One of the key considerations in structuring merger and acquisition (M&A) transactions is determining which contracts of the target company, if any, will remain in effect for the acquiror following closing. This post will briefly outline: (1) the general rules of contract assignment; (2) the effect of anti-assignment clauses and other exceptions to the general rule of assignability; and (3) the effect of four common M&A structures on contract assignment.
The general rule is that contracts are freely assignable unless the contract itself, a statute, or public policy dictates otherwise. This is true in Washington State, where courts have found that contractual rights are generally transferable unless the contract expressly prohibits assignment in “very specific” and “unmistakable terms.”
The exceptions to the general rule of free assignability fall into two broad categories: (1) contractual prohibitions on free assignability (“anti-assignment clauses”) and (2) case law prohibitions on free assignability of certain types of contracts that arise out of public policy concerns.
Anti-Assignment Clauses
In light of the general rule of free assignability, most business contracts contain a clause – commonly referred to as an “anti-assignment clause” – that expressly prohibits the assignment of contractual rights without the consent of the other party to the contract. These anti-assignment clauses typically take one of two forms. The first, which we will call “simple” anti-assignment clauses, simply prohibit the contractual right from being assigned without the consent of the other party to the contract. For example, a simple anti-assignment clause might state:
This contract shall not be assigned or transferred by Party X without first obtaining the consent of Party Y.
While simple anti-assignment clauses are generally enforceable, certain types of M&A deal structures effectively circumvent such provisions and, accordingly, the necessity of third-party consents (see the discussion below regarding the impact of M&A deal structures on contract assignment for more detail).
Comprehensive Anti-Assignment Provisions
In response to the inability of “simple” anti-assignment clauses to protect contractual rights in certain M&A contexts, many contracts include more robust anti-assignment provisions designed to require third party consent prior to an M&A event, even where the content itself will not be transferred. For example, a comprehensive anti-assignment clause might state:
Party X shall not assign this Agreement in whole or in part without Party Y’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Any change in control of Party X resulting from a merger, consolidation, stock transfer or asset sale shall be deemed an assignment or transfer for purposes of this Agreement that requires Party Y’s prior written consent.
Courts will generally enforce these types of comprehensive anti-assignment clauses and conclude that consummation of a change of control transaction without consent is a breach of contract. Accordingly, to assign contracts with comprehensive anti-assignment provisions, the target must seek the consent of the counterparties to each such contract. Obtaining third party consents in connection with M&A transactions may create sticky situations or cause costly delays. The target company may not want their customers, suppliers or others to know that they are going through an M&A event, while the acquiror may want assurances that important contracts will remain in place. What is more, certain contract counterparties may use the leverage of their consent to renegotiate the terms of the contract or extract concessions from the target company. Accordingly, it is important that the parties identify and address comprehensive anti-assignment clauses early in the process – particularly where the contracts to be acquired make up a large portion of a target company’s value.
Contracts That Involve a “Personal” Right
Contracts involving “personal rights” or contracts deemed “personal” by contractual recital or federal law are considered non-assignable or non-transferable unless specific consent is given by the non-assigning party. Generally, “personal” contracts are those that contemplate personal services, skills or performance from the non-assigning party, such as employment, consulting, and partnership agreements. Courts have found that these types of agreements are not freely assignable as a matter of public policy because assigning personal contracts may result in materially adverse consequences (e.g., a material change in duty, risk, or burden) to the non-assigning party. In addition to general contracts for personal services discussed above, courts have also found many types of intellectual property (IP) licenses to be “personal” in nature due to the profound importance of an IP holder’s right to choose who may use the protected IP. Accordingly, non-exclusive IP license rights pertaining to copyright, trademark, and patent licenses are generally considered non-assignable, unless specific consent is given by the non-assigning party. Personal contracts are also treated differently from other types of contracts in the context of M&A events (see the discussion below regarding the impact of M&A deal structures on contract assignment for more detail). Each of the types of “personal” contracts described above should receive heightened contract-by-contract due diligence to ensure that assignment does not violate applicable law.
Other Considerations
Courts may also consider the subject matter of the contract and the material risks associated with transferring those rights to the acquiror. For example, where the non-merging entity is a competitor to the acquiring entity, courts may find that given the high risk and burden to the non-merging party, the assignment is ineffective on equitable grounds.
The structure employed in a given M&A transaction is critical to determining the treatment of the target company’s various contractual rights. This section will examine the treatment of contractual rights in connection with four common M&A structures: (i) reverse triangular mergers, (ii) forward-triangular mergers, (iii) stock purchases, and (iv) asset purchases. For more information regarding M&A deal structures, please see here and here . While reviewing each of the deal structures that follow, please note that each of the general rules are subject to the exceptions discussed above.
Reverse Triangular Merger
A reverse triangular merger occurs when an acquiror forms a subsidiary and the newly created subsidiary merges with and into the target company. The target survives as a wholly-owned subsidiary of the acquiror following the merger, and continues to own its assets, owe its liabilities, and be party to its contracts.
In a reverse triangular merger, simple anti-assignment clauses generally are not triggered because, as a matter of law, no assignment of the contract has occurred (the target company survives and is the same legal entity as the original contracting party). Accordingly, the contracts of the target remain with the surviving entity without the need to obtain third party consents or take other action. Despite the general rule that no assignment occurs in connection with a reverse triangular merger, thorough contract-by-contract due diligence is still required to identify all contracts that include comprehensive anti-assignment provisions and/or may be deemed to be contracts for personal services (and therefore require consent) under applicable law.
Forward Triangular Merger
In a forward triangular merger, the acquiring entity forms a subsidiary corporation and the target corporation merges directly with and into the newly created subsidiary. As a result, the subsidiary survives the merger. Under this structure, the subsidiary obtains all of the target company’s assets and liabilities by operation of law.
Simple anti-assignment clauses are generally not triggered in a forward triangular merger because the rights are vested, and not assigned, by operation of law. Therefore, the target’s contracts generally transfer automatically to the acquiror without the need to obtain third party consents. However, courts have created considerable ambiguity around the applicability of this general rule in the context of forward triangular mergers. Accordingly, acquirors frequently require target companies to obtain third party consent as a matter of risk allocation and to create certainty that important contracts will remain in place after the merger. As with the above, contract-by-contract due diligence is required to identify contracts that contain anti-assignment language or may be considered to be “personal.”
Direct Stock Purchase
In a direct stock purchase, the acquiror purchases all the outstanding shares of the target directly from its stockholders. Instead of owning certain assets and related liabilities, the acquiror owns the entire selling company. The selling company continues to exist as a separate legal entity and wholly-owned subsidiary of the acquiror (assuming 100% of the outstanding stock is purchased).
In a sale of the target company through a direct stock purchase, the individual assets of the target company (including its material contracts) need not be separately assigned because only the ownership rights of the target are being transferred. Like a reverse triangular merger, a direct stock purchase generally does not trigger a simple anti-assignment provision because the assets are not conveyed to a different entity. Accordingly, the contracts of the selling company remain entirely in place without the need to obtain third party consents. However, contract-by-contract due diligence is required to identify any contracts that contain comprehensive anti-assignment language that would be triggered by the change of control that occurs upon consummation of a stock sale and contracts that may be considered “personal” under applicable law.
Asset Purchase
The sale of some or all of the assets of a company is one method of transferring part or full ownership in the underlying business. In an asset purchase, the acquiror purchases certain enumerated assets and liabilities of the target in exchange for the cash, the acquiror’s stock, or other consideration.
