An agreement enforceable by law becomes a contract. A contract involves both rights and obligations because a contract is an agreement enforceable by law. An agreement involves promises from both sides, and thus, there is the creation of both rights and obligations. For instance, X promises to sell his car to Y, and Y promises to pay Rs. 5,00,000 for his car. This constitutes a valid contract between X and Y. Here, the right on the part of X is to get Rs. 5,00,000 as consideration for selling his car, and the obligation for X is to deliver the car to Y as consideration for Rs. 5,00,000 paid to X by Y for selling his car.
Similarly, the right on the part of Y is to get the car delivered as consideration for Rs. 5,00,000 paid, and the obligation for Y is to pay Rs. 5,00,000 as consideration for the vehicle. If either X or Y fails to discharge their responsibility, there will be a breach of contract. In this way, a contract leads to the creation of both rights and obligations for both parties.
Assignment of Contract
Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z. In this case if Y asks Z to directly pay Rs. 1,000 to X, and if X accepts the same, there will be an assignment of Y’s right to Z. But, if in a similar situation, instead of transferring his ownership, Y would have transferred any of his obligations, then it would amount to novation. Section 37 of the Indian Contract Act, 1872, enables the parties to dispense the performance by way of the contract’s Assignment. Apart from conforming with the Indian Contract Act, 1872, there are exceptional circumstances where the contract assignment must be duly stamped in conformity with the provisions of the Indian Stamp Act, 1899.
The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. There are three parties involved in contracts of Assignment, namely, the assignor, assignee, and obligor. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment.
But if a contract between two parties relies entirely on the’ promisor’s skill or expertise, then such a contract cannot be assigned under any circumstances. This is because the ‘promisee’ has entered into the contract based on the’ promisor’s skill or expertise. The case of Robinson v Davison is important case law in this regard. In this case, the defendant’s wife promised to play piano on a particular at a concert. She was unable to discharge her liability, that is, to play piano at the concert because of her illness. In this case, it was held that the contract was directly dependent on the good health and the personal skill of the defendant’s wife, and the illness of his wife discharged the contract. It was also stated that the defendant could not be made liable to pay compensation for the non-performance of the contract. As the contract was based on the ‘promisor’s skill in the above case law, the wife could not assign her right/obligation to any third party.
Case Study: Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan Case
Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan is a recent judgment delivered by the Supreme Court of India on November 25, 2019, concerning the Assignment of rights and Interests in a contract. In this judgment, the Supreme Court reaffirmed that a party to a contract could not assign its liabilities or obligations without the consent of the other party.
The facts of the case are: The appeals to the Supreme Court resulted from the Gujrat High Court’s decision that had allowed the appeals of the respondent against the trial court’s decision. The dispute, in this case, is related to a property owned by the appellants (Vendor). The appellant has had formulated an agreement to sell in favor of some of the respondents in 1986 regarding the above-mentioned property. The respondents, who were the original vendees, had paid a part of the consideration part. The Original Vendees, in 1987, assigned the former’s rights in favor of Respondent 1 and executed an agreement in favor of Respondent 1. This led to several disputes, and subsequently, Respondent 1 filed suits against the Original Vendees and the vendor demanding specific performance of the agreement executed in 1987. The Respondent’s suits were dismissed by the trial courts stating that the Original Vendees could not have assigned their outstanding obligation of paying Vendor the remaining money to Respondent 1 without the consent of the Vendor. On the other hand, Gujrat High Court reversed the decision of the trial court and declared the Assignment of rights in favor of Respondent 1 as valid.
The Supreme Court in its judgment reaffirmed the view of the trial courts and stated that: “It is further relevant to note that under the 1987 agreements, payment of the outstanding consideration amount is to be made to the original vendees, not the Appellants, and possession/ownership of the suit property is to be handed over by the original vendees. The 1987 agreements nowhere provide for the discharge of the original vendees’ pending obligations towards the Appellants by Respondent Nos. 1. Hence, we are inclined to accept the Appellants’ argument that the 1987 agreements were not a case of Assignment but appear to be independent/sovereign agreements for sale which were contingent and dependent on the execution and implementation of the 1986 agreement. Therefore, the only way Respondent Nos. 1 can seek specific performance of the 1986 agreement against the Appellants is by proving the Appellants’ knowledge of and consent to transfer the original vendees’ rights and liabilities Respondent Nos. 1.”
From the above discussion, it is clear that the Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment. The Assignment of obligations/liabilities is not possible in the case of contracts solely relying on the personal skill or expertise of the ‘promisor’.
The recent judgment of the Supreme Court in Kapilaben & Ors. v Ashok Kumar Jayantilal Seth, through POA Gopalbhai Manusudhan Case, also reaffirms that in case of transfer/assigning of outstanding obligations under the contract, the consent of the other party is a necessary condition to make the Assignment valid. Even though this judgment reaffirms the point upheld by law, it still suggests the parties to a contract consider the various complexities of contracts, the intent contract, the availability of the assignability clause in the written agreement, etc., before drafting a commercial contract.
- The Indian Contract Act, 1872, No. 2(h) (Indian).
- Dr. R.K. Bangia, The Indian Contract Act, 2 (12th Edition, 2005), Allahabad Law Agency, Haryana.
- Krishnendu Kanungo & Pritisha Chakraborty, Assignment Of Rights And Its Practical Relevance In Financial Transactions: A Lender’s Perspective Manupatra, http://docs.manupatra.in/newsline/articles/Upload/E915DA6B-361C-493B-91D1-96D8EB703128.pdf (last accessed Mar. 12, 2021).
- The Indian Contract Act, 1872, No. 37 (Indian)
- Sir Oshley Roy Marshall, The Assignment of Choses in Action (Pitman Publishing 1950).
- Krishnendu, supra note 3, at 1.
- Khared & Co. Ltd. v Ramon & Co. Ltd., AIR 1962 SC 1810.
- Krishnendu, supra note 3, at 2.
- Robinson v Davison, (1871) L.R. Ex. 269.
- BANGIA, supra note 1, at 255.
- Ramesh Vaidyanathan & Aishini Mandal, Assignment Of Contractual Obligations – Is Consent Necessary Advayalegal (Dec. 6, 2019) https://www.advayalegal.com/blog/contractual-rights/ (last accessed Mar. 13, 2021).