assignment contract law canada

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The Assignment of Commercial Contracts in Legal Practice

Contracts are a prime example of intangible property. Parties to commercial contracts, like other property owners, frequently want to transfer their property to a third party. The transfer of a contract refers to the assignment of some or all of a party’s rights or the delegation of some or all of a party’s performance, or both, to a non-party to the agreement.

Some common instances in which a contracting party in a commercial context may desire to assign contractual rights, performance responsibilities, or both are as follows:

• In an asset sale, a corporation sells parts or all of its company.
• A contractor who subcontracts its work under certain projects.
• A business conglomerate that is going through an internal corporate reorganization.
• The borrower who offers its lender a security interest in its assets.
• A manufacturer who sells its receivables to a third party.

In any of these cases, the non-transferring party may object to assignment or delegation for a variety of grounds, including:

• The desire to choose the party with whom it does business.
• Concern that a different obligor or obligee may jeopardize the non-transferring party’s capacity to benefit from the contractual deal

To decide whether the transferring party (also known as the transferor) can execute the proposed transfer without gaining the non-transferring party’s approval, the transferring party must turn to relevant legislation and the plain text of the contract. If consent is necessary and not obtained, the transferring party faces the following risks:

• Violation of the contract.
• Making an ineffective and invalid transfer.

The Definitions of Assignment and Delegation

Each party to a contract is an:

• Obligee in terms of its contractual rights; and
• Obligor in terms of its contractual performance responsibilities.

Contract “assignability” is a term frequently used by contracting parties and practitioners. While they may expressly address the assignment of a party’s rights under the contract in some contexts, they frequently use the term “assignment” to refer to both:

• The delegation of duty to perform.
• The assignment of rights to obtain performance.

However, assignment and delegation are two distinct legal concepts that must be treated individually due to the fact that they might have different outcomes.

What is an Assignment?

Assignment is the transfer of some or all of an obligee’s (assignor’s) rights to receive performance under a contract, generally but not always to a non-party (assignee). A contract benefit is a right (a chose in action) that, in theory, may be delegated by the benefiting party to a non-party. For clarity purposes, this informative piece will assume that the assignee is a non-party, although the rights and responsibilities of the parties addressed apply equally to an assignee who is also a party to the agreement. When these rights are assigned, the assignor no longer has any claim to the advantages of the given rights, which are completely passed to the assignee.

Technically, a contract’s burden cannot be assigned under the law (see National Trust Co. v. Mead [i] and Irving Oil Ltd. v. Canada [ii] ). Transferring performance responsibilities under a contract requires the approval of all parties, making such a transfer a novation.

In practice, parties frequently refer to “assigning a contract” or “allowing the assignment of a contract,” which is actually an inaccurate representation of their intentions. For example, the parties may plan for some or all of the following:

• The contract’s rights or benefits may be assigned.
• The contract’s burdens or performance duties may be transferred.
• Rights and burdens may be transferred.

The Effects of Assignment

The assignor is no longer entitled to any benefits from the assigned rights, which have all been passed to the assignee; nonetheless, even if the assignor is stripped of its contractual rights, assignment does not decrease or remove the assignor’s duties to the non-assigning party. As previously stated, a contract’s burden may only be assigned to a third party with the approval of all parties. As a result, the assignor is still obligated to fulfill its contractual commitments. The non-assigning party retains the following:

• Its entitlement to get performance from the assignor; and
• Its remedies against the assignor in the event of non-performance.

The ordinary rule is that a party can only assign its benefits without the consent of the other party to the contract and will remain liable to the other party for its performance obligations (see National Trust Co. v. Mead [iii] and Rodaro v. Royal Bank [iv] ). If the assignor intends to transfer its obligations and both the non-transferring party and the potential assignee agree, the parties should enter into a novation agreement, which results in a new contract between the assignee and the old contract’s remaining (non-transferring) party. In practice, the assignee often undertakes the contract’s performance responsibilities as of the date of assignment, and the assignor gets an indemnity from the assignee in the event of a breach or failure to perform.

A clear, present, purpose to transfer the assigned rights without needing any additional action by the assignee is required for an assignment to be effective, which means that a promise to assign in the future is ineffective as an actual transfer. Otherwise, no special terminology is necessary to draft an effective assignment.

What is Delegation?

Delegation is the transfer of some or all of an obligor’s (delegating party’s) performance responsibilities (or conditions demanding performance) under a contract to a non-party (delegatee). To be effective, a delegation requires the delegatee to agree to take on the delegated performance; however, unless the non-delegating party has consented to a novation, the delegating party remains accountable for the delegated performance, whether or not it has also transferred its contractual rights.

This is distinct from an assignment of rights, in which the assignor relinquishes its contractual claims upon assignment. As a result, even if the delegating party can effectively delegate its actual performance to the delegatee (such that the delegatee’s actual performance discharges the delegating party’s duty), the delegating party cannot be relieved of its obligation to perform and liability for non-performance unless the non-delegating party agrees to a novation.

There is no precise wording necessary to create an effective delegation, just as there is not for the assignment of rights. When performance is effectively delegated, the delegatee assumes liability for the delegating party’s performance obligations (under an assumption agreement), even if the delegating party retains liability to the non-delegating party for the delegatee’s failure to adequately perform the delegated obligations in the absence of a novation. Under an assumed agreement, the delegating party may have recourse against the delegatee, which is frequently addressed through a contractual indemnity right.

If the delegating party wishes to entirely exclude itself from liability for non-performance, it must get the non-delegating party’s approval to the contract (novation). In the majority of novations, the delegating party, the delegatee, and the non-delegating party all agree on the following:

• The delegatee replaces the delegating party as a party to the contract.
• The delegating party is no longer liable for contract performance.
• The delegatee is directly and solely liable for the delegating party’s contract fulfillment.

Types of Assignment – Legal (Statutory) Assignment vs. Equitable Assignment

• Legal (Statutory) Assignment: An assignment that satisfies the provisions of the appropriate province or territory laws (for example, the Conveyancing and Law of Property Act [v] )
• Equitable Assignment: An equitable assignment may be enforced even if it does not fulfill the statutory requirements for a legal assignment.

Requirements for a Legal (Statutory) Assignment

All of Canada’s common law provinces have enacted legislation allowing the transfer of contract rights. Notably, the legislation for Ontario is the Conveyancing and Law of Property Act .

These statutory assignments are enforceable if the parties comply with the following procedures:

• The assignment is absolute.
• The assignment is in writing, signed by the assignor
• the non-assigning obligor is given express written notice.

A statutory assignment does not need consideration, and no precise words or form are necessary. They can be made as gifts and be valid.

Requirements for an Equitable Assignment

An assignment may be enforceable as an equitable assignment even if it does not fulfill the formality criteria of a statutory assignment. An equitable assignment does not necessitate the use of any specific terms or form. However, in order to comply with any provincial statutes of frauds regulations, the assignment must be in writing. The phrasing must clearly indicate that the assignee is to benefit from the rights being assigned. In contrast to a statutory assignment, consideration is required until there is a full transfer, such as a gift. It is not necessary to provide the non-assigning obligor with express written notification (except in the case of a transfer of land). However, notification is often given largely to assure that:

• The obligor ceases to pay the assignor.
• The assignee has priority over subsequent encumbrances.

