Get Your Assignments Right


Contract Boilerplate: Assignment Clauses

By Benjamin P. Michaelson

I started this series on contract boilerplate a while ago. In that post ( I asked a question as to if you would prefer boilermakers over boilerplates, and I think that thought process holds true here.

Perhaps you remember choosing boilermakers over college homework assignments. You may look back fondly on ignoring those assignment requirements and having that boilermaker. Or, perhaps you chose to pay attention to the assignment. Either way, the decision may have worked for you, or against you, based upon the circumstances that existed at the time, or that resulted thereafter (a result that could probably have been predicted at the time of the decision).

Maybe you have bad memories of getting assignments in school, but you know that, in the end, they were good for you – at least they should have been. Assignments of contracts can be good for you too, but they can also be fodder for far worse memories than botched school assignments. While I doubt that anyone has been waiting on this next installment of the contract boilerplate posts, it is an important one – so let’s look a little closer at one of these exciting clauses – assignment.

Generally speaking, and while it varies by state, general common law allows the rights and benefits under a contract to be assigned by a contracting party to someone else at any time without restriction. Just like school homework, you may, or may not, want that. Boilerplate assignment provisions are used to modify that right.

In effect, this means that if you (Gold Go.) sign a contract to purchase widgets from XYZ Company (maybe because you know that they are the best widgeters in all of Widgetland and you got a really great deal on the price), XYZ Company can then immediately sell that contract to ABC Corp. (whom you know are the worst, most pathetic widgeters in all of the land). If that happened, you would still be bound under that agreement to buy widgets from bad bad ABC Corp. That’s right, without a contract term to the contrary, you would be contractually obligated to do business with those horrible ABC Corp. folks!

The assignment clause then, is principally used to restrict the ability of contracting parties to subcontract or sell their contract rights and duties under the agreement. Perfect, right? We should always have that clause, right? That is why it is IN THE BOILERPLATE after all, right? Of course not.

Just as with all boilerplate, you need to understand why it is there, why it is important, and how it impacts you, your business. Now that you know that the failure to have such a clause leaves either party (including yourself) free to assign the agreement, you need to consider if you want that right, or if you want to restrict the other party from having that right. This most often comes up in the area of buying and selling a business. While an assignment clause in this widget agreement would stop XYZ Company from substituting ABC Co. and any other supplier to the contract, which is good for the buyer, Gold Co., that may not be good at all for XYZ Company.

Perhaps XYZ Company is thinking of selling their business. Maybe they sign thousands of these contracts every year. If that were the case, prior to selling their business, XYZ Company could have to go out and get thousands of customers like Gold Co. to consent to the assignment in order to complete the sale. This can stop the XYZ Company business sale dead in its tracks or it can leave them in a precarious position as customers seek to use the request for assignment as leverage to obtain better terms. Alternatively, if the contract didn’t have this clause, or if it only restricted Gold Co. from assigning its contractual rights, ABC Company could be perfectly placed to sell (at least in this regard).

The takeaway is that this boilerplate (like all boilerplate) can work for you, by avoiding the requirement of doing business with the bad widgeters of the world, or against you by making you go through the painful process of obtaining thousands of contract assignment approvals to sell your business. Thus, you need to think through the risks and benefits of the other party’s assignment of rights as well as your ability or inability for the assignment of rights – then makes sure that the “boilerplate” on assignment is used or is revised in a way that best protects your business, how you operate it, and what future plans you have for it.