Consent to Assignment Defined
Consent to assignment of contract is required to transfer one party’s rights to perform its contractual obligations under an existing contract (the "Source Contract") to a third party who, with the other party (the "Counterparty"), will be required to perform subsequent work (the "Subsequent Work"). The Counterparty may wish to make a claim against the Source Contract for breach of contract or some other action arising out of the Source Contract, whether or not such a claim or claims have merit. If faced with a claim, a prudent Subcontractor should be aware of how that claim may affect its rights in the Subsequent Work and seek to limit or eliminate any negative impact.
A provision requiring consent to assignment is frequently included as a boilerplate provision in contracts. But consent to assignment provisions may have special effect in construction contracts. For example, in many construction contracts, subcontractors and material suppliers are required to provide waivers of mechanic’s lien on each payment to them and to their lower tier subcontractors.
Contracts commonly provide that consent to assignment is not effective unless given in writing and specific parties are covered by the provision . Under certain circumstances where there is a prohibition on assignment of contract provisions, a consent to assignment from the non-assigning party may also be required. Assignments of contracts also appear in real estate transactions as well as mergers and acquisitions.
Examples of contracts in which transfers may be restricted include: a leases prohibiting an assignment without landlord consent; a sale of business in which a seller agrees not to assign his rights under warranties of its products; a credit agreement restricting granting of assignments without creditor consent; and an employee agreement in which the employee agrees to not assign his rights under the employment contract.
However, there are many instances when consent to assignment is not required; for example, when the Counterparty has actual knowledge of the assignment and does not object to it. In other cases, the Counterparty waives consent requirement in a contract provision. In some situations, such as assignments by testamentary disposition or operation of law, consent to assignment does not apply.
Legal Requirements for Consenting to Assignment
From a legal standpoint, the Federal Assignment of Claims Act requires that any Government contract in excess of $1,000 require the contractor to assign the proceeds of the contract. Federal law also recognizes that such an assignment can be prohibited if the assignment would result in an increase in performance costs to the Government. In most commercial contracts, however, contracts will either require consent or any attempted attempt will be deemed invalid.
Some contracts will allow either assignment or delegation but require the contractor (or subcontractor) to obtain consent prior to using either method. Those contracts requiring some form of consent are within the general requirements of Section 9 of the Restatement of the Law, Second of Contracts, which defines an assignment as "transfer of an interest in a contract." Most contracts contain similar provisions concerning assignment. The most common of these provisions is the so-called anti-assignment clause: "[N]either this agreement nor any nor any rights or obligations under this agreement may be assigned, delegated, or otherwise transferred by Contractor".
These clauses are enforceable, and if the intended assignment violates contractual clause prohibiting assignment or transfer, the assignment is void. Many will also have language that states that a purported assignment or delegation will constitute a default.
Other contracts contain a consent clause, typically with the language similar to the following: "Any assignment or subcontract or other such transfer made by the Contractor without the approval of the owner shall be null and void and without effect." Again, the effect of such a clause is that unless, and until, the owner provides its consent, any attempted assignment or transfer will be void. Therefore an assignment that is impermissible under the terms of the contract is not effective to vest even equitable title to the property in the purported assignee. There are a few statutes that are specific to assigning a particular kind of contract, as with the Marine Transport Workers Act (46 U.S.C. §§ 876-885). However, the vast majority of assignments to which this Blog writing applies will be either private placements of securities or loans to another entity. Because assignments of both statutory and contract rights are highly regulated, care must be taken to look at the intended assignment and ensure that you have satisfied your legal requirements of any applicable state, federal, or contract requirements.
Consenting to Assignment: Why it Matters
The importance of obtaining consent to assignment has implications in many areas. First, there are legal consequences. Generally speaking, an assignment without consent – assuming that consent is needed for the assignment – may be a breach of the contract. That breach could expose the non-assigning party to liability.
Second, and perhaps more importantly, obtaining consent is often a business necessity as well. When contracting parties deal at an arm’s length, or even with some familiarity, it is to be expected that after an assignment there will still be a relationship between the original players. The assignee will want a good reputation before it. The assignor will want the same. That relationship can be jeopardized if the original party to the contract is unhappy with the assignment. In the worst case scenario, the original party will use the assignment as a basis for terminating the contract. That may or may not expose the assigning party to damages or liability to the original party.
How to Get Consent to Assignment
Obtain, in writing, the consent of the other party or parties to the assignment of the interest created by the contract. If it appears that the counterparty’s consent is being unreasonably withheld, the party requesting the consent may want to consider sending something in writing demanding that the consent be supplied. However, one must be careful that any written communication does not constitute a repudiation of the contract (which could have the effect of terminating the contract). See my earlier blog on terminating contracts for more on this.
