Volume 5, Chapter 13
Contract modifications are changes in the work required during construction. This chapter discusses the means of accomplishing these changes:
- Field orders
- Change orders
Guidelines for approving substantial change orders and granting time extensions are also given.
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13.1 FIELD ORDERS
- - Long Form, General Conditions.
If a change in the work must be accomplished before the University and contractor agree upon all terms of the change, a field order describing the change in the work scope and estimated contract sum and contract time adjustments, if applicable, may be issued by the University with or without the contractor's agreement.
Field orders are used only when (1) emergency conditions exist where life or property are endangered, (2) the extent of the work cannot be determined due to unknown conditions, or (3) a delay in proceeding with the work would affect the critical path and cause a delay to the entire Project. Field orders are not to be issued when the scope of the work and an estimated cost can be determined. A Change order or a directed change order must be used instead.
The contractor is required to promptly proceed with a field order. If the contractor does not agree with the order and does not sign it, the University's Representative must adjust the contract sum and contract time based upon back-up documentation provided by the contractor to justify actual costs and time, if applicable. A field order contains a statement that it shall be superseded by a change order that includes the actual adjustments, if any, to the contract sum and the contract time, as well as the change in the scope of the work.
13.1.1 Payment for Work Directed by a Field Order
- - Long Form, General Conditions.
When a contractor is directed by a field order to perform work, payment is made for the actual cost of the extra work plus a contractor fee in accordance with General Conditions, Subparagraph 22.214.171.124; however, payment cannot be made until a change order is issued incorporating that field order.
Field orders must be incorporated into change orders at the earliest possible time in order not to delay payment to the contractor. When the extra work on a field order extends over a lengthy period of time—more than one month the Facility converts the field order by issuing a "not to exceed price" change order. This special type of change order will allow the contractor to be paid for actual costs with the normal monthly progress payments.
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13.2 CHANGE ORDERS
- - Long Form, General Conditions.
A change order is a post-award modification to the contract. A change order may revise, add to, or delete previous requirements of the work, adjust the contract sum, or adjust the contract time.
By signing a change order, the contractor agrees to the cost and time, if applicable, of the contract modification; however, the University has the right to order changes in the work by issuing a field order (see 13.1). Change orders are not to be used in pre-award negotiations to negotiate a change in the scope of work, contract sum, or contract time. Change orders may not be executed until the contract has been signed by University and contractor.
Expected market rate for worker’s compensation (WC) on a Change Order (CO) can be calculated using the following formula:
Expected Rate = Current approved WCIRB (Workers Compensation Insurance Bureau of California) base rate by class code X contractor’s EMR (Experience Modification Rate) X 1.1.
WCIRB publishes approved rates by class code for all trades twice a year; these rates can be obtained from Campus Risk Management. EMR for a contractor can be verified at www.compline.com, for a fee. Alternatively, a campus may request the Compline EMR report from a contractor with their Change Order Request.
To expedite payment to the contractor, a directed change order may be issued by University without contractor's signature.
13.2.1 Cost Proposals
- - Long Form, General Conditions.
Before a change order can be prepared, the cost of the change must be determined. Four methods are used to determine the cost:
- Unit prices listed in the construction Agreement.
- Agreed-upon unit prices.
- Agreed-upon lump sum supported by a Cost Proposal.
- Actual cost plus a contractor fee.
When requested by the University, the Cost Proposal form, or an approved version thereof, must be used by the contractor. Instructions for the contractor are included on the form. The contractor's fee, which includes overhead and profit, is defined in the Cost Proposal and in General Conditions, Subparagraph 7.3.4. The University's Representative is required to review and recommend the submitted proposal.
Agreed-Upon Lump Sum Supported by a Cost Proposal. General Conditions, Subparagraph 126.96.36.199, authorizes compensation for extra work by a lump sum agreed upon by the University and the contractor. The lump sum proposed must be determined to be fair and reasonable. Require the contractor to provide an estimate with detailed backup using the Cost Proposal contained in the Exhibits.
