Assignment Clauses in Contracts: What You Need to Know for Business Success
What are they?
The purpose of an assignment clause in a contract is to allow a party transfer a benefit it is entitled to receive under that contract to another party.
A contract may simply be described as a trading of obligations for benefits. However, it is essential to remember that by law, obligations cannot be assigned. Understanding the significance of assignment clauses and their importance is crucial for both small and big businesses, as well as individuals.
Why they are important?
Assignment clauses often appear as standard terms in agreements, thus, tricking one into believing that they are not as important as other more carefully drafted and negotiated clauses. This is not true. Assignment clauses are useful for parties who wish to control who receives the benefit of their performance, especially in circumstances where a performing party is concerned that should the wrong party receive the benefit of such a performance, irrevocable harm may be done to their business (for example, intellectual property infringements).
Assignment clauses are also useful for companies or individuals with liquidity problems since it allows them to assign the fees payable to them under a contract to a third party.
The absence of an assignment clause in an agreement would often mean that a party is allowed to assign its benefit under the contract without the consent of the other party.
Where assignment clauses require consent of the other party, this consent should not be unreasonably withheld.
What happens if you need to transfer your obligations?
Since one cannot assign an obligation, there are two options open to a party who wishes to transfer their obligation: a novation or a subcontract agreement.
A novation operates to cancel a previous contract in order to create a new one. Once the option to novate is chosen, whatever obligations one had under a previous contract would be transferred to another party under the new contract.
A subcontract agreement on the other hand, operates to create a sub agreement under a main contract, so that some, or all the obligations to be carried out by a party under a main contract would be transferred to a third party for consideration. It is important to note that once a party chooses the subcontract option, a robust indemnity clause should be negotiated to ensure that the party entitled to the benefit in the main contract has sufficient protection from breach. This indemnity would be given by the party that wishes to subcontract its obligations.
What to do when you wish to assign a contract
check your contract to be sure there is no non-assignment clause – a breach may result in termination or liability for other remedies;
check to see whether you require consent;
seek consent, if applicable; and
prepare a deed of assignment.
What to do when you wish to transfer an obligation under a contract
check for a novation or subcontract clause;
if neither is allowed, consider asking for a renegotiation of the contract to add in those clauses (albeit it may be too late for this);
if either or both is allowed, check to see whether you need consent before you proceed unilaterally;
seek consent from the other party (if applicable); and
draft a subcontract or novation agreement with the appropriate indemnity clauses.
Conclusion
Understanding the significance of assignment clauses in contracts is crucial for businesses and individuals alike. While they may often appear as standard provisions, their impact on the control and protection of benefits cannot be underestimated. Without an assignment clause, you risk the possibility that the other party can freely assign their benefits without your consent. Therefore, it's essential to be proactive when you wish to assign a contract or transfer an obligation.
For help reviewing your agreements and ensuring your contracts work for you, contact Arianne King.
