[Update June 17, 2013: Go here for the June 15, 2013 post about my article It’s Time to Get Rid of the “Successors and Assigns” Provision.]
[Update April 12, 2013: For more recent posts about the “successors and assigns” provision, see “The ‘Successors and Assigns’ and Successor Liability” (here) and “The Illinois Appellate Court’s Problematic Take on the Traditional Recital of Consideration and ‘Successors and Assigns’ Provisions” (here).]
A standard ingredient of contract boilerplate is the “successors and assigns” provision. Here’s what a run-of-the-mill successors and assigns provision looks like:
This agreement is binding upon, and inures to the benefit of, the parties and their respective permitted successors and assigns.
I’ve long considered the successors and assigns provision to be one of the abiding mysteries of contract drafting. After some research, I’ve decided to dispense with it. Allow me to explain why:
(For purposes of the following discussion, bear in mind that an assignment occurs when one party transfers to a nonparty its right to receive the other party’s performance. The transferring party is the “assignor”; the nonparty to whom the right is assigned is the “assignee”; and the party who must perform in favor of the assignee is the “nonassigning party.”)
When I want to research a contract provision that constitutes boilerplate, I generally start by consulting Negotiating and Drafting Contract Boilerplate (Tina L. Stark ed. 2003). That’s what I did in this case—it has a chapter devoted to the successors and assigns provision.
According to Tina’s book, the case law suggests that the successors and assigns provision could have up to five different functions. (That courts should have read so much into the successors and assigns provision suggests how problematic it is.) I list these ostensible functions below, along with my take on them.
1. To Bind an Assignee to Perform: According to Tina’s book, some courts have held that a successors and assigns provision in a contract binds the assignee of any rights under that contract to perform the assignor’s obligations under that contract. But such a holding is inconsistent with accepted law. Privity of contract dictates that whether the assignee assumes the assignor’s obligations would be a function of whether the assignee has agreed to do so. See 9-48 Corbin on Contracts § 871 (“But if the assignee is held to be bound by a legal duty to render the service, it will be because he expressed an intention to assume it when he took the assignment.”) The contract between the assignor and the nonassigning party would have no bearing on the issue, and a successors and assigns provision in that contract would be ineffective as a means of binding the assignee of any rights under that contract to perform the assignor’s obligations under that contract.
2. To Bind a Nonassigning Party: Tina’s book says that a second purpose of the successors and assigns provision is to restate common law to the effect that after an assignment, the nonassigning party is obligated to perform in favor of the assignee. This is indeed the common law. See 9-48 Corbin on Contracts § 870 (“The effectiveness of an assignment does not depend upon the assent of the obligor. If in other respects the assignment is good, his duty is now a duty to the assignee ….”). But why bother restating the common law? If a party is permitted to assign its rights under a contract, it’s obvious that the nonassigning party must perform in favor of the assignee—otherwise, being able to assign your rights would be of no value. Whereas it’s sometimes useful to state in a contract what would apply anyway—particularly when the parties might otherwise be unaware—doing so to this extent would seem excessive.
3. To Determine Whether Rights Are Assignable: Some courts have relied on the successors and assigns provision to determine whether a party may assign its rights under a contract. It’s standard practice to address that issue in a separate section; if you do so, you certainly wouldn’t need the inscrutable language of a successors and assigns provision, too. And if you don’t address assignment in a separate section, you’d be advised to dispense with the successors and assigns provision, lest a court look there for guidance on assignment.
4. To Determine Whether Performance Is Delegable: And some courts have relied on the successors and assigns provision to determine whether a party may delegate its obligations under a contract. The same considerations apply in this context as apply to the question of whether rights are assignable.
5. To Bind the Parties to the Contract: If you take at face value the traditional language of a successors and assigns provision, it indicates that the parties intend to be legally bound. Such a statement would be ineffective, as it isn’t a condition to enforceability of a contract that the parties have, or explicitly express, an intent to be legally bound. See MSCD 2.29 and Farnsworth on Contracts § 3.7.
