Assignment Clause is a Form of Security For Your Customers

If you’re partaking in any business contract or signing up for an account or service on a website, you might have seen the term “assignment clause” once or twice. It is a standard inclusion in business contracts everywhere.

Before you sign or daft a business contract, you must make sure that if there is an assignment clause, it is clear and straightforward. As a responsible business owner or manager, you should look into adding an assignment clause to your contract.

Not only are assignment clauses extremely useful for businesses. They also serve as a form of security for customers who might be inconvenienced by a change of hands in the business or ownership of intellectual property.

In this article, you'll learn how this applies to online businesses.

What is an assignment clause?

An assignment clause is a term included in business contracts that grants a person or a business the opportunity to assign or completely transfer their contract obligations, rights, and benefits to a separate entity (person or business).

In other words, an assignment clause is all about the allocation of an obligation or item of value from one party to the next. While anyone can use assignment clauses, it is essential to note that the transfer should be mutually agreed upon by both participating parties.

Generally, an assignment clause is included in contracts so that one party will have the chance to transfer their portion of the contract to another party in the future should certain circumstances arise.

More often than not, assignment clauses happen between a business owner to a successor, or a company to a subsidiary.

Note that while assigning a contract is generally permitted, it can be excluded from contracts if there are assignment prohibitions in the contract, or it includes performing personal service contracts.

There are three major steps when it comes to assigning a contract:

1. Examine the contract and see if there are existing limitations or prohibitions

When you read the contract, check if any clauses prohibit the assignment clause. You have to review the whole document, as this may be included with other provisions.

If you see a phrase that states, “The agreement may not be assigned,” then you won’t be able to assign anything unless the other party consents to the contractual change.

2. Enter into an assignment contract

Once you see that there are no prohibitions on having an assignment clause, you should start entering into an assignment contract with a business entity of your choice.

3. Inform your contracting party of the assignment

To prevent facing issues, it is best to inform the contracting party of the assignment that you did and the details surrounding it. That way, you will be cleared from liability from the contract unless stated otherwise.

Why do you need an assignment clause?

As mentioned, an assignment clause is almost always included in contracts. There’s a reason why this is the case.

An assignment clause is a vital tool to establish the rights and obligations in the contract, and details how the line of succession should be in the business, and contract agreements should issues arise.

The Uniform Commercial Code (Article 2) provides that parties can assign their rights and obligations freely to another party even without seeking approval from other clients/customers as long as there will be no decrease in the level of performance delivery.

Without the existence of an assignment clause, your vendor will be free to execute these obligations and liability transfers without any limits.

Here are some of the reasons why you may need to have an assignment clause in your contract:

It prevents vendors from freely assigning their contractual obligations to others.

Without a clearly defined assignment clause, the other party is technically allowed to transfer their obligations to other parties without notifying you or seeking your consent.

It can be unfavorable on your end since you’re not sure of the performance of other businesses, and you don’t know how to do direct business with them.

You can limit the parts of the contracts that are assignable and those that are not.

Having an assignment clause allows you to name your terms when it comes to the assignability of the portions of your contract.

You can either completely prohibit the existence of the transfer, or partly allow it, as long as you reach an agreement with the other party. It is beneficial if you want full control of your business.

You may think that not including the assignment clause in your contract automatically means that any transfer is not allowed, but that is not the case.

Since the Uniform Commercial Code (Article 2) states that parties can assign their rights and obligations freely to another party, the absence of an assignment clause that can limit the contract will mean that the other party is free to transfer its obligations to anyone who meets their criteria.

Are assignment clauses enforceable or not?

Since assignment clauses are included in contracts, it is a given that these are legally enforceable. However, maybe you’re curious: are there certain limitations to these clauses?

To further explain, here are some points on the enforceability of assignment clauses:

You can make an anti-assignment clause

An anti-assignment clause prohibits and voids any assignment laid down in a contract. Once this has been added to your contract, any previous assignments will not be valid anymore and new ones cannot be made anymore unless this is clause gets removed.

Being unable to meet contract expectations can make an assignment unenforceable

When deciding upon the assignment clause, two separate parties agree that there won’t be any significant change to the type of service rendered from one to another.

If the assignment clause gets activated, and it affects business performance negatively (fewer business returns or increased risk for the company), then the courts are less likely to enforce the initial agreement.

For example, you have a way out of your assignment clause if your vendor specializes in a certain production technique and the assignment clause leads you to a new vendor with a different specialization.

Your assignment should not violate public policy or the law

Even with the existence of the Uniform Commercial Code, there are still laws that prohibit the existence of assignments. If these laws apply to you, then your assignment isn’t allowed to be enforced anymore.

Why is an assignment clause important?

Contracts exist to have a well-laid-out document that details how business between two entities should go about in a business relationship. Having an assignment clause in a contract is vital for a couple of reasons:

It lays down clearly the intent of both parties in the business relationship

It is vital to a good relationship between two business entities, as it is a show of hands regarding how they want their businesses to interact when certain circumstances arise.

It lays down the groundwork for a more transparent and more stable relationship between the businesses.

It protects both parties from the uncontrolled transfer of obligations and rights on covered contracts

As mentioned before, the lack of assignment clauses can cause uncontrolled transfers of contractual obligations and rights from one party to another without consent.

With the existence of an assignment clause, there will be more orders on such contractual obligations, and the necessity for such transfer is reviewable, if necessary.

It makes both parties aware of the contract expectations

In contracts, you can detail your expectations for your business and how it will perform with the help of the other party.

With the help of an assignment clause, you can start to think about the future and decide what you want with a company, as well as what you expect should the trigger for an assignment clause happen.

Sample assignment clause

Here are sample clauses you can find online for assignment clauses and anti-assignment clauses:

Assignment clause

No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

Anti-assignment clause

Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the Parties without the prior written consent of the other Party. Any purported assignment without such consent shall be void. Subject to the preceding sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the Parties and their respective successors and assigns.

Final words

As an online business owner, you should know assignment clauses to represent the assets and obligations of your company well. These make or break your relationship with other businesses, and give way for better collaborations between separate business entities.

Of course, some risks come with assignments, so it’s always preferable to tread lightly when it comes to this part of the contract to make sure it is clear and straightforward.