Transfer of Obligation
by Marcus Baum
1. Subject matter and purpose
By way of a transfer of obligation the new debtor takes over an obligation of the original debtor with the effect that the original debtor is discharged from his obligation, ie that he is freed from it. The characteristic feature of a transfer of obligation is therefore that there is a change in the position of the debtor. Because a transfer of obligation results in the release of the original debtor, the agreement by the creditor is necessary. The creditor must not without his consent be referred to a new debtor who may be less capable or less willing to perform.
A significant difficulty in the attempt clearly to distinguish transfer of obligation from other related legal devices is that there is no common doctrinal understanding of transfer of obligation in the European jurisdictions. Some jurisdictions consider transfer of obligation as a distinctive legal institution, whereby, although there is a change in the position of the debtor, the debt itself remains the same. Other jurisdictions consider transfer of obligation as a case of novation. While parties to a novation are often the parties of the original agreement, it is also a case of novation when the old debtor is released from his obligation as a result of a new debtor taking over a new obligation vis-à-vis the creditor. On the basis of this understanding the original obligation is not transferred but replaced by a new obligation or a new contract.
Despite the varied doctrinal concepts of transfer of obligation, it can still be distinguished from a number of related legal concepts, which, again however, are not generally recognized in all European jurisdictions. One such concept is the additional assumption of an obligation which is not, in a strict sense, a case of a transfer of obligation. In such a case a new debtor joins the original debtor in an already existing obligation and is also consequently liable for the same obligation. Both debtors are jointly and severally liable, that is, their obligations are solidary, with the consequence that each of them is bound to render one and the same performance. The creditor may require performance from either one of them, however only until full performance has been received. For this reason the relationship between the creditor and the original debtor does not, in principle, change if a new debtor joins; rather, the new debtor takes his place alongside the original debtor and additionally secures, from the viewpoint of the creditor, the performance of the debt.
Apart from solidary obligations, further forms of plurality of debtors are known to European jurisdictions. So if the obligations are separate, each debtor is bound to render part of the performance. If the obligations are communal, the creditor has several debtors, each of whom is not individually responsible for the whole debt but who are bound to render performance together.
Transfer of obligation is to some extent the counterpart of an assignment of a claim, whereby a new creditor replaces the original creditor with the obligation however remaining the same. Three parties are also involved in case of a stipulation in favour of a third party; however, there is only one debtor.
Further, some jurisdictions have adopted the separate concept of a promise to perform the obligation of a debtor. Such promise refers only to the performance of the obligation rather than to the debt itself. Therefore, the promise to perform the obligation of the debtor does not change the legal position of the original debtor towards the creditor. The promise to perform another’s obligation can consequently be agreed upon between the original debtor and the party making the promise, that is, without the consent of the creditor. It is obvious that there is a very close relationship indeed between transfer of obligation and the promise to perform a debtor’s obligation. In some jurisdictions, therefore, an attempted transfer of obligation, as long as the creditor does not give his consent, is considered to be a promise to perform the obligation of the original debtor.
Transfer of obligation is, further, to be distinguished from a transfer of contract. While transfer of obligation deals with the transfer of one or several specific obligations under a contract, which otherwise remains in existence and continues between the original debtor and the creditor, in case of a transfer of contract all rights and obligations are transferred and the original contractual party is completely removed from the contract. While a transfer of contract, as is obvious from the wording, only refers to contractual obligations, the transfer of obligation can also relate to non-contractual obligations, eg obligations arising from delict/tort.
2. Historical foundations and tendencies of legal development in the European jurisdictions
Today, the possibility of a transfer of obligation with the effect of a discharge of the original debtor is generally recognized. Historically, this has however not been a straightforward path. For a long time the understanding of classical Roman law that the obligation is a strictly personal bond between a specific debtor and a specific creditor stood in the way of the acceptance of transfer of obligation as a separate legal concept. Such understanding prohibits the assignment of an existing contractual claim as well as the transfer of an existing debt to a new debtor with, at the same time, the claim or the debt itself remaining the same. That does not mean that transfer of obligation was unknown to Roman law; however, it was accomplished by way of novation, and not by exchanging the debtor of an otherwise unaltered obligation. As a consequence of the novation, the old debt was terminated and the securities granted for it were released. To what extent the new debtor could invoke the defences the original debtor had against his debt was less clear. This basic understanding of transfer of obligation as a case of novation was also shared by the medieval lawyers. While a direct influence of Roman law cannot be traced, for a long time the historical common law also found it difficult to come to terms with the concept of transfer of obligation. It was only step-by-step that transfer of obligation established itself as a case of novation.
