In this post, Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora (here) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) (NDCB). Here’s Brian’s 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.
It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously (here), and Brian’s post prodded me to revisit the topic.
I’ll start by offering the following comments on Brian’s provision:
- In the interest of consistency I prefer using “shall not” for language of prohibition, but that’s something I’m still exploring. Using “neither party may” works too.
- If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
- Isn’t “voluntarily or involuntarily” needless elaboration, analogous to saying “I don’t eat fish, whether fresh-water or salt-water”?
- To avoid having to be all encompassing (“or in any other manner”), I’d use “including”.
- You might want to make it clear whether the prohibition applies to mergers regardless of whether the party is the surviving or disappearing entity (see this post).
- The distinction between assigning rights and delegating obligations is pointless; in this context, “assign” and “delegate” constitute what I call “misapplied terms of art” (see this post). Because the provision refers to what is being assigned and delegated, a generic alternative to both words would work just as well, and I opt for “transfer”. Regarding that choice, NDCB, at 56, says, “The problem, however, is that there are reams of cases that analyze ‘assign,’ but not ‘transfer.’ If ‘transfer’ were used alone, the precedential value of the existing cases might be compromised. Moreover, the cases already question the meaning of ‘transfer.'” This doesn’t worry me, as the context makes it clear what’s going on.
- It’s unclear what “rights” refers to. (I don’t use the word “rights” anywhere in MSCD.) I think it refers to discretion granted to a party under an agreement and any remedy that a party has under an agreement, and I’d rather make that explicit.
- By referring to delegation of performance rather than delegation of obligations, Brian’s provision seeks to reflect that a party might delegate not only a duty but also a condition. See NDCB at 26, 74. But I think it’s unrealistic to expect readers to deduce that nuance from a reference to delegation of performance; it would be better to make it explicit.
- The last sentence is language of policy. I suggest that because it relates to a contingent future event, most native English speakers would say “will be void” rather than “is void”.
So here’s my initial version (it’s certain to change) [Updated 9 August 2016: Language tidied up]:
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 under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.
Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).
I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.
[Updated 27 November 2023: Bear in mind that in some contexts—notably bankruptcy—no-transfer provisions are unenforceable by law. See my 2014 article on termination-on-bankruptcy provisions, here.]
I have several concerns here. First, I have never been happy with the “each party shall not” formulation. I don’t mind “may not,” or better yet, “no party may,” but if you really want to use “shall not,” then I recommend “a party shall not” as being less awkward and contrary to normal usage.
Second, I’m surprised that you would allow “by operation of law” to survive here. For the most part, this phrase is used to refer to the “automagic” continuation of the disappearing company’s contracts under the aegis of the surviving company in a merger, in which case the language is redundant when you’ve already discussed mergers. Moreover, if this language relates to some other operations of law, for example an order of a bankruptcy court, it’s rather hubristic to think a contract can trump the ruling authority. Better, if it’s such a big deal, to handle the consequences of such a mandated transfer by giving the affected party an explicit termination right (without the nasty consequences of breach).
Third, in my experience the issues surrounding “delegation” are not only that it’s a misapplied term of art, but that it mistakes the transfer of a contractual obligation for a subcontracting of its performance. In fact, reliance on delegation or transfer is misplaced if one is concerned about subcontracting (since it doesn’t really amount to a transfer of any contractual obligation, only having that obligation physically performed by someone else). A drafter should inquire carefully what the client is really concerned about here, and if it’s subcontracting, that should be explicitly mentioned.
Ah, thank you Vance. I thought My discomfort with ‘delegate’ was a translation issue from US to UK English. I,too, Think that is the wrong word to use.
“No purported transfer of one or more of the following arising from this agreement will be valid without prior written consent of the other party: (1) discretion, (2) right to satisfy a condition, (3) remedy under this agreement, and (4) obligation.”
Other than light trimming, the principal thing this version does is dump the duty not to transfer and go solely with the avoidance of purported transfers. Why prohibit killing the dead?
Because failure to comply with a prohibition gives rise to a remedy; voiding purported transfers doesn’t. I can imagine situations where that might be significant.
No one can fail to comply with a prohibition against transfer when purported transfers are void. Void transfers are non-transfers. Killing the dead isn’t wicked, it’s just impossible.
