Assignment & Delegation

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Corporate & Commercial Law I: Contracts & Employment Law

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University of Illinois at Urbana-Champaign

Corporate & Commercial Law I: Contracts & Employment Law

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This class deals with the business law topics that appear on the CPA exam: Agency, Contracts, Debtor-Creditor Relationships, Government Regulation of Business, and Business Organizations. Students will gain an understanding of how these areas of the law affect businesses and their operations, with an eye on preparation for the business law portions of the REG section of the CPA exam. By the end of the class, students will be able to identify the legal principles that govern various business situations and apply those principles to an issue to determine the outcome when the law is applied to the facts of a scenario.

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Module 3: Enforcing Agreements

In this module, we continue our discussion of contract law by focusing on the enforcement of agreements. We begin by examining who can enforce contracts, then discuss when contracts can be enforced in court, and end by looking into what types of awards courts will grant when a party has been the victim of a breach of a contract. Throughout this module, we will call special attention to different rules that apply to contracts for the sale of goods.

Assignment & Delegation17:07

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Professor Michael R Fricke
Teaching Assistant Professor
Department of Business Administration

This lesson deals with the concepts of

assignment and delegation in a contractual setting.

We need to understand what are your rights in a contract?

What are your duties? How are they different?

When can you transfer rights and duties to someone else?

What are the rules surrounding those transfers?

So, in a contract,

each party has rights and they have duties, right?

So your rights are the things you get,

your duties are the things you have to do or give.

So, take a very simple example of a contract.

You and I have a contract for me to sell you my bicycle for a $100.

Your right is to receive my bicycle,

your duty is to pay me a $100.

Now, your rights and your duties in contracts can sometimes be assigned to other people,

transferred to other people.

Now, when you transfer a right,

we call that an assignment.

When you transfer a duty,

we call that a delegation.

In both instances, you're transferring something related to your role in the contract.

When you transfer a right,

something that you get, we call it an assignment of rights.

When you transfer a duty,

something you're supposed to do,

we call it a delegation of your duties.

So in this lesson, we're going to talk about what assignments and delegations are,

when you can do them, and when you can't.

So, let's start with assignments of rights.

As a general rule,

parties to a contract are usually free to assign their rights to other people.

So for instance, we have a contract for me to sell you my bicycle for a $100.

My right is to receive a $100 from you,

but maybe I owe a $100 to somebody else,

and I want to assign my right to receive that $100 to this other person.

As a general rule, that's fine,

I can assign my rights.

Now, when you assign your rights, there's a couple of rules.

First, you have to give notice to the other party the contract.

If I assign my right to receive my money to somebody else,

I've got to let you know that so that you know

to pay this other person the $100 instead of me.

So, when you assign rights,

you have to give notice to the other party to the contract so they

know to whom to render their performance.

When I assign my rights,

my rights are extinguished.

So, the right fully transfers to the assignee and I

no longer have any rights with regards to whatever rights I transfer.

Now, it can get complicated.

Sometimes you can transfer all of your rights,

you can transfer less than all of your rights to a contract.

The rights you assign are extinguished in you and vested in another person.

But if you retain other rights,

you might still have some rights in the contract.

Now, the general rule, as we just stated,

is that rights are freely assignable,

but there are some exceptions to that general rule.

Sometimes you will not be allowed to assign your rights under a contract.

In the first instance of the exception to

that general rule is what's called an anti-assignment clause.

A lot of contracts have anti-assignment clauses in them for all sorts of reasons.

But an anti-assignment clause is actually specific language in a contract between

two parties that says you are

not allowed to assign your rights under this contract to somebody else.

A very common case is,

say I lease some property,

maybe an apartment to live in,

some office space from my business,

in the lease, there will almost always be

an anti-assignment clause that says you are not allowed

to assign your rights in this lease to another tenant without approval from the landlord.

Why? Because the landlord vetted me as the tenants.

I have the right to occupy the space,

under the terms of our lease,

but the landlord vetted me as a tenant not somebody else.

How does he or she know that if I assign my rights and somebody else comes and

takes that space they're not going to have a meth lab or do other crazy stuff there.

So, anti-assignment clauses prohibit the assignment of

that right without the approval of the other party to the contract.

So, if you have an anti-assignment clause,

you will not be allowed to assign your rights

without the approval of the other party to the contract.

Next example of when you won't be allowed to make an assignment

is in the case of what's called the personal service contract.

