Sunday, May 03, 2009

Assignment of Contractual Rights without the Consent of the Engineer

By: Gary D. Quesada, Hon. Aff. AIA, J.D.
Principal Attorney, Cavanaugh & Quesada, PLC

When entering a contract, an Engineer cannot accurately assess its risks without being assured that the other party will in fact remain its contracting partner throughout the Project. Therefore, an important risk-management tool for Engineers is to prohibit the assignment of the contract without the Engineer’s written consent.


Management of Risk through Non-Assignment Clause

Most standard form contracts governing an Engineer’s professional services contain a “non-assignment” clause, which purports to prohibit either party from assigning its rights and obligations under the contract, without the written consent of the other. When utilizing the standard forms, scrutiny of the non-assignment clause is rarely deemed necessary, because a commonly held belief is that these “non-assignment” clauses absolutely prohibit assignment without consent, such that any attempted assignment will be void and to no effect, unless the Engineer has expressly granted its consent.

Oliver/Hatcher v. Shain Park

A new Michigan Court of Appeals case has cast significant doubt on whether the non-assignment clauses in the popular standard contract forms will serve to void an assignment, despite lack of consent.

In Oliver/Hatcher Construction v. Shain Park Associates UNPUBLISHED, COA No. 275500, SC No. 136803 (Application DENIED, December 23, 2008), the parties were operating under a AIA A201 General Conditions (1997). The Owner allegedly assigned all its contractual rights without the consent of the Contractor. The Assignee sent notice to the Contractor of alleged latent defects. The Contractor brought an action for declaratory judgment, arguing that the Assignee had no rights against it, because the assignment was without consent and therefore void.

The Trial Court agreed with the Contractor, but the Court of Appeals reversed. The Court of Appeals held that the language of the AIA A201 was consistent with the common law rule that if a party breaches a promise not to assign a contract, the breach gives rise to a cause of action for damages but does not render the assignment itself ineffective.

Heightened Attention to Contract Language for Non-Assignment Clauses

Given the result in Oliver/Hatcher, an Engineer that wishes to secure the identity of its contracting partner throughout the Project should be certain to include language expressly stating that “any attempted assignment by the Owner [or Architect] of its contractual rights or obligations without the written consent of the Engineer is void and of no effect.” Consideration should be given to whether certain rights may be exempted from this prohibition, such as the right to assign to a lender under certain circumstances, or the assignment of contractual proceeds.

The Engineer should expect the inclusion of language “voiding” an attempted assignment will likely be answered with a demand by a contracting partner that the prohibition be reciprocal. Therefore, the pros and cons of the language should be weighed depending on the circumstances.

Survey of Standard Contract Non-Assignment Clauses in Light of Oliver/Hatcher

If the reasoning of Oliver/Hatcher is applied by Michigan Courts in the future, it is doubtful that any of the recent or current versions of the most popular standard contract forms will serve to “void” an assignment made without consent.

1) AIA A201 (Both 1997 and 2007 versions)

General Conditions of the Contract for Construction

The contract in Oliver/Hatcher was the 1997 AIA A201. The language in the non-assignment clause has remained unchanged in the 2007 edition:

Section 13.2 Successors and Assigns

13.2.1 The Owner and Contractor respectively bind themselves, their partners, successors, assigns and legal representatives to covenants, agreements, and obligations contained in the Contract Documents. Except as provided in Subparagraph 13.2.2, neither party to the Contract shall assign the Contract as a whole without written consent of the other. If either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the contract.

(13.2.2 permits the Owner to assign the contract to an institutional lender providing construction financing for the Project without the Contractor’s consent.)

Comment: The AIA A201 provides for an exception, and also provides for a remedy in the case of assignment without consent. Specifically, if such an assignment is attempted, the original contracting party remains responsible for all obligations under the contract. The Oliver/Hatcher Court interpreted this language not as precluding an assignment but in fact contemplating one, as well as providing for the consequences of assignment.

2) AIA C401-2007

Standard Form of Agreement Between Architect and Consultant

An Engineer may be provided an AIA C401 when performing consulting services to an Architect. The language in AIA C401 does not include the exception, or the remedy contained in the AIA A201:

Section 10.3

The Architect and Consultant, Respectively, bind themselves, their agents, successors, assigns and legal representatives to this Agreement. Neither Architect nor Consultant shall assign this Agreement without the written consent of the other.

Comment: Under the foregoing language, the Engineer’s remedy may be limited to a cause of action for damages arising from the assignment. If the contract does not otherwise provide for it, the Engineer may wish to incorporate the terms from the AIA A201 section 13.2.1, which provides the Architect will remain bound even if an assignment is made (see above).

3) EJCDC 1910-1 (1996) and E-500 (2002)

Standard Form of Agreement Between Owner and

Engineer for Professional Services

The non-assignment language remained the same from the EJCDC 1910-1, 1996 edition to the EJCDC E-500 2002 edition:

Section 6.07 (Section 6.08 in the 1996 edition)

A. OWNER and ENGINEER each is hereby bound and the partners, successors, executors, administrators and legal representatives of OWNER and ENGINEER (and to the extent permitted by paragraph 6.07.B the assigns of OWNER and ENGINEER) are hereby bound to the other party to this Agreement and to the partners, successors, executors, administrators and legal representatives (and said assigns) of such other party, in respect of all covenants, agreements and obligations of this Agreement.

B. Neither OWNER nor ENGINEER may assign, sublet, or transfer any rights under or interest (including, but without limitation, moneys that are due or may become due) in this Agreement without the written consent of the other, except to the extent that any assignment, subletting, or transfer is mandated or restricted by law. Unless specifically stated to the contrary in any written consent to an assignment, no assignment will release or discharge the assignor from any duty or responsibility under this Agreement.

Comment: Similar to the AIA language, the standard EJCDC language appears to contemplate an assignment and provide a remedy, being the continued obligation of the assignor to its contractual duties. Therefore, although the EJCDC forms were not at issue in Oliver/Hatcher, prudence would dictate assuming a court will interpret the EJCDC language similarly to the AIA language.

4) ConsensusDocs 240

Standard Form of Agreement Between Owner and Architect/Engineer

While the ConsensusDocs do not have the history of either the AIA or EJCDC standard forms, a number of owners appear to be embracing these documents. The ConsensusDocs’ non-assignment language is more limited than either the AIA or EJCDC forms:

Section 10.3

ASSIGNMENT. Neither the Owner nor the Architect/Engineer shall assign their interest in this Agreement without the written consent of the other except to the assignment of proceeds

Comment: Applying the reasoning of Oliver/Hatcher to the ConsensusDocs language, it appears ConsensusDocs 240 provides nothing more than a promise not to assign without consent. A court may find that if a party breaches the promise under this clause, the breaching party is only exposed to a claim of damages arising from the assignment. Such damages may be difficult to identify and/or prove. Therefore, the Engineer will want to consider the issues raised in this article. Additional language may be advisable, which either voids any assignment or provides for the continued obligation of the assignor to the Engineer.

1 comment:

Stevew said...

Gary,

How does the idea of an engineering contact being a personal services contract play into this, if at all.

Steve