6.6 Assignment of Rights

• Library: Virginia Law and Practice: A Handbook for Attorneys (Virginia CLE) (2020 Ed.)

6.6 ASSIGNMENT OF RIGHTS

6.601 Assignable Rights.

A. General Rule. Generally speaking, contractual rights may be assigned to a third party. ⁴⁵⁶ This general rule is codified with respect to the sale of goods in Article 2 of the Uniform Commercial Code (UCC) as adopted in Virginia. ⁴⁵⁷ UCC section 2-210 provides that buyers and sellers may assign contracts to third parties, except where the assignment would materially change the duty of the other party. ⁴⁵⁸

B. Exceptions to the Rule. Notwithstanding the general rule that contractual rights may be assigned, there are several exceptions.

1. Substantial Change in the Obligor's Duty. If the assignment would substantially change the obligor's duties under the contract, the assignor may not assign the agreement. ⁴⁵⁹ An example of such a contract is a "requirements contract." ⁴⁶⁰ Under a requirements contract, one party is required to provide an unspecified amount of goods or services in accordance with the requirements of the other party to the agreement. Using the facts of the sale of Little Hospital to Big Hospital, suppose that Little had a contract with a linen company (Linen Company) whereby Linen Company would provide sheets and towels for all facilities owned by Little. If the agreement were assigned to Big, which owns several more facilities than Little, the assignment would be invalid because Linen Company's duties would be different and enlarged beyond what was originally contemplated in the contract.

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A personal service contract is another type of contract that cannot be assigned without consent. ⁴⁶¹ The rationale is that an assignment of a personal service contract would result in the obligor having to perform personal services for someone other than the person originally contemplated, which may substantially alter the duties of the obligor.

When analyzing whether a contract can be assigned generally, the question to ask is whether the parties' rights are being substantially altered by the assignment. A contract may be assigned as long as the non-assigning party's rights are not materially affected.

2. Substantial Change in the Obligor's Risk. Similarly, when the obligor's risk is substantially altered by an assignment, the assignment will be invalid. ⁴⁶² For example, suppose that a bank (Bank) agreed to lend money to a valued bank customer (Patron) under a revolving credit line. If Patron assigned his or her revolving credit line rights to another person, arguably Bank's risk would be altered by the assignment because the assignee's creditworthiness may be poor. In such case, the assignment would not be valid.

C. Laws Prohibiting Assignment. A right may not be assigned if the assignment is prohibited by law. Using the example of the sale of Little Hospital to Big Hospital, suppose that Little tries to assign its state medical licenses to Big. If the applicable statute or regulations provide that such licenses are not assignable, then the assignment would be invalid.

Practitioners should be wary of attempts to assign governmental licenses or permits, as most assignments of licenses or permits are typically prohibited by statute or regulation. Even if a permit is transferable, the issuing agency will normally require some type of notice of the assignment.

D. Non-Assignment Provisions. Under the UCC, unless the circumstances indicate the contrary, a prohibition against assignment of the contract bars only the delegation to the assignee of the assignor's duties and

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not the transfer of the assignor's rights. ⁴⁶³ However, under Virginia common law (not dealing with the sale of goods), an assignment will be deemed invalid if the contracting parties agreed that the contract could not be assigned. ⁴⁶⁴

It is very common for contracts to contain non-assignment provisions. In fact, most commercial contracts contain such provisions. Using the facts of the sale of Little Hospital to Big Hospital, suppose all of the equipment leases and other major contracts have non-assignment provisions in them. Does this mean that Big will have to execute new agreements with vendors so Big can step in and operate the hospital on the closing date? The answer is "probably not." In this situation, the parties to the contract can agree to waive the non-assignment provision. Furthermore, and more...