Most people assume that when they hire someone to perform a service for them, that person will deliver the service. This is not always true. In many circumstances, one party can assign its service obligations to another party. By statute, North Carolina allows one party to delegate- or assign- its obligations to perform some service under a contract to another party unless the contract prohibits assignment, or unless the non-assigning party has some substantial interest in having the originally obligated party perform the work themselves. The idea is that assignment allows individuals and companies necessary flexibility to sell valuable contractual interests or to merge with other companies while maintaining existing rights under contracts. Sometimes a company will go out of business, but assign its contracts to another company as it divests itself of assets during the “winding down” or entity termination process. Or, a company or service provider may merge with another company or form a partnership- or find that the company or person can no longer provide a service in a given area. Rather than terminate the contract, the service provider can assign its obligations to another company, almost always receiving some payment in exchange for the assignment. There are many situations that can cause one service provider to wish to assign its obligations to another provider, but the way this is done is fairly standard., Most service contracts will contain language along the lines of one of the following:
- This contract may not be assigned without the express written permission of the non-assigning party, which permission shall not be unreasonably withheld.
- This contract is assignable at will.
- Party A may assign this agreement or any of its rights and obligations under this agreement, effective upon notice to party B.
If a contract is assignable with the “reasonable” permission of the other party, you may find yourself arguing over why the assignment is needed and why you may object to the assignment. Factors that a court will look at when considering whether a refusal of assignment is reasonable will include the nature of the service, the particular skill or expertise of the original service provider versus the proposed assignee, and the assignee’s reputation and history of prior performance or nonperformance.
When there is a dispute over the assignment of a contractual obligation, an important factor to be considered by the courts is what legitimate interest Party A (the non-delegating party) has in requiring Party B (the would-be delegating party) to perform the original terms of the contract. Does Party B have some specialized skill or expertise? Was Party B chosen because of its experience or reputation? Does Party A have a legitimate objection to the would-be assignee? There is no concrete set of facts that will dictate where a court will land on this issue, but the general trend is that the more specialized the service to be performed under the contract, the less likely that a discretionary assignment will be allowed.
It is also important to note that assignment of a contract does not automatically eliminate all liability of the original, assigning party. It will remain responsible for making sure that the contractual obligations it had, and assigned, are performed by the new service provider unless there is an agreement to the contrary by the beneficiary to the service contract.
What does this mean for you? If you are a homeowner association and have hired Peaceful Waters Pool Company, this means that Peaceful Waters may be able to assign its obligations to Mediocre Pools. This can come as quite a shock to the association that spent months selecting Peaceful Waters. The take away here is that if you hire someone to perform a service and are adamant that only they perform that service, you need to make sure that the service contract prohibits assignment, or at a minimum assignment without consent. If you are willing to allow assignment to a well-qualified party, you may wish to include specifics in the contract about when and how assignment would be acceptable, such as relevant experience or specialized training or certifications.
For assistance with these or other contractual issues, contact one of the business law attorneys at Law Firm Carolinas in our Charlotte, Greensboro, Triangle or Coastal offices.