Assignment provisions

Legal background

When a party to a contract “assigns” the contract to someone else, it means that party, known
as the assignor, has transferred its rights under the contract to someone else, known as the
assignee, and also has delegated its obligations to the assignee.

Under U.S. law, most contracts can be freely assigned; the rationale is that assignability of
contracts helps promote the smooth flow of commerce by allocating resources where they can best be
used. But a party to a contract might not be able to assign it if that party’s contract
obligations are of a special nature or character.

Hypothetical example: Suppose a renowned opera
singer signed a contract to guest-star with an opera company, singing her signature role. She likely
could not assign the contract – and delegate her performance to another singer – without the
consent of the opera company.

Patent- and copyright licenses are also exceptions to the general rule that contracts may be
freely assigned. Commonly, a licensee may not assign its license rights nor delegate its license
obligations without the licensor’s consent.

Assignment consent

Model language

[Party name] may not assign this Agreement to any other person without the express prior
written consent of the other party or its successor in interest, as applicable, except as
expressly provided otherwise in this Agreement. A putative assignment made without such required
consent will have no effect.

Optional: Nor may [Party name] assign any right or interest arising out of
this Agreement, in whole or in part, without such consent.

Alternative: For the avoidance of doubt, consent is not required for an assignment (absolute,
collateral, or other) or pledge of, nor for any grant of a security interest in, a right to payment
under this Agreement.

Optional: An assignment of this Agreement by operation of law, as a result of a merger, consolidation, amalgamation, or other transaction or series of transactions, requires consent to the same extent as would an assignment to the same assignee outside of such a transaction or series of transactions.

Takeaways

• A provision of this kind can give the non-assigning party a chokehold on a future merger or
corporate reorganization by the assigning party — see the case illustrations below.

• A party being asked to agree to a restriction on its ability to assign should consider trying
to negotiate one of the carve-out provisions below, for example, when the assignment is
connection with a sale of substantially all the assets of the assignor’s business {Link}.

Case illustrations

The Dubai port deal (NY Times story and story)

In 2006, a Dubai company that operated several U.S. ports agreed to sell those operations. (The
agreement came about because of publicity and political pressure about the alleged national-security
implications of having Middle-Eastern companies in charge of U.S. port operations.)

A complication arose in the case of the Port of Newark: The Dubai company’s lease agreement gave the
Port Authority of New York and New Jersey the right to consent to any assignment of the agreement –
and that agency initially demanded $84 million for its consent.

After harsh criticism from political leaders, the Port Authority backed down a bit: it gave consent
in return for “only” a $10 million consent fee, plus $40 million investment commitment by the buyer.

Cincom Sys., Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009) (affirming summary judgment)

A customer of a software vendor did an internal reorganization. As a result, the vendor’s software
ended up being used by a sister company of the original customer. The vendor demanded that the
sister company buy a new license. The sister company refused.

The vendor sued, successfully, for copyright infringement, and received the price of a new license,
more than $450,000 as its damages. The case is discussed in more detail in this blog posting.

The vendor’s behavior strikes me as extremely shortsighted, for a couple of reasons: First, I
wouldn’t bet much on the likelihood the customer would ever buy anything again from that vendor.
Second, I would bet that the word got around about what the vendor did, and that this didn’t do
the vendor’s reputation any good.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, No. 5589-VCP (Del. Ch. Apr. 8, 2011) (denying motion to dismiss).

The Delaware Chancery Court refused to rule out the possibility that a reverse triangular merger
could act as an assignment of a contract, which under the contract terms would have required consent. See also the discussion of this opinion by Katherine Jones of the Sheppard Mullin law firm.

Assignment with transfer of business assets

Model language

Consent is not required for an assignment of this Agreement in connection with a sale or
other disposition of substantially all the assets of the assigning party’s business.

Optional: Alternatively, the sale or other disposition may be of substantially all the assets of the
assigning party’s business to which this Agreement specifically relates.

Optional: The assignee must not be a competitor of the non-assigning party.

Takeaways

• A prospective assigning party might argue that it needed to keep control of its own strategic
destiny, for example by preserving its freedom to sell off a product line or division (or even the
whole company) in an asset sale.