Contractual Anti-Assignment & Anti-Delegation Clauses

Rather than relying on relatively uncertain legal rules, most commercial contract parties handle transferability issues in the written agreement. As a result, most commercial contracts include a negative covenant that restricts one or both parties’ rights to assign.

These clauses frequently include specific exceptions that allow one or more of the parties to assign and delegate rights and duties, often to designated non-parties such as affiliates and successors-in-interest to the transferring party’s business.

Courts frequently uphold provisions that prevent assignment because they favor the rights of parties to freely contract. However, subject to specific limitations, there is a broad assumption that contractual rights are assignable. As a result, the case law on anti-assignment provisions is a little erratic. Some courts have upheld anti-assignment clauses and declared the agreement unenforceable. Others have argued that an anti-assignment provision cannot preclude assignment.

Overall, contractual anti-assignment and anti-delegation provisions are commonly included in many types of business contracts. If not, transferability is determined by the contract’s subject matter and the nature of the rights and obligations to be transferred. It is important to stay knowledgeable the existence of such contractual terms when dealing with various commercial contracts…such as contracts for the sale of goods, personal service contracts, commercial real estate leases and various other types of contracts.

If you have any questions about your business’s contractual assignment or delegation needs, contact Cactus Law today to speak with a lawyer specializing in commercial law.

Disclaimer:

The information presented above is solely for general educational and informational purposes. It is not intended to be, and should not be taken as, legal advice. The information given above may not be applicable in all cases and may not even reflect the most recent authority after the date of its publication. As a result, please refer to all updated legislation, statutes, and amendments. Nothing in this article should be relied on or acted upon without the benefit of legal advice based on the specific facts and circumstances described, and nothing in this article should be interpreted otherwise.

About the Author:

Kanwar Gujral is entering his third year at Osgoode Hall Law School in Toronto, Ontario. He has a dedicated interest in real estate, business, and corporate law.

[i] National Trust Co. v. Mead , 1990 CarswellSask 165 (S.C.C.).

[ii] Irving Oil Ltd. v. Canada , 1984 CarswellNat 137 (Fed. C.A.).

[iii] Supra note 1.

[iv] Rodaro v. Royal Bank , 2002 CarswellOnt 1047 (Ont. C.A.).

[v] Conveyancing and Law of Property Act , R.S.O. 1990, c. C.34.

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Understanding Contract Assignment (All You Need To Know)

Wondering what is contract assignment and how it works?

You’re looking to assign your contract and need to better understand the assignment process.

Don’t go any further…

We’ve got what you need!

In this article, we will talk about everything there is to know about a contract assignment process.

We’ve divided this article into the following sections:

What is the assignment of contract

Assignment clause in a contract, types of assignment clauses in a commercial contract, is a contract assignment enforceable.

• Who is involved in contract assignments

How does the assignment of a contract work

Type of contract that can be assigned, assignment vs delegation.

Let’s get started…

An assignment of contract is when a party to a contract hands off the contract terms and conditions to another party.

The assigning party is the “assignor” and the party receiving the contract is the “assignee”.

Once the assignor assigns the contract to the assignee, then the terms and conditions of the contract will apply to the assignee as well.

In some cases the assignor will be completely liberated from its obligations under the contract and in other cases the assignor will have varying degrees of responsibility or liability.

We will cover such details in this article.

When you are looking to assign a contract, the first thing that you should do is to look at your contract and see if you have an assignment clause.

In most commercial contracts, businesses will plan ahead and include an assignment clause.

In most instances, the assignment clause will state that the parties to the contract are not authorized to assign the contract to another unless it is approved by the other party.

The assignment clause will also state in some cases the liability applicable to the assignor.

The assignment clause may state that the assignor will remain obligated to the same extent as the assignee towards the other party to the original contract.

In such a scenario, the assignment of the contract will benefit the other party as it will now have the assignor and assignee responsible and liable towards it.

Before performing an assignment, it’s important to consult the assignment clause in the contract to ensure you respect its terms. 

There are different variations of an assignment clause in business contracts.

We’ll go over the three main contract assignment flavours.

The first type of assignment clause in a contract is when the assignment is entirely prohibited.

In this case, neither party may assign the contract without the prior consent of the other.

Another scenario is that the assignment is generally not authorized unless a party wishes to assign the contract to a subsidiary, an affiliate or an entity of its own corporate group.

If the assignor intends to assign the contract to another entity in its own group of entities the assignment will generally be authorized if the assignor owns more than fifty percent of the shares of the assignee or controls the management. 

A third scenario is when the assignment is generally authorized but subject to a prior notification of the other party.

In such clauses, the other party will still be required to give consent for the assignment but the consent must not be unreasonably withheld.

A contract assignment, to the extent the assignor has followed the terms and conditions of the contract, will be enforceable against the other party.

However, if the assignor does not follow the terms of the contract, the assignment will be unenforceable against the other original contracting party.

If the assignment is not done properly, the assignor, assignee and the other party to the original contract may all get entangled in unwanted legal risk.

To avoid creating legal risk for all parties involved, make sure that you ensure that the contract authorizes the assignment.

If the contract allows for the assignment, make sure the assignor gives the proper preliminary notifications to the other contracting party and receives any required consent or authorization before assigning the contract.

In the assignment agreement between the assignor and assignee, make sure the assignee understands the terms and conditions of the contract so it will perform its obligations as it was originally intended between the original contracting parties. 

It is also important for the assignor to ensure it understands the extent of liability or responsibility it will continue to have following the assignment should the contract require the assignor to remain responsible in some way.

If the assignor continues to have ongoing responsibilities after the assignment, the assignor must include terms and conditions in its own assignment agreement with the assignee to ensure the assignee adequately observes the contract terms to avoid triggering the responsibility of the assignor towards the other contracting party.

Provided the terms and conditions of the assignment are respected, the assignment of the contract will be enforceable.

And assignment will not be effective if it substantially changes the terms and conditions for the other contracting party.

For example, if you are a software company, you will not be able to assign the contract to a real estate company.

This goes without saying!

Who is involved in contract assignments 

There are typically at least three parties to an assignment.

You will have two original contracting parties and a third party.

Among the two original contracting parties, one party intends to assign the contract to the third party.

That party is the assignor.

The third-party agreeing to take over the contract from the assignor is referred to as the assignee.

Essentially, once the contract assignment is performed, the third party becomes a contracting party and the assignor becomes a third party.

So the assignor and assignee swap positions in relation to the other contracting party.

The assignment of a contract is fundamentally not complicated.

The process starts with one party to a contract notifies in writing of its intention to assign the contract to a third-party or assignee.

The other contracting party will either consent or not to the request.

If the consent is given, then the assignor enters into a commercial agreement with the assignee.

This agreement will typically cover the terms and conditions and the commercial considerations between the assignor and the assignee.

Every contract has a value and the assignor will probably require the assignee to pay for the right to take over the contract.

The agreement between the assignor and assignee will also clarify their obligations and responsibilities towards the other contracting party.

Once the assignor and assignee agree on the assignment terms and conditions between themselves, the assignor will prepare an assignment agreement that will be executed between the assignor, the assignee and the other contracting party. 

This assignment agreement will clarify the terms and conditions of the actual assignment and will formally result in the assignment of the contract as of that date.

