anti assignment clause breach of contract

What is an Anti-Assignment Clause?

When business owners are negotiating contracts to gear up for the sale of their business, they are rightly concerned with key questions such as the sale price for the business including assets such as how much the sale will cost them and what happens if something goes wrong.  At the end of the contracts, there are usually several pages of type that usually look like boilerplate. Inside those clauses is usually something called an assignment clause, or more accurately, an anti-assignment clause.

It’s one of those clauses that everyone glosses over – after all, it’s just standard legal text, right?

For a business owner hoping to sell their business, an anti-assignment clause can dissuade potential buyers and play a crucial role in the selling price of a business.  If this sounds familiar and you’re in the process of negotiating the merger or acquisition of your business, read on – we’ve put together a practical guide to anti-assignment clauses and what to look out for.

Looking for legal help? feel free to get in touch with our  commercial lawyers  for matters related to contracts.

What is an assignment clause?

The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense – after all, if you sign a contract with a specific party, you don’t expect to be entering into an agreement with a third party you didn’t intend to be.

However, when you sell your business, you will want to transfer ownership of those contracts to the buyer. If your contracts all contain an anti-assignment clause, they effectively restrict you from transferring ownership to the interested party. Now, you’re presented with a new challenge altogether – before you can focus on the sale of your business, you must first renegotiate the terms of your contracts with each party.

Language to look out for in anti-assignment clauses

If you’re thinking about selling your business or even have potential buyers interested, it’s better to know in advance if you’ve got anti-assignment clauses in your contracts. There are generally two types of anti-assignment clause to look out for. The first relates to the complete bar on assignment of rights and responsibilities and is typically worded in this way, or similar:

“Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”

The second type prevents the transfer of rights or duties without prior written consent of the other party. This will read along the lines of:

 “Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written consent of the other party, and whose consent may be withheld for any reason.”

So, where the first prohibits assignment altogether, the second prohibits assignment unless permission is sought in advance. Some clauses may even explicitly state that a change of control such as a merger or acquisition is an assignment. The last thing you want is to cause a dispute by breaching the contract, but if you’ve already agreed to these terms, you’ll have to open a fresh set of negotiations with the contracting party before you sell the company.

Assignment clauses in M&A: what’s the problem?

Due diligence is the bread and butter of any merger or acquisition. Rather than a leap of faith, due diligence ensures the purchase of a business is a calculated decision with minimal risk to the buyer. Typically carried out by specialist lawyers, the process is designed to lift the hood on the target business to determine the valuation of assets and liabilities and identify any glaring issues that could leave the buyer open to risk.

During the due diligence process, the buyer will look through all of the major contracts the business has open, and specifically keep a close eye out for assignment clauses.

Despite the virtual environment that many businesses have been forced to operate in in 2020, most companies will have commercial leases for the premises from which they typically work. Almost all leases have an anti-assignment clause, and this is a perfect example of an instance that is often overlooked by commercial tenants when selling a business which includes a leasehold property.  This transfer of ownership may well be prohibited under an anti-assignment clause so that prior to the sale of the business, you would be required to ask permission from your landlord. The issue here is that the landlord may well see this as the perfect opportunity to renegotiate and secure a better deal for themselves. What’s worse, if they don’t sign off on the transfer, you’ll have an obstruction on your hands that will stand in the way of the sale.

In any case, an unexpected anti-assignment clause usually winds up being a last-minute hitch in the sale, and it never comes at a good time. Whether it delays the sale or obstructs it altogether, overlooking an anti-assignment clause can cost you considerably in an M&A transaction.

What makes anti-assignment clauses enforceable?

Generally speaking, an anti-assignment clause will be enforced by the courts if it was agreed upon by both parties to the contract. Many contracts exclude or qualify the right to assignment – according to the courts, a clause that states that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract.

Courts won’t always enforce assignments to which the counterparty did not give permission, even where there is no anti-assignment clause that specifies this provision.

How to negotiate anti-assignment clauses

The best practice for business owners is to be vigilant when negotiating new contracts and ensure that any anti-assignment clauses still allow for the transfer of ownership when they decide to sell the business.

Remember, even though the buyer is purchasing the assets of the business, this usually means that all of the contracts of the business go with it because the business remains intact. Therefore, the best way forward is to negotiate these clauses upfront from the outset of the relationship, so that when you do decide to sell your business, you automatically have permission to transfer the ownership without having to delay the sale by entering into fresh negotiations.

If your agreement does not permit assignments, it’s worth seeking the advice and support of a specialist lawyer who can help protect your interests through negotiation with your counterparty on this point. You may be able to include a provision that allows for assignment of your rights and obligations upon the prior written consent of the other party. Your lawyer will likely advise you to carve out a specific provision to prohibit the counterparty from unreasonably withholding or delaying consent or making it subject to unreasonable conditions – an issue which, if not provided for within the contract, can cause serious delay and disruption to the sale of your business. Further, it may be beneficial to add an extra element to the contract that makes exceptions to the clause for assignments between affiliates.  If you’re planning to sell your business, this would be the right place to carve out an exception within the clause to the change of control via a merger or acquisition.

It’s important to bear in mind that anti-assignment clauses tend to be viewed narrowly by courts, and that there have been several instances whereby anti-assignment clauses have not been enforced since the clause itself did not explicitly state that the assignment of rights, duties or payment would render the contract void or invalid. So, if you’re in the process of negotiating an agreement and wish to protect your interests through the addition of an anti-assignment clause, it’s critical that you include the consequences of assignment within the clause itself and state that assignments would invalidate or be in breach of the contract.

If you do not wish for the counterparty to be able to transfer the legal obligation to perform their duties as stated in the contract to a third party, this must be explicitly stated in one of three ways:

• Specify the need for consent

There’s no need to be unreasonable – you can protect your interests while still giving the counterparty the space to re-negotiate should they wish to assign rights by including a clause that asks for consent.

• Provide an exemption to consent for affiliates, successors or new owners

Ask your lawyer to draft an exception into the clause that permits assignment to affiliates or successors to the counterparty, such as:

“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party will own greater than 50 per cent of the shares or other interests; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will relieve an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”

• Require reasonable consent

Just as you would not wish for consent to be held back from you unreasonably in the renegotiation of contract terms prior to a sale, your assignment clause should make clear that you will not unreasonably withhold or delay consent should the third party request permission to assign their legal obligations. This may read something like this:

 “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”

Whatever the circumstances, we strongly recommend calling upon a contract law specialist, whether you’re undergoing due diligence in the run up to an M&A transaction, are considering selling your business or are negotiating new contracts with customers and suppliers. Our lawyers bring in-depth expertise in the area of anti-assignment clauses and will work closely with you to protect your interests and ensure no clauses in your contracts negatively impact the sale of your company.

For a free consultation, get in touch with our team through the contact form below or using our online chat service.

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41 U.S. Code § 6305 - Prohibition on transfer of contract and certain allowable assignments

In subsection (a), the words “The party to whom the Federal Government gives a contract or order” are substituted for “the party to whom such contract or order is given” for clarity. The words “A purported transfer in violation of this subsection” are substituted for “any such transfer” because an actual transfer is precluded by this provision.

In subsection (b)(1), the words “amounts due from the Federal Government” are substituted for “moneys due or to become due from the United States or from any agency or department thereof” to eliminate unnecessary words. The words “may be assigned” are added to provide explicitly for authority that is necessarily implied by the source provision.

In subsection (b)(3), the words “in the case of any contract entered into after October 9, 1940 ” are omitted as obsolete.

In subsection (b)(5), the words “participating in such financing” are omitted as unnecessary.

In subsection (b)(8), the words “is not liable to make any refund to the Federal Government” are substituted for “no [liability] . . . shall create or impose any liability on the part of the assignee to make restitution, refund, or repayment to the United States of any amount heretofore since July 1, 1950 , or hereafter received under the assignment” to eliminate unnecessary words. The words “an assignor’s liability to the Federal Government” are substituted for “liability of any nature of the assignor to the United States or any department or agency thereof ” for clarity and to eliminate unnecessary words.

In subsection (b)(9)(A), the words “except any such contract under which full payment has been made” are omitted as unnecessary because subsection (b)(8) precludes refund where full payment has already been made. The words “payments made to an assignee under the contract” are substituted for “payments to be made to the assignee of any moneys due or to become due under such contract” to eliminate unnecessary words.

In subsection (b)(9)(B), the words “When a ‘no reduction or setoff ’ provision as described in subparagraph (A) is included in a contract” are substituted for “If a provision described in subsection (e) of this section or a provision to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract”, the words “payments to the assignee” are substituted for “payments to be made thereafter to an assignee of any moneys due or to become due”, and the words “an assignor’s liability” are substituted for “any liability of any nature of the assignor to the United States or any department or agency thereof ”, for clarity and to eliminate unnecessary words.

In subsection (b)(9)(C), the text of 40:15(g), which provided that nothing in 40:15 affected rights and obligations accrued before subsection (g) was added by the Act of May 15, 1951 (ch. 75, 65 Stat. 41 ), is omitted as obsolete.

Memorandum of President of the United States, Oct. 3, 1995 , 60 F.R. 52289 , provided:

Memorandum for the Heads of Executive Departments and Agencies

Section 2451 of the Federal Acquisition Streamlining Act of 1994 , Public Law 103–355 ([amending former] 41 U.S.C. 15 [see 41 U.S.C. 6305 ]) (“Act”), provides, in part, that “[a]ny contract of the Department of Defense , the General Services Administration , the Department of Energy or any other department or agency of the United States designated by the President, except [contracts where] . . . full payment has been made, may, upon a determination of need by the President, provide or be amended without consideration to provide that payments to be made to the assignee of any moneys due or to become due under [the] contract shall not be subject to reduction or set-off.”

