Transfer of rights and obligations under commercial contracts | In Principle

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Transfer of rights and obligations under commercial contracts

Comments on statutory and contractual restrictions on the assignability of agreements.

Unlike share deals, where the subject of the transaction is transfer of the rights to shares in a company, an asset deal, involving sale of an enterprise within the meaning of Art. 551 of the Polish Civil Code, results in a change in the identity of the business and thus the entity which is a party to the contracts connected with the operation of the enterprise.

Under Polish law, there is no instrument enabling transfer of both the rights and obligations under a contract through a unilateral act of just one party to the contract. To achieve this effect, at least two acts are required, namely the assignment of rights and the assumption of obligations.

While assignment of rights generally does not require the consent of the debtor (of other affirmative act on its part), the consent of the creditor is required for an obligation to be passed to another entity.

Sometimes, however (particularly where performance is closely tied to the identity of a party or its individual characteristics, knowhow etc.), commercial contracts will be worded to include limitations on the transferability of the contract—most often in the form of a contractual prohibition on assignment of rights (pactum de non cedendo).

As a rule, regardless of the structure of the planned transaction (including both share deals and asset deals), it is crucial to determine whether the agreements to which the target undergoing due diligence is a party contain any contractual restrictions or exclusions of transferability.

If they do, it should then be determined whether they apply to the planned transaction or—in extreme cases—could result in loss of an essential contract.

If the contract provides for automatic consequences from fulfilment of certain conditions (e.g. termination of the contract in the event of a change in control of one of the parties), before conducting the planned transaction the other party to the contract in question should be notified and its consent obtained to conduct the planned change in ownership structure, or other conditions provided in the contract should be met.

Similarly, in the case of the sale of an enterprise, an organised part of an enterprise or specific assets relevant to the contract, in order to achieve full transfer of obligations, and sometimes also rights (if the contract includes a prohibition of assignment), it will be necessary to obtain prior consent to the transaction from the other party to the contract.

Dr Jarosław Grykiel & Maciej Szewczyk, Wardyński & Partners

See also the chapter by J. Grykiel, M. Szewczyk & I. Zielińska-Barłożek “Corporate Risks Connected with Legal Defects in Shareholder Resolutions” in P. Ciećwierz & I. Zielińska-Barłożek (eds.), Legal Risks in M&A Transactions, Warsaw 2013 (in Polish), pp. 492 and following.