An assignment is the transfer of a right from one party to another. The benefit of a commercial contract is such a right and in principle, can be freely assigned by the benefiting party, subject to any restrictions in the contract.
The burden of a contract cannot be assigned. However, in practice the parties often behave as though it has been, particularly in relation to ongoing performance obligations, where the assignee (the party to whom the contract has been assigned) takes over the performance of the contract from the assignor (the party who has assigned the contract).
Since the burden of a contract cannot be assigned, the assignor shall in principle remain liable after the assignment, to perform any outstanding obligations that still have to be fulfilled. Upon assignment, the assignor should ensure that it is indemnified by the assignee, against any breach or failure to perform the contract by the assignee. An assignor should speak to their commercial solicitor about drafting an indemnity. It should be noted that the assignor will remain liable for any past liabilities incurred before the assignment.
After the assignment of a contract, the assignee is entitled to the benefit of the contract. This means that in certain circumstances, it may bring proceedings against the other contracting party to enforce those rights. It should be noted that an assignment only transfers existing rights, and does not create new ones. Therefore, the assignee can only enforce rights that the assignor would have been legally entitled to enforce, and not any other or additional rights.
Contract assignment is commonly used:
- in business asset or going concern sales when the benefit of the business’s contracts needs to be transferred to the buyer.
- in corporate reorganisations where the assets of one group company are hived off and transferred to another.
- where a party to a contract wants to transfer a contract to a third party.
The advantages of assigning a commercial contract may include:
- the benefit of the contract can be assigned to a third party without the other contracting party’s consent.
- notice of assignment only has to be given after the event. Therefore, in principle there is no obligation to forewarn the other contracting party
However, there cold be practical restrictions and limitations on the above advantages as many contracts include either: (i) a prohibition on assignment; or (ii) require the assignor to obtain the other party’s prior consent prior to assignment.
The disadvantages of assigning a commercial contract include:
- it is not possible to transfer both the rights and the obligations under the contract.
- the burden of a contract cannot be assigned and the assignor shall remain liable to the other contracting party.
There are other options to assigning a contract including novating a contract, which transfers a contract outright, including the rights and obligations.
Christian Browne is a corporate solicitor and the Managing Director of Summerfield Browne Solicitors (www.summerfieldbrowne.com). Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester. Christian Browne is also a legal advisor with the Institute of Directors in London.
Photo Credit : Dan Moyle