contract assignment risks

Assignment of Contract Rights: Everything You Need to Know

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 3 min read updated on February 01, 2023

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 

What Is an Assignment of Contract?

The party that currently holds rights and obligations in an existing contract is called the assignor and the party that is taking over that position in the contract is called the assignee. When assignment of contract takes place, the assignor usually wants to hand all of their duties over to a new individual or company, but the assignee needs to be fully aware of what they're taking on. 

Only tangible things like property and contract rights can be transferred or assigned . Most contracts allow for assignment or transfer of contract rights, but some will include a clause specifying that transfers are not permitted. 

If the contract does allow for assignments, the assignor isn't required to have the agreement of the other party in the contract but may transfer their rights whenever they want. Contract assignment does not affect the rights and responsibilities of either party involved in the contract. Just because rights are assigned or transferred doesn't mean that the duties of the contract no longer need to be carried out. 

Even after the assignor transfers their rights to another, they still remain liable if any issues arise unless otherwise noted in an agreement with the other party. 

The purpose for the assignment of contract rights is to change the contractual relationship, or privity , between two parties by replacing one party with a new party. 

How Do Contract Assignments Work?

Contract assignments are handled differently depending on certain aspects of the agreement and other factors. The language of the original contract plays a huge role because some agreements include clauses that don't allow for the assignment of contract rights or that require the consent of the other party before assignment can occur.

For example, if Susan has a contract with a local pharmacy to deliver her prescriptions each month and the pharmacy changes ownership, the new pharmacy can have Susan's contract assigned to them. As long as Susan continues to receive her medicine when she needs it, the contract continues on, but now Susan has an agreement with a new party. 

Some contracts specify that the liability of the agreement lies with the original parties, even if assignment of contract takes place. This happens when the assignor guarantees that the assignee will continue to perform  the duties required in the contract. That guarantee makes the assignor liable. 

Are Assignments Always Enforced?

Assignments of contract rights are usually enforceable, but will not be under these circumstances:

• Assignment is prohibited in the contract language, which is called an anti-assignment clause.
• Assignment of rights changes the foundational terms of the agreement.
• The assignment is illegal in some way.

If assignment of contract takes place, but the contract actually prohibits it, the assignment will automatically be voided. 

When a transfer of contract rights will somehow change the basics of the contract, assignment cannot happen. For instance, if risks are increased, value is decreased, or the ability for performance is affected, the assignment will probably not be enforced by the court. 

Basic Rights of Contract Assignments

Most contracts allow for assignments, but you'll want to double check a contract before signing if this is something you anticipate happening during the lifespan of your agreement. Contract law does impose strict rules and regulations regarding the assignment of contract rights, so it's important to be sure that any transfers of rights are fully legal before acting on them. 

Any business agreements should always outline provisions for contract assignments and be well-drafted to be sure that the agreement is effective and enforceable. 

Why Use Contract Assignments?

When an assignor hands over their contracts rights to an assignee, they are signing away their obligation to perform and putting that obligation on a new party. The other party involved in the contract should see no difference in how the agreement plays out. If performance is negatively affected by the assignment of rights, something is wrong. 

If a party in a contract can no longer perform their duties, it is better to assign their contractual rights to a party who can carry out the duties rather than breach contract. 

If you need help with the assignment of contract rights, you can  post your legal need  on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. 

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Content Approved by UpCounsel

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• Assignment of Rights and Obligations Under a Contract
• Legal Assignment
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• What Is the Definition of Assigns

Assignment of Contract

Jump to section, what is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Nicholas M.

Assignment of Contract in Real Estate

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

Meet some of our Lawyers

I grew up in Beaumont, Texas. I attended Baylor University for college and the The University of Texas School of Law for law school. I gained extensive experience in many areas of transactional law through my former position as corporate counsel at National Western Life Insurance Company and my current position as an Associate at Nance & Simpson, LLP.

Senior experienced contracts/transactions attorney in the Software Technology space. Also very versed in general corporate legal matters relating to business operations.

As a lawyer of 27 years, I have a great deal of experience handling many different types of legal projects. Starting with a simple estate plan or the purchase of a personal residence, and moving all the way to complex estate plans and real estate transactions. I regularly advise small business owners and real estate investors.

Trusted contracts attorney specializing in real estate and business law. I handle leases, land purchase contracts, investment valuations, cease and desist letters, and operating agreements.

I am a Berkeley Law 2020 graduate. I have experience working in finance and operations, plaintiff and defense litigation, and have been involved in multiple start-ups.

Jeanilou M.

Jeanilou G.T. Maschhoff has over 20 years of comprehensive business operations, finance, and development experience in addition to being a licensed attorney in California and Hawaii. She zealously works as a Trusted Advisor, Business/Brand Consultant, and Advocate for small businesses, non-profit organizations, and personal brands. She is dedicated to helping female business owners and professionals in the entertainment, beauty, fashion, and wellness industries make their goals a reality. She uses her diversified expertise to provide a holistic approach to addressing business and legal needs. Acting as a trusted advisor and outsourced general counsel, she assists on an array of business and personal matters. Passionate about social justice and assisting underrepresented populations, Jeanilou started her legal career working in the non-profit sector working towards access to justice and gender equity. She continues to assist non-profit organizations in many capacities and actively looks to partner businesses with charitable causes, creating a synergistic effect that benefits not only the organizations involved but our society as a whole. As an early adopter of the virtual practice of law, Jeanilou has been assisting law firms and solo practitioners adjust to the remote delivery of legal services and helping businesses explore Web 3.0.

30 year practitioner. Seasoned but not old. Wide variety of practice areas, including criminal, domestic and civil law.

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Contract Risk Assessment Checklist: 10 Steps to Follow

• Oct 28, 2021
• Justin Perkins

In this post, you’ll learn how to create a contract risk assessment checklist for your organization. 

Assessing contract risk is essential, as any given contract can put your entire operation at risk. To reduce the overall risk to your organization, you need to mitigate the risk associated with each agreement. One important way to do that is to put together a contract risk assessment checklist for each contract you enter into. 

What should that checklist entail? Read on to find out.

Key Takeaways

• To help minimize contract risk, create a checklist that assesses various types of risks for each contract.
• Your contract risk assessment checklist should include evaluating obligations, reviewing the schedule and terms, and assessing the contract partner.
• Also important is determining mandatory provisions, looking for risky provisions, and ensuring regulatory compliance.

Why Contract Risk Assessment is Important

Contract risk is assessed based on the probability and consequence of the risk and can be defined as the possibility of some clause or term in a contract harming your organization. 

Contracts can expose your organization to:

• Financial risks
• Legal risks
• Compliance risks
• Operational risks 

Your company can’t operate risk-free. You know that you need to take reasonable risks to maximize your business’ growth and profits. It’s important, then, to recognize those risks you take and minimize their potential effect. You can do this by conducting a risk assessment for each new contract you create. 

If you pay attention to the risks you identify, you’ll lower the chance of losing money, being sued, being fined, or suffering operational difficulties.

The 10-Step Contract Risk Assessment Checklist

An important component of any contract risk management strategy is to create a contract risk assessment checklist and then work through that checklist for new contracts. This checklist should identify potential areas of risk and quantify those risks. 

The process of working through the checklist will help you identify, mitigate, and manage the risks your organization faces daily. 

1. Evaluate Your Obligations

The first item on your contract risk assessment checklist is to evaluate the scope of the contract. You should ask the following questions:

• What are your obligations under the contract? 
• Can you deliver on these obligations? 
• How much time and money will be involved in meeting these obligations? 
• Are there any “gray areas” where your obligations are not clearly defined and could end up in dispute? 

Once you’ve effectively evaluated your obligations, the next step is determine how you will manage those obligations by reviewing the schedule. 

2. Review the Schedule 

A contract obligates you to certain deliverables on a specified timetable. You need to be aware of the following:

• The schedule of deliverables and whether you can meet the delivery dates
• Penalties involved if you miss the dates – that is, the financial risk associated with committing to a schedule 
• The risks if your contract partners do not adhere to their contracted delivery dates 

Managing contract obligations and deliverables is a critical risk management function. With contract management software, you can set automated alerts and reminders for obligations such as a renewal date, termination window, the need to send a client a quarterly report, or some other key commitment. It makes obligation management much more automated and accurate.

3. Review the Terms

Most contracts involve a financial transaction. Either you’re paying the other party for something or they’re paying you. You must review the pricing and payment terms to make sure that the terms are fair to both parties. You don’t want to enter into an agreement in which you’re overpaying – or be underpaid for delivering products or services to a client. 

With contract management software, you can easily track contract line items such as product pricing, payment schedules, and many other financial aspects of the agreement. You can also set automated workflows to ensure contracts with certain dollar values get reviewed and approved by the appropriate people in the organization.

4. Evaluate Location-Specific Obligations and Risks

Many contracts are entered into with vendors or customers who operate in different locations. Some locations, especially foreign ones, pose their own risks. These risks may involve local rules and regulations, such as the EU’s GDPR privacy regulations, which are different from what you’re accustomed to in the U.S. 

Other location-specific risks may impact product quality, delivery time, or even the monetary exchange rate. Think through all aspects of contracting with distant partners. To assess these risks, it’s important to have the ability to report on all your contracts by organization, location, and even key legal language that may be geographically-specific. Contract management software from Contract Logix makes all of this possible in a real-time fashion.

5. Assess the Contract Partner

Doing business with some new vendors, customers, partners or other third parties can be riskier than others. It’s important to properly assess the other organization’s reputation, reliability, policies, principles, and stability. 

For example, if security is a concern, do they have the proper security protocols and certifications in place like SOC 2 Type II compliance, employee background checks, data privacy, etc.? And what about their financial performance? Or, how do they treat their employees and what are their guiding principles? These are just some of many items you may want to assess when entering into a contract with a new party. It’s also critical to ensure all of the supporting documents for the contract are in place and up-to-date like a Certificate of Insurance (COI). A modern contract management solution can help you centralize and track all of this information so that it is at your fingertips when you need it.

