Wednesday, April 28, 2010

assignment (of contract)

Did you ever start a magazine subscription with one company (say, “The National Scholar”) and midways into the subscription begin receiving another magazine (“The National Enquirer”)? That’s usually because the first company has gone out of business and assigned all its subscription contracts to another company. 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 his shoes and assume all of his contractual obligations and rights. In order to do that, the other party to the contract must be properly notified.

EXAMPLE: Tom contracts with a dairy to deliver a bottle of half and half every day. The dairy assigns Tom’s contract to another dairy, and—provided Tom is notified of the change and continues to get his daily half & half—his contract is now with the new dairy.

An assignment doesn’t always relieve the assignor of liability; that depends on many factors, especially the language of the contract. Some contracts may contain a clause prohibiting assignment, others may require the other party to consent to the assignment, and others may include a guaranty that regardless of an assignment, the original parties (or one of them) guarantees performance.

EXAMPLE: Jonas and Murphy owned property in San Francisco that they leased to Schiller. Schiller assigned his lease to a battery manufacturing company, which became the new tenant under the lease. Jonas assigned his rights as a property owner to Kahn. When the battery manufacturer failed to pay rent, Kahn (the new owner) sued Schiller (the original tenant). The lease agreement included a guaranty clause, stating that if Schiller or “his assigns” failed to pay rent, than Schiller would be on the hook for it. Schiller’s lawyers, looking for a creative way out of the payment, argued that the lease required Schiller to pay Jonas and Murphy, not Kahn (because Kahn was not mentioned in the original lease). The court disagreed, finding that Jonas was free to assign his rights to Kahn. The court said that if the lease was supposed to prevent Jonas from assigning rights, there should have been a prohibition written into it. In other words, if the parties want to prevent assignment of the contract, they must include an anti-assignment clause. (By the way, the issue wouldn’t have arisen if the lease had said that Schiller had to pay Jonas “and his assigns and successors.”) [i]

When assignments will not be enforced. An assignment of a contract will not be enforced if:

  • The contract prohibits assignment. Contract language, typically referred to as an anti-assignment clause, can prohibit (and “void”) any assignments. We provide a sample, below.
  • The assignment materially alters what’s expected under the contract. If the assignment affects the performance due under the contract, decreases the value or return anticipated, or increases the risks for the other party to the contract (the party who is not assigning contractual rights), courts are unlikely to enforce the arrangement.
  • The assignment violates the law or public policy—Some laws limit or prohibit assignments. For example, many states prohibit the assignment of future wages by an employee, and the federal government prohibits the assignment of certain claims against the government.[ii] Other assignments, though not prohibited by a statute, may violate public policy. For example, personal injury claims cannot be assigned because doing so may encourage litigation.

Delegation or Assignment? In some cases, a party may not wish to assign the whole contract but only to get somebody else to fulfill its duties.

EXAMPLE: Phyllis enters into a written agreement with Robert’s Bakery to provide cupcakes for her child’s birthday party. Phyllis pays $200 in advance. Robert’s Bakery has an emergency and can’t deliver the cupcakes, so Robert pays $150 to Sylvia’s Cupcakes to take over the delivery. Robert hasn’t assigned the contract; he’s delegated his duties to Sylvia. If Sylvia doesn’t deliver, Phyllis’ dispute would be with Robert. If Robert had properly assigned the contract, Phyllis’ dispute would be with Sylvia. (Of course, to be effective as a delegation, the person to whom the task is delegated—in this case, Sylvia—has to accept or assume the duty or responsibility.)

Obviously, not all duties can be delegated—for example, some personal services are usually not delegated because they are so specific in nature. If you hired Ted Nugent to perform at your event, for example, he could not arbitrarily delegate his performing duties to Lady Gaga.

To prohibit delegation, the parties should include specific language to that effect in the agreement. For example, an anti-assignment clause might state. “Neither party shall assign or delegate its rights …”

How is a contract assigned? There are three steps to follow if you want to assign of a contract.

  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.
  2. Execute an assignment. If you are not prohibited from assigning, prepare and enter into an assignment of contract, an agreement transferring rights and obligations.
  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). Unless otherwise prohibited by the contract or by law, this notice will effectively relieve you of any liability under the contract.

Assignment Checklist. As you draft a contract clause about assignment or a later assignment agreement, consider these questions:

  • Do you want the freedom to delegate tasks in the agreement? If so, be sure that the contract does not prohibit delegation. Usually that prohibition is included in an anti-assignment clause. You can also include affirmative language if you wish, such as “Either party may delegate its obligations under this agreement.”
  • Do you want the ability to assign the revenue you receive from a contract? If you want to be able to assign revenue from a contract but not the performance obligations—for example, you want your nephew to receive the royalties from a licensing deal, but otherwise you are to be on the hook for all other obligations—then make sure you have made this freedom explicit if the contract has an anti-assignment clause. For example, you could include language such as, “Neither party may assign its rights or obligations except that Licensor may assign its right to receive revenue under this agreement.”
  • Do you want the ability to assign all rights under the agreement to a company that acquires your business? If so, review the anti-assignment exceptions, below.
  • Do you want to make sure that the other party to the agreement will always be responsible to you, even if the agreement is assigned? If so, you should include a guaranty similar to that mentioned in the example above, in which the assigning party guarantees performance after assignment.
  • Do you want to prevent the other side from assigning the contract or delegating their obligations? Include a general anti-assignment/anti-delegation clause and be sure that it includes language such as “Any assignment or delegation made in violation of this clause is void.”

Anti-assignment clauses. Below are three variations of anti-assignment clauses that can be used in a contract. EXAMPLE 1 is a standard anti-assignment clause barring any assignment or delegation. EXAMPLE 2 is used when the parties want to prohibit assignments except if they transfer the agreement to new owners or affiliate companies (and don’t want to ask for permission). EXAMPLE 3 is similar to EXAMPLE 2 except it requires permission for such an assignment. The good news is that permission can’t be withheld on a whim. Consent to the assignment to a new owner can only be made for a valid business reason. What’s a valid reason? If the assignee is in terrible financial shape or is a direct competitor, that would qualify.

EXAMPLE 1: No Assignment or Delegation Permitted

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 other. Such consent shall not be unreasonably withheld. Any assignment or delegation in violation of this section shall be void

Anti-assignment clauses can 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 only prevent “voluntary” assignments; you cannot prevent assignments that are ordered by a court or that are mandatory under law—for example in a bankruptcy proceeding.

[i] Murphy v. Luthy Battery Co. 74 Cal.App. 68, 239 P. 341 (Cal.App. 1 Dist. 1925).

[ii] 41 U.S.C. Sec. 15


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