So, to summarize, here’s what I think, from the drafter’s perspective, of the five ostensible functions of a successors and assigns provision: (1) ineffective; (2) too obvious; (3) wrong place to address this issue; (4) wrong place to address this issue; and (5) ineffective.
Tina’s book suggests that the problem with the traditional successors and assigns provision is that “the provision is so truncated that its objectives are veiled.” I, on the other hand, think that the problem is that it’s a provision without a useful purpose. That raises the question of how it has come to be a fixture in contracts.
Whenever you have a contract provision that serves no useful purpose and is incoherent to boot, somehow that helps ensure its survival—because drafters are unsure what function it serves, they’re loath to delete it. Take, for instance, the traditional recital of consideration—even though it serves no purpose (MSCD 2.63–71 and this article), you can still find it in a large proportion of contracts. I suggest that this phenomenon helps explain why the traditional successors and assigns provision hasn’t been put out of its misery.
Tina’s book offers an alternative successors and assigns provision, one that ostensibly “clarifies the provision’s purpose and application.” But the first two subsections of the alternative provision—the other two address ancillary matters—serve to perform two of the five ostensible functions described earlier in the chapter, namely functions 2 and 1, respectively. So while the alternative provision may serve to clarify its purpose, that’s of little use if one purpose would be to state the obvious and the other would be ineffective.
So you’d be better off omitting the successors and assigns provision from your drafting. It serves no useful purpose, it’s confusing, and its incoherence gives courts leeway to find in it what they want to find. And reworking it to make it clearer would only serve to make more apparent the lack of a useful purpose.
Let me suggest a possible purpose for the “successors and assigns” clause – a variation on #1: To assure that, if either party sells all or substantially all of its assets (or merges into another firm), the asset sale (or merger agreement) will include a clause specifically committing the purchaser (or successor-in-interest) to continue performing the contract.
To be sure, the clause itself would have to be amended to make that purpose clear.
Robert: The provision you mention could indeed be a helpful one, but as you suggest you can’t possibly get there through the standard “successors and assigns” provision. Ken
I had assumed (and now question) that ‘permitted successors’ addressed the issue of a contracting party changing legal form (e.g., changing from an LLC to an S-corp).
Nestor: Often the first words out of a drafter’s mouth after any drafting mishap are “I assumed ….” :-) Ken
Ken, I think your article focuses too much on the ‘assigns’ part of the clause.
A possible context where the ‘successors and assigns’ clause may be meaningful is in mergers: the company (A) that is merged into another (B) ceases to exist and its contractual relationships devolve upon the the company it is merged into (B).
This is not an assignment and is therefore outside the scope of the section where you define whether consent is required.
I am not an American lawyer but this would be treated under the law applicable in my country (Portugal) as a ‘legal succession’ and the clause would therefore clarify that the other party to a contract with (A) that includes such clause keeps all rights and obligations vis-a-vis company B.
Luis
Luis: You’re seeking to attribute to the “successors and assigns” provision a function that would be redundant for contract purposes: under state statutory law, if Company A merges into Company B, Company B automatically assumes all Company A’s obligations.
And secondarily, as I explained in my original post, a contract between Company A and some other party would be an unpromising vehicle for imposing obligations on Company B.
Ken
Ken, I am very happy that I came across your article — I was actually researching this issue myself with respect to the scenario suggested above by Robert Sonenthal. In the matter I was recently working on there was a provision in a contract that was binding on the purchaser of a business and its “successors and assigns.” That party is now selling the business and the question was raised as to whether that provision would be binding on the new buyers in the context of an asset purchase agreement. In my view, the draftsman of the original contract may have had the intention of binding all future successors in interest, but this was not specified in the original contract. As you note in your response to Robert Sonenthal (which I agree with), I don’t see how you would be able to bind a future purchaser with the standard “successors and assigns” provision alone. Your article provided excellent authority in an area that most practioners do not stop to think about – thank you!
