What is a contract Assignment Clause?
Contract assignment clauses are used in legal agreements to give one of the parties the right to transfer some or all of its rights or obligations under the agreement to another party. The contract assignor is the party who has the right to assign its rights or obligations in the agreement to another party (the ‘assignee’), and the contract assignee is the party that accepts the assignment of the rights or obligations under the agreement. These clauses are often important for the assigning party as they allow it to transfer its obligations and/or rights to a third party.
However, these clauses are not always a catch-all for the parties to avoid performing their duties under the agreement as the assignor may still be required to perform certain restrictions in the assignment clause which may prevent it from fully assigning all of its obligations or rights under the same agreement . Such restrictions may include obtaining the consent of a third party to the assignment in order to assign its obligations and/or rights under the agreement. Additionally, the assignor may not be able to obtain its assignee’s consent which means that the assignor must still perform its obligations under the agreement and as such may still be responsible for any action or breach of the agreement.
Contract assignment clauses should always be carefully drafted to ensure that the assignment of obligations and/or rights under the agreement complies with the clause as well as any other relevant clauses including but not limited to third-party rights and limitations on the scope of the agreement.
Examples of Contract Assignment Clauses
When drafting a contract assignment clause, the writer has the option to make that clause global or specific, along with the possibility of including certain contingencies and exceptions. Contract assignment clauses generally fall into the following categories:
1. Global Assignment Clause
A global assignment clause allows for a party to assign its rights and delegate its obligations under any and all agreements of the contracting parties. As such, it is important to consider whether the intent of the contracting parties is authorization of assignment in this manner. Absent this intent, a global assignment clause may not be practical or appropriate in that it may unnecessarily burden the obligations of the assignor. As such, contract writers should consider whether the purpose of the assignment could be achieved by an assignment of certain contracts only. Under a global assignment, the assignor would then be responsible for performing the obligations of the assignee under every contract at a time when certain obligations have already been performed.
2. Partial Assignment Clause
A partial assignment clause limits the assignment of rights under the agreement to those identified by the parties. If the clearest intent of the parties is to assign all of their rights and obligations under selected agreements only, a partial assignment clause would be appropriate and advisable in order to avoid inadvertent assignments. Contract writers should be mindful that a partial assignment clause may not include conditional assignments, as these are subject to performance or receipt of satisfaction, and so such conditions would not warrant a partial assignment.
3. Conditional Assignment Clause
A conditional assignment clause is a limited assignment of rights that takes effect only upon the occurrence of specified conditions. So long as the condition is satisfied, the objective of the contract writer is accomplished upon the satisfaction of the condition. However, if the condition is not met, the contract writer must consider whether the drafting of the contract permits such failure to satisfy the condition to constitute a default under the contract. A common contractual condition can include the occurrence of an event, such as applying for a loan, acquiring financing or obtaining lien waivers or UCC releases.
Implications Under The Law Of Assigning Contracts
While an assignment can transfer the greater part of the contractual rights and benefits for an assignor, the assignor may be left with some considerable residual obligations. The parties should carefully weigh the legal implications of an assignment.
The original contract, which is unaffected by the assignment, will dictate the extent to which rights can be assigned and liabilities transferred. A contract may provide that rights may be assigned but that obligations may not be assigned. In this case, the transfer of rights will not relieve the assignor from liability if the assignee defaults on the contract. Other contracts may give a party the right to assign its interest in the contract but require the consent of the other party to the assignment. Some contracts give the other party the right to terminate upon assignment, while others contain a prohibition against assignment. It pays to review the contract first in order to see whether it specifically prohibits or allows an assignment and then review state law to determine whether the contract or state law governs.
Even where there is no prohibition against assignment, there can be legal consequences to assigning a contract. An assignment in violation of a prohibition in the contract could result in a breach, at least under the common law of contracts. (However, New York adopted a statute allowing the assignee to receive all the assignee’s due from the assignor or debtor after notice, even against a contractual prohibition.)
If the contract has a clause providing that an attempted assignment will be void ab initio, the attempted assignment is ineffective and the assignee has no rights, and the attempted assignee may have a cause of action for fraud against the assignor. Such provision should, however, be strictly construed. A clause voiding an assignment ab initio does not affect a delegation — the contracting party remains liable under the contract for the performance of the acts of the agent. An attempted assignment in violation of a prohibition on assignment would also be ineffective.
