Wednesday, March 21, 2012

What is a Successors and Assigns Provision and should it be used?

A standard successors and assigns clause would be something like:
“This Agreement shall be binding upon and shall inure to the benefit of the parties and their permitted successors and assigns.”

A successor is a third party that either acquired or merged with one of the parties to the agreement. Assigns are third parties that the agreement has been assigned to as may be allowed under the terms of the agreement. Generally you do not allow parties to assign the agreement to another party without your consent, but a common exception to that is when the
Agreement is used by a business and that business is sold to a third party.

In the book Negotiating and Drafting Contract Boilerplate author Tina Stark noted that courts have interpreted a successors and assigns provision five different ways.
1.To bind an assignee to perform.
2.To bind the non-assigning party to continue to perform.
3.To determine whether rights are assignable.
4.To determine whether performance is delegable.
5.To bind those successors and assigns to the agreement.

Since the intent isn’t clear let’s looks at how these things may be managed without such a clause.

1.To bind an assignee to perform. This can be managed by simply requiring that with any assignment, there must also be an assumption section or agreement where the assignee assumes responsibility for performance.

2.To bind the non-assigning party to continue to perform. As long as the assignment was allowed under the agreement the non-assigning party is not excused from performance. Assignment does not excuse either or the original parties from performance. The assigning party is only excused when there is a novation where the non-assigning party has agreed to excuse them.

3.To determine whether rights are assignable. If a contract allows for the assignment by either party and the assignment meets the requirements of the agreement for the assignment all rights and obligations both parties have in the agreement remain in place. In signing an assumption, the assignee has agreed to assume them. In allowing the assignment the non-assigning party has allowed those rights and obligations to be assumed, but with the assigning party secondarily liable. In agreeing to an assignment and novation, the non-assigning party has agreed to only looks to the assignee for performance and no longer has any obligations with the assigning party.

4.To determine whether performance is delegable. In an assignment the parties are not delegating anything. They are transferring rights and obligations under the agreement. The assignee, when they provide an assumption has agreed to provide all performance. The assignor is only excused from performance if there is a novation.

5.To bind those successors and assigns to the agreement. Assigns are bound when they sign an assumption. Successors who get contracts as a part of an acquisition or merger are not excused from performance. They remain obligated to perform until performance is excused. The law excuses performance under a contract only when:
•Subsequently illegality such as a change in the law that makes the performance illegal,
•Impossibility, where the work cannot be done.
•Impracticability, where it is not capable of being done
•Frustration, such as one party failing to meet their obligations can frustrate the other party allowing them not to perform
•Rescission, where the parties have agreed to stop it.
•Novation, where the parties agree that another party will complete the work and the original party is excused from performance, and
•Lapse; such as where the contract term may have lapsed without the work being completed.

My opinion is that you can accomplish anything a “successors and assigns” clause purports to do in the assignment provision by requiring that for an assignment to be effective the assignee must sign an assumption section or document agreeing to assume all rights and obligations under the agreement. With successors no language is needed as when they assume control over the original party they still have the rights and obligation. The sole exception to that would be when one party includes special termination rights in the agreement where they have the right to terminate the agreement if there is a "change of control" the the is acquired by a competitor. In that situation both parties continue to have their own respective rights and obligations until the party with right elects to exercise it.

10 comments:

  1. How would you go about, contractually, handling the following:
    You are a key employee/executive, with no ownership in a small company. The owner of the company has a will that divides the business in half to each of his children, in the event of his death. The owner wants to make sure that the company is still run by you, in the event of his death, until a certain period of time at which point the heirs (his children) can assume full control of the company. The owner wishes to protect the business for his children's sake, knowing that you are a key executive that will continue to grow the company, thus helping his children have a more valuable asset.

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  2. SK, this whole thing should be structured by a lawyer that does estate planning.

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  3. Assuming there is no specific restriction in the document, can a party to assign only partial rights? Example; a non-exclusive ground easement owned by a telephone company, granting certain rights to place their poles, cables, etc. within the easement area. Can the telephone company assign rights to another communications company to also use the easement area with their equipment?

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  4. I think you answered it in your question. Non-exclusive means that the rights are not limited solely to the party granted the easement. The owner could grant use to others as long at it doesn't interfere with the initial easement. Unless there was a restriction against sublicensing rights the easement holder could do a grant. That grant would not be an assignment of rights as they continue to retain their rights.

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  5. Jack, what about a company that has a valid contract in place. The owner retires and the business ceases to operate. One of the employees of the now defunct company opens a company and wishes to have the contract with original company assigned to this new company. What factors need to be considered by the other party (the buying entity) in this scenario?

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  6. Only the original party to the agreement can assign it, so an assignment is not the route to be taken. Assuming that there is nothing proprietary involved, and the buying entity is confident the new entity and individual can do the work, what could be done is to have the new company and buyer sign a agreement for the work. They could use the same terms, term and pricing. As the original owner stopped operating I don't see a claim of interference with contract rights as being something the original owner could pursue.

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  7. Jack, I'm not sure I follow the explanation you gave to the August 24, 2016 question. If you would address it stated this way. If the electric power company ("Elec") bought an 50' wide easement for "electric transmission lines, wires, telephone and telegraph wires...", and the document included Elec's "its successors and assigns", from a landowner ("Owner"), and at a later date the local telephone company ("Tele") wanted to install their phone cable within the Elec's easement area, (example, hang it on Elec's poles), can Elec simply assign Tele that right as an "assign," or would Owner need to grant a separate easement to Tele? Thank you for your help.

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  8. Earl,
    It would depend upon the scope of the grant. Elec was granted certain rights via an easement. That easement runs to their Successor company or the company the agreement is assigned to. For Tele to have any rights to the easement would require one of two things. Elec would need to have been granted the right to sub-license rights to other parties under the easement. The Owner would need to do a grant to Tele. If Tele what to use any Elec property on the easement such as their poles, they need to also have an agreement. I would also want to check the scope of the grant to see whether it was exclusive as that impacts whether the owner could make a second grant.

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  9. Jack,
    Say a pipeline company had a contract with a homeowner which included the successors and assigns clause. The contract is for a right of way to build a pipeline and compensation is rewarded but not paid until construction begins. The owner then sells the property and essential their interest in the lands. Is the new owner the successor to the contract? Is the new owner entitled to the compensation for the pipeline as being the owner that deals with the effects of having the pipeline on their new property?
    Thanks,
    Jordan

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  10. Jordan, as long as the successor and assigns clause was mutual, the right under it would be conveyed to successors so the new owner would have the same rights as the original owner.

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