General effectiveness of no-assignment clauses
No effect on assignment
No liability of assignee
No-assignment clauses are found in many contracts and are often phrased as follows: "No Party may assign any of its rights, claims and receivables under this Agreement (in whole or in part) without the prior written consent of the other Party."
The rationale behind no-assignment clauses is that they allow the rights, claims and receivables to remain with the parties that have negotiated and executed the underlying agreement, rather than allowing a counterparty to sell or otherwise transfer their claims to an unrelated party.
General effectiveness of no-assignment clauses
Under Austrian law, no-assignment clauses are subject to Article 1396a of the Civil Code. Article 1396a provides that any clause that prohibits the assignment of monetary claims stemming from commercial transactions between entrepreneurs is binding only if the below requirements are met. The idea behind the introduction of Article 1396a (which came into force in June 2006) was to prohibit the abuse of entrepreneurs' market power and foster the financing possibilities therein, allowing entrepreneurs to use monetary claims (receivables) for financing (in particular, factoring).
In order to be effective, a no-assignment clause must:
- have been expressly negotiated and agreed; and
- with due consideration of all circumstances, not grossly disadvantage the creditor.
The first requirement will be considered to have been met if the clause is the result of real negotiations; a mere discussion between the parties may not suffice.
The second requirement will be analysed on case-by-case basis. According to a legal interpretation of the law, a gross disadvantage to the creditor exists if:
- there is an economic mismatch between the creditor and debtor;
- the payment term is extraordinary long; and
- the creditor has exhausted all avenues to finance its business (eg, because the creditor can use receivables only to obtain third-party financing via, for example, factoring).
Even if the no-assignment clause is binding on the parties, it has no legal effect on an assignment in breach of the no-assignment clause (ie, the right, claim or receivable would still be validly transferred). Thus, no-assignment clauses are meant only to provide clarity to corresponding assignment transactions.
Although the assignment is still effective, any other rights and obligations of the assignor and the debtor with regard to each other remain. This means that the debtor may claim damages incurred due to a breach of the no-assignment clause (including contractual penalties in the form of liquidated damages) or may even terminate the underlying agreement with the assignor for cause.
However, in practice, actual damages are hard to prove and in case of one-time transactions (eg, sale and purchase transactions), a termination of the transaction agreement will typically not apply. Thus, in practice, the most effective way to secure a no-assignment clause is to agree on a contractual penalty as remedy for any breach of the no-assignment clause. However, contractual penalties are only rarely accepted in practice.
With respect to claims against the assignee, Article 1396a of the Civil Code clarifies that the debtor cannot claim against the assignee only on the basis that the assignee was aware of the no-assignment clause.
Due to lack of court practice, there are many questions as to the interpretation of Article 1396a of the Civil Code. For example, a purchase agreement (share purchase agreement, business purchase agreement or asset purchase agreement) may contain a no-assignment clause. However, such agreements typically create different types of claim, including claims for payment of the consideration (purchase price) and claims for breaches of warranties or covenants. While claims for payment of the purchase price will likely fall under monetary claims, it is questionable whether claims for breaches of warranties or covenants will also do so, as the primary claim consists of specific performance (compliance with the covenant or remediation of a defect), with the claim for payment of losses only being brought as a secondary claim. It is also unclear whether transactions between entrepreneurs qualify as 'commercial transactions' within the meaning of Article 1396a of the Civil Code or only ordinary, day-to-day transactions.
In any case, parties should consider a peculiarity of Austrian law: the assignment of receivables in Austria triggers stamp duties in the amount of 0.8% of the consideration paid for the assignment. Both the assignor and assignee are liable for such stamp duty. Only certain assignments – including assignments in satisfaction of a factoring agreement – are excluded.
For further information on this topic please contact Thomas Kulnigg or Clemens Rainer at Schoenherr by telephone (+43 1 5343 70) or email ([email protected] or c[email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.