Contract Tip: What is an Assignment Clause?
Let’s say that you are planning your wedding reception and you contracted with a particular ice sculptor because of his demonstrated ability to sculpt intricate, life-size ice replicas of the newlywedded couple. A resplendent hypothetical, of course. If that accomplished ice sculptor later wants to outsource his contractual responsibility to another ice sculptor—who does not have a similar people-sculpting portfolio—what do you do?
What your contracted ice sculptor is trying to do is assign his contractual responsibilities. Assignment of contract is when one party, the assignor, wants to transfer its rights or obligations under the contract to a third party, the assignee. Whether that assignment can happen will depend on whether there is an assignment clause within the contract in question. The Cambridge Dictionary defines an assignment clause as the “part of a contract that says whether or not you can give your rights and responsibilities in it to someone else[.]”
The General Rule is Contracts are Assignable
The general rule of contracting is that rights are assignable, unless they are of a personal nature (and our ice sculptor just may be personal enough to not be assignable without a clause permitting it in the contract). The Uniform Commercial Code (UCC), the body of laws established to regulate business transactions and contracting, generally favors free assignability. So, the ice sculptor’s assignment of your contract will generally be honored unless it is expressly prohibited by the contract or it is viewed as personal in nature. Absent any mention of assignability in the contract, the presumption is that the contract is assignable. If the drafter of a contract does not want the contract to be assignable, he may choose to expressly prohibit assignability or may allow for assignability only after consent of the other party is obtained.
It is important to note that there may not be an assignment to a third-party if the assignment would materially change the duty of the other party or materially increase the burden or risk imposed by the contract. If this new ice sculptor does not have a refrigerated truck to transport the sculpture as the previous sculptor did, this might be an impermissible assignment.
If you find yourself in the contracting phrase of a business transaction, you will want to consider whether you want to allow assignment. An assignment clause could look like any of the following:
Assignability with consent that cannot be withheld or delayed without cause: “Neither this Agreement nor any right or interest herein may be assigned or transferred by either Party without the prior written permission of the other Party, which consent may not be withheld or delayed without cause.”
Assignability with consent that can be withheld for any reason: “Neither this Agreement nor any right or interest herein may be assigned or transferred by either Party without the prior written permission of the other Party, which consent may be withheld at the sole discretion of the other Party.”
Prohibition on assignability: “No right, duty or obligation hereunder this Agreement may be assigned or delegated by either Party.”
One rule-of-thumb you want to think about is, is the assignment clause mutual? That is, if the other party is giving you the contract (i.e. your landlord), does it permit the other party to assign but not you? This is something you would want to check for in a contract.
Another rule-of-thumb you want to make sure of is that if there is a permissible assignment, to make sure there is another paragraph that talks about what happens if there is an assignment. For example, suppose your contract had a non-compete clause? You sure wouldn’t want the other party to assign the contract to someone else, thinking that someone else has to abide by the non-compete clause but they no longer have to abide by said clause. Therefore, you would want language that said something to the effect of “In the event of an assignment of the rights, duties and/or obligations of this Agreement, the assigning Party may not assign, delegate or discharge the restrictive covenants in this Agreement, including Para. 16, Non-Compete, Para. 18, Confidentiality, and Para. 21, Trade Secrets” (assuming, of course, those you had those paragraphs in your contract).
You Can Really Get Screwed in an Assignment — Beware!
So, how can a bad assignment clause really screw you or your business?
(1) You’re Depending on a Specific Party to Perform
This seems to happen a lot. A business will pay a particular vendor, sometimes a premium thinking they are paying for the best, but then that vendor assigns the contract or the services to a subpar contractor.
(2) You’re Landlord Sells the Building and Assigns the Lease
This has created heart-wrenching problems for small businesses. It goes like this: a small business leader signs a rather shoddy lease for a long term (think 10 years or more), and they do this because the landlord is a friend of theirs. Despite the poor language in the lease, they and their friend-the-landlord have a verbal agreement that is very different from the lease. This goes on for years. Both of them forget about the lease, because they’ve been doing things for years a certain way.
Then, the friend either dies or otherwise sells the building to another party. In the sale of the commercial real estate, the new landlord is assigned the lease. The new landlord looks at the shoddy lease, and realizes that you haven’t paid for all sorts of expenses that were identified in the lease. The new landlord not only demands you start paying for those expenses, but because they have been assigned “all rights, duties and obligations” of the lease, they are entitled to all the unpaid expenses from the beginning of the lease, even though the new landlord didn’t own the building from the beginning.
See the problem? An assignee (i.e. new landlord) can demand and claim all sorts of rights in a contract, that the original contracting party may not have been demanding because of some verbal or off-contract arrangement. So, if you’re not careful, assignment can really screw you — especially if your arrangement is different from what is in the contract. BEWARE!
Assignment clauses generally fall under the category of “boilerplate” contract terms—the contract terms we sometimes blindly accept assuming that they are “tried and true.” But it is important to give an assignment clause some thought and amend as necessary. The degree to which your wedding is deserving of its own reality television show may depend on it.