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Assignment Clause Meanings

Updated: Mon, May 26 2008. 12 01 AM IST

The principle of assignment as recognized under Indian law—and affirmed and applied by Indian courts—derives its origins from English law.

Simply put, the word “assignment” means transfer of rights or obligations held by one party to another party. The Black’s Law Dictionary has defined the word “assignment” to mean “a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or if in estate or in right therein”. Assignment of rights under a contract is the complete transfer of rights to receive benefits accruing to one party to that contract.

Common law systems have favoured freedom of assignment, such that when there is no express prohibition against assignment in a contract, then assignment should be freely permitted.

However, courts in India have taken a different view—in the absence of a specific clause restricting transfer of a contract, the intention of the parties has to be taken into account, which can be gathered from the nature of the agreement and the surrounding circumstances.

Where a contract is silent or incomplete as regards the parties’ intention concerning assignment, one will have to rely on the provisions of the Indian Contract Act, 1872, and the principles of assignment enshrined therein.

If the agreement between the parties does not spell out their intention as regards assignment, then—under Indian laws—it will have to be determined on the basis of whether the contract is of personal nature—that is, contracts involving personal qualities, skill or qualifications.

A contract of personal nature or those involving personal skills is such that it needs to be performed by the promisor himself and, therefore, is not assignable.

For instance, if a painter promises to paint a picture for a customer, the painter has to perform this promise personally, since the painter has been engaged for his personal artistic skills, style and capabilities.

The judicial trend in India has reiterated this position and laid down that rights under a contract are capable of assignment unless (a) the contract is personal in nature; or (b) the rights are incapable of assignment either under law or under an agreement between the parties. Hence, if the parties intend to restrict assignability, it is best to state it expressly in the contract between the parties.

Likewise, it is prudent to expressly record a party’s right to assign, if that is the intention. Any agreed limitations on such assignment rights should also be expressly recorded.

An important issue that often arises is with respect to assignment of “obligations” under the agreement versus assignment of “rights”.

The Supreme Court—in the case of Khared and Co. Ltd v Ramon and Co. Pvt. Ltd—has observed that, as a rule, obligations under a contract cannot be assigned except with the consent of the promisee. Where such consent is obtained, it will be considered as a deemed novation, resulting in the substitution of liabilities and obligations to the assignee.

The introduction of a new party into an existing contract would itself amount to a novation of the existing contract, that is, the creation of a new contract between the original party and the new party. Courts have proceeded on the basis that a transfer of “obligations” can be effected only through a novation. Hence, the assignmentclauses in contracts should also deal with novation, if the intention is to transfer obligations as well.

Drafting the assignment clause in any contract, therefore, requires careful consideration. The treatment may be different depending on the nature of the contract. For example, in agreements with private equity investors, it is common to see a right to freely assign rights and obligations in favour of its affiliates. A pre-consent of other parties to the agreement is obtained through such clauses, and all that is usually required to give the assignment effect is the execution of a deed of adherence between the assignor and the assignee.

In real estate transactions, a proposed buyer would like to retain the right to assign the “agreement to sell” in favour of a nominee (which may be an affiliate or an independent third party), so that the final conveyance can occur in favour of the intended buyer. This is sometimes necessitated when large areas of land are being consolidated for the purposes of a final acquisition by a developer.

Assignment rights are usually limited in contracts that pertain to licensing of intellectual property rights or technology. Sometimes, contracts may enable sub-licensing, subject to specified conditions.

In lending transactions, a borrower will expressly be prohibited from assigning rights or novating the contract, whereas the lender will retain an absolute and free right of assignment. Such a right enables the lender to sell loan portfolios to other lenders/parties or to a securitization company.

Factoring transactions and assignment of receivables also depend significantly on the assignment clauses of the relevant agreements in relation to which the receivables are being assigned. Assignment clauses under various agreements determine the contract’s treatment in a transaction that involves the sale of a business or undertaking, together with such contracts.

So, even though “assignment” usually appears in the boiler plate section of a contract, it does require special consideration on a case-by-case basis, depending on the nature of the contract and the specific requirements of the transaction.

It is prudent to expressly set out the intention of the parties as regards assignment in the relevant contracts. Whether the intent is to allow or disallow or limit assignment, the advice is usually towrite it expressly.

