Contracts are a prime example of intangible property. Parties to commercial contracts, like other property owners, frequently want to transfer their property to a third party. The transfer of a contract refers to the assignment of some or all of a party’s rights or the delegation of some or all of a party’s performance, or both, to a non-party to the agreement.
Some common instances in which a contracting party in a commercial context may desire to assign contractual rights, performance responsibilities, or both are as follows:
- In an asset sale, a corporation sells parts or all of its company.
- A contractor who subcontracts its work under certain projects.
- A business conglomerate that is going through an internal corporate reorganization.
- The borrower who offers its lender a security interest in its assets.
- A manufacturer who sells its receivables to a third party.
In any of these cases, the non-transferring party may object to assignment or delegation for a variety of grounds, including:
- The desire to choose the party with whom it does business.
- Concern that a different obligor or obligee may jeopardize the non-transferring party’s capacity to benefit from the contractual deal
To decide whether the transferring party (also known as the transferor) can execute the proposed transfer without gaining the non-transferring party’s approval, the transferring party must turn to relevant legislation and the plain text of the contract. If consent is necessary and not obtained, the transferring party faces the following risks:
- Violation of the contract.
- Making an ineffective and invalid transfer.
The Definitions of Assignment and Delegation
Each party to a contract is an:
- Obligee in terms of its contractual rights; and
- Obligor in terms of its contractual performance responsibilities.
Contract “assignability” is a term frequently used by contracting parties and practitioners. While they may expressly address the assignment of a party’s rights under the contract in some contexts, they frequently use the term “assignment” to refer to both:
- The delegation of duty to perform.
- The assignment of rights to obtain performance.
However, assignment and delegation are two distinct legal concepts that must be treated individually due to the fact that they might have different outcomes.
What is an Assignment?
Assignment is the transfer of some or all of an obligee’s (assignor’s) rights to receive performance under a contract, generally but not always to a non-party (assignee). A contract benefit is a right (a chose in action) that, in theory, may be delegated by the benefiting party to a non-party. For clarity purposes, this informative piece will assume that the assignee is a non-party, although the rights and responsibilities of the parties addressed apply equally to an assignee who is also a party to the agreement. When these rights are assigned, the assignor no longer has any claim to the advantages of the given rights, which are completely passed to the assignee.
Technically, a contract’s burden cannot be assigned under the law (see National Trust Co. v. Mead[i] and Irving Oil Ltd. v. Canada[ii]). Transferring performance responsibilities under a contract requires the approval of all parties, making such a transfer a novation.
In practice, parties frequently refer to “assigning a contract” or “allowing the assignment of a contract,” which is actually an inaccurate representation of their intentions. For example, the parties may plan for some or all of the following:
- The contract’s rights or benefits may be assigned.
- The contract’s burdens or performance duties may be transferred.
- Rights and burdens may be transferred.
The Effects of Assignment
The assignor is no longer entitled to any benefits from the assigned rights, which have all been passed to the assignee; nonetheless, even if the assignor is stripped of its contractual rights, assignment does not decrease or remove the assignor’s duties to the non-assigning party. As previously stated, a contract’s burden may only be assigned to a third party with the approval of all parties. As a result, the assignor is still obligated to fulfill its contractual commitments. The non-assigning party retains the following:
- Its entitlement to get performance from the assignor; and
- Its remedies against the assignor in the event of non-performance.
The ordinary rule is that a party can only assign its benefits without the consent of the other party to the contract and will remain liable to the other party for its performance obligations (see National Trust Co. v. Mead[iii] and Rodaro v. Royal Bank[iv]). If the assignor intends to transfer its obligations and both the non-transferring party and the potential assignee agree, the parties should enter into a novation agreement, which results in a new contract between the assignee and the old contract’s remaining (non-transferring) party. In practice, the assignee often undertakes the contract’s performance responsibilities as of the date of assignment, and the assignor gets an indemnity from the assignee in the event of a breach or failure to perform.
A clear, present, purpose to transfer the assigned rights without needing any additional action by the assignee is required for an assignment to be effective, which means that a promise to assign in the future is ineffective as an actual transfer. Otherwise, no special terminology is necessary to draft an effective assignment.
What is Delegation?
Delegation is the transfer of some or all of an obligor’s (delegating party’s) performance responsibilities (or conditions demanding performance) under a contract to a non-party (delegatee). To be effective, a delegation requires the delegatee to agree to take on the delegated performance; however, unless the non-delegating party has consented to a novation, the delegating party remains accountable for the delegated performance, whether or not it has also transferred its contractual rights.
This is distinct from an assignment of rights, in which the assignor relinquishes its contractual claims upon assignment. As a result, even if the delegating party can effectively delegate its actual performance to the delegatee (such that the delegatee’s actual performance discharges the delegating party’s duty), the delegating party cannot be relieved of its obligation to perform and liability for non-performance unless the non-delegating party agrees to a novation.
