Assignment of Contractual Rights: Consent Requirements and Third Party Obligations in Philippine Law

The assignment of contractual rights is a common business tool, but it can create unexpected legal complications. In Fort Bonifacio Development Corporation v. Fong (G.R. No. 209370, March 25, 2015), the Supreme Court clarified a critical point: an assignee of contractual rights may be bound by restrictions in the original contract, including a requirement to obtain the other party's consent before assignment.

The Facts of the Case

Fort Bonifacio Development Corporation (FBDC) entered into a Trade Contract with MS Maxco Company, Inc. for construction work on a condominium project. The contract contained a clause prohibiting MS Maxco from assigning its rights without FBDC's written consent.

When MS Maxco incurred delays and defective work, FBDC hired other contractors to complete and rectify the project, deducting costs from MS Maxco's retention money. Later, MS Maxco assigned its receivables—specifically P1,577,115.90 from the retention money—to Valentin Fong through a notarized Deed of Assignment. Fong notified FBDC of the assignment, but FBDC refused to pay, citing the consent requirement and prior deductions.

The Legal Issue

The central question was whether Fong, as assignee, could enforce the assignment against FBDC despite the contract's explicit requirement that MS Maxco obtain FBDC's written consent before assigning its rights.

The Supreme Court's Ruling

The Court ruled in favor of FBDC, reversing the lower courts' decisions.

The principle of relativity of contracts. Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns, and heirs—except where rights and obligations are not transmissible by their nature, by stipulation, or by provision of law. This means an assignee steps into the shoes of the assignor and is bound by the same conditions.

Subrogation in assignment. When a person assigns a credit to another, the assignee is deemed subrogated to the rights and obligations of the assignor. An assignee cannot acquire greater rights than those possessed by the assignor.

The consent requirement prevails. Because the Trade Contract explicitly prohibited assignment without FBDC's written consent, and no such consent was shown, the assignment could not be enforced against FBDC. The Court held that while the assignment was valid between MS Maxco and Fong, its practical efficacy remained contingent on FBDC's consent. Without that consent, only MS Maxco—not Fong—could collect on the credit.

Assignee's recourse. The Court noted that Fong could still pursue remedies against MS Maxco. An assignment of credit for a consideration is considered a sale of personal property, and under Article 1628 of the Civil Code, a vendor in good faith is responsible for the existence and legality of the credit at the time of sale.

Practical Takeaways

• Read the original contract carefully. Before accepting an assignment of contractual rights, review the underlying contract for restrictions on assignment. A "no assignment without consent" clause can defeat an otherwise valid assignment.

• Consent requirements are enforceable. Philippine courts will uphold contractual provisions requiring the other party's consent before assignment. The assignee is bound by these terms even if not a party to the original contract.

• Notice to the debtor is not always enough. While Article 1624 of the Civil Code generally requires only notice to the debtor for an assignment to take effect, this rule yields to explicit contractual restrictions on assignment.

• An assignee gets no greater rights than the assignor. The assignee stands in the shoes of the assignor and is subject to the same defenses and conditions that could be raised against the assignor.

• Seek written consent early. If a contract requires consent for assignment, obtain it in writing before completing the assignment. This protects both the assignor and assignee from disputes over enforceability.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.