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The basic principles of contract

A Jolly Contrarian tiptoe through the tulips of consensus™

Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent
Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

Index: Click to expand:

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The act of unilaterally passing your rights, but not your obligations, to some other fellow.

Rights: As a matter of contract law, one can assign one’s rights without one’s counterparty’s consent (broadly speaking, why should she care?), unless your contract states that you cannot, in which case you cannot.

Obligations: One cannot unilaterally assign one’s obligations to anyone without one’s counterparty’s consent. This stands to reason, since another chap might not be as skillful, creditworthy or personally attractive as you. Therefore your counterparty must consent, and if she does, it is called a “novation”.

Equitable and legal assignments

  • The assignee of a legal assignment can bring an action against the debtor in its own name. A legal assignment is stipulated by Section 136 of the Law of Property Act 1925. There are certain formal requirements but it must be the whole debt, it must be in writing, signed by the assignor, must be unconditional, and the debtor must be notified. If effectively assigned, the debtor’s obligation is to the assignee and not the assignor. This can give certain people the hives, as regards AML and so on.
  • An equitable assignment, the assignee is going to need the assignor’s help.

General bar against assignment

It is quite common to see broker and service provider contracts refusing to let people assign their rights, at least, not without consent. It isn’t clear why anyone should be so exercised about it.

Assignment and its effect on Netting and Set-off

Could a right to assign by way of security upset close-out netting such that one should forbid parties making assignments by way of security of their rights under a master netting agreement (such as an ISDA Master Agreement or a 2010 GMSLA), for fear of undermining your carefully organised netting opinions?

Generally: No.

  • An assignment by way of security is a preferred claim in the assignor’s insolvency over the realised value of certain rights the assignor holds against its counterparty. It is not a direct transfer of those rights to an assignee: the counterparty is still obliged to the assignor, not the assignee, and any claim the assignee would have against the counterparty would only be by way of subrogation of the assignor’s claim, should the assignor have imploded in the meantime or something.
  • Nemo dat quod non habet”:[1] the unaffected counterparty’s rights cannot be improved (or worsened) by assignment and, it being a single agreement, on termination of the agreement the assignee’s claim is to the termination amount determined under the Agreement, which involves terminating all transactions and determining the aggregate mark-to-market and applying close-out netting. No one can give what they do not have.[2]
  • The assignee can be in no better position than the assignor and this takes subject to any set-off. The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel. See Bibby Factors Northwest Ltd v HFD Ltd (paragraphs 38 and 48).[3]

At the point of closeout, the assignee’s right is to any termination payment payable to the Counterparty. Therefore any assignment of rights is logically subject to the netting, as opposed to potentially destructive of it.

But: This is only true insofar as your netting agreement does not actively do something crazy, like disapplying netting of receivables which have been subject to an assignment and dividing these amounts off as "excluded termination amounts not subject to netting".

I know what you are thinking. "But why on God’s green earth would anyone do that?" This is a question you might pose to the FIA’s crack drafting squad™, who confabulated the FIA’s Professional Client Agreement, which does exactly that.

Subrogation rights?

What about subrogation rights under a guarantee? A debtor cannot set off a subrogated claim against liabilities the guarantor has to that debtor[4]. Would the converse situation apply? Could a debtor set off a subrogated claim by the guarantor against another liability owed to the debtor by the beneficiary of the guarantee? On one hand the set-off should have been applied before the guarantee has been called upon. On the other hand, what if the guarantee is expressed to be payable regardless of any set-off (as usually it would be).

See also


  1. “A chap cannot give away what he doesn’t own in the first place.” Of course, try telling that to a prime brokerage lawyer, or a counterparty to a 1994 New York law CSA.
  2. Except under New York law — isn’t that right, rehypothecation freaks?
  3. Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCACiv 1908
  4. A. E. Goodwin Ltd v A. G. Healing Ltd [1999] 1AC 1.