Contract law (2022): Rights of third parties: Assignment

An assignment is a legal term used in the context of the law of contract and of property. In both instances, assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee. An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift (such as a waiver) or it may be paid for with a contractual consideration such as money.

The rights may be vested or contingent, and may include an equitable interest. Mortgages and loans are relatively straightforward and amenable to assignment. An assignor may assign rights, such as a mortgage note issued by a third party borrower, and this would require the latter to make repayments to the assignee.

A related concept of assignment is novation wherein, by agreement with all parties, one contracting party is replaced by a new party. While novation requires the consent of all parties, assignment needs no consent from other non-assigning parties. However, in the case of assignment, the consent of the non-assigning party may be required by a contractual provision.

Procedure.

The assignment does not necessarily have to be in writing; however, the assignment agreement must show an intent to transfer rights. The effect of a valid assignment is to extinguish privity (in other words, contractual relationship, including right to sue) between the assignor and the third-party obligor and create privity between the obligor and the assignee.

Liabilities and duties.

Unless the contractual agreement states otherwise, the assignee typically does not receive more rights than the assignor, and the assignor may remain liable to the original counterparty for the performance of the contract. The assignor often delegates duties in addition to rights to the assignee, but the assignor may remain ultimately responsible.

However, in the United States, there are various laws that limit the liability of the assignee, often to facilitate credit, as assignees are typically lenders. Notable examples include a provision in the Truth in Lending Act and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.

In other cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except those issues, such as lack of performance, by the assignor may not be a valid defense for the obligor. As a response, the United States Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses", which "effectively abolished the doctrine in consumer credit transactions". In 2012, the commission reaffirmed the regulation.

Assignment of contract rights

After the assignment of contractual rights, the assignee will receive all benefits that have accrued from the assignor. For example, if A contracts to sell his car for $100 to B, A may assign the benefits (the right to be paid $100) to C. In this case, Party C is not a third-party beneficiary, because the contract was not made for C's benefit. Assignment takes place after the contract was formed; they may not precede them.