KAPILABEN AND ORS v. ASHOK KUMAR JAYANTILAL SHETH THROUGH POA MADHUSUDAN PATEL AND ORS [CIVIL APPEAL NOS. 10683-86 OF 2014 – (Decided by Supreme Court on 25-11-2019)]

The Concept

Assignment (transfer) of a contract may result by way of transfer of the rights or transfer of the obligations. If the obligations under a contract are being assigned to another party, such an assignment cannot take place without the consent of the counterparty to the contract.

This kind of assignment of contractual liabilities would amount to a novation, i.e., parties to a contract may agree to substitute a new contract in place of the old contract in which the same acts are to be performed by different parties resulting in substitution of liabilities.

Facts

Vendor had executed an agreement to sell in 1986 in favour of respondents (except Respondent 1) (“Original Vendees”), who had only paid a part of the consideration amount.

Thereafter, the Original Vendees executed agreements to sell in 1987 in respect of the Suit Property assigning the former’s rights under the 1986 Agreement in favour of Respondent 1.

Subsequently, disputes arose between the parties and Respondent 1 had filed suits against the Vendor and the Original Vendees seeking specific performance of the 1987 Agreements for remaining consideration.

The trial courts dismissed the suits on the ground that the assignment was not valid as the vendor had not consented to the same and HC reversed the judgment and hence this appeal.

Issue

Whether the Assignment in favour of the Respondents is valid?

Arguments by the Appellant

  1. There was no privity of contract between the  Appellants and the Respondent no. 1. 
  2. The agreement signed in 1987 between the original vendees and the Respondent was contingent upon the 1986 agreement getting completed, as the 1986 agreement got cancelled, the 1987 agreement does not stand. 
  3. The purported assignment under the 1987 agreement amounted to novation of the 1986 agreement and as the vendor had not given consent for the same, such assignment is not valid. 
  4. Respondent no. 1 had not shown willingness on their part to complete the 1986 agreement. 

Arguments by the Respondent

  1. The  Appellants and the original vendees are colluding to prevent the sale of the suit property. 
  2. The  Appellants cannot imply prohibition of assignment in the 1986 agreement.
  3. The requirement of consent of the other party arises only when there is a specific bar in the agreement on assignment and where the obligation is of a personal nature. 
  4. There was implied consent for assignment of rights.

Judgment

The Hon’ble Supreme Court partly allowed the Appeal. It dismissed the plea of Specific performance but allotted damages to the Respondents based on following reasons:

  1. An assignment can either be of rights or obligations. If the assignment is of obligations then the consent of the other party is required. Such an assignment is called novation. 
  2. Rights under a contract are freely assignable in India, until and unless the contract is of personal nature or there is a specific bar on such assignment under the law or the contract in question. 
  3. Assignment of contractual interest cannot be held to be valid merely because there is no express bar against assignability stipulated in the contract. 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. 

Reflective Question

Would the decision be different if instead of the payment obligations only the rights were assigned to the Respondent no. 1?