By the authority vested in me as President by the Constitution and the laws of the United States of America, including section 301 of title 3 , United States Code, I hereby designate all other departments and agencies of the United States as subject to this provision. Furthermore, I hereby delegate to the Secretaries of Defense and Energy, the Administrator of General Services, and the heads of all other departments and agencies, the authority under section 2451 of the Act to make determinations of need for their respective agency’s contracts, subject to such further guidance as issued by the Office of Federal Procurement Policy.

The authority delegated by this memorandum may be further delegated within the departments and agencies.

This memorandum shall be published in the Federal Register.

UNDERSTANDING THE ANTI-ASSIGNMENT CLAUSE IN CONTRACTS

Contracts, generally, are freely assignable i.e., either party can freely transfer one’s obligations or rights to a third party. This is what an assignment clause signifies. An assignment is a transfer of

INTRODUCTION

Contracts, generally, are freely assignable i.e., either party can freely transfer one’s obligations or rights to a third party. This is what an assignment clause signifies. An assignment is a transfer of rights and liabilities that the third party must then discharge to the other party. But sometimes, some contracts include an Anti-assignment clause to obstruct or limit assignment. They prevent either party to contract to transfer contractual obligations and/or rights to a third party.

The early legal system was against assigning contract rights as it considered them highly personal and intelligible. Fear of litigation, fear of maintenance, and champerty are some of the other reasons that many commentators feel led to the development of a non-assignability clause. However, with the passage of time and the development of technology, the work-load increased mani-fold necessitating the assignment of some rights and liabilities to the third party; now assignment of rights has become a general trend and non-assignment has taken a backseat which especially needs to be drafted to forbid assignment.

An anti-assignment clause also referred to as a non-assignment clause is a boilerplate clause that either bar completely or partially either of the party to the contract from transferring their rights and obligations under the contract to a third party without due permission from the non-assigning party.

FORMS OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause in a contract can be presented to the oblige in varied forms depending on the nature of the contract and its terms and conditions.

It may take the following forms-

• Assignments of contract rights and liabilities may be completely prohibited, or;
• Assignments may be limited to entities within the same group as the assignor.
• The agreement may prohibit any transfers of the obligation without the approval of the obligor, which should not be unreasonably denied.

IMPORTANCE OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause limits the obligor’s contractual obligations to the obligee. The courts construe the clause in favor of the non-assigning party i.e., the obliger. Since the oblige afterward assigns its rights, the obliger then needs to also cooperate with the assignee i.e., a third-party or a stranger to the contract for the performance of the contract; therefore, the courts assume that only the party that can complain about the assignment is the non-assigning party.

SCOPE OF ANTI-ASSIGNMENT CLAUSE

Anti-assignment clauses in contracts have become a frequent practice because, without them, contracts are freely assignable. However, there are certain contracts where the assignment is excused by the statutes itself, however, the anti-assignment clause is still drafted into the contract for efficient enforcement. For example, Section 37 of the Indian Contract Act [1] prohibits the practice of “offering to perform” where it is against the lex-terrae. Such contracts could be of IPR where the nature of the contract is personal [2] or could be an employment agreement where an assignment without permission would lead to significant and unfavorable consequences for non-assigning parties. For all other contracts, anti-assignment clauses can be used with ease.

Examples of the use of the Anti-Assignment Clause

• In Franchise Agreement, this clause clearly outlines the extent of the permissibility of the assignment of the intellectual property of the franchise.
• In a Purchase and Sale Agreement, the purchaser may need to assign its rights and obligations to be able to obtain financing more easily. Certainly, the seller would need to keep some control over the financing parts of the transaction through a non-assignment clause to be on the safer side and protect himself against dealing with any strange entity.
• In Asset Acquisition Agreement , a purchaser only obtains those assets and liabilities of a target listed in the agreement. In the case of an asset acquisition. In the case of an asset acquisition, any agreement with an anti-assignment clause will be activated. [3]
• In the Stockholders’ Agreement, this clause will kick in (if included), the moment stockholder tries to transfer, assign, hypothecate, mortgage, or alienate any or all stocks in a corporation. This is the case where there is a complete ban on assignment, however the same can be assigned if however, there are exemptions to non-assignment by operation by law. [4]
• Almost in all Commercial Lease Agreements, there is an anti-assignment clause. The transfer of ownership may be forbidden by an anti-assignment clause, so before selling the business, you must seek permission from your proprietor; however, this permission should not be withheld against the interests of the lease.

However, the list is not exhaustive. There are still a lot of businesses where the anti-assignment clause is used including but not limited to joint-venture agreements, partnership agreements, limited liability company operating agreements, real estate contracts, bills of sale, Assignment, and transaction financing agreements, etc.

ENFORCEABILITY OF ANTI-ASSIGNMENT CLAUSE

This restrictive clause’s effect will be triggered the moment there is any breach of this clause. According to the traditional view, a contract is void if this restrictive clause is violated; however, the modern view holds that a breach of it will only result in a claim for damages; the contract is not ipso-facto void unless expressly stated in the contract. Along with this view, the court will consider the relevant law, the jurisdiction that governs the contract, and the language of the contract to enforce this clause.

MERITS OF ANTI-ASSIGNMENT CLAUSE

A contract with an anti-assignment clause thrives with the following advantages-

• The relationship between the assignor and the obligor is preserved, while the connection between the obligor and the assignee is either limited or eliminated.
• The obligor is safeguarded by this, as they may not want to be in a situation where they must mention a set-off defence against one party and a counterclaim against the other or become involved in a disagreement between the assignor and assignee under the contract of assignment. [5]

DEMERITS OF ANTI-ASSIGNMENT CLAUSE

The anti-Assignment clause also suffers from the following disadvantages-

• In cases where this clause is violated, it is extremely difficult to quantify and measure the damages.
• It can be a lengthy and exasperating process for businesses that are on the brink of bankruptcy, such as start-ups, to finalize the closure until they get the approval of all the commercial entities with whom they had a contract that included a non-assignment clause.
• In the event of a change in ownership, such as a merger or acquisition, a business may feel uneasy about the new owner of its partner company. To have a say in the selection of the other party’s owner, the business may include a clause in the agreement that mandates their approval before the change can occur, allowing them to indirectly manage the situation.

In conclusion, an anti-assignment clause is a provision in a contract that prohibits one party from transferring or assigning their rights or obligations under the contract to a third party without the other party’s consent. This clause is commonly used in contracts to protect the interests of the parties involved and to ensure that the original parties to the contract are the ones who will perform the obligations and receive the benefits. Anti-assignment clauses can be beneficial for both parties in a contract. For the party who is providing goods or services, it ensures that they are dealing with the same party throughout the duration of the contract, which can help to maintain consistency and quality. For the party who is receiving the goods or services, it can assure that they are dealing with a party that has the necessary expertise and resources to fulfill the obligations under the contract. However, there are also potential drawbacks to anti-assignment clauses. They can limit a party’s ability to transfer their rights or obligations under the contract, which can be problematic if the party needs to assign the contract due to unforeseen circumstances. Additionally, anti-assignment clauses can make it more difficult for a party to obtain financing or sell their business, as potential buyers or lenders may be hesitant to take on a contract with such a clause. Overall, the use of anti-assignment clauses in contracts should be carefully considered and tailored to the specific needs of the parties involved. It is important to strike a balance between protecting the interests of the parties and allowing for flexibility in the event of unforeseen circumstances.

Author(s) Name: Avee Singh Dalal (Dr B.R. Ambedkar National Law University, Sonipat)

References:

[1] The Indian Contract Act, 1872, Sec. 37, No. 9, Acts of Parliament, 1872 (India)

[2] Kapilaben v. Ashok Kumar Jayantilal Sheth, (2020) 20 SCC 648

[3] Aaron R Katz, A Guide to Understanding Anti-Assignment Clauses, GT ISRAEL LAW BLOG (Feb. 18, 2023, 5:15 PM), https://www.gtlaw-israelpractice.com/2016/02/04/a-guide-to-understanding-anti-assignment-clauses/ .

[4] The Law of Offices of STIMMEL, STIMMEL & ROESER, https://www.stimmel-law.com/en/articles/assignments-basic-law (last visited Feb. 18, 2023).

[5] Michael Bridge, The nature of assignment and non-assignment clauses, LSE RESEARCH ONLINE (2015), https://eprints.lse.ac.uk/61892/1/The_Nature.pdf .

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Remedy for breach of contract with a "No Assignment" clause

It is common for written contracts between entities to contain a "No Assignment" clause, which essentially states that, for a contract between entities A and B , the benefits or rights under the contract A cannot be assigned to another entity C without the consent of B .

It is possible for a breach of contract by B to precipitate the dissolution of A . (Examples: If B poaches a key member of A , or if the existence of A as a going concern depends entirely on its contract with B .) In such an event, it appears that a "No Assignment" clause would in effect make B immune to any liability claims, because A no longer exists and the contract could not be assigned to any beneficiary of A .

Not a perfect analogy, but in playground terms this is sort of like Bob and Al agreeing, "Let's build a sandcastle. But (here's the No Assignment clause) your friends don't get to play with it unless I agree." Once the sandcastle is complete Bob kills Al (yeah, it's a tough playground). Per the contract, Bob can invite all his friends to play and reject all of Al's friends.

Is there a legal doctrine that prevents a scenario like this?

I.e., can a contract clause indirectly render a contract party immune to liability for that party's breach of contract? I have a notion that there is something like the obverse of the "unclean hands" doctrine that would prevent this.

• contract-law
• breach-of-contract

Yes. The particulars of the scenario would determine the grounds on which a non-assignment clause would be null and void. The Restatement (Second) of Contracts roughly classifies these alternative grounds for unenforceability as grounds of undue influence and of public policy . Additionally, by default a non-assignment clause " does not forbid assignment of a right to damages for breach of the whole contract ". See Restatement at § 322(2)(a). Invoking this principle seems pertinent where, inter alia , a party breaches the covenant of good faith and fair dealing .

