Anti Assignment Provisions In Agreements

In this post, Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora (here) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) (NDCB). Here’s Brian’s provision:

Neither party may assign any of its rights under this agreement, either voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, except with the prior written consent of the other party. Neither party may delegate any performance under this agreement, except with the prior written consent of the other party. Any purported assignment of rights or delegation of performance in violation of this section is void.

It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously (here), and Brian’s post prodded me to revisit the topic.

I’ll start by offering the following comments on Brian’s provision:

  • In the interest of consistency I prefer using “shall not” for language of prohibition, but that’s something I’m still exploring. Using “neither party may” works too.
  • If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
  • Isn’t “voluntarily or involuntarily” needless elaboration, analogous to saying “I don’t eat fish, whether fresh-water or salt-water”?
  • To avoid having to be all encompassing (“or in any other manner”), I’d use “including”.
  • You might want to make it clear whether the prohibition applies to mergers regardless of whether the party is the surviving or disappearing entity (see this post).
  • The distinction between assigning rights and delegating obligations is pointless; in this context, “assign” and “delegate” constitute what I call “misapplied terms of art” (see this post). Because the provision refers to what is being assigned and delegated, a generic alternative to both words would work just as well, and I opt for “transfer”. Regarding that choice, NDCB, at 56, says, “The problem, however, is that there are reams of cases that analyze ‘assign,’ but not ‘transfer.’ If ‘transfer’ were used alone, the precedential value of the existing cases might be compromised. Moreover, the cases already question the meaning of ‘transfer.'” This doesn’t worry me, as the context makes it clear what’s going on.
  • It’s unclear what “rights” refers to. (I don’t use the word “rights” anywhere in MSCD.) I think it refers to discretion granted to a party under an agreement and any remedy that a party has under an agreement, and I’d rather make that explicit.
  • By referring to delegation of performance rather than delegation of obligations, Brian’s provision seeks to reflect that a party might delegate not only a duty but also a condition. See NDCB at 26, 74. But I think it’s unrealistic to expect readers to deduce that nuance from a reference to delegation of performance; it would be better to make it explicit.
  • The last sentence is language of policy. I suggest that because it relates to a contingent future event, most native English speakers would say “will be void” rather than “is void”.

So here’s my initial version (it’s certain to change) [Updated 9 August 2016: Language tidied up]:

Except with the prior written consent of the other party, each party shall not transfer, including by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or operation of law, (1) any discretion granted under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.

Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).

I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.

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In our last post we talked about anti-assignment provisions in contracts, and we mentioned "legal overrides" that might help.  So, what are the legal overrides?

They are found in four sections of the UCC (Sections 9-406, 9-407, 9-408 and 9-409, for the academics out there).  Some overrides dispense only with limitations on the grant of a security interest, while others go further and also invalidate restrictions on security interest  enforcement(permitting the bank to foreclose on the collateral).  You will inevitably wonder: why would they be treated differently?  Well, a simple answer is for policy reasons: where the law is meant to make it easier for the borrower to get credit, it will override more restrictions in the collateral that, without the overrides, could not have been pledged.

The collateral that gets the most protection is what entitles the borrower to get paid: A/R, payment intangibles, promissory notes and chattel paper. Here, the law allows the bank to foreclose on A/R, for example, regardless of the borrower’s agreement with its account debtor so that the borrower could finance its A/R. By contrast, weaker overrides only permit the borrower to grant a lien without breaching the restrictions agreed to by the borrower and the other party. This lien is "passive"–the bank can hold a lien but cannot foreclose on it. The less protected collateral categories include healthcare insurance receivables and a really broad category of general intangibles (which includes licenses, permits and franchises for example). 

Let’s illustrate the application of the stronger and weaker overrides through a license example.

 If the borrower is a licensee, the license is a general intangible, and the weaker overrides would apply. The bank can get a passive lien only: it cannot step into the licensee’s shoes and start using the license or foreclose on it. If the license is sold in a bankruptcy proceeding, however, the bank’s lien would attach to the proceeds (and this is one of the reasons the bank would give value to this type of collateral given weaker overrides). Outside of bankruptcy, the bank may give some value to the license if the licensor’s consent is likely or if its lien would attach to the proceeds not otherwise covered by the weaker overrides.

There are a few extra tidbits. First, if collateral is leasehold interests and letter-of-credit rights, the overrides are in between the stronger and weaker ones. Second, if federal law is implicated (such as with A/R from Uncle Sam or Medicare A/R), the federal law will trump the UCC. Third, securitizations are different from a plain vanilla lien grant, so beware.  And finally: overrides won’t help with indirect restrictions rather than outright prohibitions on assignment (such as a provision prohibiting information disclosure that would severely limit the licensee’s ability to pledge its software license rights).

This concludes our discussion of anti-assignment restrictions. The take-away is that if the restricted collateral is critical to the bank’s underwriting decision, the bank is likely to ask for consent from the protected third party as a condition to making the loan rather than choosing to rely on legal overrides.

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