The possibility that a supplier may assign a contract to some third party is widely recognized as a potential risk to a municipal customer.
However, the nature of that risk is widely misunderstood. Many municipal contracts include language requiring the consent of the municipality to the assignment of the contract, but it is clear from the wording employed that the major concern is that the supplier will transfer the supply obligation to some new person.
This concern has little legal basis. The burden may be assumed by a non-party under a process called “novation,” which is no more then the non-party becoming a party to some new contract with the obligation to whom performance is owed.
Novation may take the form of the addition of a new obligor (the former obligor remaining liable) or the complete substitution of a new obligor for the old obligor, with the old obligor being released from liability.
Where a new obligor is added, it is common for the former obligor’s liability to be reduced to a secondary status, so that the old obligor will be called upon to perform only if the new obligor defaults.
It is possible, however, for the new party to be added so that he or she will be secondarily liable. There are obvious similarities between novation by way of the addition of a new party and a guarantee, and, in general, any person who is secondarily liable under a contract will be entitled to many of the same rights.
For example, subrogation to the rights of the oblige upon (performance) as are applicable to a true guarantor. Novation may not be made except with the consent of the oblige.
In contrast, the benefit of a contract may normally be assigned by a party. An assignment of a contract is an assignment of rights under a contract from one person to another. In general, the rights or benefits that a party enjoys under a contract may be assigned to another person, but not the obligations under the contract.
Assignment may take place through a statutory assignment or an equitable assignment and in some instances an assignment may take place by operation of law (e.g., upon death or bankruptcy). Assignment differs from novation in that an assignment relates only to the rights and benefits of a contract.
Unlike novation, assignment does not require the consent of the promisor, unless the parties have expressly agreed to this effect.
In the case of an equitable assignment of a legal right, the assignor must join as a party in any action against the obligor under the contract. The assignee has no independent right of claim against the obligor.
In the case of a statutory assignment, the assignee may sue in his own name and the assignor need not be joined as a party.
After notice of the assignment has been given, the assignor loses his right to enforce the contract to create a valid statutory assignment and the assignment must be absolute (meaning unconditional and complete) and in writing. The obligor must have been given notice of the assignment.
Notice may be given either by the assignor or the assignee. Where an alleged assignor disputes the existence of an assignment, the obligor may obtain relief by way of interpleader. Even where no actual dispute is made, the obligor will often ask that the assignor confirm the assignment.
An assignee can acquire no greater rights then were held by the assignor at the time of the assignment. In addition, if the obligor acquires a right against the assignee (for instance, a right of set-off) before notice of the assignment is given to the obligor, it will take priority over the right of the assignee.
Although assignments can be made informally in equity, it is now more common for assignments to be made in accordance with the procedures.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
Recent Comments
comments for this post are closed