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No-Assignment Provisions in Confidentiality Agreements Don’t Make Sense

28 June 2024

It’s routine for a confidentiality agreement to say, in various ways, that neither party may transfer its rights and obligations under the contract. That doesn’t make sense, and it tells us something about the state of mainstream contract drafting.

The Examples

Below are screenshots from three confidentiality agreement templates offered to the public; I’ll refer to them as the first, second, and third templates. I selected them as a matter of convenience; I could have used instead any number of other templates. In the first two, the relevant provisions are highlighted; in the third, both sentences are relevant, so highlighting is unnecessary.

The First Template

Screenshot 2024-06-23 110605

The Second Template

Screenshot 2024-06-23 110839

The Third Template

Screenshot 2024-06-23 203602

Preventing Transfer of Obligations Doesn’t Make Sense

One can quibble with the terminology used in all three templates: Does it make sense to refer to assigning a contract? (Negotiating and Drafting Contract Boilerplate 37 (Tina L. Stark ed. 2003) says that “clauses forbidding the ‘assignment of contract’ are imprecise and, therefore, should not be used.”) Should you refer to assignment and delegation, or should you use another term? And exactly what transfers do you want to prevent? (See my 2012 blog post for my thoughts on those issues.)

But these extracts raise a more fundamental issue: it doesn’t make sense to prevent the parties to a confidentiality agreement from transferring their obligations under that contract.

The key obligations under a confidentiality agreement are the obligations not to disclose or use confidential information, except as contemplated under the contract. You and I sign a confidentiality agreement; you give me confidential information covered under that contract. I then purport to transfer to someone else my obligations not to disclose or use. But in doing so, I’ve transferred those obligations to someone that doesn’t have that confidential information and so is incapable of performing those obligations! And if I transfer confidential information to them, I’ll breach our confidentiality agreement. So unless I want that liability, I will have accomplished nothing by transferring those obligations. (We don’t even have to get into what kind of obligations one may transfer as a matter of law, and the fact that anyone transferring obligations remains liable for performing those obligations.)

Preventing Transfer of Rights Likely Doesn’t Make Sense, But Preventing Transfer of Remedies Might

What about transferring rights under a confidentiality agreement? Confidentiality agreements primarily impose obligations. It’s hard to imagine what purpose would be served by transferring whatever discretion happens to be granted in a confidentiality agreement.

But transferring remedies under a confidentiality agreement might be an issue. (My 2012 blog post recommends distinguishing between discretion granted under a contract, the right to satisfy a condition under a contract, and remedies under a contract.)

Here’s how a friend of the blog articulated this:

If you agree to keep certain of my information confidential and there is a lender or joint venturer or affiliate of mine who also wants to have the benefit of your confidentiality obligation, it might make sense for me to transfer to them the right to bring a claim for breach of that obligation. To avoid multiple parties claiming that you breached your obligation to me, it might be prudent for you to prohibit such transfers.

But it would make sense to address this in a contract only if there’s some reason to think it might be an issue. And if you wish to address it, do so explicitly—by referring to transfer of remedies under the contract, instead of nebulously referring to “rights”. (If you’re interested in transfer of contract remedies, this 2020 article in the Indiana Law Journal by Paul MacMahon looks like it might be a decent place to start.)

The M&A Context

The second and third templates allow for transfer of obligations if a company is acquired. If a contract doesn’t prohibit such transfers, courts generally permit them.

In that context, confidential information would be transferred. Paradoxically, that could cause problems—the company might be acquired by a competitor of the disclosing party. Of course, the acquirer could use any confidential information only for purposes stated in the confidentiality agreement, and not for competing, but if the confidential information is sensitive, that might be cold comfort. Having the recipient agree in the confidentiality agreement not to compete with the disclosing party would offer additional protection.

It's Systemic

No-assigning provisions aren’t found in all confidentiality agreements, but they’re found in many. That would seem to result from drafters assuming that routine boilerplate that makes sense in other kinds of contracts also makes sense in confidentiality agreements.

One could argue that because prohibiting transfer of obligations in a confidentiality agreement doesn’t accomplish anything, it’s harmless—why worry about it! That’s a suitable position to take for purposes of a given transaction. But templates apply a given approach at scale, so for purposes of templates, it matters that including pointless stuff in a contract clogs up the works. It matters that someone might think the pointless stuff is important. And it matters that including pointless stuff in a contract would seem inconsistent with whatever image of expertise the organization responsible for that contract might want to project.

Also, this isn’t an isolated glitch. Instead, it’s a symptom of a systemic problem.

Contracts have long been created by copying, on faith, from precedent contracts and templates of questionable quality and relevance. One consequence is that mainstream contract drafting is dysfunctional, in terms of how contracts say whatever they say; I’ve made a career out of chronicling that dysfunction.

But it’s routine for contracts to also fall short in terms of what they say. The glitch discussed in this post is an example of that. In my experience, where you find one problem in terms of what a contract says, you can expect to find others. I’ve identified many such problems.

Generally, the transactional world doesn’t rely on scholarship—scholarship is time-consuming, it’s at odds with the expediency-driven mindset required to do deals, and it can make the transactional bar look foolish. So instead, mostly we continue cranking the handle of the copy-and-paste machine, and mostly we rely on conventional wisdom, much of it misguided.