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The contractual prohibition of assignment - a comparative overview of the legal protection of the assignee

This paper examines the effect of a contractual prohibition on assignment and its embodiment in major European legal systems. A thorough comparative overview reveals two legal principles concerning the contractual prohibition on assignment in any
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  107 Dimitar Stoyanov, PhD*   THE CONTR CTU L PROHIBITION OF SSIGNEMENT  –   A COMPARATIVE OVIERVIEW OF THE LEGAL PROTECTION OF THE ASSIGNEE УДК: 347.441.141 Original research paper  Abstract  : This paper examines the effect of a contractual prohibition on assignment and its embodiment in major European legal systems. A thorough comparative overview reveals two legal principles concerning the contractual  prohibition on assignment in any national legislation that serve as a founding  stone of any respective set of rules in this matter. The first one, referred to as “the autonomy of the will” principle acknowledges the possibility for parties to exclude the transferability of a receivable with an absolute effect, enforceable against any third party. The second one, known as the “free alienability of assets” principle aims to promote the unrestricted transfer of rights over objects, thus limiting the effect of a prohibition on assignment to contracting  parties only. This existing diversity testifies for the need to provide a harmonized approach to the anti-assignment clause. The paper calls for an adoption of the provisions of several soft law instruments with regard to the contractual prohibition on assignment due to their balanced legal approach. Keywords:  contractual prohibition on assignment; autonomy of will; free alienability of assets; Draft Common Frame of Reference; Principles of  International Commercial Contracts. I. Introduction   Every modern legal system provides an abundance of rules regarding transfer and acquisition of rights on an ever-increasing number of objects. Several factors, such as the growing complexity of social relations and constant  pursuit of an economic advantage facilitate the process of treating a diverse group of rights as transferable. Part of this ongoing process is the possibility to obtain rights over intangible objects, such as receivables. Nowadays, receivables are no longer considered to be a matter limited solely to the srcinal contracting  parties, but are rather seen as an independent transferable object that can be freely sold and bought or used as security in the course of other ongoing  business activities. As a result, the assignment of receivables proves to be an important stimulus for both economy and business. However, as plausible as it THE CONTRACTUAL PROHIBITION OF ASSIGNMENT  108 might be, this business-driven policy to regard receivables as transferable rights like chattels, cannot eradicate the essential differences between them. The vast majority of national legislations provide a sharp distinction between chattels, that are tangible objects, and receivables, that are intangible ones. This circumstance predetermines a major difference between them. Should the owner of a chattel decide to dispose of his or her goods, no further interest should be taken into consideration. On the contrary, the alienation of a receivable could lead to affecting some legitimate interests of the debtor who has relied on the contract concluded with the initial creditor. In order to grant a sufficient level of legal protection of the debtor‟s interests, some national legislations allow parties to prohibit the assignment of a receivable srcinating from a contract by including a special anti-assignment clause in it, known as  pactum de non cedendo . Others insist on the principle of free alienability of rights regardless of their nature and either provide limitations to the legal consequences of such a clause or, ultimately, exclude its legal effect completely. The existing diversity throughout different national legislations in Europe with regard to the  pactum de non cedendo  has become a recent issue in the context of the Single European Market and one of its underlying legal and economic principles  –   the free movement of goods and services. The more recent supranational attempts to  propose a harmonized legal regime of the  pactum de non cedendo  have either  been limited to a certain type of contracts 257  or have been introduced in the form of a soft law codification 258 . In my opinion, these circumstances justify a comparative study of the implementation of the anti-assignment clause in different groups of national legislations. However, an in-depth analysis of the  pactum de non cedendo  would be incomplete without taking into consideration the conflict between the aforementioned two underlying legal principles  –   the autonomy of the will and the free alienability of assets. The provisions in the  particular national legislations on the anti-assignment clause are ultimately the result of embodying either one of the principles or of the adoption of a balanced outcome that purports to grant a sufficient level of legal protection to all parties involved. * Ass istant in Civil and Family Law, Faculty of Law, “St. Kliment Ohridski” University, Sofia, Republic of Bulgaria. 