Some contracts feature what is called an ‘assignment’ clause, which has the effect of transferring a benefit to another party. In a similar way, Novation clauses transfer the obligations, rights and benefits of a contract to another party (who basically replaces the original party). Both clauses can have the effect of preventing, allowing, or making conditional, a transfer to another party.
It is important to remember that this article only touches on the assignment of a contract itself and not the assignment of intellectual property, which usually warrants its own separate contract. For assistance in drafting one of these clauses, it is advisable that you speak with a contract solicitor.
What does an assignment clause look like?
There are several ways in which an assignment or novation clause can be worded. The following are several examples:
- The parties to the agreement may only assign this Agreement, wholly or partially, with the prior written consent of the other party;
- Neither party may assign its rights under this Agreement; or
- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns.
Keep in mind that the third example reflects the old legalese that used to be used to express an assignment clause and most probably won’t be used as often nowadays.
What is the purpose of an assignment or novation clause?
Generally, a contract will only include rights and obligations of two parties. Sometimes a 3rd party might become a beneficiary of the contract, though will be unable to enforce its rights. All other persons are excluded from the contract.
With an assignment, the benefits of the contract are transferred to another party. Along with the transfer of the benefits under the contract, there is also a transfer of the rights to enforce those benefits, such as the right to sue another party in the event that it does not fulfil its obligations under the contract.
Novation allows a new party to step into the shoes of the party transferring their interests and obligations under the contract. In effect, novation equates to an exchange of one party for another party.
An assignment or novation clause will clearly define the parameters of who is allowed to assign and the conditional basis on which this can take place.
When is an assignment or novation used?
When buying a business, it goes without saying that much of the value is in the quality of the existing customer base, as well as the quality of the contracts with suppliers. When selling a business, ideally you want to finalise any existing debts or contractual obligations. By ‘novating’ or transferring the contracts to a new party, the new party usually inherits these debts and obligations.
Sometimes, however, you might wish to deal with just one party, like when you start up a new business, or you hire a contractor for a period of time. In these circumstances, you would only want to restrict assignment.
If you are meeting a new party that might replace the original party to the contract (to build rapport), you will want to be certain that he or she has the skillset that you are looking for. In these situations, where confidential information is being disclosed, it is advisable that your contract lawyer restricts assignment.
It is worth noting that a novation/assignment clause might afford the right to transfer rights and obligations to one party and not to another. For example, suppliers might be granted the right, whereas clients might not.
What are the risks?
The greatest risk of not having your contract lawyer review, and possibly restrict, your novation/assignment clause is ending up in a contract with an unknown party. This party might have different values and abilities, which can negatively affect your business. This can lead to a stressful scenario where everyday business activities are being interrupted.
On the flipside, however, not having the ability to assign your contracts with customers or suppliers might decrease the overall attractiveness (and value) of your business to a prospective buyer.
If you have not spoken with a contract lawyer about novation or assignment clauses, now is the time. These clauses are important for transferring interests and obligations without any doubt as to the boundaries and limitations (if any) of this transfer of interests. Our team of contract lawyers are ready to provide efficient and affordable advice. For a fixed-fee quote, contact LegalVision on 1300 544 755.
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In this post, Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora (here) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) (NDCB). Here’s Brian’s provision:
Neither party may assign any of its rights under this agreement, either voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, except with the prior written consent of the other party. Neither party may delegate any performance under this agreement, except with the prior written consent of the other party. Any purported assignment of rights or delegation of performance in violation of this section is void.
It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously (here), and Brian’s post prodded me to revisit the topic.
I’ll start by offering the following comments on Brian’s provision:
- In the interest of consistency I prefer using “shall not” for language of prohibition, but that’s something I’m still exploring. Using “neither party may” works too.
- If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
- Isn’t “voluntarily or involuntarily” needless elaboration, analogous to saying “I don’t eat fish, whether fresh-water or salt-water”?
- To avoid having to be all encompassing (“or in any other manner”), I’d use “including”.
- You might want to make it clear whether the prohibition applies to mergers regardless of whether the party is the surviving or disappearing entity (see this post).
- The distinction between assigning rights and delegating obligations is pointless; in this context, “assign” and “delegate” constitute what I call “misapplied terms of art” (see this post). Because the provision refers to what is being assigned and delegated, a generic alternative to both words would work just as well, and I opt for “transfer”. Regarding that choice, NDCB, at 56, says, “The problem, however, is that there are reams of cases that analyze ‘assign,’ but not ‘transfer.’ If ‘transfer’ were used alone, the precedential value of the existing cases might be compromised. Moreover, the cases already question the meaning of ‘transfer.'” This doesn’t worry me, as the context makes it clear what’s going on.
- It’s unclear what “rights” refers to. (I don’t use the word “rights” anywhere in MSCD.) I think it refers to discretion granted to a party under an agreement and any remedy that a party has under an agreement, and I’d rather make that explicit.
- By referring to delegation of performance rather than delegation of obligations, Brian’s provision seeks to reflect that a party might delegate not only a duty but also a condition. See NDCB at 26, 74. But I think it’s unrealistic to expect readers to deduce that nuance from a reference to delegation of performance; it would be better to make it explicit.
- The last sentence is language of policy. I suggest that because it relates to a contingent future event, most native English speakers would say “will be void” rather than “is void”.
So here’s my initial version (it’s certain to change) [Updated 9 August 2016: Language tidied up]:
Except with the prior written consent of the other party, each party shall not transfer, including by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or operation of law, (1) any discretion granted under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.
Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).
I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.
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