Assignment issues are implicated in each of the following clauses—during or after the project—as a result of a project sale or through a contractor delegating certain responsibilities to a subcontractor.
Clause A: Neither Owner nor Architect [or Contractor] shall assign this Agreement as a whole without the written consent of the other, except that Owner may assign this Agreement to an institutional lender providing financing for the Project. (Note: This clause is also typically found in subcontracts.)
Clause B: Owner and Architect [or Contractor], respectively, bind...their...assigns to the other party to this Agreement...with respect to all covenants of this Agreement.
Clause C: Consultant [or Subcontractor] shall provide the Architect [or Contractor] with the following [professional] services in the same manner and to the same extent as the Architect [or Contractor] is bound by the Prime Contract to provide such services to Owner.
Clause D: A copy of the Prime Contract shall be made a part of this agreement by reference.
In turn, the risk management decisions made, based on the identity of the parties contracted with, could be inaccurate. As a result, careful attention should be paid to the language of the clause, regardless of the company’s position on a project. For example, Clause A purports to prevent contract assignments, but in reality only prohibits assignment of a contract while that contract is executory (i.e., while being performed), and even then probably does not prevent an assignment.
In theory, the purpose of an anti-assignment clause is to protect a party’s right to choose who it works for. Most industry professionals believe such a clause prevents assignment and conduct their affairs accordingly. However, Clause A does nothing to prevent assignment. If the goal is to actually prevent an assignment while a contract is executory, the clause needs to specifically state that any assignment in violation of the agreement is void and unenforceable.
WHEN TO APPLY CAUSES OF ACTION
Assignment of a cause of action arising from a non-executory contract does not require consent and most likely cannot be prevented, even when the “void and unenforceable” language is present. There is a distinction between an assignment for purposes of performance versus an assignment for purposes of damages. When, at the time of assignment, a contract is non executory and the only right remaining is the right to sue for breach, a cause of action assignment is not prohibited or prevented by an anti-assignment clause.
There are two reasons for this principle. The first is the general rule that causes of action are freely assignable. The second reason is due to the distinction between executory and non-executory contracts, and a weighing of the relative risks that exist for parties before and after a contract breach.
Even though assignment of an executory contract may be prohibited because of its personal nature, the reason for the rule disappears after an event that gives rise to a liability on a contract. This is because pre-breach assignments involve the potential creation of new contractual relationships, which could materially increase the risk of the non-consenting party. However, post-breach assignment does not materially increase the risk of the non-consenting party because, in theory, that risk is fixed when the contract is breached.
When considering legal responsibility, Texas courts generally adhere to the linear chain of contracts on construction projects. Put another way, Texas courts typically will not allow an owner to sue a subcontractor, where standard prime and subcontract agreements exist. In order to avoid expansion of potential liability beyond an agreement with prime contractors, consultants and subcontractors must also consider assignment language because the language identified in Clauses B through D could modify the general rule, which limits a consultant’s or subcontractor’s legal responsibility to the other party in the contract, and not to an owner.
Pursuant to Clause B, the architect and contractor agreed to bind all “assigns” to the prime contract for the benefit of the owner. To the extent that a consultant or subcontractor is “assigned” within the context of the prime and subcontracts, consultants and subcontractors are bound to the terms of the prime contract and could be liable for any breach thereof. Furthermore, by incorporating the prime contract by reference (Clause D) and describing the scope as providing a benefit to the owner, an owner could hold a consultant or subcontractor directly responsible for a breach of contract with an architect or contractor.
It follows that if the owner has these direct rights and assigns them to a subsequent purchaser, that purchaser would be able to assert a cause of action directly against a consultant or subcontractor, resulting in an expansion of risk beyond the parties to the original agreements.
Risk management is only possible through a clear understanding of contract terms. Frequently, industry professionals hold to assumptions and standard courses of conduct that are not supported by the terms of their agreements.
A misplaced reliance on these assumptions could result in a significant loss that could have been prevented by a thorough understanding of their contracts.
Ben Wheatley is a shareholder at Munsch Hardt in Austin, Texas. For more information, email email@example.com.