6. Determine Mandatory Provisions

Your company should have a list of terms and conditions that need to be included in all your contracts. 

These mandatory provisions may include:

• Payment terms
• Limitation of liability
• Damage waiver
• Non-disclosure

Whatever mandatory provisions your company entails, make sure they’re included in each new contract in which you engage. Contract Logix’s data-driven CLM software has an easy-to-use Clause and Template library for drafting agreements with all your pre-approved legal language. You can even set conditional rules to determine which clauses and templates to use based on different factors associated with the agreement. This provides a significant increase in compliance and goes a long way to help mitigate your risk.

7. Consider Optional Provisions

Once you ensure that the contract contains your company’s mandatory provisions, you may want to consider other optional provisions you’d like to have included. Including these provisions may mitigate your risk to some degree; not including them may or may not significantly increase your risk. As mentioned in the mandatory provisions section, contract management software and the use of clause and template libraries can be a big help with ensuring the right provisions are included in the contract.

8. Look for Risky Provisions

One of the more important things you can do when assessing contract risk is to scour the contract for any provisions that carry a high degree of risk. These high-risk provisions may include the following:

• Tight schedules
• Complex deliverables
• Deliverables highly dependent on outside factors, such as deliverables from other parties

You should also look for any terms that, if not met, can result in breach of contract or hefty penalties. 

9. Ensure Regulatory Compliance

All of your contracts must comply with all applicable government and industry regulations. Failure to comply puts you at risk of hefty fines and other penalties. Also consider the risk of whether delivering on a contractual obligation might result in noncompliance .

You’ll want to ensure you have a complete history of all activities associated with the contract to serve as an audit trail in the event you need to provide evidence of compliance. This is also very helpful when working through disputes about the contract. In addition, the use of tools like electronic signatures, document comparison, and real-time messaging help you keep track of everything required to execute the contract and ensure you have the latest and greatest contract. Contract Logix automates and streamlines all of this to drive a huge increase in compliance.

10. Track All Changes

A contract might start out relatively low risk but after negotiations, additions, redlining, and the like, it may end up with a higher degree of risk. You need to track all changes and amendments made to the contract and assess and minimize any new risks introduced during the process.

As mentioned above, CLM software functionality like document compare and automated version tracking make all of this easy and accurate. In addition, stage and status tracking giving you visibility into where the contract is in your process at all times. That, coupled with modern collaboration and negotiation technologies, ensure you have all your bases covered when it comes to edits and redlines.

Let Contract Logix Help Minimize Your Contract Risk

The best way to minimize contract risk is by deploying contract lifecycle management (CLM) software. The robust CLM solutions offered by Contract Logix automatically work through all the steps in the contract risk assessment checklist to protect against undue risk being introduced into the contract process. 

Even better, our CLM software automates the entire contract process for your organization, which results in a more efficient, more accurate operation. 

Contact Contract Logix today to learn more about using CLM software to reduce contract risk.

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Effective Contract Risk Management: Top Tips & Strategies

In 2018, a missing comma in the state's overtime laws once cost a Portland dairy company a staggering $5 million !

As an in-house legal counsel, you know that overlooking such details can have disastrous consequences for your business. But staying on top contract risk is not easy either - and we understand that all too well. In this post, we'll share proven tips and strategies for mastering contract risk management, saving your business' reputation, and keeping the commas (and cash) where they belong.

Read on to understand how you can reduce the likelihood of costly disputes and protect your organization's interests by effectively managing contract risk.

What is contract risk management?

Contract risk management is the process of identifying, evaluating, and limiting the exposure to risks associated with business agreements. 

The process involves a strategic assessment of all potential hazards that an organization may face during operations, with the aim of mitigating the likelihood and impact of any adverse events.

While it may not be possible to manage or anticipate every risk, you can plan for different scenarios to help lessen their impact on the business. This means taking a comprehensive approach to contract risk management that includes identifying and analyzing all potential risks, developing effective mitigation strategies, and monitoring the implementation of those strategies.

Before we delve into the strategies and best practices for contract risk management, let’s explore why you should implement such a process in the first place.

6 reasons to set up a robust contract risk management process

We’ve already established that effective contract risk mitigation strategies are an indispensable part of the in-house legal counsel’s responsibilities. But let’s see in detail how contract risk management can largely benefit your organization as a whole.

#1 Protecting the organization's financial position

Contracts involve significant financial commitments, and effective risk mitigation strategies will help protect your organization's financial position and prevent losses. By identifying and addressing potential financial risks, you can ensure that you are entering into contracts that align with your financial goals and objectives.

#2 Avoiding legal and regulatory penalties

Failure to comply with laws and regulations related to contracts can result in legal and regulatory penalties, which can be costly for organizations. The Association of Corporate Counsel (ACC) found that the global average cost of a data breach is $4.35M . Data breaches can occur as a result of noncompliance with legal and regulatory requirements related to contracts, highlighting the importance of effective contract risk mitigation. By implementing effective risk mitigation strategies, you can ensure that you are complying with all applicable laws and regulations, and avoid costly legal and regulatory penalties.

#3 Reducing operational disruptions

Contracts can impact business operations, and effective risk mitigation can help reduce the likelihood of disruptions and ensure that operations continue smoothly. By identifying and addressing potential operational risks, you can minimize the impact that contracts have on the company’s day-to-day operations.

#4 Protecting the organization's reputation

Effective risk mitigation can help prevent breaches of confidentiality, unethical behavior, or other actions that could damage the organization's reputation.

#5 Improving vendor and supplier relationships

Contract risk mitigation can help build stronger relationships with vendors and suppliers by ensuring that contractual obligations are met, and issues are addressed proactively. 

#6 Maximizing the value of contracts

You can maximize the value of your contracts by identifying and addressing potential risks and issues that could impact the contract's value over time. By proactively managing risks, you can ensure that your contracts deliver the intended value and achieve their desired outcomes.

6 common types of contract risks

Contracts are a fundamental part of doing business, but they can also carry significant risks if not managed effectively. Here are some of the most common types of contract risks that you may encounter.

#1 Legal and regulatory risks

Contracts must comply with all applicable laws and regulations, and failure to do so can result in legal and financial penalties. 

Example : A contract that violates antitrust laws or data protection regulations can result in significant legal liability for the company.

#2 Financial risks

Contracts often involve financial commitments, such as payment obligations or performance guarantees. Failure to manage these commitments effectively can lead to financial loss or a negative impact on cash flow. 

Example : If a vendor fails to deliver goods or services as agreed, it can result in financial losses for the company.

#3 Reputation risks

Contracts can have a significant impact on a company's reputation, particularly if there are breaches of confidentiality, unethical behavior, or other actions that could damage the company's reputation. 

Example : If a company is found to have engaged in unethical behavior in a contract negotiation, it can damage its reputation with customers and partners.

#4 Operational risks

Contracts can impact a company's operational processes and procedures, and failure to manage these risks effectively can lead to disruption of business operations. 

Example : If a vendor fails to provide goods or services on time or at the required quality, it can impact the company's ability to meet its own obligations to its customers.

#5 Intellectual property risks

Sometimes, contracts involve the use or sharing of intellectual property, and failure to manage these risks effectively can lead to infringement claims or loss of intellectual property rights. 

Example : If a company shares confidential information with a vendor without proper safeguards, it can result in the loss of trade secrets or other intellectual property.

#6 Data leakage risks

The risk increases exponentially if you use unsecured methods to communicate contractual information between parties. Confidential or sensitive information exchanged during contract negotiation, such as financial data or customer information, can be vulnerable to cyberattacks or data breaches.

By identifying and understanding these common contract risk types, you can develop effective risk mitigation strategies to manage these risks effectively and protect your business interests.

4 ways to identify risks in contracts

“Over the past five or so years, one of the key responsibilities businesses are placing on in-house lawyers is spotting and managing risk. The business wants its in-house lawyers to be the ones who sniff through virtually every situation looking for risk (legal or otherwise). What this means is that in-house counsel need to be masters of the company’s business operations and strategy (both short and long term), because you cannot successfully spot and manage risk unless you understand how the company operates and where it wants to go.” ~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC Ten Things: Spotting, Analyzing, and Managing “Risk”

#1 Evaluate the risk exposure of each contract

Start by identifying which contracts have a higher exposure to risk. Consider the value, duration, and complexity of each contract and assess the potential risks associated with it. This can help prioritize contracts that require more attention and a more detailed risk management plan.

#2 Assess the contract management process

Look for any gaps or inefficiencies in the contract management process that may introduce risks. This could include a lack of standardization, gaps in the approval workflow, or insufficient controls for reviewing and approving contracts.

#3 Consider vertical-specific regulatory compliance risks

If your organization operates in a specific industry or sector, there may be vertical-specific regulatory compliance risks that need to be managed in your contracts. For example, healthcare organizations need to comply with HIPAA regulations, and government contractors need to comply with DFARs. Ensure that your contracts contain provisions that address these regulations and that they are updated as regulations change.

#4 Consider geographic regulatory compliance risks

If your organization does business in different states, countries, or legal jurisdictions, there may be geographic regulatory compliance risks that need to be managed in your contracts. Also, consider any political or economic risks associated with certain jurisdictions that need to be taken into account when drafting contracts.

