CHAPTER 9 - SECTION 3

CHAPTER 9: ASSIGNMENT OF RIGHTS,TRANSFER OF OBLIGATIONS, ASSIGNMENT OF CONTRACTS - SECTION 3: ASSIGNMENT OF CONTRACTS

“Assignment of a contract” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”) of the assignor’s rights and obligations arising out of a contract with another person (the “other party”).

 

COMMENT

Rights and obligations can be transferred separately, under the respective rules of Sections 1 and 2 of this Chapter. In some cases, however, a contract is assigned as a whole. More precisely, a person transfers to another person all the rights and obligations deriving from its being a party to a contract. A contractor, for instance, may wish to let another contractor replace it as one of the parties in a construction contract. The Articles of this Section cover the assignment of contracts as defined in this Article.

Only transfers by agreement are concerned, as opposed to various situations where the applicable law may provide for legal transfers (such as, under certain jurisdictions, the automatic transfer of contracts in the case of the merger of companies – see Article 9.3.2).

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

 

COMMENT

The assignment of contracts may be subject to special rules of the applicable law when it is made in the course of the transfer of a business. Such special rules often provide for mechanisms that cause all contracts of the business to be transferred, under certain conditions, by operation of law.

This Article does not prevent the present Section from applying when certain contracts pertaining to the transferred business are assigned individually.

 

Illustrations

1. Company A is transferred to company B. If the otherwise applicable law provides that all contracts to which the former company was a party are automatically transferred to the latter, the Principles do not apply.

2. The facts are the same as in Illustration 1, but B is not interested in taking over a particular contract with company X, and prefers that contract to be assigned to company C. This particular transfer is subject to the Principles.

The assignment of a contract requires the consent of the other party.

 

COMMENT

1. Agreement between assignor and assignee

The first requirement for the assignment of a contract is that the assignor and the assignee agree on the operation.

 

2. Other party’s consent required

This agreement does not however suffice to transfer the contract. It is also necessary for the other party to give its consent.

If it were only for the assignment of the rights involved, such a consent would in principle not be needed (see Article 9.1.7). However, the assignment of a contract also involves a transfer of obligations, which cannot be effective without the obligee’s consent (see Article 9.2.3). The assignment of a contract can thus only occur with the other party’s consent.

 

Illustration

Office space is let by owner X to company A. The contract expires only six years from the date of the contract. Due to the development of its business, A wants to move to larger premises. Company B would be interested in taking over the lease. The contract can be assigned by an agreement between A and B, but the operation also requires X’s consent.

 

3. Assignor not necessarily discharged of its obligations

With the other party’s consent, the assignee becomes bound by the assignor’s obligations under the assigned contract. It does not necessarily follow that the assignor is discharged (see Article 9.3.5).

(1) The other party may give its consent in advance. 

(2) If the other party has given its consent in advance, the assignment of the contract becomes effective when a notice of the assignment is given to the other party or when the other party acknowledges it.

 

COMMENT

1. Advance consent by the other party

Paragraph (1) of this Article provides that the other party’s consent, required under Article 9.3.3, may be given in advance.

This rule, concerning the assignment of contracts, corresponds to the rule in Article 9.2.4 according to which the obligee, who must consent to the transfer of the obligation may give its consent in advance. Similarly, the other party, who must consent to the assignment of the contract, may also give its consent in advance.

 

Illustration

1. Company X enters into an agreement with agency A, providing that the latter will be responsible for advertising X’s products in country M for the next five years. A, however, is already considering ceasing its activities in country M in the not too distant future, and obtains X’s advance consent to the subsequent assignment of the contract to agency B, located in country M’s capital. This advance consent is effective under Article 9.3.4.

 

2. When the assignment of the contract is effective vis-à-vis the other party

According to paragraph (2), if the other party has given its consent in advance, the assignment of the contract becomes effective when it is notified to the other party or when the other party acknowledges it. This means that it is sufficient for either the assignor or the assignee to notify the assignment 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. When A actually assigns its contract to B, the assignment becomes effective vis-à-vis the other party when either A or B notifies it to X.

3. The facts are the same as in Illustration 1. No notice is given, but B sends X a proposal for a new advertising campaign. X understands that the assignment has taken place and sends its comments on the proposal to B. The assignment of the contract is effective with this acknowledgement.

(1) The other party may discharge the assignor. 

(2) The other party may also retain the assignor as an obligor in case the assignee does not perform properly. 

(3) Otherwise the assignor and the assignee are jointly and severally liable.

 

COMMENT

1. Extent of assignor’s discharge

This Article, concerning the assignment of contracts, corresponds to Article 9.2.5. To the extent that the assignment of a contract causes obligations to be transferred from the assignor to the assignee, the other party, as an obligee, may decide the effect that the acceptance of the assignee as a new obligor will have on the assignor’s obligations. This Article gives the other party several choices and provides for a default rule.

 

2. Other party’s choice: full discharge

The other party may first of all fully discharge the assignor.

 

Illustration

1. By contract with company X, company A has undertaken to dispose of the waste produced by an industrial process. At a certain point, X accepts that the contract is assigned by A to company B. Fully confident that B is solvent and reliable, X discharges A. Should B fail to perform properly, X will have no recourse against A.

