Restrictions on assignments in business transactions Part 3 – is it worth making a reservation of a restriction or prohibition of assignment rights and can such a restriction be circumvented?

In principle, an assignment may be made without the debtor’s consent, unless this is in conflict with the provisions of the contract.

An assignment of claims is very frequently in conflict with the debtor’s interests. This conflict arises for practical reasons, e.g. cooperation with the acquirer of the claims may be more difficult (he may not be inclined to extend the payment term or to agree to spread the repayments into instalments, or to make other concessions to the debtor). It most frequently makes a difference to a debtor as to which entity he has to perform an obligation for and therefore, he wants to have control over the manner in which the contract will be performed in the future.

To secure his interests, the debtor should insist that a reservation is made in the underlying contract to restrict or eliminate assignment rights.

The restriction of assignment rights may, for example, involve:

• subjecting the effectiveness of the assignment to meeting certain terms and conditions (e.g. in the judgment of 25 March 1969, the Supreme Court held that, if the terms and conditions of Powszechna Kasa Oszczędności, which constitute an integral part of the bank account agreement, make transfer of claims contingent on observing a specific form, the use of another form will lead to the ineffectiveness of the transfer);
• indicating a specific entity to which the assignment may be made (in such an event, the assignment to the other person or firm will be ineffective).

In business transactions, the restriction of the admissibility of assignment is most frequently included directly in the underlying contract. However, it can constitute a separate contract, the object of which is exclusively the restriction of an assignment. It should be remembered that, in accordance with the principle of contractual freedom, the parties may change the principles which restrict or eliminate the right to assign receivables at any time.

Most frequently, in business transactions, the parties subject the right of assignment to the consent of the debtor. Most frequently, the contractual clause reads as follows: “neither of the parties may assign or transfer its rights or obligations arising from this contract to another person or entity without the other party’s prior written consent.”

Circumventing the non-assignment clause

If a creditor concludes an assignment contract without the debtor’s consent (namely despite the arrangements of the parties to the underlying contract), such an assignment contract will not be unconditionally invalid. The fate of the contract concluded by the creditor will depend on the good will of the debtor. The debtor’s consent will “heal” a defectively concluded contract. However, if the debtor does not give his consent to the assignment of the receivables, he will be required to provide the performance exclusively to the creditor.

A non-assignment clause in the underlying contract prohibiting the assignment of receivables without the debtor’s consent is effective with respect to all entities, including those that are not parties to the underlying contract. Nevertheless, the non-assignment clause can be circumvented by the creditor if the debtor has not secured his interests in advance.

The lawmakers acknowledged that if a claim is confirmed by a document, a reservation in the underlying contract that it cannot be assigned without the debtor’s consent is only effective with respect to the acquirer of the claim if the said document mentions the reservation, unless the acquirer of the claim knew of the reservation at the time that the assignment took place.

This is best illustrated by the following example. Entrepreneur A concludes an underlying contract with Entrepreneur B (e.g. an accounting office). The underlying contract may be a contract for the provision of accounting services. The underlying contract includes a non-assignment clause prohibiting the assignment of contractual claims without the debtor’s consent. If the accounting office assigns the fee encompassed by invoice X to a third party, such an assignment contract will be valid despite the lack of required consent, if there is no mention on the invoice of the non-assignment clause and the acquirer of the receivable is unaware of the content of the underlying contract. Consequently, Entrepreneur A will be required to pay the invoice amount for the accounting services to the acquirer of the receivable.

This can be prevented. It is sufficient to include a provision in the underlying contract stating that every invoice must mention the non-assignment clause and to make sure that an annotation actually appears on the invoices.

The ability to circumvent a non-assignment clause in the manner described above is a consequence of the fact that acquirers of claims are extensively protected, to the extent that the protection of an acquirer of claims is deemed not to be disabled if a document confirming the existence of a claim (e.g. an invoice) does not include a mention of the non-assignment without the debtor’s consent clause, and the acquirer of the claim could have learned of the non-assignment clause had he applied due diligence. Therefore, if the acquirer can learn of the non-assignment clause by simply requesting the presentation of the underlying contract and he does not do so, the assignment will be effective despite the non-assignment clause.

In my opinion, such extensive protection of the acquirer of a receivable is unreasonable. In extreme cases, entities in professional transactions can acquire claims without the consent of the debtor required in the underlying contract, based on invoices, without a detailed examination of the underlying contract which constitutes the source of the assigned claim.

A debtor who does not appropriately protect his interests will be able to defend himself against the assignment made without his consent exclusively by proving that the new creditor knew about the non-assignment clause when the assignment was made. Proving this may be very difficult, and sometimes even impossible. The fact that the creditor learned about the non-assignment clause after the contract was concluded is irrelevant to the establishment of the effectiveness of the assignment of the claim.

In its judgment of 19 June 2009, the Supreme Court acknowledged that the acquirer of a receivable does not need to verify the information about a possible non-assignment clause in documents other than those presented by the seller of the receivable. Consequently, the creditor does not have to ask to be shown the contract from which the amount transferred arises. He may settle for the VAT invoices that are presented, which do not mention the non-assignment clause.

In conclusion, the manner in which one’s interests are protected at the stage of concluding a contract, is very important. The non-assignment clause is an additional contractual reservation, although a lack of due care for detail at this stage can prove decisive at the stage of performance of the contract.