 Chapter 14 o Assignment, Delegation, and Novation

Imperial Refining Co. v. Kanotex Refining Co.

A delegator remains liable on the duties it delegates. The delegator is the surety of the delegate.

Assignment

A party to a contract frequently may transfer one of its contract rights (that is, its right to receive the performance of a promise) to another person.

Delegation

A party to a contract may transfer one of its contract duties to another person.

When the party to the K is simultaneously the assignor and the delegator . . .

A party to a contract will both assign its contract rights and delegate its contract duties to another person. The recipient is both the assignee and the delegate. Furthermore, the other party to the contract is both the obligor and the obligee.

Assignment for value.

An assignment for which consideration is given

There is a second presumption we should learn:

An assignment of a contract is presumed to be both an assignment of the assignor's rights and a delegation of the assignor's duties i.e., performance. Restatement (Second) of Contracts § 328; UCC § 2-210(5). Consideration isn't required for a valid assignment.

Gratuitous assignment.

An assignment with no consideration Under some circumstances, a gratuitous assignment may be revocable by the assignor. For those circumstances, see § 332 of the Second Restatement.

An assignment for value . . .

Carries warranties made by the assignor. Restatement (Second) of Contracts § 333. Also carries a promise made by the assignor.

How do we know a release of a delegator when we see one?

Here's an easy one to spot: "I, the obligee under our contract, hereby release you, the obligor and delegator, from your obligations under our contract." Sometimes, though, we see this language: "I hereby discharge your debt to me." The release from the obligee might be conditioned on the delegate expressly promising the obligee to perform the delegated duties. Once the delegate promises, the condition is met and the release is effective.

WHAT DUTIES MAY BE DELEGATED?

In general, any duty in a contract may be delegated.

WHAT RIGHTS MAY BE ASSIGNED?

In general, any right in a contract may be assigned.

Assignor

Party making the transfer.

Remember, rights and duties..

Rights are assigned, but duties are delegated. · Finally, conditions can also be delegated. · So, it's good to say that rights are assigned, but performance is delegated. · Performance includes both duties and conditions.

The assignor's promise is . . . :

The assignor will do nothing to take value away from the assignment.

If the delegator must step in and answer for the failing delegate . . .

The delegator is entitled to reimbursement from the delegate.

Macke Co. v. Pizza of Gaithersburg, Inc. (No exceptions)

The obligee couldn't object to the delegator's delegation of its duties to another company. The Macke Co. court also stated that a duty may be delegated if the quality of the performance remains materially the same, as was true when Macke Company took over the duties of Virginia Coffee Service.

If the delegate fails to perform its duties . . .

The obligee may sue the delegator for performance.

If a contract prohibits assignments of rights under the contract and a party assigns its rights anyway. . .

The party breaches the contract's prohibition. However, the assignment is still effective and the obligor is left dealing with the assignee anyway.

Obligee

The party to the contract who is not involved in the transfer. From the obligee's point of view, the performance of the duty is a right to which the obligee is entitled.

Obligor

The party to the contract who is not involved in the transfer. The obligor must make good on the right (that is, perform its promise), regardless of whether the right is owned by the assignor or by the assignee. From the obligor's point of view, the right is a duty for the obligor to perform.

Delegate

The party who receives the duty.

Delegator

The party who transfers the duty.

Assignee

The person receiving the transfer.

To bar the assignment of rights,

The prohibition must bar the assignment of rights under the contract.

Where does the release come from in a novation?

The release comes from the obligee, that is, from the person entitled to the performance of the duties. In a novation, the delegate steps into the shoes of the delegator and the delegator walks away, free of liability.

METHOD OF ASSIGNMENT What's required for an assignment to occur?

The test is whether the would-be assignor intends to transfer a present interest in the contract. The Second Restatement rephrases the requirement as the assignor must intend to transfer the right without further action on its part. Section 324.

NOVATIONS

When a delegator is released from liability on the duties or other performance it has delegated.

Globe & Rutgers Fire Insurance Co. v. Jones (third exception)

You'll recall that the court in Globe & Rutgers held that a company could not assign its rights under a personal services contract without the consent of the obligor (Jones). The court applied a rule from employment law: an employer cannot assign its rights under an employment contract without the consent of the employee. The court quoted a statement from an employment law treatise that said the parties to an employment contract "are treated as having contracted in reference to the personal qualities of each other." The reference to the parties' personal qualities brings to mind the obligor's (Jones') testimony that he objected to the reputation and character of the assignee. To the extent that the poor reputation of Globe & Rutgers would harm his own reputation in the insurance world, Jones (the obligor) might suffer a materially decreased return under the contract (the third exception to free assignability). Assignments of rights to payment are very useful in a market economy: a company can use its right to be paid under its contracts to line up a bank loan. The company will assign its right to payment to its bank as collateral for a larger loan. Without collateral, the company will receive a smaller loan or no loan at all. Because assignments of contract rights are so useful in a market economy, courts will narrowly interpret any restrictions that parties might place on assignments of their contracts. For example, a contract that prohibits "any assignment of the contract" will be interpreted by a court only to prohibit the delegation of duties and conditions. As a result, the parties to the contract may still assign their rights under the contract, including the right to payment. Restatement of Contracts (Second) § 322. In order to prohibit the assignment of rights, the contract must prohibit the assignment of rights under the contract, rather than "the assignment of the contract." § 322.

In a novation, there are only two parties going forward:

the obligee and the delegate.

Four exceptions to the delegation of duties: Restatement (Second) of Contracts § 318; Uniform Commercial Code § 2-210.

1. A party may not delegate one of its duties under a contract if the contract prohibits the delegation of duties. 2. In addition, a party may not delegate one of its duties under a contract if a statute or other public policy prohibits the delegation. 3. Furthermore, a party to a personal services contract cannot delegate their duties under the contract. 4. Moreover, a person cannot delegate their duties under a contract that requires the person's unique services or the person's personal skill or discretion. The fourth exception sometimes is written with the phrase, "delectus personae" ('choice of person'). o The phrase, "delectus personae," refers to the choice of a person because of the chooser's trust or confidence in the person's character, abilities, or creditworthiness.

To avoid the effectiveness of the assignment to the assignee, the contract must do two things:

1. Prohibit assignments of rights under the contract, and 2. Provide that any attempted assignment is void.

The assignor's warranties include the following three:

1. The rights really do exist. 2. The rights aren't subject to limitations or defenses that the assignor hasn't disclosed or aren't apparent. 3. The assignor knows of nothing that would detract from the assignment's value (for example, the assignor hasn't previously assigned the rights to somebody else).

Three exceptions to the assignment of rights: §317 Restatement of Contracts (UCC § 2-210).

1. When the contract itself prohibits the assignment of any of its rights. Note that the parties to the contract create this prohibition. 2. When a statute prohibits the assignment of one or more rights under the contract. § Examples of the second exception include statutes that prohibit the assignment by workers of their wages and statutes that prohibit the assignment of rights under a government contract. 3. Finally, the assignment of a right under a contract is not permitted if it materially changes the obligor's duty, risk, or return. § An example of the third exception is the attempted assignment of a right to fire insurance by a fire-proof business to a fire-prone business.