In the scenarios outlined in the 2nd paragraph of your question (i.e., B poaching a key member of A , or A 's existence depending entirely on its contract with B ), the contract is voidable by A if A " is justified in assuming that [B] will not act in a manner inconsistent with [A's] welfare ", Restatement at § 177(1) (brackets added).

Although undue influence typically involves some sort of fiduciary duty that is unlikely to exist in an arm's-length agreement between A and B , the Restatement certainly elaborates in terms of domination . That choice of term affords to A the argument that B 's abuse of its domination warrants voiding the non-assignment clause insofar as it frustrates A 's ultimate purpose of entering that contract.

In the playground scenario, B 's intentional killing of the counterparty with whom B partnered constitutes serious and deliberate misconduct that renders the clause unenforceable on grounds of public policy. See Restatement at § 178(3)(c). Moreover, the connection between the killing and the non-assignment clause would be evident as to timing and motive, Id at (d).

Lastly, notwithstanding the premise of " breach of the whole contract " (emphasis added) in Restatement at § 322(2)(a), the multiple references to " grant[ing] relief as justice requires " and similar phrases suggest that other principles would supersede said premise in order to preempt an absurd outcome. That is, the interests of justice would outweigh B 's allegation that his compliance with other portions of the contract should bar an assignment [to A 's beneficiaries] of a right to damages.

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Feldman & Feldman

Civil litigation law firm, what happens to existing contracts after a business is sold.

In many cases, a company’s contracts are one of the major reasons why a suitor wants to buy it. In most instances, the buyer of the business should be able to assume a contract the seller had. The question is usually what process the buyer will need to follow in order to substitute themselves into an existing contract.

Most Contracts Are Assignable, Meaning the Rights and Obligations Remain Intact

In the best-case scenario, a business’ existing contract will be freely assignable to a new party. The new party will inherit all of the rights and obligations under the contract. The mere fact that a sale took place is enough to allow for the assignment of a contract. Note that the party that sells the business may not be off the hook if the incoming party to the contract fails to perform in accordance with their contractual obligations. However, the seller of the business may be able to seek indemnification from the buyer in case of a breach of the contract or a lawsuit.

The original contract will often include a clause that states whether the agreement is assignable. If it is, the customer or counterparty does not have any say over who is on the other side of the agreement; but they can still sue the new party for breach of contract because they still maintain their rights under the agreement.

Assignment Can Make a Business Agreement More Efficient

If a contract is assignable, there is no new agreement necessary. When a transaction closes, the new company will simply take over performance as the successor-in-interest to the old company. The merger agreement will already assign the rights and obligations under existing contracts to the buyer without a new, specific process for each existing agreement. In general, the principle of assignment makes business transactions more efficient and saves the parties from a complex legal process.

The general rule is that a contract is assignable unless there is a provision in it to the contrary. An anti-assignment clause is generally enforceable; however, the clause must be in the agreement at the time of the business transaction in order to be enforceable. The counterparty to a contract cannot argue against assignment in court when there is no language in the contract concerning assignment just because they do not approve of the new business entity coming into the deal.

At the same time, the incoming business will still have an obligation to perform under the terms of existing contracts. If it fails to perform, it may be sued for breach of contract. Just because there is a new owner does not mean the counterparty forfeits its rights under the contract. The counterparty may not have a say in who performs the contract, but they can still file a lawsuit just the same.

Novation Is a More Complex and Less Certain Way of Transferring Contracts

The complex process that assignment saves parties to a contract from is called novation . This process requires a separate agreement for each contract where the substitution of a party is needed. While novation is not necessarily an anti-assignment process, it will keep a seller from automatically assigning agreements upon the completion of a deal. The original party to a contract must approve and agree to the substitution of a new party.

For example, contracts with a government entity often require novation when there is a merger or sale of the business. Novation is not automatic. There may be requirements that the new party must meet in order to take over an existing contract. The contractual counterparty may try to use a merger transaction and their consent as leverage to negotiate better terms. Never assume a contract will be novated just because a deal has taken place; however, if the counterparty refuses to novate the contract, it will give the other business the right to terminate the deal. If many contracts require novation, the merger process can be complex. The buyer of the company is assuming the risk that not all contracts can be novated because the process would happen after the deal closes.

Some contracts may not be able to survive a business merger. For example, some personal services contracts require the original party to perform. Additionally, some contracts may have specific provisions that prohibit assignment regardless of the circumstances. And, some leases may completely prohibit assignment. Finally, public policy may mandate that certain contracts are not assignable.

A party may not even need a full merger agreement in order to trigger the need for assignment or novation provisions. There may be a stock sale or other business transaction that results in a change of control over the company. In this case, there may be a need to assign or novate contracts, depending on their terms.

Pay Close Attention to the Language of Each Contract Before the Deal Closes

If you are considering purchasing a business, you will get the chance to review relevant contracts before the deal closes and after you have agreed to the terms. There is a due diligence period where you will be able to view corporate financials and agreements. During due diligence, you should scrutinize the terms of key contracts to determine locate any potential anti-assignment provisions. You should also review agreements to understand what your legal obligations may be after the deal closes. Determining which contracts are assignable is a necessary component of assessing the value of the business you’re contemplating purchasing.

If you are selling a business, you need to develop an in-depth understanding of the reliability and trustworthiness of your counterparty. You should contact a contract lawyer to ensure you have adequate protection from a potential lawsuit in case the buyer does not perform in accordance with the obligations in your company’s 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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Are Anti-Assignment Clauses Enforceable?

Written by: Brittainy Boessel

July 22, 2020

8 minute read

Contracts, in general, are freely assignable, which means that either party can transfer its contractual obligations or rights to a third party. But sometimes contracts include anti-assignment clauses to limit or prohibit assignment. Read on to discover the basics of assignment and anti-assignment clauses, what makes them unenforceable, and learn how to negotiate them.

What Is Assignment?

An assignment is like a transfer. If an agreement permits assignment, a party could assign — or transfer — its obligation to another party. The second party — the one to whom the contract was assigned — would then be required to provide the products or services.

Assignments don’t necessarily relieve liability for the party who transfers the agreement. Depending on the contract, the party who assigned its obligations may remain a guarantor of— or responsible for—the performance of the third party assigned the work. In other words, the party to the contract (the assignor) would be responsible for breaches committed by the party to which it assigned its performance (the assignee). To remove itself from the liability of the agreement, the assignor would need to seek a novation , which cancels the first contract and creates a new contract between the party that is the assignee and the original counterparty to the contract.

What is an Anti-Assignment Clause?

Anti-assignment clauses—also sometimes referred to as assignment clauses or non-assignment clauses—can appear in various forms. Essentially, they prevent one or both contracting parties from assigning some or all of their respective contractual obligations or rights to a third party.

Anti-Assignment Language to Look for in a Contract

When reading through your contract, you can typically find a separate paragraph entitled “Assignment,” “Non-assignment,” or “Anti-assignment.” Sometimes you’ll find the assignment language buried within a “Miscellaneous Provisions” section, which contains all the boilerplate language of a contract, such as severability and waiver provisions.

Contracts include two primary types of anti-assignment clauses. The first type categorically precludes all assignments of rights and duties. It usually reads something like this: “Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”

The second type prohibits assignments unless the assigning party obtains the prior written consent of the other party. It usually reads something like this: “Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written permission of the other party, and whose consent may be withheld for any reason.”

Some clauses may state that a change of control, such as a merger, consolidation, or acquisition, is considered an assignment. Read carefully , because you want to ensure that you won’t be in breach if you transfer the contract to an affiliate.

Additionally, check the termination section of your agreement. Some termination clauses may state that a non-assigning party may terminate the contract in the event of a non-permitted assignment. Or a termination clause may state that the agreement automatically terminates upon such a transfer.

Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts.

Still, courts normally enforce anti-assignment clauses that are negotiated and agreed upon by both parties, depending on the applicable law, the jurisdiction governing the contract, and the language agreed upon in the contract. Be aware though that courts tend to narrowly interpret anti-assignment clauses. For instance, an anti-assignment clause may prohibit assignment but fail to state that an assignment in violation of the contract will be invalid. In this case, a party may be able to file a suit for breach of contract, but the court may not permit it to invalidate the assignment.

Even without a solid anti-assignment clause, there may still be an opportunity to prevent certain assignments. Courts may not enforce assignments to which the counterparty did not consent, even in the absence of a valid anti-assignment clause, especially if the contract is personal in nature. Some obligations can be performed equally well by a third party, such as a requirement to make payments. But a personal obligation involves a special relationship between parties or requires special levels of expertise, discretion, or reputation. For example, personal service contracts, including employment agreements, are personal enough in nature that they’re not transferable unless the non-transferring party consents.

In general, assignment is not enforceable when:

• The contract prohibits and voids assignment

As discussed above, contract provisions can prohibit and void an assignment.

• The assignment materially changes the contract

If the assignment would significantly impact the performance of the contract — for instance, if it greatly increases the risks or burden imposed on the other party — then a court would likely not enforce the assignment.

• The assignment violates the law

Certain laws prevent assignments. For example, some states legislate that an employee cannot assign its future wages to a third party.

• The assignment violates public policy

If the assignment would harm public policy interests, it will be void. For instance, victims may not assign their personal injury claims to third parties to discourage excessive litigation.

Negotiating Anti-Assignment Clauses

In certain situations, the inclusion of an anti-assignment clause may not be in a party’s best interests. If a party depends on a unique service provider or a specific person to perform, then it must make sure that that service provider or person can’t assign work to an unknown third party without its consent. For instance, if you pay a premium to hire a renowned jazz band to perform at your charity gala, you don’t want a local high school garage band to show up instead. In any situation involving unique services or providers, make sure you have the right to consent prior to any assignment under the agreement.