It’s wicked and depraved! Actually, what happens if Acme makes a purported assignment that results in costly and protracted litigation? Widgetco would like to be able to go after Acme. Wouldn’t that be easier if Widgetco could point to breach? Should the obligation refer to not attempting to transfer?
“Any purported transfer by Acme, without Widgetco’s advance written consent, of one or more of Acme’s rights or obligations under this agreement will be void and will constitute a breach of this agreement.”
This game is based so much on underlying US laws on the meaning of assignment, merger, etc, that it is impossible for a non-US lawyer to participate. We don’t generally have mergers where a party disappears into a puff of smoke. A sale of a business [nearly] always happens by a sale of shares or a sale of assets.
I think the concept of assigning rights under a contract is well established in case law and using different terminology is reinventing the wheel.
I think the “if you do it despite the prohibition, it will be void” concept is strange, but one that I have seen before in US contracts. I don’t think it works, under English law, in respect of prohibitions on assignments of IP. I am doubtful whether it works for assignments of rights under contracts.
For what it is worth, my English law version would be very different and would simply say:
Neither party may assign any rights, or transfer any obligations, under this agreement, without the prior written agreement of the parties.
I have used the word “agreement” rather than “consent” to try to avoid case law on whether a term should be implied that consent should not be unreasonably withheld. The terminology of assignment and transfer is based on a House of Lords case, Linden Gardens v Lenesta Sludge – see http://www.bailii.org/uk/cases/UKHL/1993/4.html
As usual, caselaw is of less interest to me than the scope for confusion. I suspect that if you ask many lawyers what is meant by assignment of rights under a contract, you’d get quite a variety of answers.
Okay, Ken I’ll take your word for it. English lawyers who keep Chitty on Contracts under their pillows won’t be so variegated
Mark: Regarding your statement, “I think the ‘if you do it despite the prohibition, it will be void’ concept is strange, but one that I have seen before in US contracts,” consider the probable source of such provisions:
Since U.S. contract law is the province of the states, we have the high court of each of the 50 states reviewing the handiwork of probably twice that number of state appellate courts, which in turn have reviewed the work of probably thousands of trial courts. In addition, we have almost 90 federal district courts trying to predict how the supreme courts of the various states would rule if they were hearing the contracts cases that have fallen into the laps of the federal courts due to accidents of jurisdiction, plus the dozen courts of appeals and the Supreme Court. Then there are specialty federal courts such as the bankruptcy and tax courts which provide an additional source of cases for the federal district and appellate courts to review. And did I mention the extensive administrative law system that probably dwarfs all of the above in scope and which I’m sure has plenty to say about contracts?
Somewhere, sometime in the distant past one of those courts had an unfortunate fact pattern and, wanting to avoid the effect of an anti-assignment provision, decided that although the purported assignment was a breach of the contract in which it was found, the assignment was still effective. Other courts picked up on the work-around, and commercial lawyers have all been covering that base ever since.
Brian
Thanks Brian, interesting insight. I would have posted on your site but For the reasons given above I didn’t have a useful contribution.
The language as being quoted from
Negotiating and Drafting Boilerplate is incomplete. Here is the full language, along with
explanations of some of the text. Many of my points will be at odds with those
of Ken and arise because of differences in drafting philosophy.
Assignment and Delegation.
(a) No Assignments. No party may assign any of its rights under this Agreement, except with the prior written consent of
the other party. [That party shall not unreasonably withhold its consent.] All assignments of rights are prohibited
under this subsection, whether they are voluntary or involuntary, by merger,
consolidation, dissolution, operation of law, or any other manner. For purposes of this Section,
(i) a
“change of control” is deemed an
assignment of rights; and
(ii) “merger” refers to any merger in which a
party participates, regardless of whether it is the surviving or disappearing corporation.
(b) No Delegations. No party may delegate
any performance under this Agreement.
(c) Consequences of Purported Assignment or Delegation. Any purported assignment of rights or
delegation of performance in violation of this Section is void.
1. The provision is divided into three separate subsections, each
dealing with a different topic. A long provision violates the so-called “three-line
rule.” Sentences longer than three lines
are hard for the reader to take in. Also, by separating assignment from
delegation, the drafter is reminded that each of these provisions may need to
be elaborated based on facts. (Perhaps delegation is permitted subject to
certain conditions.)
2. Generally, exceptions should not begin a sentence. The usual
rule is to state the rule – so that the reader has context – and then state the
exception. This is also helpful if the sentence contains multiple exceptions
that the drafter might want to tabulate.
