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Understanding Contract Assignment (All You Need To Know)

Wondering what is contract assignment and how it works?

You’re looking to assign your contract and need to better understand the assignment process.

Don’t go any further…

We’ve got what you need!

In this article, we will talk about everything there is to know about a contract assignment process.

We’ve divided this article into the following sections:

Let’s get started…

What is the assignment of contract

An assignment of contract is when a party to a contract hands off the contract terms and conditions to another party.

The assigning party is the “assignor” and the party receiving the contract is the “assignee”.

Once the assignor assigns the contract to the assignee, then the terms and conditions of the contract will apply to the assignee as well.

In some cases the assignor will be completely liberated from its obligations under the contract and in other cases the assignor will have varying degrees of responsibility or liability.

We will cover such details in this article.

Assignment clause in a contract

When you are looking to assign a contract, the first thing that you should do is to look at your contract and see if you have an assignment clause.

In most commercial contracts, businesses will plan ahead and include an assignment clause.

In most instances, the assignment clause will state that the parties to the contract are not authorized to assign the contract to another unless it is approved by the other party.

The assignment clause will also state in some cases the liability applicable to the assignor.

The assignment clause may state that the assignor will remain obligated to the same extent as the assignee towards the other party to the original contract.

In such a scenario, the assignment of the contract will benefit the other party as it will now have the assignor and assignee responsible and liable towards it.

Before performing an assignment, it’s important to consult the assignment clause in the contract to ensure you respect its terms. 

Types of assignment clauses in a commercial contract

There are different variations of an assignment clause in business contracts.

We’ll go over the three main contract assignment flavours.

The first type of assignment clause in a contract is when the assignment is entirely prohibited.

In this case, neither party may assign the contract without the prior consent of the other.

Another scenario is that the assignment is generally not authorized unless a party wishes to assign the contract to a subsidiary, an affiliate or an entity of its own corporate group.

If the assignor intends to assign the contract to another entity in its own group of entities the assignment will generally be authorized if the assignor owns more than fifty percent of the shares of the assignee or controls the management. 

A third scenario is when the assignment is generally authorized but subject to a prior notification of the other party.

In such clauses, the other party will still be required to give consent for the assignment but the consent must not be unreasonably withheld.

Is a contract assignment enforceable

A contract assignment, to the extent the assignor has followed the terms and conditions of the contract, will be enforceable against the other party.

However, if the assignor does not follow the terms of the contract, the assignment will be unenforceable against the other original contracting party.

If the assignment is not done properly, the assignor, assignee and the other party to the original contract may all get entangled in unwanted legal risk.

To avoid creating legal risk for all parties involved, make sure that you ensure that the contract authorizes the assignment.

If the contract allows for the assignment, make sure the assignor gives the proper preliminary notifications to the other contracting party and receives any required consent or authorization before assigning the contract.

In the assignment agreement between the assignor and assignee, make sure the assignee understands the terms and conditions of the contract so it will perform its obligations as it was originally intended between the original contracting parties. 

It is also important for the assignor to ensure it understands the extent of liability or responsibility it will continue to have following the assignment should the contract require the assignor to remain responsible in some way.

If the assignor continues to have ongoing responsibilities after the assignment, the assignor must include terms and conditions in its own assignment agreement with the assignee to ensure the assignee adequately observes the contract terms to avoid triggering the responsibility of the assignor towards the other contracting party.

Provided the terms and conditions of the assignment are respected, the assignment of the contract will be enforceable.

And assignment will not be effective if it substantially changes the terms and conditions for the other contracting party.

For example, if you are a software company, you will not be able to assign the contract to a real estate company.

This goes without saying!

Who is involved in contract assignments 

There are typically at least three parties to an assignment.

You will have two original contracting parties and a third party.

Among the two original contracting parties, one party intends to assign the contract to the third party.

That party is the assignor.

The third-party agreeing to take over the contract from the assignor is referred to as the assignee.

Essentially, once the contract assignment is performed, the third party becomes a contracting party and the assignor becomes a third party.

So the assignor and assignee swap positions in relation to the other contracting party.

How does the assignment of a contract work

The assignment of a contract is fundamentally not complicated.

The process starts with one party to a contract notifies in writing of its intention to assign the contract to a third-party or assignee.

The other contracting party will either consent or not to the request.

If the consent is given, then the assignor enters into a commercial agreement with the assignee.

This agreement will typically cover the terms and conditions and the commercial considerations between the assignor and the assignee.

Every contract has a value and the assignor will probably require the assignee to pay for the right to take over the contract.

The agreement between the assignor and assignee will also clarify their obligations and responsibilities towards the other contracting party.

Once the assignor and assignee agree on the assignment terms and conditions between themselves, the assignor will prepare an assignment agreement that will be executed between the assignor, the assignee and the other contracting party. 

This assignment agreement will clarify the terms and conditions of the actual assignment and will formally result in the assignment of the contract as of that date.

Type of contract that can be assigned

In the business world, nearly all types of business contracts can be assigned.

The assignment clause will govern the assignment process from a legal point of view.

Although most types of contracts can be assigned, some types of contracts cannot be effectively assigned. 

If a business contract was signed with a person specifically for the skills and abilities of that individual, that individual may not assign the contract.

For example, you’ve asked your favorite band to sign at your wedding, the band could not assign that contract to another because you don’t care for the other signers to be at your wedding.

So a contract signed with an individual or entity based on the considerations and value brought by that specific person or entity cannot be assigned.

Assignment vs delegation

In some cases we talk about contract assignment and in other cases we talk about contract delegation.

What is the difference between a contract assignment and contract delegation?

The assignment of a contract is when you hand off the entire contract to another party.

The assignor will typically want to be discharged from its own obligations and the assignee inherits all the contract obligations towards the other party.

When we talk about contract delegation, this is a case when a party does not assign the entire contract but delegates part of its own responsibilities to another party.

Takeaways

A contract assignment is a process where a party to an existing contract transfers or gives up its contract rights and obligations for the benefit of another party.

Contract assignments are relatively frequent in cases where a company restructures and changes its corporate operations.

It can also happen between a company and its suppliers.

No matter the reason for the contract assignment, you’ll need to ensure that you follow the terms and conditions of your contract, particularly the assignment clause.

If you follow the assignment terms of the contract, your assignment will be enforceable against the other contracting party.

We hope that this article was useful to you.

Should you need any legal advice on contract assignment or contract law, we are here to support you.

In the meantime, best of luck!

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