Assignments And Subcontracts

“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.

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