In the business world, nearly all types of business contracts can be assigned.

The assignment clause will govern the assignment process from a legal point of view.

Although most types of contracts can be assigned, some types of contracts cannot be effectively assigned. 

If a business contract was signed with a person specifically for the skills and abilities of that individual, that individual may not assign the contract.

For example, you’ve asked your favorite band to sign at your wedding, the band could not assign that contract to another because you don’t care for the other signers to be at your wedding.

So a contract signed with an individual or entity based on the considerations and value brought by that specific person or entity cannot be assigned.

In some cases we talk about contract assignment and in other cases we talk about contract delegation.

What is the difference between a contract assignment and contract delegation?

The assignment of a contract is when you hand off the entire contract to another party.

The assignor will typically want to be discharged from its own obligations and the assignee inherits all the contract obligations towards the other party.

When we talk about contract delegation, this is a case when a party does not assign the entire contract but delegates part of its own responsibilities to another party.

A contract assignment is a process where a party to an existing contract transfers or gives up its contract rights and obligations for the benefit of another party.

Contract assignments are relatively frequent in cases where a company restructures and changes its corporate operations.

It can also happen between a company and its suppliers.

No matter the reason for the contract assignment, you’ll need to ensure that you follow the terms and conditions of your contract, particularly the assignment clause.

If you follow the assignment terms of the contract, your assignment will be enforceable against the other contracting party.

We hope that this article was useful to you.

Should you need any legal advice on contract assignment or contract law , we are here to support you.

In the meantime, best of luck!

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction.

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , which requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

The  Capital Markets Group  at Aird & Berlis will continue to monitor developments in cross-border and domestic Canadian M&A transactions, including developments related to anti-assignment provisions and commercial contracts generally. Please contact a member of the group if you have questions or require assistance with any matter related to anti-assignment provisions and commercial contracts generally, or any of your cross-border or domestic M&A needs.

[1] An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

[2] MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

[3] R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

[4] Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

[5] MTA Canada Royalty Corp .

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Assignment of contract

How it relates to the law in british columbia canada.

In British Columbia, an assignment of contract is a legal document that allows one party to transfer their rights and obligations under a contract to another party. This can be useful in situations where the original party is unable or unwilling to fulfill their obligations under the contract, or where they wish to transfer the benefits of the contract to another party. Under British Columbia law, an assignment of contract is generally valid and enforceable, provided that certain conditions are met. These conditions may include obtaining the consent of the other party to the contract, ensuring that the assignment does not violate any laws or regulations, and ensuring that the assignee is capable of fulfilling the obligations under the contract. In some cases, an assignment of contract may also be subject to specific legal requirements or restrictions, depending on the nature of the contract and the parties involved. For example, certain types of contracts may be subject to specific statutory requirements, such as the requirement for written consent or notice of assignment. Overall, an assignment of contract can be a useful tool for parties in British Columbia to transfer their rights and obligations under a contract, but it is important to ensure that all legal requirements are met in order to avoid any potential legal issues or disputes.

Impact on Business Owners in British Columbia

The impact of the assignment of contract on small businesses in British Columbia, Canada, is that it provides them with the ability to transfer their contractual rights and obligations to a third party. This can be useful for small businesses that are unable or unwilling to fulfill their obligations under a contract, or for those who wish to transfer the benefits of the contract to another party. However, small businesses must ensure that all legal requirements are met, such as obtaining the consent of the other party to the contract and ensuring that the assignee is capable of fulfilling the obligations under the contract, in order to avoid any potential legal issues or disputes.

Potential Legal Risks, Legal Challenges, or Legal Pitfalls for Businesses in British Columbia

As a small business owner in British Columbia, it is important to be aware of the potential legal risks and challenges associated with the assignment of contract. This refers to the transfer of rights and obligations under a contract from one party to another. One potential legal risk is that the assignment may be prohibited by the terms of the contract itself. It is important to carefully review the contract to ensure that there are no restrictions on assignment, or to obtain the consent of the other party to the assignment. Another potential legal challenge is that the assignment may not be valid if it is not properly executed. This could result in a breach of contract and potential legal action against the business. To avoid these issues, it is important to seek legal advice before entering into any contract that may be subject to assignment. This can help ensure that the contract is properly drafted and that any potential restrictions on assignment are identified and addressed. In addition, it is important to ensure that any assignment is properly executed and that all necessary steps are taken to transfer the rights and obligations under the contract to the new party. By being aware of these potential legal risks and challenges, small businesses in British Columbia can take steps to avoid or mitigate them and ensure that their contracts are properly assigned.

BC Business Practices and Consumer Protection Act (BPCPA)

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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By: Warren H.O. Mueller, B.A., LL.B., LL.M., Q.C. of the Ontario Bar, and D. Morgan, B.A., LL.B, LL.M.

I: Basis of Contract

Click   HERE   to access the CED and the Canadian Abridgment titles for this excerpt on WestlawNext Canada

I.1: Contract Defined

See Canadian Abridgment: CON.I.1 Contracts — Nature of contract — What constitutes contract

A contract is a legally recognized agreement between two or more persons which gives rise to an obligation that may be enforced in the courts. More comprehensively, a valid and operative contract may be defined as an agreement free from vitiating factors such as mistake or misrepresentation, and constituted by the unconditional acceptance of an outstanding offer involving a reasonably precise and complete set of terms between two or more contractually competent parties, who intend to create mutual and reciprocal rights and duties that may be the subject of judicial sanction, if they are expressed in any required form, and are free from the taint of illegality or immorality, and are not subsequently discharged by law, by agreement, by breach, or by sufficient supervening circumstances.

I.2: Consensus Ad Idem

See Canadian Abridgment: CON.III.1 Contracts — Formation of contract — Consensus ad idem

Since mutuality lies at the root of any legally enforceable agreement, a contract requires a meeting of the minds of the parties on all essential matters relating to it (consensus ad idem). However, rather than trying to find the real subjective intention of each party, the courts have generally applied the dispassionate and objective test of the reasonable man. Therefore, whatever a party’s real intention may be, if he or she acts in such a way that a reasonable person would believe that the party was assenting to the terms proposed by the other party, and if the other party, upon that belief, enters into an agreement with him or her, an enforceable contract will come into effect. For a contract to be binding, the parties must come to the same determination, which must be disclosed by written or spoken words, or by some other signification of intention from which an implication of law, or an inference of fact, or both, may arise. In conclusion, the law of contract describes the formation of a contract in terms of rules that order and define the process of contract formation. A contract does not exist until there has been a definite offer and an unqualified and unconditional acceptance of the offer communicated to the offerer. There is also a general rule, however, that a court should interpret a contract, if possible, so as to make it work.

Similarly, whether a statement is to be construed as an offer capable of direct acceptance to form a contract depends upon a reasonable, objective interpretation of the words used.

Occasionally, however, a court’s equitable jurisdiction may be exercised to permit a more subjective assessment of the circumstances of the case. The existence and/or contents of the contract in such cases may be determined by reference to a party’s subjective belief, rather than by reference to the understanding of the reasonable person.

