The Corporation Assumption of a Contract

As a small-business owner, at some point, you may deal with the assignment or assumption of a corporate contract. Not all contracts are capable of being assigned or assumed, but under the correct circumstances, you may wish to assign a contract to a third party or assume a contract on behalf of a third party. Always check the terms of the contract first to see whether assumption is possible.

An assumption of contract occurs when one party, the assignee, accepts the benefits and obligations of an existing contract from one of the contract's original parties, known as the assignor. A corporate assumption of contract just means that either the assignee or the assignor, or both parties are corporations. Keep in mind that the other original party to the contract must be notified before assignment can take place, and that the individual who agrees to assign or assume duties on behalf of the corporation must have authority to do so.

The original contract should have a clause stating how contract assignment and assumption are to be handled. This clause may prohibit assignment, expressly permit assignment or specify that assignment is only allowed with the consent of the original parties to the agreement. Additionally, the clause should set forth the notice requirements for contract assignment, if any exist. If the original contract is silent as to contract assignment and assumption, you will need to contact the other party to the agreement and obtain their consent to proceed.

There are two main differences when a corporation assumes a contract. Only authorized individuals may bind a corporation. As a result, you must make certain that the individual assuming or assigning the contract on behalf of the corporation has authority to do so. Typical individuals within a corporation with authority may include executives, board members and high-level managers. The other potential difference with a corporate assumption of contract is that a corporation may be forced to assign or assume a contract due to being dissolved, merged into another corporation or purchased. Under these potential scenarios, a new corporation may be forced to assume the duties of the corporation that no longer exists as a stipulation of the merger, dissolution or purchase.

Depending on the terms of your contract, it may be possible to invoke a contract assignment or assumption clause through a verbal agreement. However, you should formalize the arrangement in writing to avoid any potential disputes in the future. Write a letter to the original party to the agreement stating you are invoking the contract assignment clause in your prior agreement. In your letter, be sure to identify the party assuming your rights and obligations, and provide their contact information.