Assignment and Novation: The Transfer of Contractual Rights and Liabilities, Assignment of Actionable Claims under the Transfer of Property Act, 1882, Non-Assignable Personal Contracts, and Assignment Compared with Novation and Sub-Contracting

A contract creates rights on one side and obligations on the other, and the law treats them very differently when it comes to transfer. The benefit of a contract may generally be assigned without the other party's consent, because it makes no difference to a debtor who receives his money. The burden may not, because it makes every difference to a creditor who must perform. That asymmetry is the organising principle of the subject, and it is why a transaction described as an assignment of a contract is, so far as it purports to move obligations, in truth a novation and needs everyone's agreement.

1. The Basic Distinction

📖 Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd., AIR 1962 SC 1810 (Constitution Bench)

Facts: A contract for the sale of jute contained no express prohibition on transfer. One party purported to transfer the contract, and the question arose whether the contract was assignable and what the transfer achieved.

Held: The Constitution Bench, through Venkatarama Aiyar J, stated the law. An assignment of a contract might result by transfer either of the rights or of the obligations under it, and there is a well-recognised distinction between these two classes. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given it is really a novation resulting in the substitution of liabilities. Rights under a contract are assignable unless the contract is personal in its nature, or the rights are incapable of assignment either under the law or under an agreement between the parties. On the question whether the parties agreed that the contract should be non-transferable, the absence of a specific clause forbidding transfer is not conclusive; what has to be seen is whether, on a reasonable interpretation of the contract and the circumstances, the agreement was that it should not be transferred.

Ratio: The benefit of a contract is assignable unless it is personal, prohibited by law or excluded by agreement; the burden is not assignable without the promisee's consent, and consent produces a novation. A prohibition may be inferred without express words.

	Assignment of the benefit	Transfer of the burden
Consent of the other party	Not required	Required; without it the transfer is ineffective
What the transaction is	An assignment	A novation, substituting a new contract
Effect on the assignor or original obligor	He parts with the right but, having no further obligation on that right, drops out as to it	He is discharged only if the promisee agrees to accept the substitute
Equities	The assignee takes subject to the equities available against the assignor	The new contract stands on its own terms
Governing provisions	Sections 130 and 3, Transfer of Property Act, 1882, for actionable claims; the general law otherwise	Section 62, Indian Contract Act, 1872

What moves, whose consent is needed, and who remains liable

2. Assignment of the Benefit

The general rule is assignability. A contractual right is a species of property and may be transferred, and commercial life depends on it: factoring of receivables, securitisation, transfer of loan portfolios and the sale of a business all rest on the assignment of benefits.
The assignee takes subject to the equities. He gets no better right than the assignor had, and the debtor may set up against him every defence and set-off available against the assignor at the date he received notice.
Notice to the debtor is important in practice. Until he has notice, a debtor who pays the assignor is discharged, and priorities between competing assignees may turn on notice.
An assignee of a right takes the correlative obligations attached to that right. Where a contract involves mutual rights and obligations, an assignee cannot enforce the right without fulfilling the obligations that condition it; that is not an assignment of the burden but a recognition that the right was never unconditional.
The arbitration clause ordinarily follows the assigned right, so that the assignee may invoke it and may be compelled to arbitrate, the clause being part of the bundle of rights transferred.

2.1 Actionable claims

Sections 3 and 130, Transfer of Property Act, 1882, in substance

Section 3, definition. Actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

Section 130. Transfer of actionable claim. The transfer of an actionable claim, whether with or without consideration, shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent, and shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether notice of such transfer is given or not.

The transferee of an actionable claim may, upon the execution of such instrument of transfer, sue or institute proceedings for the same in his own name without obtaining the transferor's consent and without making him a party.

Writing and signature are mandatory for the transfer of an actionable claim; an oral assignment of a debt does not operate under Section 130.
The transfer is complete on execution, whether or not notice is given, though notice matters for the debtor's protection and for priorities under Section 131.
The transferee sues in his own name, without joining the transferor.
Section 132 subjects him to all the liabilities and equities to which the transferor was subject at the date of the transfer.
Certain claims are excluded from the definition, including a debt secured by a mortgage of immovable property or by hypothecation or pledge of movables, which are transferred by their own machinery.

3. Contracts That Cannot Be Assigned

Category	Why	Examples
Personal contracts	The identity of the party is material; the other side bargained for that person	Contracts of employment, engagements of an artist, author or professional adviser, contracts depending on personal skill or confidence
Contracts expressly prohibited	The parties have agreed that the contract shall not be transferred	A non-assignment clause; and per Khardah, the prohibition may be inferred without express words
Contracts prohibited by law	A statute forbids or restricts the transfer	Certain licences and permits that are personal to the holder; a right to maintenance; a pension
A mere right to sue	Section 6(e) of the Transfer of Property Act, 1882 prohibits its transfer, to prevent trafficking in litigation	A bare right to damages for a tort, as distinct from an assignable debt or a right coupled with an interest in property
Public offices and their salaries	Section 6(f) and (g) of the Transfer of Property Act, 1882, on grounds of public policy	The salary of a public officer, a stipend allowed to a pensioner

📖 Tolhurst v. Associated Portland Cement Manufacturers (1900) Ltd., [1903] AC 414 (HL)

Facts: A quarry owner agreed to supply a cement company with all the chalk it should require for its works, for fifty years. The cement company transferred its undertaking to a larger company, which claimed the benefit of the supply agreement. The quarry owner refused to supply, contending that the contract was personal to the original company and had not been assignable.

