Very often, contracts prohibit assignment without the other party’s consent. If you think you might ever want to assign a contract (bearing in mind that a merger or sale of the business can trigger assignment), then this kind of provision should generally be modified by adding that the other party’s consent cannot be unreasonably withheld, conditioned or delayed.
Without this language, consent can generally be withheld as long as doing so does not rise to the level of “abuse of rights,” a theory difficult to prove (i.e., proof of intent to harm or a violation of good faith is required).
Adding the language recommended above will require the other party to demonstrate some legitimate reason for denying consent, such as the proposed assignee is financially inferior to the assignor; the assignor is in default; or the proposed assignee cannot comply with the existing terms of the subject agreement.
In a recent case, the court found that a landlord withholding consent for competitive reasons was not reasonable (i.e. the proposed assignee would be operating a business competitive with the landlord’s nearby business). Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hosp. Service Dist. No. 1, 426 F.3d 738 (5th Cir. 2005). The court noted that the landlord’s objection must be based on ownership and operation of the leased property, not the landlord’s “general economic interest.” The court held that the competitive concerns did not relate in any way to an objective evaluation of the proposed assignee as a tenant and were not a reasonable basis for denying consent. This is the first time Louisiana contract law has been interpreted in this fashion. Historically, economic reasons were a permitted basis for refusing consent to assignment.
Avoid becoming trapped into contracts, including leases, by making sure the other party must act reasonably if you need to request consent to assignment. On the flip side, be aware that if your consent to assignment is requested, refusing to grant it for competitive reasons may trigger a claim that you’ve breached the contract. Whether you can successfully defend such a claim will depend largely on the wording of the assignment provision and whether it expressly permits withholding consent for competitive reasons.