What if you have a contract with another business or with a person, and there is a significant change in one of the businesses?
Some business changes are small, like a location change, and some are large, like bankruptcy or a name change or one of the parties to the contract being bought by another business.
You might work for a business as an independent contractor and you have a contract with that. Or your business might have a license agreement to sell the licensed products of another business. Or your company may be leasing commercial space from someone.
The simple answer to what happens to a contract when a business changes is, "it depends on the contract."
Contract Sections and Business Changes
Many business contracts include sections dealing with what happens if there is a change in the business. Two contract principles that might affect the need to make a change in the contract are novation and assignment.
Novation is a substitution, including the substitution of one party or obligation for another in a contract. Here's how that works: Party A and Party B are the original signers of the contract. Party A has been bought by Party C, Parties A and B must agree to the novation and sign a novation agreement stating that Party C has been substituted for Party A. Party A is excused from liability by the novation agreement, and Party A gives up any rights against Party B.
A novation agreement may be part of an original contract, or it may need to be signed at the time of the change. In the case of a name change, for example, a novation agreement might be needed in order to make a new contract with the newly named business.
Assignment is a transfer of some property or ownership to someone else, including duties and rights. For example, some independent contractor contracts state that the duties of the contractor can't be assigned or transferred to someone else. Ownership of intellectual property (copyrights, trademarks, or trade secrets) are sometimes transferred to someone else. A contract might include the right to transfer the responsibilities of one of the parties of a contract to another business entity, which might include the assignment to a successor (new) company.
Another option for changing a contract for a business change is to create a letter of agreement that refers to the specific change and have both parties sign it.
Here's an example of an assignment agreement by which the assignor (the party who does the assigning) assigns a stock purchase agreement to an assignee (new owner). The assignee gains all the assignor's rights and interest in the property, and the assignee agrees to perform all "obligations, duties, liabilities and commitments" of the assignor under the agreement.
Contract if a Company Changes its Name
Here is an example of what might happen to a contract if a business changes its name:
"I have an employment contract with a business. I was informed this morning that the company has changed its name and legal entity. They even have a new sign on the building. Does this mean the contract is void? More to the point, does that mean I don't have to abide by the non-compete agreement?"
In these types of situations, a lot depends on the wording of the contract. Some contracts plan for the possibility of changes.
Some contracts specifically state that the parties "now known as XYZ Corporation" or "by any other name" or " by which the party may be titled." or something to that effect. Even if the possibility of a name change isn't specifically mentioned in the contract language, the business doesn't get out of contracts just by changing its name and legal type.
If you think about it, that would be a neat way to avoid debts, by just changing the name of the business. So, no, a name/entity type change doesn't mean a contract is void.
An Example of a Name Change Agreement
You can also sign a separate agreement to acknowledge the name change of a company. In this case, the change-of-name agreement includes:
- A document proving that the name has officially been changed with the state where the business is registered,
- The opinion of an attorney that the change of name was legally done,
- A list of contracts and purchase orders between the two parties,
- The agreement that all rights and obligations of both parties to these contracts are not affected by the change, and
- A statement that all contracts covered by the agreement are amended by substituting the name.
Contracts When a Business is Bought or Sold
If a business has a major change in ownership, (the sale of a business, for example), part of the terms of the sale may be the assignment of the contract to the new owner. If the business sale documents don't specify, you might have to look at the contract itself.
As part of the buy/sell process, a new contract may be substituted for a previous contract, with the agreement of both parties. This is the novation section discussed above.
Contracts When a Business Declares Bankruptcy
The bankruptcy judge in a bankruptcy process decides what happens to active ongoing contracts during the bankruptcy process. You can hire an attorney to protect your interest in the process, including making the debtor (the company in bankruptcy) specifically affirm or reject your contract.
The amounts owed to you under a contract also fall into the bankruptcy process and you become a creditor of the company in bankruptcy. In Chapter 11 (reorganization), the debtor agrees to a plan, which creates new contract rights that replace or supersede pre-bankruptcy contracts.
You should know that if you and the debtor have an ongoing contract that obligates you both to certain requirements (buying and payment, for example), you can't stop doing what the contract requires during the bankruptcy risking being in default.
Disclaimer: If you have a contract with a business and something changes, consult your attorney before you make any decisions, sign a new contract, or make statements that might compromise your status in the contract.