Assignability Of Contracts: Everything You Need to Know
The assignability of contracts is when one side of a contract agreement transfers the contract to another entity, so that the new entity fulfills the terms of the contract. 3 min read
The assignability of contracts is when one side of a contract agreement transfers the contract to another entity, so that the new entity fulfills the terms of the contract. Being able to assign contracts depends on a variety of factors, mainly the language contained in the contract.
How Contract Assignments Work
Some contracts prohibit assignment altogether, while others may allow it with the other party's consent. An example of a basic contract assignment may look like this:
- Bob contracts with a dairy to deliver a gallon of cream to his house every day.
- The dairy assigns Bob's contract to another dairy.
- As long as Bob is notified of the change in provider and gets his gallon of cream every day, his contract is with the new dairy.
Because the law has a preference for the free alienation of property, parties are free to assign contract rights and delegate contractual obligations.
Assigning a contract to another doesn't always take away the assigning party's liability. Some contracts include a clause that at least one of the original parties guarantees performance — or fulfills the contract terms — no matter what the assignment.
The performance, however, can't be changed in contract assignment. There's a limit to substitution, so the new party has no power to change the performance per the rights stated in the contract. For example, if the obliging party has pledged to perform only if some event happens (with no certainty that it will happen), no assignment should increase the risk to the obliging party if the event doesn't happen through no fault of the obligor.
The nature of a contract's obligations determines its assignability.
When Assignments Won't Be Enforced
In certain cases, contracts can't be assigned.
- A clause in the contract prohibits assignment. This is usually called an anti-assignment clause.
- Assignments can't take place if they materially alter what's expected under the contract. If the assignment affects the expected performance as outlined in the contract, lowers the value of returns (including anticipated returns), or increases risks for the other contract party (the one who's not assigning contractual rights), it's unlikely that any court will enforce the arrangement.
- If an assignment violates public policy or the law, it won't be enforced. For instance, the federal government prohibits certain claim assignments against the government, and many states prohibit an employee from assigning future wages.
Other assignments may not be illegal, but they could still violate public policy. As an example, personal injury claims can't be assigned because doing so might encourage litigation.
When looking into whether one party can transfer a contract or some rights and obligations in the contract, the transferring party has to check into applicable laws and statutes. That party must also check the contract's express language to determine whether or not it can transfer the assignment without obtaining consent from the non-transferring party.
If the contract requires that consent is given and the transferring party doesn't get that consent, it risks a contract breach as well as an invalid, ineffective transfer.
How to Assign a Contract
Follow these steps to assign contracts, when it's allowed for you to do so.
- Carefully study the contract for prohibitions or limitations, such as anti-assignment clauses. In some cases, there isn't a separate anti-assignment clause, but it may be stated in another way, such as language that says, "This contract may not be assigned."
- Execute the assignment. As long as you're free to assign the contract, prepare and enter into the assignment, which is basically an agreement transferring your rights and obligations.
- Notify the obligor, or the non-transferring party. After you assign contract rights to the assignee, notify the other party that was the original contractor, also known as the obligor. This notice relieves you of any liability as stated in the contract, as long as the contract doesn't say differently — for instance, the contract states that you, as the assignor, guarantee performance under the contract.
Before trying to assign a contract to a third party, it's very important to understand if you're allowed to do so. You'll have to research legal statutes as well as the language in the contract to ensure you follow rules and regulations. Otherwise, you risk a breach of contract.
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