Such historical foundations continue to have an impact today. While there are only minor differences in the practical legal consequences of a transfer of obligation in the different jurisdictions, there is still a fundamentally different doctrinal understanding of transfer of obligation and there are differences in the technical pre-requisites for effecting it. In several civilian codifications, one can find express rules on transfer of obligation (eg Austria, Germany, Portugal, the Netherlands, France, Spain and Italy). While, for example, in Austria and Germany transfer of obligation is considered as a separate legal concept and distinguished from novation, many other jurisdictions consider transfer of obligation to be a case of novation. That is expressly the case in the French, Italian and Spanish codifications. French law, for instance, provides that novation may operate in the way that with the consent of the creditor a new debtor is substituted for the old debtor. In English and Irish law one also finds a form of novation whereby the original debtor is substituted by a new one. Because English law considers transfer of obligation as a case of novation, it requires, as for any contractual obligation, consideration for it to become effective.
In all jurisdictions transfer of obligation can be effected in three different ways, and in all cases the consent of the creditor is a pre-requisite. It is possible to effect the transfer of obligation by way of a tripartite agreement between the original debtor, the new debtor and the creditor. Further, it can be effected by way of an agreement between the original debtor and the new debtor to which the creditor consents. Finally, it can be effected by way of an agreement between the new debtor and the creditor. In the latter case only some jurisdictions demand the consent of the original debtor in order for the transfer of obligation to become effective. While such consent of the original debtor is not necessary under German, Austrian, French and Greek law, it is required under Danish, English and Irish law. However, this difference lacks major practical consequences. Even if the original debtor has to consent to the transfer of obligation, the creditor is not, of course, either before or after the performance by the new debtor, prevented from waiving, renouncing or not invoking his rights vis-à-vis the old debtor. The transfer of obligation then takes place in two separate legal acts rather than in one act.
The consent to a transfer of obligation need not be expressly declared, but it must be unequivocal. The consent may be given in advance. There are no specific formal requirements for a transfer of obligation in any of the European jurisdictions. However, if for a certain type of contract general formal requirements must be observed, such general formal requirements must also be met for a transfer of obligation under such a contract.
To what extent a transfer of obligation allows the new debtor to invoke defences and how it affects the securities granted for such debt are questions of considerable practical importance. As for the defences, many civil law jurisdictions follow—with slight nuances—the principle that the new debtor may invoke against the creditor all defences which were available to the original debtor. Thus, pursuant to German law, the new debtor is allowed to raise defences against the creditor which at the time of the transfer of obligation had arisen (sich ergeben) from the legal relationship between the creditor and the original debtor. German legal practice takes a rather generous view on the question as to whether a defence has already ‘arisen’. The new debtor can, for example, raise the defence that the debt did not even come into existence in the first place (be it because of lack of agreement, or violation of the boni mores), or that at the time of the transfer the obligation had partly or fully ceased to exist or had been time-barred. As to the right to alter or terminate the obligation, pursuant to German law, the new debtor only has those rights available which exclusively concern the actually transferred obligation. All other rights, such as rescission or termination, which also refer to the counter-performance, remain with the original debtor. In Austria the new debtor may invoke all rights which have their source (entspringen) in the original relationship. However, Austrian law generally views a transfer of obligation as a waiver of all defences which were known to the new debtor at the time of the transfer unless he expressly reserves them. In Italy the new debtor may invoke all defences the original debtor could have invoked unless such defences are personal ones or are based on facts which occurred after the transfer of obligation took place. The new debtor also does not have the rights of set-off that the original debtor had, unless that is expressly agreed upon. Although English law considers transfer of obligation as a case of novation, a new debtor may, unless the parties agree otherwise, invoke the defences which were available to the original debtor.
