Assignment of Contract Rights
There is no such thing as an assignment of a contract.
It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1993 UKHL 4 (22 July 1993):
It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation.
Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.
In short, contracts are not assigned:
- ownership of assets is assigned.
- Contractual rights are transferred. They're novated.
So when it comes to “assigning” (ie transferring or novating) contracts, there are 3 possibilities:
- Transfer all or part of the burden of the contract to another person. This is novation
- Assign all or part of the benefit of the contract to another person
- Transfer the whole of the benefit and the burden to another person. This is also novation.
The general law does not require any particular formality to novation.
Where a supplier notifies a contracting partner that they will be replaced by another supplier, and then starts to receive supply from the new supplier without objection or complaint, there's a good chance the contract has been novated.
That's acceptance of a new contract (and termination of the old contract) by conduct.
When businesses enter administration or liquidation, potential purchasers might express an interest in “acquiring the contracts” of the business. That requires novation of each contract, individually.
Novation is a fundamental principle of contract law, and is closely related to privity of contract. It's pretty difficult to understand one without the other.
What do "Assignment Clauses" in Contract do then?
Assignment clauses either:
- confirm the general operation of the law - ie no transfers of contractual rights. It expressly prohibits or enables transfers of the burden or the benefit of the contract.
- displace or override the general rule of law of novation, in favour of one party or both parties.
Do you need one or not? That depends.
Context of Assignment Clauses
Contracts impose strict liability on the contracting parties to perform their legal obligations.
It means this: if a seller does not perform what they are required to do under the contract to the standard fixed by the contract, they’re in breach of contract, and liable to make good on a legal remedy for breach. Likewise, if a buyer does not do what they are legally required to do, they’re in breach of contract, and facing the same consequences.
For example, take a company supplying SaaS related services:
The SaaS supplier hosts its SaaS solution in the cloud for its customers.
The SaaS supplier doesn't own its own infrastructure for the hosting.
It subcontracts the hosting to a dedicated hosting company, such as Rackspace.
That subcontracting doesn't relieve the SaaS supplier from its obligations to perform the contract: in this example, host the SaaS solution in the cloud to its own customers.
Using Rackspace to host the SaaS solution is just a delegation of the contractual duty of the SaaS supplier to provide services to the customer.
If the hosting fails, the SaaS supplier is liable to its customers for the breach of contract.
Not Rackspace.
Assignment clauses permit transfer of contractual obligations to perform the burden of the contract to third parties. So, where the obligation to perform is assigned to a third party and it's not performed, it will be the party that has taken over the burden of the contract (ie the assignee) that will be liable to the customer. Not the original contracting party (which would be the SaaS supplier in the example above).
The end result is that one of the original contracting parties is no longer a party to the contract: that’s novation.
Example: Assignment Clause
A boilerplate provision to prevent assignment of the benefit and burden in a contract might be:
Neither party may without the prior written consent of the other party assign a benefit or obligation imposed in this Agreement.
The reference to “obligation” is usually redundant, because it can't be transferred without the consent of the other party in the first place.
Contract Assignments vs Subcontracting
Assignment clauses shouldn't be confused with subcontracting clauses.
The general law provides that a contracting party is entitled to subcontract works to a third person, unless there is a contractual restriction preventing it.
It would be quite a mistake to regard that as an "assignment" of the obligations under the contract.
It isn't a transfer of the contract, or any part of the burden of the contract.
It's a delegation.
Subcontracting performance of contractual obligations:
- is permitted where personal performance is not required to produce the result intended by the contract
- means performance by the subcontractor will discharge the principal contracting party's obligations.
- The principal contracting party remains liable if the subcontractor does not complete performance on behalf of the principal contracting party.
Related:
- Boilerplate Clauses
- Who are you actually contracting with? Separate Legal Entities
- Increasing Liability for Breach of Contract: Indemnities
Contract Law Solicitors
Contract law can be tricky. Sometimes it's matter of seeing what has happened before when parties have tried to transfer a contract to ascertain what is likely to happen in the case at hand.
Transferring contract rights and obligations can be a serious business. Getting it wrong can mean a party is in breach of contract, leading to termination and damages claims.
If you're in business and need legal advice on a contract, call +44 20 7036 9282 to speak for an initial chat with one of our contract law solicitors or email your enquiry to contact@hallellis.co.uk.