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Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

Table of Contents

• What is a Deed of Novation? 
• What is a Deed of Assignment? 

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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Charchit Pathak

Actionable Claim Under Transfer Of Property Act, 1881

Coverage of this article

1. Introduction - An actionable claim is a term that is included in the Transfer of Property Act, 1881, which regulates real estate transactions in India.

2. UNDERSTANDING ACTIONABLE CLAIM - Existence of a Debt or Obligation - Legal Action Required - Transferability

3. TRANSFERABILITY OF ACTIONABLE CLAIMS - Under the Transfer of Property Act of 1881, actionable claims are not only enforceable but also transferrable from one party to another.

4. MODES OF TRANSFER OF ACTIONABLE CLAIMS

A. Assignment The Act's Section 130 addresses the assignment of actionable claims and lays out the procedures for doing so.

B. Negotiation Another transfer method that may be used in some types of actionable claims is negotiation, especially when it comes to claims involving negotiable instruments like promissory notes and bills of exchange.

C. Endorsement Endorsement is frequently applied to negotiable instruments and is strongly related to negotiation.

D. Transfer Methods in Special Circumstances Respecting these clauses guarantees the transfer of actionable claims' validity and enforceability, supporting the smooth operation of real estate deals and the transfer of rights and obligations between parties.

5. RIGHTS AND DUTIES OF THE PARTIES INVOLVED

6. REMEDIES IN CASE OF BREACH

7. CASE LAWS RELATED TO THE TOPIC Satyam Computer Services Ltd. v. Upaid Systems Ltd. [2008] EWHC 31

8. CONCLUSION - Overall, actionable claims are essential in real estate transactions because they give parties flexibility and legal protection.

KEY TAKEAWAYS

• The Transfer of Property Act, 1881 requires valid transfers to meet specific criteria, such as written consent, registration, and signature, ensuring their enforceability
• The Act recognizes various ways to transfer property ownership, including sale, gift, exchange, lease, and mortgage, giving individuals flexibility in choosing the appropriate mode.
• The Act defines the rights and liabilities of both the transferor and transferee, ensuring that parties fulfill their obligations regarding the condition of the property, consideration, and adherence to any restrictions.

INTRODUCTION

An actionable claim is a term that is included in the Transfer of Property Act, 1881, which regulates real estate transactions in India. According to Section 3 of the Transfer of Property Act, a claim or right to obtain a debt, money, or movable property by legal action is referred to as an actionable claim. It includes a variety of legal rights that can be enforced through legal action, including debts, mortgages, and contracts. Actionable claims cover both current and upcoming claims, and their reach is extensive. Future claims involve potential or contingent debts or obligations, whereas existing claims are currently due and enforceable. By facilitating the transfer of rights and interests in movable property, they play a significant part in real estate transactions.

It is crucial to remember that claims based on interpersonal ties or torts are not actionable claims under the Transfer of Property Act. The Act excludes claims relating to the transfer of immovable property, which are governed by different rules, and principally concentrates on claims relating to the transfer of movable property. People interested in real estate transactions must comprehend the extent and definition of actionable claims. A legal foundation for the transfer of these claims is provided by the Transfer of Property Act, which also makes it possible to transfer debts, contracts, and other obligations. This promotes the smooth flow of real estate transactions.

UNDERSTANDING ACTIONABLE CLAIM

According to the Transfer of Property Act of 1881, a claim or right to obtain a debt, money, or moveable property through legal proceedings is referred to as an actionable claim. Since it enables the transfer of rights and interests in movable property, it is a crucial idea in real estate transactions. The Transfer of Property Act, which controls the transferability and enforceability of such claims, provides the legal framework for actionable claims. Debts, Mortgages, and Contractual Claims are some examples of Actionable Claims. 

Certain features and traits must be present for a claim to be actionable. These consist of:

• Existence of a Debt or Obligation : When there is a debt or obligation due by one party to another, a claim becomes actionable. This can apply to debts, unpaid invoices, contracts, and other claims of a similar nature.
• Legal Action Required : The assertion must be capable of being upheld in court. To recover the debt or acquire the movable property, the party with the actionable claim has the right to file a lawsuit.
• Transferability : Claims that are actionable can be passed from one party to another. The Transfer of Property Act offers methods for transferring these claims, such as endorsement, negotiation, and assignment.

TRANSFERABILITY OF ACTIONABLE CLAIMS

Under the Transfer of Property Act of 1881, actionable claims are not only enforceable but also transferrable from one party to another. The ease of transferring rights and interests in movable property is made possible by the transferability of actionable claims, which offers flexibility in real estate transactions. The Transfer of Property Act offers several channels for the transfer of claims that can be brought to court. The assignment of rights by the claim holder to another person is one such technique. The claimant's right to recover the debt or acquire the movable property is effectively transferred to the assignee through the assignment, which can be made either in writing or by operation of law.

Negotiation is another method of transfer in which the claimant endorses the claim to a third party. The actionable claim is legally transferred by endorsement, which also gives the endorsee the right to seize the movable property or pursue the debtor. Bills of exchange and promissory notes are two examples of instruments that frequently use this mechanism of transfer. The Transfer of Property Act also acknowledges the idea of endorsement in blank, which is when the claimant approves the claim without indicating who the endorsee is. This makes it possible to further negotiate the claim or transfer it through delivery. It is crucial to remember that there might be limitations and exceptions to the transferability of actionable claims, including contractual terms or legal requirements. The transfer of actionable claims should also adhere to the formalities and legal conditions set forth by the law.

MODES OF TRANSFER OF ACTIONABLE CLAIMS

A. assignment.

Under the Transfer of Property Act of 1881, assignment is one of the main ways to transfer actionable claims. It entails giving another individual, referred to as the assignee, the claimant's rights. Either a written assignment or the operation of law may transfer the property. The Act's Section 130 addresses the assignment of actionable claims and lays out the procedures for doing so.

B. Negotiation

Another transfer method that may be used in some types of actionable claims is negotiation, especially when it comes to claims involving negotiable instruments like promissory notes and bills of exchange. It entails the claimant, often referred to as the endorser, endorsing the claim on behalf of the endorsee. Endorsement and delivery of the negotiable instrument are acceptable methods of making this transfer. Sections 131 to 135 of the Transfer of Property Act contain provisions relating to the negotiation of actionable claims.

