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Assignment of Contractual Obligations – Is Consent Necessary?

The Supreme Court of India (“Supreme Court”) recently delivered an important judgement in relation to assignability of contractual rights and interests.

Assignment refers to the transfer of contractual rights or liability by a party to the contract to some other person who is not a party. The Court, in its judgement of November 25, 2019 in the case of Kapilaben and Ors. v. Ashok Kumar Jayantilal Sheth through POA Gopalbhai Madhusudan Patel and Ors. (“Judgement”), re-affirmed the established position of law that a party to a contract cannot assign its obligations/liabilities without the consent of the other party.

Background

The appeals to the Supreme Court arise out of the judgement of the High Court of Gujarat (“Gujarat HC”) that had allowed the appeals of the respondents against the decisions of the trial courts.

The dispute was in relation to a property (“Suit Property”) that was owned by the appellants (“Vendor”). The Vendor had executed an agreement to sell in 1986 (“1986 Agreement”) in favour of some of the respondents (except Respondent 1) (“Original Vendees”), who had only paid a part of the consideration amount. Thereafter, the Original Vendees executed agreements to sell in 1987 (“1987 Agreements”) in respect of the Suit Property assigning the former’s rights under the 1986 Agreement in favour of Respondent 1. Subsequently, disputes arose between the parties and Respondent 1 had filed suits against the Vendor and the Original Vendees seeking specific performance of the 1987 Agreements.

The trial courts dismissed the suits stating that the Original Vendees could not have assigned their outstanding obligation to pay the remaining consideration without the written consent of the Vendor. Further, as there was no evidence of such consent given by the Vendor, either verbally or by conduct, the rights of the Original Vendees under the 1986 Agreement were not validly passed on to Respondent 1 under the 1987 Agreements. However, the Gujarat HC reversed the findings of the trial courts and held that there was a valid assignment of rights in favour of Respondent 1.

The Ruling

In the Judgement, the Supreme Court reiterated the following principles:

  1. An assignment of a contract may result by way of transfer of the rights or transfer of the obligations. If the obligations under a contract are being assigned to another party, such an assignment cannot take place without the consent of the counterparty to the contract. This kind of assignment of contractual liabilities would amount to a novation, i.e., parties to a contract may agree to substitute a new contract in place of the old contract in which the same acts are to be performed by different parties resulting in substitution of liabilities.

  2. The judicial trend in India has reiterated that rights under a contract are freely assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties.

  3. The Supreme Court further observed that assignment of contractual rights interest cannot be held to be valid merely because there is no express bar against assignability stipulated in the contract. In order to examine whether an interest is assignable, it has to be seen whether the terms of the contract, and the circumstances in which the contract was entered into, lead to an inference that the parties did not intend to make their interest therein assignable.

Impact on businesses

While the Judgement does not formulate anything new and only reaffirms the already established principle, it is advisable for parties to a contract to keep in mind the following:

  1. If the parties to a contract intend to restrict assignability, it is best to state the intent expressly in the contract. Likewise, it should also be noted that it is prudent to expressly record a party’s right to assign, if that is the intention.

  2. In complex commercial transactions, it is imperative for parties to a contract to take into account the pre-existing goodwill between parties, which is often a significant factor influencing their decision to contract with each other, before a party proposes to assign its obligations under the contract. It would be inequitable for that party to contract out his responsibility to a stranger if it is apparent that the counterparty would not have accepted performance of the contract had it been offered by a third party.

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