“Once you have spotted and analyzed risk, you will likely want to estimate the “cost” or “value” of the risk, depending on whether the risk is negative or positive in nature. There is a relatively simple and standard formula for this:

Risk Value = Probability of Event x Cost/Value of Event if it Occurs

For example, you are faced with a large breach of contract claim. While the dollar value claimed is high ($1M), you estimate the probability of losing to be low (25%). The Risk Value is then: .25 (probability) x $1M (cost) = $250,000. On the positive side, if you have a merger worth $25M in incremental operating income every year if consummated and you think the odds that regulators approve the merger is high (80%), the Risk Value is: .80 (probability) x $25M (value to company) = $20M. ” ~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC Ten Things: Spotting, Analyzing, and Managing “Risk”

6 ways to mitigate contract risks

“Because lawyers are trained issue-spotters, the analysis of risk in commercial agreements and the process of minimizing that risk usually falls in the lap of the in-house legal department. Unfortunately, the process of spotting and analyzing risk is rarely black and white. It’s generally highly subjective and it’s not always right.” ~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC Ten Things: Minimizing Risk in Commercial Contracts

The following strategies can help minimize the risks associated with contracts:

#1 Review and negotiate contract terms to ensure they align with your business needs 

Before signing any contract, it's essential to review the terms and conditions carefully. Ensure that they align with your business needs and risk tolerance. Consider negotiating terms that can minimize risks, such as indemnification, limitation of liability, termination clauses, and dispute resolution mechanisms. Consider using a clause and template library to ensure consistency in contract terms and minimize the risk of errors or omissions.

Also read: 5 Most Negotiated Terms and Clauses in a Contract

#2 Implement a contract management process to ensure mistake-free reviews

Implementing robust contract management processes can help minimize contract risks. Establish a contract review and approval workflow to ensure that all contracts are reviewed and approved by the appropriate parties. Create a centralized repository to store all contracts and related documents. Ensure that all contracts are easily accessible and searchable by the relevant stakeholders.

Also read: Contract Lifecycle Management Process: The A-Z Guide

#3 Create contingency plans to mitigate the effects of unforeseen circumstances

It's essential to develop contingency plans to minimize the impact of unexpected events such as a vendor going out of business or a breach of contract. Develop procedures for identifying and addressing potential issues before they become significant problems. Establish a process for quickly responding to incidents to minimize the impact on the organization.

#4 Implement security controls to protect confidential information

Access controls are necessary to ensure that only authorized personnel can view and access contracts. Implement role-based access control to ensure that only those with a need to know can access sensitive information. Consider using encryption to protect confidential information in contracts.

#5 Enable alerts and notifications to never miss an important event

Ensure that your contract management system provides alerts and notifications for important events such as contract renewals, terminations, and critical dates. This helps you never miss an essential event and enables you to respond quickly to any issues that may arise.

#6 Implement contract version control to ensure correct versions are signed

Maintain an audit trail of all changes made to a contract, including who made the changes, when they were made, and why. Implement version control to ensure that all parties are working from the same version of the contract. This helps minimize the risk of disputes and ensures that everyone is working with the most up-to-date information.

Also read: The Perfect Contract Risk Assessment Checklist

How to measure the effectiveness of your contract risk management process

After you’ve implemented the above best practices for contract risk management, you need to ensure the effectiveness of your process by introducing a risk-scoringr system and measuring litigation and enforcement actions against the company.

A risk scoring system for contract risk should be based on a comprehensive analysis of various factors that can impact the likelihood of a contract dispute and the potential financial and reputational harm to the organization. 

• Contract complexity : The more complex a contract, the higher the risk of misunderstandings, misinterpretations, and disputes
• Contract value : Contracts with higher values have a higher potential for disputes, and the financial impact of such disputes can be significant
• Contract scope : Contracts that involve more parties or more extensive obligations may have a higher risk of disputes.
• Jurisdiction : Contracts involving parties in different jurisdictions may have legal complexities and pose a higher risk of disputes
• Contract language : Ambiguous or vague contract language may lead to disputes
• The reputation of the counterparty : Contracts with parties that have a history of disputes or legal issues may have a higher risk of disputes
• Compliance with laws and regulations : Contracts that violate laws or regulations can lead to enforcement actions against the company

The above factors can be used to assign a risk score to each contract. For example, each factor could be given a score of 1 to 5, and the total score could be calculated by adding up the scores for each factor.

The performance of the risk scoring system and the system for escalating high-risk issues can be measured by tracking the number and severity of contract disputes and the costs associated with defending against those disputes. By implementing a robust risk scoring system and escalation process, you can proactively identify and manage contract risk, minimizing the potential for litigation and enforcement actions and reducing the associated costs.

Also read: Contract Security: Hacks and Tips for Safeguarding Your Contracts

How does Contract Management Software help mitigate contract risks?

“A simple way to reduce risk in commercial agreements is to use a contract management tool. Using technology over a manual process almost always reduces risk. There are two types of tools here. The first stores all your contract templates and executed contracts (including amendments) in a central repository where the legal team (or anyone else with access) can locate them through a simple search.” ~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC Ten Things: Minimizing Risk in Commercial Contracts

The truth is, contract risk management is crucial for any organization. Without it, businesses can lose a significant portion of their value. 

According to analysts at KPMG and World Commerce and Contracting, organizations can leak up to 9% of their value without an adequate risk mitigation strategy. The good news is that with a comprehensive contract lifecycle management (CLM) system, you can identify, assess, and mitigate risks collaboratively, putting their CLM at the heartyourheir digital transformation.

SpotDraft is a CLM software designed by lawyers for lawyers. Not only do you get a comprehensive dashboard to get all the information about your contracts, but there’s a host of features that you can significantly benefit from when it comes to mitigating risks in your contracts.

#1 Contract review

When a new contract is imported into the system, SpotDraft pulls out key terms and clauses using powerful machine-learning models. This enables contract reviews and due diligence processes to happen a lot faster.

#2 Access controls

SpotDraft provides you complete visibility over your contracts, allowing you to encrypt contracts, maintain audit trails, and establish access control over all contracts. This way, you can make sure that individuals only have access to data and contracts that they need to do their jobs.

#3 Auto reminders

SpotDraft sends you reminders on the dashboard about an upcoming renewal date. You can track various important dates, details, and deadlines automatically. Moreover, reminders are proactively sent to the relevant stakeholders to notify them whenever a contract is expiring or due for renewal.

#4 Version control

SpotDraft creates automated naming and versions upon edits or when a new version of a contract is imported. It lets you track changes and compare different versions to see what changes the other party has made. With SpotDraft’s audit trail feature, you can tamper-proof your entire contract process with a detailed script of what changed, when, and who changed any part of it.

#5 Custom tagging

SpotDraft has the custom tags feature through which you can add tags to your contracts depending upon how risky they are.

By implementing best practices for contract risk management and using the right technology, legal teams can stay ahead of the curve and ensure that your contracts are always up-to-date and in compliance with legal requirements. 

Don’t forget to conduct legal research, engage in continuing legal education (CLEs), consult outside counsel, subscribe to industry newsletters, and follow current events impacting your business to stay up-to-date with changes in laws and regulations that may affect contract risk management

Meanwhile, try a SpotDraft demo , maybe?

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14.1: Assignment of Contract Rights

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LEARNING OBJECTIVES

• Understand what an assignment is and how it is made.
• Recognize the effect of the assignment.
• Know when assignments are not allowed.
• Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment , an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person ( assignee ); the obligee then becomes an assignor (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.”Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights" ). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course. Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor.Uniform Commercial Code, Section 9-206. While a waiver of defenses makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment.

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.”Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments" ). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 (see Chapter 22 "Secured Transactions and Suretyship" ), the first assignee to file will prevail.

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

KEY TAKEAWAY

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

• If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
• Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
• Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
• Why are leases generally not assignable? Why are insurance contracts not assignable?

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Risk Management & Audit Services

• Basic Guidelines for Contracts and Contract Risk Management

Contracts in all forms are embedded in virtually all parts of University operations and represent a vital and integral support mechanism in furthering Harvard's mission.  They come in many styles but most often take the form of a consulting services agreements, licenses, memoranda of understanding, real estate leases, equipment or fixed asset leases, purchase orders, partnership agreements, research grant applications and associated award and/or sub-award agreements.  They are used to arrange for the delivery of every day supplies, basic services, and for the performance of specialized services in the areas such as publishing, architectural/engineering and design, financial advisory, cloud based IT infrastructure and applications, and research data analytics.  Given the wide spectrum such activities entail, it is incumbent on all who are involved with the negotiation and execution of contracts to understand the risks involved and employ prudent control strategies to mitigate them.

Contracts can be verbal or written and are used to create or expand the relationship between two or more parties and define the conditions of how each will interact within a given set of circumstances.  To be valid and enforceable in the US (1) , all contracts must have the following basic components:

• Consideration - each party to the contract must be providing something of value to the other, such as a product, service, or payment.
• Offer and acceptance - an offer made by one party, such as to provide a good or service, is accepted by the other, often for payment
• Intention to create legal relations - the parties to the contract must intend for the contract to be legally binding, and if such intent is not the case, it should be clearly stated within the document
• Legal purpose - in order to be legally enforceable, the contract must be for legal purposes
• Competent parties - the parties entering into the contract must be capable of making the contract and understanding what they are doing

While contracts can include any number of parties, the most common type of contract is between two-parties with one acting as the supplier, provider or lessor and the other party as the purchaser, buyer or lessee.  Each time a member of the Harvard community enters into an enforceable contract, they could be obligating the University to perform whatever commitments are prescribed in the agreement, however costly or difficult.  Individuals authorized to execute contracts on behalf of Harvard, therefore, have a duty to act in the best interest of the University without assuming unreasonable risk.  Consistent with the role Harvard holds in a particular contract situation and PRIOR to undertaking negotiations with the other participant(s), it's important to ascertain the business objectives (opportunities) behind the contractual relationship, the business risks created by entering into the relationship, and whether the proposed compensation is equitable given the services to be performed/delivered when weighed against the allocation of those risks. 