C. Endorsement 

Endorsement is frequently applied to negotiable instruments and is strongly related to negotiation. It describes the action of the endorser signing the document's reverse, transferring ownership to the endorsee. Sections 131 to 135 of the Act contain provisions that address the endorsement of actionable claims. These sections cover endorsement in blank, special endorsement, and restrictive endorsement.

D. Transfer Methods in Special Circumstances

The Transfer of Property Act permits particular means of transfer of actionable claims under special situations in addition to assignment, negotiation, and endorsement. Insolvency, bankruptcy, or transfer by operation of law are a few examples of these situations. The Act has procedures to deal with these circumstances, making sure that the transfer of actionable claims is done within the bounds of the law. It is crucial for those involved in real estate transactions to comprehend these modalities of transfer as well as the relevant sections and clauses of the Transfer of Property Act. Respecting these clauses guarantees the transfer of actionable claims' validity and enforceability, supporting the smooth operation of real estate deals and the transfer of rights and obligations between parties.

RIGHTS AND DUTIES OF THE PARTIES INVOLVED

The parties involved in the transfer of actionable claims under the Transfer of Property Act, 1881, are granted several rights and obligations. The interests of both the transferor and the transferee are safeguarded by these rights and obligations.

• Rights of the Transferor: The party transferring the actionable claim, or the transferor, is entitled to money or recompense in exchange for the transfer. Depending on the specifics of the actionable claim, the transferor may also have the right to hold the movable property or to seek to have the claim enforced against the debtor.
• Duties of the Transferor: The transferor has a responsibility to inform the transferee of any important information or flaws pertaining to the actionable claim. Transparency and fairness in the transfer procedure are guaranteed by this responsibility of disclosure.
• Rights of the Transferee: The rights and advantages related to the actionable claim are transferred to the transferee, or the party who receives the actionable claim. This includes all applicable rights to payment, possession, and enforcement of the claim against the debtor.
• Duties of the Transferee: The transferee is responsible for carrying out the duties and obligations connected to the transferred actionable claim. This includes making all required payments, abiding by all conditions of any contracts, and behaving in good faith towards the transferor.

REMEDIES IN CASE OF BREACH

In the event of a breach of the transfer of actionable claims, there are legal remedies available to the aggrieved party. These remedies aim to provide compensation or restore the party to their rightful position.

• Damages: The harmed party has the right to pursue damages, which entails requesting monetary compensation for any losses sustained as a result of the violation. Normally, the awarded damages would be equal to the loss incurred as a result of the breach.
• Specific Performance: In some circumstances, the court may impose a requirement that the party who violated the transfer fulfil its duties by specific performance. Usually, where monetary compensation is not sufficient to undo the harm, this remedy is provided.
• Revocation: Revocation enables the person that was injured to revoke the transfer of the actionable claim resulting from the breach. This remedy aims to annul the transfer and put the parties back in their pre-contractual positions.
• Injunction: An injunction may be requested to stop a breach from happening again or to compel one party to carry out or refrain from doing something. When it comes to actionable claims, an injunction may be requested to stop the transferor from giving the identical claim to a different party or to stop the transferee from using the claim in any other way.

CASE LAWS RELATED TO THE TOPIC

Satyam computer services ltd. v. upaid systems ltd. [2008] ewhc 31:.

In this decision, the Supreme Court of India ruled that even though a contract expressly forbids such assignment, it is nonetheless permissible to assign an actionable claim based on a breach of that contract. The court emphasised that, barring clear statutory prohibition, the Transfer of Property Act permits the transfer of actionable claims.

Bank of India v. Arthur Anderson & Co. (2019):

The Bombay High Court decided that a consultancy agreement's actionable claim might be transferred by endorsing and delivering the relevant documents. The court explained that even if actionable claims relating to contractual commitments are not expressly designated as negotiable, the Transfer of Property Act nonetheless enables their transfer.

The law surrounding actionable claims has been significantly impacted by recent court judgements, which have clarified and expanded the parameters of such claims' transferability and enforceability. These rulings have strengthened the idea that actionable claims can be transferred, excluding situations in which doing so is specifically banned by law or agreement. The decisions have also shown how crucial it is to take into account the specific requirements of the Transfer of Property Act when determining whether actionable claims can be transferred. Courts have acknowledged the necessity of striking a balance between the parties' legitimate interests and the flexibility to transfer claims.

Additionally, the rulings have offered helpful advice on the transfer of actionable claims in particular situations, like contract breaches or consulting agreements. They have emphasised that a variety of actionable claims, including those resulting from contractual responsibilities, are covered by the Transfer of Property Act.

Finally, under the Transfer of Property Act of 1881, actionable claims are crucial in property exchanges. They stand for rights over obligations or moveable property, and they can be exchanged via endorsement, negotiation, or assignment. For people and enterprises involved in real estate, contracts, and financial instruments, understanding actionable claims is essential. Actionable claim jurisprudence has been clarified and broadened by recent court decisions, which also recognise their transferability and offer guidance in particular situations. Actionable claims make it easier for debts to be paid off and property rights to be protected, but following the law is essential. Overall, actionable claims are essential in real estate transactions because they give parties flexibility and legal protection.

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Home / clat pg / Actionable Claim and Transfer of Actionable Claim under Transfer of Property Act

Actionable claim and transfer of actionable claim under transfer of property act.

Introduction

The code of contract with respect to the law of property was completed with the enactment of the Transfer of Property Act in the year 1882  (‘ToPA’) . It codified the laws pertaining to the transfer of property. However, TOPA does not cover all kinds of properties and their transfer.

An actionable claim represents a legal right that can be the subject of a lawsuit, and the transfer of actionable claims involves the assignment of these rights from one party to another. This post deals with actionable claim and their transferability under the Transfer of Property Act.

Actionable Claim under Transfer of Property Act

The term “Actionable Claim” is a legal concept that is defined under Section 3 of the Transfer of the Property Act . According to said provision, an actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing confidential or contingent.

Thus, as per the aforesaid provision, an actionable claim is a claim to:

i) any unsecured debt, or

ii) any beneficial interest in a movable property that is not in the claimant’s possession, either actual or constructive.

Apart from aforesaid types of claims, there are other kinds of claims as well that are actionable in nature and can afford relief. However, several kinds of claims are not actionable claims as per the definition enumerated under the TOPA, and therefore, they cannot be transferred.

For instance, in Jugal Kishore Saraf v. Raw Cotton Limited , the Apex Court found that since the action is necessary in case of a decree or a judgment debt, it cannot be termed as an actionable claim.

