CHAPTER 9 - SECTION 2

CHAPTER 9: ASSIGNMENT OF RIGHTS,TRANSFER OF OBLIGATIONS, ASSIGNMENT OF CONTRACTS - SECTION 2: TRANSFER OF OBLIGATIONS

An obligation to pay money or render other performance may be transferred from one person (the “original obligor”) to another person (the “new obligor”) either

a) by an agreement between the original obligor and the new obligor subject to Article 9.2.3, or 

b) by an agreement between the obligee and the new obligor, by which the new obligor assumes the obligation.

 

COMMENT

As is the case with the assignment of rights covered by Section 1 of this Chapter, also the transfer of obligations may serve useful economic purposes. For instance, if company A can claim payment from its customer B, but itself owes a similar amount to its supplier X, it may be practical to arrange for the customer to become the supplier’s obligor.

Such a transfer of an obligation may occur in two different ways.

 

1. Transfer by agreement between the original obligor and the new obligor 

In practice, the more frequent of the two ways indicated in this Article to transfer an obligation is by agreement between the original obligor and the new obligor, with the obligee’s consent as required by Article 9.2.3.

 

Illustration

1. Company A owes its supplier X EUR 50,000, and customer B owes the same sum to A. A and B agree that the latter will take over the former’s obligation towards X. The obligation is transferred if X agrees to the transaction.

 

2. Transfer by agreement between the obligee and the new obligor

Another possibility is an agreement between the obligee and the new obligor, by which the new obligor accepts to take over the obligation.

 

Illustration

2. The products of company X are sold by distributor A on a certain market. The contract between the parties is close to termination. Distributor B enters into negotiations with X, proposing to take over the distributorship. In order to gain X’s acceptance, B promises that it will assume a debt of EUR 50,000 still owed by A to X, and X accepts. B has become X’s obligor.

 

3. Obligee’s consent necessary

In both cases, the obligee must give its consent to the transfer. This is obvious when the transfer occurs by agreement between the obligee and the new obligor. If it occurs by an agreement between the original obligor and the new obligor, the requirement is stated in Article 9.2.3. Consent may be given in advance under Article 9.2.4.

Without the obligee’s consent, the obligor may agree with another person that the latter will perform the obligation under Article 9.2.6.

 

4. Transfer by agreement only

Only transfers by agreement are governed by this Section, as opposed to situations where the applicable law may provide for legal transfers (such as, under certain jurisdictions, the automatic transfer of obligations in the case of the merger of companies – see Article 9.2.2).

 

5. Obligations in respect of payment of money or other performance

This Section is not restricted to the transfer of obligations in respect of payment of money. It covers also the transfer of obligations relating to other kinds of performance, such as the rendering of a service. Nor are transferable obligations limited to obligations of a contractual nature. Obligations deriving from tort law or based on a judgment, for instance, can be governed by this Section, subject to Article 1.4.

 

6. What is meant by “transfer”

The “transfer” of an obligation means that it leaves the original obligor’s assets to enter those of the new obligor.

However, in some cases although the new obligor becomes bound towards the obligee, the original obligor is not discharged (see Article 9.2.5).

This Section does not apply to transfers of obligations made under the special rules governing transfers of obligations in the course of transferring a business.

 

COMMENT

The Articles contained in this Section do not apply to transfers of obligations made in the course of transferring a business under any special rules governing such transfers, as may happen in the case of the merger of companies. The applicable law often provides for mechanisms that cause all rights and obligations to be transferred under certain conditions in their entirety by operation of law.

Article 9.2.2 does not prevent this Section from applying when certain obligations pertaining to the transferred business are transferred individually.

 

Illustrations

1. Company A is transferred to company B. If the otherwise applicable law provides that all obligations pertaining to the former company are automatically transferred to the latter, the Principles do not apply.

2. The facts are the same as in Illustration 1, but B has reasons to prefer not to become the obligor of company X, one of A’s suppliers. A can transfer the obligations concerned to company C, with the consent of X. This particular transfer is subject to the Principles.

The transfer of an obligation by an agreement between the original obligor and the new obligor requires the consent of the obligee.

 

COMMENT

1. Agreement between the original and the new obligor

As stated in Article 9.2.1(a), the transfer of an obligation may occur by an agreement between the original obligor and the person who will become the new obligor.

 

2. Obligee’s consent required

This agreement, however, does not suffice to transfer the obligation. It is also necessary for the obligee to give its consent.

