#39: Assignments of Contractual Rights and Duties
When two parties enter into a contract to define their respective performances, they generally expect that those performances will not be handed off to others. In the case of a construction contract, the reality is that contractors don’t care who pays them; money is fungible, and if it comes from a third party rather than from the owner, so be it. But contractors are not as interchangeable as dollars; owners generally want the particular contractor they hired, even if most of the work ends up being subbed out.
The law reflects this common-sense expectation. In the absence of a contract provision prohibiting assignment without the other party’s consent, assignments of contractual rights and duties are usually allowable. But “when rights arising out of a contract are coupled with obligations to be performed by the contractor and involve such a relation of personal confidence that it must have been intended that the rights should be exercised and the obligations performed by him alone the contract including both his rights and his obligations cannot be assigned.” Town of Hampton v. Hampton Beach Improvement Co., 107 N.H. 89, 95 (1966) (quoting 4 Corbin, Contracts, s. 865).
Sophisticated owners don’t leave such matters to chance; they insert provisions in their contracts to control when assignments can or will be made. Typical is AIA Form A201 (2007) § 13.2.1: “Except as provided in Section 13.2.2, neither party to the Contract shall assign the Contract as a whole without the written consent of the other.”
Owners typically want not only the right to prevent contractors from assigning the contract to third parties, but also the right to receive an assignment of the contractors’ subcontracts in the event of default by the contractor. The reason is not hard to fathom: if a GC goes belly-up in the middle of a project, subs would otherwise be free to walk away. The owner typically wants “good” subs to stay on, and wants the right to sue “bad” subs whose work is deficient but who cannot be sued for breach by an owner without “privity” of contract. An assignment achieves that contractual link. Hence, AIA Form A201 (2007) § 5.4.1: “Each subcontract agreement for a portion of the Work is assigned by the Contractor to the Owner, provided that assignment is effective only after termination of the Contract by the Owner for cause pursuant to Section 14.2 and only for those subcontract agreements that the Owner accepts by notifying the Subcontractor and Contractor in writing . . .”
Lenders have a similar interest; if the owner defaults on a construction loan in the middle of a project, the lender typically wants the right to insist that the contractor finish the project – which is likewise accomplished by an assignment. Hence, AIA Form A201 (2007) § 13.2.2: “The Owner may, without the consent of the Contractor, assign the Contract to a lender providing construction financing for the Project, if the lender assumes the Owner’s rights and obligations under the Contract Documents.”
All of these provisions concern assignments of an entire contract (or what may be left of it), and deal with scenarios in which future performances are still required on both sides, i.e., an assignment of both rights and duties. It is also possible to assign a right without the corresponding duty, for example the right to payment. If part performance by one party has triggered the other’s obligation to pay, an assignment of that payment right must be honored by the payor upon notice of the assignment. In the construction setting, that assignment will often be to a surety or to the contractor’s bank (or both, in which case the owner can simply pay the money into court and let the two assignees fight it out – perhaps with a side wager on the surety, American Employers Ins. Co. v. School District of Town of Newport, 99 N.H. 188 (1954)). At that point the contractor is likely in trouble – and if the owner didn’t contract for retention of sufficient funds to complete punch list items or for a warranty holdback, it may be in trouble too.