Is it in the investor’s interest to exclude or limit the right of assignment of claims from a construction contract?

Publication / 05.02.2024

The assignment of the contractor’s claims from a construction contract, especially when it involves future claims, is an issue that the investor’s lawyers face at every stage of the execution and settlement of the construction work and, subsequently, the entire contract.

The situations that threaten the investor can be two, namely:

  • the investor did not exclude in the construction works contract the right to transfer claims, which means that any contractor of construction works can transfer an already existing claim (covered by partial settlement in the works performed), or a future claim (one that will arise in the future in connection with the performance of construction works) to a third party without the consent of the investor;
  • the investor limited the right to transfer the claims in the contract in such a way that it made the transfer of the claims to a third party conditional on its consent in each case, but in the course of the construction work it gave such consent without modifying the terms of the contract under which the assignor transferred the claims.

Leaving aside the dogmatic issues arising from divergent interpretations of the law on assignment of claims, the essence of the problem comes down to the fact that the investor, upon receipt of the notice of assignment, becomes the debtor of the assigned claims and, in both cases indicated above, is severely limited in making any decisions, including withdrawal from the contract, suspension of works, conclusion of annexes to the construction contract, on the basis of which he would like to exclude, limit, postpone the terms of performance or payment of remuneration, or otherwise modify the obligatory relationship. This is because the transfer of claims from a reciprocal contract creates, so to speak, a tripartite relationship between the assignor, the assignee and the debtor of the transferred claim (the investor), which means that for each such action the consent of the assignor, with whom the construction contract was originally concluded, is not sufficient, but the consent of the assignee, i.e. the entity that acquired the claim through its transfer, is also needed. In the case of right-making actions, a statement to that effect must also be made to the assignee.

Another issue that may prove even more onerous after the conclusion of a claims transfer agreement is the investor’s ability to enforce its claims under the contract, or to perform its obligations to third parties, which are carried by the contractual provisions. We are talking here about the investor’s actions that involve the accrual of contractual penalties, damages, or the performance by the investor of other contractual obligations imposed on the contractor and performed by the investor under the authority of the contract (e.g., the purchase of an insurance policy relating to the construction), which then involve the obligation to settle them by deduction. In any such case, the investor, when performing the above actions, must bear in mind the content of Article 513 of the Civil Code, which states that:

  • a debtor shall be entitled to all charges against the assignee of the claim which it had against the assignor at the time it learned of the assignment,
  • a debtor can set off any claim it may have against the assignor against the assigned claim even though it became due and payable only after the debtor received notice of the assignment. This does not, however, apply where the claim against the assignor became due and payable after the claim which is the subject of the assignment.

The provisions of the aforementioned Article 513 of the Civil Code may strongly complicate the implementation of the contractual provisions, when the investor has not settled his claims in time, and in the case of an assignment of future claims that arise during the term of the contract, in connection with the progress of work on the construction site. This is because these claims arise successively with the date of completion of the construction work, and any issues concerning the possibility of deducting counterclaims from the contract must be examined each time based on the rules cited above.

The Law Firm’s recommendation on assignment of claims:

  • the construction contract should not contain such provisions on the basis of which the contractor of the works is entitled to transfer claims to any other entity without the consent of the investor,
  • each time granting consent for the transfer of claims, it should be examined in detail to what extent and under what conditions such consent may be granted.