Actual Cost Plus Contractor Fee. General Conditions, Subparagraph 188.8.131.52, authorizes compensation for extra work based on actual cost plus a contractor fee. The contractor is paid for the actual time spent by the contractor's employees and subcontractors and the materials they actually used. In addition, the contractor is paid for overhead and profit. The contractor is required to keep daily records of its actual costs, and submit them on a weekly basis for approval by the University's Representative.
This compensation method is used when the University and the contractor cannot agree on payment based on unit prices or a lump sum. In these cases, the University orders the work to be performed by issuing a field order (see 13.1). The field order must stipulate a "not-to-exceed price."
Unit Prices. General Conditions, Subparagraphs 184.108.40.206 and .2, authorize compensation for extra work based on unit prices stated in the construction documents or agreed-upon by the University and the contractor. This compensation method is used when the cost of a procedure can be estimated, but the quantity cannot be determined prior to beginning work. For example, if the contractor is required to perform excavation for a building foundation, the contractor may be required to excavate until the soil encountered is of specific physical properties. In this case, the contractor knows the cost of removing a unit of soil, but does not know how much soil will be removed before the excavation operation is considered complete.
The unit-price method of costing is usually anticipated before the project goes out to bid. Unit price amounts are usually stated in the Bid Form; however, unit prices may also be agreed upon during construction. The contractor's overhead and profit are included in unit-price figures.
13.2.2 Change Order Execution
After the Facility Project Manager reviews and recommends the change order, and the accounting office verifies sufficient funds are available, and the University's Representative recommends the change order, it is sent to the contractor for acceptance. After receipt of the signed change order from the contractor, the Facility approves the change order. Executed change orders are then distributed to all signature parties. The original and all backup is placed in the project file. (See 13.2.10 for restrictions on executing certain change orders.)
13.2.3 Change Orders and Beneficial Occupancy
- - Long Form, General Conditions.
According to General Conditions, Paragraph 9.6, the University may occupy and use part or all of the project prior to its completion. If this "Beneficial Occupancy" is taken, a Certificate of Beneficial Occupancy is required (see 17.1).
13.2.4 Change Orders and the Notice of Completion
Change orders may be issued to adjust the contract time or contract sum after the Notice of Completion (see 18.5) is filed. Such change orders must not change the scope of the work because the Notice of Completion represents that all work is complete. Work includes receipt of as-built documents, guarantees, manuals, and all required submittals.
13.2.5 Contractor Disapproval of Change Orders
- - Long Form, General Conditions.
The contractor may not agree with the content of a change order and, therefore, may refuse to sign the order. The Facility may issue a directed change order without contractor's signature when the Facility determines it is in it's best interest for the contractor to receive an adjustment of the contract sum or the contract time, as Facility believes to be properly due contractor, even though no agreement has been reached between the contractor and the Facility.
Promptly reject any attempted qualification the contractor adds to its agreement to the terms of a prepared change order on the face of the change order or in an accompanying letter. In unusual circumstances, General Counsel will provide language for accepting a qualified change order.
13.2.6 Substantial Changes to the Work After Contract Award
Substantial changes to the work may be required after contract award. If such changes are known during bidding—and their design is complete – use alternates that are exercisable for a stipulated period of time after award (see 13.2.9). If the design of the substantial change is not final and cannot be bid as an alternate, the substantial change may be accomplished as a change order only if the conditions of [II]:3.2.7, below, are met.
13.2.7 Guidelines for Substantial Change Orders
Additive Change Orders
If the cost of a change in the scope of work to be accomplished by a change order or series of change orders exceeds $100,000, or if the proposed changes in design are not incidental to the scope of the work as bid, the work may not be performed by change order unless it can be convincingly demonstrated that no advantage would be gained by conducting an advertised bid for the work. Breaking down an addition to the work such that it falls below the $100,000 for the purpose of avoiding the substantial change analysis is not acceptable. Also, note that changes to the work known after the bid date but prior to award are generally not acceptable because of the appearance of a non-competitive bid process. Changes made to Design-Build, Unit Price, Cost Plus and CM at Risk contracts have particular exceptions to the $100,000 threshold.
It is the Facility’s responsibility to document the rationale for a substantial change order. The written justification for the substantial change order shall identify the primary factors supporting the decision to proceed by change order. In addition to the primary factors, all of the following factors also must be considered in the written justification to determine if a change order is justified.
