delaware law assignment of contracts

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Delaware Court holds anti-assignment clause prevents enforcement of contract after merger

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On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets.  In MTA Can. Royalty Corp. v. Compania Minera Pangea , S.A. De C.V. , No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”. 

Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers.  In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure.  In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary.  By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses.  Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.

Background of the contract and subsequent merger

In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”).  In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions.  Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):

Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity.  Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”).  In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.

Superior Court holds that anti-assignment clause extends to certain mergers

CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA.  MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger.   Id. at *11-12.  To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited.   Star Cellular Tel. Co. v. Baton Rouge CGSA ., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993).  According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.

The Superior Court disagreed.  It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply.   MTA , at *6.  It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers.   Id.  at *7-14.  In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the  Star Cellular analysis.  The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract.   Id. at *13.

Potentially at odds with Chancery precedent?

Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers.  Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous.  Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause. 

Specifically, MTA  appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp. , which also involved the impact of an anti-assignment clause following a forward triangular merger.  C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002).  The language of the anti-assignment clause in Tenneco  was similar to that in MTA :  both clauses prohibited assignment “by operation of law” while also referencing “successors”.  In Tenneco , Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract.   Id. at *7-10.  The MTA Court did not explain why it reached the opposite result.

Similarly, in ClubCorp, Inc. v. Pinehurst, LLC , Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”.  No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011).  Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger.   MTA did not address Pinehurst.

Insights from MTA

MTA has several significant implications for practitioners.  The first is a reminder to carefully review a target’s contracts for anti-assignment clauses.  Such clauses in important contracts should be flagged and thoughtfully evaluated. 

In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive.  The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure.  For example, in MTA , the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger.  The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”.  62 A.3d 62, 83 (Del. Ch. 2013). 

If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence.  According to MTA , such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]

[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law.  The transaction structure was equivalent to a forward triangular merger. 

[2] This may not be true in other jurisdictions.  For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law .  See SQL Sols. v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991). 

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Why You Should Care What Law Applies to Your Contract

So why choose Delaware law for your contract? To begin with, if you choose Delaware law, you have a good chance your choice will be respected. The 3rd U.S. Circuit Court of Appeals' June 6 decision in Coface Collections v. Newton shows why that is important. Many states have statutes that nullify contracts restricting competition by former employees against their prior employer. In those states, an employee may walk out the door with years of important information to join a competitor. That is true of Louisiana, where Coface bought Newton's business and then sought to enforce a non-competition agreement to stop him from later competing with Coface. The Delaware District Court upheld the non-competition agreement because it had a Delaware choice-of-law provision and Delaware permits non-competition agreements. The court of appeals affirmed the choice of Delaware law and the injunction against competition that Delaware law supported. That was true even though the contract was signed in Louisiana by a Louisiana resident and Louisiana law would have nullified that contract provision. Thus, by choosing Delaware law, Coface obtained substantive advantages not available to it under the Louisiana law that by default would have otherwise applied. This decision, in part, turned on a unique new Delaware statute, 6 Del. C § 2708. Under Section 2708, a Delaware choice of law provision in itself provides the proof of a "material and reasonable relationship with [Delaware] and shall be enforced whether or not there are other relationships with this state." That provision then provides the justification to apply Delaware law that used to be only found when some act or business actually occurred in Delaware. In short, by statute Delaware now provides for the enforcement of Delaware choice-of-law provision. In addition to ensuring that your choice of law will be upheld, Delaware law has other advantages as well. For example, Delaware contract law is well developed and largely mirrors the general principles of contract law taught in law school. There are no big surprises. In particular, there are no hidden rules that affect whether a contract will be enforced or not, but instead a strong policy exists to let the parties bargain as they wish free of artificial restraints. The Delaware Chancery Court case of GRT Inc. v. Marathon GTF Technology Ltd. decided July 11 illustrates this point. The issue in GRT was whether a joint venture agreement barred litigation over its representations after one year from the parties' closing on their deal. The Delaware court, applying Delaware law, upheld the one-year ban on litigation and dismissed the breach of contract claim. The court carefully explained that Delaware law permits the parties to a contract to limit the time to file suit and distinguished the law of other jurisdictions that would have rejected such a contractual limitation. Thus, by choosing Delaware law the parties affected their substantive rights and the court enforced that choice. That provided desirable certainty that fosters commerce. Finally, it is important to note that these decisions and the Delaware statute do not require that any litigation be actually filed in Delaware for Delaware law to apply. To be sure the dispute ends up in Delaware, a forum selection clause together with consent to jurisdiction by a Delaware court from non-Delaware parties should be used as well. These clauses too are becoming more popular, but that is another story.  

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Assessing Assignability: Transferring Contractual Rights or Obligations | Practical Law

Assessing Assignability: Transferring Contractual Rights or Obligations

Practical law legal update 5-546-6326  (approx. 7 pages).