Once the consent is given, the assignor writes a formal Notice of Assignment of Contract along with an Assignment Agreement or other similar document to confirm the assignment. There are times when an oral assignment of a contract will be found effective at law, but, as with most business arrangements, a written document is preferred because it not only gives notice to third parties, it provides a record of the transaction.
The assigning party should ensure that it is holding copies of all contract documents between the parties. It should also be prepared to supply copies of these documents to the party agreeing to consent.
Sometimes, parties do not have actual consent agreements in writing, but that consent is implied in their dealings. These types of consent arrangements can be problematic where a dispute or a bankruptcy arises, because the terms of the consent are not clear.
Common Issues and Their Solutions
One of the first problems in obtaining a consent to assign a contract is discovering what entities must give their consent. In a franchise situation, you often have to get the approval of the franchisor. If the contract is an affiliate agreement, family member approval may also be needed. This can be difficult when family members are not available to approve the assignment. An example of this would be a family limited partnership agreement where approval of the family members is needed. People do not want to give up control and more importantly they may not understand that they signing away control. This is a common mistake in those agreements which provide an asset preservation aspect.
One way to overcome a lack of consent is to provide an indemnity for the failure to obtain consent. For example , in a franchise situation, if there is a failure to receive a franchise, as the buyer, you would want the seller to indemnify you for the damages you suffer as a result of your inability to obtain that franchise. It is also important to note that if you buy an asset and do not buy stock or partner interest then you often do not need approval of the remaining partners or shareholders. Tax issues should also be reviewed including whether the transaction can be structured to avoid a conflict with the qualified payments rules and failing to satisfy those rules could cause the payment(s) to be ordinary income and therefore hurt cost basis.
Consent to Assignment in Action: Case Studies
A noteworthy case involved an assignment dispute arising in the context of a company’s financial restructuring. In re DBSD North America, Inc., Case No. 09-13061 (Bankr. S.D.N.Y.): By virtue of its credit agreement with DBSD, Hughes Network Services, LLC (Hughes) held a security interest in substantially all of DBSD’s assets. In the normal course, Hughes was required to consent to any proposed assignment of contracts encumbered by its security interest, and Hughes sought to exercise this right just prior to the filing of the Bankruptcy Case. However, DBSD sought to reject its contract with Hughes, even though Hughes had renewed its consent prior to the bankruptcy pursuant to an intervening agreement that extended the contract term. Hughes objected to DBSD’s rejection on the ground that DBSD was required to obtain Hughes’s consent (and be willing to pay for it) before rejecting the contract. The bankruptcy court sided with Hughes, holding that by its exercise of the right of consent, Hughes received consideration in the form of an extension of the term of its contract. Under these circumstances, the court held that DBSD was not permitted to reject the contract without obtaining Hughes’s consent. The lesson to be learned from DBSD is that an assignee seeking to obtain the benefit of the right of refusal must be aware of the potential risk of loss that is inherent in attempting to exercise that right.
Another real-world example is found in Vasta v. C.Pajer Co., 2012 Ill.App. Unpub. LEXIS 2679 (July 12, 2012). In Vasta, the plaintiff Vasta and the defendant C. Pajer Company, Inc. ("Pajer") signed an agreement to distribute ice cream and related products. Pajer then sold its assets to recreational products distributor Toy Bank, Inc. and transferred its distribution rights under the Vasta agreement to Toy Bank without obtaining consent or even giving notice to the Vasta parties of the transfer.
Vasta sued Pajer and Toy Bank, and the trial court entered summary judgment finding that Toy Bank’s claim was unenforceable for failure to comply with the Notice provision of the Vasta Agreement concerning assignment to a third party. The appellate court affirmed, holding that Pajer had not made "a full, formal assignment of rights to Toy Bank," but rather, had "unilaterally allowed Toy Bank to take over … and continue the business[.]"
Practical Tips for Negotiating Consent Clauses
Strategies for Negotiating Consent Clauses
When negotiating consent clauses in a contract, it is important to keep the best interests of both parties at the forefront of your mind. This means understanding and complying with applicable legal standards while reaching an agreement that satisfies both sides of the negotiation. The following are a few tips to keep in mind when negotiating these clauses:
First and foremost, your contract needs to be clear and precise in the description of rights and responsibilities. In a situation where there are ambiguities in a contract, courts will often side with the party who has no control over the construction of the language. Because of this , drafting the contract in a clear and definite manner is crucial to upholding your rights.
What is also important for adhering to legal standards and making sure all parties are satisfied is a detailed explanation of the purpose of the clause. This does not have to be extremely long or descriptive, but highlighting the purpose of the clause in a detailed manner, such as including additional sentences describing the necessity of the clause, will make the parties’ rights and responsibilities clear to all involved.
Another way to make sure both parties are satisfied is to suggest alternative wording for the clause. In many cases, each side to a contract will compromise on certain terms, and negotiating the clause in a way that is suitable for both the buyer and the seller will help to seal the deal.