What Happens to a Contract When a Business Changes?
Can a Contract Survive a Name Change?
What if you have a contract with another business or with a person, and there is a significant change in one of the businesses. For example, maybe a business changes its name or is purchased by another business or goes bankrupt. What happens to the contract? Let's look at some of these changes.
We are discussing a contract that someone might have with a business that does not involve the change. For example, you might work for a business as an independent contractor and have a contract with XYZ business.
Or your company might have a license agreement with a company, to sell licensed products. Or a business may be leasing commercial space from you.
There are a variety of possible changes that occur to a company that is a party to a contract, including changes in name, changes in ownership (bought or sold, changes in legal structure. And, of course, what happens when a company goes out of business?
What Happens to an Employment Contract if a Company Changes its Name?
Here is one example:
"I have an employment contract with a business. Things are not going well, and 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.
What Happens to a Contract 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/sale process, a new contract may be substituted for a previous contract, with the agreement of both parties. This is called"novation."
What Happens to a Contract 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. Depending on the type of bankruptcy - Liquidation (Chapter 7) or Reorganization (Chapter 11) - you may be included in the list of creditors to be paid during the process.
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 without risking being in default.
Disclaimer: If you have a contract with a business that changes, consult your attorney before making any decisions or making statements that might compromise your status in the contract.