CHAPTER 4
Assignment of Contract

Assignment of contract is quite simply the transfer of a contract from one party to another. Buyers are often concerned that a seller may assign their contract or a portion thereof to a third party without seller’s permission. Buyers’ concerns may include potential undue hardship and/or a transferal of the contract to an outfit not of their choosing. Note that the law specifically prohibits the transfer of a contract if such a transfer of rights would increase the performance obligations of the other party. An example of such an increase is the sale of an engineering firm that provides personnel services under a contract. The contract may be with a local outfit, thus travel and accommodations are minimal. If seller assigns the contract to an alternate company outside the region, the cost of travel and accommodations may increase substantially. This creates an increased performance obligation on buyer.

Buyers will often insert an assignment provision in the contract to circumvent seller from transferring it in whole or in part to a third party. This clause allows buyer more control over who is working their contract. The following example is similar to an assignment provision that seller may encounter in a proposal or contract:

Seller may not assign or transfer in whole or in part any rights under this contract without prior written consent of buyer. Any transfer of contract without buyer’s consent may, at buyer’s discretion, be considered as a violation of the contract and subject to the termination for default provision established herein.

In other words, buyer is asserting that seller may not assign (sell or transfer in any way) the contract to a third party without first obtaining buyer’s written concurrence. If seller proceeds to assign the contract to a third party without buyer’s consent, buyer has the unilateral right to cancel the contract for non-compliance with the terms of the agreement.

RISK

The purchase or sale of a business is a strategy many companies use to promote growth and gain new business, technology and employees. Other companies wish to sell or liquidate product lines that are not doing well or do not fit within their core business objectives. If a contract includes an assignment provision negating seller’s ability to transfer the contract to an alternate party, the sale of the company, product line or service may not take place without buyer’s consent. This has potential monetary consequences including delay and even the termination of the sale.

RESPONSE

As assurance that no obstacles will stop the sale of a product line, service, or business base, seller may consider negotiating one of the following conditions into the terms of the contract:

1) The best-case scenario for seller is to negotiate that the contract remains silent regarding the assignment provision. This allows seller to transfer the contract without buyer’s permission provided the sale does not create additional performance obligations or increased expenses for buyer.

2) If buyer does not wish to omit the assignment provision, a second approach is to express seller’s ability to transfer title to any of its affiliates or a successor in interest. Inclusion of such language allows seller to transfer the work to another division or subsidiary of theirs or sell the contract or parts thereof to a third party wishing to purchase the company, specific product line, or service.

3) In the event that buyer does not agree to any of the above suggestions, seller may propose the following less desirable language ensuring that buyer will reasonably consider the transfer of the contract to an alternate party: “This subcontract is not assignable and shall not be assigned by seller without the prior written consent of buyer, which shall not be unreasonably withheld.”