Contractual Remedies Act provides additional liability for assignees

A recent Court of Appeal case has confirmed that the Contractual Remedies Act 1979 alters the common law position applicable to contractual assignments by finding that a contract and its benefit together with its burden may now be assigned. This opens the way for the non-assigning party to bring an independent cause of action against the assignee for a breach of the assignor's obligations.

The facts

The case¹ concerned an assignment by a building contractor, JR Construction Limited (JRC) of "all its rights, title and interest" in a contract to perform site works for SB Properties Limited (the non-assigning party) to an assignee, Mr Holdgate. In effect, this gave Mr Holdgate the right to call for progress payments to be paid to him personally upon completion of the work by JRC. However, at the time the contract was assigned, SB Properties had terminated the contract for non-completion of the work by JRC and there was only a small non-contested sum owed to JRC under the contract.

Having terminated the contract prior to completion of the site works, SB Properties engaged a substitute contractor to complete the contracted work and brought claims against JRC (then in liquidation) and Mr Holdgate, on discovering that the contract had been assigned to him, for damages (based on the difference in the actual cost of the works paid by SB Properties and the JRC contract price).

Background to the legal issues

In contract law, an assignment involves one party transferring some or all of its rights to a third party (the assignee), so that the assignee is entitled to the contractual benefits from the non-assigning party. An assignment in itself however does not create a contract between the assignee and the non-assigning party, nor does it make the assignee a party to the original contract. Further, an assignor can not relieve itself of its contractual obligations by assigning the burden of a contract without the consent of the non-assigning party. Under the common law, this means the non-assigning party has no right to bring an action for damages against an assignee for breach of a contractual obligation by an assignor.

In contrast, section 11(1) of the Contractual Remedies Act 1979 states that "if a contract...is assigned, the remedies of damages and cancellation shall...be enforceable by or against the assignee".

The question before the Court of Appeal was therefore whether section 11(1) of the Contractual Remedies Act had altered the common law position governing assignments, with the effect that in addition to the continuing liability of JRC, SB Properties had an independent cause of action against Mr Holdgate as the assignee.

The decision

The court held that in light of the "emphatic language" of section 11(1) a contract and its benefit together with its burden may now be assigned. Section 11(1) had improved SB Properties' position by granting an independent cause of action against Mr Holdgate for the breach of JRC's contractual obligations. This represents a change from the common law position. However, the court found that in all other respects the common law applicable to assignments remains unaltered. In particular, the court confirmed that JRC as the assignor remained liable to SB Properties.

There is also an important qualification to an assignee's liability under the Contractual Remedies Act. Under section 11(2) of the Act "the assignee shall not be liable in damages...in a sum exceeding the value of the performance of the assigned contract to which he is entitled by virtue of the assignment". The court held that this meant Mr Holdgate as the assignee was not liable to SB Properties for any amount beyond "the amount by which the assignee was enriched by the non-assigning party's performance of the contract [i.e. the net increase in the assignee's assets following the assignment]". In order to claim any surplus to the amount claimed from the assignee, the non-assigning party must look to the assignor.

On the facts, Mr Holdgate did not derive any value from the assignment. All payments during the course of the contract were paid to JRC. As a result this meant no damages were payable by Mr Holdgate.

Comment

Prior to the enactment of the Contractual Remedies Act, a party to a contract had no right to bring an action for damages against an assignee for breach of an obligation by an assignor. This case confirms that the Act has altered the common law position in this respect, subject to the assignee being liable for no more than the net increase in the assignee's assets following the assignment.

However, it is important to note that the Contractual Remedies Act does not alter the law on assignment of contractual liabilities with regards to an assignor. A contracting party is not relieved of its contractual obligations by assigning the burden of the contract; that can only be achieved with the consent of the assignee and the original contracting parties by novation, where the non-assigning party consents to the release of the assignor and the substitution of the assignor by the assignee.

¹ SB Properties Limited (in liquidation) v Holdgate (CA) CA453/2008 [24 July 2009]

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