3. I prefer “No party may” to “Each party shall not.” The sentence’s
purpose is to express a prohibition that applies to all – no one can do it. In
this context, a negative subject is appropriate: no party/neither party. When
using a negative subject “may” is correct. “Shall not” works perfectly well
when the subject of the sentence is a single party. “Sam shall not borrow any money.”
4. As to whether consent can be unreasonably withheld is a matter
of state law. Some states read into a provision that grants discretionary
authority an implied promise of good faith and fair dealing, stated
differently, they read in reasonableness. Others do not imply a reasonableness
requirement. For example, in New York, landlords may be unreasonable in denying
consent to assignment.
5. Courts seriously dislike anti-assignment provisions. They view
them as interfering with the free flow of commerce. They insist that if a
particular assignment is to be prohibited, it must be listed. For example, if a
provision prohibits the assignment of rights, the issue arises as to whether the
provision prohibits the assignment of rights by merger. In all states that I’ve
checked, unless the assignment by merger is explicitly prohibited, it’s
permitted. The courts are rather adamant. They’ll turn their decisions inside
out to find the anti-assignment provision unenforceable. They don’t like them
and if the provision isn’t explicit, the courts will say that if the parties
had really wanted to prohibit assignments by merger, they knew how to use their
words. “Voluntarily or involuntarily” is used consistent with these cases.
6. Drafters have tried multiple ways to create all-inclusive
provisions, but the courts reject them as not having been specific. “or in any
other manner” was blessed by one court, so it’s used in the provision. Another
court rejected the phrase “or by any other transfer,” stating that it did not
know what “transfer” meant and it therefore could not act as an omnibus savings
provision.
7. An anti-assignment provision should also address whether a
change of control is deemed an assignment. If Parent Company A sells all of its
issued and outstanding shares in Subsidiary A to Buyer Company, Subsidiary A
becomes a wholly-owned subsidiary of Buyer Company. Nothing has happened at the
Subsidiary A level; there’s been no assignment. Courts hold that unless the
change of control is expressly prohibited, it does not rise to the level of an
assignment. This prohibition can generally be accomplished in one of two ways:
either through a definition, as in the stated provision, or by including a
change of control as a default.
8. Assignment and delegation are terms of art, not misapplied
terms of art. The Restatement (Second) of Contracts carefully defines them, as
do legions of cases. Unfortunately, some lawyers are unfamiliar with them
because their contracts courses didn’t cover them. That doesn’t mean new words
should be created.
9. Rights are the flip-side of an obligation. If I have an
obligation to pay you $100, you have a right to my performance. The transfer of
the right to performance is what the assignment is all about. It’s technical.
Using terms in a technical way creates precision. If one has discretionary
authority, that is a colloquial right but not a contract right. That’s the
reason why “right” is not used to signal discretionary authority. Instead, the
correct verb to signal discretionary authority is “may”. Incorrect:
The publisher has the right to reject the book. Correct: The publisher
may reject the book.
Rights can also refer to remedies, but that is consistent with the definition
of rights. If a party has a right to have its deposit returned, the flipside
obligation is the obligation to return it. If a party has a right to an
injunction, the flipside obligation is the promise not to contest the right to
the injunction.
10. “Will be void” v. “is void.” I can’t get too excited about this
issue. I start from the premise that the contract should always read as if it
presently applies and that, therefore, the present tense is correct.
11. Subsection (c) is another consequence of the courts’ dislike
for anti-assignment provisions. Mere prohibition does not void the assignment. The
courts draw a distinction between the “right” to assign and the “power” to
assignment. A flat prohibition merely prohibits the assignment of the right to
assignment. Violation of the prohibition is a breach, like any other contract
breach. The assignment is enforceable, but gives rise to damages.
Unfortunately, the nonassigning party often has trouble finding damages to
claim. What difference does it make to whom it pays money? If the nonassigning
party’s performance is somehow changed, then damages might be claimed. To make
the purported assignment unenforceable, a provision must take away the “power”
to assign. That is accomplished through language along the lines of subjection
(c).
Tina: Thanks; some readers might find that extract helpful.
More generally, the only drafting philosophy I buy into is identifying the clearest contract language.
Ken
Do you see any issues with making the transfer voidable by the non-transferring party instead of void ab initio?