Are you a small business seeking to assign contractual rights to a third party? For example, businesses within the construction industry may assign rights to future owners or lessees.
Before you contract to assign, continue reading to find out whether an assignment is the correct business strategy for you.
If you would like to draft an assignment contract, LawPath can refer you to our team of experienced contract lawyers, who can provide you with relevant advice.
What Is An Assignment?
An assignment involves the transferal of some or all of the contractual rights or benefits by one party (the assignor) to a third party (the assignee). For example, a contractor may assign its right to payment of a sum of money but not its obligation to perform specific tasks such as construction or accounting.
The obligations and liabilities flowing from the original agreement will not be transferred. Assignments are distinguished from novations, which are arrangements that replace an existing contract with an entirely new one. For more information about novations, check out our legal guide.
How Do Assignment Contracts Work?
Usually, an assignment can be effected without the consent of the remaining party to the contract. The assignor must clearly show intent of making an assignment, although it is recommended that this be made in writing.
Since the assignor still owes obligations and can incur liability for breaches of the contract, to the other contracting party, outstanding tasks will need to be performed. In practice, the assignor may request the assignee to finalise performance, but seek an order of insurance against potential breaches or failures to perform by the assignee. The assignor is still responsible for breaches occurring before assignment. In this situation, it is typical that all three parties involved are aware of and consent to the assignment of incomplete obligations.
Issues To Be Considered Before Assigning
1. Is there a clause preventing assignment?
Before assigning rights and benefits to a third party, make sure this is permitted under the original contract.
2. Is Consent Required Before Assignment?
If assignment of the contract is allowed, check to see if formal approval is required from the other party. An assignment can be rendered void if consent is required but not obtained from the other party.
3. Due Diligence Checks
It is in your best interests to consider any information about the assignee that would be relevant to prevent potential future conflicts.
If the assignee is a corporation, it may be worthwhile examining their:
- Management capabilities and skills; and
- Financial status.
Timing is vital to assignment contracts. You should consider the bulk of the work that still remains outstanding and assess the risks as to whether a project can be completed. For additional information on how to manage risks for small businesses, have a look at our legal guide on this topic.
While it may be difficult to assign specific rights to another party, assignment can help you simplify business operations across time. Since the assigned agreement will, in practice, be typically treated like a separate contract, you may wish to seek advice from an experienced contract lawyer.
Still unsure of whether to assign contractual rights? Contact a LawPath consultant on 1800LAWPATH for advice and obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.