Assignment of contract

What it means

Assignment of contract means transferring one party's entire contractual position, both rights and obligations, to a third person. The newcomer steps into the contract in place of the original party, who leaves it. Unlike the transfer of a single claim, the whole relationship changes hands, for example the tenant, supplier or customer.

It differs from an assignment of a receivable in that obligations pass as well. A claim can be assigned without the debtor's consent, but assigning a contract always requires the other party's consent, because it must accept a new counterparty who will perform in place of the original one.

The Slovak Commercial Code does not regulate assignment of contract as a separate institution. In practice a three-party agreement is concluded on the basis of freedom of contract, or a combination of assigning claims and an assumption of debt is used to achieve the same result.

How it works in practice

It is used when part of a business is sold, when the supplier changes within a group, when a lease passes to a new tenant or when projects are reorganised. In a sale of a business as a whole, contracts pass by law, but when individual assets are sold each contract has to be assigned separately.

The agreement should state exactly when the newcomer takes over, how performance for the period before the transfer is settled, who answers for defects in what was already delivered, and what happens to security, guarantees and insurance. Without that, disputes arise over who pays the invoice for the transitional period.

For tax and accounting, check whether consideration is paid for the assignment. If the transferee pays for an advantageous contract, it may be an intangible asset or a service subject to VAT. The transferor records income and must settle any balances linked to the contract.

What to watch out for

Without the other party's consent, the assignment has no effect against it and the original party remains bound. Many contracts also prohibit assignment or require written consent, so the contract must be checked before the transaction.

The original party may agree, or be required as a condition of consent, to guarantee the newcomer's obligations for a time. Without an express release it may remain liable even after the transfer, which is a significant risk when selling a business.