Restrictions on Contractual Rights: The Necessity of Consent in Deed of Assignment

The Philippine Supreme Court, in Fort Bonifacio Development Corporation v. Domingo (G.R. No. 218341, December 7, 2022), clarified a fundamental rule in contract law: a party cannot assign its rights under a contract if the contract itself requires the other party's written consent, and that consent is not obtained. The ruling is a crucial reminder for businesses and individuals dealing with assigned credits, especially in construction and development projects.

The Facts of the Case

Fort Bonifacio Development Corporation (FBDC) entered into a Trade Contract with MS Maxco Company, Inc. for the construction of the Bonifacio Ridge Condominium Project. Under the contract, FBDC was to hold a 5% retention money from the contract price for one year after project completion to guarantee MS Maxco's repair of defects.

The contract contained a clear stipulation (Clause 19.1): MS Maxco could not assign or transfer any of its rights, obligations, or liabilities under the contract without the written consent of FBDC.

Despite this, MS Maxco executed a notarized Deed of Assignment dated February 28, 2005, assigning its receivables from FBDC—specifically P804,068.21 from the retention money—to Manuel M. Domingo, to whom MS Maxco owed money. FBDC did not give its written consent to this assignment.

Meanwhile, FBDC received multiple notices of garnishment against MS Maxco's receivables from other creditors. FBDC paid these garnishment orders and also deducted costs for rectifying defects. The retention money was eventually exhausted. When Domingo demanded payment from FBDC, the latter refused, leading Domingo to file a collection suit.

The Issue

The central issue was whether FBDC was liable to pay Domingo the amount assigned to him under the Deed of Assignment, considering that FBDC had not consented to the assignment.

The Ruling of the Supreme Court

The Supreme Court ruled in favor of FBDC, reversing the Court of Appeals' decision. The Court held that FBDC was not liable to pay Domingo.

The Court applied the principle of relativity of contracts, which states that contracts bind the parties, their assigns, and heirs. Under Article 1311 of the Civil Code, this binding effect on assigns exists except when the rights and obligations are not transmissible by their nature, by stipulation, or by provision of law.

In this case, the Trade Contract contained a valid stipulation prohibiting assignment without FBDC's written consent. This stipulation is not contrary to law, morals, or public policy and is therefore binding.

The Court explained that when a person assigns a credit, the assignee is subrogated to the rights of the assignor. The assignee "stands in the shoes" of the assignor and cannot acquire greater rights than the assignor had. Since MS Maxco itself could not assign its rights without FBDC's consent, Domingo, as assignee, could not demand payment from FBDC.

The Court emphasized that while the assignment may be valid between MS Maxco and Domingo, its practical efficacy against FBDC remained contingent upon FBDC's written approval. Without that consent, the assignment could not be enforced against FBDC.

The Court also noted that even if the assignment were valid, the retention money had already been exhausted by the garnishment payments and rectification costs.

Practical Takeaways

• Contractual restrictions matter. If a contract requires written consent for assignment, that requirement is enforceable. An assignee cannot claim greater rights than the assignor had.
• Consent must be in writing. Verbal approval or mere knowledge of the assignment is insufficient when the contract expressly requires written consent.
• Assignment validity is relative. A deed of assignment may be valid between the assignor and assignee, but it may still be unenforceable against the obligor who did not consent.
• Due diligence for assignees. Before accepting an assignment of receivables, verify whether the underlying contract restricts assignment and whether the required consent has been obtained.
• Garnishment vs. assignment. Garnishment orders, when validly served and paid, can exhaust the funds that an assignee seeks to claim.

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