Is the Assignment Clause boilerplate? You better think twice.
What is an assignment clause?
An assignment clause states whether a party (assignor) may assign (transfer) the contract (with all its rights and obligations) to a non-party (assignee). The parties to a contract can forbid all assignments, or let only one party assign the contract (with or without the other part’s prior consent), or freely allow any assignment.
What if the original contracting party does not want to do business the new person/entity (assignee)? For most parties, the ability of the assignee to perform and pre-conditions geared at ensuring performance dictates whether an assignment will be permitted or not. And yet, some contracts allow assignments in instances of a merger or acquisition.
The common law in the United States favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is permitted, the assignor may not need to consult the other party to the contract.
What kind of effect does the assignment clause have?
An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. These are:
- The assignment would change the entire nature of the agreement. For instance, if an entertainer was hired due to her particular unique skill, she usually can’t assign or delegate her duties and performance obligations to another entertainer, because she would not have the same unique skill that is being requested in the contract
- The parties have agreed in their original contract that assignment is not permitted
- The assignment involves a promise to pay a financial debt
- The assignment involves or would result in a violation of any type of law
A caveat for contract holders…
This can be a provision fraught with peril, so the consequences of an assignment must be fully understood because it can create significant liability and exposure.
Typically, if a party (assignor) assigns the contract to another person (assignee), the assignor (or the original contracting party) is still liable if the assignee fails to perform. As such, and unless as expressly stated otherwise either in the written instrument or through a novation, it is important to note that an assignment usually does not transfer the assignor’s liability.
To the extent that a party’s prior consent is required, most contract clauses provide that such consent “will not be unreasonably withheld” by the party. What is reasonable? If a party’s consent is sought, the ability to perform the obligations of the assignor is probably the most significant factor for that party’s consideration in order to determine whether it would be reasonable. The proposed assignee’s credit rating/ability to pay for services, ability to deliver services, or adequacy and sufficiency of capable resources, etc. are all examples of reasonable criteria for a party to determine whether consent is permitted or withheld.
Contract review by attorney
Contract law is a tricky area that is open to wide interpretation and changing law, especially as courts grapple with how to apply existing law to ever-emerging technologies. Because of these changes and obscurities, always be aware of communication with other parties, and if necessary, consult an experienced contract attorney for advice.