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Assignees May Sue for Breach of Contract Under Texas Law

Written by John McConnell on June 8, 2021 . Posted in News .

The original parties to the contract are not the only parties who can sue on a contract. Assignees and third-party beneficiaries may also sue. This article deals with the rights of assignees.

Assignments are governed by general contract law. Cadle Co. v. Henderson , 982 S.W.2d 543, 546 (Tex. App.—San Antonio 1998, no pet.). “As a general rule, all contracts are assignable.” Crim Truck & Tractor Co. v. Navistar Intern. Transp. Corp. , 823 S.W.2d 591, 596 (Tex. 1992).  Assignments may be whole or partial. Ins. Network of Tex. v. Kloesel , 266 S.W.3d 456, 465 (Tex. App.—Corpus Christi 2008, pet. denied). An “assignment” is a transfer of some right or interest to an assignee who receives the authority to assert that right. Matter of Estate of Abraham , 583 S.W.3d 374, 379 (Tex. App.—El Paso 2019, pet. denied).

“[T]here are no required forms or formalities by which an assignment must be made.” In re Cooper Mfg. Corp. , 344 B.R. 496, 508 (Bankr. S.D. Tex. 2006) (applying Texas law). Like contracts in general, assignments need not be in writing, can be oral, do not need any particular form of words, and can even be inferred from circumstances showing the intent to assign. Banco Longoria, S. A. v. El Paso Nat. Bank , 415 S.W.2d 1, 5 (Tex. Civ. App.—Eastland 1967, writ ref’d n.r.e.); Brown v. Mesa Distributors, Inc. , 414 S.W.3d 279, 285 (Tex. App.—Houston [1st Dist.] 2013, no pet.); Escalante v. Luckie , 77 S.W.3d 410, 418 (Tex. App.—Eastland 2002, pet. denied); Adkins Services, Inc. v. Tisdale Co., Inc. , 56 S.W.3d 842, 846 (Tex. App.—Texarkana 2001, no pet.).

An assignment is created upon a manifestation of intent to transfer a right to another – that’s it. Miller v. Bank of the W. , 01-88-00195-CV, 1988 WL 88320, at *2 (Tex. App.—Houston [1st Dist.] Aug. 25, 1988, no writ); Banco Popular, N. Am. v. Kanning , 638 Fed. Appx. 328, 334 (5th Cir. 2016) (applying Texas law). An assignment may be proven by oral testimony. Adkins Services, Inc. v. Tisdale Co., Inc. , 56 S.W.3d 842, 846 (Tex. App.—Texarkana 2001, no pet.). An assignment may be shown or proven by circumstantial evidence. Banco , 638 Fed. Appx. at 334 (5th Cir. 2016).

“A plaintiff establishes standing to maintain a breach-of-contract action by demonstrating that it has an enforceable interest as a party to the contract, as an assignee of a party , or as a third party beneficiary.” Republic Petroleum LLC v. Dynamic Offshore Res. NS LLC , 474 S.W.3d 424, 430 (Tex. App.—Houston [1st Dist.] 2015, pet. denied) (emphasis added). See also , Foster v. Nat’l Collegiate Student Loan Tr. 2007-4 , 01-17-00253-CV, 2018 WL 1095760, at *8 (Tex. App.—Houston [1st Dist.] Mar. 1, 2018, no pet.) (since assignee stands in shoes of assignor, assignee has privity and may sue for breach of contract); Frontier Communications Nw., Inc. v. D.R. Horton, Inc. , 02-13-00037-CV, 2014 WL 7473764, at *1 (Tex. App.—Fort Worth Dec. 31, 2014, no pet.) (“To establish standing to assert a breach of contract cause of action, a party must prove its privity to the agreement or that it is a third-party beneficiary or assignee.”). An assignment places the assignee in privity of contract with the other contracting party. Stark v. Am. Nat. Bank of Beaumont , 100 S.W.2d 208, 213 (Tex. Civ. App.—Beaumont 1936, writ ref’d); Dodd v. Terrill , 05-93-00268-CV, 1994 WL 24378, at *5 (Tex. App.—Dallas Jan. 28, 1994, writ denied).