Another example of the importance of assignability is in mergers and acquisitions. When a company purchases another business, the acquired business’s existing customer base and supplier contracts make it more valuable . Consequently, if a party hopes to eventually sell its business, it would want the right to assign its existing contracts to the buyer. Otherwise, potential buyers may be scared off because of the time and money it will take to transfer the existing agreements. Plus, the existence of anti-assignment clauses may heavily impact the selling price. If it’s possible you may sell your business, ensure that you have the right to assign your contracts and that consent is not solely within the discretion of the counterparty.

If you want the right to assign the contract, but your agreement does not permit assignments, you’ll need to negotiate with your counterparty on this point. If the clause in your agreement prohibits all assignments, try to include a carve out by allowing assignment of your rights and obligations upon the prior written consent of the other party. Add that the counterparty shall not unreasonably withhold or delay consent. You may also want to carve out an exception to the anti-assignment clause by excluding assignments between affiliates or necessitated by change of control transactions, such as mergers or acquisitions.

Courts tend to construe anti-assignment and anti-delegation clauses narrowly. As mentioned, a number of courts have held that an anti-assignment clause does not remove the power of a party to assign the contract and invalidate the contract unless the provision explicitly states that such assignments will be invalid or void. Thus, if you want to make an assignment that violates your agreement, rather than creating an opportunity for a breach of contract case, explicitly state in your contract that such assignments are invalid or void.

If you don’t want the counterparty to be able to assign its rights or obligations, state your preference clearly in your agreement with one of these options.

• Require consent always

Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, and any assignment or delegation that violates this provision shall be void.”

• Don’t require consent for affiliates or successors

Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party owns greater than 50 percent of the assets; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will receive an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”

• Require consent to be given reasonably

Include a clause such as, “Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”

Note that you will not be able to prevent assignments resulting from court orders or by operation of law, such as those ordered through a bankruptcy hearing.

When you enter a contractual relationship, make sure to clearly determine your rights and obligations, as well as those of the other party. If it may be important for your business to have the right to assign all or parts of the contract, negotiate for the removal of the anti-assignment clause, or request changes to it to provide sufficient flexibility for you to assign.

Learn how to tackle Due Diligence projects more efficiently and free up your (and your associates’) time more effectively!

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Anti-Assignment Clauses; Are LLC Operating Agreements Different From Other Contracts?

In a little noticed case reported on December 19, 2011,  Condo v. Conners , the Colorado Supreme Court issued a decision on a common contract drafting problem – the effect of an anti-assignment clause.

Historically, when contracting parties wanted to prohibit each other from assigning the contract, a lawyer would include language reading something like: “A party shall not assign, sell or otherwise transfer its rights under this agreement without the written consent of the other party.”

Back in the day, that language accomplished the parties’ intent, because courts held it meant that a party did not have the power to assign a contract, and any assignment without consent would be void and treated as though it never happened. That is the “classical” or “historical” rule.

Over the last 10-20 years, a new rule has developed; some courts have held that language prohibiting assignment does not mean the parties can’t assign, it means that if they do it is a breach of the contract, but the assignment still stands. The foundation of the new rule is a public policy that the law favors assignability of contract rights. Under the new rule if a party assigns the contract without consent and in breach of the contract language, the other party could not bring an action to void or ignore the assignment, but could only bring an action for damages – a very bad outcome for someone who simply doesn’t want to be in a contract with a party he didn’t chose! Moreover, in most situations it is very difficult to measure and prove damages arising from a prohibited assignment.

Anti-assignment clauses are found in many types of contracts, but are particularly important in contracts where people are going into business together, like partnership agreements, joint venture agreements and limited liability company operating agreements. For example, if three people decide to join-up and start a business, they are usually counting on one another to contribute some special area of expertise, to invest time and money, and to be there for the others, at least until the business is established. They do not want to suddenly find they have a new business partner because one of them sold his interest or transferred it in a divorce, and that is exactly what happened in this case.

In Condo v. Conners, three people formed a Colorado limited liability company and signed an operating agreement that said “a member shall not sell, assign, pledge or otherwise transfer any portion of its interest in [the Company] without the prior written approval of all of the Members”. One of the members got a divorce, and as part of the divorce settlement he tried to assign his membership interest to his wife. The other two members did not consent, so he assigned his wife only the right to receive distributions, and also agreed to follow her instructions when voting his membership interest. When he later sold his membership interest to his partners, his ex-wife sued to void the sale and enforce the earlier assignment to her.

The outcome of the case hinged on the new rule versus classic rule debate – if the new rule applies, the assignment to the ex-wife in violation of the operating agreement is not void, but the two partners would have a breach of contract claim against the husband – the wife wins. If the classic rule applies, the wife loses because the assignment to the wife in violation of the operating agreement would be void and treated as though it never happened.

The dispute made it to the Colorado Supreme Court, where the wife argued that a Colorado LLC operating agreement should not be interpreted under contract law, but rather as a formation or governing document like corporation articles or bylaws. Fortunately, the Supreme Court disagreed. Looking to Delaware case law, In re Seneca Invs. LLC, 970 A.2d 259 (Del. Ch. 2008), the Supreme Court held that operating agreements are contracts and shall be interpreted under prevailing contract law. This part of the decision is important because limited liability company acts are divided into two categories: (1) those with extensive default rules governing the conduct of the company’s governance (like corporation acts), and (2) those with very few or no default rules, leaving all or most matters to the contract between the members (contractarian acts). The Delaware Act follows the contractarian view, and several years ago Colorado changed its limited liability company act to remove most of the default rules and became a contractarian act similar to the Delaware model. A holding by the Supreme Court that an LLC operating agreement was something other than a contract would have undermined the intent of the Colorado legislature in overhauling the LLC Act, and diminished one of the primary benefits of an LLC – the flexibility to constitute, govern and operate your company in the manner you wish, without extensive statutory constraints.

However, the Supreme Court also recognized that an LLC operating agreement is different from the average commercial contract, because it has a statutory scheme at its foundation – the Colorado Limited Liability Company Act. Each operating agreement must be interpreted as a contract, but within the language and requirements of the act. For example, the husband’s operating agreement prohibited assignment of “any portion of” the membership interest. The Supreme Court looked to C.R.S. Sec. 7-80-102(10), which says that a membership interest in an LLC includes the “right to receive distributions”, and C.R.S. Sec. 7-80-108(4), which requires the courts to give “maximum effect” to the operating agreement. Since the right to receive distributions is part of a membership interest, and the husband assigned his right to receive distributions, then he assigned a “portion” of his membership interest, in breach of the operating agreement.

In light of the breach, the court had then to decide whether to apply the modern rule and let the assignment stand anyway, or apply the classical rule and void the assignment. So, when faced with the opportunity to say which rule applies to contracts in Colorado, the Supreme Court…………punted. Instead of adopting a hard and fast rule for the interpretation of anti-assignment clauses, or even anti-assignment clauses only in operating agreements, the Supreme Court held that either rule might apply to a contract under Colorado law, and which rule applies can only be determined by discerning the intent of the parties and the facts of a specific case. In THIS CASE, the Supreme Court applied the classical rule, holding the assignment by the husband to his wife was void because the language of the operating agreement, read in conjunction with the language of the statute, indicated that the parties wanted to restrict who they would do business with and prevent any assignment without consent. The ruling implies that similar language in other operating agreements might be interpreted the same way, but it is not a rule. Moreover, the court specifically said it was not rejecting the modern rule, which might apply to other contracts, including other operating agreements, if the facts and intent warranted.

The lessons from this decision are not new. Courts seldom adopt a hard and fast rule when it is unnecessary to decide the case before them – doing so often invokes the law of unintended consequences, and restricts the flexibility of courts to fashion justice in other cases. It is up to the parties to say what they want. Since at least 2003 and possibly earlier, legal commentators have been advising lawyers who want to strictly prohibit assignment of a contract to address this very issue. In Negotiating and Drafting Contract Boilerplate (ALM Publishing 2003), Tina Stark dedicates an entire chapter to this issue (Chapter 3, Assignment and Delegation).

Recommendation

An anti-assignment clause in an important contract should not be thrown in as “standard language” or culled from form boilerplate. If you might want to assign the contract or certain rights or obligations in the future, but don’t want to raise the issue during negotiations, then vague language of the type used in Condo v. Conners may be best – leave that fight for another day. But if it is important to you that the contract not be assigned, language of the following type will avoid the type of analysis and uncertainty reflected in Condo v. Conners:

No party may assign its rights or delegate its obligations under this Agreement, without the written consent of the other party. Any purported assignment or delegation in breach of the preceding sentence shall be void.

Problem solved!

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Caveat Emptor—Anti-Assignment Clause Renders Transferred Claim Unenforceable

Amid the explosion of trading in claims against distressed and bankrupt entities, courts in recent years have issued numerous rulings of interest to both buyers and sellers. Notable decisions have addressed, among other things, "loan to own" acquisition strategies resulting in vote disqualification or claim amount limits; buying claims to block confirmation of a chapter 11 plan; equitable subordination, disallowance, and other lender liability exposure based upon the seller’s misconduct; the adequacy of standardized claims trading agreements; claim-filing requirements in the era of computerized records; and buying claims for the purpose of creating appellate standing.

One of the latest developments in the growing body of bankruptcy jurisprudence affecting this area was contributed recently by the U.S. Bankruptcy Court for the District of Delaware in In re Woodbridge Group of Companies, LLC , 2018 WL 3131127 (Bankr. D. Del. June 20, 2018). The court ruled that, because an anti-assignment clause in a promissory note was enforceable under state law, the associated claim asserted in bankruptcy by the purchaser of the note must be disallowed. Among other things, the court noted that "[t]he evidence does not support the claims trader’s argument that enforcing the anti-assignment clause would disrupt the market."