Held: The House of Lords held that the benefit had passed. Whether the benefit of a contract is assignable depends on whether the contract is personal in its nature, that is whether the identity of the party makes a material difference to the performance the other side has to render. Here the obligation was to supply chalk for the works, the quantity being measured by the requirements of the works rather than by anything personal to the company, and the supplier was in no worse position. The benefit was therefore assignable.

Ratio: The benefit of a contract is assignable unless the contract is personal in nature. The test is whether the substitution of the assignee makes a material difference to the obligation the other party must perform.

4. Assignment and Novation Compared

	Assignment	Novation, Section 62
What moves	The benefit only	The whole contract is replaced; benefit and burden may move
Consent required	Of the assignor and assignee only	Of all parties, including the one to be released
Effect on the original contract	It continues, with a new person entitled to the benefit	It is extinguished and replaced by a new one
Effect on the original party's liability	He remains liable on his own obligations	He is discharged
Equities	The assignee takes subject to them	The new contract stands on its own terms
Arbitration clause	Ordinarily passes with the assigned right	Perishes with the original contract, per Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362
Form	Writing and signature for an actionable claim, under Section 130 of the Transfer of Property Act, 1882	No particular form; agreement of all parties suffices

5. Assignment and Sub-Contracting

Sub-contracting is not a transfer of anything. The original party remains fully liable to the other side and simply arranges for someone else to do the work, on his own responsibility and at his own risk.
Vicarious performance is permitted where the contract is not personal, on the same principle as Section 40 of the Contract Act: the promisor may employ a competent person unless it appears that the parties intended personal performance.
The other party has no claim against the sub-contractor, there being no privity, and his remedy for defective work lies against the main contractor.
The main contractor's liability is unaffected, so sub-contracting transfers the work but not the responsibility.
A purported assignment of obligations is often in truth a sub-contract, and where the other party has not consented that is the correct analysis.

⚠ A clause described as an assignment of the contract usually needs consent

Commercial documents routinely speak of assigning the contract, and the expression is inaccurate. So far as it purports to transfer obligations, the transaction requires the other party's consent and takes effect, if at all, as a novation under Section 62. A party who relies on such a clause without obtaining consent achieves three things and not the one he intended: the benefit passes, the burden does not, and he remains liable for performance. The practical drafting answer is either a properly documented novation agreement signed by all three parties, or an assignment of the benefit coupled with a sub-contract of the work, with the original party remaining liable.

6. Assignment by Operation of Law

Death. Under Section 37 the rights and liabilities of a deceased party pass to his legal representatives, unless a contrary intention appears or the contract is personal.
Insolvency. The estate of an insolvent vests in the assignee or trustee under the applicable insolvency law, and contractual rights pass with it.
Amalgamation and merger. A scheme sanctioned under the Companies Act, 2013 transfers the transferor company's rights and liabilities to the transferee company by force of the order, without individual assignments.
Statutory transfers, where an enactment vests an undertaking in a successor body.
Subrogation, which is not strictly an assignment but produces a similar result, as with a surety under Section 140 or an insurer on payment of a claim.

7. The Position Stated Shortly

The benefit of a contract is generally assignable; the burden is not, without the other party's consent.
Khardah Company v. Raymon: obligations cannot be assigned except with the promisee's consent, and such consent produces a novation.
A prohibition on transfer need not be express and may be inferred from a reasonable interpretation of the contract and the circumstances.
The assignee takes subject to the equities, and an assignee of a right takes the obligations that condition it.
An actionable claim under Section 3 of the Transfer of Property Act, 1882 is transferred only by a signed writing under Section 130, and the transferee sues in his own name.
Personal contracts, contracts prohibited by agreement or by law, a mere right to sue, and public office salaries are not assignable.
Tolhurst: the benefit is assignable unless the contract is personal in nature, the test being whether substitution makes a material difference to the other party's obligation.
Novation under Section 62 extinguishes the original contract and requires everyone's consent, and the arbitration clause perishes with it.
Sub-contracting transfers the work and not the responsibility, and the main contractor remains liable.
Rights and liabilities pass by operation of law on death, insolvency, amalgamation, statutory vesting and subrogation.

8. Related Topics and Provisions

Topic or provision	Connection
Discharge by Breach and by Agreement under Section 62	Novation, rescission and alteration in full
Privity of Contract	Why a third party ordinarily acquires no rights
By Whom Contracts Must Be Performed under Sections 40 to 45	Personal performance and vicarious performance
Rights of the Surety under Sections 140 to 147	Subrogation as a transfer by operation of law
Section 62, Indian Contract Act	Novation
Sections 37 and 40, Indian Contract Act	Devolution on death, and vicarious performance
Sections 3, 6, 130 to 132, Transfer of Property Act, 1882	Actionable claims, what cannot be transferred, and the machinery of transfer
Companies Act, 2013	Transfer of rights and liabilities on amalgamation