Boilerplate clauses are standard clauses that find their place under the miscellaneous section of a commercial agreement. Under most circumstances, these clauses are inserted in a contract without regard to the repercussions that may follow such inclusion. This article focuses on the assignment clause in contracts, the importance of the same and some key considerations to be kept in mind while drafting or reviewing the assignment clause.
What is an Assignment Clause?
An assignment clause regulates the manner in which the contract and the rights and/or obligations under the contract can be transferred to a third party. Inclusion of this clause in a contract is important as it protects assignment of a contract in a manner that has not been contemplated by the parties.
Position under Indian Law
The concept of assignment is embedded in the Indian Contract Act, 1872 (“Act“). As per Section 37 of the Act, the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of the Act, or of any other law. As a general rule, a person cannot acquire rights under a contract to which he is not a party. An exception to this rule is when there has been assignment of rights under a contract in favour of a third person by act of the parties or by operation of law.
The position regarding assignment of the rights and obligations of a contract was laid down by the Supreme Court in Khardah Company Limited vs. Raymon and Company (India) Private Limited (AIR 1962 SC 1810). While discussing the question of assignability of a contract, the Supreme Court in the aforementioned case, recognising the distinction between assignment of rights and assignment of obligations in a contract, held that:
(i) On Assignment of Obligations: Obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities; and
(ii) On Assignment of Rights: Rights under a contract are assignable unless (a) the contract is personal in its nature; or (b) rights are incapable of assignment under law or under an agreement between the parties.
The Supreme Court in Kardahalso held that the absence of a specific clause forbidding transfer is not conclusive and that: “What has to be seen is whether it could be held on a reasonable interpretation of the contract, aided by such considerations as can legitimately be taken into account that the agreement of the parties was that it was not to be transferred. When once a conclusion is reached that such was the understanding of the parties, there is nothing in law which prevents effect from being given to it.”
In Hindustan Steel Works Construction Limited vs. Bharat Spun Pipe Company (AIR 1975 Cal 8),the petitioner sought to set aside an arbitration award on the ground that it did not have an agreement with the party who referred the dispute to arbitration. It was urged by the petitioner that the arbitration clause is personal and could not be assigned. The Calcutta High Court held that:
- A contract in the nature of a personal covenant cannot be assigned;
- Secondly, the rights under acontract can be assigned, but the obligations under a contract lawfully cannot be assigned;
- Thirdly, the intention about assignability would depend upon, the terms and the language used in a contract; and
- Fourthly, the existence of an arbitration clause per se does make neither the contract nonassignableor assignable. But in a particular case the arbitration clause may be so worded as to afford an indication about the contract being personal or not.
While Indian Courts in the above decisions appear to have taken the intention of the parties into account, good form and good drafting demand that the intention of the parties be expressly mentioned so as to avoid any future ambiguity. The key take-aways from Kardahare that if you wish to restrict assignment of the rights in a contract, there must be an express restriction prohibiting the parties, or a particular party from doing do. With respect to the obligations, if the parties to a contract agree that these may be assigned, there must be an express clause permitting the same.
For instance, while negotiating a lease deed, the landlord may want assignment of the lease prohibited. However, the lessee want to retain the right to assign the lease or sub-let part of the leased premises to its affiliates and group companies. If agreed with the landlord, this intention must be clearly expressed on the lease.
We have observed, in multiple transactions, that most business contracts (be it services agreements, vendor contracts, distribution agreements) executed by a company contain a standard clause prohibiting either party from assigning the contract. This then leads to the company having to seek consents from the counterparts prior to closure of the present transaction, leading to unnecessary delays and expense (as counterparts often ask for change in terms or payment for granting such consent). Far more prudent would be to deliberate and diligently draft this clause on a case-to-case basis, depending upon the nature of the contract and intention of the parties.