An assignment of contract is the transfer by one party to a contract (the assignor) of its rights under that contract to someone else (the assignee). After an assignment, the assignee can collect what the other party, often called the obligor or debtor, owes, such as a debt or a stream of payments. The original contract stays in place, and the assignor usually remains responsible for its own obligations; in most legal systems the duty to perform or pay cannot be passed on by assignment alone.
Assignment is common in finance. Banks assign loans, businesses sell invoices to finance companies, and the proceeds of trade instruments are often assigned to lenders. It is frequently confused with novation, which replaces a party entirely and needs everyone's consent, and with subcontracting or delegation, where a third party performs the work without taking over the contract.
Assignment of contract in plain terms
Suppose a friend owes you $100 next month and you need cash now. You agree with your cousin that she pays you $95 today and collects the full $100 from your friend later. You have handed her your right to be paid. Your friend still owes the same amount; he simply pays a different person.
What you cannot do on your own is hand over your duties. If you had promised to paint your friend's fence, you could not make your cousin legally responsible for the painting without your friend's agreement. That is the basic line between assigning rights and transferring a whole contract.
How assignment works
Rules differ between countries, but common-law systems share several features:
- Rights, not burdens. The assignor can transfer the benefit of the contract, while its obligations stay with it unless the other party agrees to a novation.
- Notice to the obligor. Until the debtor learns of the assignment, it can keep paying the assignor and be discharged. In England and Wales, section 136 of the Law of Property Act 1925 requires a legal assignment of a debt to be absolute, in writing and notified in writing to the debtor; other assignments can take effect in equity.
- Subject to equities. The assignee takes the right as it stands, so the debtor can usually raise against the assignee the defences and set-offs it had against the assignor.
- Personal contracts. Contracts that depend on a party's personal skill or identity generally cannot be assigned without consent.
In the United States, the Restatement (Second) of Contracts summarises similar general principles, and Article 9 of the Uniform Commercial Code governs the sale and assignment of receivables. The idea that every payment is a contract means these rules reach into ordinary payment relationships too.
Anti-assignment clauses
Many commercial contracts forbid assignment without the other party's consent, and English courts generally uphold such clauses. To help smaller firms raise money against their invoices, some jurisdictions override them for receivables. In the United States, UCC section 9-406 makes most terms that prohibit the assignment of accounts ineffective. In the United Kingdom, the Business Contract Terms (Assignment of Receivables) Regulations 2018 render such terms ineffective for many receivables owed under business contracts, subject to listed exceptions.
Uses in finance and payments
- Lending. Loans are sold by assigning the lender's right to repayment, which also underpins securitization.
- Receivables finance. Businesses assign or sell unpaid invoices to raise cash in factoring and other forms of trade finance, and merchant cash advances are typically structured as purchases of future card receipts.
- Security. A borrower may assign rights, such as insurance proceeds or contract payments, to a lender as collateral for collateralized loans.
- Trade instruments. Under the ICC's UCP 600, a beneficiary may assign the proceeds of a letter of credit even when the credit itself is not transferable. A bill of exchange, as a negotiable instrument, moves by endorsement under separate rules.
- Payment routing. In the proposed tradable remittance contract model, handing a customer's transfer to another provider could combine an assignment of the right to be paid with a subcontract for the payout, but the sending firm would normally stay liable to its customer under the original remittance contract and to its payout partner under their agreement.
Risks for assignees
An assignee bears the credit risk of the obligor and is exposed to any defence the obligor had against the assignor. It also faces the risk that the same right has been assigned twice, which is why many systems rank competing assignees by order of notice or registration, and the general counterparty risk of dealing with an assignor that may be in difficulty. Careful due diligence on the underlying contract, know your business (KYB) checks on the assignor, prompt notice to the obligor and registration where available all reduce these risks. Where the incoming party must take on obligations as well, novation is usually the right tool, and where it only needs a right to enforce a promise made for its benefit, the contract can name it as a third-party beneficiary. Because the result always turns on the wording of the original contract and the governing law, firms normally take legal advice before relying on an assignment.