- COST – Will competitive bidding save money? To what extent will site conditions, storage, limited accessibility, etc. restrict interest of bidders for new work if the new work is bid as a separate project and thereby increase cost?
- REWORK – To what extent will rework be necessary to coordinate with new work? Will competitive bidding of new work affect the University’s ability to obtain correction of deficiencies in specialty work or integrated systems due to a division of responsibilities?
- INCIDENTAL – Is the new work incidental to existing work? A change order is inappropriate if there is a significant difference in function or in the programmatic features or additions to the as-bid design.
- SCHEDULE – To what extent will competitive bidding of the new work affect the existing/current schedule? To what extent will competitive bidding of the new work affect use of the completed space if the new work is competitively bid either during the performance of the existing contract or later?
Additive Change Orders to Design-Build, Unit Price and Cost Plus contracts
Change orders exceeding $100,000 to Design-Build, Unit Price and Cost Plus contracts are expected as a matter of course to assign detailed scope and costs to the contractor. These change orders typically involve scope clarifications and cost accounting; they do not increase the total cost of the contemplated contract as bid. Such a change order is substantial but is automatically justified if the scopes of the work and the cost have already been appropriately competitively bid through the contractor selection process or otherwise. The Facility must document the change in the Project File, noting that it is a function of the delivery method and is within the contemplated cost and scope. However, if the change alters the programmatic scope or the total contemplated cost or if the change is not incidental to the scope of the work as bid, then the change is substantial and is not automatically justified. The factors listed above must be used to determine if proceeding with the change as a Change Order is justified.
Additive Amendments/Change Orders to CM at Risk contracts
- Prior to award of bid package: Bid-packages (in phase 2) for CM at Risk contracts most commonly exceed $100,000 and are executed as Amendments and not Change Orders. This is a matter of course when assigning detailed scope, schedule and costs of the bid-packages to the contractor. The Amendments are substantial and justified because the work is competitively bid by the CM Contractor following University competitive bidding rules and procedures. The contractor’s fee to assume responsibility and risk of this work is included in the CM at Risk contract.
- After award of bid package: However, if a substantial change associated with a particular scope of work of a bid package is proposed after award of the contract for that bid package, the change must be evaluated as any typical change order would be, and the factors listed above must be used to determine if proceeding with the change as a Change Order is justified.
- Increase in the CM’s fee: At any time, an increase of $100,000 or more in the CM’s fee is a Substantial Change and must be justified in accordance with the requirements of this section 3.2.7 to be implemented as a change order.
The use of an independent design professional, cost consultant, construction scheduler, or contractor may be appropriate to document the justifications for proceeding with a substantial scope change by change order. A proposed additive substantial change order and the adequacy of the justification for using a change order instead of competitively bidding the work may be discussed with the Office of the President and Office of the General Counsel.
It is the responsibility of the facility to maintain a written record as part of the contract file of the facts and conditions which justify the determination that the change order is justifiable in accordance with the factors above.
Delay Cost Considerations. The possibility of contractor claims for reimbursement of indirect costs (e.g, extended overhead and loss of efficiency) because of the impact of a proposed change order on the work is evaluated by the Facility. Such an evaluation is especially pertinent if the cumulative value of contract sum adjustments exceeds or will exceed 5 percent of the original contract sum, or if the project is already significantly behind schedule, and completion would be further delayed by the proposed change order.
A change order which extends the contract time, when the contractor is already subject to Liquidated Damages due to delay in completion of the project, will forfeit the University's right to collect Liquidated Damages based upon the original contract time (see 13.4.1).
13.2.8 Change Orders Changing the Scope of Work
Certain steps must be taken prior to approving a change order which changes the formal scope of work for a capital project. A "change to the scope of work" is defined as any change that alters the programmatic capability or requirements as delineated in the project's approval document (e.g., Project Planning Guide, state-approved Preliminary Plans or Working Drawings).
