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Can a contract be assigned, and why does it matter?

“Assignment” is one of those legal terms that clients may suspect their lawyers use to blind them with science and justify their fees. What does it mean, and why does it matter?

An assignment is the transfer of a right from one person or entity to another. In practice, it usually comes up in one of two contexts:

  • when a contract is being negotiated; or
  • when some or all of the business assets of one of the parties to a contract are transferred to a third party.

Before looking at those two situations, it is first necessary to understand what the default position is.

The default position

The general rule is that, unless otherwise agreed:

  • a party to a contract may assign contractual rights to a third party without the consent of the other party; but
  • contractual obligations cannot be transferred without such consent.

The distinction between benefits (rights) and burdens (obligations) is important. If X sells some wine to Z for £50,000, X can assign its right to receive payment to a third party (this is known as “factoring” a debt).  But Z cannot transfer its obligation to make that payment to a third party without X’s consent. Thus, although one might talk of “assigning a contract”, a contract can’t actually be assigned in its entirety. If a third party is to step into the shoes of Z, and Z is to be relieved of its obligations to X, that can only occur with the consent of all concerned. Such an arrangement is called a “novation”. It terminates the existing contract and puts a new one, with different parties, in its place.

Issues when negotiating a contract

The question when negotiating a contract is whether you are content with the default position on assignment. If not, it will be necessary for the contract to state expressly what is and is not permitted in the way of assignment.  For example, if you are unhappy with the idea of the other party being able to transfer to AN Other the right to receive, and collect, payments from you, the contract should expressly forbid that without your consent.*

It may be important to you, commercially, to be able to offer a purchaser of your business assets the right to step into your shoes and take over all existing agreements, both benefits and burdens. Otherwise, for example, a distributor would need the consent of every single producer with whom he has a distribution agreement, and vice versa. You therefore need wording in the agreement by which the other party gives advance consent to a novation in favour of any purchaser of your business assets. But the other party may refuse to give such consent – what if he objects to a proposed purchaser?  It may become a matter of negotiation, its resolution depending on what other issues there are and the strength of your respective bargaining positions.

What if a purported transfer takes place without your consent?

Say your agent or distributor (we’ll call him X) has been operating as a sole trader, but then transfers his business to a limited company he has set up (Newco). There is no written distribution agreement – or, if there is, it is silent on the question of assignment.  X should seek your consent to Newco assuming his obligations under the agreement. Unless he can show that you have expressly or impliedly consented, only contractual benefits can be assigned to Newco.  And, crucially, the agreement will still be between X and yourself.

A High Court case from 2011** illustrates how important this can be in practice. N engaged B (a partnership) as its commercial agent for the UK. B subsequently transferred its business to a limited company, C. B said nothing to N about the transfer, but started invoicing N for commission through C. Some time later N terminated the agency. C claimed circa £200,000 by way of compensation under the Commercial Agency Regulations. The Judge found that N had never consented to the transfer of any part of the agency agreement to C. This meant that C had never been N’s agent and could not pursue a claim as such. Only B could have done so, but it was now out of time (because an agent must notify a claim for compensation under the Regulations within 12 months of termination.)

Moral

There are two:

  1. when negotiating a contract – especially a “relational” contact involving a continuing cooperative relationship, whether agency, distribution, joint venture, licensing, or whatever – consider carefully what the position on assignment should be;
  2. if you wish to transfer to another entity all or part of any business conducted under such a contract, consider carefully whether you should seek the consent of the other party, and the implications of doing/not doing so.

* Under a UK government initiative to improve access to finance for small and medium businesses, legislation is being considered which would make any term in a business contract that prohibits or restricts the assignment of receivables automatically ineffective.

** Barnett Fashion Agency Limited v Nigel Hall Menswear Limited, High Court, 2011

Except where otherwise stated, all information given and any legal opinions expressed on this website assume that English law applies.  See Conditions of use.