Cohen and Henning, ‘Freedom of Contract vs. Free Alienability: An Old Struggle Emerges in a New Context’

Abstract:
This article addresses a contemporary reigniting of an ages-old conundrum in Anglo-American law. The conundrum results from the collision of two concepts that are usually thought of as mainstays of the law – freedom of contract and free alienability of property – in the context of assignments of receivables.

A prototypical case is easy to imagine. Obligee enters into a contract to do something of value for Obligor in exchange for Obligor’s promise to pay Obligee. Obligor not only wants to receive the promised value from Obligee, however, but wants to pay nobody but Obligee for that value, so Obligor insists that the contract with Obligee contain a provision prohibiting Obligee from assigning to anyone else the right to be paid by Obligor.

As a very general matter, our legal system gives effect to contractual provisions agreed to by the parties to a transaction unless they run afoul of a strong public policy. Yet, the history of that same system has been to disfavor restraints on alienation of property. Obviously, these two concepts cannot both be effectuated if Obligee attempts to assign its claim against Obligor to someone else – either the contractual restriction will be given effect (at the expense of free alienability) or free alienability will prevail (at the expense of the contractual prohibition).

By the time Article 9 was drafted and promulgated, the prior consensus favoring enforcement of contractual restrictions on assignment of receivables had eroded considerably. It is not surprising, then, that the position taken by Article 9 (the principal drafter of which – Grant Gilmore – was a proponent of that erosion) was one that favored free alienability of receivables. The embodiment of that position was former UCC section 9-318(4), discussed in more detail in Part II of this article. So matters stood until the promulgation of revised Article 9 in 1998 and its effectiveness in 2001. As we shall see in Part II, the revised version of the rules addressing the subject made significant changes. Those changes, which were the subject of considerable debate and discussion, were seen at the time of promulgation as settling the matter. As a result, it came as a significant surprise when the preparation in 2007 of a PEB Commentary on application of the revised rules to ownership interests in unincorporated organizations revealed that fundamentally different views as to the meaning of the revised rules were held by several members of the Permanent Editorial Board for the Uniform Commercial Code, even though all of those members had participated in the drafting of revised Article 9. These irreconcilable views resulted in the matter once again being referred to a drafting committee. The dispute and its resolution are the subjects of this article.

Cohen, Neil B and Henning, William H, Freedom of Contract vs. Free Alienability: An Old Struggle Emerges in a New Context (2011). Gonzaga Law Review, Vol 46, pp 353-406, 2011.

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