Assignment of a contract (rights and liabilities under the contract) with notice and consent of other party normally vests in the assignee an absolute interest in the contract which has been assigned. In other words, assignment by its very nature falls in the category of sale except that the underlying transfer of interest is in rights under a contract and not in physical goods. Assignment falls in the genre of transfer of property which transfers absolute property to the assignee similar to ‘sale’ which should normally transfer all the property in goods or other property absolutely and unconditionally.
However, I have noticed that many banks and other financial institutions use ‘assignment’ for purposes of security for loan. If one goes by mere definition and meaning of assignment and compare it with other modes of transfer of interest like Mortgage, pledge, bailment, hypothecation etc, the fundamental difference lies in kind of interest being transferred by such transfer. A transfer by way of mortgage, pledge or bailment transfer only limited property (often referred to as General or Special property) and not absolute interest (so as to make transferee the owner). However, an assignment or sale transfers absolute interest in the property to the transferee. Normally, the property so transferred is irrevocable. I have security documents which use ‘assignment’ in the same vein as they refer to ‘mortgage’, ‘pledge’, hypothecation etc. They have used statements like “We hereby assign by way of security….” in these security documents. I have also wondered how can a borrower assign (literally ‘selling’) his interest in his ‘project documents’ to banks for sake of availing loans. Once assigned normally the assignee (banks) becomes true owner of all rights under the contract (project documents).
Firstly, I will explain the common law principles of assignment and novation and then focus on assignment as a security for debt.
Assignment by Act of parties may cause assignment of rights or of liabilities under a contract. As a rule a party to a contract cannot transfer his liabilities under the contract without consent of the other party. This rule applies both at the Common Law and in Equity (vide para 337 of Halsburys Laws of England, Fourth Edition, Part 9).
Assignment and notice
In Khardah Company Ltd. v. Raymon and Co. India (Pvt.) Ltd., AIR 1962 SC 1810. T. L. Venkataramiah J. who spoke for the Bench has observed thus (at p. 1817 of AIR) :
“The law on the subject is well settled and might be stated in simple terms. An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promise, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties.”
In common law where assignment of liabilities is also made but without notice and consent of the other party to the contract in such case the assignee acquires only “right in personam” or only right against the assignor who has transferred him the interest. Applying the doctrine of privity of contract, the assignee has no right to sue the other party either for performance of the contract or for damages in case of breach without joining the assignor as a party to suit against the other party or without obtaining the consent of assignor.
Section 130 and 138 of the Transfer of property Act, 1882 deal with assignment of actionable claims (unsecured debts which are lawfully enforceable) and similarly Insurance Act also deal with assignability of fire insurance policies and life insurance policies.
Section 38 of the insurance Act waives the requirement issue of notice of assignment to the other party in case the assignment is to the other paty.-
Assignment and transfer of insurance policies
(1) A transfer or assignment of a policy of life insurance, whether with or without consideration may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor his duly authorised agent and attested by at least one witness, specifically setting forth the fact of transfer or assignment.
(2) The transfer or assignment shall be complete and effectual upon the execution of such endorsement or instrument duly attested but except where the transfer or assignment is in favour of the insurer shall not be operative as against an insurer and shall not confer upon the transferee or assignee, or his legal representative, and right to sue for the amount of such policy or the moneys secured thereby until a notice in writing of the transfer or assignment and either the said endorsement or instrument itself or a copy thereof certified to be correct by both transferor and transferee or their duly authorised agents have been delivered to the insurer.
Similarly, subsection 5 of the above section restates the common law position on assignment with proper notice to the other party as follows:
“The Insurer shall recognise the transferee or assignee named in the notice as the only person entitled to benefit under the policy, and such person shall be subject to all liabilities and equities to which the transferor or assignor was subject at the date of the transfer or assignment and may institute any proceedings in relation to the policy without obtaining the consent of the transferor or assignor or making him a party to such proceedings.”
