Assignment Of Interest Is Not Valid Merely Because It Was Not Expressly Prohibited In Contract: SC [Read Judgment]

The Supreme Court has observed that assignment of contractual interest cannot be held to be valid merely because there is no express bar against assignability stipulated in the contract.

The bench comprising Justice Mohan M. Shantanagoudar and Justice Aniruddha Bose observed that to examine whether an interest is assignable, it has to be seen whether the terms of the contract, and the circumstances in which the contract was entered into, lead to an inference that the parties did not intend to make their interest therein assignable

The contention taken in this case [Kapilaben vs. Ashok Kumar Jayantilal Sheth] was that the requirement of consent of the other party for assignment under Section 15(b) of the Specific Relief Act is only applicable in cases where the obligation is of a personal nature or where there is an express bar in the contract prohibiting such assignment of interest.

To answer this issue, the bench reiterated the general principles governing assignability of contracts. It noted that though the provisions of the Contract Act do not particularly deal with the assignability of contracts, there are judgments to the effect that a party to a contract cannot assign their obligations/liabilities without the consent of the other party. Even in a case of assignment of rights simplicitor, such assignment would necessarily require the consent of the other party to the contract if it is of a 'personal nature'; the bench said referring to Commentary by Pollock and Mulla.

It then explained the Section 15(b) of the Specific Relief Act as follows:

The rule stated in Section 15(b) is that any interest in a contract can be specifically enforced by the assignee thereof, except where the 'personal quality' of the party is a material ingredient in the contract; or where the contract, expressly or by necessary implication, prohibits the beneficiary from transferring their contractual interest to third parties. Hence Section 15(b) does not contradict the general law on assignability of contracts as laid down by this Court, but rather clarifies that the same conditions will have to be satisfied if an assignee seeks to secure specific performance of the assigned contract. Therefore, for example, a contract for a singing performance or a painting may not be assignable as it involves a personal skill and even if it is assigned, the assignee cannot seek specific performance in respect of such a contract. Whereas it may be said that general contracts for payment of money or building work do not involve any personal considerations, as it makes no difference as to who discharges the obligation to pay or perform a certain act under the contract. Hence the assignees of parties to such contracts may seek specific performance.

It observed that where the conferment of a right or benefit is contingent upon, or coupled with, the discharge of a burden or liability, such right or benefit cannot be transferred without the consent of the person to whom the co-extensive burden or liability is owed. It said:

"It further has to be seen whether conferment of benefits under a contract is based upon the specific assurance that the coextensive obligations will be performed only by the parties to the contract and no other persons. It would be inequitable for a promisor to contract out his responsibility to a stranger if it is apparent that the promisee would not have accepted performance of the contract had it been offered by a third party. This is especially important in business relationships where the pre-existing goodwill between parties is often a significant factor influencing their decision to contract with each other."

Referring to Section 40 of the Contract Act, the bench observed:

It is clear from the above that the promisor 'may employ a competent person', or assign the contract to a third party as the case may be, to perform the promise only if the parties did not intend that the promisor himself must perform it. Hence in a case where the contract is of personal nature, the promisor must necessarily show that the promisee was agreeable to performance of the contract by a third person/assignee, so as to claim exemption from the condition specified in Section 40 of the Contract Act. If the promisee's consent is not obtained, the assignee cannot seek specific performance of the contract.

Having noted the above principles, the Court observed that the agreement in the instant case does not contain any express bar against assignability. Two judgments were relied on to support the contention that the requirement of consent of the other party for assignment is required only when there is an express bar in the contract prohibiting such assignment of interest.

In this regard, the bench said:

"These decisions cannot be taken to lay down a blanket rule that in every case where there is no express bar against assignability stipulated in the contract, assignment of the interest therein should be upheld without looking at the context in which the parties contracted with each other. It has to be seen whether the terms of the contract, and the circumstances in which the contract was entered into, lead to an inference that the parties did not intend to make their interest therein assignable."

It referred to following observation made by the Constitution bench in Khardah Company Ltd v. Raymon & Co (India) Private Ltd., AIR 1962 SC 1810:

Therefore on the question whether there was an agreement between the parties that the contract was to be non-transferable, the absence of a specific clause forbidding transfer is not conclusive. What has to be seen is whether it could be held on a reasonable interpretation of the contract, aided by such considerations as can legitimately be taken into account that the agreement of the parties was that it was not to be transferred. When once a conclusion is reached that such was the understanding of the parties, there is nothing in law which prevents effect from being given to it." 

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