In determining whether the parties have reached agreement for legal purposes, the starting point must be the alleged contract itself. If there is a written contract whose wording reveals a plain and unambiguous intention, that will ordinarily be the end of the matter. But where it is unclear whether or not the parties have in fact agreed, the court may resort to evidence beyond the contractual language, including the factual matrix in existence at the relevant time and the genesis and aim of the transaction. The conduct of the parties during and subsequent to the purported making of a contract is also admissible to determine whether they did in fact make a binding contract, and, if they did, what the contractual terms were.

The absence of real consent to a contract apparently complete and binding may be shown to have resulted from mistake, fraud, or mental incapacity.

An agreement by a husband to remove the religious barriers to remarriage by providing a get or Jewish divorce is consistent with public order and harmonizes Canada’s approach to religious freedom, equality rights, divorce and remarriage generally. Thus, the contractual obligation contained in the agreement is valid and legally binding. The fact that a consent has religious elements does not thereby immunize it from judicial scrutiny.

The burden of proving a consensus between the parties is upon the party seeking to prove its existence, on a balance of probabilities.

I.3: Uncertainty and Incompleteness of Terms

See Canadian Abridgment: CON.III.1.b Contracts — Formation of contract — Consensus ad idem — Certainty of terms

Even when parties intend to contract, the essential terms of the bargain must be agreed and possess a sufficient degree of clarity before a legally binding agreement can be said to exist. Where, therefore, an agreement is incomplete because essential provisions have not been settled, or the agreement is too general or uncertain to be valid in itself, or the understanding of the parties is that their legal obligations are to be deferred until a formal contract has been executed, no binding contract will have been created, even if the parties may have thought they were bound. In such circumstances, the purported contract is often characterized as a mere “agreement to agree” or an agreement to negotiate, which is not legally enforceable. Where, on the other hand, the parties have settled all disputed primary terms and expressed their agreement with sufficient reasonable certainty to allow the court to give it practical meaning, their agreement will bind them, even if a formal written document is thereafter to be prepared and signed.

Although uncertainty and incompleteness are distinct conceptual notions, their application in contract law is often intermingled. Incompleteness refers to parties failing to indicate adequately by their words or actions, objectively determined, that they have completed an agreement. Uncertainty, on the other hand, presupposes that the parties have in principle reached an agreement, but it is impossible for the court, within the rules of evidence, to give any clear or substantial meaning to their bargain. In practical terms, both uncertainty and incompleteness create problems regarding enforceability, since a court cannot make a contract for the parties where they have not sufficiently indicated what their intentions and expectations are.

Accordingly, the failure of contracting parties to agree on one or more essential terms will prevent the creation of a binding contract. Further, the terms agreed upon must be clear and certain, in the sense that they must either be stated with reasonable specificity, or be reasonably ascertainable by application of an agreed formula, method, or principle of determination. Specificity is particularly important in regard to terms of payment, although promises to pay money or perform services “when able to do so” have generally been treated as enforceable. It is permissible, however, to leave for determination during the course of performance of a contract, insignificant details necessarily incidental to the carrying out of the work involved. And the fact that the parties fail to reach agreement on a severable and collateral aspect of their negotiations will not preclude enforcement of a concluded agreement with respect to transfer of an interest in property.

The courts have consistently maintained that they will not supply essential terms necessary to convert a mere “agreement to agree” into a concluded contract, even if the parties themselves believe that they have made an enforceable contract. Similarly, the presence of particularly vague primary terms will preclude the finding of an enforceable contract.

Notwithstanding, where a completed contract exists, but ambiguity remains in what the parties have purportedly agreed upon, some lack of clarity will not necessarily render the “agreement” unenforceable. Courts will strive to give effect to the reasonable expectations of the parties, objectively determined, where it is apparent that they intended some legal relationship to exist between them. Some courts have asserted that a contract will be rendered unenforceable only where a missing term is so essential that the court cannot collect the real intentions of the parties from the language within the four corners of the instrument without it, and so give effect to such intentions by supplying anything necessarily to be inferred. The principles of construction of contracts should be applied liberally to give legal effect to a clause in an agreement if the words used can be given a plain and ordinary meaning that is not in conflict with the agreement as a whole. This is particularly so where the precise nature of what are usually subsidiary or minor (that is, non-essential) contractual terms is in issue, or where there has been partial performance of the agreement. Lastly, it is not for a court to fill in essential terms in an otherwise incomplete agreement.

One means of giving effect to the parties’ contractual intentions is the judicial technique of implying terms to flesh out the agreement in order to give it business efficacy. However, it will be necessary for a court to define the nature of any implied terms with particularity only where there is a live issue and specific facts before it whose effect depends on that aspect of the agreement; otherwise, the court may simply satisfy itself that the absence of an express provision is not such an obstacle to the proper operation of the agreement as to render it unenforceable. Remaining issues of interpretation can be reasonably resolved at a subsequent time by employing the ordinary tools of documentary construction available to the courts.

A reference to the “usual terms” of a particular type of contract has often been sufficient to render a contract binding. Subsequent correspondence may clarify uncertainties in an agreement. A meaningless clause can often be ignored.

The plaintiff has the burden of showing that the contract is so unambiguous that the defendant will not be permitted to set up an alleged misunderstanding. The court must be satisfied with some degree of confidence on an objective basis that it can clearly identify the terms on which the parties have agreed. An agreement to agree does not constitute an enforceable agreement.

I.4: Necessity for Formal Written Contract

Where a tentative agreement is reached as a result of negotiations conducted orally or by correspondence, whether the creation and execution of a formal contractual document embodying the entire agreement is a condition precedent to the formation of a binding contract, or only an unessential means of recording an already concluded contract, depends on the intention of the parties. In practical terms, this depends primarily upon whether or not agreement has been reached on all of the essential terms of the contract.

Certain phrases, such as “subject to contract”, are strong indicia of an intention to have the creation of a contract conditional upon execution of a formal document. However, a document that clearly records all essential terms, even though “subject to” formalization, may signify that solicitors’ approval of its terms is not contemplated as a contractual pre-condition. While a long course of negotiations involving numerous counter-offers increases the likelihood of the court deciding that the parties did not intend to bind themselves without executing a formal document, continuation of negotiations after an agreement has apparently been reached do not necessarily indicate that no contract was concluded. Parties’ retainer of solicitors to assist in negotiating a complex commercial agreement is indicative of an intention not to be bound without execution of a formal written contract. Tentative acceptance subject to a condition, such as approval by senior management, is not binding unless the condition is satisfied.

Where a putative agreement exists in a series of communications between the parties, rather than in a formal note or memorandum signed as evidence of a contract, then everything that has passed between the parties in relation to the agreement should be considered when deciding whether or not a binding contract was made. Bare language phraseology (for example, “confirming verbal understandings”; “points discussed are”) may disclose an absence of the firmness of settled obligations. The conduct of the parties in carrying out an informal agreement in accordance with its terms is a strong indication that the execution of a formal document was not a condition precedent to the creation of a binding contract on the stipulated term, or that the parties have waived such a requirement. Even conduct after a dispute as to whether an agreement was reached may be useful in resolving the issue.

An incomplete antecedent agreement may be looked to as a foundation for a subsequent, more complete arrangement. Where terms are left uncertain after an oral discussion, those terms can be subsequently made certain by further discussions and through draft agreements.

