Assignment of contracts

by | August 22, 2008

An “assignment” provision allows one party to a contract to transfer its rights and responsibilities under the contract to another party. This seems like a simple concept. A couple of examples: First, if I decide to move out of my leased space, either I or the landlord can find another party to move in and the new tenant takes over the rights and responsibilities of the lease. Second, if I have a contract with a distributor to sell my products and the distributor is acquired by another company, that new company takes over the distribution and is assigned the rights and responsibilities under the contract. They key issue here, though, is whether the non-assigning party is required to accept the new party to the contract and under what circumstances — the assignment clause spells this out.

Often, the assignment clause simply states that neither party may assign their rights and obligations without the prior consent of the other party. This is very broad language that would allow either party to deny the assignment for any reason whatsoever.

Another phrasing of this provision is that consent to the assignment is required but will not be withheld “unreasonably,” which begs the question, “What does ‘unreasonably’ mean?” Generally, the courts look to a “reasonable person” standard – what would a reasonable person in the same scenario do based on the facts of the situation? This remains a somewhat subjective determination, though, and much latitude is given to the non-assigning party to have the opportunity to choose who it does business with.

Finally, the assignment clause may specify certain circumstances where consent is or is not required. Business acquisitions are often specified as assignments requiring consent as the parties want to protect their business relationships and vet out a business partner rather than simply being assigned into the relationship.

Assignment provisions are one of those “miscellaneous” or “boiler plate” provisions that people often skim over assuming the language is always the same. There are many different variations and it’s important that you read and understand how it applies to you under that particular contract.