by Hein Kötz
1. Historical development and economic importance
In an economy based on money and credit, rights arising from contracts must be freely transferable. However, even though the transferability of debts and other claims is generally recognized in modern legal systems, this was achieved only at the end of a long historical development. The original principle was that a contract right was something so highly personal as to be inseparable from the actual relationship between creditor and debtor. The law treated assignments with suspicion for fear that undesirable persons such as lawyers or speculators might make it a business to buy up contested rights cheaply in order to bring them to court, and there was also the concern that assignments might enable individuals to give away their last means of support. It was also held for a long time that an assignment could take effect erga omnes only when the debtor had expressly agreed to it or had been notified of the assignment by way of a formal declaration made either by the assignor or assignee.
Obviously, a modern law of assignment must take note of the fact that just as an owner can transfer or convey his chattels, so he must be able to transfer or assign intangible rights with the effect of making the transferee or assignee creditor in his place. Nor should it make a difference whether the assignor wants to sell the right for a price or to assign it to his creditor ‘by way of payment’ or to his bank as a means to provide security for a loan. There must also be a possibility to assign, by way of a single transaction, whole packages of hundreds of claims either to a bank as security or pursuant to a factoring agreement (factoring). Such bulk assignments must be valid in principle even though it may not be clear at the time of assignment whether and when the assigned claims will come into existence or become enforceable or who the debtor is. To some extent, such arrangements may run foul of mandatory assignment rules dating back to earlier historical periods. Where such rules still exist (as in the civil codes of France, Spain, Italy and Portugal) special legislation has been passed creating special statutory schemes for assignments to banks, factors or other assignees who make it a business, by way of what is called ‘securitization’, to create asset-backed securities and place them on the capital market. Adapting rules of assignment law to modern business needs is also a purpose pursued by the UNIDROIT Convention on International Factoring (1988) and the UN Convention on the Assignment of Receivables (2001). The PECL (Chapter 11: Assignment of Claims) and the UNIDROIT PICC (Chapter 9, Section 1: Assignment of Rights) also seek to modernize the general rules of the law of assignment. In some cases what the parties try to achieve is not simply an assignment, ie the transfer of a right to claim something from someone else, but the transfer of the contract as a whole so that one contracting party is replaced by someone else (transfer of contract).
2. Requirements of an effective assignment
In order for a right to be assigned the old and the new creditor must agree on the transfer. Some legal systems distinguish between the agreement whereby the assignment is effected and the underlying agreement which explains the reason why the parties effected it, this reason commonly being sale, gift, provision of security for an existing debt or an agreement under which the assignee undertakes to ask the debtor for payment and refund the proceeds to the assignor. While this distinction rarely leads to practical consequences, it does provide a persuasive reason why the rules relating to assignment should be placed not in the rules on sale, as the French Civil Code does, but in the general part of the law of obligations, as is done in most other European codes. In the Netherlands an assignment is regarded as a property transaction like the transfer of chattels, so the Dutch Civil Code deals with them both under the heading of ‘Transfer of Property’ (see Arts 3:83 ff).
Like any other contractual agreement, an agreement providing for the assignment of a right can be invalid by reason of its illegality or immorality or where it contravenes other mandatory rules. In particular, it is generally accepted that the assignment of a right is ineffective if there is a legal rule under which the right is ‘non-assignable’. Thus claims for wages, maintenance, support and social security benefits are non-assignable to the extent to which an assignment would, if valid, deprive the assignor of his ability to satisfy basic needs. A claim is also non-assignable if the debtor’s expectation that he be liable only to his original creditor deserves protection (Art 11:302 PECL; Art III-5:109 DCFR). On the other hand, where the claim is divisible it may be assigned in part (Art 11:103 PECL; Art III-5:107 DCFR). Nor are most legal systems opposed to the validity of the assignment of future claims. Consequently, a seller may assign his claim for the purchase price even though he has not yet concluded a contract with the buyer provided, however, that the claim for the price does come into existence at some later point and that it can be identified at that point as the claim to which the assignment relates (see Art 11:102 (2) PECL; Art III-5:106 (1) DCFR; Art 5 UNIDROIT Convention on International Factoring; Art 10 UN Convention on the Assignment of Receivables in International Trade).
The basic principle is that once a claim has been assigned it no longer forms part of the assignor’s estate so that it can neither be attached by his creditors nor claimed as part of the distributable mass by the trustee in the assignor’s bankruptcy. The assignment is described in this case as being effective not merely inter partes, but erga omnes. However, there is no agreement as to whether this applies also in cases in which the debtor has not been notified of the assignment or where he and the assignor have agreed that the claim should be incapable of transfer (‘no-assignment clause’). Clearly, if a notification of the debtor were required and no-assignment clauses were always held valid this would curtail the circulation of money rights, inhibit the readiness of credit institutions and factoring firms to accept assignments, and hobble the economically desirable provision of credit. Most of these objections against the free assignability of claims have therefore faded away in the face of the overwhelming practical needs of commercial practice. In particular, it is generally agreed that an assignment can be effective erga omnes even though the debtor knows nothing about it. After all, he will be released from liability if he pays the original creditor before learning of the assignment. As to no-assignment clauses, some legal systems allow the debtor to set them up against the assignee while other systems do so only where the assignee knew or ought to have known of the clause. In German law no-assignment clauses are ineffective only if both the assignor and the assignee are merchants who have agreed on the assignment in the course of their business (§ 399 German Civil Code, § 354 a German Commercial Code). Article 11:301 PECL adopts a compromise solution under which the debtor may not rely on a no-assignment clause if the assignee neither knew nor ought to have known of the clause or if the assignment is made under a contract for the assignment of future rights to payment of money. Similar rules may be found in Art 6(1) UNIDROIT Convention on International Factoring; Art 11 UN Convention on the Assignment of Receivables in International Trade; Art III-5:108 DCFR.
