Revisiting an Experiment in Crowd-Sourcing Contract Language

Contract Drafting

In a fun little experiment recently, I set up a question on Quora, “What’s the best anti-assignment provision in a contract ever?”, and invited people to submit clauses for the crowd to vote on.

Of course, asking what’s the best provision ever is a bit of a trick question, because the answer depends on the contract in which it’s to be used. For example, in a short and sweet agreement, you might want to go for minimum viable legal protection instead of a more full provision. Two of the players submitted answers along those lines. Here’s an example, which was submitted by Dana Shultz: “Neither Party may assign any of its rights or obligations under this Agreement without the prior written consent of the other Party.”

My own submission takes into account the fact that transfers of rights and obligations, such as through a merger, might not be deemed an assignment under applicable law, as well as the fact that assignments in breach of the anti-assignment provision might still be effective. I also explicitly state that the provision covers the transfer of obligations as well as rights. Here’s my 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.

In his submission, Ken Adams unpacks the categories of rights, obligations, and the like that a contract contains, spelling them out specifically, and uses the word “transfer” instead of the more common “assignment” and/or “delegation.” He also takes into account the potential importance of whether a party is the surviving or disappearing entity in a merger:

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 it under this agreement, (2) any right that it has to satisfy a condition under this agreement, (3) any remedy that it has under this agreement, or (4) any obligation imposed on it under this agreement. Any purported transfer in violation of this section X will be void.

The provisions I’ve discussed so far involve blanket prohibitions, but it’s common to carve out situations in which assignment is permitted even without consent. The most common involve internal corporate re-arrangements (e.g., transferring business assets among affiliated companies) and the sale of a business. Jay Parkhill’s submission (which Quora inexplicably “collapsed”) takes the latter into account:

Neither party may assign this Agreement or any of the rights or obligations herein, whether by operation of law or otherwise, without the prior written consent of the other party; provided that either party may assign this Agreement to its successor in the event of a merger, acquisition or sale of all or substantially all of the assets of such party.  Any other purported assignment shall be void.

Lessons to be learned

Here are some of my takeaways from this exercise:

  • It’s helpful to think in terms of minimum viable legal protection, both because less is sometimes more and because identifying what provides minimum protection helps distill the issue to its essence.
  • Although more full provisions involve additional complexity, the building blocks are the same, or at least similar.
  • Unpacking what’s really going on in a clause is instructional and a fruitful exercise.
  • Although this isn’t properly a takeaway from the exercise, I support adhering to standards, even when my own preference differs, both because standardization is necessary for the efficiency improvements I envision and because it can foster improvements in quality.

What do you think?

6 comments… add one
  • Mark Anderson Dec 7, 2012 Link Reply

    Brian, I take several lessons from your interesting article:
    1. That under US laws, some types of merger could give rise to an assignment but the position may not be clear. My simplistic English law approach is that you either have a sale of assets, in which case assignment is needed, or a sale of shares, in which case no assignment is needed.
    2. That I still don’t really understand the concept that (a) an assignment could occur despite being contractually prohibited, yet (b) could become void by other contractual wording saying that it is void. So the contractual wording doesn’t work in (a) but does work in (b). Mind boggling.
    3. That US parties are still prepared to use the term assignment to include both an assignment of right and a transfer (or delegation) of obligations. In England, since the House of Lords case of Linden Gardens v Lenesta http://www.bailii.org/uk/cases/UKHL/1993/4.html, in which their Lordships analysed assignment language, it is arguably negligent drafting to use the term “assign this Agreement” in this way.

    • Brian Rogers Dec 7, 2012 Link Reply

      Mark:

      1. Yes, we have other options, in particular merger or consolidation in which two entities become one. No assignment is necessary, but the transfer of contracts to the surviving company might be considered an assignment, depending on how the applicable state merger statute reads and how courts have interpreted it. Here’s Missouri’s merger statute relating to corporations.
      2. I see your point. I’d like to revisit authority on the issue, including Tina Stark’s book, which is always my starting point. It’s on the research to-do list. One thing I know: this is how we handle it.
      3. Like all deal attorneys, I’ve read thousands of anti-assignment provisions. I couldn’t venture to guess what percentage use “assignment” to cover both rights and obligations, but it’s very common.

      By the way, do your courts deliver their opinions seriatim? I’m not aware of a US court that does, although the Supreme Court did initially, as I recall.

      • Mark Anderson Dec 8, 2012 Link Reply

        Brian, in the English Court of Appeal and Supreme Court, all judges can give judgments. Usually, someone gives a lead judgment, and if others agree they tend to just say “I agree” or give some brief comments on points not covered in the lead judgment. Dissenting judges give their own judgments.

        They are being encouraged by the President of the Supreme Court to give collective judgments wherever possible, and you do occasionally see this, but it hasn’t really caught on.

        By the way, Latin is banned nowadays in the English courts, so words like seriatim, and nunc pro tunc (an expression I learnt from US attorneys in relation to IP assignments) aren’t encountered. Sic transit gloria mundi!

    • Rick Colosimo Jul 26, 2013 Link Reply

      Mark, the language does in fact work, but they are different provisions with different intended outcomes.

      On your point 2(a), the distinction is that the no assignment provision is a covenant of a party, which it may breach by assigning the agreement anyways. Under many circumstances, the other party will be hard-pressed to prove damages.

      On 2(b), the goal of the “improper assignment is void” language is to prevent the
      “assignment as breach without damages” situation entirely. I have not read (nor looked for) any cases attempting to construe, apply, or enforce that kind of provision. But I believe, as a matter of principle, that contracting parties should be able to specify such a result in their contract — that’s fair to anyone paying, as with an asset purchase, to take the contract on assignment: it’s right there on the page in black and white — that’s notice.

  • Brian Rogers Dec 8, 2012 Link Reply

    Onay oubtday!

  • Mark Anderson Dec 9, 2012 Link Reply

    Mmm… I see what you’re doing, but don’t have the cultural reference point. The closest I can offer is Stanley Unwin: http://en.wikipedia.org/wiki/Stanley_Unwin_%28comedian%29

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