During negotiations and PRIOR to contract execution, one must conclude whether the risks inherent to the relationship are satisfactorily addressed by specific language in the agreement, via representation, warranty, default, and allocation of risk clauses.  This is best accomplished by having the final draft version reviewed by a knowledgeable person (e.g. a representative from Strategic Procurement or the Office of the General Counsel) not directly responsible for ratifying the deal.  Such contract reviews typically entail: 1) estimating the magnitude of identified risks associated with the desired business venture, 2) deciding whether the projected impact of those risks exceeds the buyer's risk appetite, and 3) evaluating and implementing appropriate transfer and/or financing mechanisms for losses that are beyond the declared risk tolerances of which the underlying economics do not support assumption.

Proper and consistent treatment of contract risk (via transfer and/or financing mechanisms) is a significant lever for controlling the overall cost of risk for the University.  It is not the role Risk Financing and Insurance to mandate universal contract formats and content be used across the organization but to offer guidance on the choices available to Harvard associates in aligning their risk appetite with the particular aspects of the deal at hand.  While the Department maintains some limited financial resources for supporting legal liability risk assumed by TUBS, mainly in the form of the  master insurance program , the policies have certain limitations in size and scope.  Therefore contracting parties should consider themselves as the primary holder and financially responsible party for contractually assumed risk unless otherwise transferred via written agreement.

Allocation of Risk

Contractual risk transfers are intended to assign responsibility (financial or otherwise) for associated risk exposures to one party or the other.  Contractual risk transfer can relieve the person or organization originally responsible for the risk (the "transferer") by assigning it to one or more of the contract's counterparties (the "transferees").  Within a contract, risk transfer is primarily accomplished through a combination of indemnification/hold harmless, limitation of liability, and waiver of subrogation clauses.  Unless specific circumstances dictate a Harvard procurement manager fully accept the financial consequences for a negative event, it is highly recommended that contracts be structured to allocate responsibility for risk to the party that creates it and/or is best positioned to mitigate its impact. 

Indemnification/Hold Harmless. An indemnification clause obligates one party (the "indemnitor") to compensate the other party (the "indemnitee") for losses or damages (physical injury or monetary) caused by that other party.  In its purest form, indemnity is intended to save a party from the legal consequences or from the outlay of money for defense costs, damages, etc. thus shifting all or partial responsibility for payment to the party who caused the damages.  Indemnification clauses are often closely tied to representations or warranties, which are promises that specific things are a certain way. 

Limitation of Liability. Sometimes referred to as a damages cap, it seeks to limit the amount payable in damages on a breach, restrict the types of loss recoverable or the remedies available, or imposes a short time frame in which damages are recoverable.  It is common to base the cap on a percentage of the value of the contract.

Waiver of Subrogation. An agreement between two parties in which one party agrees to waive subrogation rights against another in the event of a loss. The intent of the waiver is to prevent one party's insurer from pursuing subrogation against the other party.  Subrogation occurs when an insurance company pays its insured and then sues the entity or person responsible for the loss to recover the amounts paid to their insured.

Commercial Insurance

Along with the allocation of risk clauses, it is common for transferers to require transferees to carry certain types and amounts of commercial insurance as a means to assure financial resources will be available should a loss occur.  Because it’s likely the typical vendor, independent contractor or landlord in Harvard’s supply chain does not have sufficient liquidity, should they be called upon, to fulfill their indemnification obligations for a major loss event, all vendors and independent contractors selling goods to Harvard, having a presence on Harvard premises, or providing services to or performing work on behalf of Harvard should be required to maintain minimal levels of commercial insurance covering claims or loss arising out of the delivery of those goods and/or services. This requirement to maintain insurance also applies to all persons and/or entities providing goods and/or services to Harvard indirectly through such vendors/contractors (e.g. "subcontractors").  [Note: Contractors providing construction services and firms providing building design or engineering services for capital projects (as defined by Harvard CAPS) should instead comply with the minimum insurance amounts specified in Harvard’s Standard Construction and Design contracts which are available on the  Capital Projects (CAPS) website .

Implementing the Guidelines and Recommend Practices

The Risk Financing and Insurance department has published recommended contract risk management standards applicable to the various scenarios most procurement managers, contract specialists or leasing agents are likely to encounter. In general, the most fundamental risk management tool University buyers can and should employ when entering an agreement is to select and thoroughly vet their counterparty to verify they possess the necessary means and capabilities to supply the desired goods or deliver on the agreed upon scope of services.  Beyond that, individuals drafting and/or negotiating agreements should consider these attributes as standard practice for all contracts (2) :

• Agreements should not contain any limitation to, cap on, or waiver of Harvard’s right of recovery for direct or consequential losses arising out of the delivery of goods and/or services to Harvard, or which limits a provider’s liability for such losses;
• Each agreement should contain an indemnification provision conferring indemnitor status on the provider for liability (direct, indirect, and consequential including reasonable defense costs) arising out of the delivery of the goods and/or services described in the scope of work. 
• The provider, including all of their subcontractors, should be required to post and maintain the minimum types and amounts of commercial insurance typical for the nature of goods being provided or work described in the scope of services.

The Office of the General Counsel and Office of Strategic Procurement both are experts in drafting and negotiating agreements governing an array of situations; both groups are also cognizant of the benefits of prudent risk assumption and the consequences of inadequate insurance coverages of a provider.  Utilizing either group in finalizing contract terms and conditions has two benefits: first, the procuring TUB no longer has to consult with the Risk Financing and Insurance department seeking a review/approval of particular contract wording and therefore is likely able to expedite agreement execution.  Second, each is able to, based on local business needs and risk factors, modify the standard contract risk allocation and insurance language (dealing with limitation of liability, waivers of subrogation, indemnification/hold harmless, and minimum insurance coverages) that would normally be expected to apply. 

Failure of a buyer to solicit and implement guidance from either group or otherwise adhere to the contract risk management standards and practices presented herein exposes the University collectively and their individual academic or administrative unit to potentially significant financial loss.  Although Harvard maintains its own programs of insurance, there are certain types and portions of losses that Harvard can’t or does not insure against.  As such, for liabilities arising from a provider agreement that were magnified by allowing less stringent terms than those recommended above, the responsible TUB will absorb the increased financial consequences imposed on the University for the portion of a loss that would have been recoverable from the provider if the applicable standards and practices had been followed

While the Risk Financing and Insurance department remains available to any University department or affiliate for a consultation to assist with risk analysis efforts and advising on appropriate risk financing solutions, we strongly urge any group looking for specific guidance on contract language allocating (assumption/transfer and minimum insurance wording) risk contact OGC or Strategic Procurement for help.  As of April 2015, the Risk Financing and Insurance department will no longer be evaluating these aspects of any vendor, independent contractor or consultant agreements, instead will refer all such inquires to the OGC or Strategic Procurement for incorporating of the noted risk and insurance standards.

(1) while similar requirements exist in many non-US jurisdictions, subtle differences in local laws and legal environment can create unintended impacts on contractual terms.  Qualified legal counsel with a working knowledge of local conditions and business practices should always be consulted before entering into contracts outside the United States

(2) not applicable to construction agreements on capital projects; see HPPM/CAPS website for model agreements reflecting standard practices applicable to capital projects.

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• When Can a Party Assign Contractual Rights to...

When Can a Party Assign Contractual Rights to Another Party?

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  What is a Contract?

An agreement between two private parties creates mutual legal obligations. A contract can be either oral or written. However, oral contracts are more challenging to enforce and should be avoided, if possible.

A contract that involves a significant amount of money (over $500) must be written in order to be valid. Every aspect of life involves contracts. To ensure you have a valid contract, you must understand the rules governing them.

All valid contracts must include the following elements to be enforced:

• An offer (I will pay you $1,000 for 1,000 cupcakes);
• And acceptance of the offer presented with (Another person accepts $1,000 for 1,000 cupcakes);
• A promise to perform (Other person says they will perform);
• A valuable consideration ($1,000);
• A time or an event when the performance must be made (1,000 cupcakes exactly two weeks from now);
• Terms and conditions for the performance (The cupcakes must be chocolate and have vanilla frosting); and
• Performance (The 1,000 cupcakes are delivered, and the person is paid $1,000).

On top of that, the courts will not enforce certain contracts unless they are in writing. These contracts fall under the Statute of Frauds and must be in writing. Examples include marriage contracts, contracts not to be performed within one year, interest on land contracts, and the decedent’s debt guarantees.

When dealing with a contract issue, it is important to consider the local laws since state statutes govern most contracts.

What are the Required Elements for a Contract?

What is considered a breach of a contract, what are there different types of contracts, what is a contract assignment, does a contract assignment need to be in writing, do i need a lawyer for help with contract assignments.

Any contract must contain five elements. A contract must have a legal purpose and cannot be used for illegal purposes. Contracting to commit a crime (such as hiring a hitman). In addition, there must be a mutual agreement between the parties. In order for this to occur, one party must have made an offer to another party for acceptance. The signing of a contract, for instance, indicates that the parties are in agreement and on the same page.

Some offers may not have an expiration period , so the offer remains open for a “reasonable” time. Offers can also be revoked until acceptance occurs. Acceptance usually means agreeing to the terms of the offer, and if there is any change to the terms in the acceptance, it would be considered a counteroffer. States differ on this, and it would be ideal to consider the regulations in your local jurisdiction.

Third, consideration is key in order for the contract to be valid. Both parties agree to provide something of value in exchange for a benefit. The consideration can take the form of a car, money, or even manual labor. It must be something of real value.

Gifts and promises differ as well. It is not considered a contract if someone gives you a handbag or if they promise to give you a handbag but don’t; there is still no contract. A contract exists, however, when a friend promises you a handbag in exchange for completing a task. I will buy you a handbag if you clean my gutters.

Fourth, the parties must be legally competent . Minors and the mentally impaired cannot validly contract. Additionally, the party must be of a sound mind while contracting and without the influence of drugs or alcohol. Lastly, all parties must agree based on their own will. Contracts will be void if there is a mistake, duress, or fraud by one or more parties.