• An intended transfer is of the type that is prohibited by law or public policy (see Practice Note, Assignability of Commercial Contracts: Statutory and Public Policy Exceptions ).
• The parties expressly agree to restrict transferability (see Practice Note, Assignability of Commercial Contracts: Contractual Anti-assignment and Anti-delegation Clauses ).
• Breaching the contract.
• Making an ineffective and invalid transfer.

Distinguishing Between Assignment and Delegation

• The assignment of rights to receive performance.
• The delegation of duties to perform.

Characteristics of Assignments

• The right to receive performance from the assignor.
• Its remedies against the assignor for any failure to perform.

Characteristics of Delegation

The general rule governing assignment and delegation.

• Most assignments of contractual rights.
• Many delegations of contractual performance.
• Assignments and delegations that violate public policy or law.
• Assignments of rights or delegations of performance that are personal in nature.
• Contracts with anti-assignment or anti-delegation clauses.

Contracts That Present the Greatest Challenges

• Personal services contracts (see Personal Services Contracts ).
• Non-exclusive intellectual property licenses (see Intellectual Property Licenses ).
• Contracts with anti-assignment and anti-delegation clauses (see Contracts With Anti-assignment and Anti-delegation Contract Clauses ).

Personal Services Contracts

Intellectual property licenses, contracts with anti-assignment and anti-delegation clauses, is a change of control an assignment.

• Contains an anti-assignment and anti-delegation clause expressly restricting a change of control.
• States that a change in management or equity ownership of the contracting party is deemed to be an assignment.

When Does an Involuntary Transfer Trigger a Restricted Transfer?

• A contractual anti-assignment and anti delegation clause applies to a specific type or transfer.
• The transfer is permissible, with or without a contractual anti-assignment and anti-delegation provision.

Drafting and Negotiating Anti-assignment and Anti-delegation Clauses

• Directly addressing assignment of rights and delegation of performance.
• Clarifying the universe of restricted transfers.
• Designating the non-transferring party's consent rights.
• Specifying any exceptions to non-transferability.
• Requiring notification of a permitted transfer.
• Including a declaration that impermissible transfers are void.
• Adding a novation to the anti-assignment and anti-delegation provision.

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2014 Delaware Code Title 6 - Commerce and Trade ARTICLE 2. SALES PART 2 § 2-209. Modification, rescission and waiver

(1) An agreement modifying a contract within this Article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

5A Del. C. 1953, § 2-209; 55 Del. Laws, c. 349.;

§ 2-210 Delegation of performance; assignment of rights.

(1) A party may perform his or her duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his or her original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.

(2) Except as otherwise provided in Section 9-406, unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him or her by his or her contract, or impair materially his or her chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his or her entire obligation can be assigned despite agreement otherwise.

(3) The creation, attachment, perfection, or enforcement of a security interest in the seller's interest under a contract is not a transfer that materially changes the duty of or increases materially the burden or risk imposed on the buyer or impairs materially the buyer's chance of obtaining return performance within the purview of subsection (2) unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the seller. Even in that event, the creation, attachment, perfection, and enforcement of the security interest remain effective, but (i) the seller is liable to the buyer for damages caused by the delegation to the extent that the damages could not reasonably be prevented by the buyer, and (ii) a court having jurisdiction may grant other appropriate relief, including cancellation of the contract for sale or an injunction against enforcement of the security interest or consummation of the enforcement.

(4) Unless the circumstances indicate the contrary a prohibition of assignment of "the contract" is to be construed as barring only the delegation to the assignee of the assignor's performance.

(5) An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him or her to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.

(6) The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to his or her rights against the assignor demand assurances from the assignee (Section 2-609).

5A Del. C. 1953, § 2-210; 55 Del. Laws, c. 349; 70 Del. Laws, c. 186, § 1; 72 Del. Laws, c. 401, § 7.;

Disclaimer: These codes may not be the most recent version. Delaware may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.

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Delaware Clarifies Impact of Common Merger Structure on Contractual Anti-Assignment Clauses

In a long-awaited decision, the Delaware Court of Chancery recently held in Meso Scale Diagnostics v. Roche Diagnostics [1] that the acquisition of a company by reverse triangular merger does not result in an assignment (whether by operation of law or otherwise) of the target company’s agreements. Thus, the Court put to rest the uncertainty that it created two years ago in the same case.

Reverse Triangular Mergers

A reverse triangular merger is a common form of merger in which the acquirer creates a wholly-owned subsidiary that then merges into the acquisition target. As a result, the target entity remains intact, while the “merger subsidiary” ceases to exist. The net effect is the same as a stock sale of the target, but with the advantage that a merger does not require action by all target stockholders as in a stock sale – a majority vote is typically sufficient. The reverse triangular merger is often used because of its relative simplicity and its ability to allow acquiring companies to obtain control of the target’s non-assignable contracts… or so everyone thought until April 2011.

Transaction Background… and Uncertainty

In 2007, Roche Diagnostics GmbH acquired BioVeris Corp. through a reverse triangular merger. BioVeris had previously licensed certain intellectual property from Meso Scale under an agreement that contained the following anti-assignment language:

“Neither this Agreement nor any of the rights, interests or obligations under [it] shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .”

