How an Assignment of Contract Works (and When It Won’t)

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How an Assignment of Contract Works (and When It Won’t)

When one party to a contract transfers the obligations and rights under that contract to another party (the assignee), this is known as an assignment of contract.  The assignee is then expected to carry out all the duties under the original contract in place of the original contracting party and the other party to the contract must be properly notified of the new assignment for it to be in force.

In order to assign a contract, there are three steps that need to be followed:

Step 1:  Review contract for limitations or prohibitions on assignment.  Some contracts carry anti-assignment clauses, so if there is language anywhere in the contract that states, “This agreement may not be assigned,” the agreement may not be assigned unless the other party agrees.

Step 2:  Execute the assignment.  If there are no prohibitions to assigning the contract, a party may enter into an assignment of contract, transferring all rights and obligations to another party.

Step 3:  Provide notification.  After the contract rights have been assigned, the other contracting party (known as the obligor) must be provided notice.  This notice effectively relieves the original party from any contractual liability unless there is language in the original contract that states otherwise.  For example, the original contract may include language that states the assignor must guarantee performance of the assigned contract or assignment is prohibited.

Under certain situations, an assignment of contract will be unenforceable.  These include:

Contract prohibits assignment.  The inclusion of an anti-assignment clause in a contract can prohibit any assignments.

Assignment materially alters performance.  If the performance due under the contract will be materially altered by an assignment or if the risks for the other party are increased, the assignment is unlikely to be enforceable.

Assignment violates public policy or the law.  In some cases, an assignment may be prohibited by law or found to violate public policy, thereby making it unenforceable.

If you are executing a contract and do not want assignment to be an option, you will need to include an anti-assignment clause in the contract.  However, you cannot prevent involuntary assignments that may be mandated by law or by court order.

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