This article is written by Neha Dahiya, a law student at Dr. B.R. Ambedkar National Law University, Sonipat. This article explains the meaning, types, and conditions of the assignment of contract. It also seeks to explain the judicial opinion about assignment by the means of a case study.
A contract binds the involved parties to fulfil their obligations. Non-fulfillment of the obligations results in the breach of the contract. Thus, the rights and obligations arising from the contract are owned by the contracting parties. However, in certain cases, these contractual rights and obligations can be transferred to a third party. This is known as the assignment of contract. In a world where the complexity of transactions is increasing continuously, such assignments have become very common.
Section 2(h) of the Indian Contract Act, 1872 defines a contract as “an agreement enforceable by law”. It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise. The formation of a contract results in rights and obligations for both parties. A lawful contract binds both parties to fulfil their obligations. In case they are not fulfilled, the aggrieved party can avail of the remedies provided by the law.
Thus, Contract= (Offer + Acceptance) Agreement + Enforceability of law
For example: ‘A’ promises to sell his house to ‘B’ for a consideration of Rs. 50 lakhs. Here, there was an offer to sell the house by ‘A’ and acceptance by ‘B’ for consideration of a fixed sum. It is a lawful agreement and hence is a contract. Here, ‘A’ has the obligation to give the house to ‘B’ and ‘B’ has an obligation to pay the amount. If either of them fails to fulfil their respective obligation, it will result in a breach of the contract.
When the rights and obligations in a contract are transferred to a third party, who is not a party to the contract, it is called the assignment of contract. For example, in the case where there was a contract between ‘A’ and ‘B’ where ‘A’ was supposed to pay ‘B’ some amount, ‘A’ had an obligation to pay ‘B’ the amount and ‘B’ had the right to receive the amount. Along with this, if ‘B’ had to pay the same amount to ‘C’ and he asked ‘A’ to pay the money directly to ‘C’, it can be called an assignment of the obligation by ‘B’ to ‘A’. It is covered in Section 37 of the Indian Contract Act, 1872. The Section provides that a party can dispense the performance of the contract by the assignment of it to a third party. This concept can also be found in the Transfer of Property Act, 1882. The use of assignments has increased tremendously in recent times owing to the financial and contractual complexities of the transactions. Usually, it is employed in high-risk transactions that are secured by assigning the contractual rights along with the securities (like hypothecation or mortgage).
The party currently holding the rights and obligations of the existing contract is called the ‘assignor’ and the party to whom they are assigned and taking over the position is called the ‘assignee’. The transfer takes place from the assignor to the assignee. Also, it is pertinent to note that assignment does not affect the rights and responsibilities of the parties involved in any way. These rights and duties remain the same. And even after the transfer, the assignor remains liable if any problems arise unless there was an agreement to the contrary. Thus, the assignment of the contract involves an incorporeal transfer of the rights and obligations. And as per the laws of India, these transfers must be brought onto paper.
The assignment depends upon several factors including the provisions of the contract entered into by the parties. The original contract may contain a clause that does not permit the assignment or make the consent of the other party necessary before the assignment. The contract can also contain a stipulation that states that the liability of the agreement would lie with the original parties, even after the assignment. This happens in situations where the assignor acts as a guarantor for the performance of duties as per the contract by the assignee. Acting as a guarantor makes the assignor liable. It is also possible that a contract may permit an assignment without any formal notification to the other party. But in this case, it is important for that party to create a ‘Letter of Assignment’ containing the details to notify all other contracting parties. The letter must be signed by both outgoing and incoming parties.
For example: If ‘A’ and ‘B’ enter into a contract and include a clause that does not allow the assignment of the contract, neither of them can transfer their rights and liabilities to a third party. And if the contract contains a clause that necessitates the requirement of consent, then neither of them can transfer the rights and obligations without the other party’s consent. Also, if ‘A’ decides to assign his obligations to ‘C’ and acts as a guarantor for ‘C’, then also ‘A’ will continue to hold the liability.
Usually, assignments of contract rights and obligations are enforceable. However, under some circumstances, they are not enforced. These are as follows:
As per Indian law, any kind of contract can be assigned, provided it conforms to the provisions of the contract and is carried out with the consent of the parties involved. Also, for any contract whose foundation lies upon the ‘personal skills’ of the promisor, such a contract cannot be assigned under any circumstances. This is because such a contract depends upon the qualities or qualifications of the promisor only and cannot be found in someone else, thus, the obligations cannot be assigned in such a case. This has also been highlighted by our judiciary that two types of contracts can never be assigned, that are:
Thus, it is prudence that is followed while deciding the assignability of a contract. It is prudent to explicitly state the conditions regarding assignment in the contract itself, taking due care of the limits placed by the law.
The most competent person to handle the assignment of contract is an attorney. An attorney is a licensed court practitioner who acts as a deputy or the agent of the party he/she is representing in the court of law. Such contracts need professional expertise as they contain some very technical and intricate details that are crucial for the correct and beneficial assignment.
