https://content.next.westlaw.com/practical-law/document/Ib97b243c643711e38578f7ccc38dcbee/Assessing-Assignability-Transferring-Contractual-Rights-or-Obligations?viewType=FullText&transitionType=Default&contextData=(sc.Default) Parties to a commercial contract often desire to transfer their rights or obligations to a non-party. However, even though the general rule permits the unilateral assignment or delegation of contractual rights and obligations, there are certain key exceptions to the general rule. This update provides guidance on selected issues to consider when assessing the assignability of a commercial agreement.
Enter to open, tab to navigate, enter to select| Published on 12 Nov 2013 • USA (National/Federal) |
Parties to a commercial contract often desire to transfer their rights or obligations to a non-party. However, even though the general rule permits the unilateral assignment or delegation of contractual rights and obligations, there are certain key exceptions to the general rule. This update provides guidance on selected issues to consider when assessing the assignability of a commercial agreement.
Almost every party to a commercial contract holds a right to receive performance and owes a duty to perform. As a general rule, stemming from the law's preference for the free alienation of property, contractual rights are freely assignable and contractual obligations are freely delegable. However, there are two important exceptions to this general rule, when:
Therefore, when determining whether a party may unilaterally transfer a contract or any of its rights and obligations under the contract, the transferring party must look to applicable law and the express language of the contact to determine whether it can validly complete the intended transfer without obtaining the non-transferring parties' consent. If consent is required and is not obtained, the transferring party risks:
Breaching the contract. Making an ineffective and invalid transfer.For more information on assigning rights and delegating obligations, see Practice Note, Assignability of Commercial Contracts.
Contracting parties and practitioners often refer to assignability of contracts. While in some instances they are specifically addressing the assignment of a party's rights under the contract, in many cases they use the term "assignment" to refer to both:
The assignment of rights to receive performance. The delegation of duties to perform.However, assignment and delegation are two distinct legal concepts that must be separately addressed because they may have different consequences.
An assignment involves the transfer by an obligee (assignor) of some or all of its rights to receive performance under the contract to a non-party (assignee). The assignor no longer receives any benefits of the assigned rights, which are all transferred to the assignee.
However, even though the assignor divests its contract rights, the assignment does not reduce or eliminate the assignor's performance obligations to the non-assigning party. Therefore, the non-assigning party retains:
The right to receive performance from the assignor. Its remedies against the assignor for any failure to perform.A delegation involves the transfer by an obligor (delegating party) of some or all of its performance obligations (or conditions requiring performance) under the contract to a non-party (delegatee). For a delegation to be effective, the delegatee must agree to perform the delegated performance. However, the delegating party remains liable for the delegated performance, whether or not it has also assigned its contracts rights, unless the non-delegating party has agreed to a novation.
This differs from an assignment of rights where, on assignment, the assignor relinquishes its contractual entitlements. Therefore, even if the delegating party can effectively delegate its actual performance to the delegatee (so that the delegatee's actual performance discharges the delegating party's duty), the delegating party cannot be relieved of its obligation to perform and its liability for non-performance unless the non-delegating party has agreed to a novation.
The modern rule generally permits free transferability of all types of property, including contracts. It broadly permits: