Assignment of Rights and Obligations Under a Contract: Everything You Need to Know
An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. 3 min read
An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.
What Is an Assignment of Contract?
In an assignment contract, the assignor prefers that the assignee reverses roles and assumes the contractual rights and obligations as stated in the contract. Before this can occur, all parties to the original contract must be notified.
Contracts create duties and rights. An obligor is the party who is legally or contractually obliged to provide a benefit or payment to another, while an obligation is owed to the obligee. The obligee transfers a right to obtain a benefit owed by the obligor to a third party. At this point, the obligee becomes an assignor. An assignor is the party that actually creates an assignment.
The party that creates an assignment is both the obligee and a transferor. The assignee receives the right to acquire the obligations of the promisor/obligor. The assignor can assign any right to the obligor unless:
- Doing so will materially alter the obligation
- It's materially burdening
- It decreases the value of the original contract
- It increases their risk
- Public policy or a statute makes it illegal
- The contract prevents assignment
Assignments are important in business financing, especially in factoring. A factor is someone who purchases a right to receive a benefit from someone else.
How Assignments Work
The specific language used in the contract will determine how the assignment plays out. For example, one contract may prohibit assignment, while another contract may require that all parties involved agree to it before proceeding. Remember, an assignment of contract does not necessarily alleviate an assignor from all liability. Many contracts include an assurance clause guaranteeing performance. In other words, the initial parties to the contract guarantee the assignee will achieve the desired goal.
When Assignments Will Not Be Enforced
The following situations indicate when an assignment of a contract is not enforced:
- The contract specifically prohibits assignment
- The assignment drastically changes the expected outcome
- The assignment is against public policy or illegal
- The contract contains a no-assignment clause
- The assignment is for a future right that only would be attainable in a contract in the future
- The contract hasn't been finalized or written yet
Delegation vs. Assignment
Occasionally, one party in a contract will desire to pass on or delegate their responsibility to a third party without creating an assignment contract. Some duties are so specific in nature they cannot be delegated. Adding a clause in the contract to prevent a party from delegating their responsibilities and duties is highly recommended.
Characteristics of Assignments
An assignment involves the transfer by an assignor of some or all of its rights to receive performance under the contract to an assignee. The assignee then receives all the benefits of the assigned rights. The assignment doesn't eliminate or reduce the assignor's performance commitments to the nonassigning party.
Three Steps to Follow if You Want to Assign a Contract
There are three main steps to take if you're looking to assign a contract:
- Make sure the current contract does not contain an anti-assignment clause
- Officially execute the assignment by transferring the parties' obligations and rights
- Notify the obligor of the changes made
Once the obligor is notified, the assignor will effectively be relieved of liability.
If you'd prefer not to allow the party you're doing business with to assign a contract, you may be able to prevent this from occurring by clearly stating anti-assignment clauses in the original contract. The three most common anti-assignment clauses are:
- Consent required for assignment
- Consent not needed for new owners or affiliates
- Consent not unreasonably withheld
Based on these three clauses, no party in the contract is allowed to delegate or assign any obligations or rights without prior written consent from the other parties. Any delegation or assignment in violation of this passage shall be deemed void. It is not possible to write an anti-assignment clause that goes against an assignment that is issued or ordered by a court.
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