Contract assignment for the assignment of the benefit of a contract, in the form of a letter agreement between the outgoing party (assignor) and the incoming party (assignee). Includes notice of assignment to be given to the other contracting party
Read moreThe assignment of a contract is the transfer by one party to the contract (the assignor) of its rights under the contract to a person who is not an original party to the contract (the assignee). Examples of when a contract might be assigned include:
Rights under contracts are, generally, enforceable only by the parties to the contract (referred to as privity of contract). Under English law, the rights under a contract (the benefit of the contract) are assignable unless assignment is prohibited by the terms of the contract. Certain contracts are however not assignable (for example, publishing agreements and car insurance policies), though this is generally not a relevant consideration in most commercial circumstances.
The express terms of a contract may however exclude or qualify the right of a party to assign the benefit of the contract. Before entering into an assignment, the terms of the contract should be checked for any exclusion or qualification.
The exclusion or qualification might be:
The legal assignment of a contract requires the following:
If the assignment takes effect as a “legal assignment”, the assignee has the right to enforce the assigned rights directly in its own name against the remaining party.
If the assignment is not a legal assignment, it will be an “equitable assignment” only, which means that the assignor will be required to join in legal proceeding with the assignee in order for the assignee to enforce the assigned rights against the remaining party. There may be difficulties in achieving this, including if the assignor no longer exists for any reason.
The assignment of a contract will only amount to the transfer of the rights under the contract, known as the benefit of the contract. The obligations under a contract, known as the burden of a contract, cannot be assigned. If a party to a contract wants to transfer both the benefit and the burden of a contract, the contract will need to be novated.
Under a novation, the contract is replaced with a new contract and the new party to the contract is treated as an original party to the contract in place of the departing party. Novation requires the consent of the other party to the contract and is documented in a novation agreement or deed of novation between the three parties.
An alternative to the novation of a contract is for the performance obligations of the contract to be sub-contracted to a third party. In the absence of an express term which prohibits sub-contracting, one party to a contract (the sub-contracting party) may sub-contract its performance obligations to a third party (the sub-contractor).
A sub-contract is the agreement between the sub-contracting party and the sub-contractor. However, a sub-contract does not discharge the liability of the sub-contracting party to the other party under the underlying contract to whom the obligations are owed. If the sub-contractor fails to perform, the sub-contracting party may have a claim against the sub-contractor but will remain liable to the other party under the underlying contract for the failure of performance of the sub-contracted obligations.
For a template novation agreement, see
Corporate transactions usually involve one party (the warrantor) providing warranties to another party concerning the company and its business, financial performance, prospects, assets, contracts, rights and liabilities. A breach of the warranties may result in a legal claim against the warrantor for damages for breach of contract.
The warrantor may wish to disclose specific events or circumstances as exceptions to certain warranties. The disclosure of these matters is intended to shield warrantor against a potential claim for breach of the particular warranties. Instead of amending or qualifying the warranties themselves, the disclosures against specific warranties are set out in a separate letter prepared by the warrantor, known as a “Disclosure Letter”.
As an example in an investment transaction, the agreement may include a warranty that the target company has complied with all legal requirements in its business conduct. If the founders, acting as warrantors, are aware of a failure by the company to comply with a specific legal requirement, they would disclose this as an exception to the warranty. This is done by setting out a narrative of the circumstances of the breach, along with supporting documents, in the Disclosure Letter. If the disclosure satisfies the defined requirement of “fair disclosure” in the investment agreement, it should shield the founders from a claim under the investment agreement for breach of this warranty regarding the disclosed non-compliance.
The warranties may explicitly require that certain facts or documents be included in the Disclosure Letter. For instance, a warranty might require that the Disclosure Letter contains details and copies of all material contracts entered into by the target company. Failure to disclose a material contract may result in a claim against the warrantors for breach of warranty if the omission causes loss to the investor(s).
Upon receiving disclosures during transaction negotiations and discussions on the draft Disclosure Letter, the investor(s) have several options:
For a disclosure letter for use in a share purchase transaction, see
For a disclosure letter for use in a business purchase transaction, see
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Updated by a lawyer on 05/01/2023
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Sample available