Although an assignment in violation of a prohibition on assignment may be said to be void rather than a breach of contract, it may permit the nonassigning party to sue for damages based on frustration of performance, as where the contract served some specific purpose which was rendered incapable of fulfillment by the attempted assignment.
At common law, the assignee of a "bare right" such as a right to restitution, was not considered a real party in interest and lacked standing to sue because the assignor’s rights were still subject to defenses. The Restatement (Second) of Contracts section 326(1) now provides that "an assignment of a contractual right to performance of a duty after breach by the obligor discharges a contractual duty of the assignee, the obligor can assert any defense or claim that the obligor could have asserted against the assignor."
In any event, the assignee of an obligation can enforce it without formal consent of the obligor, unless the contract prohibits delegation or assignment of duties. A failure to perform whatever acts the contract requires leads to the imposition of the usual liability for breach of contract. The assignee may incur liability for nonperformance by his delegatee on the ground that he has breached the implied duty to exercise due care in selecting a qualified delegatee.
A "delegation" simply means the transfer of one duty to another; it does not, by itself, make either the delegator or the delegatee liable for the nondelivery. The Obligor is still responsible to act as the contract requires, despite the breach by the delegatee, unless the contract expressly relieves him of any further duty.
Delegation must be distinguished from a "sale" or "assignment of all rights." An "assignment of all rights" is a transfer of full ownership of the obligation or right, and it is also a transfer of the duty to perform. (In some states, this assignment terminates obligations.) A transfer of only a part of the obligations or one made "for value" is usually invalid.
The issues surrounding assignment of contracts are not simple to resolve. In particular, when one party attempts to transfer a contract to another party, the other party is entitled to all appropriate consideration including price, spectrum of liabilities, etc. Before entering into any agreement, it is imperative to understand the nature and scope of obligations so that the appropriate contractual strategy is applied.
How To Draft An Assignment Clause
Drafting a concise and comprehensive assignment clause will expedite even the most complicated transactions. A concise and transparent assignment provision minimizes the risk that one party to the agreement will attempt to assign the contract in a manner that is not transparent, which could harm the other party’s interests. A prevalent mistake when drafting an assignment clause is failing to be entirely clear what rights are or are not assignable. Does the contract permit partial assignments? Is the assignment subject to any conditions? Are certain rights assignable and others not? Are the assigned rights delegated to the party and, if so, have the party’s obligations also been delegated? Is there a requirement that the assignor provide notice, or secure the assignee’s consent? Drafting a clause that anticipates each of these questions before they become an issue simplifies enforcement later and avoids time-consuming litigation. Short and simple assignment clauses won’t address all possible circumstances, but these basic provisions will help you execute a straightforward assignment.
This clause is clear and simple. The right to assign performance is limited to assignments "not made for value." There is no longer a concern that an assignment will require the other party’s consent, and if the provision is enforceable, a buyer or seller can have peace of mind that the assignment is enforceable. A slightly wordier assignment clause may require consent unless there is a "bona fide reason" or "bona fide consideration" for the assignment . This clause helps the parties that don’t want to assign contract rights without notice, but may be prepared to assign contract rights in certain situations depending on the "reason" or whether the consideration received is "bona fide." A clause that requires consent – perhaps in the form of a notice provision – will be a more effective way to handle an assignment. A simple assignment clause that requires consent isn’t enough because obtaining consent from the other party may be difficult and it may not be straightforward how much consent is needed for each assignment or to what extent consent is necessary. Contracts with assignments that require consent sometimes require "notice" instead of consent. An assignment clause that requires notice only has the downside that consent may in fact be necessary prior to assignment, but the clause only grants the notice right. To avoid any confusion or complications, it is possible to combine clauses to offer a thorough and easy to understand assignment provision requiring notice or consent from the other party. The assignment clause can indicate that the assignee must deliver notice of the assignment to the non-assigning party and must obtain consent from the other party before continuing to perform any obligation under the contract. This means the original party must obtain consent for the assignment – notice won’t be enough if the clause calls for consent.