This is different from the corresponding rule on the assignment of rights, where the operation is in principle effective without the consent of the obligor (see Article 9.1.7). The assignment of a right does not affect the obligor’s situation, except that the obligor will have to deliver performance to another person. On the contrary, a change of obligor may considerably affect the obligee’s position, as the new obligor may be less reliable than the original one. The change may therefore not be imposed on the obligee, who must consent to it.

 

Illustration

Company A owes USD 150,000 to company X, located in Asia, for services rendered. Due to a reorganisation of the group, A’s activities in Asia are taken over by affiliate company B. A and B agree that B will take over A’s debt towards X. The obligation is transferred only if X gives its consent.

 

3. Original obligor not necessarily discharged

With the obligee’s consent, the new obligor becomes bound by the obligation. It does not necessarily follow that the original obligor is discharged (see Article 9.2.5).

 

4. Lack of consent by the oblige

If the obligee refuses to consent to the transfer, or if its consent is not solicited, an arrangement for a third party performance is possible under Article 9.2.6.

(1) The obligee may give its consent in advance. 

(2) If the obligee has given its consent in advance, the transfer of the obligation becomes effective when a notice of the transfer is given to the obligee or when the obligee acknowledges it.

 

COMMENT

1. Advance consent by the obligee

Paragraph (1) of this Article provides that the obligee’s consent, required under Article 9.2.3, may be given in advance.

 

Illustration

1. Licensor X enters into a transfer of technology agreement with licensee A. For a period of ten years, A will have to pay royalties to X. When the contract is concluded, A envisages that at some time in the future it will prefer the royalties to be paid by its affiliate, company B. X may agree in advance in the contract to the obligation to pay the royalties being transferred by A to B.

 

2. When the transfer is effective as to the obligee

According to paragraph (2), if the obligee has given its consent in advance, the transfer of the obligation becomes effective when it is notified to the obligee or when the obligee acknowledges it. This means that it is sufficient for either the original or the new obligor to notify the obligee of the transfer when it occurs. Notification is not needed if it appears that the obligee has acknowledged the transfer, to which it had given its consent in advance. “Acknowledgement” means giving an overt sign of having become aware of the transfer.

 

Illustrations

2. The facts are the same as in Illustration 1, but there comes a time when A actually agrees with B that from then on the latter will take over the obligation to pay the royalties. This decision becomes effective when notice is given to X.

3. The facts are the same as in Illustration 1. No notice is given, but the first time B pays the yearly royalties, X writes to B to acknowledge receipt of the payment and to confirm that from then on it will expect B to pay the royalties. The transfer is effective with this acknowledgement.

(1) The obligee may discharge the original obligor. 

(2) The obligee may also retain the original obligor as an obligor in case the new obligor does not perform properly. 

(3) Otherwise the original obligor and the new obligor are jointly and severally liable.

 

COMMENT

1. Extent of original obligor’s discharge

The obligee’s consent, whether given under Article 9.2.1(b) or under Article 9.2.3, has the effect of binding the new obligor to the obligation. What still remains to be determined is whether the original obligor is discharged. It is primarily up to the obligee to choose among different options. Only in the case of Article 9.2.1(b) will the choice depend also on the original obligor.

 

2. Obligee’s choice: full discharge

The obligee may first of all fully discharge the original obligor.

 

Illustration

1. Supplier X accepts that its obligor company A transfer its obligation to pay the price to customer B. Fully confident that the new obligor is solvent and reliable, X discharges A. Should B fail to perform, the loss will be on X who will have no recourse against A.

 

3. Obligee’s choice: original obligor retained as a subsidiary obligor

Another possibility is for the obligee to accept the transfer of the obligation from the original obligor to the new obligor on condition that it retain a claim against the original obligor.

There are two options.

The first option is that the original obligor is retained as an obligor in the event that the new obligor does not perform properly. In this case the obligee must claim performance first from the new obligor, but if the new obligor does not perform properly the obligee may call upon the original obligor.

 

Illustration

2. Supplier X accepts that its obligor company A transfer its obligation to pay the price to customer B, but this time stipulates that A will remain bound if B does not perform properly. X no longer has a direct claim against A, and must first request performance from B. However, should B fail to perform, X will have a claim against A.

