Check These Three Things to Ensure Your Contract Can Be Assigned
Sometimes companies experience sudden growth spurts beyond their current capabilities or decide to go in a different direction than when they first started. One way to handle the contracts you have with current customers is to assign them to another party to fulfill. Here's more information about this option and what you need to do to avoid landing in legal trouble for invoking it.
What Can You Do with Contract Assignment?
Assignment is essentially the transfer of the duties, obligations, and benefits of a contract to another party. For example, you have a contract with a couple to bake a wedding cake. Assignment would let you transfer the contract to another baker, and that person would be responsible for fulfilling the terms of the agreement as well as receiving any benefits the contract provides (e.g., payment for services).
In general, any agreement can be assigned as long as there is no language in the contract prohibiting the practice. However, there are a few things you must take into account before you attempt to transfer your customer contracts to another party.
Can Your Duties Be Assigned?
While a contract may not expressly prohibit assignment to another party, the nature of your duties might. You can only transfer a contract to another party who is capable of fulfilling the terms agreed to by the customer. Going back to the cake example, if your client hired you because you're exceptionally skilled at making one-of-a-kind fantasy cakes, you could only assign the contract to another baker with the same level of skill and creativity.
This issue is mostly a problem for people who offer services that are unique to them or have a specific reputation that customers are also buying in addition to the product itself. People purchase Gucci handbags as much for the name as the quality, for instance. It would be considered a breach if you tried to assign a contract to someone who only makes Michael Kors handbags, even if the quality and style of the bags were exactly the same.
Before considering who to transfer the contract to, make sure your duties and obligations can be assigned to someone else and that the person (or company) can fulfill those duties to the same quality expected by your customers.
Does the Assignment Materially Alter the Contract?
Another thing you have to be careful of is that the assignment doesn't change the contract in unexpected and material ways. For example, transferring the contract to another provider may increase the customer's risk in some way. If the second baker in the previous example has a habit of delivering goods late, this may increase the customers' risk they may not receive what they paid for. This could invalidate the assignment agreement you have with the other company, and customers could come after you for damages as a result.
It's essential to evaluate how the assignment is likely to alter or impact the contract. If the matter will lower the value of the agreement, reduce any anticipated returns, increase the customers' costs, risks, or burdens, or have a negative impact on the performance of the agreement, then it is best not to continue with the assignment.
Does the Assignment Break the Law or Go Against Public Policy?
The laws in some states may expressly prohibit certain things from being assigned, such as future employee wages. Likewise, a contract assignment may be prohibited if it goes against public policy. For example, if assigning your contracts to another party creates some type of monopoly in your community, the courts may invalidate the transfer.
Contract assignments may seem simple on their face, but they can be complex depending on the situation. It's essential that you work with an attorney to ensure your contract assignment is legal and enforceable. For more information about this issue, contact a lawyer, such as one from Carter & West Law, near you.