As per the common law, the assignment was done by the way of three kinds of transactions:
As per the existing laws in India, there are broadly two types of assignment.
The assignment of contractual rights and liabilities has been covered under Section 130 of the Transfer of Property Act, 1882 under the heading of ‘actionable claim’. An actionable claim can be transferred simply by the execution of a written instrument. Nothing more is required. The contract permitting assignment must be clearly laid down, strictly adhering to the provisions of this Section. The intention to assign must be clear and certain. Under Indian property laws, a deed is required for the assignment. And this deed must be duly stamped. However, stamp duty is extremely high in India. Also, it is a subject that falls in the concurrent list. So when it is legislated on by both centre and states, it leads to variations and there is no uniformity. This acts as a hindrance in the way of assignment.
In the case of Doraisami v. Doraisami (1924), following the English precedent, it was held that if there is an assignment of a debt, the transfer must be of the whole debt and not just a portion of it. Thus, part-assignment was not recognised. However, in the subsequent case of Rajamier v. Subramaniam (1928), the previous judgement was overruled. It was recognized that even though part-assignment was not recognised in the English common law, part-assignment of debt was a valid transfer as it was held to be good in equity. However, it was also laid down that in such part-assignments, while enforcing a claim, it was necessary to implead the owner of the rest of the portion as well. It was observed that no such distinction was made in the Transfer of Property Act, 1882. Thus, both may be transferred under the term ‘actionable claims’.
However, the only problem that persists is presented by Order 2 Rule 2 of the Code of Civil Procedure, 1908. As per this, a single cause of action cannot be allowed to be split into many. Thus, it may prevent the owner of a part of the debt from enforcing his rights. Thus, to avoid this, the lenders often submit a substitution claim or notice in the court so that this provision is not applied.
Assignment of intellectual property implies the transfer of the owner’s rights in copyrights, patents, trade secrets, trademarks, and such other intangible properties. Many times, companies look to sell or transfer their intellectual property because an excess of these can prove to be a burden for them. Maintaining intellectual property requires continuous registrations, defending suits against third-party claims or marketing, and creating a finished product. Thus, such transfers can generate good profit for the company and save it from unnecessary expenditure. On the other hand, several companies look for purchasing such property to provide an impetus to their growth. Thus, when intellectual property is assigned, all the rights, titles, and interests with respect to it are transferred to the assignee from the assignor.
The use of assignments in real estate is known as ‘real estate wholesaling’. As per this, the real estate dealers instead of going by the conventional way of buying and selling the house, enter into a contract and then reassign it to another buyer so as to avoid the additional costs and pocket the profit earned in doing so. This is possible because a real estate purchase agreement does not contain a binding obligation to actually buy the property. Such an agreement is called an ‘Assignment of Real Estate Purchase and Sale’ agreement. Thus, here the assignor merely acts as a middleman, selling their right to buy the property with an equitable interest, i.e. in exchange for an assignment fee from the assignee, who is the ultimate buyer of the property.
There are certain other types of transfers that operate as an alternative to assignment.
They are as follows:
In this case, the appellants here had executed an agreement to sell in 1986 in favour of some of the respondents. The respondents had paid only a portion of the consideration amount. Thereafter, the original buyers, i.e. the respondents executed another agreement to sell in 1987 in respect of the same property in favour of Respondent 1 who was not included in the agreement of 1986. Subsequently, a dispute arose among the parties, and Respondent 1 filed a petition against both the original sellers and buyers seeking specific performance of the 1987 agreement. The petition was dismissed by a trial court citing that the original buyers could not have transferred the contract and assigned their obligation to a third party without the written consent of the original seller. Additionally, there was no evidence suggesting that the seller’s consent was taken. However, the decision was overruled by the High Court of Gujarat. Later on, the matter went to the Supreme Court of India
Was the assignment of obligations by the original buyers to Respondent 1 without the consent of the original seller valid?
The Supreme Court laid down the following principles in its judgment:
In this case, the defendant’s wife had promised to play the piano at a concert. However, she failed to perform owing to her bad health. As a result, the plaintiff sued for compensation.
The Court held that the performance of the present contract depended upon the personal skills of the defendant’s wife, which in turn depended on her good health. Thus, non-performance due to ill-health discharged the contract. Hence, no compensation could be claimed. Also, since the contract was based on the promisor’s personal skills and capability, it could not be assigned to a third party.
Assignment of contracts has become a common phenomenon in recent times. However, it is important that the assignments conform to the provisions laid down by the law. It must be carried out with the consent of the contracting parties. There are certain cases where the assignment is not possible like the contracts which are personal in nature, where there is an explicit provision in the contract to prohibit it, or when the law does not allow it in particular cases. These conditions must be adhered to. In fact, our law recognises both legal and equitable assignments. These assignments are covered under the provisions of the Transfer of Property Act, 1882, and the Indian Contract Act, 1872. Thus, all the contracts where the contractual rights and obligations are transferred to a third party are valid, provided all the conditions laid down by law are followed.
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