Transfer of Contract
by Marcus Baum
1. Subject matter and purpose
By way of a transfer of contract one side of a contractual relationship is transferred as a whole. The consequence is that a new party takes on all rights and obligations of one of the original parties to the contract. Technically, a transfer of contract can be effected either by way of a number of individual successions, ie by the assignment of all rights and the assumption of all obligations under the contractual agreement, or uno actu, ie by a contractual form of universal succession. The legal act of transferring a contract therefore allows for the transfer of the entirety of rights and obligations constituting the contractual relationship in question by means of a single legal transaction (juridical act). The concept of transfer of contract is very important in practice, especially in the case of long-term contracts such as leases, loans and employment agreements as well as in acquisitions of enterprises effected by way of an asset deal. In an asset deal an enterprise is not transferred by selling the shares held in it but by the transfer of the individual assets—including the contracts—which in their entirety make up the enterprise.
Transfer of contract is doctrinally understood either as a separate legal institution constituting a contractual form of universal succession, or as a case of novation. According to the former view an existing contract is transferred but apart from the change in the person of one of the parties the contract remains the same. By contrast, according to the latter view the original contract is replaced by a new contract. Irrespective of its doctrinal classification, the transfer of contract requires the participation of all three parties involved, ie the original parties to the contract and the new party entering into the contract and replacing one of the original parties.
Transfer of contract needs to be distinguished from the accession to an existing contract. Here, the new party joining a contract does not replace one of the original parties. Rather, the new party enters into the contractual relationship in addition to one of the original parties. As a consequence, the new party is liable for the obligations under the contract of the original party on whose side he has joined. The specific form of such liability depends on the actual agreement. Thus, the new party and the original party can be jointly and severally liable for the obligations arising from the contractual relationship with the consequence that both are bound to render one and the same performance (performance and its modalities) and the creditor may require it from either of them until full performance has been received (solidary obligations). It is also possible that the new party and the original party are only required to render part of the performance. Their obligations are then separate or divided. But it may also be the case that the new party and the original party are required to render performance jointly, ie that their obligations are communal or joint, and that the creditor can only demand performance collectively from both of them and not from each one of them alone.
Like the transfer of a contract, accession to a contract requires the participation of all three parties involved because as a result of another party joining the contract the position of the party on the other side of the contractual relationship is not only improved: he also has to face another creditor.
Transfer of contract can also be distinguished from the assumption of debt (transfer of obligation). In case of the latter it is only an obligation arising from a legal relationship (not necessarily a contractual one) which is taken over by a new debtor, while the original debtor is released from that obligation. Consequently, and in contrast to the transfer of a contract, if the transfer of an obligation relates to a contractual debt, the original debtor continues to be a party to the contract; it is just an isolated obligation that is transferred. Therefore all rights to affect, ie to alter or terminate the contractual relationship, remain with him.
Transfer of contract also needs to be distinguished from what is referred to as a contractual undertaking by a third party to perform the obligation of another. Such an undertaking does not result in a change of the existing contractual relationship. It does not even change the position of the original debtor. Rather, the third party only undertakes towards the debtor to perform the obligation in question on behalf of the latter.
2. Tendencies of legal development
Today, transfer of contract is universally recognized as a legal concept. But it is a fairly recent concept, not least because it is completely at cross-purposes with the Roman law understanding of contract as a ‘juris vinculum inter personas’, in other words a strictly personal bond between the parties to the contract. According to this view a transfer of a contract would be impossible.
Nowadays, at least in more recent codifications such as the Italian, Portuguese and Dutch ones, one can even find explicit rules on transfer of contract. The majority of jurisdictions, irrespective of whether transfer of contract is codified as such or not, view it as a single legal act and not as the sum total of several assumptions of debts and assignments of claims. The development of German law provides a good example. The German Civil Code (Bürgerliches Gesetzbuch (BGB)) does not contain explicit rules on transfer of contract. That is due to the fact that the draftsmen of the code did not view contractual relationships as a legal entity but rather as the sum total of each party’s rights and obligations. Thus, it was thought that the rules on the assignment of claims and assumption of debts would be sufficient for a transfer of such rights and obligations. Today also under German law it is well understood that a transfer of contract can be effected by way of a single legal act which requires the participation of all parties. The concept of transfer of contract is in principle also known to the common law jurisdictions. English law considers the transfer of a contract as a case of novation requiring the consent of all parties involved. Scots law sees the transfer of a contract as a separate legal institution which also requires the consent of all parties.
