Restat 2d of Contracts, § 322

• Restatement of the Law, Second, Contracts
• Chapter 15- Assignment and Delegation
• Topic 1- What Can Be Assigned or Delegated
• § 322 Contractual Prohibition of Assignment

(1) Unless the circumstances indicate the contrary, a contract term prohibiting assignment of "the contract" bars only the delegation to an assignee of the performance by the assignor of a duty or condition.
(2) A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested,

(a) does not forbid assignment of 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;

(b) gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective;

(c) is for the benefit of the obligor, and does not prevent the assignee from acquiring rights against the assignor or the obligor from discharging his duty as if there were no such prohibition.

Comment:

a.  Rationale.  In the absence of statute or other contrary public policy, the parties to a contract have power to limit the rights created by their agreement. The policy against restraints on the alienation of property has limited application to contractual rights. Compare Restatement of Property §§ 404-17. A term in a contract prohibiting assignment of the rights created may resolve doubts as to whether assignment would materially change the obligor's duty or whether he has a substantial interest in personal performance by the obligee (see §§ 317-19); or it may serve to protect the obligor against conflicting claims and the hazard of double liability (see §§ 338-43). But as assignment has become a common practice, the policy which limits the validity of restraints on alienation has been applied to the construction of contractual terms open to two or more possible constructions. Compare Restatement of Property §§ 418-23.

b.  Ineffective terms.  In some circumstances where contractual prohibitions of assignment are regularly limited by construction, explicit contractual provision would not change the result. Where a right to the payment of money is fully earned by performance, for example, a provision that an attempt to assign forfeits the right may be invalid as a contractual penalty. See § 356. If there is no forfeiture, and the obligee joins in demanding payment to the assignee, a contractual prohibition which serves no legitimate interest of the obligor is disregarded. Uniform Commercial Code §§ 2-210 and 9-318 render contractual prohibitions ineffective in additional circumstances, and in some situations a prohibition is invalid as a restraint on alienation aside from statute. See Uniform Commercial Code § 9-311.

Illustrations:

1. A holds a policy of industrial insurance issued to him by the B Insurance Company. After lapse for failure to pay premiums, B refuses to pay the "cash surrender value" provided for in the policy. A and others similarly situated assign their claims to C for collection. The assignment is effective without regard to any contractual prohibition of assignment.

2. A and B contract for the sale of land by B to A. A fully performs the contract, becomes entitled to specific performance on B's refusal to convey the land, and then assigns his rights to C. C is entitled to specific performance against B without regard to any contractual prohibition of assignment. See Restatement of Property § 416.

c.  Construction.  The rules stated in this Section do not exhaust the factors to be taken into account in construing and applying a prohibition against assignment. "Not transferable" has a clear meaning in a theatre ticket; in a certificate of deposit the same words may refer to negotiability rather than assignability. Where there is a promise not to assign but no provision that an assignment is ineffective, the question whether breach of the promise discharges the obligor's duty depends on all the circumstances. See §§ 237, 241.

d.  Consent of the obligor.  Ordinarily a contractual prohibition of assignment is for the benefit of the obligor. In such cases third parties cannot assert the invalidity of a prohibited assignment if the obligor makes no objection. Where, however, the prohibition is not solely for the benefit of the obligor, waiver by the obligor may not validate the assignment. The validity of restraints on alienation in such cases is governed by considerations similar to those governing the validity of spendthrift trusts. See Restatement, Second, Trusts §§ 153-57.

Illustrations:

3. B contracts to transfer land to A on payment of $ 5000. The contract provides that A shall not assign his right. A assigns his right to C. B, on receiving $ 5000 from C, conveys the land to him. B's duty under his contract with A is discharged.

4. A Manufacturing Company contracts with B Insurance Company for group insurance on the lives of A's employees. The policy and certificates issued under it to individual employees limit the class of permitted beneficiaries, permit the employee to change the beneficiary, forbid irrevocable designation of a beneficiary, and provide that the certificate is not assignable. A certificate is issued to C, a widower, who designates his son D as beneficiary and delivers the certificate to D asa gift. Later C remarries and designates his second wife E as beneficiary. On C's death B interpleads D and E, paying the insurance money into court. E is entitled to the fund.

This Section is new. Subsection (1) is based on Uniform Commercial Code § 2-210(3), which applies to contracts for the sale of goods. Comment d changes former § 176 from a rule of law to a canon of construction. See 3 Williston, Contracts § 422 (3d ed. 1960); 4 Corbin, Contracts §§ 872, 873 (1951); Annot., 37 A.L.R.2d 1251 (1954). But see Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 Yale L.J. 1057, 1118-20 (1954).

Comment b.  Reasoning from Uniform Commercial Code § 9-318, the Oklahoma Supreme Court found a legislative purpose to bar all anti-assignment clauses, even in situations not subject to Article Nine of the Code, American Bank of Commerce v. City of McAlester, 555 P.2d 581 (Okl. 1976). Illustration 1 is based on National Life & Acc. Ins. Co. v. Magers, 319 S.W.2d 53 (Ct. App. 1958), aff'd, 329 S.W.2d 752 (Mo. 1959); see also International Rediscount Corp. v. Hartford Accident and Indem. Co., 425 F. Supp. 669 (D. Del. 1977); Annots., 56 A.L.R. 1391 (1928), 122 A.L.R. 144 (1939). Illustration 2 is based on Gunsch v. Gunsch, 71 N.W.2d 623 (N.D. 1955); cf. Socony Mobil Oil Co. v. Continental Oil Co., 335 F.2d 438 (10th Cir. 1964); see Annots., 138 A.L.R. 205 (1942), 148 A.L.R. 1361 (1944).

Comment c.  See Trubowitch v. Riverbank Canning Co., 30 Cal.2d 335, 182 P.2d 182 (1947); Union Bond and Trust Co. v. M and M Wood Working Co., 256 Or. 384, 474 P.2d 339 (1970); Detroit Greyhound Emp. Fed. Credit Union v. Aetna Life Ins. Co., 381 Mich. 683, 167 N.W.2d 274 (1969). But see Rother-Gallagher v. Montana Power Co., 164 Mont. 360, 522 P.2d 1226 (1974). As to franchise agreements, see Annot., 59 A.L.R.3d 244 (1974). As to certificates of deposit, see Annot., 59 A.L.R. 1478 (1929). As to assignment of wages, see Annot., 76 A.L.R. 1304 (1932).

Comment d.  That a waiver by the obligor must be clear and unequivocal, and that the assignee of an ineffective assignment retains rights against the assignor, see Paul v. Chromalytics Corp., 343 A.2d 622 (Del. Super. Ct. 1975). Illustration 3 was Illustration 1 to former § 176. Illustration 4 is based on Bimestefer v. Bimestefer, 205 Md. 541, 109 A.2d 768 (1954); cf. Thomas v. Thomas, 192 Cal. App.2d 771, 13 Cal. Rptr. 872 (1961).

ALR Annotations:

Agency: Anti-assignment clause in contract as precluding enforcement by undisclosed principal. 75 A.L.R.3d 1184.
Validity, construction, and effect of clause in franchise contract prohibiting transfer of franchise or contract. 59 A.L.R.3d 244.
Validity of anti-assignment clause in contract. 37 A.L.R.2d 1251.

Digest System Key Numbers:

Assignments 58