What are Assignable Contracts?
Assignable contracts are agreements in which one of the parties has the ability to transfer their contractual rights to a third party. In its simplest terms, assignability means the legal ability to transfer rights, and many contracts explicitly include assignability and assignment provisions. The general rule is that all contracts can be assigned unless they expressly prohibit assignment or involve unique obligations that require the contracting parties to perform specific duties.
The assignment of contract rights involves transferring the rights and benefits of an original party to the contract to a third party. The party that assigns its rights is known as the assignor, while the person who receives the benefit of the assignment is the assignee – or the third party. Using this figure to transfer contractual benefits is a simple and commonly used tool to ensure that there is no disruption in a contractual relationship when a party ends their participation in the contract.
However, the assignability of a contract will depend on a number of different factors, including the nature of the contract and its provisions. For example, most commercial contracts are assignable unless they contain language stating otherwise. Other types of contracts, such as marriage or support agreements, are not generally assignable .
By contrast, the transfer of obligations and liabilities is called a "delegation" of contract duties. Legally, an assignment only transfers the rights of a party, but not the duties requiring the same level of bonding and security as a delegation. As such, unless otherwise provided by law, in a "stand-alone" agreement that includes both an assignment and delegation, the rights and obligations may be assigned and delegated separately.
The general rule is therefore all contracts can be assigned unless specifically prohibited, and they can be assigned wholly or partially. When assigning contract rights, the assignor generally does not give up their legal claims to performance under the contract. In most cases, the assignor will use a written agreement for the assignment or delegate with the original contract. While an assignment agreement is not always legally required, it is often recommended, particularly when assigning government contracts.
A valid assignment will transfer the promisor’s contractual obligation to perform, along with the assignor’s right to receive contract benefits. The parties need not state the reason for the assignment, whether the assignor should receive compensation or anything else. Parties should, however, generally agree to the terms of the assignment.
Legal Prerequisites for Assignability
For the most part, assignment is permissible unless the underlying contract or law specifically prohibits it. However, the consent of the parties to the original agreement is often required prior to an assignment. The restatement of contracts sets out an illustration of this doctrine: To A. and B, who are partners in an unincorporated business, a property (assignment of which must be consented to) has been validly assigned to C. A, being a partner in the partnership, orally consents to the assignment. Notwithstanding this, the consideration may be recovered from C. (Restatement § 317, comment g.) Many contracts today contain express provisions on assignment, but even so, the consent of the parties to the new agreement may still be needed. A. to B. contracts to pay to C. a specified amount due or to become due from A. to B.. It is agreed that this contract shall be assigned on July 1 to D. Any such assignment may be made without consent of B. (Restatement § 317, illustration 3.) Sometimes contracts prohibit assignment altogether: "This agreement may not be assigned." That type of provision or something similar will normally prevent assignment unless the two parties to the agreement both consent. However, sometimes the provision will state that assignment can occur with the consent of one of the parties, such as: The parties agree that this Agreement may be assigned (the "First Assignment") by the Borrower and/or the Agent to a Qualified Party (the Person to whom the First Assignment is made, a "Transferee"). The consent of the Guarantor and the Seller shall be required in respect of the appointment of the Agent (other than the Borrower and/or Agent) as the successor agent upon the Second Assignment. ("First Assignment" means an assignment of all or any part of the rights of the Lenders under this Agreement for consideration, whether by way of loan participation or otherwise; "Second Assignment" means an assignment in full of the rights of the Agent and each of the Lenders under this Agreement for consideration (otherwise than by way of loan participation) by way of assignment of rights to sums to be received under this Agreement or otherwise from the Guarantor or the Seller in respect of the ratio of any Defaults or Receivership in the ratio of 100 per cent., the consideration under such assignment being not less than the aggregate of the amounts (if any) secured by the Guarantees Fee and Share Charge and of any other sums at any time outstanding and due under this Agreement to which the Loan Agreements relate, inclusive of any sum then due only under the Guarantees Fee Charge or any of the Guarantees. "Qualified Party" means either a Qualifying Lender or a qualifying company (as defined in the Act). "Qualifying Lender" means a body corporate whose ordinary share capital and reserves at the date of the transfer of any rights under this Agreement are equal to or greater than US$25,000,000 or its equivalent in any currency (calculated at the relevant rate of exchange prevailing at the date of transfer) and "the Act" means the Financial Services and Markets Act 2000 (as amended) of the United Kingdom) (source: LMA) It is important to keep in mind any language or statutory provisions requiring consent as those provisions may require more than simple consent.
