Assignment of Choses in Action
An assignment is the legal process through which the benefit of a contract or a right is transferred from one person (the assignor) to another (the assignee). After the transfer, the assignee gains the right to enforce the contract or claim against the debtor, who owes the performance or payment under the original contract. Importantly, the debtor’s consent is not required for the assignment to be valid.
Assignments primarily deal with intangible property, or “choses in action,” meaning rights that can only be enforced through legal action rather than by taking physical possession.
1. Choses in Action
Definition: A chose in action is any personal right of property that can only be claimed or enforced through a legal action.
Examples of choses in action include:
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Rights to collect debts arising under contracts.
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Rights to enforce a contract or claim damages for breach.
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Rights arising from torts (civil wrongs).
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Rights to recover ownership of real or personal property.
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Rights under documents such as insurance policies, bonds, promissory notes, intellectual property rights.
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Equitable rights such as the benefit of a trust.
Key point: Almost any existing proprietary right can be assigned unless prohibited by law or contract. For example, a company may assign the right to collect rent from tenants to a financial institution as part of a loan arrangement.
2. What Assignment Means
An assignment involves the immediate transfer of an existing legal or equitable right from the assignor to the assignee. This can include both rights already in existence and contingent rights that will become effective in the future.
Legal principle: Unless a contract explicitly prohibits assignment, the debtor cannot object. This rule protects the assignor’s ability to transfer rights freely and allows for the flexibility needed in commercial transactions.
Example: A small tech company (Assignor) has a contract with a client to deliver software. The company assigns its right to receive payment to a bank (Assignee) to secure a loan. The client (Debtor) must pay the bank directly, even though they did not consent to the assignment.
3. Parties Involved
An assignment creates a tripartite relationship:
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Debtor (A): The person who owes the performance or payment under the contract.
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Assignor/Creditor (B): The original holder of the right.
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Assignee (C): The person receiving the right through assignment.
After the assignment, the debtor performs their obligation to the assignee rather than the assignor. The relationship between assignor and assignee is governed by the terms of the assignment agreement.
Example
Scenario:
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Assignor: A freelance graphic designer, “ArtCo.”
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Debtor: A marketing agency, “MarketFlow Ltd,” which owes ArtCo $10,000 for completed design work.
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Assignee: A bank that lent ArtCo money against its receivables.
ArtCo assigns the right to receive $10,000 from MarketFlow Ltd to the bank. The bank can now collect the payment directly from MarketFlow Ltd. Even if MarketFlow Ltd had issues with ArtCo’s service, the debt now belongs to the bank, and ArtCo’s loan is secured.
This illustrates how assignments can enhance liquidity and facilitate financing while legally transferring rights without needing the debtor’s approval.
Summary:
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Assignments allow the transfer of contractual or proprietary rights to a third party.
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Choses in action are intangible rights enforceable only by law.
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The debtor does not need to consent unless prohibited by contract.
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Assignments create a tripartite relationship: debtor, assignor, assignee.
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They are widely used in finance, commercial contracts, and corporate transactions to secure loans or transfer receivables.
Types of Assignment
Assignments can be legal or equitable, and the type depends on compliance with formal legal requirements:
Example:
A software company assigns its right to receive annual subscription payments from a corporate client to a financing firm. If the assignment follows all statutory formalities, it is a legal assignment. If the assignment is only agreed in writing but does not meet certain statutory formalities, it will still be effective as an equitable assignment.
Legal Assignment Requirements
For a legal assignment to be effective, several conditions must be satisfied:
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Absolute Assignment:
The assignor must transfer all rights and interests without reservations. Partial assignments or assignments by way of security usually fail at law but may succeed in equity.
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Debt or Thing in Action:
The assigned right must be a recognizable legal right under contract or law.
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Compliance with Formalities:
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Subject to Equities:
Example:
A freelancer assigns all future invoices from a client to a factoring company. The assignment is written, signed, and communicated to the client. The client now pays the factoring company, and the freelancer cannot claim the money, except for rights previously held (e.g., discounts for early payment).
Equitable Assignment
An equitable assignment arises when some formalities of legal assignment are missing, but the intention to assign is clear:
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Clear Intention: The assignor must clearly manifest the desire to transfer the right.
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Writing Not Mandatory: Except where required by law for equitable rights, writing is not essential.
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Notice Recommended: While not strictly required to the debtor, notifying the debtor is advisable so they recognize the assignee as the new creditor.
Example:
A small business owner sells the right to receive monthly rental income from a commercial tenant to a private investor. The agreement is verbal but documented in internal emails and invoices. Equity recognizes the transfer as long as the intention is clear and irrevocable.
Consideration for Assignment
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Assignments must generally involve an existing right. Future or contingent rights cannot be assigned without consideration.
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Agreements to assign rights that will exist in the future can be valid if supported by consideration (e.g., payment, promise of a reciprocal benefit).
Example:
A content creator agrees to assign royalties from a yet-to-be-released book to a publishing company in exchange for upfront payment. Even though the book isn’t released yet, the assignment is valid because the right to royalties will materialize and there is consideration.
Limits on Assignment
Assignments are not unlimited. Certain contractual or practical limitations may apply:
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Absolute Prohibition: Some contracts explicitly forbid assignment.
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Qualified Prohibition: Assignment is allowed only with debtor consent or under specific conditions.
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Attempts to circumvent these prohibitions may fail, especially if the contract requires personal performance.
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Courts recognize that protecting the original contractual relationship can justify such restrictions.
Example:
A tech consultancy contracts with a client for bespoke software development, including a clause forbidding assignment of the client’s payment obligations. The consultancy cannot assign the right to receive payment to another company without consent, because performance is personal and tied to the consultancy’s expertise.
Summary
Assignments are essential tools for transferring contractual rights. Key takeaways:
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Legal vs Equitable: Legal assignments require strict formalities; equitable assignments rely on intention and may be less formal.
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Requirements: Clear intention, formal compliance (for legal assignments), notice to debtor, and consideration where needed.
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Limitations: Contracts may limit or forbid assignment; personal performance requirements may prevent effective transfer.
Example:
A subscription-based e-learning platform assigns its rights to collect student payments to a financial partner to secure a loan. By following the proper steps (legal assignment in writing, clear notification, and consent if required), the platform ensures the assignment is valid and enforceable, while the partner can collect payments directly from students.
What is a "chose in action"?
A personal right of property that can only be enforced through legal action.
Physical goods or assets that can be possessed directly.
Does a debtor need to consent for an assignment to be valid?
No, unless the contract explicitly prohibits assignment.
Yes, the debtor must always consent.
Which parties are involved in an assignment?
Debtor, Assignor (original creditor), Assignee (new creditor).
Debtor and Assignor only; assignee is not involved.
What is the difference between a legal and an equitable assignment?
Legal assignments meet all statutory formalities; equitable assignments may lack formalities but show clear intention.
Equitable assignments are illegal; legal assignments are always verbal.
For a legal assignment, which of the following is required?
Written assignment, signed by the assignor, with notice to the debtor.
Only verbal agreement between assignor and assignee is enough.
Can a debtor use defenses they had against the assignor against the assignee?
Yes, the assignee takes the right subject to existing equities.
No, the assignee receives full rights free of defenses.
Can future or contingent rights be assigned?
Yes, if there is valid consideration supporting the assignment.
No, future rights can never be assigned.
