Contract Assignment

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).  Agreement also includes notice of assignment required to be given to the other contracting party

Use this document:

• for the assignment of the rights under a contract
• for a contract which is governed by English law
• on the basis that there is no restriction on the right to assign or that any restriction or condition to the right to assign the contract has been satisfied

Key features include:

• letter agreement between the assignor and assignee
• assignment of rights under the contract
• undertaking from assignee to perform the assignor’s obligations
• indemnity from assignee for losses arising from the assignee’s failure to perform
• separate notice of assignment to be signed by assignor and sent to remaining party, in order for assignment to take effect as a legal assignment

 Alternative documents

For a template novation agreement, see Novation Agreement.  For a template sub-contract, see Sub-contractor Agreement.

What is the assignment of a contract?

The 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:

• the assignment of a contract on completion of a business purchase transaction
• the transfer of the right to purchase property under an option agreement
• the transfer of contractual warranties given under a building sub-contract to the owner of the building

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:

• absolute: no assignment by any party will be permitted unless the other party to the contract expressly consents to it at the time of the assignment
• one way: one party’s right to assign is excluded or qualified whilst the other party’s right to assign is unrestricted
• qualified: assignment requires the prior written consent of the other party, such consent not to be unreasonably withheld or delayed
• intra-group: assignment to companies within the same group of companies is permitted
• permitted for the grant of security: a contracting party which has secured loan financing may be required to assign the benefit of contracts to the security holder under the terms of the debenture or other security document. If the contract prohibits assignment or permits it only with the prior consent of the other party, the assignment by way of security may be difficult to achieve

What formality is required for the assignment of a contract?

The legal assignment of a contract requires the following:

• the assignment must be in writing and signed by the assignor
• the assignment must be absolute (and not by way of charge only)
• express notice of the assignment must be given to the non-assigning contracting party (the remaining party)

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 if the assignor no longer exists for any reason.

What is the difference between an assignment and a novation?

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 one party 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 an agreement is for the performance obligations of the agreement 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 original agreement for the failure of performance of the sub-contracted obligations.

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