Send your comments to lawfullyyours@livemint.com

This column is contributed by Aparna Tuteja of AZB & Partners, Advocates & Solicitors.

Author’s note, Nov. 22, 2014: For a much-improved update of this page, see the Common Draft general provisions article.

(For more real-world stories like the ones below, see my PDF e-book, Signing a Business Contract? A Quick Checklist for Greater Peace of Mind, a compendium of tips and true stories to help you steer clear of various possible minefields. Learn more ….)

Table of contents

Legal background: Contracts generally are freely assignable

When a party to a contract “assigns” the contract to someone else, it means that party, known as the assignor, has transferred its rights under the contract to someone else, known as the assignee, and also has delegated its obligations to the assignee. Under U.S. law, most contract rights are freely assignable, and most contract duties are freely delegable, absent some special character of the duty, unless the agreement says otherwise. In some situations, however, the parties will not want their opposite numbers to be able to assign the agreement freely; contracts often include language to this effect. Intellectual-property licenses are an exception to the general rule of assignability. Under U.S. law, an IP licensee may not assign its license rights, nor delegate its license obligations, without the licensor’s consent, even when the license agreement is silent. See, for example, In re XMH Corp., 647 F.3d 690 (7th Cir. 2011) (Posner, J; trademark licenses); Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) (copyright licenses); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002) (patent licenses). For additional information, see this article by John Paul, Brian Kacedon, and Douglas W. Meier of the Finnegan Henderson firm.

Assignment consent requirements

Model language

[Party name] may not assign this Agreement to any other person without the express prior written consent of the other party or its successor in interest, as applicable, except as expressly provided otherwise in this Agreement. A putative assignment made without such required consent will have no effect.

Optional: Nor may [Party name] assign any right or interest arising out of this Agreement, in whole or in part, without such consent.

Alternative: For the avoidance of doubt, consent is not required for an assignment (absolute, collateral, or other) or pledge of, nor for any grant of a security interest in, a right to payment under this Agreement.

Optional: An assignment of this Agreement by operation of law, as a result of a merger, consolidation, amalgamation, or other transaction or series of transactions, requires consent to the same extent as would an assignment to the same assignee outside of such a transaction or series of transactions.

Takeaways

• An assignment-consent requirement like this can give the non-assigning party a chokehold on a future merger or corporate reorganization by the assigning party — see the case illustrations below.

• A party being asked to agree to an assignment-consent requirement should consider trying to negotiate one of the carve-out provisions below, for example, when the assignment is connection with a sale of substantially all the assets of the assignor’s business {Link}.

Case illustrations

The Dubai port deal (NY Times story and story)

In 2006, a Dubai company that operated several U.S. ports agreed to sell those operations. (The agreement came about because of publicity and political pressure about the alleged national-security implications of having Middle-Eastern companies in charge of U.S. port operations.)

A complication arose in the case of the Port of Newark: The Dubai company’s lease agreement gave the Port Authority of New York and New Jersey the right to consent to any assignment of the agreement — and that agency initially demanded $84 million for its consent.

After harsh criticism from political leaders, the Port Authority backed down a bit: it gave consent in return for “only” a $10 million consent fee, plus $40 million investment commitment by the buyer.

Cincom Sys., Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009) (affirming summary judgment)

A customer of a software vendor did an internal reorganization. As a result, the vendor’s software ended up being used by a sister company of the original customer. The vendor demanded that the sister company buy a new license. The sister company refused.

The vendor sued, successfully, for copyright infringement, and received the price of a new license, more than $450,000 as its damages. The case is discussed in more detail in this blog posting.

The vendor’s behavior strikes me as extremely shortsighted, for a couple of reasons: First, I wouldn’t bet much on the likelihood the customer would ever buy anything again from that vendor. Second, I would bet that the word got around about what the vendor did, and that this didn’t do the vendor’s reputation any good.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, No. 5589-VCP (Del. Ch. Apr. 8, 2011) (denying motion to dismiss).

The Delaware Chancery Court refused to rule out the possibility that a reverse triangular merger could act as an assignment of a contract, which under the contract terms would have required consent. See also the discussion of this opinion by Katherine Jones of the Sheppard Mullin law firm.

