Assignment clauses are among the typical boilerplate provisions appearing in most contracts. An assignment clause is included in a contract to restrict a party’s ability to assign the contract or its rights under the contract to a third party. Assignment clauses typically do this by prohibiting an assignment by one party without the other party’s prior consent. Generally speaking, assignment clauses provide assurance that a party will not have to do business with a third party that it did not originally agree to do business with when it entered into the contract. Successors and assigns clauses, another staple of contract boilerplate, are often combined with assignment clauses, particularly if the contract expressly restricts assignment by the parties.
Although contract drafters may be inclined to quickly draft an assignment clause, often using the same assignment clause that appeared in a previous contract, a poorly drafted assignment clause could have a real impact on how the contract will be interpreted. The recent decision of the Delaware Court of Chancery in ClubCorp, Inc. v. Pinehurst, LLC (C.A. No. 5120-VCP (Del. Ch. Nov. 15, 2011)) provides a good reminder of this.
ClubCorp involved a dispute regarding an indemnification agreement entered into in connection with the sale of Pinehurst, LLC, the owner and operator of the historic Pinehurst Resort and Country Club (host of several major golf championships over the past 100+ years) and certain mergers that took place after the sale. A primary issue at hand was whether the mergers violated an assignment clause in the indemnification agreement (because of a failure to seek the prior written consent of the non-assigning party) such that the successor entities would not be entitled to enforce their predecessors’ rights under the indemnification agreement. The assignment clause in the indemnification agreement provided that neither the agreement nor any of the rights, interests or obligations thereunder “shall be assigned by any of the parties [thereto], in whole or in part, by operation of Law or otherwise, without the prior written consent of the other parties, and any attempt to make such assignment without such consent shall be null and void.” Also of concern was a separate clause entitled “Rights Cumulative” stating that the right of an indemnified party to indemnification under the agreement “shall extend to such indemnified party’s successors, assigns, heirs, and legal representatives.”
In interpreting the contract, the Court noted that the assignment clause seemed to clearly prohibit a transfer of rights by merger without prior written consent, but the rights cumulative clause seemed to clearly permit a successor entity to continue to assert its predecessor’s rights under the indemnification agreement. Neither clause was drafted so that it was “subject to” or would apply “notwithstanding” any other provision. As such, the Court found that the assignment clause directly conflicted with the rights cumulative clause and was therefore ambiguous, rendering the indemnification agreement “fairly susceptible to different interpretations regarding the effect of a merger on a party’s rights thereunder.” As a result of this and certain other issues addressed by the Court, the case was allowed to proceed to trial.
As ClubCorp suggests, poorly drafted provisions could lead to expensive and time-consuming litigation, often with uncertain results. From a drafting perspective, the following tips may be helpful to keep in mind when drafting assignment clauses in order to keep your assignment clause from landing on the wrong fairway:
- Insert “permitted” before “assigns” and “successors:” If the contract contains a general anti-assignment clause, consider whether the successors and assigns (or similar) clause should include the term “permitted” before the term “assigns.” If the anti-assignment clause covers transfers by operation of law or changes of control, consider whether the successors and assigns (or similar) clause should include the term “permitted” before the term “successors.” This approach would have helped resolve the ambiguity between the conflicting assignment and rights cumulative clauses in ClubCorp. As discussed above, the Court found an ambiguity to exist between the relatively clear language of both clauses because neither clause, as drafted, was subordinate to the other. Had the rights cumulative clause included the term “permitted” before “successors,” the Court may have interpreted such clause as being subordinate to the assignment clause, thereby resolving the ambiguity between the two clauses.
- Use the “except as otherwise specifically provided herein” qualifier wisely: When used wisely, this qualifier can resolve ambiguity between two conflicting clauses. In addition to the assignment and rights cumulative clauses, the indemnification agreement in ClubCorp also contained a “parties in interest” clause stating in part that “[e]xcept as otherwise specifically provided herein, this Indemnification Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and assigns.” The Court in ClubCorp indicated that the qualifier at the beginning of the clause explicitly subordinated the clause to the assignment clause, making the assignment clause controlling. In this instance, because the term “permitted” was not inserted before the term “assigns,” without the “except as otherwise specifically provided herein” qualifier, the parties in interest clause would have been in direct conflict with the assignment clause, adding another layer of ambiguity to the indemnification agreement.
- Consider the need to add a proviso: If a party foresees the possibility of entering into a business combination or reorganization during the term of the contract, it should attempt to add a proviso to the assignment clause allowing for assignments to an acquirer of its business, in the case of a business combination, or to an affiliated entity such as a subsidiary, in the case of a reorganization. Such a proviso would have saved the assigning party in the ClubCorp indemnification agreement the time and expense of litigating whether the mergers violated the assignment clause.
- Expressly state that assignments in violation of the assignment clause are null and void: One key point about the assignment clause in the ClubCorp indemnification agreement, from the non-assigning party’s perspective, was that it eliminated the power to assign rather than merely the right to assign, by explicitly stating that an assignment without consent shall be null and void. If a contract does not have the “null and void” or similar ineffective language, an assignment in violation of the assignment clause would merely give the non-assigning party a breach of contract claim against the assigning party, in which case the non-assigning party would have the burden of proving damages, and the assignment itself would generally be deemed to be effective.
The overall lesson, once again, is that boilerplate matters. When one provision directly conflicts with another, the court will decide where the ball lies, and there will be no mulligans.