Assumed contracts: Overview, definition, and example
What are assumed contracts?
Assumed contracts are agreements that a party voluntarily takes over or agrees to fulfill, usually in the context of business acquisitions, mergers, or bankruptcy proceedings. When a company acquires another business or its assets, it may assume certain contracts, meaning it agrees to honor the terms and obligations of those agreements.
For example, if Company A acquires Company B, Company A may assume existing supplier contracts, meaning it takes responsibility for continuing those business relationships under the same terms.
Why are assumed contracts important?
Assumed contracts ensure business continuity and legal clarity during acquisitions, restructurings, or asset transfers. Without clear terms, disputes could arise over whether obligations remain in place after a change in ownership.
For businesses, assuming contracts allows for seamless operations, protects existing relationships, and ensures legal obligations are properly managed during transitions such as mergers or bankruptcies. It also helps avoid potential legal claims from counterparties who expect the contract terms to be honored.
Understanding assumed contracts through an example
Imagine a retail chain acquires a competitor’s stores. As part of the acquisition, the buyer agrees to assume the existing leases for the retail locations. This means the buyer takes over the lease agreements and must continue making rent payments according to the original terms.
In another example, a bankrupt software company sells its assets to a competitor. The buyer chooses to assume customer service contracts, meaning it is now responsible for delivering support and maintaining service agreements that were originally in place with the previous company.
An example of an assumed contracts clause
Here’s how an assumed contracts clause might appear in a purchase agreement:
“The Buyer agrees to assume and fulfill all obligations under the contracts listed in Exhibit A, effective as of the Closing Date. The Buyer shall indemnify and hold harmless the Seller from any liabilities arising under such assumed contracts after the Closing.”
Conclusion
Assumed contracts help facilitate smooth transitions in business acquisitions, mergers, and bankruptcies, ensuring that agreements remain in force when ownership or control changes. They provide clarity on obligations and protect existing business relationships.
For businesses, understanding which contracts should be assumed and defining responsibilities clearly in legal agreements helps prevent disputes and ensures operational continuity during significant corporate changes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.