Assignment of Contract
Background
What is assignment of contract?
The assignment of a contract is the transfer by one party to the contract (the assignor) of its rights under the contract to a person who is not an original party to the contract (the assignee). Examples include:
- the transfer of the right to purchase property under an option agreement
- the transfer of contractual warranties given under a building sub-contract to the owner of the building
Rights under contracts are, generally, enforceable only by the parties to the contract (known as “privity of contract”).
Under English law, the rights under a contract (the benefit of the contract) are assignable unless assignment is prohibited by the terms of the contract.
Certain contracts are however not assignable (for example, publishing agreements and car insurance policies), though this is generally not a relevant consideration in most commercial circumstances.
The express terms of a contract may however exclude or qualify the right of a party to assign the benefit of the contract. Before entering into an assignment, the terms of the contract should be checked for any exclusion or qualification.
The exclusion or qualification might be:
- absolute: no assignment by any party will be permitted unless the other party to the contact expressly consents to it at the time of the assignment
- one way: one party’s right to assign is excluded or qualified whilst the other party’s right to do so remains unaffected
- qualified: any assignment is subject to the prior written consent of the other party, such consent not to be unreasonably withheld or delayed
- intra-group: assignment to companies within the same group of companies is permitted
- permitted for the grant of security: a contracting party which has secured loan financing may be required to assign the benefit of contracts to the security holder under the terms of the debenture or other security document. If the contract prohibits assignment or permits it only with the prior consent of the other party, the assignment by way of security may be difficult to achieve
What formality is required for an assignment of contract?
A “legal assignment” requires the following:
- the assignment must be in writing and signed by the assignor
- the assignment must be absolute (and not by way of charge only)
- express notice of the assignment must be given to the non-assigning contracting party (the remaining party)
If the assignment takes effect as a legal assignment, the assignee has the right to enforce the assigned rights directly in its own name against the remaining party.
If the assignment is not a legal assignment, it will be an “equitable assignment” only, which means that the assignor will be required to join in legal proceeding with the assignee in order to enforce the assigned rights against the remaining party.
There may be difficulties in achieving this if the assignor no longer exists for any reason.
What is the difference between an assignment and a novation?
The assignment of a contract will only relate to the transfer of the rights under the contract. The burden of a contract cannot be assigned. If one party wants to transfer the burden of a contract, the contract will need to be novated.
Under a novation, the contract is replaced with a new contract and the new party to the contract is treated as an original party to the contract in place of the departing party.
Novation requires the consent of the other party to the contract and is documented in a novation agreement or deed of novation between the three parties.
For a template Novation Agreement, see CON009.001: Novation Agreement.
An alternative to the novation of an agreement is for the performance obligations of the agreement to be sub-contracted to a third party. #
In the absence of an express term which prohibits sub-contracting, one party to a contract (the sub-contracting party) may sub-contract its performance obligations to a third party (the sub-contractor).
A sub-contract is the agreement between the sub-contracting party and the sub-contractor. However, a sub-contract does not discharge the liability of the sub-contracting party to the other party under the underlying contract to whom the obligations are owed.
If the sub-contractor fails to perform, the sub-contracting party may have a claim against the sub-contractor but will remain liable to the other party under the original agreement for the failure of performance of the sub-contracted obligations.
For a template sub-contract, see CON010.00: Sub-contractor Agreement.
About this Assignment of contract
This document is for the assignment of the benefits of a contract to a third party. It is suitable for a contract which is governed by English law.
It assumes that the contract does not exclude or qualify the right to assign, or that any condition to the right to assign has first been satisfied.
Document features
Features include:
- Assignment between the assignor and assignee of the rights under the contract to the assignee
- Undertaking from the assignee to perform the contract, coupled with an indemnity for failure to perform the contract
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