Thus, all jurisdictions require the participation and consent of all parties involved. It is generally understood that this may be effected by way of a tripartite agreement or by means of an agreement between the party withdrawing from the contract and the new party with the consent of the party on the other side of the contractual relationship. That consent may also be given implicitly or in standard contract terms as long as the general validity requirements are fulfilled. It may also be given in advance. Transfer of contract does not require a specific form but the transfer agreement must satisfy the formal requirements of the contract that is being transferred.
In addition to the transfer of contract by way of an agreement between the parties involved, a contract may also be transferred by operation of law. Examples include the practically important cases of (1) where as part of the transfer of ownership of an enterprise the employment agreements automatically pass on to the acquirer of the enterprise, or (2) where real property is sold and the leases entered into by the seller automatically pass on to the buyer, or (3) where contracts are transferred as a result of corporate restructuring such as the merger or splitting off of corporations.
The majority of jurisdictions also agree on which rights and defences may be invoked between the new party and the other party to the contractual relationship. As a general rule, both of them may reciprocally invoke all defences (inter alia, defect of form, voidability on grounds of error, termination, performance) arising under the contract. Obviously, the new party and the other party to the contractual relationship may also invoke all defences arising under their legal relationship, eg an additional time for payment agreed upon between them. Although under English law a transfer of contract is considered to be a novation, the other party to the contractual relationship may nevertheless, in principle, invoke all defences against the new contract party which it could have invoked against the original contract party.
3. Uniform law: Possibilities of and requirements for a transfer of contract
Of the uniform law projects the PECL (Art 12:201) (Principles of European Contract Law (PECL)) and the DCFR (Arts III.-5:301 and III.-5:302) (Common Frame of Reference (CFR)) deal with the transfer of contracts in an almost identical way. The UNIDROIT PICC (Arts 9.3.1 ff) (UNIDROIT Principles of International Commercial Contracts (PICC)) and the Avant-projet (Arts 118 ff) (Code Européen des Contrats (Avant-Projet)) also each contain a set of rules. The Acquis Principles, however, do not deal with the transfer of contracts.
All uniform law projects understand the transfer of contracts as a single legal transaction rather than a mere combination of an assignment of claims and a transfer of obligations. PECL, DCFR and UNIDROIT PICC merely refer to the provisions on the assignment of claims and transfer of obligations for the legal consequences of a transfer of contract.
While none of the model rules deal explicitly with the legal classification of a transfer of contract, the PECL as well as the DCFR, for example, state in their commentaries that transfer of contract is to be distinguished from novation. While novation implies the extinction of the old contractual relationship and the constitution of a new one (often between the same parties) the essence of a transfer of contract, according to the PECL and the DCFR, is that the contract remains the same but is transferred from the party withdrawing from the contract to the new party. The Avant-projet recognizes the transfer of contract both as an individual legal institution and as a case of novation.
All model rules allow for the transfer of contracts by way of a tripartite agreement or by way of an agreement between the withdrawing party and the new party with the consent of the other party to the contractual relationship.
All model rules allow for consent to be given in advance. Where consent is given in advance, the transfer only becomes effective once the consenting party receives notice of the agreement between the withdrawing party and the new party.
If the other party does give his consent to the transfer of contract, according to the PECL and the DCFR the withdrawing party is released from the contractual relationship. All rights and obligations are then transferred to the new party.
A different regulation can be found in the UNIDROIT PICC. They distinguish between the consent to the transfer of contract and the discharge of the original party. Such discharge has to take place in addition to the giving of consent. If the other party to the contractual relationship refuses to grant such a discharge, the original party and the new party are to be jointly and severally liable for the obligations of the original party. The UNIDROIT PICC also explicitly provide that the other party may retain the original party as a kind of subsidiary debtor, in case the new party does not perform properly. In cases where discharge is not granted, it is not clear whether the original party remains a creditor or withdraws from the contractual relationship at least in this respect. The UNIDROIT PICC, therefore, cover both the actual transfer of contract, whereby one of the original contract parties is replaced by a new one, as well as the accession to a contract.
The Avant-projet offers yet another set of rules. In principle, the original party is released from the contract and its obligations once the transfer of contract becomes effective. However, the other party to the contractual relationship may, when giving his consent, declare that he does not want to discharge the original party. The original party then remains liable as a subsidiary debtor in case of non-performance by the new party.