In the case of Moti Lal v. Radhey Law , the Apex Court held that the right of claiming damages, whether it arises out of contract or un-liquidated damages arising out of tortuous liability, cannot be regarded as an actionable claim. This is undoubtedly an obligation but does not amount to unsecured debt. It is attributable to the uncertain sum of money involved.

Furthermore, it is also not a part of an original transaction, which is a must for a claim to become actionable. However, it includes the principal money and the interest charged thereupon for them being a specific nature of the debt. On the other hand, damages are of an uncertain nature and, therefore, not an actionable claim.

Similarly, in Jai Narayan v. Kishun Dutta , the Court found that mesne profit cannot be regarded as an actionable claim as it is un-liquidated in nature. Further, it is neither a claim to a beneficial interest in movable property. Thus, it is a “ mere right to sue “.

Moreover, rights under trademark, patent and copyright are also not termed as actionable claims. This is due to the fact that they already vest in the individual who possesses them. They are the individual’s intellectual property, and hence, another person cannot be permitted to claim under them. They are governable under their respective legislation and cannot be transferred as actionable claims.

Transfer of Actionable Claim 

Since an actionable claim is not considered “property” under the TOPA, it cannot be transferred in the same way that property can be transferred. Sections 130 to 137 of Chapter VIII of the TOPA deal with the transfer of actionable claims. This Chapter provides general principles that must be borne in mind while transferring actionable claims. The provisions are analysed hereinunder. 

Section 130 of Transfer of Property Act

This section states that an actionable claim can be transferred:

i) with or without consideration

ii) by way of an instrument in writing duly signed by the transferor or his agent duly authorised in this respect .

Thus, oral transfer of actionable claims is not permitted. However, its registration is not necessary, and no separate instrument of transfer is to be effected.

Section 131 of Transfer of Property Act

The notice is not necessary to ensure perfection of the transferee’s title of actionable claim. However, the dealings of the debtor with the creditor are protected until the former receives the notice of such an assignment in observance of the conditions enumerate under Section 131 of the TOPA. It states that:

i) The notice of transfer of the actionable claim has to be made in writing.

ii) It must be signed by the transferor or his agent authorised on his behalf.

iii) However, if the transferor refuses to sign it, then, in that case, it must be signed by the transferee of actionable claim or his duly authorised agent.

The Hon’ble Apex Court has clarified in Sadasook Ramprotap v. Hoar Miller & Co . that Section 131 of TOPA does not prescribe any time limit for the service of notice. It must be within a reasonable period of time and unconditional.

Section 132 of Transfer of Property Act

The principle behind this section is that the transferee gets no better title than the transferor. Thus, the transferee takes all the equities and also the liabilities of the transferor to which the latter was subject at the time of such assignment.

Section 133 of Transfer of Property Act

This provision deals with the warranty of solvency of debtor. In the case of assignment of a debt, the transferee runs the risk of losing the claim when the debtor becomes insolvent. Therefore, as a precaution, the transferor of the actionable claim warrants the solvency of the debtor at the date of assignment. But this is subject to contract to the contrary. Further, it is limited only to the amount or value of the consideration for which it is transferred.

Section 134 of Transfer of Property Act

Since an actionable claim is a property, its transfer by way of a mortgage is possible. When one debt is transferred to cover an other debt, whether existent debt or future debt, it is referred to as a transfer of actionable claim by way of a mortgage. This section provides the below-mentioned preposition under which the amount so realised could be appropriated:

i) the debt received by the transferor or recovered by the transferee is to be applied in payment of the cost of such recovery.

ii) it is to be applied towards satisfaction of the amount secured by the transfer.

iii) if any residue remains after the above-mentioned payments, the remainder is to be given to the transferor.

Section 135 of Transfer of Property Act

This provision was inserted by the Amendment Act of 1944. It states that the asignee of fire insurance policy in whom the property of the subject matter of policy is absolutely vested at the date of assignment, it would have the effect of transferring and vesting in him all the rights to sue just as if the insurance policy was entered into by him.

Section 136 of Transfer of Property Act

The persons mentioned under this section are not legally qualified to make transfers of actionable claims. The object behind this disqualification of “ Judges, legal practitioners and officers connected with Courts of Justice ” is to ensure that the judiciary remains impartial. 

Section 137 of Transfer of Property Act

Furthermore, this Chapter is not applicable to negotiable instruments and other instruments mentioned thereunder. This is because they are governed by other laws and statutes.

After studying every relevant provision of the TOPA it can indeed be concluded that actionable claims as defined under Section 3 of the TOPA are transferable in nature. It is a movable property of intangible nature that could be assigned as per the provisions and rules mentioned in Chapter VIII of the TOPA. Thus, one must be evident as to the nature of the property, the process of transfer of the actionable claim and the law laid down under various judgements of the Indian courts to effectuate a valid transfer of actionable claim.

For more such notes on Transfer of Property Act, click here!

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Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

Contact our experts for further advice

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Deed of Assignment: Everything You Need to Know

A deed of assignment refers to a legal document that records the transfer of ownership of a real estate property from one party to another. 3 min read updated on January 01, 2024

Updated October 8,2020:

A deed of assignment refers to a legal document that records the transfer of ownership of a real estate property from one party to another. It states that a specific piece of property will belong to the assignee and no longer belong to the assignor starting from a specified date. In order to be valid, a deed of assignment must contain certain types of information and meet a number of requirements.

What Is an Assignment?

An assignment is similar to an outright transfer, but it is slightly different. It takes place when one of two parties who have entered into a contract decides to transfer all of his or her rights and obligations to a third party and completely remove himself or herself from the contract.

Also called the assignee, the third party effectively replaces the former contracting party and consequently assumes all of his or her rights and obligations. Unless it is stated in the original contract, both parties to the initial contract are typically required to express approval of an assignment before it can occur. When you sell a piece of property, you are making an assignment of it to the buyer through the paperwork you sign at closing.

What Is a Deed of Assignment?

A deed of assignment refers to a legal document that facilitates the legal transfer of ownership of real estate property. It is an important document that must be securely stored at all times, especially in the case of real estate.

In general, this document can be described as a document that is drafted and signed to promise or guarantee the transfer of ownership of a real estate property on a specified date. In other words, it serves as the evidence of the transfer of ownership of the property, with the stipulation that there is a certain timeframe in which actual ownership will begin.