 

4. Obligee’s choice: original obligor and new obligor jointly and severally liable

The second option, the one most favourable to the obligee, is to consider the original obligor and the new obligor jointly and severally liable. This means that when performance is due, the obligee can exercise its claim against either the original or the new obligor (see Articles 11.1.3 et seq.). Should the obligee obtain performance from the original obligor, the latter would then have a claim against the new obligor (see Articles 11.1.10 et seq.).

 

Illustration

3. Supplier X accepts that its obligor company A transfer its obligation to pay the price to customer B, but stipulates that A and B will remain jointly and severally liable. In this case X may request performance from either A or B. Should B perform properly, both A and B would be fully discharged. Should A have to render performance to X, it would then have right of recourse against B.

 

5. Default rule

The language of this Article makes it clear that the last-mentioned option is the default rule. In other words, if the obligee has neither indicated that it intends to discharge the original obligor, nor indicated that it intends to keep the original obligor as a subsidiary obligor, the original obligor and the new obligor are jointly and severally liable.

 

llustration

4. Supplier X accepts that its obligor company A transfer its obligation to pay the price to customer B, but says nothing about the liability of A. Also in this case X may request performance from either A or B. Should B perform properly, both the original and the new obligor would be fully discharged. Should A have to render performance to X, it would then have right of recourse against B.

 

6. Original obligor refusing to be discharged

When the obligation is assumed by means of an agreement between the obligee and the new obligor, as provided in Article 9.2.1(b), and the agreement provides that the original obligor is discharged, the agreement amounts to a contract in favour of a third party. Under Article 5.2.6 such a benefit cannot be imposed on the beneficiary, who may have reasons not to accept it. The original obligor may thus refuse to be discharged by the agreement between the obligee and the new obligor.

If such a refusal occurs, the new obligor is bound to the obligee, but the original obligor and the new obligor are jointly and severally liable, in accordance with the default rule of Article 9.2.5(3).

 

Illustration

5. The facts are the same as in Illustration 1, except that the obligation is assumed by an agreement between X and B, and that X discharges A. If A is no longer interested in a business relationship with B, it may accept to be discharged. On the other hand, if A wants to keep the possibilities it has of benefiting from a renewal of its contract with X, it might wish to keep the relationship and may therefore refuse to be discharged.

(1) Without the obligee’s consent, the obligor may contract with another person that this person will perform the obligation in place of the obligor, unless the obligation in the circumstances has an essentially personal character. 

(2) The obligee retains its claim against the obligor.

 

COMMENT

1. Agreement on performance by another party

Obligations can be transferred either by an agreement between the original obligor and the new obligor, with the obligee’s consent (see Article 9.2.1(a)), or by an agreement between the obligee and the new obligor (see Article 9.2.1(b)).

There may be situations in which the consent of the obligee is lacking, either because it has not been solicited, or because it has been refused. In such cases the obligor may agree with another person that this person will perform the obligation in its place. When performance becomes due, the other person will render it to the obligee.

While an obligee may refuse to accept a new obligor before performance is due, in principle it may not refuse to accept the performance itself when it is offered by another party.

 

Illustration

1. Companies A and B have entered into a co-operation agreement for their activities on a certain market. At a certain point they decide to redistribute some of their tasks. Thus, B will take over all operations concerning telecommunications which were previously A’s responsibility. On the following 30 October A would have been bound to pay company X, a local operator, a sum of USD 100,000. The two partners agree that B will pay that amount when it is due. On 30 October X may not refuse such a payment made by B.

 

2. Obligation of an essentially personal character

Third party performances may not be refused by the obligee in all the cases in which they would be equally satisfactory as performances rendered by the obligor. The situation is different when the performance due is of an essentially personal character, linked to the obligor’s specific qualifications. The obligee may then insist on receiving performance by the obligor itself.

 

Illustration

2. In Illustration 1, B also takes over operations for the maintenance of some sophisticated technological equipment developed by A and sold to company Y. The partners agree that the next yearly maintenance will be carried out by B. When B’s technicians arrive at Y’s premises, Y may refuse their intervention, invoking the fact that due to the highly technical nature of the verifications involved, they are entitled to receive performance from the specialised staff of A.

(1) The new obligor may assert against the obligee all defences which the original obligor could assert against the obligee. 

(2) The new obligor may not exercise against the obligee any right of set-off available to the original obligor against the obligee.

 

COMMENT

1. Assertion of defences

The obligation transferred to the new obligor is the very same obligation that used to bind the original obligor (and, in some cases, still binds it – see Article 9.2.5).