In an asset purchase transaction, the acquiror is only responsible for the assets and liabilities specifically enumerated in the purchase agreement. All other assets and liabilities remain with the target. Without the protection of a merger statute, the purchaser of contractual assets will need to become a party to the purchased contracts through the general rule of assignability (and the absence of any exceptions). Therefore, if a contract purchased as part of an asset sale contains an anti-assignment provision (whether “simple” or “comprehensive”) or may be considered “personal”, then the target company must obtain the consent of the counter party in order to convey the contract to the acquiror. In the event that neither of the exceptions to the general rule apply, then the contract is generally assignable to the acquiror.
Although contracts are generally freely assignable, in the context of any M&A transaction or other proposed contract assignment, careful consideration should be given to: (1) whether the contract in question includes an anti-assignment provision and, if so, whether the provision is “comprehensive” ( i.e. , applies to change of control transactions even where, by operation of law, no assignment would be deemed to occur); (2) whether the contract is “personal” in nature; and (3) how the proposed deal structure impacts the treatment of the target’s contractual rights. Given the fact-specific standards for assignment, each of the target’s contracts should be carefully reviewed during the due diligence phase of an M&A transaction to ensure that they are assigned in compliance with applicable law.
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Author’s note, Nov. 22, 2014: For a much-improved update of this page, see the Common Draft general provisions article .
(For more real-world stories like the ones below, see my PDF e-book, Signing a Business Contract? A Quick Checklist for Greater Peace of Mind , a compendium of tips and true stories to help you steer clear of various possible minefields. Learn more …. )
Table of Contents
When a party to a contract “ assigns ” the contract to someone else, it means that party, known as the assignor , has transferred its rights under the contract to someone else, known as the assignee , and also has delegated its obligations to the assignee.
Under U.S. law, most contract rights are freely assignable , and most contract duties are freely delegable, absent some special character of the duty, unless the agreement says otherwise. In some situations, however, the parties will not want their opposite numbers to be able to assign the agreement freely; contracts often include language to this effect.
Intellectual-property licenses are an exception to the general rule of assignability. Under U.S. law, an IP licensee may not assign its license rights, nor delegate its license obligations, without the licensor’s consent, even when the license agreement is silent. See, for example, In re XMH Corp. , 647 F.3d 690 (7th Cir. 2011) (Posner, J; trademark licenses); Cincom Sys., Inc. v. Novelis Corp. , 581 F.3d 431 (6th Cir. 2009) (copyright licenses); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp. , 284 F.3d 1323 (Fed. Cir. 2002) (patent licenses). For additional information, see this article by John Paul, Brian Kacedon, and Douglas W. Meier of the Finnegan Henderson firm.
Model language
[Party name] may not assign this Agreement to any other person without the express prior written consent of the other party or its successor in interest, as applicable, except as expressly provided otherwise in this Agreement. A putative assignment made without such required consent will have no effect.
Optional: Nor may [Party name] assign any right or interest arising out of this Agreement, in whole or in part, without such consent.
Alternative: For the avoidance of doubt, consent is not required for an assignment (absolute, collateral, or other) or pledge of, nor for any grant of a security interest in, a right to payment under this Agreement.
Optional: An assignment of this Agreement by operation of law, as a result of a merger, consolidation, amalgamation, or other transaction or series of transactions, requires consent to the same extent as would an assignment to the same assignee outside of such a transaction or series of transactions.
• An assignment-consent requirement like this can give the non-assigning party a chokehold on a future merger or corporate reorganization by the assigning party — see the case illustrations below.
• A party being asked to agree to an assignment-consent requirement should consider trying to negotiate one of the carve-out provisions below, for example, when the assignment is connection with a sale of substantially all the assets of the assignor’s business {Link} .
The dubai port deal (ny times story and story ).
In 2006, a Dubai company that operated several U.S. ports agreed to sell those operations. (The agreement came about because of publicity and political pressure about the alleged national-security implications of having Middle-Eastern companies in charge of U.S. port operations.)
A complication arose in the case of the Port of Newark: The Dubai company’s lease agreement gave the Port Authority of New York and New Jersey the right to consent to any assignment of the agreement — and that agency initially demanded $84 million for its consent.
After harsh criticism from political leaders, the Port Authority backed down a bit: it gave consent in return for “only” a $10 million consent fee, plus $40 million investment commitment by the buyer.
A customer of a software vendor did an internal reorganization. As a result, the vendor’s software ended up being used by a sister company of the original customer. The vendor demanded that the sister company buy a new license. The sister company refused.
The vendor sued, successfully, for copyright infringement, and received the price of a new license, more than $450,000 as its damages. The case is discussed in more detail in this blog posting.
The vendor’s behavior strikes me as extremely shortsighted, for a couple of reasons: First, I wouldn’t bet much on the likelihood the customer would ever buy anything again from that vendor. Second, I would bet that the word got around about what the vendor did, and that this didn’t do the vendor’s reputation any good.
The Delaware Chancery Court refused to rule out the possibility that a reverse triangular merger could act as an assignment of a contract, which under the contract terms would have required consent. See also the discussion of this opinion by Katherine Jones of the Sheppard Mullin law firm.
Consent is not required for an assignment of this Agreement in connection with a sale or other disposition of substantially all the assets of the assigning party’s business.
Optional: Alternatively, the sale or other disposition may be of substantially all the assets of the assigning party’s business to which this Agreement specifically relates.
Optional: The assignee must not be a competitor of the non-assigning party.
• A prospective assigning party might argue that it needed to keep control of its own strategic destiny, for example by preserving its freedom to sell off a product line or division (or even the whole company) in an asset sale.
• A non-assigning party might argue that it could not permit the assignment of the agreement to one of its competitors, and that the only way to ensure this was to retain a veto over any assignment.
• Another approach might be to give the non-assigning party, instead of a veto over asset-disposition assignments, the right to terminate the contract for convenience . (Of course, the implications of termination would have to be carefully thought through.)
[Either party] may assign this Agreement without consent to its affiliate.
Optional: The assigning party must unconditionally guarantee the assignee’s performance.
Optional: The affiliate must not be a competitor of the non-assigning party.
Optional: The affiliate must be a majority-ownership affiliate of the assigning party.
• A prospective assigning party might argue for the right to assign to an affiliate to preserve its freedom to move assets around within its “corporate family” without having to seek approval.
• The other party might reasonably object that there is no way to know in advance whether an affiliate-assignee would be in a position to fulfill the assigning party’s obligations under the contract, nor whether it would have reachable assets in case of a breach.
Editorial comment: Before approving a blanket affiliate-assignment authorization, a party should consider whether it knew enough about the other party’s existing- or future affiliates to be comfortable with where the agreement might end up.
Consent to an assignment of this Agreement requiring it may not be unreasonably withheld or delayed.
Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are to be treated as direct damages.
Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are not subject to any exclusion of remedies or other limitation of liability in this Agreement.
• Even if this provision were absent, applicable law might impose a reasonableness requirement; see the discussion of the Shoney case in the commentary to the Consent at discretion provision.
• A reasonableness requirement might not be of much practical value, whether contractual or implied by law. Such a requirement could not guarantee that the non-assigning party would give its consent when the assigning party wants it. And by the time a court could resolve the matter, the assigning party’s deal could have been blown.
