Assignment And Subcontracting

“Neither party may assign any or all of its rights and obligations under this Agreement to a third party.”

Does the above language forbid the use of subcontractors? The answer is no, but why? In day-to-day conversation, the word “assignment” has broad application, but when used in a contract, an assignment is something much more specific. In the context of a legal relationship an assignment is often described as a third party (the assignee) stepping into the shoes of a party to the contract (the assigning party). While the exact interpretation of an “assignment” depends upon the chosen law of the contract, the general interpretation is that the assigning party has transferred its rights and its contractual obligations under the contract to the assignee and, in many states, the assigning party is released from the contract. For the sake of predictability and assurance against a bait and switch, many parties will therefore agree to a “No Assignment” clause.

Subcontractors are not considered assignees because they are not “stepping into the shoes” of a party. When a party hires a subcontractor to fulfill some or all of its duties, it delegates its performance to the subcontractor. The delegating party remains a party to the contract and is secondarily liable if the subcontractor does not perform or does not perform adequately. However, similar to an assignment, parties may agree to a “No Delegation” clause in the contract.

Since assignment and delegation are legally distinct from one another, a contract should address both of them separately.

Before prohibiting all assignments, consider what assignments would potentially be beneficial. A common framework is to prohibit all assignments except to those entities listed in the contract, or prohibit all assignments unless the assigning party obtains the prior written consent of the non-assigning parties.

Another issue related to assignment clauses, and one that courts prefer explicit language, is whether the parties intend the assignment clause to include, or exclude, assignments to parent companies, subsidiaries, and assignments in the event of a merger or sale of the business.

When deciding whether or not the contract should allow the delegation of performance, consult with an attorney because some states prohibit delegation in certain circumstances, such as when the contract is for a party’s unique set of skills. In most cases, delegation is allowed where the non-delegating party’s expectations will be satisfied.

In the event the non-delegating party is uneasy about the idea of subcontractors, one approach that may be used is to require the delegating party to supervise or control the subcontractor’s performance. Otherwise, the contract should describe any restrictions or standards regarding the identity of the subcontractors or their performance. Additional language that addresses subcontractors’ compensation, reimbursement of expenses, taxes and related issues should also be included to avoid any confusion down the road.

One last thing regarding assignment and delegation is the power versus the right. Courts have distinguished clauses that eliminate the right to assign or delegate with those that eliminate the power to assign or delegate. The following example illustrates the differences:

Eliminate the right: “No party may assign any of its rights under this Agreement.”

Eliminate the power: “No party may assign any of its rights under this Agreement. Any purported assignment is void.”

In the first clause, the parties have agreed not to assign any of their rights. If, however, a party decides to violate the No Assignment clause, it will be in breach of the contract but the assignment itself will likely be considered valid and binding on the parties.

In the second clause, the parties have agreed not to assign any of their rights, and also have agreed that any attempted assignment will have no effect. This clause restricts a party’s right to assign and eliminates its power to assign as well.

The same logic applies to delegation as well.

If you plan on using subcontractors, it is best to have an attorney familiar with these types of issues review the contract prior to signing it.

In this post, Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora (here) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) (NDCB). Here’s Brian’s provision:

Neither party may assign any of its rights under this agreement, either voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, except with the prior written consent of the other party. Neither party may delegate any performance under this agreement, except with the prior written consent of the other party. Any purported assignment of rights or delegation of performance in violation of this section is void.

It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously (here), and Brian’s post prodded me to revisit the topic.

I’ll start by offering the following comments on Brian’s provision:

  • In the interest of consistency I prefer using “shall not” for language of prohibition, but that’s something I’m still exploring. Using “neither party may” works too.
  • If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
  • Isn’t “voluntarily or involuntarily” needless elaboration, analogous to saying “I don’t eat fish, whether fresh-water or salt-water”?
  • To avoid having to be all encompassing (“or in any other manner”), I’d use “including”.
  • You might want to make it clear whether the prohibition applies to mergers regardless of whether the party is the surviving or disappearing entity (see this post).
  • The distinction between assigning rights and delegating obligations is pointless; in this context, “assign” and “delegate” constitute what I call “misapplied terms of art” (see this post). Because the provision refers to what is being assigned and delegated, a generic alternative to both words would work just as well, and I opt for “transfer”. Regarding that choice, NDCB, at 56, says, “The problem, however, is that there are reams of cases that analyze ‘assign,’ but not ‘transfer.’ If ‘transfer’ were used alone, the precedential value of the existing cases might be compromised. Moreover, the cases already question the meaning of ‘transfer.'” This doesn’t worry me, as the context makes it clear what’s going on.
  • It’s unclear what “rights” refers to. (I don’t use the word “rights” anywhere in MSCD.) I think it refers to discretion granted to a party under an agreement and any remedy that a party has under an agreement, and I’d rather make that explicit.
  • By referring to delegation of performance rather than delegation of obligations, Brian’s provision seeks to reflect that a party might delegate not only a duty but also a condition. See NDCB at 26, 74. But I think it’s unrealistic to expect readers to deduce that nuance from a reference to delegation of performance; it would be better to make it explicit.
  • The last sentence is language of policy. I suggest that because it relates to a contingent future event, most native English speakers would say “will be void” rather than “is void”.

So here’s my initial version (it’s certain to change) [Updated 9 August 2016: Language tidied up]:

Except with the prior written consent of the other party, each party shall not transfer, including by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or operation of law, (1) any discretion granted under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.

Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).

I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.

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