The deed of assignment is the main document between the seller and buyer that proves ownership in favor of the seller. The party who is transferring his or her rights to the property is known as the “assignor,” while the party who is receiving the rights is called the “assignee.”

A deed of assignment is required in many different situations, the most common of which is the transfer of ownership of a property. For example, a developer of a new house has to sign a deed of assignment with a buyer, stating that the house will belong to him or her on a certain date. Nevertheless, the buyer may want to sell the house to someone else in the future, which will also require the signing of a deed of assignment.

This document is necessary because it serves as a temporary title deed in the event that the actual title deed for the house has not been issued. For every piece of property that will be sold before the issuance of a title deed, a deed of assignment will be required.

Requirements for a Deed of Assignment

In order to be legally enforceable, an absolute sale deed must provide a clear description of the property being transferred, such as its address or other information that distinguishes it from other properties. In addition, it must clearly identify the buyer and seller and state the date when the transfer will become legally effective, the purchase price, and other relevant information.

In today's real estate transactions, contracting parties usually use an ancillary real estate sale contract in an attempt to cram all the required information into a deed. Nonetheless, the information found in the contract must be referenced by the deed.

Information to Include in a Deed of Assignment

• Names of parties to the agreement
• Addresses of the parties and how they are binding on the parties' successors, friends, and other people who represent them in any capacity
• History of the property being transferred, from the time it was first acquired to the time it is about to be sold
• Agreed price of the property
• Size and description of the property
• Promises or covenants the parties will undertake to execute the deed
• Signatures of the parties
• Section for the Governors Consent or Commissioner of Oaths to sign and verify the agreement

If you need help understanding, drafting, or signing a deed of assignment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

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• Contract for Deed California
• Contract for Deed in Texas
• Assignment Law
• Deed Contract Agreement
• Assignment Of Contracts
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Assignments: why you need to serve a notice of assignment

Catherine phillips.

PSL Principal Associate

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the potential change in his contractual position is brought about by a person who is entitled, and whom he can see to be entitled, to bring about that change".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

• If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
• If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
• Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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Transfer of Property Act: Notes, Case Laws and Reading Materials

• Subject-wise Law Notes Transfer of Property Act
• Aishwarya Agrawal
• December 9, 2023

Section 5 of the Transfer of Property Act, 1882 defines the term transfer of property. According to this section, transfer of property means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and other living persons.

Hello Readers!

This article provides Transfer of Property Act notes with case laws . The Act provides provisions for transfer of movable or immovable property. As a learner, you can consider it as a free, online, and self-placed course. As a competitive exams aspirant, you will find it perfect for Judicial Service Exams, UPSC CSE Law Optional, etc. And as a reader, this article on Transfer of Property Act notes is sufficient for you to learn or research on Transfer of Property Act!

For books on Transfer of Property Act, click here .

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Meaning and Definition of Property

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Sale under Transfer of Property Act

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Article III, Section 2, Clause 1:

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction; to Controversies to which the United States shall be a Party;—to Controversies between two or more States; between a State and Citizens of another State, between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

An assignment of a legal claim occurs when one party (the “assignor” ) transfers its rights in a cause of action to another party (the “assignee” ). 1 Footnote Black’s Law Dictionary 136 (9th ed. 2009) (defining “assignment” as “the transfer of rights or property” ). The Supreme Court has held that a private litigant may have standing to sue to redress an injury to another party when the injured party has assigned at least a portion of its claim for damages from that injury to the litigant. The Supreme Court in the 2000 case Vermont Agency of Natural Resources v. United States ex rel. Stevens held that private individuals may have Article III standing to bring a qui tam civil action in federal court under the federal False Claims Act (FCA) on behalf of the federal government if authorized to do so. 2 Footnote 529 U.S. 765, 768, 778 (2000) . The FCA imposes civil liability upon “any person” who, among other things, knowingly presents to the federal government a false or fraudulent claim for payment. 3 Footnote 31 U.S.C. § 3729(a) . To encourage citizens to enforce the Act, in certain circumstances, a private individual, known as a “relator,” may bring a civil action for violations of the Act. Such plaintiffs sue under the name of the United States and may receive a share of any recovered proceeds from the action. 4 Footnote Id. § 3730(d)(1)–(2) . Under the FCA, the relator is not merely the agent of the United States but an individual with an interest in the lawsuit itself. 5 Footnote Vt. Agency of Nat. Res. , 529 U.S. at 772 ( “For the portion of the recovery retained by the relator . . . some explanation of standing other than agency for the Government must be identified.” ) (citing 31 U.S.C. § 3730 ).

Ordinarily, if the relator’s financial interest in the outcome of the case were merely a byproduct of the suit itself, there would be no injury sufficient for standing. 6 Footnote Id. at 772–73 ( “An interest unrelated to injury in fact is insufficient to give a plaintiff standing. . . . A qui tam relator has suffered no [invasion of a legally protected right]—indeed, the ‘right’ he seeks to vindicate does not even fully materialize until the litigation is completed and the relator prevails.” ) (citations omitted). The Supreme Court has held that a litigant’s interest in recovering attorneys’ fees or the costs of bringing suit by itself normally does not confer standing to sue. E.g. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 107 (1998) ( “The litigation must give the plaintiff some other benefit besides reimbursement of costs that are a byproduct of the litigation itself.” ); Diamond v. Charles, 476 U.S. 54, 70–71 (1986) ( “[T]he mere fact that continued adjudication would provide a remedy for an injury that is only a byproduct of the suit itself does not mean that the injury is cognizable under Art. III.” ). In Stevens , however, the Supreme Court recognized a distinction that confers standing upon qui tam plaintiffs in FCA cases. Justice Antonin Scalia, writing for the Court, determined that assignments of claims are distinguishable from cases in which a litigant has a mere financial interest in the outcome of the suit because the assignee-plaintiff actually owns a stake in the dispute as a legal matter. 7 Footnote Vt. Agency of Nat. Res. , 529 U.S. at 773 . Justice Scalia drew support for this distinction from the long-standing historical practice of the government assigning a portion of its damages claim to a private party and allowing that party to assert the injury suffered by the federal government as a representative of the United States. 8 Footnote Id. at 774, 778 The Court noted the “long tradition of qui tam actions in England and the American colonies,” 9 Footnote Id. concluding that “Article III’s restriction of the judicial power to ‘Cases’ and ‘Controversies’ is properly understood to mean ‘cases and controversies of the sort traditionally amenable to, and resolved by, the judicial process.’” 10 Footnote Id. Although the Court held that the relator had standing to sue under the qui tam provision, it ultimately determined that the plaintiff could not maintain the action against a state agency for allegedly submitting false grant claims to the EPA because states were not “persons” subject to liability under the False Claims Act. Id. at 787 .

