There are two types of assignments involving contracts. The first is a contract assignment. A contract assignment means that a party to the contract assigns the entire contract to another party. This means that the party gives the obligations and benefits of an existing contract to another party. This situation occurs when a party to a contract wants another party to completely step in and fulfill the contract.
The ability to assign a contract to another party is a fairly common practice in contracts law. This type of assignment is common in a wide variety of different contract situations.
Parties to an Assignment
There will generally be at least three parties involved in a contract assignment. First, there will be at least two original parties to the existing contract. Let's call these parties Pink and Blue. Then, there will be a third party, who is assigned the contract. Let's call this party Yellow.
Let's say Pink and Blue enter a contract, where Pink is to provide Blue with one pallet of St. Augustine sod grass. In return, Blue will pay Pink for the grass. Now, let's say Pink is unable to locate the St. Augustine grass. He can only find Bermuda grass.
Pink's friend, Yellow, owns a gardening center. Yellow has the St. Augustine sod in stock at his store. So Pink agrees to let Yellow fulfill his contract with Blue. Pink notifies Blue that Yellow will now be fulfilling the contract. This means that Pink assigns Yellow both the obligations and the benefits under his contract with Blue.
In this scenario, Pink is the assignor, since he was the original party to the contract with Blue. Yellow is the assignee, since he now possesses the rights and obligations of the contract with Blue. Yellow is now obligated to provide Blue with the St. Augustine grass, and Blue is now obligated to pay Yellow.
Assignment of Rights
There is also a second type of assignment. Sometimes, an assignor will only make an assignment of rights. This means that the original party remains obligated to fulfill the contract, but another party receives the contractual benefits.
Let's change our scenario a little bit. This time, Pink has the St. Augustine grass and is perfectly willing and able to provide the grass to Blue. But Pink and Yellow worked together on another house, and Pink still owes Yellow for Yellow's work on that project. Pink later asks Blue to please pay Yellow for the grass, instead of paying Pink. Now Blue has an obligation to pay Yellow, even though Yellow has no obligation to Blue.
In this scenario, Pink is the assignor, since he was the original party to the contract with Blue. Yellow is the assignee, since he now possesses the benefit of the contract with Blue.
Pink is still obligated to provide Blue with the St. Augustine grass. Nothing there has changed. But now there is a new obligation. Blue is now obligated to pay Yellow. This means that Blue is an obligor, since this contract was written to profit Yellow, and Yellow is an obligee.
An assignment of rights can be made as a gift. When an assignee assigns the benefit of a contract as a gift, it's known as a donative assignment. Otherwise, as we have in our scenario, the assignment is an exchange. Yellow previously did work for Pink, so Pink will have Yellow paid for that work.
Donative assignments can be revoked. This means that the assignor can change his mind and take back the rights. Generally, assignments aren't revocable, except that the death or bankruptcy of an assignee will automatically revoke the assignment.
Assignor and Assignee
Let's revisit our scenario and take a closer look at the parties involved. Pink is an original party to the contract and is the assignor. An assignor can be an individual, a group, or a business.
The assignor is the party that transfers its contractual rights to another party. In a contract assignment, this means that the party transfers both the contractual obligations and the contractual benefits. In an assignment of rights, this means that the party transfers just the benefit of the contract.
In our scenario, the contractual obligation is the obligation to provide Blue with the St. Augustine sod. The contractual benefit is the benefit to be paid for the sod.
Yellow is the assignee. An assignee can be an individual, a group, or a business.
The assignee is the party that receives the rights and obligations under the contract, but wasn't an original party to the contract. Usually, an assignee receives the contract rights and obligations directly from an original party to the contract.
Obligor and Obligee
In our second scenario, when Pink assigns only his rights under the contract, Blue becomes the obligor. Blue is now obligated to pay Yellow. An obligor is a party that is obligated to do something under the terms of a contract.