• A non-assigning party might argue that it could not permit the assignment of the agreement to
one of its competitors, and that the only way to ensure this was to retain a veto over any assignment.

• Another approach might be to give the non-assigning party, instead of a veto over
asset-disposition assignments, the right to terminate the contract for convenience. (Of course, the
implications of termination would have to be carefully thought through.)

Similar provisions in illustrative contracts

Disney/Pixar Co-Production Agreement § 21(b) (first option)

Ford Global Services Agreement § 20.4 (second option)

Assignment to affiliate

Model language

[Either party] may assign this Agreement without consent to its affiliate.

Optional: The assigning party must unconditionally guarantee the assignee’s performance.

Optional: The affiliate must not be a competitor of the non-assigning party.

Optional: The affiliate must be a majority-ownership affiliate of the assigning party.

Takeaways

• A prospective assigning party might argue for the right to assign to an affiliate to preserve
its freedom to move assets around within its “corporate family” without having to seek approval.

• The other party might reasonably object that there is no way to know in advance whether an
affiliate-assignee would be in a position to fulfill the assigning party’s obligations under the
contract, nor whether it would have reachable assets in case of a breach.

Editorial comment: Before approving a blanket affiliate-assignment authorization, a party should
consider whether it knew enough about the other party’s existing- or future affiliates to be
comfortable with where the agreement might end up.

Consent may not be unreasonably withheld or delayed

Model language

Consent to an assignment of this Agreement requiring it may not be unreasonably withheld or delayed.

Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are to be treated as direct damages.

Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are not subject to any exclusion of remedies or other limitation of liability in this Agreement.

Takeaways

• Even if this provision were absent, applicable law might impose a reasonableness requirement;
see the discussion of the Shoney case in the commentary to the Consent at discretion provision.

• A reasonableness requirement might not be of much practical value, whether contractual or
implied by law. Such a requirement could not guarantee that the non-assigning party would give its
consent when the assigning party wants it. And by the time a court could resolve the matter, the
assigning party’s deal could have been blown.

• Still, an unreasonable-withholding provision should make the non-assigning party think twice
about dragging its feet too much, becuase of the prospect of being held liable for damages for a
busted transaction. Cf. Pennzoil vs. Texaco and its $10.5 billion damage award for tortious
interference with an M&A deal.

• Including an unreasonable-delay provision might conflict with the Materiality of assignment breach provision, for reasons discussed there in the summary of the Hess Energy case.

Consent at discretion

Model language

A party having the right to grant or withhold consent to an assignment of this Agreement
may do so in its sole and unfettered discretion.

Takeaways

• If a party might want the absolute right to withhold consent to an assignment in its sole
discretion, it would be a good idea to try to include that in the contract language. Otherwise,
there’s a risk that court might impose a commercial-reasonableness test under applicable law (see
the next bullet). On the other hand, asking for such language but not getting it could be fatal to
the party’s case that it was implicitly entitled to withhold consent in its discretion.

• If a commercial- or residential lease agreement requires the landlord’s consent before the
tentant can assign the lease, state law might impose a reasonableness requirement. I haven’t
researched this, but ran across an unpublished California opinion and an old law review article,
each collecting cases. See Nevada Atlantic Corp. v. Wrec Lido Venture, LLC, No. G039825
(Cal. App. Dec. 8, 2008) (unpublished; reversing judgment that sole-discretion withholding of
consent was unreasonable); Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation:
Reasonable Withholding of Consent to Commercial Lease Assignments, 31 Willamette L. Rev. 713
(1995) (first page available for free at HeinOnline).

Case illustrations

Shoney’s LLC v. MAC East, LLC, No. 1071465 (Ala. Jul. 31, 2009)

In 2009, the Alabama Supreme Court rejected a claim that Shoney’s restaurant chain breached a
contract when it demanded a $70,000 to $90,000 payment as the price of its consent to a proposed
sublease. The supreme court noted that the contract specifically gave Shoney’s the right, in its sole discretion, to consent to any proposed assignment or sublease.

