What is assignment?
An assignment is the transfer of an interest from one party (“assignor”) to another (“assignee”). Assignment allows the assignor to transfer the benefit of a contract to the assignee. For example, the tenant of recently built office premises may transfer the benefit of a collateral warranty originally granted in its favour to a subsequent tenant.
Without express words, assignment usually involves an assignment of accrued and future rights. Clear words are required to assign only future rights under a contract (Energy Works (Hull) Ltd v MW High Tech Projects UK and others [2020] EWHC 2537 (TCC)).
Assignment in a construction context typically refers to a legal or equitable assignment (although assignment can also occur by other means, e.g. operation of law). A key difference between legal and equitable assignments is that, in the case of a legal assignment, the assignee may enforce any assigned rights in its own name. In contrast, following an equitable assignment, the assignee would need to join the assignor in any action brought to enforce its rights.
To take effect as a legal assignment under English law, an assignment must comply with section 136(1) of the Law of Property Act 1925 (“LPA 1925“). This requires the assignment to be: (i) in writing; (ii) absolute; and (iii) expressly notified in writing to the other party to the contract (“debtor“). In practice, parties tend to effect a legal assignment by way of an assignment agreement or deed of assignment to ensure that these requirements are satisfied.
However, if the parties fail to meet any of the requirements set out in LPA 1925 the assignment will usually have equitable effect. Equitable assignments may arise orally or in writing, and whilst recommended, there is no need to notify the debtor, provided a clear intention to assign can be established. Neither legal nor equitable assignments generally require the debtor’s consent.
Assignment v novation
Although both terms are sometimes used interchangeably, assignment should be distinguished from novation. The most notable difference is that assignment only transfers the benefit of a contract (e.g. a warranty that works have been carried out to the required standard), whereas a novation transfers both the benefit and the burden (e.g. an obligation to pay for a service). As novation also requires the consent of all parties, it will typically be effected by a tripartite agreement between the novating party, the party to whom the contract is to be novated, and the counterparty to the relevant contract.
Some issues concerning assignment
- Restrictions on assignment – Unless there is an express prohibition in the contract, the parties will usually be free to assign the benefit of a contract. However, many standard form building contracts, including the JCT Design and Build Contract, prohibit assignment, or allow it only subject to certain conditions. In this regard, a developer may seek to amend the contract to reduce any restrictions on their ability to assign. In contrast, a contractor may seek to limit any rights to assign, for example by specifying the number of permitted assignments. This is often linked to the contractor’s professional indemnity insurance terms which may provide for restricted cover in respect of successive assignments.
- Ineffective assignment where prohibited – If a party purports to assign a right in contravention of an assignment clause, the assignment will only be effective as between the assignee and the assignor, and will not be enforceable against the debtor.
- Means of assignment – A clause in a contract permitting assignment is not sufficient to effect an assignment. There must be a separate document or oral agreement to show the assignor’s intention to assign (Allied Carpets Group Plc v Macfarlane (t/a Whicheloe Macfarlane Partnership) [2002] EWHC 1155 (TCC)).
* This is an updated version of an article originally published as part of the ‘Legal Terms Explained’ series of Construction Law.
For further information, please contact:
James Doe, Partner, Herbert Smith Freehills
james.doe@hsf.com