Scope of Work Changes. Examples of changes to the scope of work include (1) significant changes to assignable or gross square feet, (2) number of housing units or classroom seats to be provided, and (3) functional capacity (e.g., sewer, electrical, or mechanical). Examples of what are not considered changes to the scope of work include (1) "technical" changes (e.g., unforeseen site conditions, errors in existing as-builts that require additions or revisions to work); and (2) requests for information from the contractor which require changes to the contract documents. Questions concerning scope changes should be addressed to the Office of the President for clarification.
State-Funded Projects. Change orders that change the scope of work are not permitted for state-funded Major Capital Improvement projects unless authority has been granted by the state, as coordinated through the Office of the President. For state-funded Minor Capital Improvement projects, the project description should be revised and forwarded to the Office of the President for approval.
Non-State-Funded Projects. For non-state-funded projects, the appropriate approval body must be notified. In the case of Chancellor-approved Minor and Major Capital Improvements, a Facility approval process should be in place. For both Regents and Office of the President approved projects, the change in scope must be forwarded to the Office of the President for information required and approval.
In all cases, should the most recently approved Capital Improvement Budget require a budget augmentation due to the change order, the appropriate budget augmentation request procedure must be followed (see FM3).
13.2.9 Change Orders for Post-Award Alternates
Post-award alternates are alternates that the University may accept after award of the contract (see 17.3.2). Alternates are listed in the Agreement by number, price, and time required for acceptance. The alternate's scope of work must be described in Specifications, Section 01100.
Post-award alternates are accepted and added to the contract by change order. Contractual conditions are not changed. Track the time limits for accepting post-award alternates, as listed in the Agreement. If a time limit expires, the contractor is not obliged to accept the change order.
Alternates which do not stipulate a delayed time for acceptance may not be incorporated by change order.
13.2.10 Authority Needed to Negotiate and Execute Change Orders
The Facility may negotiate and execute a change order if the cost of the change is within appropriated funds and if the conditions below are met. If the new contract sum, including the cost of the change order, is in excess of appropriated funds, contact the Office of the President to obtain specific authorization by Resolution of The Regents.
- Before a change order is issued that changes the exterior appearance of a building design previously approved by The Regents, the proposed exterior changes must be submitted to The Regents for approval.
- Approval from the Office of the President is required when a change order alters the scope of a major capital improvement project or the description of a minor capital improvement project (see 13.2.8).
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13.3 MODIFICATION OF CONTRACTUAL CONDITIONS
When a modification of contractual conditions is desired as distinguished from a change in work scope, contract sum, or contract time the modification is made by change order. Refer such change orders to the Office of the General Counsel for approval.
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13.4 TIME EXTENSIONS RESULTING FROM DELAYS
- - Long Form, General Conditions.
- Long Form, Specifications, Section 01310.
The contract time may be extended by the number of calendar days that certain causes or events prevent work from being completed. All time extensions are granted by means of a change order (see 13.2). Space is provided for stating the adjustment of contract time, if any, on the Change Order form.
General Conditions, Article 8, authorizes the granting of an extension of time for delays in completion if six conditions are met.
To be eligible for a time extension for delay, the contractor must submit a Change Order Request (see Long Form, General Conditions, Article 4) to the University's Representative within 3 working days from the date on which a delay begins. The University's Representative is required to determine whether the cause or event identified in the request will prevent the project from being completed by the completion date (as adjusted) and, if so, the number of calendar days that the contract time is extended.
Time extensions may need to be granted for delays to completion resulting from ordered changes in the work.
Allowable Delays. Delays caused by conditions beyond the contractor's control and without the fault or negligence of the contractor may entitle the contractor to an extension of contract time. These delays are:
- Strikes, boycotts, or like obstructive actions by employees or labor organizations.
- Acts of God.
- A man-made unforeseen site condition.
- An error or omission in the contract documents.
- The University's change of scope of the work.
- The University's decision to suspend the work.
- The failure of University or University's Representative to timely perform any contract obligation.
Non-Allowable Delays. Delays of the completion of the work beyond the expiration of the contract time and resulting from causes other than those listed under "Allowable Delays," above, or "Compensable Delays," below result from causes under control of the contractor. Non-allowable delays are:
- A naturally occurring unforeseen site condition.
