Key takeaway

Assignment clauses in commercial contracts are often treated as standard boilerplate clauses, but they can have significant consequences for control, financing, business sales and contractual risk. If a contract is silent, contractual rights are generally assignable under English law. If assignment is restricted, the wording of the clause, and the parties’ conduct, can be decisive.

Why do assignment clauses matter in commercial contracts?

Few clauses in a commercial contract are as commercially significant, or as routinely misunderstood, as the assignment and other dealings clause. At Barnes Law, we regularly see businesses enter contracts without fully appreciating what this clause does or, equally importantly, what the absence of one means.

What does assignment mean?

Assignment allows a party to transfer the benefit of a contract, such as the right to receive payment, to a third party. It does not, however, transfer the burden. The original party remains liable for performance.

Take a cleaning company that assigns its contract to a new operator: the right to receive payment passes across, but the obligation to deliver the cleaning services stays with the original company. This is why any well-structured assignment should be supported by a back-to-back commitment from the incoming party to perform.

Common examples include a customer assigning a supply agreement to a group company or to the buyer of its business. Assignment clauses also typically govern related dealings such as charging, mortgaging or declaring a trust over contractual rights.

What is the difference between assignment and novation?

Novation goes further than assignment. It replaces one party entirely, transferring both rights and obligations, with the consent of all three parties. The original contract is extinguished, and the outgoing party is released. Novation is common in business sales and group reorganisations and is typically recorded in a short tripartite agreement.

Where formal novation is impractical, novation by conduct offers an alternative. If the outgoing party notifies the continuing party of the transfer and the continuing party simply gets on with dealing with the new entity, paying their invoices, accepting their performance, the English courts may, after a period of months, treat the contract as having novated. It is a practical solution, but one that carries inherent uncertainty until the position has crystallised.

What happens if a commercial contract is silent on assignment?

If your contract says nothing about assignment, English common law fills the gap, and the default position is that rights are generally assignable. That may suit some parties but leave others exposed to transfers they never anticipated.

For suppliers, the ability to assign can be essential: it enables receivables financing, supports group restructuring, and facilitates clean exits on a business sale. A blanket restriction can cause real commercial difficulty if it is not identified and negotiated upfront.

For customers, the concern typically runs the other way. They may be comfortable with an assignment of receivables to a finance provider but unwilling to find themselves dealing with an unknown third party or a competitor on the operational side of the contract.

The solution is straightforward: agree the position expressly and make sure it reflects your actual commercial objectives. For businesses preparing for a sale, buyers will often examine termination rights, renewal provisions, pricing mechanisms and restrictions on assignment in SME business sales as part of their contract risk review.

How should an assignment clause be structured?

There is no single correct approach. The right structure depends on the nature of the contract, the relative bargaining positions and what each party is trying to protect. Typical options include:

•       A simple prohibition on all assignment

•       Assignment permitted only with the other party’s prior written consent (often qualified so that consent cannot be unreasonably withheld or delayed)

•       Assignment freely permitted within a corporate group but restricted otherwise

•       Unrestricted assignment

Clauses can be mutual or asymmetric. If free assignmentis your priority, one approach is to remain silent while expressly restricting the other side.

Will the courts enforce restrictions on assignment?

The courts will enforce assignment restrictions as written. In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993], the House of Lords confirmed that a prohibition on assignment is effective. The Court of Appeal reinforced this in First Abu Dhabi Bank v BP Oil International [2018], where an assignment of receivables failed for want of prior written consent.

However, a more nuanced picture emerged in Musst Holdings Limited v Astra Asset Management UK Limited [2023]. The Court of Appeal found that novation by conduct had occurred despite a clause requiring express prior written consent to any dealings. The court confirmed that a written consent requirement can be waived by conduct and that in this case, the issuing and payment of invoices in the new party’s name was sufficient. The lesson: even a well-drafted clause will not protect you if your behaviour is inconsistent with it.

Barnes Law’s Commercial team advises clients on commercial contracts, assignment clauses, novation, contract risk allocation and business sale readiness. For more information, please contact one of our Commercial solicitors to discuss how we can support you.

Written by Barnes Law Managing Partner Yulia Barnes.