257  Cf. The UNIDROIT Convention on International Factoring (1988) whose provisions are exclusively aimed at factoring contracts. 258  The most influential soft law codifications that contain an explicit provision of the pactum de non cedendo are the Principles of European Contract Law (2000-2003), the Draft Common Frame of Reference (2009) and the UNIDROIT Principles of International Commercial Contracts (3 rd  revision from 2010).  109 II. National legislations that have adopted the principle of the autonomy of the will with regard to the anti-assignment clause It is far from surprising that there are national legislations providing an absolute effect of the anti-assignment clause. This consequence follows from the adoption of th e “autonomy of the will” principle with regard to claims. Those legislations provide a distinction between tangible objects and intangible ones. The former are subject to the law of property, comply with the numerus clausus  rule and restraint on alienation is provided by the legislator in order to achieve a higher purpose (e.g. objects that serve the public interest). The latter, however, are ruled by the law of obligations. Usually, contracting parties are free to determine the exact content and terms of their relationship in accordance with the principle of the autonomy of will. Since the claim arises as a consequence of the conclusion of a contract and it would otherwise not exist, some national legislations provide the opportunity for contracting parties to frame its exact content in a way that suits their interests in the best possible manner. This even includes the possibility to deprive the claim from its transferability. However, an anti-assignment clause may be introduced in various other forms. Firstly, the creditor may promise not to assign his claim. It is also possible that the effect of an assignment should depend on the consent of the debtor. A clause that impedes the assignment of a claim to certain persons or  prohibits a transfer for a certain period of time can also be considered as a weakened form of an anti-assignment clause 259 . This is an aspect of the freedom of contract 260 . There are numerous reasons to justify the absolute effect of an anti-assignment clause. It is generally admitted that an assignment eventually creates a risk for the debtor to pay a non-creditor. This may be the case where the assignee has transferred his claim, but prior to the notice a third person has presented himself to the debtor as the new assignee. Moreover, the debtor may overlook the notice of assignment and pay the assignor. In order to be discharged of the debt, he or she must pay again, since the assignee is the new legitimate creditor. This leaves the debtor with the necessity to bring a burdensome action for unjustified enrichment against the person who received the initial payment. Such an outcome is highly probable should the assignor decide to split his claim and assign it to two or more assignees. A second reason may be found in the case where the debtor and the creditor have continued mutual dealings. The debtor 259  Cf. Ute   Goergen,  Das Pactum de non cedendo. Eine Untersuchung zum vertraglichen Abtretungsverbot im englischen, französichen und deutschen Recht unter Einbeiziehung internationaler Harmonisierungsinitiativen. (Nomos Verlagsgesellschaft 2000) p. 48, where those clauses are considered as a “weakened”, yet fully operational form of a  pactum de non cedendo . 260  Cf. Greg   Tolhurst, Carter, J.W. , Prohibitions of assignment: contract or property?  –   Butterworths Journal of International Banking and Financial Law [December 2014], p. 692.  110 may wish to retain the right of set-off, a right which would be cut off as regards cross-rights arising after receiving the notice of assignment. Thirdly, the debtor may not want to deal with an unknown creditor who may act in a more pressing manner than the assignor. Finally, the inclusion of a  pactum de non cedendo   may be the result of the debtor‟s wish not to reveal his or her identity to any other person than his srcinal contracting party 261 . One of the first major civil law codifications to acknowledge the autonomy of will with regard to the anti-assignment clause is the German Civil Code  (Bürgerliches Gesetzbuch, BGB) from 1900. The German legislator has  provided the opportunity for parties to exclude the assignment by mutual agreement (§ 399, alt. 2 BGB). The prevailing view among German scholars is that the contractual prohibition of assignment has an absolute effect that can be enforced against any third party so that a purported transfer of a receivable is impossible 262 . The protection of legal interests of the debtor is nearly absolute. A third party can obtain rights over the receivable and become an assignee by a single exception, provided in § 405 BGB. Where the debtor has drafted a document as proof of the debt and the assignment has been carried out by  producing this document, the