Bankruptcy Claims Trading

The proliferation of trading in distressed debt, other claims, and stock and other interests provides a ready market for creditors and shareholders who want to obtain current recoveries without waiting until the end of a bankruptcy case. Although trading in public securities is regulated by disclosure and other requirements contained in federal securities laws, transfers of some types of claims are not subject to such regulation. Astute claims traders with information and expertise that other creditors may not have or may not be willing to develop can profit considerably if claims acquired at a steep discount later reap significant recoveries. For a variety of potential reasons, bankruptcy courts have sometimes played a role in monitoring or regulating such claims trading.

Bankruptcy Rule 3001

Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") expressly give the bankruptcy courts the power to regulate claims trading once a debtor files for bankruptcy. Bankruptcy Rule 3001(e) includes certain notification requirements which vary according to when a claim is transferred and for what purpose (i.e . , for security or otherwise) to ensure that the court has an accurate record of the identity of the holder of the claim and, in a chapter 11 case, to ensure that the actual holder of the claim has an opportunity to vote to accept or reject a plan. It does not provide for any court involvement in the trading process.

Bankruptcy Rule 3001 was amended in 1991 to significantly curtail court oversight of claims transfers. See Preston Trucking Co. v. Liquidity Solutions, Inc. (In re Preston Trucking Co.) , 333 B.R. 315 (Bankr. D. Md. 2005); see generally Collier on Bankruptcy ¶ 3001.08 (16th ed. 2018). Prior to 1991, Bankruptcy Rule 3001(e)(2) required court approval of all claims transfers after notice and a hearing. As a result, prior to 1991, courts frequently used Rule 3001(e) to place significant restrictions on the claims trading process. See, e.g. , In re Allegheny International Inc. , 100 B.R. 241 (Bankr. W.D. Pa. 1988) (establishing a procedure for claims trading in addition to the requirements of Bankruptcy Rule 3001(e) and requiring the debtor to provide the potential assignor with its best estimate of the value of the claim until a plan and disclosure statement were filed); In re Revere Copper and Brass, Inc. , 58 B.R. 1 (Bankr. S.D.N.Y. 1985) (refusing to approve assignments of claims until the creditors had been given a period of approximately 30 days in which to revoke assignments, where the assignee failed to show that the creditors had received sufficient information to make an informed judgment about the purchase offer).

The Advisory Committee Note accompanying the 1991 amendment states that, in the event the transferor makes a timely objection, the "court’s role is to determine whether a transfer has been made that is enforceable under nonbankruptcy law."

Under amended Bankruptcy Rule 3001(e), if a claim has been transferred for purposes other than security prior to the filing of a proof of claim, there is no need to submit evidence of the transfer. If a claim has been transferred for purposes other than security after the original claimant files a proof of claim, the transferee is substituted for the transferor in the court’s records in the absence of a timely objection by the transferor.

Courts’ Continued Role in Regulating Trading

Despite curtailment of the court’s role in the claims trading process, courts in certain circumstances have regulated claims trading or disallowed traded claims.

Restricting Trading to Preserve Tax Attributes

Chapter 11 debtors intent upon preserving valuable tax attributes commonly seek court orders restricting trading of claims and interests to prevent a corporate ownership change that, if not effectuated as part of a confirmed chapter 11 plan, could limit or eliminate the ability of the debtor or an acquirer to use net operating loss ("NOL") "carrybacks" or "carryovers" to offset past or future taxable income. See 26 U.S.C. §§ 172 and 382. Courts which have restricted trading in this manner generally reason that NOLs are property of the debtor’s bankruptcy estate under section 541, that the property is protected from forfeiture by the automatic stay in section 362, and that the court has broad equitable authority under section 105 to restrict trading. See, e.g. , Official Comm. of Unsecured Creditors v. PSS S.S. Co., Inc. (In re Prudential Lines, Inc.) , 928 F. 2d 565 (2d Cir. 1991), cert. denied , 502 U.S. 821 (1991); In re Triad Guar. Inc. , 2016 WL 3523834 (D. Del. June 27, 2016); In re Phar-Mor, Inc. , 152 B.R. 924 (Bankr. N.D. Ohio 1993). But see In re UAL Corp. , 412 F.3d 775 (7th Cir. 2005) (ruling that the bankruptcy court erroneously enjoined trading and that when two parties decide to trade claims or interests, they are transferring rights which they own and control, rather than seeking to obtain possession or exercise control over the debtor’s NOLs).

Disallowance of Traded Claims Under Section 502(d)

Section 502(d) of the Bankruptcy Code creates a mechanism for dealing with creditors who have possession of estate property on the bankruptcy petition date or are the recipients of pre- or post-bankruptcy asset transfers that can be avoided because they are fraudulent, preferential, unauthorized, or otherwise subject to forfeiture by operation of a bankruptcy trustee’s avoidance powers. This section provides in relevant part as follows:

[T]he court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable . . . . 

Some courts have held that a transferred claim must be disallowed under section 502(d) even if the transferee is not the entity from which property is recoverable—ruling, in effect, that a claim is not cleansed when it is sold or assigned. See In re KB Toys Inc. , 736 F.3d 247, 254 (3d Cir. 2013) ("the cloud on the claim continues until the preference payment is returned, regardless of whether the person or entity holding the claim received the preference payment"); In re Metiom, Inc. , 301 B.R. 634 (Bankr. S.D.N.Y. 2003); see also In ASM Capital, LP v. Ames Department Stores, Inc. (In re Ames Department Stores, Inc.), 582 F.3d 422 (2d Cir. 2009) (section 502(d) does not mandate disallowance of administrative claims acquired from recipients of voidable transfers because an administrative expense does not qualify as a "claim" within the meaning of the provision); In re Arctic Glacier Int’l, Inc. , 255 F. Supp. 3d 534 (D. Del. 2017) (citing KB Toys and ruling that purchasers of units in a chapter 15 debtor were bound by court-approved releases in a Canadian debtor’s plan of arrangement). But see Enron Corp. v. Springfield Associates, L.L.C. (In re Enron Corp.) , 379 B.R. 425 (S.D.N.Y. 2007) (infirmities travel with an assigned claim for purposes of section 502(d), but not if the claim is sold), vacating Enron Corp. v. Springfield Associates, L.L.C. (In re Enron Corp.) , 333 B.R. 205 (Bankr. S.D.N.Y. 2005) (a transferred claim can be equitably subordinated even if it is transferred to an entity that did not engage in any misconduct), and Enron Corp. v. Avenue Special Situations Fund II, LP (In re Enron Corp.) , 340 B.R. 180 (Bankr. S.D.N.Y. 2006) (transferred claims can be disallowed under section 502(d) if the transferor received a voidable transfer).

Unenforceability of Claim Under State Law— Woodbridge Group

Section 502(b)(1) of the Bankruptcy Code provides that a claim shall be disallowed if it is "unenforceable against the debtor . . . under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." In Woodbridge Group , the bankruptcy court held that a claim based upon an assigned promissory note must be disallowed under section 502(b)(1) because the note contained an anti-assignment clause which was enforceable under applicable state law.

Prior to filing for chapter 11 protection in 2017 in the District of Delaware, Woodbridge Mortgage Investment Fund 3 A, LLC ("Woodbridge") issued approximately 9,000 secured promissory notes to various investors, including Elissa and Joseph Berlinger (the "Berlingers"). Both the notes and the underlying loan agreements contained anti-assignment clauses providing that the notes, the loan agreements, and other related documents could not be assigned by the noteholders without Woodbridge’s consent and that "any such attempted assignment without such consent shall be null and void."

Woodbridge breached the loan agreements before filing for bankruptcy. In February 2018, the Berlingers entered into an agreement to "sell, convey, transfer and assign" their notes and associated rights to Contrarian Funds, LLC ("Contrarian"). Contrarian then filed a secured claim against Woodbridge on the basis of the transferred promissory notes. Woodbridge objected to the claim, contending that it was unenforceable due to the anti-assignment clause. In addition, in accordance with the terms of the notes, Woodbridge unilaterally imposed a moratorium on any transfers of its $750 million in promissory notes.

The bankruptcy court sustained Woodbridge’s objection and disallowed Contrarian’s claim.

The court was mindful that the role played by bankruptcy courts in policing claims trading was curtailed in 1991. Even so, the court wrote that it was "aware of no provision in the Bankruptcy Code or of any overarching bankruptcy policy which impairs the Court’s authority to determine and enforce applicable non-bankruptcy law concerning contract provisions which may restrict transfers of claims." It also flatly rejected the argument that sustaining Woodbridge’s objection to Contrarian’s claim would disrupt the claims trading market (citing KB Toys , 470 B.R. at 342 ("The assertion that subjecting transferred claims to § 502(d) disallowance would cause disruption in the claims trading market is a hobgoblin without a house to haunt.")).

The court explained that under applicable state law—here, Delaware law—anti-assignment clauses which restrict the power to transfer are enforceable, albeit narrowly construed due to the importance of free assignability. In addition, in Delaware and elsewhere, there is a distinction between provisions restricting a party’s power to assign by express language that any assignment will be void or invalid and those merely restricting the right to assign, in which case the assignment is valid and enforceable but causes a breach of contract. In this case, the court ruled, the notes and the loan agreement expressly limited the noteholders’ power to assign.

The court rejected Contrarian’s argument that, because it purchased the "claims" or "causes of action" underlying the promissory notes, rather than the notes themselves, the assignment was valid and enforceable under the Restatement (Second) of Contracts, which limits noteholders’ ability to delegate duties in connection with notes but does not bar them from transferring their rights, claims, or causes of action. According to the court, the Restatement provides that an anti-assignment clause, whether it purports to prevent the assignment of claims, causes of action, or notes, is enforceable if expressed in clear and unambiguous language, which was the case here.