The contract is breached if either party fails to fulfill its legal obligations. The other party will suffer economic losses if one party violates the contract. As an example, if you hired a construction company to complete a project on time and that company failed to meet the deadline, then you will most likely suffer financial losses.

There are several options available to compensate for those losses. You can either sue for damages, demand specific performance , or terminate the contract. In the end, the court will decide the outcome and the amount of compensation.

A unilateral contract involves a promise in exchange for specific performance. In a bilateral contract, one promise is exchanged for another promise.

Other types of contracts include:

• Express contracts usually specify orally or in writing the exact terms of the contract;
• Conditional contracts are based upon the completion of a condition;
• Joint and several contracts have multiple parties involved;
• Implied contracts where courts find that a contract exists based on the situation;
• Unconscionable contracts put one party at a greater advantage than another one and are considered unjust;
• Adhesion contracts are considered to give one party more bargaining power than another and therefore result in a “take it or leave it” situation;
• Option contracts allow you to enter into another contract with another party at a later time; and
• Fixed-price contracts involve a buyer and a seller that agree to pay a fixed price for a project.

Keeping in mind that contracts come in all shapes and sizes is something we deal with every day. Contact a local lawyer if you are unsure what type of contract to which you are a party.

A contract assignment occurs when one party in a contract transfers or “assigns” their contract rights to another party. For instance, suppose that party X contracts with party Y, stating that Y will build their house. X can then assign their rights to the building to another party (Z) if they choose to do so. Here, X is called the “assignor,” while Z is called the “assignee.”

Contractual rights may be assigned to another party at any time unless:

• The contract prohibits the assignment of contractual rights
• The assignment would fundamentally change certain duties or risks involved in the contract
• The assignment has to do with future rights derived from a future, non-existent contract
• The assignment is legally prohibited by law

Aside from these situations, contract assignments are allowed and frequently occur in many situations. This is especially common in contracts involving sub-contracts and building projects.

An oral agreement is usually sufficient for a contract assignment to be valid. The original party (the obligor) does not need to be informed of the assignment. In any contract situation, it’s best if the agreement is reduced to writing and signed by all parties. By doing this, everyone will be on the same page, and a record of interactions can be maintained in case of a lawsuit.

Contract rights often contain many terms, which can get more complex when other parties enter the picture. You may need to hire a contract lawyer for advice and guidance if you have any questions, concerns, or disputes involving contract assignments.

A qualified lawyer can assist with drafting documents, reviewing agreements, and other tasks. Furthermore, your lawyer can represent you in court if you need to file a legal claim. An issue that involves a large amount of money or evidence that the contract is invalid can easily get out of hand.

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Contract Insights

The leading resource for contract management & procurement professionals, contract risk management - breaking down the basics.

A proper legal risk management process is critical for the preservation of a healthy contracting process. Failure to adequately manage contract risk can be disastrous. Harmful contract risk oversights affect not only legal teams – but organizations as a whole.

Your organization should work to avoid a breach of compliance, violation of contract terms, lost revenue, wasted time, lawsuits, and a damaged company reputation by addressing different types of contract risks. As such, let’s break down agreement risk management and how it can be maximized with contract management software .

What Is Contract Risk?

Contract risk is the potential for losses or harmful outcomes arising from the terms and conditions of a contract or from the failure of parties involved to address the obligations of the contract. These risks can occur for a variety of reasons - including ambiguous contract language, party non-performance, financial instability, or changes in compliance laws and regulations. Contract risk is significant because it can lead to financial losses, business relationship damage, legal disputes, and wasted time. Managing contract risk correctly involves due diligence, a clear and precise contract creation process, regular observance of contract performance, and mitigation strategies. The goal is to minimize potentially negative impacts on businesses and ensure that all parties retain a clear understanding of their responsibilities and the consequences of failure of contractual obligations.

What Is Contract Risk Management?

Contract risk management involves using risk assessment tools to evaluate potential risks a contract can incur. Such risks include financial risks, regulatory compliance risks, breach of contract, security risks, and others. Risk can prevent effective contract management . Thus, a contract risk management strategy is paramount. 

Breaking Down the Contract Risk Management Basics

Now you know how to define contract risk management. Let’s break down the basics of what is contract management risk and how to use contract management software risk mitigation tools.

#1 - Establishing Risk Appetite in Contract Management Software

You can begin your contract risk management process by establishing a contract risk appetite within your contract lifecycle management software system. Risk appetite is the acceptable risk your organization is willing to incur in pursuit of smart goals for contract managers and broader contract management KPIs .

With a contract management risk and opportunity assessment tool , your organization can proactively map risk and risk exposure variables. You can establish risk acceptance policies and guidance by contractual risk category to be dynamically visualized and analyzed. As such, your team can quickly identify items that fall outside of your acceptable range of risk and quickly address them.

#2 - Diving Deeper Into Risk With a Risk Assessment Matrix

In addition to managing acceptable risk and your organization’s risk appetite, your organization can further supercharge risk goals.

Your organization can easily classify significant risk categories (such as contract compliance mistakes or OFAC compliance risk), depending on your hierarchy of contracting needs. You can rank and identify contract risk events and their probability to establish an understanding of events that would negatively impact your organization. For high-risk contracts, vendors, and purchases, your organization can review and log risk events and quantify risk.

With the ability to monitor risk in such a powerful and visual way, your organization can reduce risk and even avoid some risks altogether. You can recognize trends and implement routine risk reviews. You can implement strategies and best practices to reduce risk exposure and probability.

#3 – Automating Contract Data Mining & Identification

Leading contract management software can empower your contract managers’ contract risk administration.

Contract AI within CLM software can allow you to identify key contract data fields and establish rules around them. These sensitive data points can include PCI (payment card information), PII (personally identifiable information), counterparties, email addresses, financials, and more.

With drag-and-drop contract authoring , your system can use NLP (natural language processing) to automate the population of data fields onto a tidy contract record page. This feature can significantly streamline the mapping of contract language onto your organization’s pre-approved contract metadata fields.

You can also configure contract clause detection rules. These rules help you compare newly introduced clauses against those within your approved library and contract database .

When a contract is introduced, you can pinpoint possible risks. By analyzing standard contract language (such as intellectual property clauses, confidentiality clauses, and others depending on the type of contract), your system can identify positive and negative aspects of language. This identification is based on configured rules and exposure to up to one million contract clauses . A contract risk management system that has been exposed to numerous clauses and hypothetical risk events can give your organization unparalleled risk oversight.

#4 – Observing Hands-On Risk Reduction Actions

Let us examine some important actions that can typically reduce contract risk.

• Generating a Contract Amendment.
• Renegotiating a Contract to Reduce Risk.
• Transferring Risk to a Third Party.
• Offsetting Liability by Purchasing Insurance.
• Considering Carve-Out Transactions to Subset Liabilities to a Larger Enterprise.
• Running Risk Audits and Establishing Robust Security Controls.
• Seeking Third-Party Legal Advice.
• Contract Termination (If Done Correctly).

#5 – Establishing A Contract Risk AI Machine Learning Schedule

Capitalizing on the robust contract intelligence use cases mentioned before, your organization can leverage contract AI to learn from new data and contracts. Contract AI can also learn from changes to existing contracts. This machine learning can take place on a scheduled basis – depending on your organization’s needs.

For example, your system can be used to schedule recurring contract risk analysis with machine learning:

You can also configure when a recurring risk analysis with machine learning may take place. For instance, maybe you would like this recurrence to take place on the first day of every month.

You can edit, delete, or view an analysis job as needed – as contract complexity and contract volume grow.

In addition to analysis, rules can be configured to enable a contract AI engine to make intelligent recommendations based on analysis data. Your organization can be equipped with a rules-based strategy to recognize risk and evaluate it.

For an even more advanced intelligence strategy, you can configure your criteria to update over time. For example, your contract managers may want to determine If financial exposure is too high for the price of a contract.

On-screen alerts can give your organization front-end awareness of potential risks. This process can be continuously improved with more contracts and relevant data introduced.

Get Started With These Risk Tools & Strategies & More

Now that you are up to speed on contract risk management processes, it’s time to get started. All that’s left is to select a contract risk management solution that can help you with all the strategies mentioned above. That solution is CobbleStone Contract Insight ® .

CobbleStone Software is a CLM software provider that has been widely acclaimed by both CobbleStone ® users and leading third-party analysts. CobbleStone has been a leader in CLM for over twenty years, having developed one of the first contract software solutions. CobbleStone’s user-friendly platform scales with your needs to give you contract management process governance from contract requests to contract review and contract renewal.

Book a free demo with a CobbleStone expert to see the features above for contract risk management processes and more in action. Ready to try CobbleStone out for yourself? Enjoy a free trial of CobbleStone today!*

This blog post was updated  on March 25th, 2024 .  Its original publication date was August 17th, 2022.

*Legal Disclaimer: This article is not legal advice. The content of this article is for educational purposes only. The information on this website may not present the most up-to-date legal information. Readers should contact their attorney for legal advice regarding any particular legal matter - including the contract risk management process and legal and operational risk.

Topics: risk management contract risk risk response plan

Written by Reshaun Timmons

Reshaun Timmons is a Marketing Specialist at CobbleStone Software

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Contract Management 101: What is Contract Risk Management?

The management of risk is so important in business that “risk management” has become a well-respected profession, with dozens of universities producing graduates with business degrees in the field. Broadly, risk managers specialize in identifying and evaluating risks to the company. The risks are then prioritized and addressed in a manner determined to best protect the assets of the organization.

One aspect of risk management which cannot be over-emphasized is the management of risk through contracting. In this article, we will examine the contract risk management process and outline some ways in which implementation of an effective contract management system can help an enterprise manage risk.