Common Assignable Contracts
Assignable contracts are not limited to any specific or limited type of contracts. In fact, any contract can be assigned unless the contract excludes the right to assign the contract. Even personal service contracts can be assigned provided that the personal services do not need to be performed by a specific person. Customarily, leases of real property, and sale agreements for real property, furniture, fixtures, equipment and vehicles are commonly assigned.
Assignment of real property leases, whether commercial or residential, are a common practice, especially when commercial tenants become bankrupt and attempt to reject the lease. A purchaser of the lease can then step into the shoes of the tenant and continue to perform under the lease. Customarily, personal service contracts, construction contracts, labor contracts, distributorship contracts, licensing agreements, intellectual property license agreements, agency agreements, employment contracts, franchise agreements, vendor contracts, option contracts, stock option contracts, and sales contracts are customarily assignable.
Advantages and Disadvantages of Assigning a Contract
One of the reasons business assign contracts is to free up resources that were promised under that contract. For example, where a certain manufacturer commits to providing widgets for a certain number of years for "free" (meaning that the buyer only pays for them when the offer is actually made, but that might happen only once a month), then even if the seller continues to be able to perform its part of the contract, the buyer may want to assign its rights under the contract to someone else to eliminate a resource drain until it actually has need of the widgets or can afford to pay for them. In this way, the buyer benefits from the special deal with those resources set aside, but without committing more than necessary.
The benefits of assigning contracts extend beyond "just-in-time" manufacturing. Assignments are also common where a party to a contract finds itself in pre-bankruptcy or bankruptcy proceedings. In that case, not only can the debtor pass the obligation (and/or benefits) of the contract to another party, but it may find that the resulting contract is very important. After-all, it’s sometimes considered better to owe millions of dollars than to be owed millions of dollars, and if the assignment of the contract allows the debtor to keep the cash flowing it is likely that the transfer will be allowed to stand. The benefit to the non-debtor party is that the contract will be honored by a debtor who can afford to fully honor the contract.
There are risks associated with the assignment of contracts, of course, including the risk that the receiving party (the assignee) will breach the contract; that it won’t have the resources available to perform its obligations (either because it is a fledgling company or because it is in financial difficulties); or that it will want to renegotiate the contract in its favor at some point. The parties can guard against some of these risks by agreeing on certain terms beforehand and recording them in the contract. Making a list of what either side wants to avoid in the transfer is a good start for this negotiation.
How to Assign a Contract
Generally, the assignment of a contract is a two-step process: the contract must be assigned by one party to the other extending the assignment, and the result of that assignment is an agreement between the debtor and the creditor. A transaction document evidencing the assignment is often required. An assignment can be performed without a formal written agreement; however, the parties’ ability to perform under the terms and conditions of a contract may require an assignment of their rights and obligations under the contract.
For contracts typically assigned debtors or creditors, assignors or assignees often need a multi-step process that includes a written instrument evidencing the assignment (known as an "assignment agreement") when drafting the instrument can provide substantial benefits.
An Assignment Agreement
In general, a written agreement to assign the rights under one contract to another contract provides greater precision, specifically whether the terms of the original contract will not be violated, consequential costs will not arise, and the rights and obligations under the present contract will not be adversely affected. The assignment process generally negates any uncertainties by the parties and allows the parties to choose which rights and obligations are transferred to the other party .