The court also rejected Contrarian’s argument that Woodbridge’s breach of the notes rendered the anti-assignment clauses unenforceable. "It is axiomatic," the court wrote, "that a non-breaching party may not emerge post-breach with more rights than it had pre-breach." According to the court, this conclusion comports with its previous ruling in KB Toys , in which it held that a "disability"—here, the inability to assign the notes without consent—travels with an assigned claim.

Finally, the court rejected the argument that section 9-408 of the Uniform Commercial Code (the "UCC") "overrides and nullifies" any contract provision which restricts the assignment or "requires the consent of the maker of a promissory note before the note may be transferred." UCC § 9-408, the court explained, applies only to grants of security interests in promissory notes, and another provision—UCC § 9-406—"endorses the enforceability of anti-assignment provisions in the sale, or assignability, of promissory notes."

Woodbridge Group is a cautionary tale for claims traders. It highlights the importance of careful due diligence and knowledge of the law. As with many other court rulings addressing claims transfers in the recent past, Woodbridge Group reinforces the view of most courts that a claim travels with its impediments, thereby putting the burden on transferees to thoroughly vet the enforceability of a claim or to demand an appropriate indemnity in a claim transfer agreement. The ruling also suggests that courts may not be receptive to claims traders’ contentions that disallowance of transferred claims may disrupt the trading market.

Woodbridge Group is not the only recent court ruling addressing the enforceability of assigned claims under section 502(b). In In re Caesars Entertainment Operating Co., Inc. , 588 B.R. 32 (Bankr. N.D. Ill. 2018), the bankruptcy court disallowed assigned tort and contract claims because the tort claims were unassignable under applicable non-bankruptcy law and because, pursuant to a purchase and sale agreement, the contract claims could not be assigned without consent. The court also held that Bankruptcy Rule 3001(e) does not create substantive rights for claims transferees.

In addition, in In re Westinghouse Electric Co. LLC , 2018 WL 3655702 (Bankr. S.D.N.Y. Aug. 1, 2018), the bankruptcy court ruled that, because a series of email exchanges between the holder and the purported purchaser of a claim did not create a binding contract under applicable non-bankruptcy law, the notice of transfer of the claim should be canceled and the original holder recognized as the claimant. The court rejected the argument that customs in the claims trading industry demanded a contrary ruling, noting that industry participants "ought to be clear and direct in setting forth their agreements in the emails they exchange," especially when dealing with less experienced counterparties.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

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Assignability Of Contracts: Everything You Need to Know

The assignability of contracts is when one side of a contract agreement transfers the contract to another entity, so that the new entity fulfills the terms of the contract. 3 min read updated on September 19, 2022

The assignability of contracts is when one side of a contract agreement transfers the contract to another entity, so that the new entity fulfills the terms of the contract. Being able to assign contracts depends on a variety of factors, mainly the language contained in the contract. 

How Contract Assignments Work

Some contracts prohibit assignment altogether, while others may allow it with the other party's consent. An example of a basic contract assignment may look like this: 

• Bob contracts with a dairy to deliver a gallon of cream to his house every day. 
• The dairy assigns Bob's contract to another dairy. 
• As long as Bob is notified of the change in provider and gets his gallon of cream every day, his contract is with the new dairy.

Because the law has a preference for the free alienation of property, parties are free to assign contract rights and delegate contractual obligations. 

Assigning a contract to another doesn't always take away the assigning party's liability. Some contracts include a clause that at least one of the original parties guarantees performance — or fulfills the contract terms — no matter what the assignment.

The performance, however, can't be changed in contract assignment. There's a limit to substitution, so the new party has no power to change the performance per the rights stated in the contract. For example, if the obliging party has pledged to perform only if some event happens (with no certainty that it will happen), no assignment should increase the risk to the obliging party if the event doesn't happen through no fault of the obligor.

The nature of a contract's obligations determines its assignability.

When Assignments Won't Be Enforced

In certain cases, contracts can't be assigned.

• A clause in the contract prohibits assignment. This is usually called an anti-assignment clause.
• Assignments can't take place if they materially alter what's expected under the contract. If the assignment affects the expected performance as outlined in the contract, lowers the value of returns (including anticipated returns), or increases risks for the other contract party (the one who's not assigning contractual rights), it's unlikely that any court will enforce the arrangement.
• If an assignment violates public policy or the law, it won't be enforced. For instance, the federal government prohibits certain claim assignments against the government, and many states prohibit an employee from assigning future wages.

Other assignments may not be illegal, but they could still violate public policy. As an example, personal injury claims can't be assigned because doing so might encourage litigation.

When looking into whether one party can transfer a contract or some rights and obligations in the contract, the transferring party has to check into applicable laws and statutes. That party must also check the contract's express language to determine whether or not it can transfer the assignment without obtaining consent from the non-transferring party.

If the contract requires that consent is given and the transferring party doesn't get that consent, it risks a contract breach as well as an invalid, ineffective transfer.

How to Assign a Contract

Follow these steps to assign contracts, when it's allowed for you to do so.

• Carefully study the contract for prohibitions or limitations, such as anti-assignment clauses. In some cases, there isn't a separate anti-assignment clause, but it may be stated in another way, such as language that says, "This contract may not be assigned."
• Execute the assignment. As long as you're free to assign the contract, prepare and enter into the assignment, which is basically an agreement transferring your rights and obligations.
• Notify the obligor, or the non-transferring party. After you assign contract rights to the assignee, notify the other party that was the original contractor, also known as the obligor. This notice relieves you of any liability as stated in the contract, as long as the contract doesn't say differently — for instance, the contract states that you, as the assignor, guarantee performance under the contract. 

Before trying to assign a contract to a third party, it's very important to understand if you're allowed to do so. You'll have to research legal statutes as well as the language in the contract to ensure you follow rules and regulations. Otherwise, you risk a breach of contract .

If you need help with contract assignments, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

• Consent to Assignment
• Assignment Contract Law
• Assignment of Contract Rights
• Assignment of Rights and Obligations Under a Contract
• Assignment Of Contracts
• Legal Assignment
• Assignment Law
• Assignment of Rights Example
• Third Party Contracts
• What Is the Definition of Assigns

Anti-Assignment Clauses › Breach of Contract

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Superior Court Dismisses Successor-by-Merger’s Claims Where Underlying Contract Contained Anti-Assignment Clause

MTA Royalty Corp. v. Compania Minera Pangea, S.A. DE C.V., C.A. No. N19C-11-228 AML CCLD (Del. Super. Sept. 16, 2020) - Plaintiff’s predecessor-in-interest conveyed mineral rights to Defendant. Under the agreement,... more

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Amid the explosion of trading in claims against distressed and bankrupt entities, courts in recent years have issued numerous rulings of interest to both buyers and sellers. Notable decisions have addressed, among other... more

Florida Appeals Court Allows Assignment of Benefit Restrictions in Homeowner Policies - Ruling Sets Up Conflict with Earlier...

Florida's Fourth District Court of Appeal (DCA) ruled on Sept. 5, 2018, that an insurer's anti-assignment provision was not prohibited. The Court disagreed with the Fifth DCA's decision in December 2017 prohibiting any such... more

Arizona Court of Appeals Holds Insureds May Assign a Post-Loss Breach of Contract Claim to Contractors

The Holding - In Farmers Ins. Exchange v. The Honorable David Udall, 2018 WL 2931906 (June 12, 2018), the Arizona Court of Appeals accepted special action jurisdiction to hold that Insureds validly assigned post-loss... more

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The Delaware Bankruptcy Court recently voided the transfer of bankruptcy claims where the seller failed to obtain the debtor’s prior written consent, as required by the underlying promissory notes. Both the promissory... more

Delaware Bankruptcy Court Sustains Objection to Claim on a Note Transferred in Violation of Anti-Assignment Restriction

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Stuff You Might Need to Know: What Assignments Do Broad Anti-Assignment Clauses Not Prohibit? Blog Global Private Equity Watch

A recent federal court decision applying Delaware law, Partner Reinsurance Co. Ltd. v. RPM Mortgage, Inc. , 2021 WL 2716307 (S.D.N.Y. July 1, 2021), explores some rare contractual territory— i.e. , the question whether, in the absence of consent, a valid assignment may be made by a party of its rights to pursue a claim for damages for breach of a merger agreement, notwithstanding an anti-assignment clause that declared “void” any assignment of “any or all of” such party’s “rights under” that merger agreement. Surely, some might say, the right to claim damages for a breach of a contact is a “right[] under” that contract and would accordingly be prohibited by such a broad anti-assignment clause. Not so says the United States District Court for the Southern District of New York; and, in case you were wondering, this holding is consistent with long standing law concerning the scope of even the broadest anti-assignment provisions.

An important component of buy-side diligence is identifying the target’s material contracts that contain anti-assignment or change-of-control clauses, evaluating whether the proposed acquisition will trigger any of the identified clauses, and determining the consequences of proceeding with the proposed acquisition in the absence of consent if the clause is in fact triggered. Many times, there are structuring alternatives to avoid triggering the identified clause — i.e. , in the absence of a change-of-control clause, a stock purchase or reverse merger may be a means of structuring the transaction so there is no actual assignment of the contract at all. [1] And sometimes, the consequence of triggering the clause is not a void assignment or a terminable contract, but simply a breach of contract with limited or no real damages. But when there is an unquestionable assignment occurring, and the anti-assignment clause declares any assignment triggered by the clause to be void, are certain assignments of rights related to a contract nonetheless outside the scope of that anti-assignment clause?

Partner Reinsurance did not involve an anti-assignment clause in a target contract. Instead, Partner Reinsurance involved an anti-assignment clause in a merger agreement between a potential buyer, RPM Mortgage, Inc. (“RPM”), and the target, Entitle Direct Group, Inc. (“Entitle”). But the legal principles involved in resolving this case have potential applicability in both diligence and deal structuring generally.