3. Effects of assignment
Under an agreement for the assignment of a claim the assignee may require the assignor to deliver to him all documents evidencing the debt assigned and provide the information needed for its collection. Furthermore, in the absence of indications to the contrary, the transfer carries with it any existing security rights such as pledge interests in movables, mortgages on immovables, and claims against sureties and guarantors. Where an agreement for the assignment of the claim has been made there is always a risk that the debt assigned does not exist or cannot, by reason of the debtor’s insolvency, be collected. It is for the parties to make any arrangements allocating this risk either to the assignor or the assignee, eg by a provision under which the assignor guarantees the existence and/or the collectability of the debt assigned. If no such arrangements have been made, all legal systems provide default rules to fill the gap (see Art 11:204 PECL; Art III-5:112(2) DCFR).
The fundamental principle is that an assignment should not prejudice the debtor. Accordingly, the debtor may set up against the assignee all defences to the assigned claim he could have asserted against the assignor regardless of whether the grounds of defence arose before or after the notice of assignment. Thus if a seller assigns his right to receive payment, the buyer can defend on the ground that the goods delivered to him under the sales agreement turned out to be defective or were not delivered at all. This applies even where the goods were delivered or found to be defective only after the buyer had received notice of the assignment. As to set-off, any debt which the debtor could have set off in a suit by the assignor may be asserted against the assignee provided that the debt existed at the time when a notice of assignment reached the debtor even though it may have matured and become fully enforceable only after the debtor’s receipt of notice of assignment (see Art 11:307 PECL; Art III-5:116 DCFR). In addition, there is a rule protecting a debtor in the event that a new creditor has been thrust upon him without his knowledge of the assignment. Under this rule, a debtor who knows nothing of the assignment obtains a good discharge by giving performance to the assignor, and this applies also where the debtor obtained a release or additional time to pay or some other favour from the assignor in the supposition that he was still the creditor (see Art 11:304 and 308 PECL; Art III-5:118 DCFR).
Courts often have to deal with disputes over priorities, typically when a creditor purports to transfer a debt first to A and then to B, or where a debt, before or after its assignment, has been attached by one of the assignor’s creditors. Under the rule prior tempore potior iure the first to require the right obtains priority over anyone who acquires or attaches it later. Thus, if the debtor paid B in ignorance of an earlier assignment to A, his liability is extinguished, and A can claim the proceeds from B on the basis of his priority.
In some legal systems the principle of priority is applied with modifications or not applied at all in certain cases. The majority rule is that where there are successive assignments of the same claim, the assignee under the later assignment has priority over the earlier assignee if the second assignment was notified first to the debtor, provided that at the time of the later assignment the assignee neither knew nor ought to have known of the earlier assignment (Art 11:401 PECL; Art III-5:120 DCFR). Some legal systems have not accepted the results produced by the priority principle in some cases. In particular, German courts have made a significant inroad into the priority principle in cases where a seller of goods assigns the future right to the price both to a bank or a factor and to the party who supplied him with the goods under a title reservation clause. Here the supplier wins even if the assignment to the bank was earlier in time. There is a lot to be said for the view that the best solution would be the introduction of a non-mandatory system of registration under which an assignment, if entered in a publicly accessible register, would take priority over any earlier assignments of the same claim.
5. Recent developments in European private law
Both in Europe and in the world the development of assignment law is characterized by the fact that claims, in particular rights to the payment of money, are increasingly regarded as tradable assets and that, accordingly, all rules ought to be abolished or restricted that would impede or make impracticable assignments of claims, whether individually or in bulk, and regardless of whether the claim is sold outright, as in the typical factoring transaction, or assigned by way of security for a loan or other obligation. Meanwhile, it is generally accepted that the mere agreement between the assignor and the assignee is sufficient to transfer a debt and that future debts and parts of debts are freely assignable. Besides, the idea is gaining ground that no-assignment clauses, while valid inter partes, should not be an obstacle to the validity of assignments provided that the assignee neither knew nor ought to have known of the no-assignment clause. There is some doubt as to how the priority principle ought to be modified in the event of successive assignments. A persuasive argument has been made to solve these problems by the introduction of a system allowing the registration of assignments in a publicly accessible register.
Klaus Luig, Zur Geschichte der Zessionslehre (1966); Reinhard Zimmermann, The Law of Obligations (1990) 58 ff; Hein Kötz, ‘Rights of Third Parties. Third Party Beneficiaries and Assignment’ in IECL VII/2 (1990) ch 13, paras 58 ff; WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht, vol I: Inleiding en zakenrecht (1993) 265 ff; Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997), 263 ff; Tony Weir (tr), Konrad Zweigert and Hein Kötz, Introduction to Comparative Law (3rd edn, 1998) 442 ff; Hugh Beale, Arthur S Hartkamp, Hein Kötz and Denis Tallon (eds), Cases, Materials and Text on Contract Law (2002) 935 ff; Filippo Ranieri, Europäisches Obligationenrecht (2nd edn, 2003) 433 ff; Horst Eidenmüller, ‘Die Dogmatik der Zession vor dem Hintergrund der internationalen Entwicklung’ (2004) 204 AcP 457; Claudia Rudolf, Einheitsrecht für internationale Forderungsabtretungen (2006); Arthur F Salomons, ‘Deformalisation of Assignment Law and the Position of the Debtor in European Property Law’ (2007) 639 ERPL 15.