Assessing Assignability: Transferring Contractual Rights or Obligations | Practical Law

Assessing Assignability: Transferring Contractual Rights or Obligations | Practical Law

Parties to a commercial contract often desire to transfer their rights or obligations to a non-party. However, even though the general rule permits the unilateral assignment or delegation of contractual rights and obligations, there are certain key exceptions to the general rule. This update provides guidance on selected issues to consider when assessing the assignability of a commercial agreement.

Assessing Assignability: Transferring Contractual Rights or Obligations

Practical Law Legal Update 5-546-6326 (Approx. 7 pages)

Assessing Assignability: Transferring Contractual Rights or Obligations

by Practical Law Commercial
Published on 12 Nov 2013USA (National/Federal)
Parties to a commercial contract often desire to transfer their rights or obligations to a non-party. However, even though the general rule permits the unilateral assignment or delegation of contractual rights and obligations, there are certain key exceptions to the general rule. This update provides guidance on selected issues to consider when assessing the assignability of a commercial agreement.
Almost every party to a commercial contract holds a right to receive performance and owes a duty to perform. As a general rule, stemming from the law's preference for the free alienation of property, contractual rights are freely assignable and contractual obligations are freely delegable. However, there are two important exceptions to this general rule, when:
Therefore, when determining whether a party may unilaterally transfer a contract or any of its rights and obligations under the contract, the transferring party must look to applicable law and the express language of the contact to determine whether it can validly complete the intended transfer without obtaining the non-transferring parties' consent. If consent is required and is not obtained, the transferring party risks:
  • Breaching the contract.
  • Making an ineffective and invalid transfer.
For more information on assigning rights and delegating obligations, see Practice Note, Assignability of Commercial Contracts.

Distinguishing Between Assignment and Delegation

Contracting parties and practitioners often refer to assignability of contracts. While in some instances they are specifically addressing the assignment of a party's rights under the contract, in many cases they use the term "assignment" to refer to both:
  • The assignment of rights to receive performance.
  • The delegation of duties to perform.
However, assignment and delegation are two distinct legal concepts that must be separately addressed because they may have different consequences.

Characteristics of Assignments

An assignment involves the transfer by an obligee (assignor) of some or all of its rights to receive performance under the contract to a non-party (assignee). The assignor no longer receives any benefits of the assigned rights, which are all transferred to the assignee.
However, even though the assignor divests its contract rights, the assignment does not reduce or eliminate the assignor's performance obligations to the non-assigning party. Therefore, the non-assigning party retains:
  • The right to receive performance from the assignor.
  • Its remedies against the assignor for any failure to perform.
For more information on the characteristics of assignment, see Practice Note, Assignability of Commercial Contracts: What is Assignment?.

Characteristics of Delegation

A delegation involves the transfer by an obligor (delegating party) of some or all of its performance obligations (or conditions requiring performance) under the contract to a non-party (delegatee). For a delegation to be effective, the delegatee must agree to perform the delegated performance. However, the delegating party remains liable for the delegated performance, whether or not it has also assigned its contracts rights, unless the non-delegating party has agreed to a novation.
This differs from an assignment of rights where, on assignment, the assignor relinquishes its contractual entitlements. Therefore, even if the delegating party can effectively delegate its actual performance to the delegatee (so that the delegatee's actual performance discharges the delegating party's duty), the delegating party cannot be relieved of its obligation to perform and its liability for non-performance unless the non-delegating party has agreed to a novation.
For more information on the characteristics of delegation, see Practice Note, Assignability of Commercial Contracts: What is Delegation?.

The General Rule Governing Assignment and Delegation

The modern rule generally permits free transferability of all types of property, including contracts. It broadly permits:
  • Most assignments of contractual rights.
  • Many delegations of contractual performance.
The major exceptions to free transferability include:
  • Assignments and delegations that violate public policy or law.
  • Assignments of rights or delegations of performance that are personal in nature.
  • Contracts with anti-assignment or anti-delegation clauses.
For more information on the general rules governing assignment and delegation, see Practice Note, Assignability of Commercial Contracts: General Rules Governing Assignment and Delegation.