Risks Arising from the Contracting Process

In business, contracts have become more essential than ever before. Even small companies can have dozens, or even hundreds, of contracts, while large companies can have thousands. Organizations negotiate deals with vendors, customers, employees, and a host of other parties who provide goods and services, ranging from utilities to commercial leases. The final agreement is memorialized in a written contract.

The contracting process, which we will define broadly as including negotiation, the final written instrument, and the performance of the contract, results in two important forms of risk. Perhaps the more obvious is the legal liability that attaches to the parties under the terms of the contract. This can include breach of any of the requirements in the contract and resulting legal liability for the breach. For example, liability can arise under indemnity clauses, limitation of liability clauses , and other liability-shifting provisions.

The other form of risk is general business risk to the company. For example, poor contracting procedures and poor contracts, even when they do not result in legal liability, may result in lower profits, higher expenses, damage to business relationships, customer dissatisfaction, and harm to the company’s goodwill, just to name a few poor results .

The Need for an Effective Contract Management System

The risk to the company doesn’t end with the business and liability risks discussed above. A poor contract management process can exacerbate these risks, and even create new ones, while an effective contract management system can eliminate or greatly reduce them.

To illustrate, it is estimated that an average organization with 1,000 employees unnecessarily spends $2.5 million to $3.5 million per year to search for or re-create lost documents. Poor contract management also results in lost revenues, missed deadlines, unintended auto-renewals, failure to invoice, overpayment, failure to monitor, acceptance of goods or services at a quality or grade below that agreed upon, regulatory compliance failures, and many other negative outcomes.

Common Steps in the Contract Risk Management Process

Below we will offer some important steps for improved contract risk management. We divide the issues into (1) the legal contracting process and (2) the contract management process.

Legal Contracting Process – Legal issues can be highly complex, and there are many publications providing legal strategies for dealing with contracting risk. Here, we’ll hit some highlights.

Make sure all contracts are in writing.

Ensure that company policy is clear on who has the right to negotiate and sign contracts on behalf of the company.

Create checklists to be used in reviewing proposed contracts.

Pay special attention to liability-shifting provisions. These clauses typically result from hard negotiating. Examples of such clauses include indemnity and limits of liability provisions. Do not allow another party to include such a provision unless your attorney has agreed.

Do not sign until a lawyer has reviewed the contract.

Contract Management Process – It is, without a doubt, absolutely essential to adopt contract management software to minimize contract management risk. The International Association of Contract & Commercial Management (IACCM) states that digitalization plays a crucial role in the contract management process. Nevertheless, the IACCM also states that 85% of organizations still use a manual, analog contracting process. Therefore, there is obviously lots of room for improvement.

ContractSafe is fully onboard with digitalization, storing all of a company’s contracts on an easy-to-use, efficient cloud-based platform. As a result, the following features (plus many more) are then available to help reduce risk:

Central Repository – All contracts are now stored in one centralized repository so that they are safe and easy to find. This is crucial, since research suggests that in large companies, more than 10 percent of contracts are lost or missing at any given time.

Digitizing the Process- ContractSafe takes the guesswork out of digitizing contracts. All you have to do is email docs in, add the email address on the scanners, and then just drag and drop, meaning it’s easy to get all files digitized into one central repository.

Keyword Searching Capability – All of the company’s contracts can be searched using keywords, just like a Google search. This saves time, and also ensures that you can always find the relevant contracts and relevant provisions within contracts.

Access from Anywhere – Because the digitalized contracts are stored in the cloud, they can be accessed from any device or computer with an internet connection. You are almost never separated from your contracts.

Reminders and Notifications – ContractSafe tracks everything you want it to, such as auto-renewal dates, payment dates, and deadlines. The system will send reminder emails to whomever you choose, and a calendar with key dates is always available.

Customizable Permissions – Management can choose who has access to what documents.

Document Security – The type of permission granted to a document can be limited, including “no-delete” and “read-only” user settings.

At ContractSafe, we know how hard you work to negotiate and enter contracts beneficial to your company. That’s why we’re excited to offer an easy-to-use, powerful tool to reduce your contract management risks. We’re even happier to let you try it for free. Start your trial today!

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Assessing Assignability: Transferring Contractual Rights or Obligations | Practical Law

Assessing Assignability: Transferring Contractual Rights or Obligations

Practical law legal update 5-546-6326  (approx. 7 pages).

• An intended transfer is of the type that is prohibited by law or public policy (see Practice Note, Assignability of Commercial Contracts: Statutory and Public Policy Exceptions ).
• The parties expressly agree to restrict transferability (see Practice Note, Assignability of Commercial Contracts: Contractual Anti-assignment and Anti-delegation Clauses ).
• Breaching the contract.
• Making an ineffective and invalid transfer.

Distinguishing Between Assignment and Delegation

• The assignment of rights to receive performance.
• The delegation of duties to perform.

Characteristics of Assignments

• The right to receive performance from the assignor.
• Its remedies against the assignor for any failure to perform.

Characteristics of Delegation

The general rule governing assignment and delegation.

• Most assignments of contractual rights.
• Many delegations of contractual performance.
• Assignments and delegations that violate public policy or law.
• Assignments of rights or delegations of performance that are personal in nature.
• Contracts with anti-assignment or anti-delegation clauses.

Contracts That Present the Greatest Challenges

• Personal services contracts (see Personal Services Contracts ).
• Non-exclusive intellectual property licenses (see Intellectual Property Licenses ).
• Contracts with anti-assignment and anti-delegation clauses (see Contracts With Anti-assignment and Anti-delegation Contract Clauses ).

Personal Services Contracts

Intellectual property licenses, contracts with anti-assignment and anti-delegation clauses, is a change of control an assignment.

• Contains an anti-assignment and anti-delegation clause expressly restricting a change of control.
• States that a change in management or equity ownership of the contracting party is deemed to be an assignment.

When Does an Involuntary Transfer Trigger a Restricted Transfer?

• A contractual anti-assignment and anti delegation clause applies to a specific type or transfer.
• The transfer is permissible, with or without a contractual anti-assignment and anti-delegation provision.

Drafting and Negotiating Anti-assignment and Anti-delegation Clauses

• Directly addressing assignment of rights and delegation of performance.
• Clarifying the universe of restricted transfers.
• Designating the non-transferring party's consent rights.
• Specifying any exceptions to non-transferability.
• Requiring notification of a permitted transfer.
• Including a declaration that impermissible transfers are void.
• Adding a novation to the anti-assignment and anti-delegation provision.

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What is a contract assignment definition.

A contract assignment is a document that assigns rights and obligations under a contract to another party.3 min read A contract assignment can be used for a variety of reasons, but most commonly it is used when one party to a contract wants to transfer its rights or obligations to another party. For example, if Company A enters into a contract with Company B to provide services , but Company A then wants Company C to provide the services instead, Company A would use a contract assignment to assign the contract rights and obligations to Company C. Contract assignments are also common in the real estate industry. For example, if someone buys a house with the intention of flipping it, they will often assign the purchase agreement (and therefore the underlying contract rights and obligations) to the company or person they are selling the house to.

What is a contract assignment?

A contract assignment is a legal agreement between two parties in which one party assigns (gives) its rights under a contract to another party. The term “assignment” is used in the law of contracts to refer to the transfer of rights or duties under a contract from one person or entity to another. An assignment can be made orally or in writing, but it is generally advisable to have any assignment agreement in writing so that there is no dispute about the terms of the agreement later on.

There are several reasons why someone might want to assign their rights under a contract. For example, if you are a small business owner and you have a contract with a big company that you cannot fulfill, you may want to assign your rights under the contract to another company that can fulfill the contract. Or, if you are an employee who has been assigned to work on a project for a specific period of time, you may want to assign your rights under the employment contract to another employee so that they can continue working on the project after you leave.

In order for an assignment to be valid, there must be mutual assent between the parties; that is, both parties must agree to the terms of the assignment. Furthermore, an assignment cannot conflict with the terms of the original contract; if it does, then it will be void and unenforceable.

If you are considering assigning your rights under a contract, it is important to seek legal advice first so that you can understand

What are the benefits of a contract assignment?

There are many benefits to taking on a contract assignment. For one, it can help to diversify your income and give you a steadier stream of work . Additionally, it can help build your portfolio and credibility as a freelancer, which can lead to more opportunities down the road.

Another benefit of contract assignments is that they often come with shorter deadlines than traditional projects , which can be helpful if you’re struggling to find time to fit freelancing into your schedule. Finally, working on a contract basis can help build relationships with clients and allow you to get a foot in the door with companies you may be interested in working with long-term.

What are the risks of a contract assignment?

When taking on a contract assignment, it is important to be aware of the risks involved . These can include:

-The client may not be happy with the work you produce and may try to cancel the contract . -You may not be able to complete the work within the specified time frame . -The scope of the work may change, which could lead to additional costs. -There may be unforeseen circumstances that make it difficult or impossible to complete the work.

How to assign a contract

If you’re thinking of assigning a contract, there are a few things you should know first. Here’s a quick guide on how to assign a contract:

1. Make sure the contract you’re assigning allows for assignment. Not all contracts do, so it’s important to check before moving forward.

2. Determine who will be assuming the contractual obligations . This person is known as the “assignee.”

3. Get the assignee to agree to assume the obligations in writing. This written agreement is called an “assignment agreement.

4. Notify the other party to the original contract (known as the “obligor”) of the assignment in writing. The notice should include: (a) the date of the assignment; (b) the names and addresses of both parties; and (c) a statement that indicates that all rights and obligations under the contract have been transferred to the assignee.

5. Make sure that any conditions precedent in the original contract have been satisfied before completing the assignment process. A condition precedent is something that must happen before an obligation under a contract becomes effective. For example, if a contract requires that certain repairs be made to a property before it can be sold, those repairs must be completed beforethe assignment can take place.

