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What is the assignment of a contract in simple terms?
How does it work?
In this article, I will break down the meaning of contract assignment so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain to you what assignment of contract means and why it matters!
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Table of Contents
What Is Assignment of Contract
The assignment of contract refers to instances where one party to a contract transfers its rights and obligations to another party.
In other words, one contracting party exits the contract and another party steps in the exiting party’s shoes.
For instance, Mary and Joe are parties to a contract.
Joe assigns his rights and obligations under the contract to Tim.
The original contract now continues between Mary and Tim where Joe has stepped out.
The party assigning the contract is called the “assignor” and the third party stepping in to the assignor’s shoes is the “assignee”.
Be sure to keep reading as I will explain to you how the assignment works and it’s important that you know more about the assignor’s liability when assigning the contract.
Assignment Under Contract Law
Under contract law, the assignment of a contract is considered to include the assignment of rights and the delegation of the party’s duties to another.
This means that the assignor’s rights are passed on to the assignee.
In addition to that, the assignor’s duties under the contract are also assigned to the assignee.
Assignment Under Property Law
In property law, the assignment of contract generally takes place between landlords and tenants.
Typically, a person (the tenant) will sign a lease with another party (the landlord) to rent an apartment or premises.
If the tenant wishes to leave the premise without breaching the terms of the contract, an assignment may be an option.
In that case, the tenant will assign its rights and duties under the lease agreement to another party (a new tenant).
How Assignment of Contract Works
To better understand the assignment of contract, let’s look more closely at how it works.
Contract Assignment Clause
One of the first things you should consider when contemplating an assignment of a contract is to find the contract assignment clause in your contract.
In most commercial contracts, the parties will include an assignment clause governing the possible assignment by the parties.
Some contracts will authorize the assignment, others will limit assignment to specific situations, while some contracts entirely prohibit assignments.
Be sure to read the contract assignment to see how your contract regulates assignments.
Consent To Assignment of Contract
In most cases, a contracting party looking to assign the contract to another party will need to get the consent of the other contracting party.
If the staying party consents to the assignment, the assignor can proceed with the assignment of the agreement to a third party (or assignee).
However, if the staying party does not consent to the assignment, then the other party must remain in the contract and observe its contractual obligations.
Assigning a contract does not necessarily mean that the assignor will be released of all liability under the contract.
Depending on the assignment clause language, the assignor may have the right to assign the contract but continue to remain liable under the contract.
In the event the assignor may continue to remain liable under the contract, it’s important that an assignment agreement be signed where the staying party releases and discharges the assignor of future contract liability.
Under the assignment law, when a contract is assigned as per the terms of the contract, the assignment will be legally enforceable.
However, assignment contracts are not enforceable if the contract prohibits the assignment, the assignment agreement is not materially consistent with the obligations under the original contract, or the assignment violates public policy or the law in some way.
In addition, a contract cannot be assigned if the assignor is not formally in a contract.
There are also instances where the contract requires that a party with special skills or unique characteristics render the services or perform the obligations, and an assignment would not work.
Keep reading as I will now give you an example of contract assignment so you can see how it works in practice.
Contract Assignment Process
The actual contract assignment process is fairly straightforward for most contracts.
Contract Assignment Steps
Here are the steps you’ll need to take to assign a contract:
- See if the contract has an assignment clause
- Make sure that the assignment clause authorizes assignments
- If the assignment is authorized, follow the assignment logistic provided in the contract
- If the assignment is prohibited, you may want to speak to the other contracting party to see if you could get consent to assign the contract
In some cases, all you may need to do is to give notice of assignment to provide the details of the assignment if the contract allows for an assignment this way.
In other cases, you may want to have an assignment agreement signed by the staying party, the exiting party, and the third party detailing the terms and conditions of the assignment.
Assignment Agreement Content
When a contract assignment agreement is needed, you should make sure that you include all the right information for the assignment to be valid and enforceable.
In most cases, the assignment of the contract is simple where you may find an assignment of contract form online to complete.
For simple assignment contracts, here is the content that you should expect:
- Identification of the parties (original contract parties and assignee)
- Contract assignment effective date
- Original contracting party’s consent to the assignment
- Assignee’s acceptance of the assignment
- Assignor’s release and discharge of obligations going forward
- Governing law
- Signature block for the three parties
Alternatives To Assignment Contracts
What are the alternatives to a contract assignment?
Here are the main alternatives to a contract assignment:
Licensing refers to situations when a party authorizes another party to use a property or asset (whether tangible or intangible).
Delegation is when someone authorizes another to act on its behalf under a contract.
Novation is when a new party takes on a contracting party’s rights and obligations where the existing party’s rights are relinquished and all liability under the original contract wiped out.
Assignment of Contract vs Delegation of Contract
What is the difference between the assignment of a contract and the delegation of a contract?
The “assignment” of contract refers to a situation where one contracting party “transfers” the contract to a third party.
Once the assignment is completed, the assignor will no longer be in a contract with the other contracting party and the assignee will take the assignor’s place.
For example, Party A and Party B are part of a service contract.
Party B assigns the contract to Party C.
Going forward, the contract will be between Party A and Party C.
On the other hand, a delegation is when a party to a contract subcontracts parts of a contract to another party.
The party delegating the contract to another remains a contracting party and will remain responsible for the contract even though the obligations were delegated to another.
For example, a general contractor may delegate the plumbing work in a project to a plumber.
Although the general contractor has delegated part of the project to a subcontractor, it remains a contracting party and will remain responsible for the overall project.
Assignment of Contract Example
Let’s look at a few examples of when a contract may be assigned to another.
Assignment of Contract In Bankruptcy
You have entered into a contract with a company providing you with phone services.
The company goes bankrupt.
In the context of the bankruptcy, another phone company buys out a portion of the bankrupt’s book of business and your contract is in the pool of assets purchased.
The bankruptcy trustee assigns your contract from the bankrupt phone company to the new phone company.
Assignment of Contract In Real Estate
In real estate, some investors engage in assignment transactions where they do not actually buy the property but enter into a purchase contract that it then assigns to another.
In essence, the real estate investor enters into a real estate purchase agreement defining the terms and conditions relating to the purchase of a property.
Following the executing of the real estate purchase agreement and prior to the “closing” of the transaction, it assigns the contract to another party in an attempt to make a profit without ever actually owning the property.
Assignment of Contract In Corporate Restructuring
In the corporate world, companies tend to restructure their operations to ensure they are legally and operationally optimized.
In the context of a corporate restructuring transaction, a company may assign a contract to another entity within its group, a subsidiary, or an affiliate.
Assignment of Agreement Takeaways
So there you have it folks!
What Does Assignment of Contract Mean
“Assignment of contract” is a legal term used to refer to situations where a party to an existing contract transfers its contractual obligations to another party.
Following the assignment, the assignee becomes responsible to execute the contractual obligations in favor of the party staying in the original contract.
If you are looking to assign a contract, you may want to consult with a qualified contract attorney who can assess your rights and obligations.
Keep in mind that a simple assignment of a contract does not necessarily mean that the assignor is released from liability under the original contract.
Now that you know what is an assignment of contract, how it works, and what it entails, good luck with your transaction!
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