Eight years after deciding Stevens , the Supreme Court again found that an assignee of a claim had standing, even when the assignee had promised to remit all of the money it recovered in the proceedings to the assignor. 11 Footnote Sprint Commc’ns Co. v. APCC Servs., Inc. , 554 U.S. 269 , 271 (2008) . In Sprint Communications Co. v. APCC Services, Inc. , payphone operators had assigned their legal claims for money owed to them by long-distance communications carriers to third-party collection agencies. 12 Footnote Id. at 271–72 . The agencies were authorized to bring suit on behalf of the payphone operators and promised to pay all of the proceeds of the litigation to the payphone operators for a fee. 13 Footnote Id. at 272 . The Court held that these collection agencies had standing to pursue the operators’ claims because of the long history of courts’ acceptance of such claims. 14 Footnote Id. at 273–75 . The Court noted that “federal courts routinely entertain suits which will result in relief for parties that are not themselves directly bringing suit. Trustees bring suits to benefit their trusts; guardians ad litem bring suits to benefit their wards; receivers bring suit to benefit their receiverships; assignees in bankruptcy bring suit to benefit bankrupt estates; executors bring suit to benefit testator estates; and so forth.” Id. at 287–88 . Assignment was sufficient to transfer the injury to the collections agencies, and the injury to the operators that had been transferred to the collection agencies would be redressed by a favorable judicial decision, even if the agencies would subsequently pay all of the proceeds to the operators. 15 Footnote Id. at 286–87 ( “[I]f the [collection agencies] prevail in this litigation, the long-distance carriers would write a check to [them] for the amount of dial-around compensation owed. What does it matter what the [agencies] do with the money afterward?” ).

The Stevens and Sprint cases could have broader implications for Article III standing doctrine, as they suggest a way in which the constitutional limitations on standing may be bypassed through the assignment of rights to a third party. 16 Footnote See also ArtIII.S2.C1.6.4.3 Particularized Injury. For instance, if Congress enacts a federal statute recognizing an injury to the federal government that otherwise satisfies Article III’s requirements, it may assign a portion of its claim to a private party, thereby potentially giving that plaintiff standing to sue as a representative of the United States. 17 Footnote See Vt. Agency of Nat. Res. , 529 U.S. at 773 . This is essentially the operation of the False Claims Act. 18 Footnote 31 U.S.C. §§ 3729–3733 . However, it is unclear whether every such statute would necessarily resolve all Article III standing concerns. In Stevens and Sprint , the Court gave significant weight to the lengthy history of courts recognizing the types of assignments at issue when determining that the litigants in those cases had standing to sue. 19 Footnote See id. at 774, 778 ; Sprint Commc’ns Co. , 554 U.S. at 273–75 . Moreover, there may be a number of concerns about the constitutionality and practicality of using assignments to delegate core government functions (e.g., criminal prosecutions) to private parties when courts have not historically recognized claims based on such assignments, including concerns about interference with the Executive Branch’s Article II powers and prosecutorial discretion. 20 Footnote See Heather Elliott , Congress’s Inability to Solve Standing Problems , 91 B.U. L. Rev. 159 , 195–204 (2011) (questioning whether Congress’s assignment of claims to citizen suitors in order to confer standing would be constitutional or practical).

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DEED OF ASSIGNMENT: EVERYTHING YOU NEED TO KNOW.

A Deed of Assignment refers to a legal document in which an assignor states his willingness to assign the ownership of his property to the assignee. The Deed of Assignment is required to effect a transfer of property and to show the legal right to possess it. It is always a subject of debate whether Deed of Assignment is a contract; a Deed of Assignment is actually a contract where the owner (the “assignor”) transfers ownership over certain property to another person (the “assignee”) by way of assignment. As a result of the assignment, the assignee steps into the shoes of the assignor and assumes all the rights and obligations pertaining to the property.

In Nigeria, a Deed of Assignment is one of the legal documents that transfer authentic legal ownership in a property. There are several other documents like a deed of gifts, Assent, etc. However, this article focuses on the deed of assignment.

It is the written proof of ownership that stipulates the kind of rights or interests being transferred to the buyer which is a legal interest.

Read Also: DIFFERENCE BETWEEN TRANSFER OF PROPERTY THROUGH WILLS AND DEED OF GIFT

CONTENTS OF A DEED OF ASSIGNMENT

Content of a Deed of Assignment matters a lot to the transaction and special skill is needed for a hitch-free transaction. The contents of a deed of assignment can be divided into 3 namely; the introductory part, the second (usually the operative part), and the concluding part.

• THE INTRODUCTORY PART: This part enumerates the preliminary matters such as the commencement date, parties in the transaction, and recitals. The parties mentioned in the deed must be legal persons which can consist of natural persons and entities with corporate personality, the name, address, and status of the parties must be included. The proper descriptions of the parties are the assignor (seller) and assignee (buyer). The Recitals give the material facts constituting the background to the current transaction in chronological order.
• THE SECOND PART (USUALLY THE OPERATIVE PART): This is the part where the interest or title in the property is actually transferred from the assignor to the assignee. It is more like the engine room of the deed of assignment. The operative part usually starts with testatum and it provides for other important clauses such as the consideration (price) of the property, the accepted receipt by the assignor, the description of the property, and the terms and conditions of the transaction.
• The testimonium : this shows that all the parties are involved in the execution of the deed.
• Execution : this means signing. The capacity of the parties (either individual, corporate bodies, illiterates) is of great essence in the mode of execution.  It is important to note that the type of parties involved determines how they will sign. Example 2 directors or a director/secretary will sign if a company is involved. In the same way, if an association, couple, individual, illiterate, family land (omonile), firm, unregistered association, etc. is involved the format of signature would be different.
• Attestation : this refers to the witnessing of the execution of the deed by witnesses.

For a Deed of Assignment to be effective, it must include a column for the Governor of the state or a representative of the Government where the property is, to sign/consent to the transaction. By virtue of Sec. 22 of the Land Use Act, and Sec. 10 Land Instrument Registration Law, the Governor must consent to the transaction.

Do you have any further questions? feel free to call Ibejulekkilawyer on 08034869295 or send a mail to [email protected] and we shall respond accordingly.

