Issues to Consider When Agreeing That Contract Obligations can be
“Other-Sourced”

There are many business circumstances where it is both beneficial and necessary that obligations in a business contract be outsource or “other-source.” This is the legal concept of assignability. Assignability is the general legal category which allows for others to provide the services or goods that one party is obligated to provide. Examples include:

• Use of subcontractors for construction contracts
• Obtaining a sublessee or subtenant with respect to a real estate lease
• Use of an independent contractor for a service contract (such as computer software development)
• Allowing sublicensees in the context of intellectual property licenses

As said, there are many benefits to allowing assignability in many circumstances. So there is no reason to always say “no” to allowing assignment. However, there are legal and practical issues to consider and you should seek advice and guidance from an experienced San Diego corporate attorney. Here are some of the considerations.

• Approval/notice of the assignment: It is important that the main contracting party have some sort of contractual rights with respect to who becomes an assignee, subcontractor, subtenant, or sublicensee. This is particularly true if the assignee will become responsible for payment and will have final say on the provision of the goods or services.
• Payment issues: It is also important that the main contract cover all issues with respect to payment to the assignee, particularly if the assignee has legal rights such as the ability to file a mechanic’s lien. Subcontractor payment is a large area of concern in complex construction projects. If the electrical subcontractor does not get paid by the general contractor, the subcontractor will look to the owner for payment. Payment issues are just as important in other types of contracts and are the most common source of litigation. Ensuring that the main agreement has mechanisms for paying the assignee can help avoid expensive litigation.
• Carve-out and clear definitions of what can be assigned: Generally speaking, few San Diego businesses want or expect that the entire contract will be assigned to others for completion. Thus, it is important to clearly define what can and what cannot be subject to assignment.
• Master contract binding and controlling on assignees: The main contract should have provisions that mandate that any and all assignees must be subject to the terms of the main contract. It is important that the assignees receive a copy of the contract (or relevant provisions) and that the assignees sign an acknowledgment that they are bound by the master agreement. The master contract should have language making it clear that any conflict or inconsistency between the terms of any assignee contract and the terms of the master contract, the terms of the master contract shall prevail.
• Termination of assignment for violation of the master contract: Along the same lines, the main contract should provide that any violation of the contract by the assignee is grounds for termination and that both parties to the main contract have the power to terminate the assignee.
• Termination of the master contract: If the master agreement is terminated, it is crucial that an assignment also be terminated and terminated automatically. Again, this is a matter of avoiding litigation.

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.

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