An action for failure to execute an agreement will not lie if the agreement to be executed has never been reduced to writing. In order to prove a party in default of an obligation to execute a formal contract document, the document must have been submitted to the party for signature or, alternatively, the party must be shown to have given an unequivocal refusal to execute any such document. The reasonableness of a person’s refusal to sign a document upon whose execution creation of a contract depends will not be reviewed by the court. However, refusal of a party to execute a document merely reciting the terms of an already concluded agreement leaves that party open to an action for specific performance.

I.5: Intention to Create Legal Obligations

As between conscious parties, competent in law to engage in contractual relations, a contract can only come into existence if there is an intention to make a legally binding agreement.

In the case of a family or household agreement, or an agreement made on the basis of friendship, as distinct from business matters, the usual presumption is that the parties do not intend that the agreement be attended by legal consequences. Even in the case of a business agreement, however, if the parties do not intend that their agreement shall give rise to legal relations, but prefer to rely on mutual good faith and honour to the exclusion of legal remedies, no enforceable contract will result. The conduct of the parties may be examined to see if they intended their arrangement to have legal consequences. But when parties do intend to create enforceable obligations, they cannot completely exclude resort to the courts as a mechanism for resolving disputes.

I.6: Duty to Negotiate in Good Faith

See Canadian Abridgment: CON.III.1.a Contracts — Formation of contract — Consensus ad idem — General principles

In the absence of a special relationship, the common law generally has not recognized an independent duty between parties acting at arm’s length to negotiate in good faith in ordinary commercial transactions. Traditionally, courts have reasoned that agreements to negotiate in good faith, like agreements to negotiate simpliciter, are rendered legally unenforceable by uncertainty where they leave essential terms to be agreed upon in the future. Agreements to negotiate in good faith have been regarded as virtually impossible to judicially enforce, either because a party who has not committed to arrive at a concluded agreement bears no obligation respecting the ultimate conclusion of the negotiations, or because such agreements often lack an objective measure by which good faith may be assessed. Further, judges remain reluctant to impose a duty of care on a party to be mindful of another party’s legitimate interests during contractual bargaining, as it would defeat the essence of negotiation and hobble the marketplace. Notwithstanding this judicial caution toward a duty of good faith in pre-contractual settings, the doctrines of undue influence, economic duress, and unconscionability, as well as potential actions for negligent misrepresentation, fraud and the tort of deceit, remain available to provide protection to negotiating parties. There exists no duty of fairness in employment hiring situations. Lastly, any covenant to negotiate in good faith, as any other contractual obligation, must be interpreted in accordance with the intention of the parties in the context in which the agreement was negotiated and executed.

However, a duty to negotiate in good faith may operate in situations where a special relationship between the parties exists, based upon an inherent vulnerability or power imbalance between them, or arising ordinarily out of the nature of their relationship or the circumstances created by the other party. Special relationships that have given rise to a duty of good faith to negotiate include that of franchisor and franchisee, spouses entering into marriage contracts or separation agreements, insurer and insured, fiduciary relations, and tendering situations.

Some courts have found that an existing (and particularly, a long-standing) relationship between parties should give rise to a duty to negotiate in good faith by virtue of a special relationship or otherwise, although the weight of authority has generally drawn a line between pre-contractual negotiations and performance of an existing contract. A specified duty to negotiate in relation to collateral terms to an otherwise complete and binding contract may be legally enforceable. Parties to an oral contract or interim agreement may be impliedly obligated to negotiate, in good faith, further terms to be inserted in a final written agreement.

Where one party has incurred expenditures in the expectation of completing a contract in a situation where the other party has unreasonably withdrawn from negotiations, the restitutionary remedy of quantum meruit may arise on the basis of unjust enrichment.

II: Formation of Contract – Offer and Acceptance

II.1: Necessity for Offer and Acceptance

See Canadian Abridgment: CON.III.2 Contracts — Formation of contract — Offer; CON.III.3 Contracts — Formation of contract — Acceptance

A promise made under seal by one party becomes immediately binding without the necessity for acceptance by the other party, although that other party may avoid the contract by refusing to assent to the promise. In contrast, a contract not under seal can come into existence only as the result of an offer and its acceptance. It is often difficult to determine whether a communication made in the course of negotiations amounts to an offer or an acceptance.

In a bilateral contract, where both parties undertake obligations through an exchange of promises, acceptance generally occurs when the offeree communicates its counter-promise to the offeror. In a unilateral contract, however, one party makes a promise in return for the performance or forbearance of an act. This promise takes the form of an offer that can only be accepted by other party’s performing the specified act or forbearance. The other party’s performance provides the necessary consideration and allows him or her to enforce the original promise. The courts treat an offer as calling for bilateral, rather than unilateral, performance whenever the contract can fairly bear that construction.

A person who has made an offer cannot dispense with the necessity for acceptance in order to bind himself or herself contractually. Equally, a person’s actions in reliance on another person’s expressed intentions cannot amount to an acceptance capable of forming a contract where there is no offer capable of acceptance.

All essential terms must be accepted by both parties before a contract comes into being.

III: Consideration for Contract

III.1: General

See Canadian Abridgment: CON.IV.1 Contracts — Consideration — General principles

A simple contract not under seal requires consideration to support it in order to be legally binding. This means that each contracting party must exchange something of value, in the sense that the act or promise of one party must be "bought" or "bargained for" by the act or promise of the other. Hence, a gratuitous or voluntary promise or payment cannot be enforced or retained against its maker.

A contract under seal is binding without consideration, because either the formality of the sealing displaces the need for consideration, or the seal is treated as importing consideration. On the latter theory, however, it is possible for a party to assume the burden of proving that there was in fact no consideration and the contract is therefore unenforceable. In any event, a gratuitous promise under seal cannot be specifically enforced. While the mere presence in a contract of the phrase "signed, sealed and delivered" or similar language is often insufficient in itself to make the document a sealed instrument or deed, it may suffice if coupled with other indications of an intention to treat the document as sealed. Generally, some indication of a seal is required, and not merely an indication of where a seal should be placed. The contract form as a whole may indicate whether the parties intended it to be a sealed instrument.

A "mere" option (as opposed to an option under seal) is simply a promise whose binding effect depends on its having been given for consideration. The retention by one party of a unilateral right of rescission at any time results in the apparent agreement being illusory and, in fact, a mere option because of the absence of mutuality of obligation.

An acknowledgment of receipt of consideration can be rebutted by proof of the actual facts, whether the contract containing the acknowledgment is under seal or not. Similarly, the presumption that every party whose signature appears on a promissory note has received valuable consideration may be rebutted by the party alleging lack of consideration.

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

Aird & Berlis is a leading Canadian business law firm with more than 235 lawyers, patent agents and business advisors. We provide strategic legal and business advice in all principal areas of business law, including tax, corporate finance, banking, insolvency and restructuring, energy, environmental, infrastructure/P3, technology, intellectual property, litigation, workplace law, municipal and land use planning, and real estate. For more information, visit www.airdberlis.com .