You will sometimes hear the term 'obligor' used to describe a 'borrower' or a 'debtor.' This is common because many contracts are debt contracts, but it's important to note that obligors can be required to do something other than repay debt. Obligors can be obligated to perform a particular task or even to refrain from a particular activity.
Whenever we have an assignment and an obligor, we'll have an obligee. In our second scenario, Yellow is the obligee. An obligee benefits from the obligor's obligation. Yellow is our obligee because the assignment was made to profit Yellow, even though Yellow isn't considered to be a third party beneficiary. Yellow isn't a third party beneficiary because the original contract wasn't written in order to benefit Yellow.
Restrictions on Assignment
There are many different restrictions on assignments. First, an assignment can only be for present rights. This means that Pink can only assign his rights to Yellow after Pink has those rights. A promise to assign future rights is void. So Pink can't assign his rights before his contract with Blue is made.
Additionally, the assignor has to make a clear statement regarding the intent to assign rights, and those rights have to be clearly identified. If the assignor's intent isn't clear, or the rights aren't clearly identified, then the assignment is void.
A rescission clause is another type of restriction. It's a contractual clause that allows the other party to rescind the contract if an assignment is made. Also, a clause that creates a condition subsequent rescinds the contract automatically if an assignment is made.
Certain Contracts Not Assignable
The common law supports the freedom to assign a contract, so assignments are usually permitted unless there's a non-assignment clause. A non-assignment clause prohibits the assignment of specific rights, or of the entire contract, to another party. However, if an assignment is permitted, then the assignor can assign the contract without checking with the other party to the contract. It's important to note, though, that the assignment can't affect the other party's contractual rights or the assignment will be void.
For instance, in our scenario, Pink's assignment to Yellow can't affect Blue's rights. Blue must still receive the same grass, in the same quantity and quality.
This rule helps explain why certain contracts can't be assigned at all. This includes contracts that involve a unique performance. For example, let's say Blue now hires Pink to sing at his birthday party. Pink can't assign the contract to Yellow because this contract is unique and requires Pink's presence. If Yellow sings, it's not the same thing as Pink singing. It may be better or worse, but either way, it's not Pink singing.
Also, certain assignments can't be made if they violate public policy. For instance, rights obtained through a personal injury suit can't be assigned because this type of assignment might encourage litigation.
One case example is the Nevada case of Traffic Control Services v. United Rentals Northwest. In this 2004 case, the state supreme court ruled that an employee's non-compete agreement with one company couldn't be assigned to another company.
Burkhardt previously worked for NES. As part of his employment contract, Burkhardt signed a non-compete agreement and was paid $10,000 in return. This agreement said that if Burkhardt left NES, he wouldn't work for a competitor firm in the area for one year, and he would protect confidential company information. United Rentals then bought NES, and Burkhardt refused to sign a new non-compete agreement with United Rentals. Instead, he left to work for Traffic Control.
United Rentals sued Burkhardt and Traffic Control for violating the non-compete agreement. Nevada's highest court ruled that an employee's non-compete agreement is personal in nature and therefore not assignable without the employee's consent or without a clear contract clause that allows the assignment.
Let's review. There are two types of assignment. Contract assignment occurs when one party to a contract gives the obligations and benefits of the contract to another party. Assignment of rights occurs when one party to a contract gives the benefits of the contract to another party.
An assignment involves at least three parties. The assignor is the party that gives the contract rights to another party. The assignee is the party that receives the contract rights from the assignor. The obligor is the party that didn't participate in the assignment, but is now obligated to the assignee.
Assignment is a fairly common practice in contracts law, but assignment can be prevented in certain situations. Assignment won't be allowed if the contract involves personal services or if there is a non-assignment clause.
The lesson above will help you to:
- Explain what a contract assignment is
- Discuss how many parties are involved in a contract assignment and how they fit in
- Recognize what an assignment of rights is
- Understand who the assignor and assignee are
- Analyze the role of an obligor and an obligee
- Point out the restrictions that may be placed on an assignment