So for instance, if I have

an employment contract to teach business law at the University of Illinois,

the University has the right to receive my services.

Now, the University can't just assign its right

to receive my teaching services to any other school.

Say they want to assign their right to receive my teaching services to

some lesser school like Harvard or Princeton or one of those places.

They can't do that because it's a personal service contract.

It involves me giving my own personal service,

so employment contracts, things like art performances,

sports contracts, haircuts, anything that involves a personal service,

your right to receive personal services cannot be

assigned without the consent of the other party to the contract.

Okay, third exception is if the assignment would cause

a material alteration of one party's duties,

it's not assignable without the consent of the other party.

So for example, if you buy a car insurance,

the contract between you and the insurance company says,

you give them money and they provide you with

insurance against collisions and things like that.

Your rights in that contract is the right to receive insurance,

but they only provide you with that rights in the contract because of who you are.

They take into account things like how risky of a driver are you,

what kind of car do you drive, what color is your car,

all these factors that go into determining the price of that policy.

So, even though you have the right to receive that insurance,

you can't assign it to somebody else

because somebody else doesn't have the same profile as you.

The insurance company wouldn't be willing to offer them the same deal as they offer you.

So you can't just assign your rights because it would materially

alter the duties of the other party to that contract.

The last exception to the rule about

free assignability of contract rights is future rights.

Now, a future right isn't something that happens in the future,

a future right is a right that has not yet vested,

so you can have rights that occur in the future that you assign.

But for instance, say you think

that a contract will be

signed and you think that you will be getting some rights in that contract,

but it hasn't yet been signed, that's speculative,

and that's the type of future right you can't assign because it hasn't vested yet.

Now, once that contract gets signed that actually does give you some rights,

now it's vested, and you can assign those rights to somebody else.

But until they are firm and fully vested,

you can't assign those rights.

Now, a corollary to our discussion of assignment of right, imagine this scenario.

You own one share of stock in a publicly traded corporation.

In the old days, they used to actually give you a paper that said share of stock.

They don't really do that much anymore, but say they do.

You have this share of stock,

one share of stock in Apple or Microsoft or whoever.

Now, you say, "I want to sell my stock to someone else."

So, you take some money from person A and you give them a document that says,

"I'm selling you my share of stock,

assigning you my rights to this stock."

When you have stock, you have the right to dividend

and the right to vote and some other rights like that,

but you don't give them the actual stock certificate.

Now, say person B comes along and you say, "Oh,

I'm going to sell you this same share of stock."

They don't know you already sold it to person one,

so you take some money from person B,

you give them a paper that says,

"I assign you my rights and the share of stock."

But again, you don't give them the share of stock.

The person C comes along and you do the same thing,

they don't know about Person A or person B,

so you take some money from person C you say,

"Hey, I'm going to sell you my share of stock."

This time you actually give them the share of stock.

Now, imagine that person B,

the second person to come along,

doesn't have the share of stock,

but they go and they tell the company,

"Hey I'm the new stockholder here.

I'm the person who has rights to this stock.

So, next time you pay out a dividend or you have a voting notice,

some shareholder meeting notice,

make sure you send it to me because I bought the stock."

This is a mess. So, a person A gave me some money and they were first in line.

You gave them a signed document that says I sold you my stock.

Person B also gave his some money for

that same share stock you gave them a signed document they give you some money.

They notified the company that,

"Hey I'm the new shareholder."

Person C gave you some money and you gave them the actual stock certificate.

Who do you think actually has the rights to that stock?

Well, the answer is, it depends.

The answer to a lot of things is it depends.

But here in the United States,

we generally follow what's called the American Rule.

The American Rule states that,

"The first assignment in time is the one that's effective."

So, in that case person A would actually

have true ownership rights to that share of stock

because the first assignment and time effectively

eliminates my rights in the share of stock,

or your rights and the share of stock.

So, once you make that first assignment,

you don't have the right to assign it to anybody else.

Person B and person C are out of luck. That's the American Rule.

Now, the English Rule,

which you can still find in some places is that the first person to

give notice of an assignment is the person who actually has the right.

So, in that case person B would have the true rights to the share of stock,

because they gave notice to the other party to the contract,

we'll assume that it's stock ownership as a contract is very similar.

Person B gave notice to the other parties so

they would be the true owners under the English Rule.

And now there's this third exception to both the American Rule and the English Rule.

We call it the Tangible Token Rule.