Conditional Assignment of Life insurance policies is allowed specifically under this sub –section (7)
Notwithstanding any law or custom having the force of law to the contrary, an assignment in favour of a person made with the condition that it shall be inoperative or that the interest shall pass to some other person on the happening of a specified event during the lifetime of the person whose life is insured, and an assignment in favour of the survivor or survivors of a number of persons, shall be valid.
The above sub section allows conditional assignment similar to ‘mortgage by conditional sale’ U/s 58 of the Transfer of Property Act, 1882. In this kind of mortgage, Mortgage deed is executed creating vested interest in the property in favour of the mortgagee. This interest becomes absolute when the mortgage money is not paid or becomes void on payment of the mortgage money on time. This transaction which is conditional sale is a form of mortgage recognized in law. The above assignment of life insurance enables an insurance company to sanction a loan to the policy holder against the security of his own life policy.
English mortgage and assignment: S 58 of the Transfer of property Act, 1882 recognizes English mortgage which transfers the interest absolutely (sale) to the mortgagee but with a condition added that the mortgagee shall reconvey the property to the mortgagor on payment of mortgage money.
This kind of mortgage which is for all purposes sale is also called mortgage because of an added condition and the purpose for which the sale is made (debt amount).Assignment could also be an English assignment which requires the assignee to re transfer or reassign all the rights back to the assignor on payment of the loan sum.
Section 130 of Transfer of Property Act, 1882 – Transfer of actionable claim
(1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent, shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer as is hereinafter provided be given or not…………….
Notice which is normally required under equity is waived by this provision with regard to actionable claims.
Section 135 of TP Act- Assignment of rights under policy of insurance against fire
“Every assignee by endorsement or other writing, of a policy of insurance against fire, in whom the property in the subject insured shall be absolutely vested at the date of the assignment, shall have transferred and vested in him all rights of suit as if the contract contained in the policy had been made with himself.”
Being absolutely vested it is direct beneficiary of the policy and is entitled to receive the sum unlike other forms of security like mortgage which do not confer automatic rights.
Supreme court of India had stated the effect of “absolute interest” as used in the above section as follows (SC)43, AIR1999SC29 Indu Kakkar vs Harayna State Industrial Development corporation and another:
“In our opinion, therefore, the submission of the learned Counsel for the Bank that as soon as a decree is passed or order is made in favour of the complainants, the Bank is entitled to the said amount is well founded. For such a relief, it is not necessary for the Bank to become a plaintiff by filing a suit in a competent Court of law and obtain a decree in its favour. It is true that had it been the position, the provisions of 1997 Act would get attracted and such suit would be stayed and no decree could have been passed by a competent Court in favour of the creditor. But in the light of the statutory provisions in the Insurance Act and in the Transfer of Property Act, the Bank is entitled to the amount directly from the Insurance Company.”
Summary of the above principles
(1)To sue in assignee’s own name the assignment should have been done with the notice of the other party to the contract .In equity , if the assignment is done without such notice the other party need not discharge his obligation to the assignee and neither assignee has the right to sue for performance with out taking consent of the assignor or joining him in such suit .
However, if the assignment is done with notice of the other party then the assignee in equity has a right to sue in his own name.
(2)Exemption to the above equity principle is statutory waiver of the notice requirement.
If the Act enables the assignee the right to sue in his own name with out such notice/approval as in case of insurance policies and actionable claim then he can sue in his own name without requiring the approval /consent of the assignor.
(3)The kind of assignment of insurance policies/any right under a contract to a bank against the loan amount sanctioned by it is sometimes in the nature of assignment creating vested interest and not absolute interest in the right. Some times similar to English mortgage it could be absolute interest with an added condition requiring reassignment to the assignor on payment of the debt.
(4)Conditional interest is full interest in the property concerned (in this case a contract) except that it is not absolute. So for all practical purposes, the assignee will have all rights in the property /rights under contract concerned except that in future there is possibility of assignee loosing all his rights in favour of assignor in case of repayment of the amount due by the debtor on time. Does it mean such assignor of conditional assignment has any interest left in the property/right under a contract?