6. Check local laws and regulations regarding assignments, as there may be restrictions in place that you need to be aware of before proceeding.

A contract assignment is a legal agreement between two parties that assigns rights and responsibilities to one party. The assignee agrees to take on the duties of the contract , while the assignor transfers their rights under the contract to the assignee. This type of agreement is often used in business deals or when one party wants to transfer their interest in a property or asset to another party.

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How dividends can increase options assignment risk

Most experienced investors are familiar with the adage that "if an investment opportunity sound too good to be true, it probably is." While this sentiment may often be associated with overly optimistic assumptions, it also applies to investors who sell options contracts without first considering the ex-dividend date for a stock or ETF.

How dividends work

A quick review of how dividends work: A dividend represents a payment of a company's revenues to shareholders, most often in the form of cash. Cash dividends are paid out on a per-share basis. For example, if you own 100 shares of a stock that pays a $0.50 quarterly dividend, you will receive $50.

Not all companies pay dividends, but if you're investing in options contracts for companies that do pay them, you need to keep several important dates in mind:

• Declaration date: Date on which a company announces the per-share amount of its next dividend.
• Record date: The cut-off date established by the company to determine which shareholders of its stock are eligible to receive a distribution. This is usually, but not always, 1 day after the ex-dividend date.
• Ex-Dividend date: Date on which a stock's price adjusts downward to reflect its next dividend payment. For example, if a stock pays a $0.50 dividend, the stock price will drop by a half point prior to trading on the ex-dividend date. If you buy a stock on or after the ex-dividend date, you are not entitled to the next dividend.
• Dividend (payment) date: Date shareholders receive cash in their account from a dividend.

See Locating dividend information for stocks for additional details.

Dividends offer an effective way to earn income from your equity investments. However, call option holders are not entitled to regular quarterly dividends, regardless of when they purchase their options. And, unlike stock or ETF prices, options contract prices are not adjusted downward on ex-dividend dates.

This can cause a problem for anyone who has sold an options contract without first considering the impact of dividends. Why? Because the risk of being assigned on an option contract is higher when the underlying security of an in-the-money option starts trading ex-dividend. To understand the risks and how dividends impact options contracts, let's explore some potential scenarios.

Avoiding or managing early assignment on covered calls

As noted above, the ex-dividend date is particularly important to anyone who writes a covered or uncovered call option. If a covered call option you have sold is in the money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls will exercise his options early.

If you are assigned, you must deliver your shares of the underlying security, as well as the dividend income, to the owner of the call. Let's examine a hypothetical example to illustrate how this works.

• Bob owns 500 shares of ABC stock, which pays a quarterly $0.50 dividend.
• The stock is trading around $25 a share on August 1 when Bob decides to sell 5 October 30 calls.
• By early October, ABC stock has risen to $31 and, as a result, Bob's covered calls are in the money by $1. The calls will expire in 10 days and tomorrow the stock will start trading ex-dividend.
• Because the remaining time value of the call option is less than the value of the dividends, the call owner will likely exercise his options on the day before the ex-dividend date.

See Locating option values in Active Trader Pro ® .

If Bob does not take any action to close his covered call position, there is a good chance he will be assigned on the ex-dividend date. This means he will no longer own 500 shares of the stock and he will not receive the dividend income.

To avoid this scenario, Bob has a couple of choices:

• He could buy back the calls he sold to retain the stock and the dividend. However, he would have to do this prior to the ex-dividend date. If he waits until the ex-dividend date or later, he will not be entitled to the dividend income. Keep in mind that it's possible to get assigned prior to the day before the ex-dividend date, so this strategy is not foolproof.
• The other option is to close out his short position and write a new covered call with a later expiration date or a higher strike price. This strategy is known as "rolling" your options contract forward.

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Avoiding or managing early assignment on calls not covered by shares

Now let's consider what could happen if Bob had sold uncovered calls on ABC stock:

• As in the example above, ABC stock pays a quarterly $0.50 dividend and is trading around $25 a share
• Bob has a negative view on the stock and decides to sell 5 uncovered October 30 calls
• By early October, ABC stock has risen to $31 and, as a result, his uncovered calls are in the money by $1

To make matters worse, Bob learns that tomorrow the stock will start trading ex-dividend. Because the remaining time value of the options is less than the value of the dividends, owners of these calls will likely exercise their options 1 day prior to the ex-dividend date.

To limit his exposure, Bob has several choices. He can buy back his uncovered calls at a loss, buy the stock to capture the dividend, or sit tight and hope to not be assigned. If his calls are assigned, however, he will have to pay the $250 in dividend income, in addition to covering the cost of delivering 500 shares of ABC stock. If Bob had initiated an option spread (buying and selling an equal number of options of the same class on the same underlying security but with different strike prices or expiration dates), he could also consider exercising his long option position to capture the dividend.

Other considerations and risks

If you are implementing a spread strategy that includes long contracts and short contracts, you need to remain particularly vigilant in regard to assignment risk. If both contracts are in the money and you are assigned on the short contracts, you will not be notified until the following business day. While you can exercise your long position on the ex-dividend date to eliminate the short stock position that was created, you will still owe the dividend because you were short the stock prior to the ex-dividend date.

Ways to avoid the risk of early assignment

If you are selling options (covered or uncovered), there is always the risk of being assigned if your trade moves against you. This risk is higher if the underlying security involved pays a dividend. However, there are ways to reduce the likelihood of being assigned early. These include:

• Do your homework: Know if the stock or ETF pays a dividend and when it will start trading ex-dividend
• Avoid selling options on dividend-paying stocks or ETFs when your trade includes ex-dividend
• Invest in European-style options: American-style options can be assigned at any time before the option expires, European-style options can only be exercised at expiration

See Locating dividend information for ETFs for details.

If you are a Fidelity customer and you have questions about your exposure to assignment risk, you can always contact a Fidelity representative for help.

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Contract Risk Management: An Intro & The Benefits

This is the ultimate guide to contract risk management, where you’ll find out:

• What contract risk management and why it’s important

• How contract risk management is different from contract management

• The types of contract risk and the contract risk management process

• How legal tech can improve your existing contract risk management process

What is Contract Risk Management?

Contracts are at the heart of every business. They are the documents that define how your business will mitigate risk and increase growth. And in most cases, they are complex documents full of legal jargon and potential risk. But the dynamics that govern their purpose are simple; one party wants the maximum revenue return and the other a minor expense, and both want the minimum risk associated with the contract.

The purpose of contract risk management is to define the contract's maximum value through compliance tracking by identifying, managing, and minimising the potential risks throughout the contract lifecycle .

Why is Contract Risk Management Important?

Every business will sign contracts and they are crucial assets for every business. Contracts help to define and govern the rights and duties of any new relationship or agreement. As a company grows, so does the complexity of its processes and the number of contracts that need management.

However, contracts differ between companies and sectors, meaning that they can’t be treated in the same way. Managing contract risk throughout the lifecycle is crucial for the contract management process . By identifying and minimising risks, the process can help protect your business and maximise returns.

The Difference Between Contract Management and Contract Risk Management

Contract risk management and contract management are similar but separate processes. Often, contract risk management will have a multitude of crossover tasks compared to the contract management framework.

Contracts are agreements that bind two or more parties to a set of terms and conditions, and if any contract is going to be a success, it must be effectively managed from start to finish. Contracts, however, can be lengthy documents full of associated risk. And so, this is where contract risk management will feature.

Contract risk management is the process that allows businesses to realise the maximum value of their contracts while continuously identifying, tracking, and minimising risk throughout the contract lifecycle .

Contract management is the process of managing contracts from start to finish. The process involves creating, analysing and executing contracts to ensure compliance and the agreement's maximum operational and financial performance.

Types of Contract Risks

As we go about our daily lives, we are willingly entering new agreements – these agreements occur when we pay for a bus ticket or our morning coffee. Although the duration of these non-written contracts is short, it’s an annoyance when the obligations are not met, and businesses are no different.

Risk is in every contract. When managing risk, it is crucial to understand the different types. We’ve broken down the four most common contractual risks in a standard contract to make this easier to understand.

• Financial risk

Financial risks can be credit, liquidity, asset-backed, and equity risks. Financial risk can occur from various factors, including a missed payment, contract termination, or a missed delivery date.

• Legal risk

A company may have to face legal action if they breach their contract terms, with the counterparty able to pursue legal action as a result. There are several distinct types of legal risks which include compliance, dispute, and regulatory risks. Legal risks could occur from many scenarios such as improper or unused confidentiality disclosures or missing contract obligations.

• Brand risk

Brand risk is associated with your business' public and customer opinion as a direct result of financial, legal, and security issues. A brand must seek to mitigate brand risk as it can have a profound negative impact on its reputation, resulting in financial losses.

• Security risk

Contracts often hold vast sums of classified and sensitive information about the involved parties, making security risks one of the most severe consequences your business could face. Due to the sensitivity, security risks often comprise financial, legal, and brand risks in one.

The Contract Risk Management Process

Contracts act as your company’s first line of defence when any legal issues arise. They are the documents that define companies’ transactions. But while every agreement comes with inherent risk, legal teams can mitigate this risk by using the terms and conditions and implementing an effective contract risk management process. To make this easier, we’ve broken down the most common steps you may come across in a standard contract.

The negation stage is the most crucial stage for the contract risk management process as it’s

the pre-signature stage. This step allows the involved parties to agree on a set of legally binding terms before entering a new agreement. When two or more parties negotiate, both seek to obtain the best terms while minimising the financial and legal risk.

The review stage provides the parties with the opportunity to fully understand the terms and conditions, potential risks, key dates, and other crucial information they agree before anything is signed.

The auditing stage is one of the most crucial for the successful delivery of the contract. This stage enforces the regular review of a contract to ensure that the terms are still relevant and provides an opportunity to spot any potential compliance obligations and risks.