This article represents one author’s viewpoint and is not a substitute for legal advice .

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Understanding Contracts

In this article adapted from the Houston Bar Association 's Consumer Law Handbook, you will learn some very basic contract law principles.

What is a contract?

A contract is simply a promise between two parties that can be legally enforced. There must be an exchange of something of value by each party, such as money, goods, or services. A contract can be as simple as buying a gallon of milk or as complex as selling a company.

What makes a contract legally enforceable?

Both parties to an agreement must also give up something of value, which is called “consideration." Often the consideration is money, but it can be anything of value. For example, a neighbor offers to mow your lawn for $30, and you agree to that price. This agreement is enforceable because both parties have given up something of value: the neighbor gives his lawn-mowing service, and you give $30.

A contract also must have a legal purpose. In other words, you cannot enforce a contract that requires one party to break the law. Additionally, a contract can only be enforced against someone who was legally capable of entering the agreement. A contract cannot be enforced against a person under 18 or someone who lacked the mental capacity to enter into an agreement.

Does a contract have to be in writing?

No, a contract usually does not have to be in writing to be legally enforced, and you can enforce a verbal agreement if both parties intended to be bound by it.

However, there are certain types of contracts that must be in writing. These include contracts for the sale of real estate, real estate leases lasting more than one year, the sale of goods over $500, oil & gas leases/royalties, and others covered by the " statute of frauds ."

Even if a written contract is not required, it is always a good idea to have a written agreement. A written agreement does not have to be a formal or complex contract, and it can be handwritten. It must contain the terms of the agreement and be signed by both parties. Things like emails sent by the parties coming up the agreement or the parties signing a napkin with a few words about the deal can constitute a written contract.

How long do I have to change my mind after I sign a contract?

In most situations, once you sign a contract you are bound by its terms. While there is a common belief that you have the right to change your mind for up to three days after you sign a contract, that is  not  the law in most cases.

There are only a few instances in which you can change your mind (also called a “right of recission” or a “cooling off period”), and the length of time you have to cancel is governed by specific statutes. Some examples of statutes allowing cancellation are  certain door-to-door sales ,  service contracts/extended warranties , or  timeshare purchase contracts .

Read more about  The Three Day Right to Cancel a Purchase  and when it applies.

How old does someone have to be to enter into an enforceable contract?

A person of any age can enter into a contract, technically speaking. But Texas law holds that the contracts of a minor (that is, someone under the age of 18) are "voidable" by the minor. That means that a minor can choose to enforce an agreement they entered into with an adult, but an adult cannot enforce an agreement entered into with a minor. This rule discourages adults from entering into contracts with persons under 18 years of age.

What damages are available if someone breaches a contract?

If a party breaks a contract promise, the other party can sue them for “breach” of the contract and ask for money damages. The idea of damages in a contract case is to put the injured party in the same position as they would be if the contract had been completed. So the injured party can sue for the amount they lost because the contract was broken. However, these damages are to make the injured party whole and are not meant to punish the breaching party. Punitive damages are not generally available in breach of contract actions.

You should also make sure to review your contract carefully. Sometimes, a contract contains a section that outlines what the damages will be in the event of a breach. These damages may also be called “liquidated damages.”

Another type of remedy that may be available in rare situations is called “specific performance.” Specific performance basically means that the court makes the breaching party complete their responsibilities under the contract. This remedy is only available when money damages cannot adequately compensate the injured party, and it is entirely in the discretion of the judge. It is sometimes awarded in breach of sales contracts for unique goods or when a seller breaches a real estate contract. You cannot recover damages and get specific performance.

Am I entitled to my attorney’s fees if I hire a lawyer to prosecute my claim?

In a breach of contract lawsuit,  Texas Civil Practice & Remedies Code 38.001  provides that a party can recover attorney’s fees if they win the case in court.