The Tangible Token Rule says;

"If a contract is represented by some sort of tangible token,

say like a share of stock whoever actually has the tangible token is

the true owner of the rights regardless of where they fall in the order of assignment."

So, actually under the Tangible Token Rule,

which has been adopted in most places,

person C would be the true owner because they

have the tangible token even though person A was first,

and person B notified the other party first,

person C would have the vested rights in

the assignment of the rights under that stock certificate.

Let's move onto delegation of duties.

Remember rights are things you receive under a contract,

duties are things you do.

But, the general rule about transferring rights and duties is the same.

Delegation of duties is generally permitted.

So, let's go back to our simple example.

I'm going to sell you my bike for $100.

Your duty is to pay me $100.

Now, suppose somebody owes you $100 and you say to your friend,

"Oh, don't pay me.

Just pay the $100 in exchange for the bike."

So, you can delegate your duty to pay the $100.

From my perspective, do I care where $100 comes from,

not really. I just want my money.

So, if you delegate your duty to pay, I don't care.

And that's the general rule.

Delegation of duties is permitted.

Now, difference between rights and duties is that,

if you delegate your duties as a general rule

you are still liable for the performance of those obligations.

So, you delegate your duty to pay $100 to somebody else,

if that person doesn't pay,

you are still liable for it.

I can still sue you.

So, remember with rights once you assign it, they're gone.

With duties once you delegate them,

you're still on the hook.

So, you've got to make sure the other person performs as expected.

Now, as with rights,

we have some exceptions to the general rule,

and the first exception is actually the same.

You can have an anti-delegation clause,

just as you can have an anti-assignment clause, same thing.

And you can have an anti-delegation clause in your contract that

prevents you from delegating your duties without the approval of the other party.

Personal service contracts again,

are excepted from the general rule.

If you are hired to perform a personal service,

you can't just swap out somebody else to perform that personal service

without the approval of the other party.

So, say I'm a concert promoter and

I want to bring in my favorite band in the world to come and play at my concert venue.

So, I call up U2's manager,

U2 is my favorite band in the world.

I call it U2's manager and, "Hey,

can the boys from Dublin come and play at my venue?"

And he says, "Of course, they can. Anything for you."

And so we have a contract for U2 come a play but at the last minute they decide,

"We don't want to do it, we're going to delegate

our duty under this contract to Justin Bieber."

Do I want Justin Bieber to come to my concert?

No of course not.

They can't delegate that duty.

It's a personal service contract.

I hired them to perform a personal service,

he can't delegate that duty.

Third exception to the general rule. Now, this is a new one.

This is if you have a high trust relationship.

Sometimes we call these fiduciary relationships things like that.

For an example, suppose you hire a trustee to

administer your charitable fund or something like that.

Some sort of relationship that requires an extra level of

trust and you have some sort of

contractual or employee relationship between you and this other person.

These relationships, fiduciary relationships, high trust relationships,

the person who is being entrusted with funds or

confidential information or things like that

cannot delegate their duties under that contract,

because you place your trust in them.

So, they have to honor that.

And then final exception to the general rule.

If the delegation of your duty will materially alter some portion of the contract,

then you cannot delegate the duty without permission.

So, for example, say I'm a manufacturing company and I have a contract to

manufacture and sell some products to you and I say well, I'm at capacity.

I'm going to delegate my duty to manufacture the products to somebody else.

They'll manufacture them and they'll deliver the products.

But, maybe they're the same products but the quality isn't the same.

That would materially alter the expectations of the other parties to the contract.

So, in that case a delegation of duties would not be permitted.

Now, last note about assignment of delegation.

There's this concept called novation.

Novation is very similar to an assignment and delegation,

except that it's the complete substitution of one party for another.

So, for instance I can assign all my rights to you.

I can delegate all my duties to you,

but remember I said your duties you're still

liable for your duties even if you delegate them to someone else.

But, if you engage in what's called a novation,

you actually are relieved from your duties.

Now, in order to have a novation,

all of the parties have to agree to it.

So, all the parties to the contract plus the person being substituted in must all agree.

But if you all agree,

then basically you can have a little one page paper that says we all agree

to substitute to this person in via a novation.

Then, you are completely relieved from all of

your rights and all of your duties and the new person takes your place in the contract.

That's a novation.

It differs a little bit from an assignment delegation,

in that they take your place entirely and you are freed

from all rights and all obligations under the contract.

So, that's assignment and delegation.

The quick and dirty of the rules about how to

transfer your rights and duties under a contract.

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