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• Capital Markets
• Corporate Finance/M&A
• Aird & Berlis LLP | Aird & McBurney LP
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• > Contract Law
• > Assignment

Book contents

• Frontmatter
• Table of cases
• Table of statutes
• Table of statutory instruments
• Part I Introduction
• Part II Formation
• Part III Consideration and intent to create legal relations
• Part IV Third parties and assignment
• 7 Third parties
• 8 Assignment
• Part V Vitiating elements
• Part VI Terms and interpretation
• Part VII Breakdown and liability
• Part VIII Remedies for breach
• Part IX Illegality and public policy
• Part X The future
• Appendix: A who's who of contract law
• Bibliography

8 - Assignment

from Part IV - Third parties and assignment

INTRODUCTION

Summary of main points

(1) The holder of certain contractual rights (the promisee and assignor, B) can transfer the right to a third party (the assignee, C) without the promisor's (A's) consent. Thus, where A owes B a debt or other chose in action, the right-holder, B, can assign the benefit of this right to C.

(2) In the case of a statutory assignment, the assignment by B to C must be in writing, and B or C must notify A of the assignment.

(3) Such notice is also desirable in the case of equitable assignments.

(4) Certain rights are intrinsically incapable of being assigned because they are personal to the A/B relationship.

(5) A can preclude an assignment by inserting a prohibitory clause in his contract with B.

M. Smith, The Law of Assignment (Oxford, 2007)

EFFECTS OF ASSIGNMENT

Assignment has four effects (here, A is the promisor, B is the promisee, and C is the assignee):

(1) A, once notified, is obliged to pay C.

(2) To enforce the obligation created by the assignment in C's favour, C can sue A directly, without joining B as a party to the claim. This is true of statutory assignment (8.04) and of equitable assignment (8.05) of equitable choses in action. In the case of equitable assignment of a legal chose in action, such as a debt, the assignee must join the assignor as party to the claim (although there might be exceptions, where such joinder becomes unnecessary or it has been waived).

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• Neil Andrews , University of Cambridge
• Book: Contract Law
• Online publication: 05 June 2012
• Chapter DOI: https://doi.org/10.1017/CBO9780511973567.009

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Anti-Assignment Provisions And Assignments By 'Operation Of Law': What Do I Have To Do? What Should I Do?

Contributor.

Introduction

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the "change of control" of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: "When is consent actually required?" While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction's structure will often dictate the purchaser's next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisionsare and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party's rights and obligations under the contract in question to another person without the non-assigning party's prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ's prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the "purchased assets" in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a "change of control" of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a "direct" or "indirect" change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . 1

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. 2

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies "merge" in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the "merger" concept is commonly used in the U.S., Canadian corporations combine through a process called "amalgamation," a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada's description of an amalgamation as "a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands." 3 Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. 4

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no "surviving" entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision's express prohibition against all assignments without the other side's consent. 5

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity's revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

1. An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

2. MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

3. R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

4. Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

5. MTA Canada Royalty Corp .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Corporate/Commercial Law

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• MLA 8TH EDITION
• Baudouin, Jean-louis. "Contract Law in Canada". The Canadian Encyclopedia , 30 October 2020, Historica Canada . www.thecanadianencyclopedia.ca/en/article/contract-law. Accessed 06 July 2024.
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• Baudouin, J. (2020). Contract Law in Canada. In The Canadian Encyclopedia . Retrieved from https://www.thecanadianencyclopedia.ca/en/article/contract-law
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Contract Law in Canada

Article by Jean-louis Baudouin

Updated by Andrew McIntosh

Published Online February 6, 2012

Last Edited October 30, 2020

A contract is a legally binding agreement between two or more persons for a particular purpose. It is an instrument for the economic exchange of goods and services. In Canada, contract law is administered both in common law and, in Quebec, civil law .

Economic Exchange

In general, contracts are always formed on the same pattern. A person offers to give another person something (for example: to deliver an item in return for a certain price); to provide a service (to work for a certain salary); or to refrain from doing something (not to compete for a period of time in return for compensation). If the offer is accepted, the contract is then valid in principle. A contract is, above all, an instrument for the economic exchange of goods and services.

Types of Contracts

The four most common types of contracts are:

• the contract of sale, whereby a person acquires the ownership of property in return for payment;
• the lease and hire of services, whereby a person offers his services to another in return for payment;
• the lease and hire of things, whereby a person is temporarily granted the use of property (e.g., an apartment) in return for a price (rent);
• and the mandate, whereby a person gives another the power to represent her.

Contracts Under Civil and Common Law

Unlike other agreements, a contract is a legally binding promise. If one of the parties fails or refuses to fulfil its promise without a valid reason recognized by law, the party suffering the consequence of this breach of promise may call upon the courts either to force the defaulting party to carry out its promise (specific performance) or to demand compensation in the form of damages.

Quebec civil law  and Canadian  common law  generally follow similar rules in this regard: a contract legally entered into represents a legal bond between the parties. Parties are free to contract whenever and for whatever reason they wish. The only limits to absolute contractual freedom are certain restrictions imposed by legislation and by accepted ethics . Contracts contrary to a statutory law such as the Canadian  Criminal Code  are null and void. (Examples of this might include a work contract for a professional killer, or for a sex trade worker ). The same is true for a contract that goes against accepted ethics; or in civil law, public order.

Civil Code  regulations governing contracts in Quebec (articles 1377, 1456 of the  Québec Civil Code  – QCC) are derived mainly from French civil law. (French civil law is sourced from Roman law.) In other provinces, regulations governing contracts are based mostly on jurisprudence (previous court decisions) and on traditional British common law.

Many provinces, however, have adopted legislation codifying the rules of certain contracts. This is particularly true of sales and consumer contracts. Although Canada’s two major legal systems differ in certain respects for contract law, the practical solutions they provide are very similar when not identical.

For a contract to be valid and therefore legally binding, five conditions must be met. First, there must be the mutual consent of both parties. No one can be held to a promise involuntarily made. When consent is given by error, either under physical or moral duress, or as a result of fraudulent practices, the contract may be declared null and void at the request of the aggrieved party. In certain types of contractual relationship, the law demands that the consent of the party be both free and informed. This is the case, for instance, with contracts involving medical treatment.

The second is contractual capacity — the mental ability to keep the promise one has made. A young child, a person suffering from a serious mental disorder, and in some cases a minor are all considered incapable of contracting.

The third condition is that the contract should have an object or a purpose. It must concern a specific and agreed-upon good or service.

The fourth condition is “lawful cause” in  civil law ; or a “valuable consideration” in  common law . In this area, important technical differences exist between the two legal systems. Briefly, according to this fourth condition, the promise made must be serious and each obligation assumed by one of the parties must find a corresponding (but not necessarily equivalent or equal) promise made by the other party. A person may thus legally sell goods at a price that does not represent their actual market value. The contract would still be a valid one.

The fifth condition, which is not required in all cases, is the compliance in certain circumstances to formalities provided by law , such as a valid written instrument. In general, this condition holds for contracts that may have serious consequences for the parties; or those for which certain measures of publicity are required.

Parties to a valid contract are always bound by law to carry out their promise. Should they fail to, the other party is free to go to court to force them to comply. At times, the court may order the defaulting party to do exactly what he had promised (specified promise). In that respect, civil law provides more readily for the forced execution of promises than common law, for which specific performance appears to be still an exception to the rule. ( See also   Torts in Canada ;  Law of Delict in Québec .)

Courts may also award financial compensation in the form of damages equal in value to the loss suffered and profits lost as a result of the breach of contract; however, this loss and profit must be directly related to the non-fulfillment of promise (article 1611 QCC). Furthermore, courts award only damages equivalent to those benefits that the parties might reasonably have expected to receive at the time the agreement was made.