Disclaimer: The above is for information purposes only and should not be construed as legal advice. Ibejulekkilawyer.com (blog) shall not be liable to any person(s) for any damage or liability arising whatsoever following the reliance of the information contained herein. Consult us or your legal practitioner for legal advice.

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A General Assignment of Assets to one’s Living Trust can help avoid a Probate.

                 Re-titling assets, like stock and bonds, from one’s name into one’s living trust is necessary to avoiding an unnecessary probate of such assets if held outside of the trust.   Sometimes people fail to transfer some or all of their intended trust assets into their trust.   A general assignment of assets to one’s living trust provides an important safeguard. Let’s examine what a general assignment is and how it helps to fund one’s trust and avoid a probate with the help of a Lake County probate attorney:

                A general assignment of assets transfers ownership on a wide variety of assets as the name implies.   An all encompassing general assignment is regularly used by estate planners to transfer all types of financial assets (excluding tax deferred retirement accounts) and personal property (such as the contents of one’s home) into the trust. It is a half-step towards actually re-titling the securities and the financial accounts into the name of the trustee.   Nevertheless, the settlor should still proceed to contact the banks, brokerages, and stock transfer agents (as relevant) to formally transfer legal title into the name of the trustee.   But, in the event that the formal legal title is not transferred prior to death, the general assignment can be used to obtain a court order to transfer legal title into the trust.

                In Kucker v. Kucker , (2011), 192 CA 4 th , 90, the Court of Appeal reversed a trial court decision wherein the trial court disallowed a petition to transfer stocks into a trust based on a general assignment of all assets by the settlor to the trustee.   The Court of Appeal agreed with the petitioner that a general assignment of all or substantially all of the settlor’s assets into one’s trust does cause the stocks to be owned by the trustee.   An otherwise unnecessary probate was thus avoided thanks to a general assignment by the settlor.

                Similarly, a declaration of trust by a settlor to hold certain assets listed on a schedule of pledged assets attached to a trust document can likewise be used to accomplish the same result.   Most attorneys use a schedule of initial trust assets and a general assignment to reinforce one-another.   Moreover, unlike the general assignment, the schedule of trust assets will also include the real estate – together with a full legal description — for the same reason.   That is, if a trust transfer deed is not properly executed prior to the settlor’s death, then the schedule of initial trust assets to a declaration of trust can be used to petition the court to transfer legal title into the trust without a probate.

                While the general assignment and the declaration of trust are important safeguards against the failure to formally transfer title to trust assets while the settlor is still alive and competent, such safeguards are just safeguards.   The better course of action is to see that one’s real estate, stocks and bonds, and financial accounts (and other trust assets) are properly titled in the name of the trustee of one’s trust.   After all, filing a court petition entails further expenses and delay in the administration of the trust that can be avoided.   

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Moveable and Immovable Property under The TPA,1882

The Transfer of Property Act, 1882 is a civil legislation of immense significance owing to the vast number of properties related transactions taking place throughout the country. A uniform legislation was the need of the hour considering this factor, and this Act was drafted to serve the selfsame purpose. The Act came into existence on 1 st July, 1882 which gives for the regulations of transmission of property inter vivos i.e., among living things. Therefore, the Act does not cover the dimension of transfer of property in totality. Erstwhile, the transfer of immovable property was governed by the English laws. The Act of 1882, sets out the objectives and governs only the transfer which is made by the parties and not by the operation of law. However, the Act contains the provisions of transfer of both moveable and immoveable property but the major portion of the Act talks about the transfer of immovable property which is visible from the below mentioned paper. [1]

It is crucial to understand the meaning of the term “property” as applied in the Act. Property has been given a wider aspect covering both tangible material things, e.g., land and houses as well as rights which are not exercised over any material, e.g., a right to repayment of a debt. The word ‘transfer’ in the Act has also been used in a wider sense. It may mean either transfer of all the rights and interests in the property or transfer of one or more of subordinate rights in the property. [2]

Table of Contents

Property in its wider sense may include anything which has some value and over which the right of ownership may be exercised. In general terms, the property can be defined as the virtual or physical entity which is owned by a person jointly or severally. The definition of the property can be seen under the Benami Transactions (Prohibition) Act, 1988 which says:

“Property of any kind, moveable or immoveable, tangible or intangible and is inclusive of any right or interest in such property”. [3]

The very concept of property plays a crucial role in a human’s life, because a human cannot live without the use of material objects which are covered under the purview of property. The 1882 Act plays a crucial role in the statute book with the ultimate objective to render the system of transfer of immovable property a system of public transfer legislation. It is one of the legislation made in the 19th century to govern the property rights of individuals. [4]

The concept of moveable and immoveable property under the Indian laws is parallel to the concept of English law under which property is divided into two categories, real property and personal property. The real property means the property pertaining to specific recovery and freehold interests in land whereas the personal property means the property which involves a personal action and includes everything other than real property. Therefore, ‘property’ in its most comprehensive sense includes all legal rights of a person except his personal rights, which constitute his status or personal condition. [5]

Immoveable Property 

The transfer under the TPA, 1882 deals with specific transfer pertaining to immoveable and moveable property. However, it is said that anything which excludes immoveable property is regarded as moveable property. Section 3 (2) of the Act states:-

“Immoveable property does not include standing timber, growing crops or grass’. [6]

Therefore, the Act does not have a comprehensive definition of immovable property and hence it can be concluded that it’s an unsatisfactory definition. Therefore, for the purpose of definition of immovable property we will refer to various other Acts where such definitions are defined.

The General Clauses Act of 1897 under Section 3(26) states that: “immoveable property shall include land any benefits arising out of land and also the things attached to the earth, or permanently attached to the earth”. Thus, the definition of immovable property is also not exhaustive. However, the definition has clarified on things “ attached to earth” which includes: [7]

a) “anything rooted in earth, it can be trees and shrubs”;

b) “imbedded in earth, things like walls or buildings”; or

c) “attached to what is so imbedded for the permanent beneficial enjoyment of that to which is attached”

This very definition of the General Clauses Act is applicable to the Transfer of Property Act as well and same was held in Babul Lal v. Bhawani [8]. Therefore, together they give a wider ambit to the definition of the term “immoveable property”. The benefit arising out of land would mean ‘right to catch fish, right to collect rent, any interest thereof, any income derived from that land will be considered as a part of immovable property.

