Template:Assignment and assumption capsule
Under an assignment and assumption the outgoing party assigns its rights against the remainer to the incoming party, while at the same time the incoming party assumes the outgoing party’s obligations to the remainer, and an infinitesimal moment later the outgoing party gracefully steps away into the night, propelled by the good wishes, respect, discharges and hold harmlesses of those remaining. Somehow, as a result, the Transaction is is not terminated and reconstituted as such, as would happen in a novation, but granted perpetual existence through the whole surgical procedure: the Transaction is transferred as a live, palpitating organ from the breast of the retiring counterparty and into the ribcage of the incoming one.
This is a lovely, imaginative solution to a technical tax risk.[1] It is bold, elegant, endlessly fascinating and superficially attractive — rather like one of those Penrose triangles. Like a Penrose triangle, you can easily commit it to paper, and it pleases the easily gulled. Also like a Penrose triangle, it is conceptually impossible and cannot work.
Perhaps the “duck rabbit” is the better philosophical metaphor. You call it a “rabbit”, but it quacks like a duck, looks like a duck, and lays eggs. Abn assumption and assignment is just a novation by another name.
A bilateral contract is not a “material thing”, in the Cartesian sense: it is not res extensa. It has no life independent of the minds of the people who entered it. A contract is A’s personal obligation to B, and B’s personal obligation to A. Those obligations are defined by reference to their obligor: they do not — cannot float free of the person must see to it that they are carried out. Obligations have no separate legal personality and no independent existence.
Now a merchant who has agreed something with one customer may come to wish she hadn’t. She may find another merchant willing to step into her shoes and carry out the services required. This may all even happen with the customer’s agreement — even its encouragement.
Now Merchant A may transfer its rights to enjoy performance of customer’s personal obligations to Merchant B, easily enough, and without interrupting the customer’s personal obligations themselves.[2] But Merchant A cannot transfer its personal obligations to anyone else without destroying the contract which have legal force to those obligations and replacing it with a new one.
Thus, the novation, which preserves for the remaining party the economic effect of the old transaction whilst simultaneously cancelling it and replacing it with a new one.
Look: if an assignment and assumption agreement worked as intended, then this is how we would always transfer derivative contracts, as clearly the intention would always be to preserve the ontological integrity of one’s existing transactions as totally as one could. But yet the ISDA’s crack drafting squad™ — I grant you, an organisation given to gratuitous abstrusity, but not generally where it would imperil one’s tax burden — went with the novation. That there is no published ISDA standard form assignment and assumption agreement should tell what whatever the foregoing cannot.
- ↑ Namely, that terminating the existing transaction would realise a taxable profit.
- ↑ Indeed, a right to “assign” follows as a matter of common law unless the parties have agreed otherwise.