The Assignment of Contractual Rights

Gregory J. Tolhurst

• Publisher: Hart Publishing
• Year: 2016
• ISBN:
  9781509902439
• Edition: 1
• Topic: Derecho
• Subtopic: Derecho contractual

This book explains the existence, meaning and application of the rules governing the assignment of contractual rights. The second edition is updated and retains the structure of the first edition, focusing on what is meant by 'assignment', the distinction between legal and equitable assignments, how an assignable contractual right is identified, what formalities apply to assignment, and what rights and remedies are available to the parties to an assignment. In reviewing the first edition, The Hon JD Heydon said 'it is essential reading for … teachers, especially those who teach contract, equity and personal property. Above all, it should always be consulted-read carefully, slowly and repeatedly-by any practitioner facing an assignment problem. … It is not only the best book ever written on its subject, but among the best monographs dealing with legal doctrine published in recent years' (2008) 30 Sydney Law Review 169.

Part 1

Introduction

1

Introduction

(a)General

[1.01] Subject matter of the book. The subject matter of this book is the rules governing the voluntary inter vivos assignment of contractual rights.¹ Such transactions involve the transfer of a contractual right from the owner (assignor) to the transferee (assignee). The person bound to perform the correlative obligation is either (in the case of a debt) the debtor or (in the case of some other contractual performance obligation) the obligor. Assignments of contractual rights form an important area of commercial practice. Despite this, in terms of legal publications, the assignment of contractual rights is an area that until recently had received little attention² and was described as ‘undeveloped’.³

In the result, the assignment of contractual rights is made up of a number of rules which overlap, make little sense as statements in their own right and appear to lack any general underlying and unifying principle. These rules are as follows:

1.An assignor can assign no greater right than it has nor can an assignee obtain a right greater than that held by the assignor.

2.Only non-personal contractual rights may be assigned.

3.It is not possible by assignment to increase or vary the obligations or burdens of an obligor.

4.It is possible to assign only rights and not obligations.

5.After receiving notice of an assignment, the obligor may not do anything to diminish the rights of the assignee.

6.An assignee can be in no better position than the assignor was prior to the assignment.

7.An obligor should be no worse off by virtue of an assignment.

8.An assignee takes subject to the equities.

[1.02] Objects and themes of the book. This book seeks to explain the existence, meaning and operation of these rules in Anglo-Australian law by proving two points.⁴ First, that most of these rules can be explained by reference to what is termed (in this book) ‘the principle of transfer’. Case law dictates that an assignment involves a transfer of rights. This prompts an investigation into the legal concept of transfer. It is shown that the principal effect of a legal transfer flows from the fact that it is governed by the nemo dat rule. This rule forms the basis of ‘the principle of transfer’. The principle of transfer holds the key to understanding the rules governing the assignment of contractual rights as it is the fundamental principle governing such assignments. Most of the ‘rules’ are merely different ways of expressing this principle. The reason for having different expressions of the one principle is that each rule attempts to express the operation of the principle of transfer at different stages of an assignment. Therefore, the principle of transfer explains the existence, meaning and operation of these rules. In short, an assignment does not merely involve a transfer; assignment is transfer.

Secondly, in investigating the case law to show its compliance with the principle of transfer, it will be seen that there are some deviations. It is suggested that those deviations are explicable by recognising that a formal legal relationship exists between the assignee and obligor which is policed by equity to prevent unconscionable conduct. The content of rules 5 and 8, to the extent that they focus on the obligor/assignee relationship rather than the assignor/assignee relationship, are explicable on this basis rather than the principle of transfer.⁵

[1.03] Application of theme to the rules governing the assignment of contractual rights. The conclusions that are reached in the book as regards the application of the principle of transfer to the rules governing the assignment of contractual rights are as follows.

Rule 1: An assignor can assign no greater right than it has nor can an assignee obtain a right greater than that held by the assignor. This rule is a clear adoption of the nemo dat rule which is the hallmark of all legal transfers. As an assignment involves a transfer, the principle of transfer dictates the existence of this rule and provides the meaning of this rule.

