Key Takeaways

  • Assignments allow a party (assignor) to transfer their contractual rights and/or obligations to a third party (assignee).
  • Some contracts limit or prohibit assignments through anti-assignment clauses.
  • Delegation transfers duties, while assignment transfers rights—sometimes both occur together.
  • Certain assignments are not enforceable, including those that materially alter a contract or violate public policy.
  • Assignments can be partial, conditional, or revocable depending on the nature and terms.
  • The law requires clarity, notice to obligors, and sometimes consent for assignments to be effective.

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.

Assignment vs. Novation

While assignment transfers contractual rights to another party, it does not automatically relieve the assignor of their obligations unless a novation occurs. A novation is a three-party agreement where:

  • The original party is released from the contract.
  • A new party is substituted and assumes the obligations.
  • All original parties, including the obligor, consent to the new arrangement.

Novation offers greater protection to all parties involved and should be used when a complete transfer of both rights and liabilities is intended.

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.

Types of Assignments

Assignments of contractual rights and obligations may fall into the following categories:

  • Absolute vs. Conditional: An absolute assignment transfers rights without condition; a conditional one takes effect only upon a specified event.
  • Gratuitous vs. Commercial: Gratuitous assignments are made without compensation, whereas commercial ones usually involve consideration.
  • Legal vs. Equitable: A legal assignment meets statutory requirements and allows the assignee to enforce the contract in their name. Equitable assignments are less formal and may require the assignor’s involvement in enforcement.

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:

  1. Make sure the current contract does not contain an anti-assignment clause
  2. Officially execute the assignment by transferring the parties' obligations and rights
  3. Notify the obligor of the changes made

Once the obligor is notified, the assignor will effectively be relieved of liability.

Risks and Pitfalls of Assignments

Assignments may seem straightforward but involve legal risks if not handled properly:

  • Residual liability: The assignor may still be liable if the assignee fails to perform unless a novation is executed.
  • Disputes over performance: The non-assigning party may challenge performance if they weren’t notified of the assignment.
  • Breach of contract: Unauthorized assignment may lead to breach if the original agreement contains anti-assignment provisions.
  • Ambiguous language: Vague assignment terms may lead to litigation, especially in high-value contracts.

Legal counsel can help ensure that assignments comply with governing law and contract terms, mitigating these risks.

Best Practices for Drafting Assignments

To ensure clarity and enforceability when creating an assignment of rights and obligations under a contract, consider these drafting tips:

  • Clearly identify parties: Use legal names for the assignor, assignee, and obligor.
  • Specify what is being assigned: Identify the exact rights and/or duties transferred.
  • Include effective date: Indicate when the assignment becomes valid.
  • Obtain consent if required: Refer to the contract to determine if consent is needed and document it.
  • Use a written agreement: Even if not required by law, a written assignment provides legal clarity.
  • Attach the original contract: To prevent ambiguity, attach the underlying contract or clearly reference it.

Anti-Assignment Clauses

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:

  1. Consent required for assignment
  2. Consent not needed for new owners or affiliates
  3. 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.

Legal Limitations and Enforceability Issues

Courts may refuse to enforce an assignment of rights and obligations under a contract under certain conditions, even if the contract does not explicitly forbid it. These include:

  • Material Alteration: If the assignment would significantly alter the risks or burdens of the non-assigning party, it may be unenforceable. For example, assigning a performance-based contract to a party with a different skill set may affect expected results.
  • Public Policy Violations: Some assignments are prohibited by law, such as assignments of future wages or personal injury claims, due to policy concerns.
  • Prohibited by Law or Statute: Specific statutes may bar assignments in regulated sectors, like government contracts or insurance benefits.
  • Lack of Notice: Although consent is not always required, failure to notify the obligor may complicate enforcement or delay performance.

Frequently Asked Questions

  1. Can both rights and duties be assigned under a contract?
    Yes, but assigning duties (delegation) often requires consent from the other original party, especially if the duties are personal or performance-based.
  2. Does the original party remain liable after assigning a contract?
    Yes—unless a novation is executed. An assignment alone does not release the assignor from liability.
  3. What makes an assignment invalid?
    An assignment may be invalid if it’s prohibited by the contract, materially alters obligations, violates public policy, or lacks proper notice.
  4. Is a written agreement required to assign a contract?
    While oral assignments can be valid, a written agreement is strongly recommended to avoid disputes and ensure enforceability.
  5. What’s the difference between an assignment and a novation?
    An assignment transfers rights and possibly duties without releasing the assignor, while a novation substitutes one party with another and requires all parties’ consent.

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