- The financial inability, misconduct, or default of the contractor, a subcontractor, or supplier.
- The unavailability of materials or parts.
Compensable Delays. Compensable delays are events caused by the negligence or acts of the University, its employees, or of the University's Representative. These delays may entitle the contractor to an adjustment of the contract time and the contract sum. Examples of compensable delays include, but are not limited to, the following:
- Change in the scope of the work.
- Errors or omissions in the contract documents.
- Lack of timely direction, problem resolution, or approvals by the University's Representative.
- Stopping the work for University's convenience.
Compensation for delays is limited to adjustments to the contract sum as determined by General Conditions, Article 7.
13.4.1 Guidelines For Granting Time Extensions Resulting From Delays
- - Long Form, General Conditions.
In general, a delay is an occurrence that stops or detains the work for a period of time. Some delays adversely affect work completion, and an extension of the contract time may be granted. Other delays either do not affect work performance, do not prevent timely completion, or may be the responsibility of the contractor, and a time extension must not be granted (see 13.4).
The University's Representative is designated as the initial interpreter of the contract documents. The University's Representative, therefore, determines whether a timely request for a time extension has been made and, if so, whether there has been cause for delay. The University's Representative then determines if a time extension may be granted and the length of the extension.
Use the following guidelines to evaluate proposed time extensions:
- To be eligible for a time extension, the contractor must submit to the University's Representative a written change order request for a stipulated time extension within 3 working days of the beginning of a delay. If the University's Representative approves the contractor's request, a change order that adjusts the contract time is issued.
- Any extension of time relieves the contractor from the assessment of liquidated damages for the period of the time extension (see 15.6).
- To be eligible for a time extension under General Conditions, Article 8, the contractor must meet the six conditions listed in General Conditions, Subparagraph 8.4.1. These conditions are:
- When the event causing the delay commences, the contractor has complied with all the contract requirements.
- The delay is critical.
- The delay is supported by the contract schedule.
- The contractor submits a change order request within 3 working days of the date the contractor discovers the cause of the delay.
- The delay is not caused by any of the three causes listed in 13.4, "Non-Allowable Delays."
- The delay is caused by one or more of the eight causes listed in 13.4, "Allowable Delays."
- If two or more events occur at the same time and delay the work, the contractor may be entitled to a time extension unless the contractor is responsible for all the events. If a delay that is the contractor's responsibility occurs concurrently with a delay that is the University's responsibility or that is not the responsibility of either party a time extension may be granted to the extent of the duration of the excusable delay. A time extension granted for concurrent delays cannot be computed consecutively in any case.
- If strikes, boycotts, or like obstructive actions not caused by any act or conduct of the contractor delay a work activity on the critical path schedule, a time extension may be granted. The fact that a trade strikes during the course of work is not an automatic ground for a time extension. For example, if elevator workers go on strike for 30 days during the middle of a two-year project, but the strike does not affect a work activity on the critical path schedule, a time extension is not to be granted.
- A shortage or delayed delivery of materials is not an authorized ground for a time extension unless the shortage or delay was caused or contributed to by the University.
- The contractor may be granted a time extension if a change in the scope of the work adversely affects a work activity on the critical path schedule of the contractor.
- The contractor may be granted a time extension if Beneficial Occupancy (see 17.1) adversely affects a work activity on the critical path schedule or prevents the completion of the work as scheduled.
- The contractor may be granted a time extension if the work of another contractor, under separate contract with the University, adversely affects a work activity on the critical path schedule of the contractor.
- If a work activity on the critical path schedule is delayed by a denial of site access, lack of timely approvals or the like, the contractor may be granted a time extension for the period of effect of such a delay. Delays caused by the contractor or subcontractors cannot be the basis for a time extension.
- The contractor may be granted a time extension if a work activity on the critical path schedule is delayed by errors or omissions in the contract documents or by lack of timely direction, problem resolution, or approval by the University's Representative.
- Minor field changes, instructions, or clarifications cannot be the basis for a time extension unless the change extends the critical path past the completion date.
- The contractor may be granted a time extension if alternates quoted in the bid form are exercised after the contract is awarded, and such alternates include adjustments of the contract time.
