Assignment of contracts requires care

It ought to be easy but it’s not. Transferring a contract from one business or individual to another is complicated, as anyone who has tried to get a finance company to transfer a contract for leasing equipment or vehicles from one person to another on the sale of a business will tell you.

There are various circumstances in which someone might want to assign a contract. This might come up, for example, when there is a sale of business or when tax planning.

So what is the legal position if a contract is to be assigned?

Generally speaking, a contracting party can assign its rights under a contract. Where assignment is possible, the consent of the other party to the contract is not usually required. However, there are some circumstances in which a contract cannot be assigned, including:

• if there is a prohibition on assignment in the contract itself. This is relatively commonplace and means that the consent of the other party is required
• sometimes, if the thing being assigned is just the right to sue someone else. However, it’s difficult to know precisely when this applies because there is, for example, no prohibition on assigning debts – if there was, invoice discounting would not be possible!

An assignment of a contract will only take effect if it is intended to, and can have immediate effect.  An attempt to assign a future right that does not yet exist, for example payments under a contract that has not yet been entered into, will be treated as only an agreement to assign, rather than an actual assignment.  It can be difficult to decide whether there is an existing or only a future right.

The burden, or obligations, under a contract can never be assigned. If the other contracting party agrees, a new person can step in and take over a party’s obligations under a contract, but this is technically a ‘novation’, not an assignment. If the parties intend that one party will ‘take over’ the contract from another, difficulties can arise if the wrong language is used.

This may all seem like mere legal detail but in at least one situation it could be crucial to make sure that an assignment actually takes place. If someone wants to make a lifetime gift for Inheritance Tax purposes, they will need to know that the assignment actually takes place as planned. If not, the whole purpose of making the gift might be defeated. It’s therefore really important to check that in legal terms the assignment actually works with effect from the right date.

A version of this article appeared in the East Anglian Daily Times on 12 May 2015.

Clare Richards is a specialist in corporate law at Barker Gotelee, Solicitors in Suffolk.

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