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Collateral Assignment Of Contract

Most prime construction contracts – the ones between owner and contractors – say that neither the owner nor the contractor may assign the contract without the other’s consent. More often then not, the contract says that neither side will “unreasonably withhold, condition, or delay” their consent. One example is Section 13.2 of the American Institute of Architects’s A201 General Conditions of the Contract For Construction.

The underlying reason for these kinds of restrictions is usually to preserve identity of the parties operating under the contract. When making the contract the owner and the contractor know each other, and to some degree, decided to enter in to the contract because of the identity of the party on the other side. These restrictions are the parties’ attempt to ensure that the party on the other side at the beginning is still the party on the other side at the end. But these restrictions lack in at least two big areas:

  • What happens if one side assigns the contract without the other’s consent?
  • What is withholding, conditioning, or delaying consent unreasonably?
  • Should there be exceptions that allow one side to assign without the other’s consent?

First, they often don’t usually do a very good job of ensuring continuity. What happens if one side assigns without the other’s consent? Usually this kind of defiance is considered a breach of the contract. But that usually doesn’t stop the assignment and it usually doesn’t allow the non-assigning party to suspend or stop their own performance.  The non-assigning party may sue for damages.But usually that is about all they can do.

Suing for damages does not preserve continuity. Most of the time damages are speculative – extremely difficult or even impossible to prove. And most owners and contractors don’t want to sue before a project is complete. The assigning party essentially presents the non-assigning party with a fait accompli and the non-assigning party can usually do little in response.

One way avoid this situation is to change the contract. Add language that says that if one side assigns without the consent of the other, the non-assigning party need not recognize the assignment and need not recognize the assignee as party to the contract. If the proposed assignee is reads the contract before assignment (and they should), they’ll probably insist on getting consent from the non-assigning party’s consent before the assignment. In most cases this will allow the non-assigning party to ensure the continuity they bargained for – either by stopping an assignment they don’t like before it happens, or by granting consent to an assignee that’s acceptable.

But keep in mind that sometimes restrictions on assignment are not enforceable no matter what you say in the contract. A prime example is when the assigning party is a debtor in bankruptcy. While this right is not unqualified, the United States Bankruptcy Code allows the debtor to assume and then assign the contract regardless of what restrictions the owner and contractor put in the contract.

Second, when it comes to requesting and granting consent, it would be good to know what are reasonable, and what are unreasonable, reasons for withholding, delaying or conditioning consent. You’ll never be able to think of everything. But if you can identify reasons you expect to be a problems, change your contract to say that those reasons are considered unreasonable, or will at least be presumed unreasonable.

The third problem is that sometimes one side wants to assign without asking for consent. And in these situations they’re concerned that the other side will take too long to grant consent or will ask for too much in exchange for consent. So once the contract has a general rule prohibiting assignments without the other side’s consent, consider adding some exceptions.

Exceptions that owner usually want:

  • Collateral assignment to lenders, especially a construction lender who is funding the project.
  • Assignment to the owner’s affiliates. This is so the owner can reorganize its corporate organizational structure.
  • Assignment to a buyer of the project or a part of the project if the project has parts the owner can sell off separately. Sometimes they owner may decide to sell the project while it’s still under construction. The contractor may require that buyer be at least as creditworthy as the original owner.
  • To the buyer of all, or substantially all, of the owner’s assets. This where another company buys the owner through an “asset purchase acquisition” before the project is complete…

In each of these situations the owner will usually want to assign the contract without having to bother the contractor for consent, and without having to stand-by for the contractor to grant it.

Exceptions contractors usually want:

  • Collateral assignment of the right to payments to their lenders. But some owners resist this. If there is a falling-out between the contractor and their lender, the owner doesn’t want to have to guess who to pay.

When you build these exceptions into your contract, remember that it’s still important for the non-assigning party to know that the other side assigned the contract, when they assigned, who they assigned to, and where to contact the assignee. So your contract should require that when either side assigns without consent as allowed by one of these exceptions, the assigning party must give the other side notice:

  • Telling the other side that an assignment just happened.
  • When the assignment happened.
  • The name of the assignee. Preferably the exact name according to the official records of the secretary of state where the assignee is organized. With the Internet it’s easy to find out this information.
  • How to contact the assignee – snail-mail, fax, e-mail, phone, and the name of a real live individual contact person.

Она ощутила запах Хейла, но повернулась слишком поздно. И тут же забилась, задыхаясь от удушья. Ее снова сжали уже знакомые ей стальные руки, а ее голова была намертво прижата к груди Хейла.