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ASSIGNMENTS: Assigning your Contract to someone else!

Under a contract, the assignment of rights is the complete transfer of the rights to receive the benefits available to one of the parties to that contract. Say, party X makes a contract with Party Y to sell his bicycle to him for $100. Party X can later assign the benefits of the contract or the right to be paid $100 to party Z. Here, party X is the assignor/obligee, party Y is an obligor, and party Z is the assignee. This assignment could be donative, a gift, or could be contractually exchanged for consideration. The point to note is that party Z is not a third party beneficiary, because the contract itself was not made for the purpose of benefiting party Z. Thus, an assignment only transfers the rights/benefits to a new owner while the obligations remain with the previous owner. That being said, unless agreed to by both parties to the original contract, a party can only assign the benefit he or she is to gain from performance of the contract, but not his or her own obligation owed to the other original party in the contract.  Hence, nor can one original party to a contract unilaterally assign his or her obligation owed to the other original party, unless agreed to by both original parties to the contract (or as may already have been stipulated in the original contract).

That means, an Assignment is the giving away of rights held by one party or the assignor to another party or the assignee. Some additional rights and liabilities which are part of the contract, determine the legal nature of the assignment. Without an agreement to the contrary, the assignor remains liable all the time under the original contract. An agreement has to show unambiguously the intent to transfer the rights. It need not necessarily be in writing, words will do, and the rights assigned are to be certain. A valid assignment removes privity between the assignor and the obligor and introduces privity between the obligor and the assignee.

A Permitted Assignment

As there is nothing in common law against the freedom of assignment, an assignment will generally be permitted unless there is an express prohibition against an assignment in the contract. When an assignment is so permitted, the assignor need not consult the other party to the contract. Nonetheless, an assignment does not affect 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. It follows, therefore, that certain kinds of performance cannot be assigned, because they create a unique relationship between the parties to the contract. If an attorney is hired for representation in a civil case for a fee of $1000, then the client cannot assign the contractual right of legal representation to someone else.

Requirements

In order to be effective, the assignment has to occur in the present. There is no specific language for making such an assignment, but the assignor has to make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future is not legally effective.

There could be a non-assignment clause in a contract prohibiting the assignment of specific rights, or of the entire contract, to another. Even then, the clause does not necessarily destroy the power of either party to make an assignment. In place of that, it only gives the other original party the option to sue for breach of contract if such an assignment is made (can only sue the other side to the original contract). However, an assignment of a contract with such a clause is ineffective if the assignee is aware of the non-assignment clause, or if the non-assignment clause specifically states that all assignments are void.

There are two ways to prevent the assignment of contracts:

  1. Rescission clauses or
  2. Clauses creating a condition subsequent.

The first gives the other original party to the contract the power to rescind (i.e. cancel) the contract if an assignment is made, while the second rescinds the contract automatically in circumstances like that.

Revoking

If an assignment is made for consideration, then it is irrevocable as between the assignor and assignee. It means that the assignor permanently gives up the legal right to take back the assignment once it has been made. As against this, donative assignments are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor (i.e. the other original party to the contract), or making a subsequent assignment of the same right to another.

Breach

If there is a breach on the part of the obligor (i.e. the other original party to the contract), the cause of action lies with the assignee, who holds the exclusive right to commence a cause of action for any failure to perform or defective performance. In such a situation, because the assignee is in the shoes of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor (e.g. a no assignment clause, condition subsequent or rescission). In addition, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. Hence, at the time of making the assignment, the assignor makes it with an implied warranty that the right to assign was not subject to any defences by the obligor. If the contract had a provision making the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Likewise, the assignee could also sue utilizing this theory if the assignor wrongfully revoked the assignment.

Although a lucrative form of doing business, assignments are tricky and require the wisdom of a seasoned lawyer.  Its one thing to assign the benefit owing to you under a contract, its another to ensure that you do not remain on the hook once the assignee runs with it!  Contact the lawyers at Levy Zavet PC for professional advice and ways to structure your deal securely.

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