Both the civil and the common law jurisdictions agree that in principle the new debtor may invoke against the creditor all defences which arise from his own legal relationship with the creditor. Therefore, he can assert that he has been granted an extension of the term for payment, or he can use a claim of his own against the creditor to effect a set-off. Further, it is generally agreed upon that the new debtor may not invoke defences against the creditor which stem from the legal relationship between the original debtor and the new debtor.
The majority of jurisdictions agree that, with a transfer of obligation, securities granted for the original debt expire unless the person providing the security consents that the security continues. While this can expressly be derived from the codes in Austria, Germany, Italy and France, in the common law jurisdictions this follows from the understanding of transfer of obligation as a case of novation.
3. Uniform law
As an important legal concept, transfer of obligation is dealt with in several unification projects, specifically the UNIDROIT PICC (Art 9.2.1 ff), the DCFR (Art III.-5:201 ff), the PECL (Art 12:101 and 102) and the Avant-projet (Art 125 ff). The Acquis Principles, however, do not contain provisions on the transfer of obligation. The UNIDROIT PICC, the DCFR and the PECL understand transfer of obligation as the contractual succession of a new debtor in the place of the original debtor with the debt itself remaining the same. On this basis transfer of obligation is not a case of novation. The Avant-projet recognizes transfer of obligation both as a case of succession into an existing debt and a case of novation.
The PECL and DCFR rules on transfer of obligation are identical. While the PECL deal with transfer of obligation (using the terminology of substitution of new debtor) in a separate section, the DCFR deals with transfer of obligation (designated as complete substitution of new debtor) as part of a section on various forms of substitution or addition of debtors. Apart from the transfer of obligation as dealt with in the PECL, the DCFR in this section also deals with what it calls ‘incomplete substitution’ as debtor. Such incomplete substitution has the consequence that the original debtor continues to be liable to the creditor as a subsidiary debtor in case the new debtor does not perform properly. In this section the DCFR further deals with the addition of a new debtor, with the effect that the original debtor and the new debtor are under a regime of solidary liability. If it is clear that there is a new debtor, but not clear what type of substitution or addition was intended, the DCFR assumes that the parties intended an addition. The comments to the PECL merely state that no particular problems would be presented by the addition of a new debtor and therefore no specific rules are required.
A transfer of obligation under both the PECL and DCFR does not require the observance of any specific form; however, it does require the consent of both the creditor and the original debtor. As a consequence there are the following possible ways by which a transfer of obligation can directly be achieved: one is an agreement between the original and the new debtor with the consent of the creditor; the other is a tripartite agreement. An agreement between the new debtor and the creditor without the consent of the original debtor does not, however, suffice for a transfer of obligation. Yet both the PECL and the DCFR seem to allow the creditor, pursuant to general rules, to waive his rights against the original debtor.
The consent of the creditor is not so easily substituted. Consequently, the uniform law projects place a greater focus on it. That consent need not be given expressly, but it must be definite and unequivocal. It can also be given in advance. However, if the creditor has given his consent in advance, the transfer of obligation will only take effect if and when the creditor has been informed about it by the new debtor. If the creditor does not consent, the legal effects of the intended transfer of obligation depend on what the original debtor and the third party intended the consequences to be in such case. It can either have no effect, it can mean a contractual undertaking by the third party to perform the obligation of the original debtor, or it can result in the addition of a new debtor. The DCFR rule according to which in case of doubt it will be presumed that the parties have intended an addition of the new debtor will probably not apply.
The UNIDROIT PICC rules are very similar in substance to those in the PECL and the DCFR. They expressly name two possibilities for effecting a transfer of obligation: on the one hand the agreement between the original debtor and the new debtor with the consent of the creditor, and on the other hand the agreement between the creditor and the new debtor. In the latter case, the consent of the original debtor does not appear to be necessary. That is different from the PECL and the DCFR. Of course, also with the UNIDROIT PICC a transfer of obligation must be possible by way of a tripartite agreement. For the transfer of obligation the UNIDROIT PICC require, apart from the consent of the creditor, that the creditor ‘discharges’ the original debtor. If the original debtor is not discharged, the original debtor and the new debtor are to be jointly and severally liable. The consequence therefore is the additional assumption of an obligation, ie the addition of a new debtor. The creditor, pursuant to the UNIDROIT PICC, can also retain the original debtor—as a subsidiary debtor—in case the new debtor does not perform properly. As a consequence the UNIDROIT PICC deal with the same forms of substitution or addition of a new debtor as the DCFR.
