Restrictions on assignments in business transactions Part 1 – transfer of receivables and form of the assignment contract

One of the most frequent reservations in business contracts is the restriction of the right to transfer receivables to a third party (restriction on assignment). As the debtor is usually not indifferent as to whom he is performing the duties for, it is worth knowing certain things about an assignment.

What is an assignment? In what form can it be concluded? What can and cannot be assigned? Can the right to assign receivables be restricted? How can one hedge against overriding the contractual restriction on the right to assign claims? I shall answer all these questions in a series of posts on the assignment contract.

Please note! A creditor can assign his receivables to a third party without the debtor’s consent

At the outset, I would like to emphasize that two contracts and three entities take part in an assignment.

The two contracts are:

• the underlying contract (in which the rights and obligations may be assigned)
• the assignment contract (in other words, the transfer contract – in short, the transfer or assignment).

The three entities are:

• the debtor (obligor) – the covenantor of the underlying contract
• the creditor (assignor) – the covenantee of the underlying contract (the entity which has the claim, i.e. the right to demand a performance, such as payment, from the debtor);
• the acquirer of the receivable (assignee) – the entity to which the assignment (i.e. the transfer of claims) is made.

In accordance with to the applicable regulations a creditor may assign his receivables to a third party without the debtor’s consent, unless this is in conflict with a reservation in the contract, statute or the properties of the claim.

However, the transfer of receivables, namely the assignment, must be based on a contract.

It should be emphasized that, based on an assignment contract, the party acquiring the claim acquires the claim from the underlying contract, although it does not acquire any obligations. As a consequence of concluding the assignment contract, the underlying contract changes in such a way that a third party (the acquirer of the claims) is added to the former two parties to the former claim. The previous rights and obligations of the creditor are split among the acquirer of the claim, who acquires the rights, and the creditor from the underlying contract, who retains the obligations.

For example, when receivables from a rental contract are assigned, the landlord (here: the creditor) is required to provide a performance on behalf of the tenant in accordance with the rental contract (i.e. to make the premises available to him), while the acquirer of the claim is entitled to receive the rent.

Together with the receivables, all rights which had been vested in the creditor in the underlying contract – e.g. the claim for the outstanding interest, accessory rights securing the given receivable (arising from a surety, pledge or mortgage), a claim for damages for default, a claim for the payment of a contractual penalty, a claim for the provision of information on the object of the performance by the debtor, the consequences of concluding a prorogation agreement (namely an agreement specifying the court which has the jurisdiction for ruling on disputes between the parties) and an arbitration clause – are transferred to the acquirer of the receivables by law (namely without the need to make additional stipulations).

An assignment contract may be concluded in any form

The law does not require the parties to conclude an assignment contract in a specific form, which means that it can even be concluded orally. However, I do not recommend this form, especially in business relations. It would be difficult to prove the circumstances that are important in the case in the event of a dispute, in particular the content of such a concluded contract, and therefore, the rights and obligations of the parties.

An assignment contract must indicate the legal relationship of which the receivable is the effect (namely the underlying contract), the parties to the underlying contract and the object of the performance.

An assignment contract may or may not be free of charge.

In my next post I shall explain, which receivables may be the assigned.