However, many cases are settled out of court, and it is common for the parties pay their own attorney’s fees as part of the settlement agreement. Also, you should carefully read the contract you are trying to enforce. Some contracts contain terms about attorney’s fees that may determine whether a party receives attorney’s fees in a breach of contract or other lawsuit. So, while it is possible to get attorney’s fees paid in a breach lawsuit, it is not guaranteed.

More Information

The complete Consumer Law Handbook is available on the Houston Bar Association's Legal Handbooks  page. 

The Library of Congress's Contract Law: A Beginner's Guide also has links to additional resources. 

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Assignment of Contract

Jump to section, what is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Assignment of Contract in Real Estate

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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Attorney Yu represents clients in business and real estate transactions and has successfully handled more than 200 cases. She has experience in corporate law, including forming legal entities, employment law and workers’ compensation law matters pertaining to wage and hour violations, industrial injuries, misclassifications, and other employment-related torts and contracts. Attorney Yu works with employers to address employee relationship issues, develop effective policies and craft employment agreements. Attorney Yu regularly advises clients on the legal and business aspects of potential investments, ongoing business operations, debt collections, shareholders and partners disputes, business purchase agreements, risk assessment, intellectual property disputes, and potential contract disputes. She regularly handles real estate law matters such as landlord-tenant disputes, lease agreements, buy-sell disputes, title disputes, and construction disputes. She also has substantial experience settling debts, and she drafts, reviews and negotiates settlement agreements. Attorney Yu conducts extensive legal research and provides on-point legal advice to both corporate and individual clients.

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Attorney licensed to practice in both California and New York, Josiah is focused on helping people understand what's in their contracts, and do business with confidence.

I am an experienced in house counsel and have worked in the pharmaceutical, consumer goods and restaurant industry. I have experience with a variety of agreements, below is a non-exhaustive list of types of agreements I can help with: Supply Agreements Distribution Agreements Manufacture Agreements Service Agreements Employment Agreements Consulting Agreements Commercial and residential lease agreements Non-compete Agreements Confidentiality and Non-Disclosure Agreements Demand Letters Termination notice Notice of breach of contract My experience as in house counsel has exposed me to a wide variety of commercial matters for which I can provide consulting and assistance on. I have advised US, Canadian and International entities on cross-functional matters and have guided them when they are in different countries and jurisdictions as their counterparties. I can provide assistance early on in a business discussion to help guide you and make sure you ask the right questions even before the commercial agreement needs to be negotiated, but if you are ready to put a contract in place I can most definitely help with that too.

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Notice of Assignment (TX) | Practical Law

Notice of Assignment (TX)

Practical law standard document w-016-2255  (approx. 11 pages).

Cross-Examination: Don’t Mess with Texas Contract Law

How to prosper with proper documentation for cat losses.

Photos credit: BrAt_PiKaChU/Stock / Getty Images Plus via Getty Images and Ed Crosss

“Don’t mess with Texas” has been the unofficial slogan of the Lone Star State since 1985. While the rest of the country thinks it’s just a catchphrase, true Texans know it actually began as an anti-littering campaign. The saying is especially fitting now because the State of Texas does not want remediation contractors littering the state with contracts that do not comply with its unique laws. These laws are traps for the unwary. 

Follow the Special Rules for Disaster Remediation Contracts

Texas is the only state I know of that has a separate body of statutes specifically targeting “disaster remediation contracts.” The rules are very specific and have more twists than a pretzel factory, particularly when it comes to lien rights. The state is on the lookout for crooked contractors, and violators can land in the hoosegow. 

In the aftermath of Hurricane Harvey, some contractors pressured Texans to provide upfront payments for work that was never performed. The state took a rather dim view of that, and made it a crime for a contractor to require full or partial payment before work is performed. Texas Disaster Remediation Contracts must state that the contract is subject to Chapter 58 of the Texas Business & Commerce Code, that the contractor may not require advance payments, and that progress payments must be in reasonable proportion to the amount of work actually performed, including materials delivered.¹ A violation of any of these requirements is deemed a “deceptive act” that may have serious legal consequences. 