There is no precise wording necessary to create an effective delegation, just as there is not for the assignment of rights. When performance is effectively delegated, the delegatee assumes liability for the delegating party’s performance obligations (under an assumption agreement), even if the delegating party retains liability to the non-delegating party for the delegatee’s failure to adequately perform the delegated obligations in the absence of a novation. Under an assumed agreement, the delegating party may have recourse against the delegatee, which is frequently addressed through a contractual indemnity right.
Novation
If the delegating party wishes to entirely exclude itself from liability for non-performance, it must get the non-delegating party’s approval to the contract (novation). In the majority of novations, the delegating party, the delegatee, and the non-delegating party all agree on the following:
- The delegatee replaces the delegating party as a party to the contract.
- The delegating party is no longer liable for contract performance.
- The delegatee is directly and solely liable for the delegating party’s contract fulfillment.
Types of Assignment – Legal (Statutory) Assignment vs. Equitable Assignment
- Legal (Statutory) Assignment: An assignment that satisfies the provisions of the appropriate province or territory laws (for example, the Conveyancing and Law of Property Act[v])
- Equitable Assignment: An equitable assignment may be enforced even if it does not fulfill the statutory requirements for a legal assignment.
Requirements for a Legal (Statutory) Assignment
All of Canada’s common law provinces have enacted legislation allowing the transfer of contract rights. Notably, the legislation for Ontario is the Conveyancing and Law of Property Act.
These statutory assignments are enforceable if the parties comply with the following procedures:
- The assignment is absolute.
- The assignment is in writing, signed by the assignor
- the non-assigning obligor is given express written notice.
A statutory assignment does not need consideration, and no precise words or form are necessary. They can be made as gifts and be valid.
Requirements for an Equitable Assignment
An assignment may be enforceable as an equitable assignment even if it does not fulfill the formality criteria of a statutory assignment. An equitable assignment does not necessitate the use of any specific terms or form. However, in order to comply with any provincial statutes of frauds regulations, the assignment must be in writing. The phrasing must clearly indicate that the assignee is to benefit from the rights being assigned. In contrast to a statutory assignment, consideration is required until there is a full transfer, such as a gift. It is not necessary to provide the non-assigning obligor with express written notification (except in the case of a transfer of land). However, notification is often given largely to assure that:
- The obligor ceases to pay the assignor.
- The assignee has priority over subsequent encumbrances.
Contractual Anti-Assignment & Anti-Delegation Clauses
Rather than relying on relatively uncertain legal rules, most commercial contract parties handle transferability issues in the written agreement. As a result, most commercial contracts include a negative covenant that restricts one or both parties’ rights to assign.
These clauses frequently include specific exceptions that allow one or more of the parties to assign and delegate rights and duties, often to designated non-parties such as affiliates and successors-in-interest to the transferring party’s business.
Courts frequently uphold provisions that prevent assignment because they favor the rights of parties to freely contract. However, subject to specific limitations, there is a broad assumption that contractual rights are assignable. As a result, the case law on anti-assignment provisions is a little erratic. Some courts have upheld anti-assignment clauses and declared the agreement unenforceable. Others have argued that an anti-assignment provision cannot preclude assignment.
Overall, contractual anti-assignment and anti-delegation provisions are commonly included in many types of business contracts. If not, transferability is determined by the contract’s subject matter and the nature of the rights and obligations to be transferred. It is important to stay knowledgeable the existence of such contractual terms when dealing with various commercial contracts…such as contracts for the sale of goods, personal service contracts, commercial real estate leases and various other types of contracts.
If you have any questions about your business’s contractual assignment or delegation needs, contact Cactus Law today to speak with a lawyer specializing in commercial law.
Disclaimer:
The information presented above is solely for general educational and informational purposes. It is not intended to be, and should not be taken as, legal advice. The information given above may not be applicable in all cases and may not even reflect the most recent authority after the date of its publication. As a result, please refer to all updated legislation, statutes, and amendments. Nothing in this article should be relied on or acted upon without the benefit of legal advice based on the specific facts and circumstances described, and nothing in this article should be interpreted otherwise.
About the Author:
Kanwar Gujral is entering his third year at Osgoode Hall Law School in Toronto, Ontario. He has a dedicated interest in real estate, business, and corporate law.
[i] National Trust Co. v. Mead, 1990 CarswellSask 165 (S.C.C.).
[ii] Irving Oil Ltd. v. Canada, 1984 CarswellNat 137 (Fed. C.A.).
[iii] Supra note 1.
[iv] Rodaro v. Royal Bank, 2002 CarswellOnt 1047 (Ont. C.A.).
[v] Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34.