• Still, an unreasonable-withholding provision should make the non-assigning party think twice about dragging its feet too much, becuase of the prospect of being held liable for damages for a busted transaction. Cf. Pennzoil vs. Texaco and its $10.5 billion damage award for tortious interference with an M&A deal.
• Including an unreasonable-delay provision might conflict with the Materiality of assignment breach provision, for reasons discussed there in the summary of the Hess Energy case.
A party having the right to grant or withhold consent to an assignment of this Agreement may do so in its sole and unfettered discretion.
• If a party might want the absolute right to withhold consent to an assignment in its sole discretion, it would be a good idea to try to include that in the contract language. Otherwise, there’s a risk that court might impose a commercial-reasonableness test under applicable law (see the next bullet). On the other hand, asking for such language but not getting it could be fatal to the party’s case that it was implicitly entitled to withhold consent in its discretion.
• If a commercial- or residential lease agreement requires the landlord’s consent before the tentant can assign the lease, state law might impose a reasonableness requirement. I haven’t researched this, but ran across an unpublished California opinion and an old law review article, each collecting cases. See Nevada Atlantic Corp. v. Wrec Lido Venture, LLC, No. G039825 (Cal. App. Dec. 8, 2008) (unpublished; reversing judgment that sole-discretion withholding of consent was unreasonable); Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation: Reasonable Withholding of Consent to Commercial Lease Assignments , 31 Willamette L. Rev. 713 (1995) (first page available for free at HeinOnline ).
In 2009, the Alabama Supreme Court rejected a claim that Shoney’s restaurant chain breached a contract when it demanded a $70,000 to $90,000 payment as the price of its consent to a proposed sublease. The supreme court noted that the contract specifically gave Shoney’s the right, in its sole discretion , to consent to any proposed assignment or sublease.
Significantly, prior case law from Alabama was to the effect that a refusal to consent would indeed be judged by a commercial-reasonableness standard. But, the supreme court said, “[w]here the parties to a contract use language that is inconsistent with a commercial-reasonableness standard, the terms of such contract will not be altered by an implied covenant of good faith. Therefore, an unqualified express standard such as ‘sole discretion’ is also to be construed as written.” Shoney’s LLC v. MAC East, LLC , No. 1071465 (Ala. Jul. 31, 2009) (on certification by Eleventh Circuit), cited by MAC East, LLC v. Shoney’s [LLC] , No. 07-11534 (11th Cir. Aug. 11, 2009), reversing No. 2:05-cv-1038-MEF (WO) (M.D. Ala. Jan. 8, 2007) (granting partial summary judgment that Shoney’s had breached the contract).
A non-assigning party may terminate this Agreement, in its business discretion , by giving notice to that effect no later than 60 days after receiving notice, from either the assigning party or the assignee, that an assignment of the Agreement has become effective.
Consider an agreement in which a vendor is to provide ongoing services to a customer. A powerful customer might demand the right to consent to the vendor’s assignment of the agreement, even in strategic transactions. The vendor, on the other hand, might refuse to give any customer that kind of control of its strategic options.
A workable compromise might be to allow the customer to terminate the agreement during a stated window of time after the assignment if it is not happy with the new vendor.
Optional: Delegation: For the avoidance of doubt, an assignment of this Agreement operates as a transfer of the assigning party’s rights and a delegation of its duties under this Agreement.
Optional: Promise to perform: For the avoidance of doubt, an assignee’s acceptance of an assignment of this Agreement constitutes the assignee’s promise to perform the assigning party’s duties under the Agreement. That promise is enforceable by either the assigning party or by the non-assigning party.
Optional: Written assumption by assignee: IF: The non-assigning party so requests of an assignee of this Agreement; THEN: The assignee will seasonably provide the non-assigning party with a written assumption of the assignor’s obligations, duly executed by or on behalf of the assignee; ELSE: The assignment will be of no effect.
Optional: No release: For the avoidance of doubt, an assignment of this Agreement does not release the assigning party from its responsibility for performance of its duties under the Agreement unless the non-assigning party so agrees in writing.
Optional: Confidentiality: A non-assigning party will preserve in confidence any non-public information about an actual- or proposed assignment of this Agreement that may be disclosed to that party by a party participating in, or seeking consent for, the assignment.
The Delegation provision might not be necessary in a contract for the sale of goods governed by the Uniform Commercial Code, because a similar provision is found in UCC 2-210
The Confidentiality provision would be useful if a party to the agreement anticipated that it might be engaging in any kind of merger or other strategic transaction.
IF: A party breaches any requirement of this Agreement that the party obtain another party’s consent to assign this Agreement; THEN: Such breach is to be treated as a material breach of this Agreement.
A chief significance of this kind of provision is that failure to obtain consent to assignment, if it were a material breach, would give the non-assigning party the right to terminate the Agreement.
If an assignment-consent provision requires that consent not be unreasonably withheld , then failure to obtain consent to a reasonable assignment would not be a material breach, according to the court in Hess Energy Inc. v. Lightning Oil Co. , No. 01-1582 (4th Cir. Jan. 18, 2002) (reversing summary judgment). In that case, the agreement was a natural-gas supply contract. The customer was acquired by a larger company, after which the larger company took over some of the contract administration responsibilities such as payment of the vendor’s invoices. The vendor, seeking to sell its gas to someone else at a higher price, sent a notice of termination, on grounds that the customer had “assigned” the agreement to its new parent company, in violation of the contract’s assignment-consent provision. The appeals court held that, even if the customer had indeed assigned the contract (a point on which it expressed considerable doubt) without consent, the resulting breach of the agreement was not material, and therefore the vendor did not have the right to terminate the contract.
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When business owners are negotiating contracts to gear up for the sale of their business, they are rightly concerned with key questions such as the sale price for the business including assets such as how much the sale will cost them and what happens if something goes wrong. At the end of the contracts, there are usually several pages of type that usually look like boilerplate. Inside those clauses is usually something called an assignment clause, or more accurately, an anti-assignment clause.
It’s one of those clauses that everyone glosses over – after all, it’s just standard legal text, right?
For a business owner hoping to sell their business, an anti-assignment clause can dissuade potential buyers and play a crucial role in the selling price of a business. If this sounds familiar and you’re in the process of negotiating the merger or acquisition of your business, read on – we’ve put together a practical guide to anti-assignment clauses and what to look out for.
Looking for legal help? feel free to get in touch with our commercial lawyers for matters related to contracts.
The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense – after all, if you sign a contract with a specific party, you don’t expect to be entering into an agreement with a third party you didn’t intend to be.
However, when you sell your business, you will want to transfer ownership of those contracts to the buyer. If your contracts all contain an anti-assignment clause, they effectively restrict you from transferring ownership to the interested party. Now, you’re presented with a new challenge altogether – before you can focus on the sale of your business, you must first renegotiate the terms of your contracts with each party.
If you’re thinking about selling your business or even have potential buyers interested, it’s better to know in advance if you’ve got anti-assignment clauses in your contracts. There are generally two types of anti-assignment clause to look out for. The first relates to the complete bar on assignment of rights and responsibilities and is typically worded in this way, or similar:
“Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”
The second type prevents the transfer of rights or duties without prior written consent of the other party. This will read along the lines of:
“Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written consent of the other party, and whose consent may be withheld for any reason.”
