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Assign of the times

by Simon Tolson
Building magazine
26 September 1997

Simon Tolson explains the difference between types of contractual assignment and looks at recent legal developments in this area.

As a rule, a contract between two persons cannot confer rights on a stranger to that contract. One party to the contract may, however, transfer the benefits, such as the contractor's right to be paid, to another by assignment. The burdens of the contract - the obligation of the client to pay, or the contractor to do the work - cannot be assigned.

A simple assignment arises when A and B have a contract under which A must do something for B, say, to pay him £100 for a new door. B may arrange with C, a third person, that A shall pay the money to C instead of B. This is called an assignment to C of B's rights under the contract. B is the assignor and C the assignee.

To qualify as a legal assignment:

• the assignment must be in writing and signed by the assignor
• it must be absolute, not just part of the debt or contractual benefit
• written notice must be given to the other party.

If the assignment satisfies these requirements the assignee can sue the other party in its own name. Otherwise, the assignment is merely equitable and the assignee must sue in the name of the assignor, or if the assignor refuses to be joined as a plaintiff, must make the assignor a second defendant to the case.

In the context of building contracts four types of assignment commonly crop up:

• where contractors and subcontractors assign their rights to payment as part of the security required by their bankers
• where developers "assign" their contracts with professionals to investors or tenants
• under design-and-build contracts where employers "assign" contracts with designers to the contractor on execution of the design-and-build contract
• where parties to a settlement assign rights against a potential defendant who is not a party to the settlement.

The second and third examples are frequently referred to as assignments yet they are not strictly so as a matter of law.

One common problem occurs where a provision prohibits assignment "without the consent of the other party, such consent not to be unreasonably withheld". In Midland Land Reclamation and Leicester County Council v Warren Energy ⁽¹⁾ the court found that unreasonably withholding consent has the same effect as giving written consent.

The related cases of Linden Gardens v Lenesta Sludge Disposal ⁽²⁾ and St Martins Property Corporation v Sir Alfred McAlpine ⁽³⁾ considered the rule that a plaintiff can only recover its own losses as damages for breach of contract.

In both cases, the employer purported to assign the benefit of the contract without the contractor's consent despite the conditions in the JCT contracts used.

The House of Lords held that an exception could be made to the rule if certain conditions were met, allowing the employer to recover losses suffered by a third party.

In Darlington Borough Council v Wiltshier Northern ⁽⁴⁾ the Court of Appeal allowed an employer that never had a proprietary interest in the site to recover substantial damages for breach of contract in respect of the losses of the owner of the site.

The circumstances in which a plaintiff can recover for another party's losses have steadily increased over the past five years. This reflects concern about the unfair effect of the privity of contract rule, which has been said to be one of the sacred cows of English law: a contract cannot confer rights or impose obligations on any person except the parties to the contract.

As we have seen, even where assignment is prohibited an assignee can still pursue one of the original contracting parties. What is more, the courts frown upon attempts by employers and contractors to unreasonably refuse consent to assignment.

1. CILL Feb 97

2. (1993) 3 ALL ER 417

3. (1993) ALL ER 497

4. (1995) 3 ALL ER 895

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