The rapid increase of class actions both in contractual and delictual fields has had a significant impact on the amount of damages awarded by courts; in certain cases, the amount can reach millions of dollars.

Consumer Protection and Good Faith

Increasingly, provincial and federal legislatures are acting to protect citizens against certain abusive commercial practices. Consumer protection law , in which rules and standards are imposed to suppress fraud , to avoid forced sales and to protect the consumer against dishonest practices, is an example of this type of action. The Quebec Civil Code  has provisions concerning performance in good faith (article 1375 QCC), as well as abusive, illegible or incomprehensible clauses (article 1379 QCC). These go a long way to promote fairness in contractual relationship.

In recent years, good faith has played an increasingly important role in  Quebec  case law. In other provinces, a recent judgement of the  Supreme Court of Canada  has also set a new requirement of good faith in contractual matters, but in limited circumstances.

See also Landlord and Tenant Law ; Employment Law ; Torts in Canada ; Restitution ; Insurance .

• legal system
• Criminal Code

Further Reading

John McCamus, The Law of Contracts , 2nd ed. (2013).

• Angela Swan, Jukab Admaski and Annie Y. Na, Canadian Contract Law , 4th (2018).

Recommended

Law of evidence.

Constitutional Law

Family law in canada, landlord and tenant law, employment law, torts in canada, restitution (legal).

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6. Contract Law

Sample Contract Structure

Written contracts can be organized in many different ways. However, having a structure can help keep information organized, clear, and easy to find. The best contracts have clear headings that accurately describe what is contained in that section. Using emphasis, such as bold and underlining, work better than italics alone for capturing the reader’s eye.

In general, contracts often contain:

• Introduction of Parties and Purpose
• Definitions of Material Terms
• Covenants and Promises of Performance
• Breach and Its Consequences
• Representations and Warranties
• Procedure to Modify Contract
• Rights of Assignment and Delegation
• Alternative Dispute Resolution
• Choice of Law and Forum
• Integration
• Severability
• Exculpatory Clause
• Force Majeure
• Signature Block

Note that not all contracts will contain all these elements and provisions. The parties’ needs and the purpose of the contract determine the structure of the document.

Contracts have a title, often in bold or CAPITAL letters, at the top of the page. Titles should be as descriptive as possible. “Contract” or “Agreement” are not useful because they require the reader to read through the contract to know what it is about. The best contracts capture the nature of the document in the title. For example, “Employment Agreement Between Jane Doe and Queen’s University.”

Introduction of Parties and Purpose:

The introduction should name the parties and describe the nature of the contract. If background information is useful in explaining the parties’ interests and objectives, then it should be included here.

Definitions of Material Terms:

Most business contracts contain some definitions, unless the subject matter and parties are clear. Definitions are useful because it is an area readers can reference to ensure compliance with the contract. For example, did the seller provide the specific goods as defined by the contract?

Definitions are not necessary for every term, though. If not defined, legal terms are given their legal meaning. And ordinary words are given their common, ordinary meaning. Therefore, businesses should define the material terms of the transaction such as: goods, services, quantity, quality, and price. Definitions that are specific to the industry are also helpful to include.

Covenants and Promises of Performance:

A covenant is a formal promise to perform. This is the section of the contract where the parties state exactly how they will perform the contract. The Buyer will pay a specific amount for the goods while the Seller will deliver a specific item at a particular location. To ensure clarity, the best contracts use active verbs in this section. For example, “Buyer will pay Seller ten dollars.” It is clear who will be paying whom, and how much is owed. Passive voice injects ambiguity, which can be problematic. For example, “Seller shall be paid ten dollars.” Will Buyer pay Seller the money or will someone else tender payment? If payment is not made, is Buyer in breach of contract?

Conditions:

As discussed earlier, conditions are things that must occur before performance is due. Usually, conditions must be expressly stated in a contract to be legally enforceable. The best contracts identify any conditions and delineate a timeline for when performance is due after the condition is met. For example, if an inspection of a property is a condition of purchasing it, it is important to indicate the deadline by which the buyer must perform after the inspection is completed.

Breach and Its Consequences:

To constitute a violation of the contract, a breach must be material. A material breach is a substantial breach of contract that excuses aggrieved parties from further performance and affords them the right to sue for damages.

In contracts that require performance over a period of time, or payments in instalments, it is helpful to define what constitutes a material breach. This clarifies when the non-breaching party can seek a remedy. The best contracts anticipate reasons for breach and identify consequences for them.

An acceleration clause makes all future payments due immediately under the contract. Acceleration clauses often exist in contracts where periodic payments occur. For example, a contract to purchase a vehicle may require payment of all remaining money owed under the contract if the buyer misses a monthly payment. This allows the business that sold the vehicle or the bank that issued the loan to sue for breach of contract once, rather than filing a new lawsuit for each month.

A liquidated damages clause allows parties to determine the amount of damages in the event of a material breach. Agreeing to the value of the contract before any breach occurs often saves time and money should the case be litigated. To be enforceable, liquidated damages must apply to all parties equally, and be based on the value of the contract rather than acting as a penalty.

Representations and Warranties:

Representations are statements of fact made to induce someone to enter into a contract. Common representations by businesses include:

• They are properly licensed;
• They are insured;
• Their financial statements are accurate;
• They own all relevant assets;
• They have legal authority to enter into contracts.

Warranties in a contract are express promises that guarantee something in furtherance of the contract by one of the parties. For example, a seller warrants that the object being sold is as represented or promised.

Warranties differ from representations in four ways:

• A warranty is an essential part of a contract, while a representation is usually only a collateral inducement;
• A warranty is written in a contract; while a representation may be written or oral;
• A warranty is conclusively presumed to be material, while a representation must be proven to be material by the party claiming breach; and
• A warranty must be strictly complied with, while a representation must be substantially true.

Standard Provisions:

Modification:.

Often with contracts that require an extended period for performance, modification becomes a concern. What happens if prices or deadlines need to be altered? Will a new contract be required or can the existing contract be modified? Good contracts often include a procedure for how to modify a contract. This may be as informal as writing changes directly on the original contract with the parties’ initials and date. Or it could be through a formal addendum procedure.

Regardless of the chosen procedure, it is best practice for businesses to discuss modification procedures when entering into a contract. If the procedure is clear, less friction occurs when a party seeks modification.

Assignment and Delegation:

In general, parties are free to assign and delegate their rights and duties under a contract. Parties can limit those rights, or they can request notice if an assignment or delegation occurs. This is a provision that is often not needed unless a party has a concern about assignment, such as in the insurance industry.

Alternative Dispute Resolution:

As discussed earlier, many businesses want to reduce their risk of litigation by participating in alternative dispute resolution (ADR). Mandatory arbitration clauses are common in consumer and employment contracts. Before including an ADR provision in a contract, parties should be fully comfortable with the option that they choose. If a party agrees to mediation or arbitration, a court will enforce that choice even if the parties change their mind.

Choice of Law and Forum:

Choice of law provisions determine which province’s laws will be used to interpret the contract. Choice of forum provisions determine the province in which any litigation will take place. If the parties do not select that province’s law or location for litigation, the courts look to:

• Where the contract was signed;
• Where the contract is performed;
• Where the parties are residents; and
• The court’s jurisdictional rules.

