Assessing Assignability

Entities involved in a commercial agreement frequently seek to shift their rights or responsibilities to a third party. While the standard practice allows for the one-sided transfer or delegation of a part of the contractual rights and obligations, it is crucial to note specific exceptions to this norm. This update offers insights into essential considerations when evaluating the transferability of a commercial contract.

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Contractual rights are generally assignable, allowing a contract with party A to extend to A and their assigns. However, exceptions arise in cases where rights are rendered unassignable, are personal, or when the contract expressly prohibits assignment.

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In recent years, two perspectives have emerged regarding the effectiveness of restrictions on assigning contractual rights. One standpoint, referred to as "the property view," asserts that these prohibitions categorize contractual rights as choices in action, stripping them of their inherent transferability. Conversely, the "contract view" posits that such prohibitions only apply at the contractual level and do not hinder the equitable assignment of a contract's benefits. Both perspectives garner support from both the judiciary and academia. The choice between these views significantly impacts contract drafting and assignment law.

Professor Roy Goode, an Emeritus Professor of Law, highlighted that the impact of a contractual prohibition on assignment remains a subject of debate. It contends that such a prohibition, even when encompassing a declaration of trust, operates solely within the contractual realm and does not impede the transfer of ownership of the contract right. This aligns with the prevailing stance in Barbados v. Bank of Zambia, asserting that if the assignor declines to initiate legal action, the assignee should have the right to include the assignor as a defendant to secure a judgment in favor of the assignor, who would then be answerable to the assignee. Lastly, given its adverse effects on receivables financing, a no-assignment clause should be deemed ineffective in that specific context.

This delves into the characteristics and consequences of contractual provisions prohibiting the assignment of debts and other contractual rights. Non-assignability based on other grounds, such as statutory provisions, public policy rules, and the inherently personal nature of certain creditor rights, falls beyond the purview of this analysis. Historically, common law has placed considerable emphasis on the transferability of property, deeming it contrary to the public interest for assets to be indefinitely tied up.

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Established rules exist to invalidate overly restrictive limitations on alienation, whether deemed repugnant to the grantor's intent or contrary to public policy. While these rules traditionally apply to physical assets and land, the modern commerce landscape sees transactions involving intangibles, such as debts, intermediated securities, and derivatives, surpassing those involving physical assets in value. Therefore, legal principles supporting freedom of contract must not hinder the unimpeded flow of intangibles in trade.

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Nevertheless, when a contract between parties A and B explicitly forbids the assignment of contractual rights by A, four possible interpretations may arise:

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• The term does not invalidate an attempted assignment by A to C but results in a claim by B against A for breaching the prohibition.
• The term invalidates any assignment by A to C but does not preclude A from agreeing, internally with C, to account for what A receives from B.
• A is barred from effectively assigning contractual rights to C and agreeing to account for the contract's fruits received from B.
• A purported assignment by A to C constitutes a repudiatory breach, allowing B to refuse payment to both C and A.

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For example, an attempted assignment without contractors' consent breached Contract clause 17 in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd?[1993] UKHL 4 case. Linden Gardens' claim as an assignee fails unless it can prove that clause 17's prohibition is void due to public policy or, notwithstanding the breach, the assignment effectively transferred the choice in action to Linden Gardens. The court firmly establishes that attempting to assign contractual rights violating a contractual prohibition renders such assignments ineffective. This legal stance ensures that original parties remain insulated from direct contractual relations with third parties, safeguarding their commercial interests.

The assignee can recover only what the assignor could have recovered without the assignment. This prevents the wrongdoer from escaping accountability, ensuring that claims for damages do not vanish into a legal void. When pursuing damages under a contract, the claim must be tied to the breached obligation. In instances of defective or non-performance, the right to sue for breach aligns with the right to demand performance.

Another example is in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, it was agreed that Panatown entered into the building contract as a principal, not an agent. The Duty of Care Deed (DCD) prevented Panatown from recovering damages, even if it intended to rectify breaches unless it invoked a specific clause in the building contract. The DCD's existence altered the dynamics, emphasizing the intricacies of contractual relationships and their impact on remedies and recovery.

Thank you for your attention.

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