 

3. Other party’s choice: assignor retained as a subsidiary obligor

Another possibility is for the other party to accept the assignment of the contract on condition that it retain a claim against the assignor.

There are two options.

The first option is that the assignor is retained as an obligor in the event that the assignee does not perform properly. In this case the other party must necessarily claim performance first from the assignee, but if the assignee does not perform properly, the other party may call upon the assignor.

 

Illustration

2. The facts are the same as in Illustration 1, except that X, when consenting to the assignment, has stipulated 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, then X would have a claim against A.

 

4. Other party’s choice: assignor retained as jointly and severally liable with the assignee

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

 

Illustration

3. Company X accepts that company A assign the contract to company B, but stipulates that A and B will remain jointly and severally liable. In this case X may require 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 a 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 other party has neither indicated that it intends to discharge the assignor, nor indicated that it intends to keep the assignor as a subsidiary obligor, the assignor and the assignee are jointly and severally liable.

 

Illustration

4. Company X accepts that company A assign the contract to company 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 A and B would be fully discharged. Should A have to render performance to X, it would then have a right of recourse against B.

 

6. Differentiated options possible

A party to a contract is often subject to a whole set of obligations. When the contract is assigned, the other party may choose to exercise different options with regard to the different obligations. The other party may for instance accept to discharge the assignor for a certain obligation, but to retain it either as a subsidiary obligor or to consider it jointly and severally liable with the assignee with respect to other obligations.

 

Illustration

5. Company A has entered into a know-how licence contract with company X. In return for the transferred technology, A has undertaken to pay royalties and to co-operate with X in the development of a new product. When X later on accepts that A assign the contract to company B, X discharges A from the obligation to participate in the joint research, for which it will deal with the assignee only, but retains A as a subsidiary or a jointly and severally liable with B for the payment of royalties.

(1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.13 applies accordingly. 

(2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.7 applies accordingly.

 

COMMENT

The assignment of a contract entails both an assignment of the original rights and a transfer of the original obligations from the assignor to the assignee. The transaction should not adversely affect the other party’s situation as an obligor and it should put the assignee in the same situation as the assignor in its capacity as obligor.

As a consequence, the provisions concerning defences in Sections 1 and 2 of this Chapter apply accordingly. When the assignee exercises its rights, the other party may assert all the defences it could have asserted as obligor if the claim had been made by the assignor (see Article 9.1.13). When the other party exercises its rights, the assignee may assert all the defences that the assignor could have asserted as obligor if the claim had been made against it (see Article 9.2.7)

 

Illustrations

1. Company X has out-sourced its risk management department to consultant A. With X’s consent, the contract is assigned to consultant B. Due to A’s incompetence, X was not properly insured for a loss it subsequently suffered. Pending indemnification, X may suspend paying B the agreed fees.

2. Airline A has a contract with catering company X. A transfers the operation of its flights to certain destinations to airline B. With X’s consent, the catering contract is assigned by A to B. Litigation later arises, and X sues B before a court at its place of business. As a procedural defence B may successfully invoke that the assigned contract includes an arbitration clause.

(1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.14 applies accordingly. 

(2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.8 applies accordingly.

 

COMMENT

The assignment of a contract entails both an assignment of the original rights and a transfer of the original obligations from the assignor to the assignee. In parallel to what has been said about defences under Article 9.3.6, the operation should not adversely affect the other party’s situation as an obligee and it should place the assignee in the same situation as the assignor in its capacity as obligee.

As a consequence, the provisions of Sections 1 and 2 of this Chapter concerning rights related to the claim assigned and to the obligation transferred will apply accordingly.

When the assignee acts against the other party, it may assert all the rights to payment or other performances under the contract assigned with respect to the rights assigned, as well as all rights securing such performance (see Article 9.1.14). When the other party exercises its rights, it may assert all its rights to payment or other performances under the contract with respect to the obligation transferred against the assignee (see Article 9.2.8(1)). Securities granted for the performance of the assignor’s obligations are maintained or discharged in accordance with Article 9.2.8(2) and (3).

 

Illustrations

1. A service contract provides that late payment of the yearly fees due by customer X to supplier A will bear interest at the rate of 10%. With X’s consent, A assigns the contract to supplier B. When X fails to pay the yearly fees on time, B is entitled to claim such interest (see Article 9.1.14(a)).

2. The facts are the same as in Illustration 1, but X has also provided A with a bank guarantee covering payment of the fees. B may call upon that guarantee should X fail to pay the fees (see Article 9.1.14(b)).

3. Company X has ordered the construction and installation of industrial equipment from company A. Performance levels have been agreed between the parties, and the contract provides for liquidated damages should actual performance be insufficient. With X’s consent, A assigns the contract to company B. The assignee delivers equipment that does not meet the required performance levels. X may avail itself of the liquidated damages against B (see Article 9.2.8(1)).

4. The facts are the same as in Illustration 3, but A has provided X with a bank guarantee covering satisfactory performance. The bank guarantee will not apply to B’s obligations resulting from the assignment, unless the bank accepts to continue to offer its guarantee in respect of the assignee’s obligations (see Article 9.2.8(2)).