Document the effective date and length of a delay to prevent the possible overlapping of time extensions from various causes. Effective dates of time extensions granted are extremely important information in the event that disputes arise about alleged delays or the timely completion of the work. Grant an extension of time for only the period of effect of a delay, and if two delays occur on the same date, grant only one calendar day of time extension.
Arriving at a New Completion Date. The contract time is based on calendar days. General Conditions, Article 14, implies that the work normally be performed only on weekdays. The total number of days required to complete the work is therefore determined by estimating the number of workdays (weekdays) and then by adding intervening Saturdays, Sundays, and holidays.
The completion date would then be determined by adding those calendar days to the previous completion date. For example, if the original contract time is 365 days, and the scope of the work was increased by change order that took the contractor six working days to perform, the time extension granted would be for eight days, and the new completion date would be determined by adding those eight days to the previous completion date.
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13.5 TIME EXTENSIONS RESULTING FROM FACTORS OTHER THAN DELAYS
- - Long Form, General Conditions.
General Conditions, Paragraph 7.2, provides for adjustments in the contract time for work covered by a change order (see 13.2).
A time extension may result from a claim made by the contractor as stated in General Conditions, Paragraph 4.3. The University's Representative makes decisions on such claims, and a time extension may be granted as a result of the University's Representative's interpretations or decisions required by the provisions of General Conditions, Paragraphs 4.4 and 4.5.
Either the contractor or the University may appeal the University's Representative's decision on a claim. The appeal may go to mediation, arbitration, or litigation (see 16). The arbitrator or court may award a time extension, or may increase or decrease given time extensions.
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Revised October 5, 2012 (Change # FM 12-013-P)
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"Assignee" redirects here. For the racehorse, see Assignee (horse).
An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party, the assignor, to another party, the assignee. It can also be a transfer of a benefit, including an equitable interest, according to established rules (at common law or in equity). The rights may be vested or contingent. The details of the assignment determines some additional rights and liabilities (or duties).
Typically a third party is involved in a contract with the assignor, and the contract is, in effect, transferred to the assignee. For example, a borrower borrows money from a local bank. The local bank receives a mortgage note and can thereafter transfer that note to a financial institution in exchange for a lump-sum of cash, thereby assigning the right to receive payment from the borrower to another entity. Mortgages and lending contracts are relatively amenable to assignment since the lendor's duties are relatively limited; other contracts which involve personal duties such as legal counsel may not be assignable.
The related concept of novation is not assignment. Rather than assigning only the rights to another party, novation involves the replacement of the original party with a new party or the replacement of the original contract with a new contract. Since novation creates a new contract, it requires the consent of all parties, but assignment does not require the consent of the nonassigning party, but in the case of assignment, the consent of the nonassigning party may be required by a contractual provision.
The assignment does not necessarily have to be in writing; however, the assignment agreement must show an intent to transfer rights. The effect of a valid assignment is to extinguish privity (in other words, contractual relationship, including right to sue) between the assignor and the third-party obligor and create privity between the obligor and the assignee.
Liabilities and duties
Unless the contractual agreement states otherwise, the assignee typically does not receive more rights than the assignor, and the assignor may remain liable to the original counterparty for the performance of the contract. The assignor often delegates duties in addition to rights to the assignee, but the assignor may remain ultimately responsible.
However, in the United States, there are various laws that limit the liability of the assignee, often to facilitate credit, as assignees are typically lenders. Notable examples include a provision in the Truth in Lending Act and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.
In other cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except that issues, such as lack of performance, by the assignor may not be a valid defense for the obligor. As a response, the United States Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses", which "effectively abolished the [holder in due course] doctrine in consumer credit transactions". In 2012, the commission reaffirmed the regulation.
Assignment of contract rights
Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if Party A contracts with Party B to sell Party A's car to Party B for $10, Party A can later assign the benefits of the contract - i.e., the right to be paid $10 - to Party C. In this scenario, Party A is the obligee/assignor, Party B is an obligor, and Party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that Party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting Party C. When an assignment is made, the assignment always takes place after the original contract was formed. An Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner. Compare Novation.