Under the Avant-projet a transfer of obligation can be effected, as mentioned earlier, either by way of a contractual succession into an already existing debt or by way of novation. Novation is the exception. The Avant-projet expressly refers to all three different ways of effecting a transfer of obligation. The Avant-projet further deals with both the transfer of obligation and the addition of a new debtor. For the former, the Avant-projet, as the UNIDROIT PICC, requires that the creditor discharges the debtor.
All uniform law projects agree as to the effects of a transfer of obligation on defences. Pursuant to all of them, the new debtor may invoke against the creditor all defences which the original debtor could have invoked against the creditor. With the Avant-projet, however, that is only the case when the transfer is effected by way of a contractual succession into an existing debt and not by way of novation.
The comments to the PECL and the DCFR refer to the defence of prescription as an example. The crucial moment for the question as to whether a new debtor may invoke a defence is whether the original debtor could have raised it at the time of the transfer of obligation. According to the comments to the PECL it is sufficient that the defence is based on events which have taken place by this time. Defences which became available to the original debtor only after the transfer of obligation had been effected cannot be raised by the new debtor. According to the comments on the UNIDROIT PICC the new debtor may also withhold or refuse payment if the original debtor would have been able to do so on the basis of a defence such as the defective performance of the creditor’s own obligations. According to the DCFR, the comments to the PECL and the UNIDROIT PICC, the new debtor may not exercise against the creditor any right of set-off available to the original debtor against the creditor because that would go beyond raising a defence. Further restrictions concerning, for instance, the personal nature of defences do not seem to exist. Even if not always expressly stated, it must be possible for the new debtor to invoke all defences which arise from his own legal relationship with the creditor.
The PECL and DCFR also state that the new debtor cannot invoke against the creditor any rights or defences arising from the relationship between himself and the original debtor. According to the comments to the PECL and the DCFR, that shall even be the case if the transfer of obligation between the original and the new debtor is void and, further, even if that is known to the creditor. According to the comments to the DCFR that, however, can be different if the creditor is responsible for the ineffectiveness of the transfer of the obligation. While such rules cannot be found in the UNIDROIT PICC, the principle appears to be the same. The Avant-projet confirms this principle, while allowing for exceptions.
In principle all uniform law models agree on the fate of securities granted for the obligation that is to be transferred. The PECL and DCFR state that all securities granted by any person other than the new debtor, that is, either by the original debtor or a third party, are released unless the third party or the original debtor agree that they should continue to be available to the creditor. There is, however, no release, if the security is over an asset which is transferred to the new debtor as part of the transaction between the original and the new debtor. In case of an ‘incomplete’ substitution of a new debtor, the DCFR provides that to the extent that the original debtor is not discharged, securities granted for that debtor’s obligations are unaffected. For the effect on securities in case of the addition of a new debtor, there are no explicit rules in the DCFR, but it appears that they remain in place.
According to the UNIDROIT PICC and the Avant-projet the securities granted by the original debtor or a third party are only released if the original debtor is discharged, ie in the case of a transfer of obligation, but again it is possible to agree otherwise. According to the UNIDROIT PICC, securities are not released if they are over an asset which is transferred as part of the transaction between the original debtor and the new debtor. In case of an additional assumption of debt, the securities remain in place both according to the UNIDROIT PICC and the Avant-projet. That is seen as adequate, as the position of the person granting the security does not deteriorate with the additional debtor.
On the whole, the uniform law models agree on all important questions as to the transfer of obligation.
4. Provisions in the CISG
The CISG (sale of goods, international (uniform law)) does not contain provisions on the transfer of obligation. The validity and legal consequences of a transfer of obligation therefore have to be derived from the national law applicable under the conflict of law rules.
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