Ken,
All of your points are all well-taken, rational and coherent; conceptually hard to argue with. That being said, I defer to what has worked, and continues to work, for me, which is the standard clause. Practicality is key to my practice. In my 25 years of law practice on behalf executives worldwide, I’ve found the standard successors-and-assigns clause, coupled with a cautionary reminder to general counsel of the employer that he/she should advise successors/assigns of this important obligation, or be potentially considered to have withheld material information, has gotten my clients where they want to go. In court, too, I’ve enforced the standard clause upon acquiring entities on a “knew or should have known with reasonable due diligence” argument. Though potentially rife with risks and imperfections, the standard clause invites universal acceptance, and generally works.
Al Sklover, SkloverWorkingWisdom.com
Al: When you look at change from the perspective of the needs of any given lawyer, change can seem counterproductive, even downright scary: expedience is the order of the day. But I have the luxury of looking at change from a broader perspective, and in that context, all that matters is your suggestion that my points are conceptually hard to argue with. If we fix the language of business contracts, life will be much simpler for the next generation of lawyers. Ken
Ken,
I’ve given careful consideration to your thoughts. Are we to accept that the highest purpose is simplicity for lawyers (our generation or the next)? Although it has been said that “simplicity is the ultimate sophistication,” it is not, to my mind, the ultimate purpose. I don’t think I find change to be either counterproductive or scary; rather, I do seek every possible advantage for my clients, actual or perceived, for they are often the same. I think the highest purpose of the law is the welfare of humankind, however messy, disorderly or complicated that may be.
Al Sklover
Al: Making order out of chaos is certainly a noble endeavour, but not if the lawyer is the one making the mess. I see plenty of advantages, and no disadvantages, to eliminating a profoundly confused provision and accomplishing the client’s goals more directly. Ken
Ken –
Could not another purpose of the clause be to prevent the non-assigning party from arguing it has no contractual privity with a successor or assignee in an action by the assignee to enforce the contract? Especially where another boilerplate provision typically provides that there are no third party beneficiaries to the contract, it would seem the “inure to the benefit of” clause still has value here.
Jim: I believe that you’re referring to reason number 2 above. Ken
What about the case where one or more of the parties to the agreement are individuals, one of the parties dies, the agreement does not contain the successors and assigns provision (is completely silent on this issue), and the agreement does contain a restrictive covenant (non-compete/non-solicit/non-disparagement) provision. Would the restrictive covenant be enforceable against the estate of the deceased party—even if the agreement otherwise terminates on the death of a party?
And how does your suggestion gel with the recent decision of the Supreme Court of Ohio: Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-2297?
Hi Ken,
I completely agree 100% with your posts and comments. I am a transactional attorney for a large bank (Big Bank) that recently acquired a smaller bank (Small Bank). Small Bank has a lot of master agreements with customers, and my documentation clients always ask me if it is ok to execute new schedules under Small Bank's master agreements. I always tell them yes, that we are now the party to that contract as successor to Small Bank. Imagine my surprise when I came across this article. I think this is just bad court decision, but don't you find it concerning? Would love to hear your thoughts.
http://skloverworkingwisdom.com/blog/index.php/th…
If this provision is included in a rental agreement, and one day some lawyer emails me saying they’re representing the landlord, is that enough. Shouldn’t the landlord hv to tell me first. How do I know they’re really representing the landlord, if I wasn’t told by them.
Also, my lease has a non- reliance clause stating- Both Tenant & Landlord acknowledge that they have not received or relied upon any statements or representation or promises or agreements or inducements by either Broker or their agents which are not expressly stipulated herein. If not contained herein, such statements, representations, promises, or agreements shall be of no force or effect.This non-reliance clause shall not prevent recovery in tort for fraud or negligent misrepresentation or intentional misrepresentation.
Blah blah blah. There’s more, but I’m not sure its relevant.