Contractors will march into Texas with good intentions and traditional work authorizations that fail to specify material terms, making them difficult or impossible to enforce. Think of a contract as a list of everything you would want a court to give you in the event the customer does not pay. If it’s not in a writing signed by the customer, the court probably won’t give it you. When a Texas judge sees an old fashioned work authorization, they’ll might think the contractor just fell off the turnip truck. 

Contractors must provide their residential customers with a list of subcontractors, or get a waiver of the right to the list. However, most or all of the other requirements cannot be waived. Before a residential contract is executed by the owner, Texas requires the contractor to provide a written statement substantially similar to the text of Texas Property Code Section 53.255, indicating that: 

• Texas law requires contractors to provide owners with an overview of their rights, responsibilities, and risks in the transaction.
• The contractor may not require the owner to convey the property to the contractor as a condition to the agreement to perform work.
• The owner should investigate the contractor and obtain references before signing the contract.
• The owner should insist on a written contract that explains what the contractor will do, when it will be done, and the cost of work or an explanation of how the cost will be determined. 

Give Notice of the Right to Cancel

Consumers in Texas may cancel a consumer transaction up to three business days after signing the agreement. Contractors have to provide a notice of the right to cancel, and it must be in same language used in the principal sales presentation, e.g., Spanish. The form of the notice is dictated by the Texas Business and Professions Code and must be in boldface type in a minimum size of 10 points. The contractor must also provide a Notice of Cancellation form for customers to sign in the event they elect to cancel.

Hold Harmless Provisions and Releases of Liability

Texas courts generally don’t want you to hang your wash on someone else’s line. The EPA and OSHA, in addition to local and state authorities, have specific and stringent requirements for the removal of materials that contain lead and asbestos. Contractors should also follow the applicable federal and local regulations for preventing silica dust exposure to workers and occupants. In light of recent weather activity, when the restoration industry is overtaxed, there is a temptation to rush in without following proper procedures. Some jurisdictions require asbestos surveys and a notification process many days before work begins. Some good-intentioned contractors may try to expedite demolition projects by seeking waivers or releases of liability to skirt the rules. Not so fast! Some releases are enforceable in Texas, but many are not! 

It is not unusual for businesses to seek releases of liability for negligence or even gross negligence. The more serious the wrong, the more difficult it is to be released from liability for it. Some courts in Texas believe that releases for gross negligence violate public policy and should not be enforced. Definitely ask for a release if the customer refuses your recommendations on an issue that could lead to secondary damage or bodily injury. 

Releases are subject to the Texas Fair Notice Requirements, which essentially stands for the proposition that a business must have very good evidence that a customer was aware of a release and had a good understanding of what rights were being released. Written releases must be specific and conspicuous. This means that they must not be buried in fine print. A good practice is to put them in bold, capital letters. They must be presented in a way that would capture the attention of a reasonable person. 

Add Some Teeth to Improve Collection Chances 

Contractors have much better leverage in collections when their contracts contain provisions for attorneys’ fees, collection costs, late fees, service charges, and interest. Unlike many states, Texas has some serious teeth to its lien statute, which states that the court “shall” award costs and attorney’s fees in a lien foreclosure action.² 

Customers Must Pay Deductibles

It’s a crime in Texas to pay or offer to pay policyholder’s deductible or to rebate all or part of a deductible. It’s also a crime for a policyholder to submit a claim for charges that have been padded to offset the deductible. Texas allows insurers to deny claims when the deductible is not paid. The deductible protects the carrier by ensuring the policyholder has some skin in the game. Contractors are coming to Texas in droves from all of the country, in response to the catastrophe resulting from the severe winter weather of 2021. Unfortunately, some of these contractors are “all hat and no cattle.”

