An assignment of contract is when one party to an agreement transfers its rights under that contract to a third party. The assigning party is the assignor. The party who receives the assignment is the assignee.
The key is understanding what rights and obligations are included as part of the assignment.
Assignments often arise in business transactions. A company may decide to sell its receivables. Similarly, a buyer acquiring a business may want to take over the seller’s vendor contracts and leases. A developer transferring its rights to a related entity under a purchase agreement may occur before closing. Each of these examples illustrates an instance where parties to a business transaction execute an assignment
Examples of Assignment of Contract
Real estate. A buyer signs a purchase agreement, then assigns that contract to another buyer before closing. The assignee steps in and closes the deal. The original buyer may collect an assignment fee. This is often referred to as “wholesaling.”
Business acquisitions. When a company is sold, the buyer often needs the seller’s existing contracts assigned. Vendor agreements, client contracts, leases, and service agreements may all require assignment to remain in effect after the sale. In many cases, both parties to the subject agreement (e.g., both the landlord and the lessee to the commercial lease) will need to execute the assignment.
Accounts receivable financing. A business assigns its right to collect payment from customers to a lender or factoring company in exchange for immediate cash. The lender then collects directly from those customers.
Intellectual property licensing. A party who holds rights under a licensing agreement may assign those rights to another company, giving that company the right to use the licensed property on a go-forward basis.
Construction and subcontracting. A general contractor may assign certain contract rights to a subcontractor or a project may be transferred to a new developer mid-construction.
When Assignments Will Not Be Enforced
Not every assignment is valid. Courts will refuse to enforce an assignment in several situations.
The contract prohibits it. Commercial contracts can include an anti-assignment clause. If the contract says rights and/or obligations cannot be assigned without consent, then the assignment may be deemed void or voidable depending on the jurisdiction and the specific language used.
The assignment materially increases the obligor’s burden. If transferring the contract would require the other party to perform something substantially different from what they agreed to, courts may not allow it. Personal service contracts are the clearest example. If you hired a specific attorney, architect, or consultant, for instance, that party may not assign the obligation to perform to someone else without your consent.
The assignment violates public policy or a statute. Certain rights cannot be assigned by law. Workers’ compensation claims, some personal injury claims, and certain government contracts fall into this category depending on the state.
The subject rights are too personal in nature to assign. Courts look at whether the obligor agreed to deal with a specific party for a reason. If so, an attempt to substitute a different party will not hold.
What is Consent to Assignment?
Consent to assignment is the other party’s written agreement that an assignment is permitted. Many contracts require it. When they do, you cannot transfer your rights without getting that approval first.
Consent matters for a few reasons. First, it protects the obligor. They agreed to deal with you. If your rights are transferred to someone else, they have a right to know who they are now dealing with and whether that changes their risk.
Second, consent can be a negotiating point. In a business sale, the seller often needs key contracts assigned to the buyer. If those contracts require consent, obtaining that consent is a closing condition. A vendor who withholds consent can delay the closing.
Third, the scope of consent matters. Consent to one assignment does not mean blanket permission for future assignments. Read the language carefully. Some consent provisions apply only to the specific transaction at hand.
Best practice includes obtaining consent in writing, confirming it covers the specific assignment, and ensuring the person signing the agreement has such authority.
Common Pitfalls and Mistakes to Avoid
Not reading the anti-assignment clause. This is the most common mistake. Business owners assume contracts are transferable by default. Many are not. Before you assign anything or agree to accept an assignment, read the contract.
Assuming assignment transfers your obligations. It does not. If you assign your rights under a contract and the assignee fails to perform, the obligor may still come after you depending on how the assignment was structured. A novation, which substitutes a new party entirely, is different from a simple assignment. Know which one you are doing.
Failing to get consent in writing. A verbal agreement to allow an assignment creates disputes. Get it in writing, signed by someone with authority, before you close or proceed.
Not notifying the obligor. Even when consent is not required, the obligor needs to know who to pay or perform for. Failure to provide notice can result in the obligor paying the wrong party, which creates a legal mess that is avoidable.
Assuming all rights are assignable. Some contractual rights, like the right to terminate for convenience or the right to audit, may not transfer with an assignment. Work through the contract right by right if the assignment is material to a deal.
Overlooking downstream consents. In a business acquisition, you may need consent not just from one counterparty but from ten. Missing one can leave a gap in what the buyer receives.