Significantly, prior
case law from Alabama was to the effect that a refusal to consent would indeed be judged by a
commercial-reasonableness standard. But, the supreme court said, “[w]here the parties to a contract
use language that is inconsistent with a commercial-reasonableness standard, the terms of such
contract will not be altered by an implied covenant of good faith. Therefore, an unqualified express
standard such as ‘sole discretion’ is also to be construed as written.” Shoney’s LLC v. MAC East, LLC, No. 1071465 (Ala. Jul. 31, 2009) (on certification by Eleventh Circuit), cited by MAC East, LLC v. Shoney’s [LLC], No. 07-11534 (11th Cir. Aug. 11, 2009), reversing
No. 2:05-cv-1038-MEF (WO)
(M.D. Ala. Jan. 8, 2007) (granting partial summary judgment that Shoney’s had breached the
contract).

Termination by non-assigning party

Model language

A non-assigning party may terminate this Agreement, in its business discretion, by
giving notice to that effect no later than 60 days after receiving notice, from either
the assigning party or the assignee, that an assignment of the Agreement has become effective.

Commentary

Consider an agreement in which a vendor is to provide ongoing services to a customer. A powerful customer might demand the right to consent to the vendor’s assignment of the agreement, even in strategic transactions. The vendor, on the other hand, might refuse to give any customer that kind of control of its strategic options.

A workable compromise might be to allow the customer to terminate the agreement during a stated window of time after the assignment if it is not happy with the new vendor.

Assignment – other provisions

Model language

Optional: Delegation: For the avoidance of doubt, an assignment of this Agreement operates as a transfer of the assigning
party’s rights and a delegation of its duties under this Agreement.

Optional: Promise to perform: For the avoidance of doubt, an assignee’s acceptance of an
assignment of this Agreement constitutes the assignee’s promise to perform the assigning party’s
duties under the Agreement. That promise is enforceable by either the assigning party or by the
non-assigning party.

Optional: Written assumption by assignee: IF: The non-assigning party so requests of an assignee
of this Agreement; THEN: The assignee will seasonably provide the non-assigning party with a written
assumption of the assignor’s obligations, duly executed by or on behalf of the assignee; ELSE: The
assignment will be of no effect.

Optional: No release: For the avoidance of doubt, an assignment of this Agreement does not release
the assigning party from its responsibility for performance of its duties under the Agreement unless
the non-assigning party so agrees in writing.

Optional: Confidentiality: A non-assigning party will preserve in confidence any non-public
information about an actual- or proposed assignment of this Agreement that may be disclosed to that
party by a party participating in, or seeking consent for, the assignment.

Commentary

The Delegation provision might not be necessary in a contract for the sale of goods governed by
the Uniform Commercial Code, because a similar provision is found in UCC § 2-210

The Confidentiality provision would be useful if a party to the agreement anticipated that it
might be engaging in any kind of merger or other strategic transaction.

Materiality of assignment breach

Model language

IF: A party breaches any requirement of this Agreement that the party obtain another party’s consent
to assign this Agreement; THEN: Such breach is to be treated as a material breach of this Agreement.

Commentary

A chief significance of this kind of provision is that failure to obtain consent to assignment, if
it were a material breach, would give the non-assigning party the right to terminate the Agreement.

If an assignment-consent provision requires that consent not be unreasonably withheld, then failure
to obtain consent to a reasonable assignment would not be a material breach, according to the
court in Hess Energy Inc. v. Lightning Oil Co., No. 01-1582 (4th Cir. Jan. 18, 2002) (reversing
summary judgment). In that case, the agreement was a natural-gas supply contract. The customer was
acquired by a larger company, after which the larger company took over some of the contract
administration responsibilities such as payment of the vendor’s invoices. The vendor, seeking to
sell its gas to someone else at a higher price, sent a notice of termination, on grounds that the
customer had “assigned” the agreement to its new parent company, in violation of the contract’s
assignment-consent provision. The appeals court held that, even if the customer had indeed assigned
the contract (a point on which it expressed considerable doubt) without consent, the resulting
breach of the agreement was not material, and therefore the vendor did not have the right to
terminate the contract.