignment of a patent can be recorded with the United States Patent and Trademark Office. Although such recording is not required, if an assignment is not recorded at the USPTO within three (3) months or prior to a subsequent assignment, the assignment will be void against a subsequent assignee without notice of the earlier, unrecorded assignment.

With respect to a trademark, the owner of the mark may not transfer ownership of the mark without transferring the goodwill associated with the mark.

Companies sometimes request from employees that they assign all intellectual property they create while under the employment of the company. This is typically done within an Employment Agreement, but is sometimes done through a specific agreement called Proprietary Information and Inventions Agreement (PIIA).

Personal injury torts[edit]

The standard rule is that personal injurytort causes of action are nonassignable as a matter of public policy.[9][12] These should be distinguished from final settlements or judgments resulting from lawsuits brought on such causes of action, which may be assignable.

Legal malpractice[edit]

In the majority of jurisdictions, assignments of legal malpractice causes of action are void as against public policy.[13]

Equitable assignment[edit]

An equitable assignment is an assignment, or transfer of rights, in equity.

General principles[edit]

There are numerous requirements that exist for an equitable assignment of property, outside the 'standard' clear and unconditional intention to assign.[14] These requirements are fundamental characteristics of a statutory assignment: Absolute assignment (an unconditional transfer: conditions precedent or part of a debt are not absolute) and the assignment must be made in writing and signed by the assignor, and in particular, this applies to real property.[15]

Assigning future property in equity cannot be gratuitous. The assignor must receive consideration for the agreement, otherwise the assignment will be ineffective.[3] However, an absolute assignment does not require consideration to be given. Secondly, between the period of agreement between assignor and assignee and acquisition by the assignor, the assignees rights are not contractual, but rather a proprietary right to the property.[16] This means the assignee has an interest in this future property, in the same manner any owner has over property.

In equity, these principles operate to protect both the assignor and the assignee. In Norman v Federal Commissioner of Taxation,[3] a taxpayer attempted to assign by deed, to his wife certain moneys which he was eventually going to receive. This included dividends and interest due on loans. The court held the interest and the dividends were expectancies or possibilities which could not be assigned without consideration. The court's worry was that assignments without consideration might be used as instruments of fraud, to avoid creditors and tax collection.

Mere expectancies[edit]

Courts will not enforce a contract to assign an expectancy unless there is a valuable consideration. For example, under a settlement of property the respondent "the son" would have been entitled to an equal portion of properties along with his other siblings which was gained in a settlement by his mother. This portion was only his when allocated to him at his mothers discretion. Prior to this allocation being made, the respondent allotted his benefit to trustees for a voluntary settlement. He was assigning or purporting to assign something which he might become entitled to in the future, not a contingent interest. The judgment held it ineffective and elaborated on previous points to state the respondent cannot be compelled to allow the trustees to retain the appointed sum.[17]

References[edit]

  1. ^For the assignment of claim see Trans-Lex.org
  2. ^Australian Law Dictionary (second ed.). oxford university press. 
  3. ^ abcNorman v Federal Commissioner of Taxation[1963] HCA 21, (1963) 109 CLR 9, High Court (Australia).
  4. ^Tips and traps in contracting: novation versus assignmentArchived January 26, 2013, at the Wayback Machine.. Association for General Counsel. (Australia).
  5. ^ abAssignee Liability: Through the Minefield. Arnstein & Lehr LLP.
  6. ^See 15 U.S.C. 1641(a).
  7. ^ abCommercial Paper: Holder in Due Course & DefensesArchived 2012-11-28 at the Wayback Machine..
  8. ^FTC Opinion Letter Affirms Consumers' Rights under the Holder Rule. FTC.
  9. ^ abcdStark T. (2003). Negotiating and Drafting Contract Boilerplate, Ch. 3: Assignment and Delegation. ALM Publishing.
  10. ^Chapter 18: Assignment and Delegation. LexisNexis study outline.
  11. ^Uniform Commercial Code § 2-210. Delegation of Performance; Assignment of Rights.
  12. ^Pony v. County of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
  13. ^Cowan Liebowitz & Latman, PC v. Kaplan, 902 So. 2d 755, 759-760 (Fla. 2005).
  14. ^Westbourne Grammar School v Sanget Pty[2007] VSCA 39, Court of Appeal (Vic, Australia).
  15. ^Conveyancing Act 1919 (NSW) s 23C.
  16. ^Federal Commissioner of Taxation v Everett[1978] FCA 39, (1978) 21 ALR 625 at p. 643, Federal Court (Full Court) (Australia).
  17. ^Northumberland (Duke) v Inland Revenue Comrs

Contents

Changing the parties bound to a contract

What is novation

What is a deed of novation?

Why novation can be difficult

Transfer of a debt

Transfer of service contracts

Assignment

 

Changing the parties bound to a contract

In 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 and are not covered in this article.

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

What is novation

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of his 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 deals with the MoT. 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.

More examples

The seller of a business transfers the contracts with his customers and suppliers to the buyer. A novation agreement should be used to transfer each contract.

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

What is a deed of novation?

A Net Lawman article, about 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 his 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.

So do you need a deed of novation? The answer is usually no, as an agreement is fine.

The exception is 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.

Why novation can be difficult

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

  1. The other original party may not understand the benefit to him of having the original contract novated and require extra information about the process that is time consuming to provide.
  2. He may need extra assurance to be persuaded that he won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).
  3. It is possible that he could play up to delay the transfer and squeeze extra concessions from you.

So when do you use an assignment agreement to transfer a debt or obligation?

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 (such as an ISP) selling your business with 10,000 customers? You can hardly get every one of them to sign up to his own separate novation. In practice, a well drawn original agreement will contain a provision which permits the ISP to assign (transfer his contract) without the permission of the customer. But what happens if it does not?

In practice what happens is that the buy “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 his 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 new owner will be safe because the customers remain (or become) bound to the terms of the original contract.So 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.

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 he fails to do so. An obligation to a third party cannot be assigned without his consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in the construction industry but can apply in any contract. 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 “walking”, the actual forward appointments could be interpreted as contracts with the seller, even though he would have no way to fulfill them because he has 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. Net Lawman offers a number of suitable agreements for different situations.

Transfer of a debt

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 he becomes liable to repay the lender instead of you. In this situation you should novate.

This is a common situation 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.

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.

Transfer of service contracts

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 this type of 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 novate.

Assignment

Our 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.

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 two documents that assign intellectual property.

Agreement to assign intellectual property can be used for any type of IP including tradenames, logos and artistic rights.

Copyright assignment agreement covers copyright of any type, including for software, books, plays, paintings, documents, articles etc.

Assignment of a life insurance policy or endowment policy

This agreement allows you to transfer the rights to receive payments from a life insurance policy or endowment policy, perhaps as a result of a separation or divorce or perhaps because you wish 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 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 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 his right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

If you’re still unsure whether you should novate or assign

Contact us and ask. We aim to reply to you in 24 hours.

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