When assignment will be permitted
The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, the assignment of a legal malpractice claim is void since an assignee would be a stranger to the attorney-client relationship, who was owed no duty by the attorney and would imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.
Torts are not assignable as public policy, and various statutes may prohibit assignment in certain instances. In addition, the Restatement (Second) of Contracts lists prohibitions in §317(2)(a) based upon the effect to the nonassigning party (obligor), with similar prohibitions in the Uniform Commercial Code §2-210. For example, UCC §2-210 states the following:
|“||Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreementotherwise [sic].||”|
Requirements for an effective assignment
For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.
A contract may contain a non-assignment clause, which prohibits the assignment of specific rights and some various rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".
Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.
Requirement of a writing
There are certain situations in which the assignment must be in writing.
- Assignment of wages; additionally, statutes may prohibit this assignment
- Assignment of any interest in real property
- Assignment of choses in action worth over $5,000
A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause may also bar delegation.
Legal remedies may be available if the nonassigning party's rights are affected by the assignment.
Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another. There are some exceptions to the revocability of a donative assignment:
- The assignment can not be revoked if the obligor has already performed
- The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
- The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token.
- Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment.
Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.
Breach and defenses
A cause of action for breach on the part of the obligor lies with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee "stands in the shoes" of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor. Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B's house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A's work. If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected.
When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.
Occasionally, an unscrupulous assignor will assign exactly the same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions.
In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies. In some countries, the rights of the respective assignees are determined by the old common law rule in Dearle v Hall.
- Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever.
- Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee.
- Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above.
Special rules for assignment of certain rights
See also: Rule in Dumpor's Case and Privity of estate
Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of the right to possess property. With an assignment, the assignor transfers the complete remainder of the interest to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. The assignee's interest must abut the interest of the next person to have the right to possession. If any time or interest is reserved by a tenant assignor then the act is not an assignment, but is instead a sublease.
The liability of the assignee depends upon the contract formed when the assignment takes place. However, in general, the assignee has privity of estate with a lessor. With privity of estate comes the duty on the part of the assignee to perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor retains the obligations to perform on covenants to maintain or repair the land.
If the assignor agrees to continue paying rent to the lessor and subsequently defaults, the lessor can sue both the assignor under the original contract signed with the lessor as well as the assignee because by taking possession of the property interest, the assignee has obliged himself to perform duties under covenant such as the payment of rent.
Unlike a Novation where consent of both the lessor and lesse is required for the third party to assume all obligations and liabilities of the original lessee, an assignment does not always need the consent of all parties. If the contract terms state specifically that the lessor's consent is not needed to assign the contract, then the lesee can assign the contract to whomever the lesee wants to.
Absent language to the contrary, a tenant may assign their rights to an assignee without the landlord's consent. In the majority of jurisdictions, when there is a clause that the landlord may withhold consent to an assignment, the general rule is that the landlord may not withhold consent unreasonably unless there is a provision that states specifically that the Landlord may withhold consent at Landlord's sole discretion.
A person can also assign their rights to receive the benefits owed to a partner in a partnership. However, the assignee can not thereby gain any of the assignor's rights with respect to the operation of the partnership. The assignee may not vote on partnership matters, inspect the partnership books, or take possession of partnership property; rather, the assignee can only be given the right is to collect distributions of income, unless the remaining partners consent to the assignment of a new general partner with operational, management, and financial interests. If the partnership is dissolved, the assignee can also claim the assignor's share of any distribution accompanying the dissolution.
Intellectual property rights
See also: transfer (patent)
Ownership of intellectual property, including patents, copyrights, and trademarks, may be assigned, but special conditions attach to the assignment of patents and trademarks. In the United States, assignment of a patent is governed by statute, 35 U.S.C. § 261. Patent rights are assignable by an "instrument in writing." Title in a patent can also be transferred as a result of other financial transactions, such as a merger or a takeover, or as a result of operation of law, such as in an inheritance process, or in a bankruptcy. An assignment of a patent can be recorded with the United States Patent and Trademark Office. Although such recording is not required, if an assignment is not recorded at the USPTO within three (3) months or prior to a subsequent assignment, the assignment will be void against a subsequent assignee without notice of the earlier, unrecorded assignment.
