If you decide to sell your business, there are a number of financial and legal matters that must be undertaken to successfully transfer the business. One of the key issues when selling a going concern is determining how ongoing agreements will be carried out. Many types of contracts may be assigned to the purchaser unless expressly prohibited by the language of the contract.
What is an assignment? An assignment is the transfer of the obligations and benefits under the contract to another party. The transferee accepts the obligation to perform the terms of the agreement. The assignor (the original party to the contract) typically provides notice to the counterparty of the assignment.
Assignment vs. delegation. When a contract is delegated, rather than assigned, the assignor transfers only the duties to be performed under the contract, and not the ancillary benefits thereunder. In contrast, an agreement to provide a product or service is assigned when the obligation to deliver the product and the right to collect payment is given to another party. If the counterparty to the contract agrees to the change, then a new contract has been formed.
When is a contract not assignable? By law, most contracts are freely assignable unless one of the exceptions below apply. First, the contract may expressly prohibit an assignment through a non-assignment clause. A non-assignment clause generally provides that “neither this agreement nor any of the rights, interest or obligations thereunder shall be assigned by any party without the prior consent of the other party.” Some contracts state that consent to an assignment should not be unreasonably withheld. In addition, there are a number of specific circumstances that would render an assignment invalid. State laws often preclude the assignment of claims against the government. Some state laws prohibit any individual from assigning wages. Claims may also be barred from assignment because they violate public policy. In some instances, a court may set aside the assignment of a contract or claim because an assignment would have a material and significant impact on the essential terms or intended performance contemplated under the contract. Specifically, an assignment could subject the counterparty to unforeseen or unnecessary risks that were not bargained for in the original agreement.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.