Integration:

An integration clause is a provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract. In other words, it is the agreement. The purpose of an integration clause is to prevent the parties from later claiming that they agreed to additional or different terms than what the contract states. This means that any statements made before the parties signed the contract are not part of the contract and they will not be used to interpret the meaning of the contract.

Severability:

A severability clause is a provision that keeps the remaining provisions of a contract in force if any portion of the contract is declared unenforceable by the court. It is also known as a savings clause because it “saves” the whole contract from being declared unenforceable. For example, if a non-compete clause in an employment contract is declared unenforceable by a court, then the rest of the employment contract remains in effect.

Exculpatory Clause:

An exculpatory clause is a provision relieving a party from any liability resulting from a negligent or wrongful act. They are often employed when the risk of injury exists. Exculpatory clauses cannot limit liability when a party acts with gross negligence, commits an intentional tort, or when public policy or provincial laws prohibit them. Exculpatory clauses have been struck down by courts in some cases where parties to a contract have greatly unequal bargaining power, especially when the party with greater power acts unethically or with gross negligence.

Force Majeure:

A force majeure clause is a provision allocating risk to a certain party if performance becomes impossible as a result of an event that the parties could not have anticipated or controlled. Force majeure events are severe, disruptive events such as natural disasters, war, terrorist attacks, and fires. For example, if the subject matter of an international sales contract is destroyed by a hurricane, does the buyer or seller lose the money in the sale?

Signature Block Example:

For example, Ahmad’s Construction, LLC By: __________ Khalid Ahmad, President

Each person signing the contract should date it next to his or her signature.

For partnerships, only general partners can sign a contract on the partnership’s behalf. For corporations, the president or chief executive officer is presumed to have authority to sign. For an organization or association, a board president would have authority, but it may require a vote of the governing board to approve the contract.

Business Law and Ethics Canadian Edition Copyright © 2023 by Craig Ervine is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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About this deed of assignment

Use this deed of assignment to transfer one or more contracts between two parties where the agreement of the other original party is not needed.

Commonly, this assignment agreement would be used to transfer customer service contracts between businesses when one business buys the other, but it can be as easily applied to other uses. This is a simple yet comprehensive agreement that ensures a quick “handover” of a contract.

Also included with the deed of assignment is a letter template to send to customers informing them of the change.

Why a deed of assignment rather than an assignment contract

Our assignment agreement has been drawn as a deed rather than a contract. At law, a contract requires consideration (something in return for the assignment). A deed does not require consideration, so it is a more flexible way of achieving the same end.

When to use this deed of assignment

Assignment is an easy way of transferring a contract because it only requires the agreement of the original party to the contract and party taking on the rights and responsibilities. However, assignment is not always possible (some contracts have non-assignment clauses requiring all parties to the contract to agree).

You should use a novation agreement rather than a deed of assignment if all parties to the contract need to agree to the change and sign the deed. If in doubt, we recommend that you novate using: Novation agreement: transfer of service contract .

Agreement features and contents

• Suitable when either party is resident outside the Canada
• Ensures a legal transfer as it is drawn as an agreement between all parties
• Comprehensive provisions provide ideas for you to mould
• Letter to customers included so that you can ensure a successful future relationship with your new clients
• Suitable for all Provinces of Canada

The deed of assignment contains the following sections:

• Details of the parties
• The assignment
• Existing claims: sets out how outstanding claims will be dealt with
• Other usual legal provisions in plain English

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• Case Comment
• Substantive Law
• Substantive Law: Judicial Decisions

Decision Clarifies Contracting Out and Contracting In

Written by Daniel Standing LL.B., Content Editor, First Reference Inc.

The Alberta grievance arbitration decision in 2024 CanLII 38826 (AB GAA) draws a distinction between contracting out and contracting in. The grievance concerned a company’s decision to fill its Tank Farm Project Operator position at its refinery, involving issuing permits for project work, isolations, expansions and tank cleaning. The position typically was filled by a bargaining unit member to promote individual development within the unit.

What happened?

In 2021, the bargaining unit member holding this special assignment left, creating a vacancy. The company had trouble filling the position from within because of the COVID-19 pandemic, so instead of posting it internally, it contracted with another firm to provide a worker to fill the role. The worker performed the duties for about six months and then worked alongside bargaining unit members for approximately two months.

The union filed a grievance arguing that the company had improperly contracted the role into the bargaining unit rather than filling it with a bargaining unit member, as required by the collective agreement. The union cited articles related to union recognition and job postings, arguing the company should have made the position available to bargaining unit members. The company defended itself by citing the challenges posed by the pandemic and claiming that no qualified bargaining unit members were available at the time.

The arbitrator’s decision

The arbitrator’s first point of analysis was to determine if the collective agreement restricted contracting out, requiring an exercise in contract interpretation. The arbitrator explained that generally a restriction on contracting out requires an explicit prohibition in the agreement. In this case, article 9.02 stated: “The Company may use non-bargaining unit employees including contractors to perform work in the Refinery and Chemical Plants, provided it does not result in the layoff of a bargaining unit employee.” This provision was highlighted as specifically restricting contracting out if it led to layoffs within the bargaining unit.

The dispute centered on whether article 9.01 constituted an additional constraint on contracting out beyond what was outlined in 9.02. Article 9.01 stipulated that work for the company by its employees, including union and non-union employees, can be directed by the Company with flexibility to meet business needs.” The arbitrator interpreted article 9.01 as applying solely to “employees,” which was distinct from article 9.02, which encompasses both employees and contractors.

Drawing on the plain meaning of the words used, the arbitrator concluded that article 9.01 did not restrict the company’s right to contract out work, affirming that such restriction would require explicit language in the agreement. In the arbitrator’s view, article 9.01 was aimed more at addressing internal workforce management rather than external contracting practices.

After painting the contractual landscape, the arbitrator determined the employer had improperly contracted the worker into the bargaining unit, despite article 9.01 not restricting the company’s ability to contract out.

Ultimately, the arbitrator determined the worker was brought in to perform bargaining unit work. There were several reasons for this finding: historically, bargaining unit members performed similar tasks; the nature of the work was production-oriented and integral to the refinery’s operations; and the worker’s role was analogous to that of bargaining unit members. The arbitrator emphasized that despite the worker’s temporary status and the involvement of an intermediary, the company exerted significant control over the work, including direction, supervision and integration into daily operations, which aligned the worker closely with a traditional employee rather than an independent contractor. Therefore, the arbitrator found the worker was effectively an employee of the company during his time on the job, constituting impermissible contracting in rather than a valid contracting out scenario under the collective agreement.

As for a remedy, the company was ordered to pay union dues for the period the worker was in the position, reflecting what would have been collected had he been correctly classified. However, the arbitrator declined to grant damages for the company’s failure to consult the union about using a contractor, as article 9.01 did not impose such a duty. Nonetheless, the arbitrator encouraged the company to maintain open dialogue with the union to prevent future disputes and uphold their positive working relationship.

Key takeaway for employers

Bringing workers in to complete bargaining unit work can be a move that is fraught with difficulty, so paying close attention to what is permissible and what isn’t under the collective agreement is a must.

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