In 2010, Meso Scale filed a complaint against Roche alleging that Roche’s acquisition of BioVeris caused a de facto assignment of BioVeris’ intellectual property rights, and that, as a result of the above prohibition on assignment, a breach of contract occurred when BioVeris merged into the Roche merger subsidiary. Roche moved to dismiss the complaint.

In a surprise April 2011 ruling, the Delaware Court of Chancery denied Roche’s motion to dismiss. The Court’s opinion injected uncertainty into the realm of Delaware corporate law by indicating that, for purposes of interpreting an anti-assignment clause, there may be circumstances in which a reverse triangular merger should be considered an assignment “by operation of law.” [2]

Order is Restored

In its motion for summary judgment, Roche analogized reverse triangular mergers to transactions in which all target company shares are acquired. In both transactions, Roche argued, the target company remains intact and continues to own its assets. Accordingly, BioVeris did not assign any of its assets at the time of the merger. As Roche made clear, Delaware courts have long held that the stock sale of a company does not violate anti-assignment provisions that do not expressly prohibit a change of control.

Drawing upon Delaware case law regarding forward triangular mergers, Meso Scale countered that the BioVeris reverse triangular merger constituted an assignment “by operation of law,” urging the Court to embrace an unreported 1991 decision by the U.S. District Court for the Northern District of California, SQL Solutions v. Oracle Corp. [3] SQL Solutions also involved a reverse triangular merger and anti-assignment language in the target company’s inbound license agreement. The SQL Solutions court found, in that case, that the third-party licensor would have been “adversely impacted” because the acquiring company was one of the licensor’s direct competitors. The court suggested that third-party consents should be obtained even in the reverse triangular merger context, especially when the intellectual property licensed to the target company is an essential part of its business.

The Delaware Court of Chancery granted Roche’s motion for summary judgment, concluding that Section 259 of the Delaware General Corporation Law supported Roche’s position that a reverse triangular merger does not result in an assignment by operation of law or otherwise. [4] Specifically, the Court held that “mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

In response to Meso Scale’s argument that the merger constituted a de facto assignment, the Court held that, under Delaware’s doctrine of “legal significance,” the fact that a forward triangular merger would have triggered the plaintiff’s consent rights did not have any bearing on the reverse triangular merger at issue.

The Court also found that the parties did not intend for the negotiated language to require third-party consent upon a change of control, since “the vast majority of commentary discussing reverse triangular mergers indicates that a reverse triangular merger does not constitute an assignment by operation of law as to the surviving entity.”

Finally, the Court rejected the approach suggested by SQL Solutions , stating simply that such an approach conflicted with Delaware’s jurisprudence regarding stock acquisitions, as well as Section 259.

Implications

The Court’s ruling confirms that, under Delaware law, reverse triangular mergers do not result in the assignment, by operation of law or otherwise, of agreements held by a target company. The decision offers comfort to practitioners and would-be acquirers that regularly engage in M&A transactions governed by Delaware law that they can structure deals in a manner that ensures that consents will not be required with respect to target company agreements that do not contain language expressly prohibiting a change of control.

The decision also highlights the fact that it is limited to transactions and agreements governed by Delaware law. There is still uncertainty as to the risks associated with contractual anti-assignment clauses in certain jurisdictions. As a result, it would be prudent in situations where Delaware is not the governing law (and there is ambiguity in the applicable jurisdiction) to obtain all third-party consents to the assignment of material agreements.

Finally, the decision also serves as a reminder to practitioners to include clear consent and assignment language when drafting licenses and other agreements to avoid a court having to infer the intent of the parties after the fact. The Meso Scale court specifically noted that the plaintiffs “could have negotiated for a change of control provision” but failed to do so.

[1] Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , No. 5589-VCP (Del. Ch. Feb. 22, 2013).

[2] Reading the factual allegations in Meso Scale’s favor (as all courts must at the motion to dismiss stage), the Court found that Meso Scale had alleged sufficient facts to withstand Roche’s motion to dismiss. Meso Scale alleged that, within months of the merger, all of BioVeris’ employees were laid off, its Maryland facility was shut down and it was slated to cease all production. The Court found that these circumstances created a plausible argument “that ‘by operation of law’ was intended to cover mergers that effectively operated like an assignment, even if it might not apply to mergers merely involving changes of control.”

[3] SQL Solutions v. Oracle Corp. , 1991 WL 626458 (N.D. Cal. Dec. 18, 1991).

[4] Section 259 provides that: “When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged, as the case may be, shall cease and the constituent corporations shall become a new corporation, or be merged into 1 of such corporations . . . the rights, privileges, powers and franchises of each of said corporations, and all property, real, personal and mixed, and all debts due to any of said constituent corporations on whatever account . . . shall be vested in the corporation surviving or resulting from such merger or consolidation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations.”

• Advisory Deleware Clarifies Impact of Common Merger Structure.pdf

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Assignment of Contract

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What is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Assignment of Contract in Real Estate

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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