So, where the first prohibits assignment altogether, the second prohibits assignment unless permission is sought in advance. Some clauses may even explicitly state that a change of control such as a merger or acquisition is an assignment. The last thing you want is to cause a dispute by breaching the contract, but if you’ve already agreed to these terms, you’ll have to open a fresh set of negotiations with the contracting party before you sell the company.
Due diligence is the bread and butter of any merger or acquisition. Rather than a leap of faith, due diligence ensures the purchase of a business is a calculated decision with minimal risk to the buyer. Typically carried out by specialist lawyers, the process is designed to lift the hood on the target business to determine the valuation of assets and liabilities and identify any glaring issues that could leave the buyer open to risk.
During the due diligence process, the buyer will look through all of the major contracts the business has open, and specifically keep a close eye out for assignment clauses.
Despite the virtual environment that many businesses have been forced to operate in in 2020, most companies will have commercial leases for the premises from which they typically work. Almost all leases have an anti-assignment clause, and this is a perfect example of an instance that is often overlooked by commercial tenants when selling a business which includes a leasehold property. This transfer of ownership may well be prohibited under an anti-assignment clause so that prior to the sale of the business, you would be required to ask permission from your landlord. The issue here is that the landlord may well see this as the perfect opportunity to renegotiate and secure a better deal for themselves. What’s worse, if they don’t sign off on the transfer, you’ll have an obstruction on your hands that will stand in the way of the sale.
In any case, an unexpected anti-assignment clause usually winds up being a last-minute hitch in the sale, and it never comes at a good time. Whether it delays the sale or obstructs it altogether, overlooking an anti-assignment clause can cost you considerably in an M&A transaction.
Generally speaking, an anti-assignment clause will be enforced by the courts if it was agreed upon by both parties to the contract. Many contracts exclude or qualify the right to assignment – according to the courts, a clause that states that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract.
Courts won’t always enforce assignments to which the counterparty did not give permission, even where there is no anti-assignment clause that specifies this provision.
The best practice for business owners is to be vigilant when negotiating new contracts and ensure that any anti-assignment clauses still allow for the transfer of ownership when they decide to sell the business.
Remember, even though the buyer is purchasing the assets of the business, this usually means that all of the contracts of the business go with it because the business remains intact. Therefore, the best way forward is to negotiate these clauses upfront from the outset of the relationship, so that when you do decide to sell your business, you automatically have permission to transfer the ownership without having to delay the sale by entering into fresh negotiations.
If your agreement does not permit assignments, it’s worth seeking the advice and support of a specialist lawyer who can help protect your interests through negotiation with your counterparty on this point. You may be able to include a provision that allows for assignment of your rights and obligations upon the prior written consent of the other party. Your lawyer will likely advise you to carve out a specific provision to prohibit the counterparty from unreasonably withholding or delaying consent or making it subject to unreasonable conditions – an issue which, if not provided for within the contract, can cause serious delay and disruption to the sale of your business. Further, it may be beneficial to add an extra element to the contract that makes exceptions to the clause for assignments between affiliates. If you’re planning to sell your business, this would be the right place to carve out an exception within the clause to the change of control via a merger or acquisition.
It’s important to bear in mind that anti-assignment clauses tend to be viewed narrowly by courts, and that there have been several instances whereby anti-assignment clauses have not been enforced since the clause itself did not explicitly state that the assignment of rights, duties or payment would render the contract void or invalid. So, if you’re in the process of negotiating an agreement and wish to protect your interests through the addition of an anti-assignment clause, it’s critical that you include the consequences of assignment within the clause itself and state that assignments would invalidate or be in breach of the contract.
If you do not wish for the counterparty to be able to transfer the legal obligation to perform their duties as stated in the contract to a third party, this must be explicitly stated in one of three ways:
There’s no need to be unreasonable – you can protect your interests while still giving the counterparty the space to re-negotiate should they wish to assign rights by including a clause that asks for consent.
Ask your lawyer to draft an exception into the clause that permits assignment to affiliates or successors to the counterparty, such as:
“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party will own greater than 50 per cent of the shares or other interests; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will relieve an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”
Just as you would not wish for consent to be held back from you unreasonably in the renegotiation of contract terms prior to a sale, your assignment clause should make clear that you will not unreasonably withhold or delay consent should the third party request permission to assign their legal obligations. This may read something like this:
“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”
Whatever the circumstances, we strongly recommend calling upon a contract law specialist, whether you’re undergoing due diligence in the run up to an M&A transaction, are considering selling your business or are negotiating new contracts with customers and suppliers. Our lawyers bring in-depth expertise in the area of anti-assignment clauses and will work closely with you to protect your interests and ensure no clauses in your contracts negatively impact the sale of your company.
For a free consultation, get in touch with our team through the contact form below or using our online chat service.
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An assignment clause governs whether and when a party can transfer the contract to someone else. Often, it covers what happens in a change of control: whether a party can assign the contract to its buyer if it gets merged into a company or completely bought out. But that doesn’t make it a change of control clause. Change of control terms don’t address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences.
Don’t confuse the two. In a contract about software or other IT, you should think through the issues raised by each. (Also, don’t confuse assignment of contracts with assignment of IP .)
Here’s an assignment clause:
Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other’s express written consent, except that either party may assign this Agreement to the surviving party in a merger of that party into another entity or in an acquisition of all or substantially all its assets. No assignment becomes effective unless and until the assignee agrees in writing to be bound by all the assigning party’s obligations in this Agreement. Except to the extent forbidden in this Section __, this Agreement will be binding upon and inure to the benefit of the parties’ respective successors and assigns.
As you can see, that clause says no assignment is allowed, with one exception:
Consider the following additional issues for assignment clauses:
Here’s a change of control clause:
Change of Control. If a party undergoes a Change of Control, the other party may terminate this Agreement on 30 days’ written notice. (“Change of Control” means a transaction or series of transactions by which more than 50% of the outstanding shares of the target company or beneficial ownership thereof are acquired within a 1-year period, other than by a person or entity that owned or had beneficial ownership of more than 50% of such outstanding shares before the close of such transactions(s).)
Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist . That party just has new owners (shareholders, etc.).
Consider the following additional issues for change of control clauses:
Some of this text comes from the 3rd edition of The Tech Contracts Handbook , available to order (and review) from Amazon here , or purchase directly from its publisher, the American Bar Association, here.
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A party to a contract may sometimes want to transfer – or assign – their rights or interests under the contract to a third party. This is common in business sales or reorganisations within group companies. Assignment can be done by way of a simple agreement and, in principle, carried out without the knowledge or consent of the other contracting party. After the assignment, the assignee is entitled to enjoy the benefits of the contract and, if necessary, enforce its rights under the contract against the other party. In practice, commercial contracts often include terms which restrict a party’s ability to transfer their rights under the contract, either by prohibiting any assignment or by requiring the consent of the other party. Where the consent of the other party is required, contracts often provide that consent may not be unreasonably withheld. That begs the question: what constitutes an “unreasonable” refusal to consent and what happens if a party does unreasonably withhold its consent? A recent case – Gama Aviation & International Jet Club v MWWMMWM Ltd – has provided some helpful guidance:
This is a reminder of the importance of considering any clauses concerning assignment when negotiating a contract. If Party A only wants to have dealings with Party B going forward, it should ensure that the contract either prohibits Party B from assigning its contractual rights or that any assignment requires Party A’s consent. Any obligation on Party A to act reasonably could significantly restrict its ability to block an assignment.
