What is an assignment and assumption agreement?
An assignment and assumption agreement is a contract that allows one of the parties to transfer their contractual rights and duties to another party.
An assignment of contract is used after a previous agreement has been signed and one of the parties wants to pass on its obligations to a third party that wasn\’t originally part of the contract.
The parties involved in an assignment of contract are:
The assignor: The giving party who was originally part of the contract and is handing over their responsibilities to a third person or business.
The assignee: The receiving party who will assume the duties of the original contract that used to be owned by the assignor.
Third-party: There can also be a third party who made the original agreement with the assignor.
Uses of assignment agreements
Asset purchase transactions
During mergers and acquisitions, the parties typically enter into additional agreements that are accessory to the purchase contract to evidence the transfer of assets. Among these ancillary documents is the assignment and assumption agreement, which may be required to make the Asset Purchase Agreement (APA) effective.
In the context of a business transaction, the assignment and assumption agreement is a shorter agreement than the APA. A buyer will use the assignment contract to evidence the ownership of the assigned assets, while the seller uses it to prove that it is the buyer who now has assumed all the rights and obligations related to the assigned asset.
In asset acquisitions, it is common to have several assignment agreements that are used to authenticate the property of different assets, such as patents, trademarks, or copyrights.
Opting out of a contract
If the party of a contract is no longer able to fulfill its obligations or wants to cede its rights to someone else, assignment agreements can come into place. Only if the terms of the original contract allow it, the assignor can transfer its property rights and obligations or debt to someone else.
An example could be a contractor who needs help to complete a job and assigns tasks and entitlements to a subcontractor.
Startup Assignment Agreements
Assignment contracts are typically used by newly formed businesses that rely on software, trademarks, or other sort of intellectual property. Since technology startups expect financing from outside investors, a technology attorney will usually recommend the use of assignment agreements as a means of ensuring third parties, such as shareholders, can profit from using their IP and make it easier to find funding for their businesses.
Conditions for an assignment contract to be valid
To be able to hand over the contractual obligations, the following criteria need to be met:
The original contract includes a provision that provides the possibility of assignment by one of the initial contracting parties.
The assignor agrees to transfer their rights under the contract to the assignee
The assignee agrees to assume the contractual rights and duties
The initial contract party consents for the assignor to transfer their rights to the assignee.
It’s essential to notice that, although assigning a contract will transfer the rights and duties to the receiving party, the assignor will not be released from any obligations that arose before the assignment. Before entering a contract assignment, ensure a contract review lawyer advises you it is safe to proceed, how to do it, and if you will be still liable for specific terms in the contract.
An assignment will not be enforced if:
The contract contains an anti-assignment clause
The assignment affects the value of what is expected under the contract or increases the risks for the party that agreed to the initial contract
The assignment violates the law or public policy
Elements of an Assignment Agreement
Details on the existing agreement: Provides identification data on the existing contract, such as its date of execution and purpose.
Assignor: Name and identity of the giving party
Assignee: Name and identity of the assuming party
Assignment: Identifies the giving party and states that the assignor agrees to transfer their rights and obligations to a third party. Describes what rights and obligations are being transferred and the assignor’s agreement.
Assumption: Identifies the party that receives the assignment and accepts their new duties and rights as an assignee.
Third-party details: States the initial opposing party’s consent to the assignment and assumption agreement
Signatures: Signatures of the assignor and the assignee and date of execution
Additionally, the assignment contract will contain provisions related to indemnification and governing law.
In M&A, when in need to prove the ownership of specific assets, or if you are facing difficulties in fulfilling your contractual obligations, an assignment and assumption agreement will demonstrate you are the right owner and keep your business’s credibility intact.