Sales and Leases - A Problem-based Approach, 2016a

Section 9-406.” The problem is that accounts receivable financing, which is facilitated by
Article 9, depends on the availability of accounts receivables that are unencumbered by
restrictions. For example, assume Steelco went to the bank to get financing. “What have
you got for collateral?” the banker will ask. Steelco will respond, “We have the right to
receive payment from all of our buyers, and we will be happy to assign those rights to you
in order to secure our loan.” That sounds good to the bank – but if there was an effective
prohibition of assignment in the agreement between Steelco and its buyers, then the bank
would not be able to recover from the buyer. So the drafters of Article 9 came up with a
simple solution – restrictions on the assignment of accounts are not effective. Therefore it
doesn’t matter what the parties say in their agreement about prohibiting assignment; the
statute will trump it in the case of secured financing.
19.4.2. The parties themselves sometimes get tripped up when they attempt to prohibit
assignment and delegation. Instead of drafting a provision stating that assignment of
rights and delegation of duties is prohibited, they state something like “This contract may
not be assigned.” Because rights rather than contracts are assigned, this language creates
an ambiguity as to what the parties meant by the language they used. Surprisingly, this
occurs frequently enough that the drafters of the Code came up with a provision that
addresses it! Subsection 2-210(4) provides that “a prohibition of assignment of ‘the
contract’ is to be construed as barring only the delegation to the assignee or the assignor’s
performance.” So when the prohibition is drafted ambiguously, the resolution is that
rights may still be assigned, but duties may not be delegated.
19.4.3. A more subtle limitation on the parties’ right to prohibit assignment and
delegation is the remedy awarded by some courts for breach of the prohibition. Many
courts hold that delegating a duty in the face of a no-delegation clause does not make the
delegation ineffective; it merely entitles the injured party to damages. In our original
example, if Buyer and Seller had agreed that “delegation of duties is prohibited,” and
Seller nevertheless delegated to Steelco its duty to tender the steel, in such a jurisdiction,
the delegation to Steelco would be effective -- Buyer would have to accept the steel from
Steelco and look to Seller for any damages resulting from the breach. In other
jurisdictions, the delegation would not be effective and Buyer would not have to accept
performance by Steelco.
Practice tip: To make clear that an attempted delegation in the face of a provision barring
delegation is not effective, the drafter should expressly provide that any attempted
delegation is void.
Problem 19-3. Brenda learned her lesson and did not want to be bothered by her seller’s creditors.
The next time she made a contract with Sarah, she insisted that the contract state “no rights under
this contract may be assigned.”
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