The purpose of a binding effect (or enurement) provision is to provide for the continuation, from one party to another, of all of the rights and liabilities contained in an agreement and to bind the substituted party to that agreement. An assignment provision may restrict a party’s right to assign the agreement (and, therefore, its rights under that agreement) to a third party.
In a blog posting, Professor Ken Adams, a leading American authority on contract drafting, suggested that it’s time to get rid of the binding effect provision. Among other reasons for doing so, he cautioned that a court might look to it for guidance on the ability of a party to assign its rights and liabilities under an agreement. In a recent decision, the Ontario Court of Appeal held that the inclusion of a binding effect provision “clearly demonstrated” that the parties intended that there would be successors to the agreement and that those successors were entitled to enforce the agreement without an express assignment.
Therefore, if your agreement contains either or both of these “boilerplate” provisions, we recommend the following:
- Ensure that the intentions of the parties are clear regarding the following:
- What rights and liabilities are to be assigned or continued?
- To whom should the rights and liabilities flow? For example, the exclusion of the binding effect provision may result in the unintended application of the common law doctrine of privity.
- Are there any conditions precedent upon which either the rights or liabilities flow?
- Ensure that there are no inconsistencies between the provisions. For example, if your agreement contains a restrictive assignment provision, then the binding effect provision should only refer to the assignees permitted by that provision (that is, the “permitted” assigns).