The Gama case arose when a party tried to avoid its liability for services that had been provided on the basis that the obligation to provide services had been assigned without consent and that the assignment was therefore invalid. The second claimant ( C2 ) entered into an agreement with the defendant ( D ) under which C2 would provide services for the management and operation of D’s aircraft ( the Agreement ). Some time later, C2’s parent company was acquired by the parent company of the first claimant ( C1 ) and C2 was wound up; C1 then provided the services to D. D paid C1 for the services for few years but then refused to pay. C1 issued a claim against D for the unpaid sums, arguing that it had taken C2’s place under the Agreement, either by novation (a means of transferring both rights and obligations under a contract to a third party) or by assignment. C1 and C2 had entered into a deed of assignment which purported to assign absolutely all of C2’s rights, interests and benefits under the Agreement to C1. As such, C1 claimed that it should be entitled to the payments owed by D under the Agreement. D argued that the assignment from C2 to C1 was not effective because the Agreement included a clause which said any assignment would require D’s consent, such consent “ not to be unreasonably withheld” . D said that it had not consented to the assignment. The court found that that the Agreement had been novated but, even if it hadn’t, the assignment from C2 to C1 would have been fully effective in transferring C2’s rights to C1 even though D had not consented. D had argued that the assignment had been carried out for the purposes of litigation rather than an ordinary business purposes, and that the assignment was unclear in its effect because it was prepared against a background in which there was an issue as to whether the novation was effective. However, the court said that C1 and C2 were entitled to regularise their position to ensure it was clear to whom obligations were owed. Furthermore, the assignment itself was perfectly clear and comprehensive. In conclusion, the court found that D had unreasonably withheld its consent and therefore D’s assertion that the assignment was invalid was unsustainable.
If you require further information about anything covered in this briefing, please contact Ben Longworth , Lucy Billett or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances. © Farrer & Co LLP, June 2022
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Out-Law Guide 4 min. read
19 Aug 2011, 4:40 pm
Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.
As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:
After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee. The assignor will remain liable for any past liabilities incurred before the assignment.
In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.
Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.
Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:
Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.
The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.
Some transfers can only take effect as an equitable assignment, for example:
If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.
Using assignment as a way of taking security requires special care, as follows:
Please see our separate Out-Law guide for more information on types of security.
There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:
If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.
In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.
Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.
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27 November 2023 20 November 2012 | Ken Adams
In this post , Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora ( here ) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) ( NDCB ). Here’s Brian’s provision:
Neither party may assign any of its rights under this agreement, either voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, except with the prior written consent of the other party. Neither party may delegate any performance under this agreement, except with the prior written consent of the other party. Any purported assignment of rights or delegation of performance in violation of this section is void.
It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously ( here ), and Brian’s post prodded me to revisit the topic.
I’ll start by offering the following comments on Brian’s provision:
So here’s my initial version (it’s certain to change) [ Updated 9 August 2016: Language tidied up]:
Except with the prior written consent of the other party, each party shall not transfer, including by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or operation of law, (1) any discretion granted under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.
Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).
I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.
[ Updated 27 November 2023: Bear in mind that in some contexts—notably bankruptcy—no-transfer provisions are unenforceable by law. See my 2014 article on termination-on-bankruptcy provisions, here .]
About the author
Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting , and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.
I have several concerns here. First, I have never been happy with the “each party shall not” formulation. I don’t mind “may not,” or better yet, “no party may,” but if you really want to use “shall not,” then I recommend “a party shall not” as being less awkward and contrary to normal usage.
Second, I’m surprised that you would allow “by operation of law” to survive here. For the most part, this phrase is used to refer to the “automagic” continuation of the disappearing company’s contracts under the aegis of the surviving company in a merger, in which case the language is redundant when you’ve already discussed mergers. Moreover, if this language relates to some other operations of law, for example an order of a bankruptcy court, it’s rather hubristic to think a contract can trump the ruling authority. Better, if it’s such a big deal, to handle the consequences of such a mandated transfer by giving the affected party an explicit termination right (without the nasty consequences of breach).
Third, in my experience the issues surrounding “delegation” are not only that it’s a misapplied term of art, but that it mistakes the transfer of a contractual obligation for a subcontracting of its performance. In fact, reliance on delegation or transfer is misplaced if one is concerned about subcontracting (since it doesn’t really amount to a transfer of any contractual obligation, only having that obligation physically performed by someone else). A drafter should inquire carefully what the client is really concerned about here, and if it’s subcontracting, that should be explicitly mentioned.
Ah, thank you Vance. I thought My discomfort with ‘delegate’ was a translation issue from US to UK English. I,too, Think that is the wrong word to use.
“No purported transfer of one or more of the following arising from this agreement will be valid without prior written consent of the other party: (1) discretion, (2) right to satisfy a condition, (3) remedy under this agreement, and (4) obligation.”
Other than light trimming, the principal thing this version does is dump the duty not to transfer and go solely with the avoidance of purported transfers. Why prohibit killing the dead?
Because failure to comply with a prohibition gives rise to a remedy; voiding purported transfers doesn’t. I can imagine situations where that might be significant.
No one can fail to comply with a prohibition against transfer when purported transfers are void. Void transfers are non-transfers. Killing the dead isn’t wicked, it’s just impossible.
It’s wicked and depraved! Actually, what happens if Acme makes a purported assignment that results in costly and protracted litigation? Widgetco would like to be able to go after Acme. Wouldn’t that be easier if Widgetco could point to breach? Should the obligation refer to not attempting to transfer?
“Any purported transfer by Acme, without Widgetco’s advance written consent, of one or more of Acme’s rights or obligations under this agreement will be void and will constitute a breach of this agreement.”
This game is based so much on underlying US laws on the meaning of assignment, merger, etc, that it is impossible for a non-US lawyer to participate. We don’t generally have mergers where a party disappears into a puff of smoke. A sale of a business [nearly] always happens by a sale of shares or a sale of assets.
I think the concept of assigning rights under a contract is well established in case law and using different terminology is reinventing the wheel.
I think the “if you do it despite the prohibition, it will be void” concept is strange, but one that I have seen before in US contracts. I don’t think it works, under English law, in respect of prohibitions on assignments of IP. I am doubtful whether it works for assignments of rights under contracts.
For what it is worth, my English law version would be very different and would simply say:
Neither party may assign any rights, or transfer any obligations, under this agreement, without the prior written agreement of the parties.
I have used the word “agreement” rather than “consent” to try to avoid case law on whether a term should be implied that consent should not be unreasonably withheld. The terminology of assignment and transfer is based on a House of Lords case, Linden Gardens v Lenesta Sludge – see http://www.bailii.org/uk/cases/UKHL/1993/4.html
As usual, caselaw is of less interest to me than the scope for confusion. I suspect that if you ask many lawyers what is meant by assignment of rights under a contract, you’d get quite a variety of answers.
Okay, Ken I’ll take your word for it. English lawyers who keep Chitty on Contracts under their pillows won’t be so variegated
Mark: Regarding your statement, “I think the ‘if you do it despite the prohibition, it will be void’ concept is strange, but one that I have seen before in US contracts,” consider the probable source of such provisions:
Since U.S. contract law is the province of the states, we have the high court of each of the 50 states reviewing the handiwork of probably twice that number of state appellate courts, which in turn have reviewed the work of probably thousands of trial courts. In addition, we have almost 90 federal district courts trying to predict how the supreme courts of the various states would rule if they were hearing the contracts cases that have fallen into the laps of the federal courts due to accidents of jurisdiction, plus the dozen courts of appeals and the Supreme Court. Then there are specialty federal courts such as the bankruptcy and tax courts which provide an additional source of cases for the federal district and appellate courts to review. And did I mention the extensive administrative law system that probably dwarfs all of the above in scope and which I’m sure has plenty to say about contracts?
