Understanding Contract Terms (post 8): Assignments
We continue the Understanding Contract Terms series by explaining assignment clauses. Most contracts include some form of assignment clause. Assignment clauses are important to understand when determining your rights and liabilities under almost any contract.
Assigning a Contract
To understand why this clause is included in the contract it is important to first understand what it means to assign a contract. An assignment of a contract occurs when one party to the contract transfers to another party their obligations, benefits, or obligations and benefits, of the contract.
In general, assignments are permitted unless there is an express prohibition against assignment in the contract. But this is a very general statement. Certain types of contracts, including “personal service contracts,” are by default unassignable. Also, contracts may not be assignable if it “would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him.”
As you can imagine, this subjective analysis can create substantial confusion for parties to a contract. By including an assignment clause, both parties can be clear about the restrictions on and process for assigning the contract.
Who’s Liable After Assignment?
When you assign your rights under a contract to another person or entity (the “assignee”), you remain liable for the obligations unless there is express assumption by the assignee evidenced by clear and unequivocal proof. This means that assigning your contractual rights does not automatically impose any liability on the assignee. For the assignee to be held liable under the contract, the assignee must clearly assume the obligations. Regardless of whether you assign the obligations under the contract to the assignee, you remain secondarily liable to the original contracting party if the assignee fails to perform the assumed obligations.
This means the other party to the contract can still bring a claim for damages against you after you’ve assigned the contract to the assignee. You may be able to recover damages from the assignee as long as the assignee clearly assumed your obligations under the contract and failed to adhere to those obligations. But you would generally still be liable to the original party you contracted with. In short, you do not absolve yourself of liability under a contract simply because you assign it to another party.
Structuring Your Assignment Clause
Assignments clauses can be structured in a variety of ways. There can be restrictions that do not allow one or both parties to assign the contract, or both parties may be free to assign the contract by obtaining written approval from the other party. There may be certain contracts where it makes sense to negotiate for more or less restrictive assignment rights.
A “One Size Fits All” Answer?
Allowing parties to freely assign contracts can lead to uncertainty, and uncertainty tends to lead to disputes. We prefer drafting clear, concise restrictions on assignments, and it is generally in both parties best interest to spell out the parties intent regarding assignment. Often you will see a restriction on all assignments, because restricting all assignments is the easiest way to create certainty.
However, “carveouts” may be appropriate in certain situations. A carveout can give the parties the ability to take certain actions if an event occurs. For example, a typical assignment clause carveout may give each party the ability to assign the contract if there is a change of control or sale of substantially all of the company’s assets. This carveout gives each party the right to assign the contract—generally without the consent of the other party—as part of a fundamental corporate change (a merger, acquisition, or other similar change of control). You will also see carveouts that preserve the right to assign the contract to certain parties, including subsidiaries. In certain situations where the parties have unequal bargaining power or a particularly compelling reason, you may see a unilateral clause that either allows one party to assign, restricts one parties’ ability to assign, or allows one party to assign and restricts the ability of the other party to assign.
How an Assignments Clause Can Affect Your Business
If you enter into a contract with the understanding that it will be carried out by the business (and business employees) with whom you contracted, it can be a rude awakening to realize that they have assigned away their rights or obligations under the contract. You may end up being forced to work with people you don’t know or companies you don’t like or risk breaching the agreement.
Alternatively, if you anticipate needing to assign a contract (e.g. to a subsidiary) but do not contract to allow for assignment, you may have to change your plans or expose yourself to more risk than you anticipated.
By understanding the practical implications of assignments clauses, you can better understand your legal rights and obligations under your business contracts. Further, you can determine when it makes sense to negotiate for more or less restrictive assignments clauses in your contracts.
Please continue to read our series on Understanding Contract Terms to learn more about common contract terms and how they affect you and your business. If you’d like to learn more about drafting clear, concise contracts for your business, please comment below or contact us.