Rule 2: Only non-personal contractual rights may be assigned. The personal rights rule on its face would appear to be the most difficult rule to explain by reference to the principle of transfer. However, it is suggested that because contractual rights owe their existence to the intention of the parties then it must follow that that intention moulds the character of contractual rights not only as personal rights but also as choses in action. This point makes it clear why the principle of transfer would dictate the existence of a rule that gave such prominence to party intention and autonomy. That is, if the parties rob a chose in action of its inherent assignability, then to allow the assignment of that right would be to allow the assignment of a right greater than and different from the one vested in the assignor, which would breach the principle of transfer.

The same reasoning explains both the efficacy of contractual provisions prohibiting assignment and provisions that make rights assignable that would otherwise be construed as personal.

Rule 3: It is not possible by assignment to increase or vary the obligations or burdens of an obligor. Like rule 1 above, this rule is a clear adoption of the nemo dat rule. If the assignor cannot assign a right different from or greater than the one vested in him or her, then the effect of that assignment must be that the correlative obligation of the obligor is also not capable of variation by reason of the assignment. It may be noted that ‘variation’ here concerns variations of legal obligations rather than factual changes to performance. So long as the obligor is being asked to perform for the assignee the same legal obligation as that promised to the assignor, then the obligor cannot complain that there has been a variation to its obligation. It is accepted that there may be some increased inconvenience in fact by reason of an assignment.

This rule is also used to state the conclusion (or sub-rule) that the assignee can recover by way of damages for breach of contract no more than the assignor could have recovered. It is suggested that the principle of transfer dictates that the assignee should recover for its own personal loss. Nevertheless, generally, the potential loss of the assignor should operate as a cap on liability, because the right to performance does not change its character when assigned but remains a right to an obligation promised to the assignor. This impacts on the value of the right vested in the assignee, and this result is dictated by the principle of transfer.

Rule 4: It is possible to assign only rights and not obligations. When dealing in choses in action, it is only possible to transfer something one owns. At the time when a contract is formed a party does not own an obligation that it owes to the other party. To recognise the assignment of a chose in action which the assignor does not own would be at odds with the nemo dat rule. The principle of transfer cannot recognise the transfer of such obligations and therefore there is necessarily a rule governing the assignment of contractual rights that such obligations cannot be assigned. There is still a debate whether a party to a contract can take from the other party an assignment of the right to the performance of the obligation that the first party owes that second party, and whether such an assignment would result in an extinction of the obligation or allow for the first party to deal further with the ‘right’ to the obligation it owes the second party. In any case, because the character of a contractual right as a chose in action is shaped by the intention of the parties to the contract, it is theoretically possible to make an obligation an intrinsic part of a right. In such a case, the principle of transfer would dictate that any transferee taking the right must also accept the obligation. If this were not the case, a right greater than and different from, that vested in the assignor would have been transferred, which is at odds with the principle of transfer.

Rule 5: After receiving notice of an assignment, the obligor may not do anything to diminish the rights of the assignee. It is suggested in Chapter 8 that this rule is not a rule dictated by the principle of transfer. This rule is concerned with the obligor/assignee relationship which is not the relationship under which the transfer takes place. The ‘transfer relationship’ is that of the assignor/assignee.

In practice, this rule has been used in Anglo-Australian law to prohibit the assignor and obligor from varying the contract after notice of the assignment. It is suggested that the principle of transfer would not prohibit such variations. Thus, in taking the assignment of a contractual right, the assignee must accept that that right in its nature as a chose in action may be varied by the obligor and assignor, because this power is vested in the parties to a contract. Such an act may put the assignor in breach of contract with the assignee, but that alone does not call into question the inherent power of the assignor to agree to such variations in its capacity as party to the contract with the obligor. It follows that the rule can be explained only by recognising a formal legal relationship between the obligor and assignee which allows the assignee to resist such variations to the contract when the obligor’s agreement to the variation amounts to unconscionable conduct.

Rule 6: An assignee can be in no better position than the assignor was prior to the assignment. The notion that an assignee can be in no better position than the assignor is a clear adoption of the nemo dat rule as recognised in rule 1 above. However, rule 6 is more often referred to when the question being asked concerns the extent of performance the assignee can demand from the obligor.

Rule 7: An obligor should be no worse off...