The Texas Hold’em: Mechanic’s Liens

Of course, the most powerful collection tool is the mechanic’s lien. A lien is a legal hold on property to secure a debt. To fix a lien on Texas residential property, a written contract must usually be executed before the work is performed. Unlike any other state law I have seen, to protect the right to lien the home of a married person, the remediation contract must be signed by both spouses, even if the other spouse’s name is not on the property! Further, the contract must be filed with the county clerk where the homestead is located.³ 

Use Lump Sum Prices Whenever Possible

Everyone hates sticker shock. After decades of collecting money for remediation contractors, I cannot overstate the point that fixed price contracts are much easier to enforce than “time and materials contracts.” I

 know what you’re thinking: “Ed, it’s impossible to state a price for emergency service before work begins!” I respectfully disagree. The problem is that emergency service work authorizations often obligate the contractor to return the property to its pre-loss condition. The price for that is usually impossible to accurately determine at the outset, but it’s not necessary to commit to that result the moment you walk on the job. 

It’s totally unnecessary to scope an entire project just to start the stabilization process! The better approach is to go in stages, pricing each one as you go. Write a scope for an initial set of services that will definitely be necessary, and agree on a lump sum price for that. Explain that water damage is progressive, and establish an understanding that drying times are difficult to predict. Return on day two or day three, taking moisture meter readings, revisiting the scope and executing change orders as necessary to bring the project to conclusion. For example, an initial scope could be six air movers and a dehumidifier for three days, and ten labor hours for the lump sum price of x dollars, to be followed by a change order for additional services, if needed. If you have the customer’s agreement to the price for each stage of work, they have no argument that they “would not have hired you if they knew it was going to cost so much.”

Assignment of Benefits

A great way restoration contractors keep insurance companies honest is to obtain an assignment of rights under a claim. A properly drafted assignment allows the contractor to make a claim directly against an insurance company that would otherwise be impossible. 

Most insurance policies contain provisions stating that the policies cannot be assigned. Most states do not apply these “anti-assignment” provisions to the assignment of rights under an individual claim. These are called “post-loss assignments of benefits.” Texas is in the minority of jurisdictions that apply the anti-assignment provisions to post-loss assignments, so the typical assignment of benefits probably will not work in Texas. However, Texas law allows the written assignment of an interest in a cause of action, which means that a contractor can receive the right to pursue a claim against an insurance company for breach of the policy.

Encourage customers to read the contract! Do not rush a customer into signing a contract. Texas is wary of contractors who get signatures on contracts with blanks in them, especially when the blanks are later filled in with terms that are not favorable to the customer. This can lead to severe legal consequences for the contractor, so simply don’t ask a customer to sign a contract with blanks in it. If space is inadvertently left blank, immediately bring this to the attention of the customer, explain how you believe the blank should be filled in, and try to reach an agreement, memorialized in a signed change order. In an impasse on a fundamental term of the contract, contact a Texas lawyer and discuss whether it is best for all concerned to cancel the contract. 

Whether required by law or not, all restoration contracts should be in writing.⁴ Thorough communications and good contracts mirroring those communications greatly reduce the chance of conflict and collection problems. 

This article is for general information and is not intended to be legal advice. Rather than relying on hearsay or entertaining magazine articles, to start getting the slack out of your rope, read the actual law. If you’d like a free copy of some of the important Texas rules for disaster remediation contracts, just send an email to [email protected] with “Texas Rules” in the subject line. 

If you’re working on the 2021 Texas freeze, just remember: this ain’t their first rodeo. Git-R-Done! 

¹ Texas Business & Commerce Code Section 58.003

² Texas Property Code Section 53.156

³ Texas Property Code Section 53.254

⁴ This is not to say that the failure to execute a written contract will always deprive contractors of the right to payment in all jurisdictions. 

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Ed Cross, “The Restoration Lawyer,” represents restorers nationwide from offices in Palm Desert, California and Honolulu, Hawaii. His firm drafts restoration contracts, collects money for restorers and represents them in litigation. He is the Restoration Contractor Advocate for the Restoration Industry Association. He can be reached at (760) 773-4002 or by email at [email protected]. For information about how to document a file to accelerate collections, visit EdCross.com/collections. 

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