With respect to a trademark, the owner of the mark may not transfer ownership of the mark without transferring the goodwill associated with the mark.
Companies sometimes request from employees that they assign all intellectual property they create while under the employment of the company. This is typically done within an Employment Agreement, but is sometimes done through a specific agreement called Proprietary Information and Inventions Agreement (PIIA).
Personal injury torts
The standard rule is that personal injurytort causes of action are nonassignable as a matter of public policy. These should be distinguished from final settlements or judgments resulting from lawsuits brought on such causes of action, which may be assignable.
In the majority of jurisdictions, assignments of legal malpractice causes of action are void as against public policy.
An equitable assignment is an assignment, or transfer of rights, in equity.
There are numerous requirements that exist for an equitable assignment of property, outside the 'standard' clear and unconditional intention to assign. These requirements are fundamental characteristics of a statutory assignment: Absolute assignment (an unconditional transfer: conditions precedent or part of a debt are not absolute) and the assignment must be made in writing and signed by the assignor, and in particular, this applies to real property.
Assigning future property in equity cannot be gratuitous. The assignor must receive consideration for the agreement, otherwise the assignment will be ineffective. However, an absolute assignment does not require consideration to be given. Secondly, between the period of agreement between assignor and assignee and acquisition by the assignor, the assignees rights are not contractual, but rather a proprietary right to the property. This means the assignee has an interest in this future property, in the same manner any owner has over property.
In equity, these principles operate to protect both the assignor and the assignee. In Norman v Federal Commissioner of Taxation, a taxpayer attempted to assign by deed, to his wife certain moneys which he was eventually going to receive. This included dividends and interest due on loans. The court held the interest and the dividends were expectancies or possibilities which could not be assigned without consideration. The court's worry was that assignments without consideration might be used as instruments of fraud, to avoid creditors and tax collection.
Courts will not enforce a contract to assign an expectancy unless there is a valuable consideration. For example, under a settlement of property the respondent "the son" would have been entitled to an equal portion of properties along with his other siblings which was gained in a settlement by his mother. This portion was only his when allocated to him at his mothers discretion. Prior to this allocation being made, the respondent allotted his benefit to trustees for a voluntary settlement. He was assigning or purporting to assign something which he might become entitled to in the future, not a contingent interest. The judgment held it ineffective and elaborated on previous points to state the respondent cannot be compelled to allow the trustees to retain the appointed sum.
- ^For the assignment of claim see Trans-Lex.org
- ^Australian Law Dictionary (second ed.). oxford university press.
- ^ abcNorman v Federal Commissioner of Taxation HCA 21, (1963) 109 CLR 9, High Court (Australia).
- ^Tips and traps in contracting: novation versus assignmentArchived January 26, 2013, at the Wayback Machine.. Association for General Counsel. (Australia).
- ^ abAssignee Liability: Through the Minefield. Arnstein & Lehr LLP.
- ^See 15 U.S.C. 1641(a).
- ^ abCommercial Paper: Holder in Due Course & DefensesArchived 2012-11-28 at the Wayback Machine..
- ^FTC Opinion Letter Affirms Consumers' Rights under the Holder Rule. FTC.
- ^ abcdStark T. (2003). Negotiating and Drafting Contract Boilerplate, Ch. 3: Assignment and Delegation. ALM Publishing.
- ^Chapter 18: Assignment and Delegation. LexisNexis study outline.
- ^Uniform Commercial Code § 2-210. Delegation of Performance; Assignment of Rights.
- ^Pony v. County of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
- ^Cowan Liebowitz & Latman, PC v. Kaplan, 902 So. 2d 755, 759-760 (Fla. 2005).
- ^Westbourne Grammar School v Sanget Pty VSCA 39, Court of Appeal (Vic, Australia).
- ^Conveyancing Act 1919 (NSW) s 23C.
- ^Federal Commissioner of Taxation v Everett FCA 39, (1978) 21 ALR 625 at p. 643, Federal Court (Full Court) (Australia).
- ^Northumberland (Duke) v Inland Revenue Comrs