Contracts That Present the Greatest Challenges

Several types of contracts are usually not transferable without the consent of the non-transferring party. Some examples include:

Personal Services Contracts

Personal service contracts are generally not transferable without the non-transferring party's consent. Many courts similarly restrict assignment of the service recipient's rights in addition to the delegation of duties, if assigning the right would materially impact the non-assigning party. Express anti-assignment and anti-delegations clauses, which many personal service contracts contain, often permit the services recipient (but usually not the service provider) to both assign rights and delegate obligations.
For more information on the transferability of personal service contracts, see Practice Note, Assignability of Commercial Contracts: Personal Service Contracts.

Intellectual Property Licenses

Unless an IP license contains an anti-assignment or anti-delegation provision, licensors can generally assign rights and delegate performance (while remaining secondarily liable) under the license agreement. However, the policy interest in permitting the licensor to control the use of its IP often supports non-transferability by the licensee, even in the absence of a transfer restriction in the license.
Therefore, as a general rule, non-exclusive IP licenses cannot be transferred by the licensee without the licensor's consent. The rule regarding exclusive licenses varies, depending on the type of IP being transferred. Most courts enforce contractual provisions that expressly permit or restrict transferability.
For more information on the transferability of intellectual property licenses, see Practice Note, Assignability of Commercial Contracts: Intellectual Property Licenses.

Contracts With Anti-assignment and Anti-delegation Clauses

Many contracts contain express anti-assignment and anti-delegation clauses. Because courts favor the rights of parties to freely contract, they commonly enforce these clauses. However, the law also favors the free alienation of property. Therefore, courts generally construe these provisions narrowly and the parties should draft these types of clauses carefully to support their intended result. For more information on anti-assignment and anti-delegation clauses, see Practice Note, Assignability of Commercial Contracts: Contractual Anti-Assignment and Anti-Delegation Clauses. For information on drafting anti-assignment and anti-delegation clauses, see Drafting and Negotiating Anti-assignment and Anti-delegation Clauses. For a sample anti-assignment and anti-delegation clause, see Standard Clauses, General Contract Clauses: Assignment and Delegation.

Is a Change of Control an Assignment?

A change of control does not involve the actual transfer of assets held by the affected business entity. Still, contracting parties sometimes assume that a change of ownership or management triggers an impermissible transfer of contractual rights or obligations that are non-assignable or non-delegable under the contract by applicable law. However, the general rule acknowledges the technical distinction and courts commonly hold that a change of control does not implicate any legal or contractual restrictions on the transferability of a particular contract unless the contract either:
  • Contains an anti-assignment and anti-delegation clause expressly restricting a change of control.
  • States that a change in management or equity ownership of the contracting party is deemed to be an assignment.
For more information on when a change of control constitutes and assignment, see Practice Note, Assignability of Commercial Contracts: Change of Control.

When Does an Involuntary Transfer Trigger a Restricted Transfer?

Commercial agreements are not always directly and voluntarily transferred to a non-party by one of the parties. They may be transferred in conjunction with a corporate reorganization or a business sale structured as a merger or as the result of a court order. With these types of transfers, often characterized as occurring by operation of law, it may be more difficult to determine whether:
  • A contractual anti-assignment and anti delegation clause applies to a specific type or transfer.
  • The transfer is permissible, with or without a contractual anti-assignment and anti-delegation provision.
The parties usually must look to state law, either the appropriate state's general contract law or business-entity law, or both, to determine whether the transfer is permissible. The result may differ depending on whether the transferred contract has an anti-assignment and anti-delegation provision and the precise language of that provision.
For more information on determining when involuntary transfers trigger transfer restrictions, see Practice Note, Assignability of Commercial Contracts: Voluntary and Involuntary Transfers.

Drafting and Negotiating Anti-assignment and Anti-delegation Clauses

When drafting or negotiating an anti-assignment and anti-delegation clause, the parties should consider several key points, including:
  • Directly addressing assignment of rights and delegation of performance.
  • Clarifying the universe of restricted transfers.
  • Designating the non-transferring party's consent rights.
  • Specifying any exceptions to non-transferability.
  • Requiring notification of a permitted transfer.
  • Including a declaration that impermissible transfers are void.
  • Adding a novation to the anti-assignment and anti-delegation provision.
For more information on drafting and negotiating anti-assignment and anti-delegation clauses, see Practice Note, Assignability of Commercial Contracts: Drafting Anti-assignment and Anti-delegation Clauses.