The Pitfalls and How To Avoid Them When Assigning Contracts
Ambiguities. Parties drafting contracts can contain ambiguities by not being specific enough about the terms of the assignment or overly specific about when the assignment is valid. For instance, some contracts include both the phrase "prior written consent" and the phrase "assignees can perform substitute services in lieu of the original party if prior written consent is obtained." A contract with this kind of redundancy leads to more questions than answers: If both parties would like an assignment, but they have to get the other party’s consent even to provide substitute services, does the phrase "prior written consent" mean anything at all? For clarity’s sake in an assignment clause – or any clause in your contract, for that matter – the best approach is to be simple but clear.
Oversights. Wait – don’t I want my assignee to be bound by exactly the same conditions as me? The answer, emphatically, is no. From a draftsperson’s perspective, it makes much more sense for your assignee to come with the best possible qualifications and to enter into the contract under terms that specifically apply to him or her. That means leaving clearly marked outs for the assignee as well as the original party to assign obligations and benefits to an assignee.
Enactment. An assignment clause won’t mean anything if it isn’t followed by the actual assignment. For example, your contract may state that you can only assign your interest "after reasonable notice." Even if you could assign your interest "after reasonable notice," you must actually send reasonable notice! As is the case with a "no assign" clause, failure to abide by the terms of the "yes assign" clause means that the assignment isn’t valid, and that the original party who executed the assignment may be liable for breach.
To avoid these pitfalls and understand how they might apply to your own contracts, always analyze the assignment clause in the context of your entire contract. Things are much clearer when you draft with an eye to the bigger picture.
Case Studies And Real Examples
To illustrate how critical contract assignment clauses can be to business planning, consider the following examples:
Manufacturing Vendor Transfer
A manufacturer of consumer goods has historically used a particular vendor for its packaging materials. However, the manufacturer’s management is concerned that the vendor will not perform as well if the company grows, and therefore desires to retain the freedom to switch to an alternate vendor if its performance falters or if prices rise significantly. The manufacturer’s attorneys add a clause in the contract for materials to the effect that, "Seller will furnish specified materials unless the manufacturer elects, in its sole discretion, to substitute equivalent materials available within one year." The manufacturer does just that: in its first year of operation, it ends up spending substantially more on packaging materials than it planned. Two years later, the manufacturer has become a market leader and is able to demand lower prices from vendors, but under its existing contract, the vendor is now entitled to a higher price. The manufacturer determines that it would like to use its contract negotiations to force its vendor to lower its prices to match competitive offers. Thanks to the early efforts of its attorneys, the manufacturer is able to use contract assignment provisions to accomplish this change.
Realtor’s Listing Agreements
Consider the standard form listing agreement that is used by real estate brokers when a homeowner asks them to act as a listing agent. Such agreements typically contemplate an initial listing period of six months. At the end of the term, the real estate agent who finds a buyer receives a commission from the seller. What often happens, however, is that the homeowner wishes to live in a new location for an extended period of time, perhaps for a full year, making it cost-prohibitive to dispose of his/her house as are considering doing . Rather than tying up real estate agents and buyers for another full year, the savvy homeowner can include a contract assignment clause in the listing agreement so that the homeowner does not have to pay the commission if his/her house is sold in less than a year, yet the homeowner has the freedom to keep the house on the market for the required amount of time to make it the best possible sale price.
Pharmacy License Transfers
Take, for example, the sale of a pharmacy license from one operations group to another operations group. The transfer of such licenses from one entity to the another, however, is not automatic and is not necessarily a matter of right. Drug Enforcement Administration (DEA) regulations (21 C.F.R. § 1301.53(c), (d)) require that a request to transfer a registration from one company to another "be executed with the same degree of formality as required by these regulations [i.e., on a DEA Form 224, executed by an owner or officer of the registrant]." This means that if the entity transferring a DEA registration holds the license in a name different from the name under which the transferee is operating, then the transfer could be problematic. Therefore, all parties to the transaction must be certain that the proper legal documents and authorities are in place before the transaction can be safely closed. In addition, federal law (21 U.S.C. § 824(a)(3)) allows the DEA to revoke the registration for transferee if during a continuous period of three years after supervision by the grant of the registration, a receiver or court-appointed officer in charge of the properties or business is guilty of such conduct that the registration is inconsistent with the public interest. As a result, it is important that transferees conduct thorough due diligence on the seller to assess and mitigate risks associated with the transfer.