In Partner Reinsurance , the merger between Entitle and RPM failed for reasons that were disputed, but Entitle terminated the agreement while apparently preserving its right to sue for damages based on alleged breaches by RPM. Thereafter, Entitle entered into and closed an alternative merger with a third party in which Entitle was the surviving company. But as part of making that alternative merger deal, one of the shareholders of Entitle, Partner Reinsurance Company Ltd. (“Partner Re”), bargained to retain any claim Entitle had against RPM for the original failed merger agreement. Because that claim belonged to Entitle, as the party actually harmed by the failed merger (as opposed to its individual shareholders), Partner Re obtained an assignment from Entitle when the merger with the third party closed that “assign[ed] to Partner Re the exclusive right to pursue any claims [Entitle] may have in respect of [the failed merger agreement].” [2]

When Partner Re sued RPM for damages arising from the failed merger agreement between Entitle and RPM, RPM sought to dismiss the case because “Partner Re lack[ed] contractual standing to pursue [the] action.” In other words, RPM argued that the purported assignment by Entitle of its rights to pursue damages for RPM’s alleged breach of the failed merger agreement was ineffective because of the anti-assignment clause set forth in the Entitle/RPM merger agreement. Note that RPM did not challenge the merger between Entitle and the third party because Entitle survived that merger— i.e. , the merger was a reverse merger.

The anti-assignment clause in the Entitle/RPM merger agreement read as follows:

Successors and Assigns . No Party to this Agreement may directly or indirectly assign any or all of its rights or delegate any or all of its obligations under this Agreement without the express prior written consent of each other Party to this Agreement. This Agreement shall be binding upon and inure to the benefit of the Parties to this Agreement and their respective successors and permitted assigns. Any attempted assignment in violation of this Section 11.6 shall be void.

Had the court sided with RPM, the assignment agreement between Partner Re and Entitle provided that Entitle had no obligation to pursue the claim on behalf of Partner Re—so this was not just a question of who was going to sue, but whether there was going to be any suit at all. But the court sided with Partner Re.

The Entitle/RPM merger agreement was governed by Delaware law; thus the scope of its anti-assignment clause was determined by applying Delaware law. While “Delaware courts recognize the validity of clauses limiting a party’s ability to subsequently assign its rights,” they “generally follow the approach of the Restatement (Second) of Contracts § 322(2)[a] (1981).” And, “[t]hat section provides that ‘[a] contract term prohibiting assignment of rights under that contract, unless a different intention is manifest, … does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of his entire obligation[.]’” As noted by the court, this rule has been applied by “[c]ourts across the country … to permit assignments of claim[s] for damages even where the relevant parties’ contract includes a clear prohibition on the assignment of rights or duties.”

Thus, because Entitle had assigned to Partner Re only its claims for damages arising from the alleged breach of the failed merger agreement by RPM, the assignment “was unaffected by the Merger Agreement’s anti-assignment clause.” Interestingly, the court noted that there is a distinction between claims for breach of contract, which are not considered “rights under” a contract, and claims for payments to be made under a contract prior to a breach, which are considered “rights under” a contract. The bottom line: if you wish to restrict assignment of claims for damages arising from breach of contract (and even other rights that arise following full performance by a party under a contract), you have to be explicit in your anti-assignment clause regarding such rights; and a mere restriction on the assignment of “any or all rights under the contract” lacks the required explicitness. [3]

And while we are on the subject of anti-assignment clauses and explicitness requirements, there are two additional explicitness rules in Restatement (Second) of Contracts § 322 that merit attention. The first is that a clause only prohibiting an assignment of “the contract,” without more, does not prohibit the assignment of rights arising from that contract; instead it only prohibits the delegation or assignment of a party’s obligations. [4] Thus, depending on the continued performance required by a target under a contract and recognition of this rule by the jurisdiction governing the contract, a mere prohibition on the assignment of “the contract” may not prevent a transaction involving the assignment of the target’s rights under that contract.

The second rule is one that is frequently overlooked. But, when this rule is recognized by the applicable jurisdiction, it can provide potential structuring flexibility. The second rule states that a contractual provision that prohibits the assignment of rights under the contract, without more, does not render an assignment made in violation of that clause ineffective; instead, such a clause only permits the other party to sue for damages for a breach of that clause. [5] The second rule thus distinguishes between the power to assign and the contractual right to assign; if the power to assign is restricted, then no assignment in violation of that provision can occur, but if only the right to assign is restricted, then an assignment in violation of that provision gives rise to a breach of contract. [6]

An anti-assignment clause declaring void an assignment made in violation of that clause is categorized as a clause restricting the power to assign, while those that do not are typically viewed as only limiting the right to assign. [7] Of course, if the contract permits the non-breaching party to terminate upon breach of the contract by the other party (like many leases do when the tenant breaches an anti-assignment clause), that distinction may be of little value. But in other cases where there are no appreciable compensatory damages arising from an assignment in breach of a right-to-assign anti-assignment clause, this rule could permit an assignment made in violation of such a clause to otherwise remain valid. Being aware of the caselaw of the specific jurisdiction that governs the contract, however, remains paramount.

When faced with drafting an anti-assignment clause, it is obviously important to draft clearly to cover what the parties intend to cover; and when faced with interpreting an anti-assignment clause drafted by others it is likewise important to read carefully the words the parties chose to express their intent in the contract. But reading or drafting clarity is not enough. It is also important know how the courts have interpreted similar clauses and what additional words are sometimes required to accomplish your objectives, as well as what the absence of those words may mean as you are considering structuring alternatives in the face of an anti-assignment clause lacking those words.

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

The Court of Appeal has held that a clause in a contract that prohibited the parties from assigning their rights under the contract did not prevent one party’s rights being transferred automatically to an insurer by operation of law. The case shines a light on how the courts may interpret a prohibition of assignment clause.

What happened?

What did the court of appeal say, what does this mean for me.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5 involved a contract for the sale of two aircraft and spare parts.

Under the contract, which was governed by English law, Dassault Aviation would sell the aircraft to Mitsui Bussan Aerospace (MBA). Under a separate contract (governed by Japanese law), MBA would subsequently on-sell the aircraft to the Japanese Coastguard.

MBA was concerned that, if Dassault delivered the aircraft late to MBA, this would affect delivery times under MBA’s contract with the Coastguard and MBA could be liable for late delivery to the Coastguard.

To protect itself against this risk, MBA took out an insurance policy from Mitsui Sumitomo Insurance (MSI) (which, despite the name, was not connected in any way with MBA). The insurance policy was governed by Japanese law.

As it happened, the aircraft were delivered late. MBA claimed under the insurance policy, and MSI duly paid the claim.

Under article 25 of the Japanese Insurance Act (No. 56 of 2008), where an insurer pays out under a Japanese policy of insurance, the insurer is automatically subrogated to any claim the policyholder may have in connection with the event that led to the pay-out. In other words, the policyholder’s right to claim damages passes automatically to the insurer.

Essentially, the same position applies in England and Wales under the common law. See the box “ What is subrogation? ” for more information.

In this scenario, this would mean that MBA’s right to claim against Dassault for breach of contract (due to the late delivery by Dassault) would pass to MSI, so that MSI could claim directly against Dassault.

However, the sale contract between Dassault and MBA contained the following clause (the assignment prohibition):

“[T]his Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.”

Dassault argued that the prohibition prevailed and prevented MBA’s rights under the contract from transferring to MSI under the Insurance Act. If correct, this would mean that MSI would have no right to claim against Dassault to recover the amount it had paid out to MBA.

Subrogation is a broad doctrine which essentially states that, if a person (X) pays or discharges a debt or obligation of someone else (Y), then X steps into Y’s shoes and acquires Y’s rights.

Under English law, subrogation applies in a wide range of circumstances, including the following.

• When an insurer pays out to a policyholder . The insurer is subrogated to the policyholder’s rights and can take action in place of the policyholder. For example, an individual might take out buildings and contents insurance on their property and, at some point during the policy term, a leak develops, flooding the property and causing damage. The damage is caused by faulty workmanship by a plumber. The individual may be able to claim against the plumber in negligence but instead claims under their insurance policy. The insurer is subrogated to the claim in negligence against the plumber in place of the individual.
• When a guarantor pays out under a guarantee . For example, a person (X) borrows a sum of money from a lender. Another person (Y) gives a guarantee for X’s obligation to repay the sum. The lender calls on the guarantee and Y repays the sum instead of X. By way of subrogation, Y can bring proceedings against X to claim back the amount Y has paid out to the lender. (This is also described as a right of reimbursement, rather than subrogation.)
• Where a person pays someone else’s secured debt . For example, a person (K) takes out a mortgage loan from a bank, which is secured by a mortgage over K’s property. The mortgage becomes payable, but K’s colleague (L) pays the mortgage off instead of K. Until K reimburses L, L is subrogated to the mortgage security over the property. If K does not reimburse L, L can enforce the mortgage and take possession of the property (and sell it).
• Where an agent pays out for their principal . For example, an individual appoints an agent to negotiate a purchase of land on the individual’s behalf. The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. The seller transfers the land to the individual. By virtue of subrogation, until the agent is paid back, the agent has all the rights over the land which the seller had before the sale.

Subrogation can be complicated and how it works in practice varies greatly depending on the legal and factual circumstances. In many respects, subrogation is less a doctrine and more a form of remedy which a person who has discharged someone else’s obligations can seek in an appropriate form. The principal point of subrogation is that the person whose obligations have been discharged should not be unjustly enriched by failing to perform those obligations themselves.

However, one common factor to all types of subrogation is that it involves an automatic transfer of rights , which occurs by operation of law and does not require a specific assignment by anyone.

Initially, the dispute was referred to arbitration at the ICC in London. The arbitration panel held (by a majority) that MBA’s rights under the sale contract had transferred to MSI under the Insurance Act.