Somewhere, sometime in the distant past one of those courts had an unfortunate fact pattern and, wanting to avoid the effect of an anti-assignment provision, decided that although the purported assignment was a breach of the contract in which it was found, the assignment was still effective. Other courts picked up on the work-around, and commercial lawyers have all been covering that base ever since.
Thanks Brian, interesting insight. I would have posted on your site but For the reasons given above I didn’t have a useful contribution.
The language as being quoted from Negotiating and Drafting Boilerplate is incomplete. Here is the full language, along with explanations of some of the text. Many of my points will be at odds with those of Ken and arise because of differences in drafting philosophy.
Assignment and Delegation.
(a) No Assignments. No party may assign any of its rights under this Agreement, except with the prior written consent of the other party. [That party shall not unreasonably withhold its consent.] All assignments of rights are prohibited under this subsection, whether they are voluntary or involuntary, by merger, consolidation, dissolution, operation of law, or any other manner. For purposes of this Section,
(i) a “change of control” is deemed an assignment of rights; and
(ii) “merger” refers to any merger in which a party participates, regardless of whether it is the surviving or disappearing corporation.
(b) No Delegations. No party may delegate any performance under this Agreement.
(c) Consequences of Purported Assignment or Delegation. Any purported assignment of rights or delegation of performance in violation of this Section is void.
1. The provision is divided into three separate subsections, each dealing with a different topic. A long provision violates the so-called “three-line rule.” Sentences longer than three lines are hard for the reader to take in. Also, by separating assignment from delegation, the drafter is reminded that each of these provisions may need to be elaborated based on facts. (Perhaps delegation is permitted subject to certain conditions.)
2. Generally, exceptions should not begin a sentence. The usual rule is to state the rule – so that the reader has context – and then state the exception. This is also helpful if the sentence contains multiple exceptions that the drafter might want to tabulate.
3. I prefer “No party may” to “Each party shall not.” The sentence’s purpose is to express a prohibition that applies to all – no one can do it. In this context, a negative subject is appropriate: no party/neither party. When using a negative subject “may” is correct. “Shall not” works perfectly well when the subject of the sentence is a single party. “Sam shall not borrow any money.”
4. As to whether consent can be unreasonably withheld is a matter of state law. Some states read into a provision that grants discretionary authority an implied promise of good faith and fair dealing, stated differently, they read in reasonableness. Others do not imply a reasonableness requirement. For example, in New York, landlords may be unreasonable in denying consent to assignment.
5. Courts seriously dislike anti-assignment provisions. They view them as interfering with the free flow of commerce. They insist that if a particular assignment is to be prohibited, it must be listed. For example, if a provision prohibits the assignment of rights, the issue arises as to whether the provision prohibits the assignment of rights by merger. In all states that I’ve checked, unless the assignment by merger is explicitly prohibited, it’s permitted. The courts are rather adamant. They’ll turn their decisions inside out to find the anti-assignment provision unenforceable. They don’t like them and if the provision isn’t explicit, the courts will say that if the parties had really wanted to prohibit assignments by merger, they knew how to use their words. “Voluntarily or involuntarily” is used consistent with these cases.
6. Drafters have tried multiple ways to create all-inclusive provisions, but the courts reject them as not having been specific. “or in any other manner” was blessed by one court, so it’s used in the provision. Another court rejected the phrase “or by any other transfer,” stating that it did not know what “transfer” meant and it therefore could not act as an omnibus savings provision.
7. An anti-assignment provision should also address whether a change of control is deemed an assignment. If Parent Company A sells all of its issued and outstanding shares in Subsidiary A to Buyer Company, Subsidiary A becomes a wholly-owned subsidiary of Buyer Company. Nothing has happened at the Subsidiary A level; there’s been no assignment. Courts hold that unless the change of control is expressly prohibited, it does not rise to the level of an assignment. This prohibition can generally be accomplished in one of two ways: either through a definition, as in the stated provision, or by including a change of control as a default.
8. Assignment and delegation are terms of art, not misapplied terms of art. The Restatement (Second) of Contracts carefully defines them, as do legions of cases. Unfortunately, some lawyers are unfamiliar with them because their contracts courses didn’t cover them. That doesn’t mean new words should be created.
9. Rights are the flip-side of an obligation. If I have an obligation to pay you $100, you have a right to my performance. The transfer of the right to performance is what the assignment is all about. It’s technical. Using terms in a technical way creates precision. If one has discretionary authority, that is a colloquial right but not a contract right. That’s the reason why “right” is not used to signal discretionary authority. Instead, the correct verb to signal discretionary authority is “may”. Incorrect: The publisher has the right to reject the book. Correct: The publisher may reject the book.
Rights can also refer to remedies, but that is consistent with the definition of rights. If a party has a right to have its deposit returned, the flipside obligation is the obligation to return it. If a party has a right to an injunction, the flipside obligation is the promise not to contest the right to the injunction.
10. “Will be void” v. “is void.” I can’t get too excited about this issue. I start from the premise that the contract should always read as if it presently applies and that, therefore, the present tense is correct.
11. Subsection (c) is another consequence of the courts’ dislike for anti-assignment provisions. Mere prohibition does not void the assignment. The courts draw a distinction between the “right” to assign and the “power” to assignment. A flat prohibition merely prohibits the assignment of the right to assignment. Violation of the prohibition is a breach, like any other contract breach. The assignment is enforceable, but gives rise to damages. Unfortunately, the nonassigning party often has trouble finding damages to claim. What difference does it make to whom it pays money? If the nonassigning party’s performance is somehow changed, then damages might be claimed. To make the purported assignment unenforceable, a provision must take away the “power” to assign. That is accomplished through language along the lines of subjection (c).
Tina: Thanks; some readers might find that extract helpful.
More generally, the only drafting philosophy I buy into is identifying the clearest contract language.
Do you see any issues with making the transfer voidable by the non-transferring party instead of void ab initio?
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Grouped into 44 collections of similar clauses from business contracts.
An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. 3 min read updated on October 29, 2020
An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.
In an assignment contract, the assignor prefers that the assignee reverses roles and assumes the contractual rights and obligations as stated in the contract. Before this can occur, all parties to the original contract must be notified.
Contracts create duties and rights. An obligor is the party who is legally or contractually obliged to provide a benefit or payment to another, while an obligation is owed to the obligee. The obligee transfers a right to obtain a benefit owed by the obligor to a third party. At this point, the obligee becomes an assignor. An assignor is the party that actually creates an assignment.
The party that creates an assignment is both the obligee and a transferor. The assignee receives the right to acquire the obligations of the promisor/obligor. The assignor can assign any right to the obligor unless:
Assignments are important in business financing, especially in factoring . A factor is someone who purchases a right to receive a benefit from someone else.
The specific language used in the contract will determine how the assignment plays out. For example, one contract may prohibit assignment, while another contract may require that all parties involved agree to it before proceeding. Remember, an assignment of contract does not necessarily alleviate an assignor from all liability. Many contracts include an assurance clause guaranteeing performance. In other words, the initial parties to the contract guarantee the assignee will achieve the desired goal.
