Looking for a legal term of art: Assumption? Ratification?
February 26, 2014 7:03 PM   Subscribe

You have a contract with Company A, which goes bankrupt. Company B buys the assets and continues operating under the original contract with you. Assuming that Company B did not simply acquire the contract in the bankruptcy, what is the term for what happened? Did Company B adopt the contract? Assume it? Ratify it? Thanks!
posted by AAAAAThatsFiveAs to Law & Government (8 answers total)
posted by RichardP at 7:33 PM on February 26, 2014

Alternatively, the bankruptcy estate of Company A assumed the contract and then assigned it to Company B.
posted by RichardP at 7:56 PM on February 26, 2014

Company B assumed the contract. It's not a novation as that requires an actual agreement among the parties, nor an assignment as nobody formally said they were assigning their rights and/or obligations under the contract. The term of art for this is "clusterfuck" because that's what happens when nobody signs anything.
posted by sinfony at 8:55 PM on February 26, 2014 [2 favorites]

Company A (the debtor) could have assumed the contract in bankruptcy. (11 U.S.C. ยง 365)

When one company buys another company (or sometimes even just buys all the assets), it usually succeeds to that companies obligations (including contract obligations). It's sometimes called assumption as well.
posted by ReBoMa at 10:21 PM on February 26, 2014

I would call it novation or assignment, depending on the type of contract. Usually rights are assigned and obligations are novated (not that this is an easy distinction, since usually both parties will have some of each).

Your agreement may be required but it doesn't necessarily have to be in writing. So if Company B turns up on your doorstep with a basket of widgets and says, "hey, we've taken over that widget supply contract from Company A" and you shrug, take the widgets and pay Company B at the same rate you would have paid Company A, I would say that you have agreed to a contract with Company B on the same terms as your previous contract with Company.

(OK, so some kinds of contracts do have to be in writing to be of any effect, and there might also be provisions in the particular contract that would make this kind of informal taking over of the contract invalid, but writing is not always necessary. It's just way better to get it in writing so that Company B doesn't turn around later and say "no, we said we'd only perform Company A's contract for 3 months, and you agreed, remember?")
posted by pianissimo at 12:29 AM on February 27, 2014

Not sure what you mean by "Assuming that Company B did not simply acquire the contract in the bankruptcy". Whether or not there was a bankruptcy, absent a novation, Company A needs to have assigned the contract to Company B, and Company B would have to assume it. In a bankruptcy, if the debtor "assumes" a contract, it wants that contract to continue in effect as to the debtor or its assignee. If the debtor sells the contract while in bankruptcy, mechanically there will still have to be an assignment, just like in an asset sale outside of bankruptcy.

If by "buys the assets" you are actually referring to a different acquisition structure, like a merger, it will depend on the structure, but the legal terms involved would be "assignment by operation of law" or the contract "vested" in Company B or Company B "succeeded" to the rights and obligations of Company A in the contract.
posted by odin53 at 1:03 AM on February 27, 2014 [1 favorite]

Minor but important points:

A simple purchase of assets does not include the assumption of obligations.

Many contracts have clauses that prohibit assignment of the obligation to another person or company without the consent of the other. If you are employed and you lease an apartment, for example, you probably cannot just walk away and "assign" the renter's obligation to your unemployed brother.
posted by yclipse at 4:14 AM on February 27, 2014

(Just an aside:

Many contracts have clauses that prohibit assignment of the obligation to another person or company without the consent of the other.

This is true, though the bankruptcy aspect of OP's question adds a spin to this, in that in the bankruptcy context an anti-assignment clause can generally be avoided.)
posted by odin53 at 5:42 AM on February 27, 2014 [1 favorite]

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