NET(net), Inc.


Assignment and Transferability by jigordon
March 13, 2007, 3:00 pm
Filed under: assignment, contract terms, transfer

Assignment is the ability to redirect an agreement (or a portion of an agreement) to another party for some purpose. In many situations, it’s a way to allow a third party the ability to perform some subset of contractual responsibilities (ie: a subcontracted electrician or programmer). In the case of say, a credit card cardholder agreement, it allows the issuing bank to act in your shoes to receive money, sue, etc. In other words, it allows rights and responsibilities to be “assigned” to another party.

Transferability, on the other hand, is the complete hand-off of an agreement from one party to another.

Language on assignment and transfer typically prevents an agreement from either type of movement, as both parties usually want the original party to perform all of their obligations (otherwise, wouldn’t you go contract with someone else if this partner couldn’t do what you wanted?). But just as typically, language is also present that allows either assignment or transfer with permission from the side not seeking the action.

Assignment and/or Transfer isn’t necessarily a bad thing. As per the examples above, there might be a great reason for a subcontractor’s performance of the work. Specialty skills, speed and cost all play into the selection and use of subs. What’s important, therefore, is an understanding of how, if you’re NOT the one seeking the action, to protect yourself and maintain the contract you originally had.

First, remember that your initial language is key. If you unilaterally allow for assignment or transfer in the contract, you won’t have the ability to prevent it later. This is one instance where it’s better to have to ask permission later, as situations can change over time.

Second, assuming that you have to grant permission, remember that you do not have to actually grant it, even if asked. Sometimes extra language is inserted to make it appear that you do, phrased as “such consent not to be unreasonably withheld”. This makes it sound as if you need a really great reason to say “No.” But the truth is that any “reasonable” “No.” is good enough. So if you think that the party accepting the subcontracting work isn’t of good quality, that’s reasonable. If you want to keep the original party responsible because they’ve had difficulty completing tasks already, that’s reasonable. In all, virtually everything can be formed into a good, reasonable reason as to why you’re saying “no”.

Third, if you DO grant permission, please put it in writing. Create an amendment to the agreement to show exactly “what for” and why you’re granting permission. Detail the specific scope of the permission (X may use ZCorp subcontractor to perform the invoice and billing tasks for the duration of and as contemplated by the Agreement). Notice that I also included a time component (“for the duration”) as well. Be as specific as possible… and include a way to revoke the permission in the event that the subcontractor/assignee does not perform work in a satisfactory manner.

Fourth, some contract professionals argue that it’s wise to have an agreement with the third party directly for the performance of services. To be honest, I’m not sure how I feel about the topic. Sometimes it seems necessary, sometimes it seems like overkill. If you have a great agreement with the prime contractor, for example, simply state in the Assignment Amendment that the terms of the prime must be “flow-down” to the subcontractor, AND state that while the permission may be granted for the performance of those certain activities, that the prime will continue to be held liable for failure to meet any goals, responsibilities or objectives listed in the Agreement. This keeps the original party responsible for the performance of their subcontractors.

Complete transfers of an agreement, however, are a little different… as it’s a replacement of the original party with a completely new party (which eliminates much of the ability to hold the original party liable for future failures by the new party). This means that if you perform any sort of background check or other due diligence-type activities with new partners, you should perform the same type of check on the proposed newer partner, as well. In fact, many organizations outright resist transfers except as a result of merger, acquisition or complete divestiture.

Next week, we’ll turn the tables about 45 degrees and talk about transfer and assignment from the software licensing perspective – which brings a whole new twist to the impact of the language.

Update: A well-respected colleague, Ken Adams, author of A Manual of Style for Contract Drafting, wrote to let me know that he believes that the use of the term “transfer” is not necessary. Rather, using the term “assignment” and then clarifying which rights are being assigned (none, some or all) would be the more appropriate contract language to use. For obligations, instead of rights, the term “delegate” would be used rather than assign. Thanks Ken. I learn something new every day!

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