Assignment of Contracts in India

Assignment of contracts in India

The principle of assignment as recognized under Indian law--and affirmed and applied by Indian courts--derives its origins from English law.

Simply put, the word "assignment" means transfer of rights or obligations held by one party to another party. The Black's Law Dictionary has defined the word "assignment" to mean "a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or if in estate or in right there in". Assignment of rights under a contract is the complete transfer of rights to receive benefits accruing to one party to that contract.

Common law systems have favoured freedom of assignment, such that when there is no express prohibition against assignment in a contract, then assignment should be freely permitted.

However, courts in India have taken a different view--in the absence of a specific clause restricting transfer of a contract, the intention of the parties has to be taken into account, which can be gathered from the nature of the agreement and the surrounding circumstances.

Where a contract is silent or incomplete as regards the parties' intention concerning assignment, one will have to rely on the provisions of the Indian Contract Act, 1872, and the principles of assignment enshrined therein.

If the agreement between the parties does not spell out their intention as regards assignment, then--under Indian laws--it will have to be determined on the basis of whether the contract is of personal nature--that is, contracts involving personal qualities, skill or qualifications.

A contract of personal nature or those involving personal skills is such that it needs to be performed by the promisor himself and, therefore, is not assignable.

For instance, if a painter promises to paint a picture for a customer, the painter has to perform this promise personally, since the painter has been engaged for his personal artistic skills, style and capabilities.

The judicial trend in India has reiterated this position and laid down that rights under a contract are capable of assignment unless:

(a) The contract is personal in nature

(b) The rights are incapable of assignment either under law or under an agreement between the parties.

Hence, if the parties intend to restrict assignability, it is best to state it expressly in the contract between the parties.

Likewise, it is prudent to expressly record a party's right to assign, if that is the intention. Any agreed limitations on such assignment rights should also be expressly recorded.

An important issue that often arises is with respect to assignment of "obligations" under the agreement versus assignment of "rights".

The Supreme Court--in the case of Khared and Co. Ltd v Ramon and Co. Pvt. Ltd--has observed that, as a rule, obligations under a contract cannot be assigned except with the consent of the promisee. Where such consent is obtained, it will be considered as a deemed novation, resulting in the substitution of liabilities and obligations to the assignee.

The introduction of a new party into an existing contract would itself amount to a novation of the existing contract, that is, the creation of a new contract between the original party and the new party. Courts have proceeded on the basis that a transfer of "obligations" can be effected only through a novation. Hence, the assignment clauses in contracts should also deal with novation, if the intention is to transfer obligations as well.

Drafting the assignment clause in any contract, therefore, requires careful consideration. The treatment may be different depending on the nature of the contract. For example, in agreements with private equity investors, it is common to see a right to freely assign rights and obligations in favour of its affiliates. A pre-consent of other parties to the agreement is obtained through such clauses, and all that is usually required to give the assignment effect is the execution of a deed of adherence between the assignor and the assignee.

In real estate transactions, a proposed buyer would like to retain the right to assign the "agreement to sell" in favor of a nominee (which may be an affiliate or an independent third party), so that the final conveyance can occur in favour of the intended buyer. This is sometimes necessitated when large areas of land are being consolidated for the purposes of a final acquisition by a developer.

Assignment rights are usually limited in contracts that pertain to licensing of intellectual property rights or technology. Sometimes, contracts may enable sub-licensing, subject to specified conditions.

In lending transactions, a borrower will expressly be prohibited from assigning rights or novating the contract, whereas the lender will retain an absolute and free right of assignment. Such a right enables the lender to sell loan portfolios to other lenders/parties or to a securitization company.

Factoring transactions and assignment of receivables also depend significantly on the assignment clauses of the relevant agreements in relation to which the receivables are being assigned. Assignment clauses under various agreements determine the contract's treatment in a transaction that involves the sale of a business or undertaking, together with such contracts.

So, even though "assignment" usually appears in the boiler plate section of a contract, it does require special consideration on a case-by-case basis, depending on the nature of the contract and the specific requirements of the transaction.

It is prudent to expressly set out the intention of the parties as regards assignment in the relevant contracts. Whether the intent is to allow or disallow or limit assignment, the advice is usually to write it expressly.

The doctrine of privity mandates that a third party cannot enforce a contract. Assignment is in a way an exception to this doctrine.

A party to a contract can assign the benefits which are to accrue to him under the contract to a third person. The third person is not a third party beneficiary and he can, once the assignment is complete, enforce the contract of his own accord. The assignor may, subject to the terms of the contract, still be liable on it. However, post-assignment, the contract retains its bilateral character with the contract virtually becoming one between the other party to the contract and the assignee.

Section 37 of the Indian Contract Act, 1872 (which speaks of the obligations