Assignment with transfer of business assets

Model language

Consent is not required for an assignment of this Agreement in connection with a sale or other disposition of substantially all the assets of the assigning party’s business.

Optional: Alternatively, the sale or other disposition may be of substantially all the assets of the assigning party’s business to which this Agreement specifically relates.

Optional: The assignee must not be a competitor of the non-assigning party.

Takeaways

• A prospective assigning party might argue that it needed to keep control of its own strategic destiny, for example by preserving its freedom to sell off a product line or division (or even the whole company) in an asset sale.

• A non-assigning party might argue that it could not permit the assignment of the agreement to one of its competitors, and that the only way to ensure this was to retain a veto over any assignment.

• Another approach might be to give the non-assigning party, instead of a veto over asset-disposition assignments, the right to terminate the contract for convenience. (Of course, the implications of termination would have to be carefully thought through.)

Assignment to affiliate

Model language

[Either party] may assign this Agreement without consent to its affiliate.

Optional: The assigning party must unconditionally guarantee the assignee’s performance.

Optional: The affiliate must not be a competitor of the non-assigning party.

Optional: The affiliate must be a majority-ownership affiliate of the assigning party.

Takeaways

• A prospective assigning party might argue for the right to assign to an affiliate to preserve its freedom to move assets around within its “corporate family” without having to seek approval.

• The other party might reasonably object that there is no way to know in advance whether an affiliate-assignee would be in a position to fulfill the assigning party’s obligations under the contract, nor whether it would have reachable assets in case of a breach.

Editorial comment: Before approving a blanket affiliate-assignment authorization, a party should consider whether it knew enough about the other party’s existing- or future affiliates to be comfortable with where the agreement might end up.

Consent may not be unreasonably withheld or delayed

Model language

Consent to an assignment of this Agreement requiring it may not be unreasonably withheld or delayed.

Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are to be treated as direct damages.

Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are not subject to any exclusion of remedies or other limitation of liability in this Agreement.

Takeaways

• Even if this provision were absent, applicable law might impose a reasonableness requirement; see the discussion of the Shoney case in the commentary to the Consent at discretion provision.

• A reasonableness requirement might not be of much practical value, whether contractual or implied by law. Such a requirement could not guarantee that the non-assigning party would give its consent when the assigning party wants it. And by the time a court could resolve the matter, the assigning party’s deal could have been blown.

• Still, an unreasonable-withholding provision should make the non-assigning party think twice about dragging its feet too much, becuase of the prospect of being held liable for damages for a busted transaction. Cf.Pennzoil vs. Texaco and its $10.5 billion damage award for tortious interference with an M&A deal.

• Including an unreasonable-delay provision might conflict with the Materiality of assignment breach provision, for reasons discussed there in the summary of the Hess Energy case.

Consent at discretion

Model language

A party having the right to grant or withhold consent to an assignment of this Agreement may do so in its sole and unfettered discretion.

Takeaways

• If a party might want the absolute right to withhold consent to an assignment in its sole discretion, it would be a good idea to try to include that in the contract language. Otherwise, there’s a risk that court might impose a commercial-reasonableness test under applicable law (see the next bullet). On the other hand, asking for such language but not getting it could be fatal to the party’s case that it was implicitly entitled to withhold consent in its discretion.

• If a commercial- or residential lease agreement requires the landlord’s consent before the tentant can assign the lease, state law might impose a reasonableness requirement. I haven’t researched this, but ran across an unpublished California opinion and an old law review article, each collecting cases. SeeNevada Atlantic Corp. v. Wrec Lido Venture, LLC,No. G039825 (Cal. App. Dec. 8, 2008) (unpublished; reversing judgment that sole-discretion withholding of consent was unreasonable); Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation: Reasonable Withholding of Consent to Commercial Lease Assignments, 31 Willamette L. Rev. 713 (1995) (first page available for free at HeinOnline).

Case illustrations

Shoney’s LLC v. MAC East, LLC, No. 1071465 (Ala. Jul. 31, 2009)

In 2009, the Alabama Supreme Court rejected a claim that Shoney’s restaurant chain breached a contract when it demanded a $70,000 to $90,000 payment as the price of its consent to a proposed sublease. The supreme court noted that the contract specifically gave Shoney’s the right, in its sole discretion, to consent to any proposed assignment or sublease.

