A Brief Introduction about the Assignment of Contract
An assignment of contract is a method through which a party to an existing contract can assign the rights, duties, and benefits of such a contract to a third party. When an agreement is assigned in this manner, the rights and obligations under such agreement stand transferred from the first party to the third party. Hence, such third party will step into the shoes of the assignor and assume all of the rights and obligations that arise from such a contract. The third-party will also enjoy any benefits that may arise from it.
The other party must be notified of such an assignment before it is completed. Some contracts may also require the other party to consent to the assignment of contract. Another essential condition for any assignment is that the contract must contain a clause that gives the parties the right to assign the contract. If a clause in the contract prohibits any assignment of the contract, then the parties will not have the authority to undertake such an assignment.
The process through which the assignment takes place usually depends on the language of the contract and the directions given by it. Such an assignment of contract rights is usually done using an assignment agreement.
Who takes the Assignment of Contract – People Involved
An assignment of a contract is done by one of the existing parties to a contract. It can be assigned to any person who is willing to assume the obligations under the contract and perform the duties required under it. The person who assigns the contract is the “assignor” and the person to whom the contract is assigned “assignee.” Once the process of assignment is completed, the assignee assumes the responsibilities of the assignor.
Purpose of the Assignment of Contract – Why do you need it?
The purpose of assigning a contract is to allow a party to transfer his interest in a contract to another person. A situation may arise where a person is no longer able to perform his part of the contract or does not wish to do so. In such a case, he can assign his duties and rights to a third person and thus ensure that the purpose of the agreement is fulfilled. It is a good way to ensure that the contract is performed in the manner that was intended and that the contractor fulfills the purpose for which it was created. Otherwise, the performance of a contract can get frustrated if one of the parties is unable to perform their responsibilities.
Assignments can also be used as a method for a contract holder to lock in certain profits that he has acquired through it or as a method to cut his losses, as the case may be. If the asset attached to the agreement is at a profit and the contract holder wishes to lock in such profit, he can assign the contract to a third party and thus realize the revenues. An assignment of a contract example is a futures contract. There can also be an assignment of a real estate contract. In an assignment of contract for real estate, the ownership rights in the property are transferred to the assignee, and he can then sell it to a buyer of his choice.
Contents of the Assignment of Contract – Inclusions
An assignment of a contract can be carried out for any agreement that can be assigned. The contents of the contract depend on the type of agreement. The agreement will need to contain all the clauses that are necessary to make it legally binding and enforceable.
The most important requirement is that the agreement should contain a clause that expressly allows such an assignment. The parties will derive the right to assign from such a clause. The clause may also state how the assignment is to be carried out. This may include the opposite party being notified when a party wishes to assign his part of the contract. It may also require a separate assignment agreement to be created.
There are specific requirements of what constitutes a binding assignment agreement. Such an assignment agreement must include the names of the assignor and the assignee, the name of the opposite party to the contract in question (known as the obligor), the term of the contract and the date on which it will expire, the title of the contract, etc.
The agreement should also mention whether the consent of the obligor is necessary for the transfer of rights under the contract. If yes, then the date on which the obligor consented to such assignment must be written. Further, it must lay down when the assignment agreement will come into effect and which state will govern the contract that has been assigned.
It is having been noticed that generally, an assignment is not allowed without the consent of the obligor. This is necessary to protect his rights. Also, the assignee should be someone who has agreed to carry out all the duties under the agreement and who has given an assurance that the contract will be successfully performed.
How to Draft the Assignment of Contract
The following are the steps to follow while drafting an assignment of contract:
- The first and most important step is to go through the contract and verify whether the right to assign has been allowed by the agreement. It is only when an express authority has been given that the parties can choose to go ahead with such an assignment.
- If the agreement requires the consent of the opposite party (the obligor) before such an assignment, then such consent must be obtained.
- The assignor and the assignee will then have to enter into an assignment agreement if the original contract so requires.
- As stated above, the assignment agreement must contain the names of all the three concerned parties, i.e., the assignor, the assignee, and the obligor. It must provide the date of the expiry of the contract and the date on which the assignment agreement will come into effect.
- All the essential to lay down all the essential details in the agreement to make the assignment a legally binding one.
- It must state that the assignee will assume all the responsibilities of the assignor and perform his end of the contract.
- Once the agreement has been drafted, all the concerned parties must go through it and review it.
- The agreement must be signed by the parties.
Negotiation Strategy
- In a contract of this nature, the negotiation mainly revolves around whether the contract should be an assignable one or not.
- The parties should weigh the pros and cons of having an assignment clause in the agreement.
- The interests of both the parties shall be protected, and any assignment should take place only after the consent of the opposite party has been obtained.
Benefits and Drawbacks of the Assignment of Contract
The following are the benefits and drawbacks of undertaking an assignment of contract:
- The most important benefit of an assignment is that a party always has the option of assigning his rights and duties under an agreement to a third party at any time during the term of the contract.
- The reason for which the contract was created can be fulfilled even in a situation where one party can no longer perform his responsibilities under it.
- As stated before, another benefit is that a party can use such right to assign to lock in any profit that he derived from the asset that is attached to the contract, or he can cut his losses under it.
- Assigning a contract may ensure that a person better able to perform the contract is made the assignee.
- A possible drawback is that the nature and purpose of the contract may undergo certain changes when it is assigned to a third party. To prevent this, the assignee must be made aware of the reason for which the agreement was created, and it must be ensured that there is no drastic change like the agreement.
What Happens in Case of Violation of the Assignment of Contract?
In an assignment agreement, it is crucial to make sure that the rights and duties of all the concerned parties are clearly defined. This goes a long way towards preventing a dispute.
The breach of an agreement that has been assigned is dealt with in the same manner as the breach of any other contract. Whenever a party to a contract breaches the clauses of the contract in any manner, the opposite party has certain aid under the law. Such legal remedies are available even to an assignee. Once the assignment has taken place, and the obligations have been transferred to the assignee, the assignee has the right to institute a suit against the obligor if the obligor has breached any clause of the contract, or has not performed his duties under the contract. Similarly, the obligor can also institute a suit against the assignee for any breach of the agreement.
The determination of the liability of the assignee, in some cases, may also depend on whether the assignor was involved in such breach or not. In some situations, the assignor is held responsible for the performance of the contract even after the assignment has taken place. Hence, he may be held liable if the assignee breaches the contract.
To avoid such a situation, the assignor and assignee must clearly define their respective responsibilities in the assignment agreement, and they can also lay down that the assignor will no longer be held responsible for the performance of the contract. Once this is clearly stated, the assignor will not be held responsible for any action or breach on the part of the assignee.
In conclusion, when a particular contract contains the right to the assignment, it can be beneficial for all the parties concerned. They can assign their obligations under the contract without the purpose of the contract being defeated. Parties may choose to assign the contract for any number of reasons, and it is useful to do so as long as contractual safeguards are maintained.
Once the contract has been assigned, the assignor is freed from performing any of its obligations. If required, he can also ask the obligor to sign a release or a waiver(1) releasing the assignor from any contractual liability.
Having such a right to assign in place can have multiple advantages for the persons involved. It is always recommended to have an assignment clause in a contract that freely allows the parties to assign their rights and duties under it.