We often see the clause below in many agreements we enter into;
Assignment
“No party may assign, transfer, sub-contract or otherwise part with this agreement or any part thereof or any right or obligation under it, without obtaining the other party’s prior written consent thereto.
OR A party may assign its rights under this Agreement to any affiliated entity which directly or indirectly controls, without the consent of the other party.”
In this week’s blog, we shall be unpacking assignment clauses by providing a broad overview in terms of what this clause actually means, how it works and when it can be enforced.
What is an assignment clause?
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An assignment occurs when one party to an existing contract (the assignor) transfers their contractual obligations and benefits to another party (the assignee). When this occurs, the original party who is the assignor is relieved of its contractual duties and obligations, and its role in the contract is replaced by the assignee unless the contrary is provided for by the contract. In essence, the purpose of the assignment clause is that the assignor transfers all its contractual obligations so the assignee such that assignee steps into his/her shoes and assume all of his/her contractual obligations and rights.
Thus, an assignment clause, spells out which, if any, of a party’s obligations and rights under a contract are able to be assigned, or transferred, to another party. Parties are therefore free to negotiate terms for the assignment clause which suit their needs best.
How does assignment work?
The manner in which an assignment works heavily depends on the wording of the contract. While some contracts may contain a clause prohibiting assignment as seen in the first example above; other contracts may allow assignment as seen in the second example above, subject to the other party’s consent. However, in order for an assignment to occur, the other party to the contract must be properly notified.
An assignment doesn't always relieve the assignor of liability. Some contracts may include a guarantee that, regardless of an assignment, the original parties (or one of them) guarantees performance (that is, that the assignee will fulfil the terms of the contract). Assignment typically includes transfer of both accountability and responsibility to another party, but liability usually remains with the assignor unless there is language to the contrary.
When assignments will not be enforced?
An assignment of a contract will not be enforced in the following circumstances:
- Where the contract prohibits assignment. This is typically referred to as an anti-assignment clause, can prohibit (and "void") any assignments. Thus, it is very important to look at the wording of the clause.
- An assignment that materially alters a contract for instance the net result of a contract or what is 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 which violates the law or public policy are not enforceable. 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.
- In a contract of employment, the employee cannot assign his/her rights to a third party.
In conclusion, an assignment clause can have very serious consequences on the fulfilment of the contract as a whole and parties must be very careful when drawing up this clause to ensure that there are not prejudiced by the terms of the clause. One must look at the nature of the contract and assess whether an assignment clause would be beneficial to the parties.