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Effect of Contract Provision Concerning Assignability

Generally, an employee contract contains a covenant not to compete.  It is presumed that if such a contract stipulates that the contract is assignable, a successor to the employer can enforce such a covenant against the employee.  The rationale behind this rule is that when the proprietor of a business sells the business in its entirety to another person in equity, the seller is presumed to have assigned so much of the benefit of the non competition contract “as is severable and necessary for the protection of the business sold to the purchaser.”[i]  A non compete covenant is a property right that is assignable and transferable in the absence of a provision prohibiting assignment.  Courts have held that a covenant not to compete in an employment agreement is assignable ancillary to the sale of a business in order to protect the goodwill of that business.[ii]  Thus, where an employment agreement incorporating a non competition provision specified that the contract shall extend to the successors and assigns of the employer, the agreement will be enforceable by the successor employer.[iii]  A vendor’s covenant not to compete with the vendee can be enforced by the vendee’s assignee.[iv]  However, some courts have taken a contrary view by holding that a non compete clause is unreasonable and unenforceable where such a stipulation is not ancillary either to a contract for the sale of a business or to existing employment or a contract of employment.[v]

Further, if the employment contract specifically provides that an assignment shall be made only with employee’s consent, a successor to the employer cannot enforce the employee’s covenant not to compete in the absence of such consent. [vi]

Although the law favors assignability of non compete covenants in employment contracts, confusion may arise when the employment contract containing such a covenant is silent as to assignability.  In such a scenario, courts have held that the covenant is assignable absent a contractual, statutory or public policy prohibition.  A clear and unambiguous prohibition is essential to effectively prevent assignment.[vii]  A transfer of employment contracts between corporations does not impose a material change in the obligations and duties of the employees and the transfer does not automatically render a non-compete covenant contained in the employment contracts unenforceable.[viii]

On the other hand, some courts have held that an executory contract for personal services that involves special knowledge, skill, or a relation of personal confidence may not be assigned without the consent of both parties.[ix]  This is especially true “where the personal acts and qualities of one of the parties form a material and ingredient part of the contract.” [x]

[i] Torrington Creamery, Inc. v. Davenport, 126 Conn. 515 (Conn. 1940)

[ii] Saliterman v. Finney, 361 N.W.2d 175 (Minn. App. 1985)

[iii] Mail-Well Envelope Co. v. Saley, 262 Ore. 143 (Or. 1972)

[iv] Schnucks Twenty-Five, Inc. v. Bettendorf, 595 S.W.2d 279, 287 (Mo.App. 1979)

[v] Zellner v. Stephen D. Conrad, M.D., P.C., 183 A.D.2d 250 (N.Y. App. Div. 2d Dep’t 1992)

[vi] Jackson v. Moskovitz Agency, Inc., 672 S.W.2d 400, 403 (Tenn. 1984)

[vii] Special Prods. Mfg. v. Douglass, 159 A.D.2d 847 (N.Y. App. Div. 3d Dep’t 1990)

[viii] Alexander & Alexander, Inc. v. Koelz, 722 S.W.2d 311, 314 (Mo. Ct. App. 1986)

[ix] Sympson v. Rogers, 406 S.W.2d 26 (Mo. 1966)

[x] Alldredge v. Twenty–Five Thirty–Two Broadway Corp., 509 S.W.2d 744, 749 (Mo. Ct. App. 1974)

Inside Effect of Contract Provision Concerning Assignability