Something to think about when you are contracting.
Business owners know to secure assets such as trade marks and patents by registration. One reason is so that on sale of the business they can be transferred to the buyer. The same attention is needed so the seller’s business contracts can be included in the sale. The business contracts could be long term contracts with customers, agreements with suppliers or agreements with licensees permitting the use of the seller’s assets such as patents or trade marks. The business contracts could comprise a substantial part of the value of the business sale, so it is important that they can be assigned to the buyer.
What are the circumstances in which a business contract can be assigned?
Business contracts can be assigned by a seller without the consent of the other party to the contract if the contract is not personal to the seller or, alternatively, with the consent of the other party. We shall look at each of these.
What Business Contracts are personal?
Some obligations in a contract are not personal to the contract parties. For example, an obligation to pay a licence fee for the use of an asset is not personal to the party providing the asset as the right to receive the licence fee could be exercised by another party in place of the original contracting party. However, other rights and obligations may be personal, and will not be assignable. For example, if the party wishing to assign the contract has the right and obligation to assess and approve the conduct of the other party to the business contract, such as its marketing plans or marketing materials, that right and obligation will be personal to the party wishing to assign the business contract and will not be assignable to a buyer. Accordingly, while a business contact as a whole may, depending upon its terms, not be assignable to the buyer, a right under the business contract to say receive royalties or a licence fee, may be assignable to the buyer.
If the business contract is personal to the seller, it could be assigned with the consent of the other party to the business contract. The consent can be implied or express.
When will consent to assignment be implied?
The business contract may expressly or impliedly authorise or prohibit the assignment of the business contract. For example, the Courts have accepted that save in exceptional circumstances, if a contract defines the party proposing to assign the contract as including “its assigns”, this signifies a contractual intent that the contract is assignable. However, if the contract contains terms referable only to the party intending to assign the business contract, the contract by its terms is indicating that it is not assignable. For example, if a contract referenced the use of guidelines published by the seller, it would be difficult for the seller to argue that the contract was assignable to a buyer.
Clearly, if a business contact is likely to be personal to the seller, a provision in the contract providing express consent to assignment is critical.
What form can express consent take?
Business contracts regularly contain a clause dealing with the assignability of the contract. The clause may consent or prohibit assignment by one or all parties. The precise terms are a matter for negotiation. Sellers should take care to negotiate business contracts that contain an express consent for their assignment. If a “blanket” consent cannot be obtained, the clause should be drawn to provide consent in specified circumstances. For example, consent should be permitted to allow the seller to assign the contract to a related company or one in which the seller retains at least 50% ownership. Further, consent to assignment could be on the proviso that the seller remains liable to the other party to the business contract. In these instances, the seller should require an indemnity from the business buyer that it will comply with the terms of the business contract.
What is important about the assignability of business contracts?
In summary, it should be apparent that:
- A business contract that contains rights which are personal will not be wholly assignable without the consent of the other party to the business contract.
- A contractual right in a business contract will not be personal if it makes no difference whether the business’s seller or buyer is owed the obligation.
- The terms of a business contract may indicate that it is implied that the assignment of the business contract is approved or prohibited.
- Express provisions should be negotiated in business contracts that provide consent for the assignment of the business contract.
Do you need advice?
If you are negotiating or require advice upon the terms of a business contract or the sale of a business including business contracts, please call Peter Bolam on 07 3223 9155 or email peterbolam@solusip.com.au for further assistance.
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