Significantly, prior case law from Alabama was to the effect that a refusal to consent would indeed be judged by a commercial-reasonableness standard. But, the supreme court said, “[w]here the parties to a contract use language that is inconsistent with a commercial-reasonableness standard, the terms of such contract will not be altered by an implied covenant of good faith. Therefore, an unqualified express standard such as ‘sole discretion’ is also to be construed as written.” Shoney’s LLC v. MAC East, LLC, No. 1071465 (Ala. Jul. 31, 2009) (on certification by Eleventh Circuit), cited byMAC East, LLC v. Shoney’s [LLC], No. 07-11534 (11th Cir. Aug. 11, 2009), reversingNo. 2:05-cv-1038-MEF (WO) (M.D. Ala. Jan. 8, 2007) (granting partial summary judgment that Shoney’s had breached the contract).

Termination by non-assigning party

Model language

A non-assigning party may terminate this Agreement, in its business discretion, by giving notice to that effect no later than 60 days after receiving notice, from either the assigning party or the assignee, that an assignment of the Agreement has become effective.

Consider an agreement in which a vendor is to provide ongoing services to a customer. A powerful customer might demand the right to consent to the vendor’s assignment of the agreement, even in strategic transactions. The vendor, on the other hand, might refuse to give any customer that kind of control of its strategic options.

A workable compromise might be to allow the customer to terminate the agreement during a stated window of time after the assignment if it is not happy with the new vendor.

Assignment – other provisions

Model language

Optional:Delegation: For the avoidance of doubt, an assignment of this Agreement operates as a transfer of the assigning party’s rights and a delegation of its duties under this Agreement.

Optional:Promise to perform: For the avoidance of doubt, an assignee’s acceptance of an assignment of this Agreement constitutes the assignee’s promise to perform the assigning party’s duties under the Agreement. That promise is enforceable by either the assigning party or by the non-assigning party.

Optional:Written assumption by assignee: IF: The non-assigning party so requests of an assignee of this Agreement; THEN: The assignee will seasonably provide the non-assigning party with a written assumption of the assignor’s obligations, duly executed by or on behalf of the assignee; ELSE: The assignment will be of no effect.

Optional:No release: For the avoidance of doubt, an assignment of this Agreement does not release the assigning party from its responsibility for performance of its duties under the Agreement unless the non-assigning party so agrees in writing.

Optional:Confidentiality: A non-assigning party will preserve in confidence any non-public information about an actual- or proposed assignment of this Agreement that may be disclosed to that party by a party participating in, or seeking consent for, the assignment.

The Delegation provision might not be necessary in a contract for the sale of goods governed by the Uniform Commercial Code, because a similar provision is found in UCC 2-210

The Confidentiality provision would be useful if a party to the agreement anticipated that it might be engaging in any kind of merger or other strategic transaction.

Materiality of assignment breach

Model language

IF: A party breaches any requirement of this Agreement that the party obtain another party’s consent to assign this Agreement; THEN: Such breach is to be treated as a material breach of this Agreement.

A chief significance of this kind of provision is that failure to obtain consent to assignment, if it were a material breach, would give the non-assigning party the right to terminate the Agreement.

If an assignment-consent provision requires that consent not be unreasonably withheld, then failure to obtain consent to a reasonable assignment would not be a material breach, according to the court in Hess Energy Inc. v. Lightning Oil Co., No. 01-1582 (4th Cir. Jan. 18, 2002) (reversing summary judgment). In that case, the agreement was a natural-gas supply contract. The customer was acquired by a larger company, after which the larger company took over some of the contract administration responsibilities such as payment of the vendor’s invoices. The vendor, seeking to sell its gas to someone else at a higher price, sent a notice of termination, on grounds that the customer had “assigned” the agreement to its new parent company, in violation of the contract’s assignment-consent provision. The appeals court held that, even if the customer had indeed assigned the contract (a point on which it expressed considerable doubt) without consent, the resulting breach of the agreement was not material, and therefore the vendor did not have the right to terminate the contract.