. What happend to me is a complete retaliation. Besides my landlord breaching a few sections of our lease & a cpl laws. He has 1 of the best lawyers. They just pretty much almost & might be able to evict me. Though my 1 year lease was up July 31, my lease says it will continue month to month. The owners of my condo also emailed me that. But, I had a huge problem being exposed to mold. I was deathly ill for 6 + months. I hv a compromised immune system & am on disability. I was fighting with them for a cpl months to properly remove the effects areas. Finally, I gave them a certified letter giving them th 14 day remediation time. Thats when this lawyer- no it was the lawyers secretary- sent me, just an email, stating several outright lies, that I hv proof of, horrible insinuations, & then told me my lease will not continue to go month to month– OBVIOUS RETALIATION. I paid for Aug, through certified mail. They sent the check back with a letter stating I need to leave. Then they were evicting me for non payment. The judge wldnt even look at any of my proof. I’m disables, my son( lives in Pa) just lost his baby( I had to go back), my rib went out of place twice- this all in July. I’m in myrtle beach, by myself.
He still only gave me only 3 days to get out.
I cldnt believe it. Disabled & nowhere to go. They were delaying me in finding a place by doing this & something else in April.
Anyway, with very bad advice from the S.C.L.S( they cldnt even get who was the plaintif & who was the defendant right), I was like a half hour from getting the appeal filed in time. The Sherriff said, too bad, I had to get out. Well, after an hour of crying, nowhere to go & nowhere to put my things, they finally let me file the appeal. Not sure its going to work though……
….. Sorry, for the book, just to ask one question.
Any help wld be very much appreciated.
I think it is pretty much same as the World Bank Sanctions Procedues, which contains Successors and Assigns Clause (Section 9.04. (c)). The difference is that Parties in the latter case may appeal against the decision of the Bank to impose sanctions on certain successor or assignee.
I read a great deal of deeds and easements in the course of my work. I assumed that “successors and assigns” preserves the chain of custody of real property and the conditions of the deed unless it is changed in subsequent deeds. For example, a landowner grants an easement to Bell Telephone company in 1964, which is recorded on the deed. The property changes hands 3-4 times, but the easement still exists because the subsequent owners are successors. In addition, the “Bell” companies merge and change their name to Verizon. It’s still their easement, even if it is not re-recorded. This has been the case as far back as I have read deeds in my county (1920’s). Does this not have merit in that case, or is this different than what you are referring to? I would agree that in contracts for services (ie – construction), “successors and assigns” is fairly weaker and should not take the place of enumerating who you are trying to oblige. But when you don’t know who the parties may be, I probably wouldn’t leave out.
When considering the function that a contract provision serves, a good rule is “Assume nothing.” Beyond that, drafters have the power and the responsibility to address any issue clearly and directly. If you want to accomplish something relating to the chain of custody of real property (a subject I know nothing about), address it directly instead of by using a mystery phrase like “successors and assigns.”
sounds patriartifcal.
“But why bother restating the common law?”
Because the common law changes, and varies from country to country. If you intend for the contract to last a really, really long time (certain contracts involving land and institutions have lasted for over 500 years and survived complete changes of government and even of the underlying legal system), you really want the interpretation to be in the contract so that it will outlast changes of the common law.
Looks like caselaw in employment contracts may be against you on #1.
https://skloverworkingwisdom.com/the-successors-and-assigns-clause-without-it-all-can-be-lost/
Some better-written samples in corporate law —
specifically, ones which cover transfers of “substantially all of the
business or assets of” a company:
https://www.lawinsider.com/clause/successor-to-company
And it appears to matter massively in the question of whether an estate is obligated to perform duties of the contractor, again a case of #1 — the executor *can* be bound by the contract:
https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2019/january-february/can-boilerplate-raise-contracts-the-dead-the-grave/
It seems like this really shouldn’t be boilerplate, because the courts appear to have a history of ignoring the boilerplate.
But it also seems that it’s exceptionally important to specifically say what is and isn’t binding on successors and assigns. I wouldn’t leave it out, but you need much better boilerplate than the one quoted here.
That provision is in a waiver my father is being asked to sign, indicating he will not sue the driving examiner he will be in the car with during a pandemic. He did not ask to have this test. He is being told to take the test. In this situation I assume this means they are asking him to sign away rights for his whole family? Is that legal?
Thanks
Would successors and assigns phrase apply to a lessee?
Or would you need to have subsidiaries and affiliates?