Anti-Assignment Clause: Everything You Need To Know
An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party.3 min read
An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party.
Anti-assignment clauses are of two types:
One that prohibits the assignment of work or service pursuant to the contract.
One that prohibits the assignment of payment under the contract.
The clause that prohibits the assignment of work or service is a valid clause, completely enforceable and does not bear much importance. However, the clause that prohibits the assignment of payment is a more complex clause that affects crucial buying and selling decisions.
Are Anti-Assignment Clauses That Prohibit Assigning Payments Enforceable?
As an anti-assignment clause prohibits the assignment of payment, it affects business and thus is unenforceable and ineffective under Section 9-406 of the Uniform Commercial Code. The code clearly states that clauses pertaining to "Discharge of Account Debtor, Notification of Assignment, Identification and Proof of Assignment, Restriction on Assignment of Account, Chattel Paper, Payment Intangibles and Promissory Notes" are ineffective and void.
What Should a Factor Do If a Client's Contract Contains an Anti-Assignment Clause?
Most factors prefer not to enter into an agreement with a client whose contract contains any anti-assignment clause to avoid hassle in the future. However, legal experts suggest that factors should ignore the anti-assignment clauses in the contract and proceed with business as usual along with providing a Notice of Assignment to the account debtor.
Even if the factor decides to proceed with the business decision with the said client, he should be aware that the account debtor may not want to engage in commercial activities with the factor, and may even create difficulties in dealings and collection. Though an anti-assignment clause does not deter the factor's decision to enter into a business arrangement with an account debtor or his ability to be paid given the issuance of a Notice of Assignment, it is for him to decide if the efforts are worth the business. However, to ensure a fool-proof commercial and business dealing, the factor can obtain a signed Estoppel Letter from the account debtor to avoid all future disputes.
What Are the Anti-assignment Provisions and Their Effect on Transaction Structures?
Most commercial contracts end with a clause, ”Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party.” This is the anti-assignment clause that ensures the interest of both the parties and that none of the two parties transfer any rights to any other individual with our prior consent of the other main party.
Often, a contract assignment issue plays an important factor in merger and acquisition prospects as buyers want to acquire all customer and vendor contracts. However, if any of the contracts bound by the anti-assignment clause need the approval of the other party, it could lead to additional costs for the buyer, which may affect the decision. The general notion is that most contracts are assignable unless categorically included anti-assignment clauses.
What Is the Typical Anti-assignment Language to Look Out For?
There are numerous ways of including an anti-assignment provision in the contract. However, the AIA Standard Form of Agreement contains the following anti-assignment provision:
- The Party 1 and Party 2, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party to this Agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this Agreement. Neither Party 1 nor Party 2 shall assign this Agreement without the written consent of the other.
What Are the Recommendations for Parties Entering Into Construction Contracts?
Usually, when commercial agreements are drawn, parties tend to focus on the key business aspects but pay no heed to anti-assignment provisions. It is thus the main responsibility of a corporate lawyer to study, analyze, and dissect agreements to ensure the best for their clients.
- Check the miscellaneous sections of any agreement to rule out any anti-assignment clause in the contract.
- Read and understand the finer points of the anti-assignment clause in the contract, if any.
- Negotiate changes in the anti-assignment clause prior to signing the contract.
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