Things rooted to the earth

Things rooted to the earth, means standing timber, growing crops or grass are not immoveable property, meaning that trees are excluded from the definition of immovable property. The main reason of the exclusion is that they are useful as timber only after their severance from land. The main thing is to determine the intention to cut down the tree from the middle and remove the tree permanently which is firmly attached to earth. In such case the latter one will be treated as ‘immoveable property’ and former as ‘moveable property’. [9]

Things imbedded in earth

Things embedded in earth herein, this would essentially include things made up by man or any non-natural objects embedded to earth. The property is treated as fixtures when it is firmly attached to the land. Buildings are the most appropriate example of the things imbedded to the earth.[10]

Further, the Registration Act, 1908 under Section 2(6) defines “Immovable Property” as the property which includes “land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit arising out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass”. Therefore, it is implied that buildings are also covered under the definition of immovable property. [11]

https://legalreadings.com/mediation-a-surpassing-method-for-family-disputes/

Moveable Property

The term moveable property has not been defined under the Act, in general parlance, it means anything which is easily moveable from one place to another without changing its structure or anything and without giving any harm to its surroundings can be said as moveable property. It is noted that moveable properties do not mandatorily require registration under the Act for the purpose of transfer. [12]

The definition stipulated under the Transfer of Property Act, 1882 for immovable property under Section 3 by excluding standing timber, growing crops and grass implies that these all are considered as moveable property, no specific definition of moveable property has been written under the act.[13] However, the General Clauses Act of 1897 under Section 3 clause 36 defines moveable property as “property of every description, except immoveable property” . [14]

Further adding to the definition under the Sale of Goods Act, which has defined moveable property as “moveable property includes every kind of property excluding actionable claims and money, it includes stock, shares, growing crops, grass, things attached to or forming a part of the land which are agreed to sale or under contract pertaining to sale.” [15]

The definitions together give a strong meaning to what is moveable property. Therefore, the framework of what constitutes a moveable property was necessary to determine the rights and duties in respect of transactions and also the tax liability of the individual under the tax provisions whenever the transactions is made in relation to property.

Stocks and Shares

Stocks and shares are considered as moveable property, they are the part of the company which is held by the person known as shareholder. The shareholder will have certain rights over the company which includes the right to vote in a general meeting of a company. These are transferable and come under the purview of moveable property. [16]

Further, standing timber, growing crops and grass are the exception to immovable property and are moveable property. These are segregated because of the benefits which arise when they are cut down and can be used for building material, for food and grass. Therefore, the property which is cut down the intention cutting down of that property has to be seen. Because, if such standing timber, tree or grass is fixed firmly and not removed then this property will be treated as immovable property and is removed (not from the grass root) then this property will be considered as moveable property. [17]

Actionable Claims and money

Actionable claims are excluded from the ambit of moveable property. The Transfer of Property Act, 1882 recognizes actionable claims as “claim to any debt, which is recognized by the Civil Court as a ground of relief to the aggrieved party in the court of law.” Other than debts which include mortgage or hypothecation or pledge of such property or any beneficial interest a person has to such property or any beneficial interest of the claimant into the respective property. Actionable claim can never be a moveable property because it’s a claim ascertainable in the court of law for the right to recover and not for the enjoyment purpose. The claimant can have the right to recover in the court of law by suit or through an action. [18]

For the purpose of money, money is not considered as good but a legal tender and it is understood that a legal tender cannot be exchanged for any other legal goods and that’s why it lacks transferability and hence cannot be covered under the Transfer of Property Act. [19]

The Transfer of Property Act, 1882 intended to amend the existing laws not to introduce new principles. It only transfers voluntarily. Transfer of property means transfer inter vivos i.e., transfer among living things, a property whether moveable or immoveable is transferred between two persons in different facts and circumstances and at different values.  There are different laws and ways to determine it for the purpose of moveable property. The Sales of Goods Act is applicable for the purpose of immovable property, the Transfer of Property Act is applicable. The paper has provided the categorization of movable and immovable, the with the intention judiciary and the provisions enshrined in the statutes have clarified on what is considered to be moveable property and immovable property.

[1] N Pradhan, “Transfer of Property Act (TPA)”, Legal Service India, available at: http://www.legalserviceindia.com/legal/article-2117-transfer-of-property-act-topa-tpa-.html (last visited on Dec 1, 2020).

[2] Dhruvi Dharia, “Rules relating to transfer of property”, Law Times Journal , March 29, 2020.

[3] The Benami Transactions (Prohibition) Act, 1988, s.2(c).

[4] Jaya V.S (ed.), Property Law 594-595, available at: http://14.139.60.114:8080/jspui/bitstream/123456789/738/21/Property%20Law.pdf (last visited on Dec, 1, 2020).

[5] Raichand vs. Dattatrya, AIR 1964 Bom. 344.

[6] The Transfer of property Act, 1882, s. 3(2).

[7] The General Clauses Act of 1897, s.3(26).

[8] ALL 1912 LJ 776.

[9] Jagdish vs. Mangal Pandey, AIR 1986 All. 182.

[10] Punnayya vs. Venkatappa, AIR 1926 Mad. 343.

[11] The Registration Act, 1908, s.2(6).

[12] Lexforti, “Categorization of Immovable and Moveable Property”, June 27, 2020 available at: https://lexforti.com/legal-news/categorization-of-immovable-and-moveable-property/ (last visited on 2 Dec, 2020).

[13] The Transfer of property Act, 1882, s.3.

[14] The General Clauses Act of 1897, s. 3(36).

[15] The Sale of Goods Act, s. 2(7).

[16] Supra note 12.

[17] Shantabai vs. State of Bombay, 1959 1 SCR 265.

[18] Supra note 12.

[19] Re Mathur Lalbhai, 1901 25 Bom. 702.

BY SURABHI SHARMA | UPES, DEHRADUN

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“By Operation of Law” (Including Draft No-Assignment Language)

30 September 2021 23 June 2011 | Ken Adams

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH (go here for a PDF copy), the Delaware Court of Chancery held that it’s not clear whether for purposes of a no-assignment provision a reverse triangular merger constitutes an assignment “by operation of law.” (A reverse triangular merger is when Sub merges into Target.)

I’m not going to go into any detail regarding the case, as that information is readily available elsewhere. (Plucking a couple of examples at random, go here for Milbank’s analysis and go here for Shearman & Sterling’s analysis.)