The Benefits of Contract Risk Management

Effective contract risk management will result in reduced financial and operational risk and increased profits for the business. However, poor contract risk management presents the company with increased costs, lost revenue, and the possibility of the counterparty taking legal action.

Legal software like Summize can change how legal teams interact with their contracts. Automating low-value work such as contract review and management, allows legal teams to reduce their time spent on tedious contractual tasks, allowing for more time to be focused on higher-value activity.

By using Summize as part of your contract review and management process, legal teams can understand their contracts at a glance with instant summaries and intuitive insights.

Summize breaks down the critical information from your contracts with an interactive dashboard, making the process quicker and easier. Summize also highlights essential dates, areas of concern red-flagged, and summaries waiting for review. You will receive a notification near each important date in a contract when working with Summize.

Did you find it useful? Or perhaps there’s something we missed? Get in touch with us at [email protected] to let us know.

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Understanding the Risks of Early Assignment

March 27, 2024 — 08:33 am EDT

Written by Gavin McMaster for Barchart  ->

Early assignment occurs when the owner of an option contract exercises it before the expiration date.

This means that if you're short an options contract (either a call or put), you may be required to fulfill your obligations as the seller of the contract before the expiration date.

If you have sold a put, you could be called upon to buy 100 shares at the strike price.

If you have sold a call, you could be forced to sell 100 shares at the strike price.

Why Does Early Assignment Happen?

Technically, an option can be assigned at any time.

However, it tends to only happen when the option is in-the-money and there is very little time premium left.

Ex-dividend dates can also impact early assignment as some traders will exercise a call option early in order to received the dividend payment.

Let’s look at some examples:

AAPL at $171

The $175 put is trading at $5.70.

The put option is in-the-money with $1.70 of time premium remaining, therefore is unlikely to be assigned early.

The $165 call is trading at $8.00.

The call option in in-the-money with $3.00 of time premium, therefore is unlikely to be assigned early.

The $185 put is trading at $14.00 

The put option is in-the-money with $0.00 of time premium remaining, therefore is very likely to be assigned early.

Risks of Early Assignment

The risks associated with early assignment revolve around the obligations on the option seller.

If the option buyer exercises their right to buy or sell the underlying asset, the seller MUST fulfil their obligation.

Being called upon to buy 100 shares could result in a margin call if the investor does not have the required capital.

Early Assignment and Credit Spreads

Let’s assume you sold a 100-95 bull put spread and the stock has dropped to 90 near expiration.

If you are assigned on the 100 put, you can exercise the 95 put.

The two offset and you are left with 0 shares.

Where is gets tricky is if the stock is trading between 95 and 100 near expiration.

Automatic Assignment

If you are an option seller, your option will either be exercised by the buyer or automatically assigned if it is ITM on the expiration date.

If you are an option buyer, your option will not be automatically assigned before expiration.

However, most brokers will automatically assign ITM options on the expiration date.

Early assignment is a risk that all options traders should be aware of and prepared to manage.

As you navigate the dynamic landscape of the financial markets, a mastery of these Greeks opens the door to a strategic and informed approach. 

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Risks of Options Trading

While options trading has significant benefits, it also has significant risks. Every option trader needs a solid understanding of what these risks are and how they can impact their trading.

The most basic risk of buying options is the chance that the contract may expire worthless. This makes options radically different from stocks. While some stocks have certainly lost so much value that they literally fell to zero, this is an unusual event in the stock market. Options commonly expire worthless, and ultimately, all options expire.

Leverage: The double-edged sword

Next is a concept you're familiar with: leverage . In the options world, leverage means using a little money to control a large amount of the underlying security (compared to buying the underlying directly).

When the amount you're investing is equal or similar to the amount you're putting at risk, risk is a little easier to conceptualize. But when leverage is involved, it can be easy for investors to focus on the potential benefits rather than the risks. If a leveraged trade goes against you and you haven't properly managed risk, you can blow up your account, which is trader-speak for taking your account balance to zero.

When you combine the leverage and sophistication of options, it can lead to a get-rich-quick mentality. Many beginning option traders are prone to "what if" thinking: "What if I bought this long-shot trade and a big move happened?" With leveraged investments, it's more important than ever to understand and carefully manage your risk while focusing on the real probabilities of success of each trade. Long-shot trades typically have very low probabilities of success.

Margin trading can present another risk. Some options are traded in margin accounts, which are accounts where the broker lends the trader money to make purchases or lends securities to make sales. These loans are secured by cash or the investments in a trader's account. The big risk with margin trading is that you can lose more than you initially invested.

Overdoing it

There's also the risk of oversimplification . One common mistake new option traders make is to underestimate the complexity of options and focus on just one factor like price. Options trading is complex—if you think you can master it and outsmart the market quickly, you're probably in for a rude awakening. But through education and experience, you can make sense of the complexity and learn how to trade options with confidence.

Another risk related to options is overtrading , or excessively buying and selling options contracts. Options trading involves contract fees, and frequent trading results in more fees. Additionally, while it technically isn't a fee, the bid/ask spread is also an important consideration. The bid/ask spread is the distance between the bid price (the best price buyers are willing to take) and the ask price (the best price sellers are willing to take).

The bid/ask spread tends to have a larger impact on options trading than it does on stocks and is therefore very important to consider in your trading. If you trade options with wider spreads, the bigger difference between bid and asking prices can negatively impact your returns. Later in this course, we'll teach you how to identify options with more favorable bid/ask spreads.

Exercise vs. assignment revisited

Let's look at one more risk: exercise and assignment risk . Assignment is what happens to the option seller when they're required to fulfill the terms of the options contract. Depending on the type of contract, that could mean either buying or selling shares at a specified price. Once assigned, it's too late to close the position, and the seller must fulfill the terms.

Similarly, if you're an option buyer and hold a stock option that expires with a value of $0.01 or more , the option will almost always be automatically exercised. The outcome here is similar to assignment—you'll buy or sell shares of the underlying stock.

If, depending on the type of option, you're obligated to buy shares, you may end up holding shares you didn't plan to buy. This obligation ties up capital and could lead to unexpected losses if the stock drops before you have time to close the position. If you don't have enough capital to purchase the shares when assignment happens, you could be forced to sell the stock at a loss.

If, on the other hand, you're obligated to sell shares, you may end up selling shares before you wanted to and miss out on any additional appreciation. By selling the shares, you lose the stock position.

Although the risks associated with assignment and expiration can never be eliminated, you'll learn ways to manage the risk when we introduce specific strategies.

Clearly, options are risky and not for everyone. That's why, if you're considering adding options to your portfolio, it's so important to educate yourself, learn about what options are and how they work, and practice paper trading options before risking real capital. By taking this course and educating yourself, you can learn to trade options more informed about the potential benefits and risks.

Just getting started with options?

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14.1 Assignment of Contract Rights

Learning objectives.

• Understand what an assignment is and how it is made.
• Recognize the effect of the assignment.
• Know when assignments are not allowed.
• Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment The passing or delivering by one person to another of the right to a contract benefit. , an obligee One to whom an obligation is owed. (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor One who owes an obligation. (the one who has a duty to perform) to a third person ( assignee One to whom the right to receive benefit of a contract is passed or delivered. ); the obligee then becomes an assignor One who agrees to allow another to receive the benefit of a contract. (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.” Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights" ). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor A person who pays money to receive another’s executory contractual benefits. is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of An assignee takes no greater rights than his assignor had. the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course (covered in detail Chapter 23 "Negotiation of Commercial Paper" ). Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor. Uniform Commercial Code, Section 9-206. While a waiver of defenses Surrender by a party of legal rights otherwise available to him or her. makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions A contract for household or domestic purposes, not commercial purposes. . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment.

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right The right or duty of a particular person to perform or receive contract duties or benefits; cannot be assigned. that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.” Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments" ). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 (see Chapter 28 "Secured Transactions and Suretyship" ), the first assignee to file will prevail.

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties Promises, express or implied, made by an assignor to the assignee about the merits of the assignment. to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

Key Takeaway

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

• If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
• Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
• Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
• Why are leases generally not assignable? Why are insurance contracts not assignable?

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Lakers News: LA Players Have Confidence in Role Player's Ability to Guard Tough Assignments

• Author: Matt Levine

In this story:

The Los Angeles Lakers season has been one of the stranger in recent years. Some nights they look like a juggernaut team, while on others, they feel like they could lose to the worst team in the NBA.

It has been a frustrating experience all season long, but the team has seemingly started to play much better of late. With the postseason coming up in a few weeks, Los Angeles is looking to continue their winning ways to propel them forward.

Within this run has been strong play from the star players on the team. But they haven't done it alone and multiple role players have stepped up to help. One of which has been forward Rui Hachimura, who has helped take this team to a new level.

Both on the offensive and defensive end, Hachimura gives the Lakers more length and flexibility to work with . Star Anthony Davis reiterated that Hachimura has the confidence of the rest of the team to take on tough assignments on defense, such as the opposing teams' star players.

“Sometimes, he guards (Nikola) Jokić. He guarded Giannis (Antetokounmpo) some when I wasn’t on him. (Devin Booker). He guarded (Kevin Durant) before,” Davis said. “So we have a lot of confidence in Rui on the defensive end. He’s shown that he can handle those matchups.”

The ability to switch the physical Hachimura onto some of the better players in the league such as Nikola Jokic or Kevin Durant gives the Lakers rotation versatility. He allows someone like Davis to focus more on protecting the rim, rather than having to step out to guard some of these players on the perimeter.

Hachimura isn't the perfect player, but he does vastly help this club. He can stretch the floor on offense as well, giving them a dual-threat each time he is on the court.

If the Lakers are going to continue to push forward, they will need contributions from players like Hachimura each night. They have a long road ahead of them, but the goal remains the same for this team.

It's championship or bust for Los Angeles, no matter where they end up in the standings or who they face off against.

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