When Should Contractual Rights be Transferable? A Legal and Economic Analysis

A contractual right can be treated as an asset and transferred to a non-party. But when are contractual rights transferable? The answer to this question is mainly provided by the law of assignment. In two articles published this year, I argue that Anglo-American law on the question of assignability is affected by dubious assumptions, tending mainly to make rights assignable that should be non-assignable. The first article, ‘Contract Law’s Transferability Bias,’ surveys US law on the question. The other, ‘Rethinking Assignability,’ covers the equivalent body of English law.

Modern law reverses the common law’s historic position that contractual rights were personal to the original parties and hence non-assignable. And where the parties have chosen to make rights assignable, there should generally be no objection to respecting their wishes. But contemporary law goes much further than that. The details of English law and US law are different, but they share a general presumption that contractual rights should be assignable even where the parties have not expressly made them so. This presumption of assignability, moreover, is often hard or impossible to shift. It is especially strong with respect to claims for payment. A claim for payment is treated as a form of ‘property’ and is hence thought by courts and scholars to be subject to the policy against restraints on the alienation of tangible property.

Contemporary law, the articles contend, has swung too far, embracing a policy in favour of assignability that transcends and sometimes overrides party intention. A patient accounting of costs and benefits shows that there is no general reason for the law to favour assignability over non-assignability (or vice versa). In many circumstances, making a right assignable does not serve the parties’ joint interests. In theory, it does not matter to the duty-holder who holds a contractual right. But, in reality, the identity of the right-holder is often crucial. Legally enforceable contracts are, to a greater or lesser extent, embedded in a broader set of relations between the parties. It is not feasible, or even possible, to make precise provisions for all contingencies. A party to a contract often expects that the terms of the exchange will be adjusted and renegotiated during performance. Knowing that a court will not necessarily be able to protect her interests, the duty-holding party wants the right-holder to be disposed towards cooperative behavior. Contracting parties thus choose their partners carefully. The significance of a right-holder’s identity is a major motivation for making rights non-assignable—as contracting parties often attempt to do.

The law’s pro-transferability policy is based on an intuitive idea that making contractual rights assignable, even against the parties’ wishes, serves economic efficiency. Yet Grant Gilmore, who was largely responsible for the original rules of Article 9 of the Uniform Commercial Code (UCC) invalidating non-assignment clauses, was candidly unable to justify the policy. ‘To rehearse social and economic arguments designed to prove that the position is sound would not be helpful. On propositions of so fundamental an order, belief is instinctive and irrational, not logical and reasoned.’ Gilmore did gesture towards an instrumental argument, stating that ‘[t]he social or economic utility of permitting creditors to transfer rights is believed to outweigh the utility of permitting obligors to forbid the transfer.’ But, he said, the claim that the utility of transferability outweighed the utility of promisors being able to prevent it ‘lies beyond demonstration and proof’ (Security Interests in Personal Property (Little, Brown 1965), vol. 1, 211-12). Gilmore, however, wrote before the advent of serious economic analysis of law. In light of advances since then, the articles argue that the economic benefits of transferability are typically adequately factored into the initial contractual negotiation. If transferability serves overall social welfare, then we can expect parties to bargain for it, or, at least, to leave in place a default rule of assignability.

The articles’ main critical bite is directed against legal rules that override decisions by the parties to prohibit assignment. In the United States, pro-assignability canons of interpretation rules mean that clauses aiming to prohibit assignment are often construed to permit it. English law is less reliant on aggressive forms of interpretation but allows a promisee to override a non-assignment clause using a declaration of trust. The article criticizes these practices and also scrutinizes statutory rules that explicitly override party autonomy. The American article calls into question the cogency of UCC Article 9’s long-standing rules invalidating many non-assignment clauses. I do not, however, argue for unbridled freedom of contract. The English article shows that the Business Contract Terms (Assignment of Receivables) Regulations 2018, were, to some extent, justified by reference to a generic pro-assignability policy. In their final form, however, the Regulations may be justifiable on another ground: the need to protect small and medium-sized suppliers from the economic power of their big-business customers.

Paul MacMahon is an Assistant Professor of Law at the London School of Economics.