debtor cannot deny payment to a good faith assignee who does not know or should not have known of the contractual  prohibition of assignment 263 . At the same time there are other provisions concerning contractual restraint on alienation of assets that can be found outside § 399 BGB. The German legislator sets out that the power to dispose of a transferable right cannot be excluded or restricted by a legal transaction. However, it is also provided that the effectiveness of a stipulation not to transfer such a right is not affected (§ 137 BGB). The majority of German scholars are not inclined to find a conflict between both provisions. Some authors 264  suggest that a contractual prohibition of assignment is not at variance with the principle of alienability of rights, since the German legislator has explicitly laid down  both of them in the German Civil Code. This would mean that the  pactum de non cedendo  is generally admis sible in accordance with the principle “  Lex  specialis derogat legi generali ”. Those authors consider the legislatively imposed prohibition, set out in § 137 BGB (also known as  pactum de non alienado ), for parties to consider transferable rights as non-transferable, as the 261  About the reasons that justify the inclusion of a  pactum de non cedendo  into a contract cf. Woo-Jung Jon , A Comparative Analysis of the Regulation on Anti-Assignment Clauses. - Korea University Law Review [7/2010] p. 98-99. 262  Cf. Goergen, U. , Das Pactum de non cedendo., op.cit., 48-49. 263  About the good faith acquisition of a receivable cf. Beck’sche Kurz -Kommentare Palandt,  Band 7. Bürgerliches Gesetzbuch, (70., neubearbeitete Auflage, Verlag C.H.Beck, München, 2011) p. 611-612. 264  The most prominent representative among them is Fritz Raber, who analyses the provisions of the German civil law in order to explain the effect of a  pactum de non cedendo  in Austrian law. Cf. Fritz   Raber , The Contractual Prohibition of Assignment in Austrian Law, Notre Dame Law Review, [vol. 64, 1989] p. 181.  111 common rule, whereas the contractual prohibition of assignment (  pactum de non cedendo , § 399 BGB) is the special rule, since it is not applicable to all assets,  but its effect is limited solely to receivables. The prevailing theory in German legal doctrine is based on the freedom of contract. Scholars believe that in accordance with this principle parties can create an inalienable receivable. Since parties are usually allowed to determine the exact nature and content of their contractual relationship by themselves, they can modify a receivable in a way to deprive it from its transferability from the outset. The prohibition of assignment affects the substance of the receivable, modifying it into a highly personal right, “locked” between the  srcinal contracting parties. Thus, it falls outside the scope of § 137 BGB, since the  provision prohibits restraint on alienation of alienable rights only 265 . However, some recent studies suggest that there is a logical incompatibility between the absolute effect of an anti-assignment clause and § 137 BGB 266 . It is argued that the prevailing view among German scholars neglects some features of a receivable as an object of law in terms of its economic function and thus reaches to a contradiction. On the one hand, a receivable is undoubtedly accepted as a transferable right that can be used as security or in factoring. On the other hand, German scholars acknowledge the unchallenged possibility for parties to modify every aspect of a receivable, including its substance in a way to deprive it from its transferability. The result is that a right which is by nature transferable shall be considered non-alienable with an effect against any third party. This outcome is put to criticism, since it allows parties to evade the provision of § 137 BGB by prohibiting the transfer of a right that is alienable by its nature. This theory calls for a reform of § 399 BGB so that the effect of an anti-assignment clause is limited to contracting  parties only. This recent criticism actually complies with the historical development of the anti-assignment clause in German law. In the middle of the 19 th  century, German scholars limited the effect of the  pactum de non cedendo  solely to contracting parties. It was accepted that a contractual prohibition of assignment is nothing more than an obligation, whose breach constitutes an action for damages. However, this breach does not invalidate the assignment, since such an outcome would be detrimental to public interest. In the conflict between the individual will to consider a receivable inalienable and the public interest to use the receivable in the course of various other civil and commercial activities, 265  This theory is supported both by scholars and case law. Cf. Georgen, U. , Das Pactum de non cedendo., op.cit., p. 49. 266  Cf. Matthias   Armgardt , Die Wirkung vertraglicher Abtretungsverbote im deutschen und ausländsichen Privatrecht.  –   Rabels Zeitschrift für ausländisches und internationales Privatrecht, Bd. 73, H. 2, [April 2009] p. 320.
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