Assignment of contract

How BC law treats it

At common law, a party can assign the benefit of a contract, such as a right to receive payment, royalties or services, without the other party's consent, unless the contract restricts assignment or the rights are personal in nature. The burden of a contract cannot be assigned. To move obligations to a new party, the original parties and the newcomer must agree to a novation, which replaces the old contract with a new one and releases the original party. Section 36 of the Law and Equity Act, RSBC 1996, c 253 sets the requirements for a legal (statutory) assignment of a debt or other legal thing in action: it must be absolute, in writing signed by the assignor, and express written notice must be given to the debtor. Once notice is given, the assignee can sue the debtor in its own name, and the debtor pays the assignee. An assignment that does not meet these requirements may still be valid in equity, but the assignee may need to join the assignor in any lawsuit. Many commercial contracts contain anti-assignment clauses requiring consent, sometimes not to be unreasonably withheld, and change of control clauses that treat a sale of shares as an assignment. Software and IP licences are often personal to the licensee and non-assignable without consent. Royalty streams can usually be assigned as a right to payment, subject to the agreement.

What it means for your business

Assignment issues decide whether a business can be sold as planned. In an asset purchase, each key contract must be assigned, and consents may be needed from customers, suppliers, landlords and licensors. In a share purchase, change of control clauses can have the same effect. Sellers who assign contracts without a novation stay liable if the buyer fails to perform, so the deal documents should include an assignment and assumption agreement and indemnities. Example: A Victoria IT firm sells its managed services business by asset purchase. The buyer takes assignments of the client contracts, but the largest client's contract requires consent, so the parties obtain a written consent and novation releasing the seller before closing.

Risks and common mistakes

Assuming an assignment transfers obligations and releases the original party, when only a novation does that. Missing anti-assignment or change of control clauses during due diligence. Failing to give the debtor written notice of an assignment of a debt, so it keeps paying the assignor. Assigning a software licence that is personal to the licensee without the licensor's consent. Using a one-line assignment without an assumption of obligations and indemnity in favour of the seller.