When assigning the rights and obligations governing the contract, an assignment agreement must include the following:
A dated written agreement.
Proper identification and description of the contract and parties involved.
A clear intent to assign the contract to another party.
Language indicating the acceptance of the assignments by all parties involved.
All requisite signatures.
Assignment Agreements Must Be Their Own Contracts
An assignment agreement should be a separate contract which independently and separately binds the parties. An assignment of an existing contract does not necessarily bind the parties unless the terms of the assignment agreement binds them. Additionally, an assignment agreement must be executed by all parties to the contract from which the rights and obligations are being transferred. When a contract does not specify that an assignment is required, an assignment agreement between the parties is still necessary.
Thus, an assignment agreement may be separate from an agreement to assign contract rights. However, the two agreements can be the same document. The assignment agreement may contain additional provisions pertaining to rights and obligations that will: run with the land; obligations of the parties; and additional terms and conditions such as or attorney’s fees.
Legal Issues in Assigning a Contract
Even when a contract is assignable and subject to the privity and consent rule, the assignment may be challenged in court and its validity nullified. In addition to having a defense to the privity rule, this section analyzes the judicial resistance to consent-based arguments used to nullify assignments. For example, in Richard A. Freundich, as Assignee of Pavement Maintenance, Inc., v The Bridia Group, 192 AD2d 1092 (4th Dept 1993), Plaintiff Freundich, attempted to enforce a guarantee and suretyship agreement against Defendant Bridia as an assignment from Pavement Maintenance (PM). Although it is unclear whether PM was still authorized to collect amounts due under the agreement the assignment was valid, since Bridia had failed to revoke its guarantee, despite receiving notice of assignment. Id. at 1093 (emphasis added). In addition, a party attempting to avoid liability may have a defense to assignability based on personal services agreements, which remain subject to the privity rule. Respective to these agreements, courts do not permit "transfer of obligations contemplated by personal services contracts." Zobrist v Continental General Corp., 18 AD2d 374, 376 (3d Dept 1963). Even if the assignment does not directly constitute an attempt to assign personal services, individuals having shared ownership or control over a business entity may be held liable based on their principal-agent relationship. See Bertoni v Lopez, 234 AD2d 231, 233 (1st Dept 1996) (i.e. debtor/shareholder could be held liable for misdeeds of corporate entity based on the allegation that the two were principals of one another for purposes of the Uniform Commercial Code); see also Zobrist, 18 AD2d at 376 (3rd Dept 1963). Thus, such an argument may be mounted against a non-domiciliary in a "long-arm statute" jurisdiction under a motion to dismiss for lack of personal jurisdiction. Id. Moreover, where the terms of a contract prohibit its assignment, the transfer of rights or performance will be invalid. See, e.g., Tyler v L.E. Jones Printing Co., 131 AD 474 (2nd Dept 1909) (assignment of bookkeeper’s services from plaintiff to defendant was prohibited by the terms of the contract); see generally Janik v Dobrusin, 78 N.Y.2d 1 (1991) (discussing those contracts which allow an assignee to sue in its own name or require the assignor to perform in the event of non-performance; "[t]he absence of a requirement to perform made the agreement freely assignable").
Best Practices for Contract Assignment
One of the most important aspects of ensuring a successful contract assignment is to maintain clear communication between the parties. In particular, it is critical to ensure that all parties are aware of any obligations they may have under the contract, as well as their responsibilities to any third parties who may be affected by the assignment.
In addition , parties should take care to ensure that they comply with any legal requirements that may be necessary to finalize the assignment. This may include seeking approval from a governmental agency or regulatory body in order to receive the necessary authorization for the assignment.
Finally, parties must make sure that they are aware of the specific legal implications of their proposed assignment. For example, if a party assigns a contract to a third party but still continues to perform some actions under the same contract, they must take care to ensure that they are not in violation of contractual obligations or applicable laws.