We continue the Understanding Contract Terms series by explaining assignment clauses. Most contracts include some form of assignment clause. Assignment clauses are important to understand when determining your rights and liabilities under almost any contract.
Assigning a Contract
To understand why this clause is included in the contract it is important to first understand what it means to assign a contract. An assignment of a contract occurs when one party to the contract transfers to another party their obligations, benefits, or obligations and benefits, of the contract.
In general, assignments are permitted unless there is an express prohibition against assignment in the contract. But this is a very general statement. Certain types of contracts, including “personal service contracts,” are by default unassignable. Also, contracts may not be assignable if it “would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him.”
As you can imagine, this subjective analysis can create substantial confusion for parties to a contract. By including an assignment clause, both parties can be clear about the restrictions on and process for assigning the contract.
Who’s Liable After Assignment?
When you assign your rights under a contract to another person or entity (the “assignee”), you remain liable for the obligations unless there is express assumption by the assignee evidenced by clear and unequivocal proof. This means that assigning your contractual rights does not automatically impose any liability on the assignee. For the assignee to be held liable under the contract, the assignee must clearly assume the obligations. Regardless of whether you assign the obligations under the contract to the assignee, you remain secondarily liable to the original contracting party if the assignee fails to perform the assumed obligations.
This means the other party to the contract can still bring a claim for damages against you after you’ve assigned the contract to the assignee. You may be able to recover damages from the assignee as long as the assignee clearly assumed your obligations under the contract and failed to adhere to those obligations. But you would generally still be liable to the original party you contracted with. In short, you do not absolve yourself of liability under a contract simply because you assign it to another party.
Structuring Your Assignment Clause
Assignments clauses can be structured in a variety of ways. There can be restrictions that do not allow one or both parties to assign the contract, or both parties may be free to assign the contract by obtaining written approval from the other party. There may be certain contracts where it makes sense to negotiate for more or less restrictive assignment rights.
A “One Size Fits All” Answer?
Allowing parties to freely assign contracts can lead to uncertainty, and uncertainty tends to lead to disputes. We prefer drafting clear, concise restrictions on assignments, and it is generally in both parties best interest to spell out the parties intent regarding assignment. Often you will see a restriction on all assignments, because restricting all assignments is the easiest way to create certainty.
However, “carveouts” may be appropriate in certain situations. A carveout can give the parties the ability to take certain actions if an event occurs. For example, a typical assignment clause carveout may give each party the ability to assign the contract if there is a change of control or sale of substantially all of the company’s assets. This carveout gives each party the right to assign the contract—generally without the consent of the other party—as part of a fundamental corporate change (a merger, acquisition, or other similar change of control). You will also see carveouts that preserve the right to assign the contract to certain parties, including subsidiaries. In certain situations where the parties have unequal bargaining power or a particularly compelling reason, you may see a unilateral clause that either allows one party to assign, restricts one parties’ ability to assign, or allows one party to assign and restricts the ability of the other party to assign.
How an Assignments Clause Can Affect Your Business
If you enter into a contract with the understanding that it will be carried out by the business (and business employees) with whom you contracted, it can be a rude awakening to realize that they have assigned away their rights or obligations under the contract. You may end up being forced to work with people you don’t know or companies you don’t like or risk breaching the agreement.
Alternatively, if you anticipate needing to assign a contract (e.g. to a subsidiary) but do not contract to allow for assignment, you may have to change your plans or expose yourself to more risk than you anticipated.
By understanding the practical implications of assignments clauses, you can better understand your legal rights and obligations under your business contracts. Further, you can determine when it makes sense to negotiate for more or less restrictive assignments clauses in your contracts.
Please continue to read our series on Understanding Contract Terms to learn more about common contract terms and how they affect you and your business. If you’d like to learn more about drafting clear, concise contracts for your business, please comment below or contact us.
Photo: Davide Mana | Flickr
An assignment and delegation provision is the clause that specifies a party’s ability to assign its rights or delegate its duties under an agreement. It is a provision that is often placed in the “miscellaneous” or “general” sections of commercial contracts, but it should not be thought of as standard “boilerplate” language that never changes.
Contracting parties should carefully consider the potential situations where an assignment would be desired or required, and should carefully draft the clause to address issues of transferability. Below is an overview of some of the key issues that should be considered when drafting an assignment provision for commercial and technology agreements. Note that, technically, a party assigns its rights and delegates its duties. This overview generally refers to assignments for shorthand.
- Yes or no to assignment. The first step is fairly straightforward. Does a party want to allow assignment or prohibit it? Most jurisdictions permit the free transferability of contracts if the contract is silent on assignment, so if there is a desire to restrict assignment, an anti-assignment clause must be included.
- Assignment of entire contract vs. individual rights and obligations. Consider whether the goal is to restrict or allow the assignment of the entire contract or individual rights or obligations. If the clause generally prohibits assignment of the agreement, courts commonly read that language to restrict only the delegation of performance, while permitting a party to assign its rights under the contract (such as license rights or the right to receive payment). To restrict such assignment of individual rights, it is important to include language such as “neither this Agreement, nor any rights or obligations hereunder, shall be assignable or otherwise transferable.”
- Specify when assignment is permitted and what rights and duties may be assigned. Generally, if specific assignment rights are to be granted, best practices are to include the general restriction highlighted above and then to provide any permitted assignment rights (e.g., “provided that either party may assign . . .”). The provision would specify the situations where assignment is permitted and what rights and duties may be assigned, such as an assignment of rights to a party’s affiliates, to an entity into which the party has merged, or to a successor organization.
- Notice and consent. If assignment is permitted, does the assigning party need to obtain the non-assigning party’s consent to the assignment? Or is notice sufficient? If consent is required, consider whether the non-assigning party has complete discretion to withhold consent or whether consent must not be unreasonably withheld or delayed.
- Impermissible transfers. Another key issue to address is what happens when there is an assignment in violation of an anti-assignment clause. Because courts generally interpret anti-assignment clauses narrowly, in the absence of additional language, an assignment that violates an anti-assignment provision will likely be considered a valid assignment in breach of the agreement. In other words, the non-assignment party can claim breach, but cannot prevent the actual assignment. To avoid this scenario, additional language should be included to void the impermissible transfer, such as: “Any attempted assignment in violation of the provisions of this Section shall be null and void.”
- Divested entities, mergers, acquisitions, and change of control. Organizations are likely to undergo a change in structure at some point. It is important to consider such situations and to specify a party’s ability to transfer its rights or duties to a divested entity or through an M&A transaction or other change of control. Frequently, issues related to competition and intellectual property will need to be considered, and these exceptions to an anti-assignment provision can be nuanced and require specific language to achieve the desired results. As part of the drafting process, parties should carefully analyze the types of transactions that could trigger an anti-assignment provision and include language to address the intended outcomes.
This Contract Corner highlights the importance of not assuming the assignment provision in the final “Miscellaneous” section of an agreement is standard language that needs no review. Each of the issues discussed above should be carefully considered and the assignment provision should be drafted to address these issues.