The following situations indicate when an assignment of a contract is not enforced:
Occasionally, one party in a contract will desire to pass on or delegate their responsibility to a third party without creating an assignment contract. Some duties are so specific in nature they cannot be delegated. Adding a clause in the contract to prevent a party from delegating their responsibilities and duties is highly recommended.
An assignment involves the transfer by an assignor of some or all of its rights to receive performance under the contract to an assignee. The assignee then receives all the benefits of the assigned rights. The assignment doesn't eliminate or reduce the assignor's performance commitments to the nonassigning party.
There are three main steps to take if you're looking to assign a contract:
Once the obligor is notified, the assignor will effectively be relieved of liability.
If you'd prefer not to allow the party you're doing business with to assign a contract, you may be able to prevent this from occurring by clearly stating anti-assignment clauses in the original contract. The three most common anti-assignment clauses are:
Based on these three clauses, no party in the contract is allowed to delegate or assign any obligations or rights without prior written consent from the other parties. Any delegation or assignment in violation of this passage shall be deemed void. It is not possible to write an anti-assignment clause that goes against an assignment that is issued or ordered by a court.
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Insight and Information on Louisiana Law, Litigation, and Legal Culture
Very often, contracts prohibit assignment without the other party’s consent. If you think you might ever want to assign a contract (bearing in mind that a merger or sale of the business can trigger assignment), then this kind of provision should generally be modified by adding that the other party’s consent cannot be unreasonably withheld, conditioned or delayed.
Without this language, consent can generally be withheld as long as doing so does not rise to the level of “abuse of rights,” a theory difficult to prove (i.e., proof of intent to harm or a violation of good faith is required).
Adding the language recommended above will require the other party to demonstrate some legitimate reason for denying consent, such as the proposed assignee is financially inferior to the assignor; the assignor is in default; or the proposed assignee cannot comply with the existing terms of the subject agreement.
In a recent case, the court found that a landlord withholding consent for competitive reasons was not reasonable (i.e. the proposed assignee would be operating a business competitive with the landlord’s nearby business). Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hosp. Service Dist. No. 1, 426 F.3d 738 (5th Cir. 2005). The court noted that the landlord’s objection must be based on ownership and operation of the leased property, not the landlord’s “general economic interest.” The court held that the competitive concerns did not relate in any way to an objective evaluation of the proposed assignee as a tenant and were not a reasonable basis for denying consent. This is the first time Louisiana contract law has been interpreted in this fashion. Historically, economic reasons were a permitted basis for refusing consent to assignment.
Avoid becoming trapped into contracts, including leases, by making sure the other party must act reasonably if you need to request consent to assignment. On the flip side, be aware that if your consent to assignment is requested, refusing to grant it for competitive reasons may trigger a claim that you’ve breached the contract. Whether you can successfully defend such a claim will depend largely on the wording of the assignment provision and whether it expressly permits withholding consent for competitive reasons.
(page 2 of 2 of what is an assignment of contract).
You'll need to follow three basic steps to assign a contract .
Step 1: Examine the contract for any limitations or prohibitions. Check for anti-assignment clauses. Sometimes the prohibition is not a separate clause but is included in another provision. Look for language that states, "This agreement may not be assigned." If you find such language, you may not be able to assign the agreement unless the other party consents.
Step 2: Execute an assignment. If you are not prohibited from assigning the contract, prepare and enter into an assignment of contract: an agreement that transfers the parties' rights and obligations.
Step 3: Provide notice to the obligor. After you have assigned your contract rights to the assignee, you should provide notice to the other original contracting party (referred to as the obligor). This notice will effectively relieve you of any liability under the contract unless the contract says differently (for instance, if the contract says that the assignor guarantees the performance of the assigned contract or the contract prohibits an assignment) or the assignment is prohibited by law.
If you're making a contract and you don't want assignment to be an option, you need to clearly state that in your agreement. Below are three variations of anti-assignment clauses that can be used in a contract.
EXAMPLE 1: Consent Required for Assignment
Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Any assignment or delegation in violation of this section shall be void.
EXAMPLE 2: Consent Not Needed for Affiliates or New Owners
Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. However, no consent is required for an assignment that occurs (a) to an entity in which the transferring party owns more than 50% of the assets, or (b) as part of a transfer of all or substantially all of the assets of the transferring party to any party. Any assignment or delegation in violation of this section shall be void.
EXAMPLE 3: Consent Not Unreasonably Withheld
Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Such consent shall not be unreasonably withheld. Any assignment or delegation in violation of this section shall be void.
Anti-assignment clauses can also be modified to prohibit only one of the parties from assigning rights. Also, when preparing an anti-assignment clause, keep in mind that you can prevent only "voluntary" assignments; you can't prevent assignments that are ordered by a court or that are mandatory under law—for example, in a bankruptcy proceeding.
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An agreement enforceable by law becomes a contract. A contract involves both rights and obligations because a contract is an agreement enforceable by law. An agreement involves promises from both sides, and thus, there is the creation of both rights and obligations. For instance, X promises to sell his car to Y, and Y promises to pay Rs. 5,00,000 for his car. This constitutes a valid contract between X and Y. Here, the right on the part of X is to get Rs. 5,00,000 as consideration for selling his car, and the obligation for X is to deliver the car to Y as consideration for Rs. 5,00,000 paid to X by Y for selling his car.
Similarly, the right on the part of Y is to get the car delivered as consideration for Rs. 5,00,000 paid, and the obligation for Y is to pay Rs. 5,00,000 as consideration for the vehicle. If either X or Y fails to discharge their responsibility, there will be a breach of contract. In this way, a contract leads to the creation of both rights and obligations for both parties.
Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z. In this case if Y asks Z to directly pay Rs. 1,000 to X, and if X accepts the same, there will be an assignment of Y’s right to Z. But, if in a similar situation, instead of transferring his ownership, Y would have transferred any of his obligations, then it would amount to novation. Section 37 of the Indian Contract Act, 1872, enables the parties to dispense the performance by way of the contract’s Assignment. Apart from conforming with the Indian Contract Act, 1872, there are exceptional circumstances where the contract assignment must be duly stamped in conformity with the provisions of the Indian Stamp Act, 1899.
The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. There are three parties involved in contracts of Assignment, namely, the assignor, assignee, and obligor. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment.
But if a contract between two parties relies entirely on the’ promisor’s skill or expertise, then such a contract cannot be assigned under any circumstances. This is because the ‘promisee’ has entered into the contract based on the’ promisor’s skill or expertise. The case of Robinson v Davison is important case law in this regard . In this case, the defendant’s wife promised to play piano on a particular at a concert. She was unable to discharge her liability, that is, to play piano at the concert because of her illness. In this case, it was held that the contract was directly dependent on the good health and the personal skill of the defendant’s wife, and the illness of his wife discharged the contract. It was also stated that the defendant could not be made liable to pay compensation for the non-performance of the contract. As the contract was based on the ‘promisor’s skill in the above case law, the wife could not assign her right/obligation to any third party.
Case Study: Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan Case
Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan is a recent judgment delivered by the Supreme Court of India on November 25, 2019, concerning the Assignment of rights and Interests in a contract. In this judgment, the Supreme Court reaffirmed that a party to a contract could not assign its liabilities or obligations without the consent of the other party.