Whenever the original obligor would have been able to withhold or refuse payment to the obligee on the basis of a defence, such as the defective performance of the obligee’s own obligations, the new obligor may rely on the same defence against the obligee.

 

Illustration

1. Company A owes company X EUR 200,000, due to be paid at the end of the year, as payment for facilities management services. With X’s consent A transfers this obligation to company B. X renders A extremely defective services which would have given A a valid defence for refusing payment. When payment is due, B may assert the same defence against X.

 

2. Defences of a procedural nature

The same solution applies to defences of a procedural nature.

 

Illustration

2. The facts are the same as in Illustration 1, except that X sues B before a court at its place of business. B can successfully invoke the arbitration clause included in the contract between A and X.

 

3. Set-off

The right of set-off relating to an obligation owed by the obligee to the original obligor may however not be exercised by the new obligor. The reciprocity requirement is not fulfilled between the obligee and the new obligor. The original obligor may still exercise its right of set-off if it has not been discharged.

(1) The obligee may assert against the new obligor all its rights to payment or other performance under the contract in respect of the obligation transferred. 

(2) If the original obligor is discharged under Article 9.2.5(1), a security granted by any person other than the new obligor for the performance of the obligation is discharged, unless that other person agrees that it should continue to be available to the obligee. 

(3) Discharge of the original obligor also extends to any security of the original obligor given to the obligee for the performance of the obligation, unless the security is over an asset which is transferred as part of a transaction between the original obligor and the new obligor.

 

COMMENT

1. Scope of the transfer

The rules laid down in this Article are inspired by the same principle as Article 9.2.7. The obligation is transferred to the new obligor as it is, not only with the defences the original obligor was able to assert, but also with all the rights to payment or to other performances under the contract that the obligee had in respect of the obligation transferred.

The following illustrations provide examples of such rights.

 

Illustrations

1. Company A must reimburse bank X for a loan of EUR 1,000,000 bearing an interest rate of 3%. A transfers its obligation to reimburse the principal to company B. The transfer also includes the obligation to pay the 3% interest.

2. The facts are the same as in Illustration 1, except that the loan contract entitles X to claim premature reimbursement if A fails to pay the interest due. X can assert also this right against B.

 

2. Contractual deviations

Party autonomy permits deviations from the rules laid down in this Article, such as a separate transfer of the obligation to pay interest.

 

3. Securities in assignment of rights and transfer of obligations compared

In the case of the assignment of a right, all rights securing performance are automatically transferred to the assignee (see Article 9.1.14(b)). This solution is justified by the fact that the assignment of a right does not alter the obligor’s situation, i.e. securities can continue to serve their purposes in unchanged circumstances.

The transfer of an obligation to a new obligor on the contrary modifies the context in which the security has been granted. If the original obligor is discharged, and if the security were to be transferred with the obligation, the risk of breach or insolvency to be covered would be that of another person, thus completely altering the object of the security.

 

4. Suretyship

If the original obligor’s obligation was covered by a suretyship granted by another person, this suretyship can survive if the original obligor remains bound. If, on the other hand, the original obligor is discharged, the suretyship cannot be transferred to cover the new obligor, unless the person who granted the suretyship agrees that it should continue to be available to the obligee.

 

Illustration

3. Company A owes USD 1,000,000 to company X. Bank S has agreed to guarantee due performance of this obligation. With X’s agreement, A transfers the obligation to company B, and X accepts to discharge A. S does not guarantee B’s obligation, unless it agrees to continue to provide the security.

A special case occurs when the suretyship was granted by the person who was itself to become the new obligor. In such a case, the security necessarily disappears, since a person cannot provide a security for its own obligation.

 

5. Securities over assets

The original obligor may have given one of its assets as security. In this case, if the obligation is transferred and the original obligor is discharged, the security ceases to cover the obligation now binding the new obligor.

 

Illustration

4. Bank X has granted a loan of EUR 100,000 to company A, secured by a deposit of shares by the obligor. With X’s agreement, A transfers the obligation to pay back the loan to company B, and X accepts to discharge A. The shares cease to serve as security.

The solution is different if the asset given as security is transferred as part of a transaction between the original and the new obligor.

 

Illustration

5. The facts are the same as in Illustration 4, but the transfer of the obligation between A and B occurs as part of a broader operation in which ownership of the shares is also transferred to B. In such a situation, the shares will continue to serve as security for B’s obligation to reimburse the loan.