Transfers by operation of law are generally considered involuntary transfers. They include court-ordered property transfers, bankruptcy-related transfers, and transfers to or from an executor or an administrator. Whether mergers and consolidations are transfers by operation of law is an open question. The cases reach inconsistent results.

That suggests that if you use the phrase by operation of law , you run the risk of getting into a fight over exactly what it means. And the Meso Scale Diagnostics case provides a great example of exactly that.

So what should you do instead? Koncision’s confidentiality-agreement template uses a bare-bones no-assignment provision that doesn’t get into by-operation-of-law territory, so here’s a more detailed version that I’ve just come up with:

Without the prior written consent of the other party, neither party may voluntarily or by court order (1) assign any of its rights under this agreement, whether by contract or by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or otherwise, or (2) delegate any of its obligations under this agreement or its performance in satisfaction of any conditions to any obligations of the other party under this agreement. Any assignment or delegation in breach of this section X will be void.

Some observations:

• I’m aware it doesn’t read very easily.
• If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
• I think it’s helpful to distinguish the issue of volition (voluntary or or by court order) from the mechanism of assignment (by contract or something else).
• I suggest that “by court order” is what’s left if you eliminate mergers, consolidations, and dissolution from by operation of law .
• The reference to “the surviving or disappearing entity” covers both direct mergers, triangular mergers, and reverse triangular mergers.
• Don’t simply prohibit assigning the entire contract—a court might construe that as prohibiting just delegation of duties.
• The reference to “performance in satisfaction of any conditions” acknowledges that if you promise to pay me $50 if I mow your lawn, I might want to delegate the task of mowing your lawn to someone else. If I do so, I’m not delegating an obligation, I’m delegating performance aimed at satisfying a condition. I got this idea from  Negotiating and Drafting Contract Boilerplate , but I’ve chosen to articulate it differently.
• Saying that any assignment or delegation in breach will be void might be enough by itself. But including a prohibition too would provide a remedy if the other party nevertheless tries to assign or delegate, thereby causing you to incur legal fees.
• Saying that a court-ordered assignment will be void won’t work if the law overrides any restriction on assignment. See this August 2006 post on AdamsDrafting on how that plays out in bankruptcy.
• If you’re worried about a change of control, you might want to handle that by means of an event-of-default provision rather than a no-assignment provision: it’s a bit of a stretch to consider a change in Acme’s ownership as constituting assignment by Acme of its rights under a contract.

But once you have your broad no-assignment wording, you have to determine whether for a given transaction you need the full monty , something less, nothing at all, or a provision authorizing assignment. I won’t get into that here.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of  A Manual of Style for Contract Drafting , and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

9 thoughts on ““By Operation of Law” (Including Draft No-Assignment Language)”

Ken, thanks for the mention of the book.  Language involving “by operation of law”, seems a bit specialist for a confidentiality agreement.  As to what it means, I think it is a sweep-up that may cover oddities, eg:

– contracts with an individual that may continue when he dies, eg copyright licence agreements? – contracts that become contracts with a new entity by virtue of a law.

In the latter category, I can cite my former client Royal Free Hospital School of Medicine, which was dissolved and whose assets transferred to University College London under the University College London Act 1996 (see section 5 which deals with automatic transfer of property without any assignment).  See http://www.legislation.gov.uk/ukla/1996/3/contents/enacted 

To tee up a potential Plan B, counsel for a non-assigning party might ask for a termination right — if the other party engages in a merger that the non-assigning party doesn’t like, and the merger would not be considered an “assignment” under applicable law, then the non-assigning party can terminate the agreement.[1] [2]

[1] Of course, the consequences of termination would have to be thought through and suitably addressed.

[2] I’ve never been 100% comfortable with the concept of terminating the Agreement.  My late partner and mentor Tom Arnold was of the school of thought that contracts per se are historical facts and can never be terminated – only specific rights and duties can be terminated.

I have some nitpicks.

The Texas statute on the effect of a merger (section 10.008 at http://www.statutes.legis.state.tx.us/Docs/BO/pdf/BO.10.pdf ) specifically says that a merger vests rights in property in the successor organization without any assignment or transfer having occurred. Someone who knows this law better than me might be able to comment on whether that would include, for example, a lease to either real property or capital equipment. If you nonetheless want to prohibit the lease vesting int he successor, i think your language will have to use a word other than “assign.”

Along the same lines, the statute makes the successor entity be the primary obligor without calling it a delegation, so the non-delegation language might not be effective. The statute does allow a contract to specify additional obligors.

The two points above are important mainly because Texas law allows a merger to have multiple surviving or new entities result from the merger. So, your valuable lease might end up being held by a much less creditworthy entity. I don’t have a solution for this problem that would be generally applicable. I think instead, the drafter will have to look towards protections elsewhere, like warranties that the lessee would breach by becoming less creditworthy or a termination right that kicks in on any organic event.

You might want to change “court order” to “government action” to handle situations where regulatory bodies take control of a company (e.g. banks, insurers) and also have statutory, quasi-judicial power to transfer obligations to successors.

Finally, your construction of “neither party may” seems to run afoul of the guidance in MSCD 2.150. But the meaning of “may” in the construction remains consistent with MCSD and the alternative construction — each party shall not — is a clunky here, so I see why you chose the alternative.

Chris: Hmm. Regarding your first two points, I’ll have to put on my thinking cap. I might take a while to respond.

Yes, I will change “court order” to something that refers to “Government Body” or some such. I did something similar for purposes of Koncision’s confidentiality-agreement template.

I periodically fall foul of my own guidelines, and I’m delighted when people point that out. But regarding “neither party may,” have a look at MSCD 2.152.

“By operation of law” could also cover death, if one of the parties is an individual.  I doubt it would be any more effective than trying to prohibit assignment by court order.  There are, of course, ways of addressing the effect of death directly, if it’s a real issue.

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One senior lawyer advised me a one-sided transfer of shares from A to B under “operation of law” without any transfer deed or court order. He explained the following: 1. A breached the shareholders agreement. The agreement said that in case any shareholder breaches, his shares will be bought by other shareholders. 2. Since the agreement was breached, hence the shares were transferred to other shareholders under “operation of law”. 3. Since it came under operation of law, hence the transfer of shares became “transmission of shares” which needs no court order or transfer deed. I was shocked to listen this approach. Can you comment.

so does permanent disability fall under operation of the law and therefore Transmission applies?

Your page is very useful for us mortals to understand some technical language. I am grateful indeed.

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