Assignment of Contract Rights
In the realm of contract law, the ability to transfer benefits from one party to another is a fundamental mechanism for business and personal finance. This process, known as assignment, allows a party to transfer their rights under a contract to a third party, ensuring that the benefits of an agreement can be liquidated or shifted to another entity without needing to rewrite the original contract.
To understand assignment, one must distinguish between the parties involved: the assignor (the original party transferring the right) and the assignee (the party receiving the right). For example, if Party A agrees to sell a car to Party B for $100, Party A may assign the right to receive that $100 to Party C. In this scenario, Party C becomes the assignee and is entitled to the payment, though they were not an original party to the contract.
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Key Facts
- Assignment refers to the transfer of contractual benefits, while delegation refers to the transfer of duties.
- Assignments occur after a contract has been formed; they cannot precede the contract.
- Common law generally favors the freedom of assignment unless expressly prohibited.
- Certain rights, such as tort claims or highly confidential fiduciary relationships, cannot be assigned.
- A promise to assign rights in the future is generally legally ineffective.
When Assignment is Permitted
Generally, an assignor does not need to consult the other party to the contract to effect an assignment, provided there is no express prohibition. However, an assignment cannot diminish the quality of performance the other party is entitled to receive, nor can it increase the burden on the obligor.
Prohibited Assignments
Not all contractual rights are transferable. Certain types of performance are considered too unique or sensitive for assignment. For instance, a legal malpractice claim cannot be assigned because the attorney-client relationship is based on a confidential, fiduciary bond that a third-party assignee cannot inherit.
Additionally, public policy prohibits the assignment of torts (civil wrongs). Statutory restrictions also exist, such as those found in the Uniform Commercial Code (UCC) §2-210, which prohibits assignments that would materially change the duty of the other party or impair their chance of obtaining return performance.
Commercial Examples: Equipment Leases
Equipment Lease Agreements frequently include clauses prohibiting the lessee from assigning the lease to protect the lessor's credit underwriting and collateral. While such leases can sometimes be assigned, the assignee must typically undergo a credit evaluation. Even with approval, the original assignor's personal guarantees may remain in effect unless the assignee's credit is exceptionally strong.
Requirements for an Effective Assignment
For an assignment to be legally binding, it must be executed in the present. A mere promise to assign rights at a future date has no legal effect, although courts of equity may occasionally enforce such promises if a strong economic relationship created a legitimate expectation of the assignment.
Non-Assignment Clauses
Many contracts include a non-assignment clause. The effect of such a clause varies:
- Breach of Contract: In some cases, the clause does not stop the assignment but allows the other party to sue for breach of contract.
- Void Assignments: If the clause explicitly states that "all assignments are void," or if the assignee is aware of the clause, the assignment may be completely ineffective.
- Rescission and Conditions: Some contracts use rescission clauses (allowing the other party to cancel the contract upon assignment) or conditions subsequent (where the contract is automatically cancelled upon assignment).
Writing Requirements
While many assignments can be oral, certain types must be in writing to be enforceable:
- Assignments of wages (subject to local statutes).
- Assignments of any interest in real property.
- Assignments of choses in action (intangible personal property rights) valued over $500.
Legislation and Delegation
Governmental entities often have stricter rules. In the United States, Title 41 of the U.S. Code § 6305 prohibits the transfer of government contracts unless the issuing governmental entity explicitly agrees to the transfer.
Parallel to assignment is delegation. While assignment transfers rights (benefits), delegation transfers duties (liabilities). These two processes often occur simultaneously, though a non-assignment clause may also serve to bar the delegation of duties.
| Feature | Assignment | Delegation |
|---|---|---|
| What is transferred? | Rights and Benefits | Duties and Liabilities |
| Primary Goal | Receiving payment or performance | Fulfilling a contractual obligation |
| Timing | Post-contract formation | Post-contract formation |
| Restriction | Non-assignment clauses | Non-delegation clauses |
Frequently Asked Questions
What is the difference between an assignee and a third-party beneficiary?
A third-party beneficiary is someone for whom the contract was originally created to benefit. An assignee, however, receives the benefits of a contract after it has already been formed through a transfer from the assignor.
Can I assign a contract if there is a non-assignment clause?
It depends on the wording. If the clause says assignments are "void," it is likely ineffective. If it simply prohibits assignment, the transfer might still happen, but the other party may have the right to sue for breach of contract.
Are all contractual rights assignable?
No. Rights that involve unique personal services, highly confidential fiduciary relationships (like attorney-client bonds), or tort claims are generally not assignable due to public policy or the nature of the relationship.
Does an assignment release the original party from their duties?
No. Assignment only transfers the benefits. The original party (assignor) typically remains responsible for their duties unless a separate novation (a new contract replacing the old one) is agreed upon by all parties.
When must an assignment be in writing?
Writing is required for assignments involving real property, certain wage assignments, and choses in action (intangible rights) that exceed a value of $500.