The facts of the case are: The appeals to the Supreme Court resulted from the Gujrat High Court’s decision that had allowed the appeals of the respondent against the trial court’s decision. The dispute, in this case, is related to a property owned by the appellants (Vendor). The appellant has had formulated an agreement to sell in favor of some of the respondents in 1986 regarding the above-mentioned property. The respondents, who were the original vendees, had paid a part of the consideration part. The Original Vendees, in 1987, assigned the former’s rights in favor of Respondent 1 and executed an agreement in favor of Respondent 1. This led to several disputes, and subsequently, Respondent 1 filed suits against the Original Vendees and the vendor demanding specific performance of the agreement executed in 1987. The Respondent’s suits were dismissed by the trial courts stating that the Original Vendees could not have assigned their outstanding obligation of paying Vendor the remaining money to Respondent 1 without the consent of the Vendor. On the other hand, Gujrat High Court reversed the decision of the trial court and declared the Assignment of rights in favor of Respondent 1 as valid.
The Supreme Court in its judgment reaffirmed the view of the trial courts and stated that: “ It is further relevant to note that under the 1987 agreements, payment of the outstanding consideration amount is to be made to the original vendees, not the Appellants, and possession/ownership of the suit property is to be handed over by the original vendees. The 1987 agreements nowhere provide for the discharge of the original vendees’ pending obligations towards the Appellants by Respondent Nos. 1. Hence, we are inclined to accept the Appellants’ argument that the 1987 agreements were not a case of Assignment but appear to be independent/sovereign agreements for sale which were contingent and dependent on the execution and implementation of the 1986 agreement. Therefore, the only way Respondent Nos. 1 can seek specific performance of the 1986 agreement against the Appellants is by proving the Appellants’ knowledge of and consent to transfer the original vendees’ rights and liabilities Respondent Nos. 1.”
From the above discussion, it is clear that the Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment. The Assignment of obligations/liabilities is not possible in the case of contracts solely relying on the personal skill or expertise of the ‘promisor’.
The recent judgment of the Supreme Court in Kapilaben & Ors. v Ashok Kumar Jayantilal Seth, through POA Gopalbhai Manusudhan Case, also reaffirms that in case of transfer/assigning of outstanding obligations under the contract, the consent of the other party is a necessary condition to make the Assignment valid. Even though this judgment reaffirms the point upheld by law, it still suggests the parties to a contract consider the various complexities of contracts, the intent contract, the availability of the assignability clause in the written agreement, etc., before drafting a commercial contract.
References:
A detailed analysis of provisions related to coercions under the indian contract law, free consent (section 13 & 14), a detailed analysis of provisions related to compensation for loss or damage caused by breach of contract under the indian contract law, editor picks, popular posts, maneka gandhi vs union of india – case summary, contract of bailment and pledge, adm jabalpur vs shivkant shukla (1976) 2 scc 521 – case..., popular category.
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COMMENTS
Assignment Clause Examples. Examples of assignment clauses include: Example 1. A business closing or a change of control occurs. Example 2. New services providers taking over existing customer contracts. Example 3. Unique real estate obligations transferring to a new property owner as a condition of sale. Example 4.
If there is language in the contract that states it can't be assigned, the other party must consent to an assignment before you can proceed. Second, the parties must execute an assignment. Create an agreement that transfers the rights and obligations of one party to the assignee. Third, notify the other party of the contract.
Assignments: The Basic Law. The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States. As with many terms commonly used, people are familiar with the ...
An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the ...
These anti-assignment clauses typically take one of two forms. The first, which we will call "simple" anti-assignment clauses, simply prohibit the contractual right from being assigned without the consent of the other party to the contract. For example, a simple anti-assignment clause might state: This contract shall not be assigned or ...
An assignment of contract occurs when one party to an existing contract (the "assignor") hands off the contract's obligations and benefits to another party (the "assignee"). Ideally, the assignor wants the assignee to step into their shoes and assume all of their contractual obligations and rights. In order to do that, the other party to the ...
The purpose of a non-assignment provision is to ensure that the identities of the original two contracting parties remain the same throughout the term of the contract. A basic non-assignment provision reads something like the following: "This contract cannot be assigned to anyone without the written consent of both parties.".
Contract assignments are handled differently depending on certain aspects of the agreement and other factors. The language of the original contract plays a huge role because some agreements include clauses that don't allow for the assignment of contract rights or that require the consent of the other party before assignment can occur.
Assignment consent requirements. Model language [Party name] may not assign this Agreement to any other person without the express prior written consent of the other party or its successor in interest, as applicable, except as expressly provided otherwise in this Agreement. A putative assignment made without such required consent will have no ...
Some contracts prohibit assignment altogether, while others may allow it with the other party's consent. An example of a basic contract assignment may look like this: ... That party must also check the contract's express language to determine whether or not it can transfer the assignment without obtaining consent from the non-transferring party.
The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense - after all, if you sign a contract with a specific party, you don't expect to be entering into an agreement with a third party you didn't intend to be.
Assignment. The transfer of a right from one party to another. For example, a party to a contract (the assignor) may, as a general rule and subject to the express terms of a contract, assign its rights under the contract to a third party (the assignee) without the consent of the party against whom those rights are held. Obligations cannot be ...
(Also, don't confuse assignment of contracts with assignment of IP.) Assignment. Here's an assignment clause: Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other's express written consent, except that either party may assign this Agreement to the surviving party in a merger ...
A party to a contract may sometimes want to transfer - or assign - their rights or interests under the contract to a third party. This is common in business sales or reorganisations within group companies. Assignment can be done by way of a simple agreement and, in principle, carried out without the knowledge or consent of the other contracting party. After the assignment, the assignee is ...
Contractual assignment provisions. Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the ...
consent to assignment. 5. Courts seriously dislike anti-assignment provisions. They view them as interfering with the free flow of commerce. They insist that if a particular assignment is to be prohibited, it must be listed. For example, if a provision prohibits the assignment of rights, the issue arises as to whether the
No Assignment.This Agreement is personal to each of the parties hereto. Except as provided in this Section 12 hereof, 14, no party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto. The Company may assign this Agreement to any successor to all or substantially all of the business and/or assets of the Company ...
The three most common anti-assignment clauses are: Consent required for assignment; Consent not needed for new owners or affiliates; Consent not unreasonably withheld; Based on these three clauses, no party in the contract is allowed to delegate or assign any obligations or rights without prior written consent from the other parties.
Very often, contracts prohibit assignment without the other party's consent. If you think you might ever want to assign a contract (bearing in mind that a merger or sale of the business can trigger assignment), then this kind of provision should generally be modified by adding that the other party's consent cannot be unreasonably withheld, conditioned or delayed.
Below are three variations of anti-assignment clauses that can be used in a contract. EXAMPLE 1: Consent Required for Assignment. Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Any assignment or delegation in violation of this section shall be ...
Sample Clauses. No Assignment of Contract. Pursuant to 65 ILCS 8-10-14, Contractor may not assign this Contract without the prior written consent of the CPO. In no case will such consent relieve the Contractor from its obligations, or change the terms of the Contract. The Contractor must notify the CPO, in writing, of the name of any proposed ...
Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party's concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z.
83% of customers are highly satisfied with Practical Law and would recommend to a colleague. 81% of customers agree that Practical Law saves them time. An outline of the ways in which contractual rights may be transferred to third parties by means of assignment, and the rule against assigning the burden, or obligations, of a contract.
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