What is an Assignment Clause?

An assignment clause is a contractual provision that determines whether a party can transfer its rights, duties, or interests under the agreement to a third party, known as the assignee. It serves as a safeguard, protecting the interests of both contracting parties and maintaining the stability of their business relationships.

In mergers and acquisitions, target company contracts are assigned to the acquiring company (or the new entity in a merger). However, the target company may have a duty to notify other parties of the change of assignment. This is why reviewing contracts for assignment clauses is so critical.

Understanding Assignment Clauses

The Basics:

The assignment clause outlines;

  • the circumstances under which an assignment is permissible
  • and the requirements that must be satisfied for a valid transfer.

For example, a provision might state that “neither party shall assign this agreement without the prior written consent of the other party.” This ensures that any attempted assignment without explicit permission is deemed invalid and can result in a breach of contract.

“Prior written consent” in assignment clauses preserves the autonomy of the contracting parties. It establishes a procedure for seeking approval before a contract is transferred to a new counterparty.

Obtaining prior written consent may involve sending notice within a stipulated time frame or providing detailed information about the assignee. Failure to comply with these requirements can render the assignment void.

Sole Discretion:

Some assignment clauses grant one party the sole discretion to permit or deny an assignment. While this provides flexibility, it also opens parties to potential abuse of power (courts should work to ensure the party with discretionary power exercises it reasonably).

Be cautious when agreeing to assignment clauses that give sole discretion to one party. Disputes over the reasonableness of their decision may arise.

Arbitration and Dispute Resolution:

Assignment disputes often involve complex legal issues. The method of dispute resolution can significantly impact the resolution process. Some contracts include provisions addressing said disputes, specifying whether arbitration or litigation should be used to resolve them. A well-drafted dispute resolution clause (in the assignment provision) can streamline the resolution process. It provides clarity on the steps to be taken in the event of a disagreement. Consider the pros and cons of arbitration versus litigation and draft your dispute resolution clauses accordingly.

What are the benefits of an assignment clause?

Protect against unwanted assignees

The requirement for prior written consent in assignment clauses provides an opportunity for parties to assess the financial stability, capabilities, and intentions of the proposed assignee. Being able to reject an assignee minimizes the risk of a contract being assigned to an entity that may be unable to uphold the original agreement.

Clear dispute resolution

Assignment clauses should contain clear language detailing resolution options for disputes arising from assignment matters. This can speed up the resolution process and minimize impact to the contractual relationship.

Protect intellectual property

Assignment clauses can include provisions to safeguard against unauthorized transfers that may compromise proprietary rights or confidentiality. This protection is especially important in industries where intellectual property is a critical asset.

Enforceability and Public Policy Considerations:

The enforceability of assignment clauses is subject to legal scrutiny. Courts often consider public policy implications and the nature of the contractual relationship. They may intervene if an assignment clause is deemed overly restrictive or contrary to public policy. For example, an assignment clause that prohibits any transfer of rights, even with the other party’s consent, may be viewed as unduly restrictive.

Attempted Assignments and Purported Assignments:

An attempted assignment is when a party tries to transfer its rights without following their contractual requirements (like obtaining prior written consent). A purported assignment is a transfer that seems valid on the surface but lack essential elements, rendering it ineffective.

The consequences of attempted or purported assignments range from breach of contract to rejection of the assignment.

Change of Assignment Examples

Change of Control and Reorganization:

During an acquisition, the acquiring company may take over existing contracts, including those with assignment clauses. In some cases, assignment clauses will address change of control scenarios, giving clarity on whether these events trigger an automatic assignment or require prior written consent. Therefore, understanding the implications of a change of control on contractual rights and obligations is crucial.

Intellectual Property and Real Estate Contracts:

Intellectual property rights are often tied to individuals or entities, the transfer of these rights may be subject to additional legal and regulatory considerations. For example, assignment clauses may include provisions that require the assignor to prove they own the intellectual property being assigned. Similarly, in real estate contracts, assignment may require approval from third parties (such as lenders or regulatory authorities). Parties involved in real estate transactions should review and negotiate assignment clauses to account for these considerations.

What is an example of the assignment of rights clause?

“Neither party shall assign this agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. Any attempted assignment without such consent shall be void and shall constitute a material breach of this agreement. Notwithstanding the foregoing, either party may assign this agreement, without the other party’s consent, to any of its subsidiaries or affiliates or in connection with a merger, acquisition, or sale of all or substantially all of its assets. In the event of such assignment, the assigning party shall provide prompt written notice to the other party. In the case of a permitted assignment, the assignor shall remain jointly and severally liable with the assignee for the performance of all obligations under this agreement. The assignee shall expressly assume in writing all obligations of the assignor under this agreement. The non-assigning party may terminate this agreement upon thirty (30) days’ written notice if the assignee fails to meet the standards and qualifications set forth herein. Notwithstanding any assignment, this agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Any assignment in violation of this clause shall be null and void and of no force or effect. The parties agree to provide each other with prompt written notice of any proposed change of control that would result in the assignment of this agreement. For the purposes of this agreement, a ‘change of control’ shall mean the sale or transfer, directly or indirectly, of more than fifty percent (50%) of the assigning party‚Äôs voting stock or the consummation of any reorganization, merger, or consolidation involving the assigning party with another entity.”

What is an example of assignment in law?

Assignment of a Sales Contract

Company A enters a sales contract with Company B to buy machinery. The contract includes an assignment clause. Company B wants to transfer its rights and obligations under the contract to Company C. The process would look something like this:

Company B reviews the assignment clause in the contract. It stipulates that any assignment requires the prior written consent of Company A. Company B requests Company A’s consent in writing, providing details about Company C (financial stability, ability to fulfill the terms of the contract).

Company A reviews the request. It is satisfied with the new proposed assignee (Company C) and believes it can meet the contractual obligations. Company A provides written consent for the assignment.

3. Draft and sign assignment agreement

Company A, Company B, and Company C enter into an assignment agreement. This document may include:

  • Details of the original contract.
  • The effective date of the assignment.
  • Confirmation of Company A’s consent.
  • The assumption of responsibilities by Company C.
  • Indemnification clauses to protect Company A against potential breaches by Company C.

4. Send notice to the counterparties

Once the assignment agreement is executed, Company B notifies Company C of the assignment, and Company C acknowledges its assumption of the contractual obligations.

5. Company C performs contract

Company C takes over the rights and responsibilities outlined in the original sales contract.

Assignment Best Practices:

Communication and Prior Written Notice:

Parties should establish clear communication channels to ensure that assignment notices are provided in line with contractual duties.

Due Diligence:

Parties should conduct thorough due diligence before entering into agreements with assignment clauses. Failure to conduct adequate due diligence may result in unforeseen complications and disputes. Assess the financial position and stability of potential assignees and consider any legal hurdles that may impact the validity of the assignment.

Addressing Change of Control Provisions:

In contracts where a change of control could trigger an assignment, parties should proactively negotiate provisions that define the steps to be taken in the event of a change of control (including obtaining consent and providing notice). This provides a roadmap for navigating change of control events with minimal disruption to the contractual relationship.

Engaging legal representatives with expertise in assignment clauses can help parties negotiate favorable terms, draft clear and unambiguous provisions, and ensure that the agreement aligns with their intentions.