Dassault appealed to the High Court of England and Wales. The High Court overturned the arbitrators’ decision, finding that the prohibition was wide enough to capture a transfer by operation of law.

The High Court noted the words “by any Party” in the assignment prohibition were ambiguous and needed to be interpreted. It therefore embarked on the traditional process of contractual interpretation that applies when the wording of a contract is unclear. See the box “ How will the court interpret a contract? ” for more information.

It held that the words indicated an element of action or willingness by a Party, and that this was what was required for the prohibition to apply. A transfer would fall outside the prohibition only if it were outside the voluntary control of the transferring party (here, MBA).

In this case, although MBA had not directly assigned its rights to MSI, it had entered willingly into the insurance policy and made a claim under it, with the direct and predictable result that its rights would be transferred to MSI under the Insurance Act. In the High Court’s view, this amounted to an assignment by MBA and was caught by the prohibition.

MSI appealed to the Court of Appeal of England and Wales.

The court re-examined the words “by any Party” and found that they were unambiguous and clear. They covered a transfer effected by a party to the sale contract, but that did not include a transfer that occurred automatically by operation of law (as was the case under the Insurance Act).

The judges disagreed with the High Court’s approach that the key question was whether the transfer was outside MBA’s voluntary control. Rather, it was a simple case of reading the contract to decide whether the transfer had been made by MBA.

It had not. The transfer had taken place automatically under the Insurance Act and so was not prohibited by the assignment prohibition.

In reaching its decision, the court noted that the sale contract between Dassault and MBA contained provisions that specifically contemplated the parties taking out insurance (Dassault insurance against loss or damage to certain specific equipment, and MBA insurance in connection with ferry flight delivering the aircraft).

Although these specific provisions did not cover the insurance policy that MBA had placed with MSI, they did indicate that the parties were happy for insurance to cover the arrangements, suggesting in turn that they understood that rights under the contract might transfer to an insurer.

The court found, therefore, that MBA’s rights had transferred to MSI and the assignment prohibition did not apply.

If the wording of an agreement is clear, the courts will assume that it reflects the parties’ intentions and enforce the literal word of the contract. This will be the case even if the result is unusual or uncommercial.

The only exception to this is where the parties’ agreement is in some way restricted by law. For example, the court may find that a clause is unenforceable as a restraint of trade, a contractual penalty, and unreasonable exclusion or limitation of liability, or an attempt to carry out unlawful acts. In these cases, the courts may be able to strike parts of the contract out to make it work.

However, if the wording of a contract is ambiguous and could have more than one meaning, the court must embark on a process of contractual interpretation (also called construction).

The law on contractual interpretation is now settled, following three landmark cases ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24).

In short, the court will examine the wording of the contract and ascertain what a reasonable person with all the relevant background knowledge at the time of the contract would have understood.

The court will look not only at the text of the contract, but also the surrounding context at the time. This is a single exercise, and the court will not automatically prefer the wording (textualism) over the surrounding circumstances (contextualism) or vice versa. However, the weight the court will give the text and the context will vary depending on the nature and formality of the contract.

If, after doing this, the court finds there is still more than one plausible interpretation of the contract, it will prefer the interpretation that is most consistent with business common sense.

The case shows the importance of formulating any prohibition of assignment provisions properly.

Here, the court felt that the wording of the sale contract was clear. By using the words “by any Party”, the prohibition extended only to direct attempts by a party to assign their rights.

Had those words not appeared (e.g. “[T]his Contract shall not be assigned or transferred in whole or in part to any third party…”), the court may have been required to embark on a deeper analysis of the clause to understand whether it would have prohibited transfers by operation of law. Indeed, the court might have concluded that it would have done so.

The case revolved around automatic transfers under Japanese law. The position might well be different under English law. This point was not argued – both Dassault and MSI appear to have accepted that, had the contract been governed by English law, the transfer of rights to MSI would have taken place – and so the court did not need to decide the issue.

But that does not mean that it is impossible to exclude the right to subrogation through a prohibition of assignment, and contract parties may wish to ensure any contractual prohibitions are worded broadly enough that they at least make an attempt to do so.

However, whether this is appropriate will need to be judged on a case-by-case basis, and may be more obviously covered by agreeing a subrogation waiver. For example, it is very common for a buyer of a business to deploy warranty and indemnity (W&I) insurance and for the seller(s) to require the W&I insurer to expressly waive any rights of subrogation.

Conversely, most liability insurance policies contain an express obligation on the insured party not to enter into any agreement with a third party that might restrict the insurer’s right of recovery. A prohibition of assignment that excludes a right of subrogation may do exactly that and could, in theory, invalidate the insurance policy itself.

Where insurance arrangements are contemplated under a contract, the parties should have a mind to the potential implications from an insurance-law perspective, including any potential subrogation following a claim under an insurance policy.

Any contractual provisions that do contemplate insurance are unlikely to stipulate a particular governing law for the insurance, so it may not be possible to make an informed assessment. In addition, the party taking out insurance may well not inform the other party that they are doing so and/or might take out insurance of a type not contemplated by the contract.

In each case, this could lead to a contract party facing legal proceedings under the contract by a third party whose identity is not known at the date of the contract.

Ultimately, where a contract party intends in advance to procure insurance in relation to the subject matter of the contract, it is important to seek legal advice to ensure that the policy and the contract operate smoothly and clearly alongside each other.

Access the court’s decision on whether a contract prohibited an assignment by operation of law ( Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5)

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September 30, 2019

Buyer Beware: Anti-Assignment Clause in Promissory Note Bars Claim Purchaser from Collecting in Bankruptcy

By Shane G. Ramsey

In In re Woodbridge Grp. of Companies, LLC , No. BR 17-12560-BLS, 2019 WL 4305444 (D. Del. Sept. 11, 2019), the United States District Court for the District of Delaware affirmed an opinion by Bankruptcy Judge Kevin Carey, and held that a proof of claim will be expunged if the note and loan agreement underlying the claim prohibit assignment and provide that assignment without consent will be “null and void.”

Prior to the bankruptcy, the debtor issued three promissory notes (collectively, the “Notes”) to two individuals. Each Note contained the following anti-assignment clause:

“ No Assignment . Neither this Note, the Loan Agreement of even date … nor all other instruments executed or to be executed in connection therewith (collectively, the ‘Collateral Assignment Documents’) are assignable by [the Noteholder] without the [debtor’s] written consent and any such attempted assignment without such consent shall be null and void.”

In connection with each Note, the Noteholders and the debtor executed a Loan Agreement (collectively, the “Loan Agreements”). Each Loan Agreement also contained an anti-assignment clause:

“This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the [Noteholder] shall not assign, voluntarily, by operation of law or otherwise, any of [their] rights hereunder without the prior written consent of [the debtor] and any such attempted assignment without such consent shall be null and void[.]”

Notwithstanding the anti-assignment provisions in the Notes and Loan Agreements, a Noteholder and a claims purchaser, Contrarian, executed an Evidence of Transfer of Claim (the “Transfer Notice”) pursuant to which the Noteholder purportedly “sold, transferred, and assigned” to Contrarian all of their “right, title and interest in and to the [Noteholder’s] claim … against the [Debtor].”

Thereafter, Contrarian filed a proof of claim against the debtor based on the Transfer Notice (the “Claim”). The debtor then filed a claim objection asserting that because the Debtors did not consent to the assignment to Contrarian, the putative assignment reflected in the Transfer Notice is unenforceable against the debtor and, thus, the Claim must be disallowed pursuant to Bankruptcy Code section 502(b)(1). In its response to the Claim Objection, Contrarian argued that the anti-assignment provisions were unenforceable under Delaware law, that the Debtors' breach of the Notes and Loan Agreements renders the clauses unenforceable, and that section 9-408(a) of the UCC overrides the anti-assignment provisions.

The Decision

On appeal, the claim purchaser argued that disallowance of the claim violated a policy of “free assignability” allegedly contained in Bankruptcy Rule 3001(e), dealing with the transfer of claims.

Regarding the alleged policy, the District Court quoted the Bankruptcy Court opinion, stating: “I am aware of no provision in the Bankruptcy Code or of any overarching bankruptcy policy which impairs the Court’s authority to determine and enforce applicable non-bankruptcy law concerning contract provisions which may restrict transfers of claims.” In re Woodbridge Group of Companies LLC, 590 B.R. 99, 103 (Bankr. D. Del. 2018).

Adopting Judge Carey’s analysis, the District Court illuminated the difference between prohibiting the right or prohibiting the power to assign. Quoting Judge Carey, the District Court said there must be “express language that any such subsequent assignment will be void or invalid” before the contract clause “prohibits the power to assign.” Id . at 103-104 (quoting Southeastern Chester County Refuse Authority v. BFI Waste Services of Pennsylvania LLC , 2017 WL 2799160 at *5 (Del. Super. Ct. June 27, 2017)).

If a contract “limits a party’s right to assign instead of the power to do so, the assignment is valid and enforceable but generates a breach of contract action that the non-assigning party may bring against the party assigning its interest.” Id .

Because the Note and Loan Agreement contained clear language making an unauthorized assignment null and void, the District Court said that the Bankruptcy Court correctly ruled that the transfer of the claim was invalid because the contract barred the power to assign, not just the right to assign.

The claim purchaser also contended that the debtor’s breach of the Notes and Loan Agreement made the anti-assignment provision unenforceable. Quoting Judge Carey once again, the District Court said it is “axiomatic” that the debtor’s breach did not give more rights to the claim purchaser than it had before the breach.

Finally, the claim purchaser argued that UCC § 9-408(a) made the anti-assignment clause unenforceable. The District Court agreed with Judge Carey’s “well-reasoned conclusion” that § 9-408(a) “applies only to transactions that grant a security interest in a promissory note, not to outright sales of promissory notes.”

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