4. Uniform Law: legal consequences of a transfer of contract
PECL, DCFR and UNIDROT PICC refer to the provisions on the assignment of claims for the legal consequences of a transfer of contract as far as the latter includes the transfer of rights, and to the provisions on the transfer of obligations as far as they contain a transfer of obligations. This reference is especially important for the questions (1) to what extent defences can be invoked, (2) to what extent the parties can give notice of set-off and (3) what effect a transfer of contract has on securities granted for the performance of obligations under the original contract.
In the case of transfer of an obligation, the new debtor can invoke all defences against the creditor which the original debtor could have invoked against him. In principle, in case of a transfer of contract it must be possible to invoke defences to an even larger extent than in the case of a ‘mere’ transfer of an obligation, because the whole contractual relationship is transferred and, therefore, the new party must also be able to invoke defences based on the fact that he is, at the same time, the creditor of the counter-performance. However, the new party cannot declare a set-off with claims which the withdrawing party had under legal relationships other than the one transferred. The other party to the contractual relationship may again invoke all defences against the new party which it could have invoked against the withdrawing party. He can also make use of any right of set-off which he could have used against the withdrawing party until he had received notice of the transfer of contract.
The provisions on the transfer of obligations also determine the fate of securities granted by the withdrawing party or a third party for the performance of the contractual obligation of the withdrawing party. Such securities, according to the PECL and the DCFR, expire unless the withdrawing party or the third party agrees that they should continue to exist. It has been seen above that the UNIDROIT PICC require the granting of both consent and discharge by the other party to the contractual relationship for the original party to be released from its obligations. Only when both consent and discharge are granted will the securities expire. According to the PECL, the DCFR and the UNIDROIT PICC securities do not, however, expire if they relate to assets which are transferred to the new party as part of the contract between the withdrawing party and the new party.
The Avant-projet does not refer to the provisions on assignment of claims and transfer of obligations. Rather, the Avant-projet explicitly states that the other party to the contractual relationship may invoke against the new party all defences arising from the contract but not defences arising from other relationships with the withdrawing party unless the other party has reserved this right when giving its consent to the transfer of contract. There are no explicit rules as far as the defences available to the new party, or his right to declare set-off, or the fate of securities are concerned. It seems, however, fair to assume that the principles of the other model rules apply analogously. The Avant-projet does, in turn, contain elaborate provisions on the question as to the extent to which the withdrawing party is liable to the new party for the validity and enforceability of the transferred claims against the other party to the contractual relationship.
The PECL, the DCFR and the UNIDROIT PICC therefore deal with the essential issues concerning a transfer of contract in a very similar way. This appears to be true also for the Avant-projet, even if it pursues a different approach, especially as its systematic exposition is concerned.
5. Provisions in the CISG
The CISG does not contain provisions on the transfer of contract. The validity and legal consequences of an intended transfer of contract therefore need to be derived from the national law applicable under the conflict of laws rules.
Helmut Pieper, Vertragsübernahme und Vertragsbeitritt (1963); Fritz Fabricius, ‘Vertragsübernahme und Vertragsbeitritt’ (1967) JZ 144; Heinrich Dörner, ‘Anfechtung und Vertragsübernahme’ (1986) NJW 2916; Knut Wolfgang Nörr, Robert Scheyhing and Wolfgang Pöggeler, Sukzessionen, Handbuch des Schuldrechts, vol 2 (1999) 180 ff; Carel Asser and Arthur S Hartkamp, Handleiding Tot de Beoefening van het Nederlands Burgerlijk Recht, Verbintenissenrecht (2000) Part 1, 11 ff; Joseph Chitty, Chitty On Contracts, General Principles (2008) 1367 ff; Francesca Mazza, ‘Assignment of Contracts’ in Stefan Vogenauer and Jan Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009) Art 9.3.1 ff; François Terré, Philippe Simler and Yves Lequette, Droit Civil, Les Obligations (2009) 1293 ff; Yvonne Flour, Jean-Luc Aubert and Eric Savaux, Droit Civil, Les Obligations, Le Rapport d'Obligation (2009); Hans-Joachim Holzapfel and Reinhard Pöllath, Unternehmenskauf in Recht und Praxis (2010) 514 f.