Last edited 20 Oct 2016

Assignment of construction contracts

Assignment is the right to transfer 'choses in action' defined as 'all personal rights of property which can only be claimed or enforced by action and not by taking physical possession'. This definition includes benefits arising under a construction contract such as right to payment, but not burdens such as the obligation to pay. The definition also includes claims for breach of contract.

A common error is to assume that the right to assign must be agreed as part of a contract, like a novation. Assignment is a unilateral right created by statute, Section 136 of The Law of Property Act 1925 or by the law of equity ( law developed by the Chancery Division of the High Court of England and Wales). Whilst not a contractual right, the right to assign can be excluded, or restricted, by contract, for example, it is common in collateral warranties to restrict to one assignment without the written permission of the warrantor.

Under Section 136 of The Law of Property Act 1925 the formalities required to create an effective legal assignment are:

  • An absolute (i.e not part of a debt or by way of charge only) assignment in writing signed by the assignor.
  • A debt or other legal right of action.
  • Express notice in writing to the debtor (no particular form of wording is necessary).

An assignment which fails to comply with the above formalities may, nevertheless, still be effective as an equitable assignment. Indeed an equitable assignment may be verbal. There is no substantial difference between legal and equitable assignments (though, of course it will be easier to prove a legal assignment), there are however procedural differences. The assignee of a legal assignment sues the debtor in the assignee's own name. The assignee of an equitable assignment of a legal chose in action or an equitable chose that is not absolute, must join the assignor (as claimant if the assignor agrees, or defendant if not ) into any legal proceedings.

The effect of a legal or equitable assignment is to put the assignee in the same position as the assignor in respect of the benefits (not burdens) arising from the original transaction with the debtor. Consequently

... a debt which accrues due before notice of assignment is received, whether or not it is payable before that date, or a debt which arises out of the same contract as that which gives rise to the assigned debt, or is closely connected with that contract, may be set off against the assignee

Ref. Business Computers Ltd v Anglo African Leasing Ltd.

Also a counterclaim for unliquidated damages may be set off by the debtor, but only to the value of the assigned debt. Further when there have been successive assignments the debtor cannot set off against claims by the ultimate assignee, counterclaims which the debtor has against intermediate assignees.

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