assignment agreement vs novation

Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

What is a Deed of Novation?
What is a Deed of Assignment?

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

Nature of the Contract: The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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What Is the Difference Between Assignment and Novation?

By Jordan Bramis Lawyer

Updated on November 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Assignments

Other differences between an assignment and novation, choosing between assignment and novation, key takeaways.

To further your commercial endeavours, you may wish to transfer your rights under a contract to another party. The primary legal mechanisms for transferring the rights or obligations under a contract to a third party are assignment, which involves transferring benefits or rights and novation, which facilitates the transfer of both rights/benefits and obligations. It is crucial to understand that these concepts are different. Unfortunately, many people tend to confuse the two, leading to unwanted consequences in relation to legal contracts. This article will explore the key differences between the two.

Under a contract, where a party (the original party to the contract) is initiating an ‘assignment’ , they are transferring some or all of their contractual rights to a third party, known as the “assignor”. The recipient of those contractual rights is known as the “assignee”. For instance, a party can transfer the right to receive payment or benefits under the contract through an assignment.

Following an assignment, the assignee gains the right to the benefits of the contract that the assignor has assigned. Furthermore, they gain the authority to initiate legal proceedings, either individually or in conjunction with the assignor. It is important to note, however, that the assignee does not become a contracting party to the original agreement. Under assignment, contractual burdens and liabilities cannot be transferred. Therefore, the assignor retains responsibility for fulfilling any remaining contractual obligations that still need to be discharged.

In most cases, assignment necessitates the consent of the obligor (the party obligated to fulfil the contract). The obligor needs to agree to the assignee taking over the rights held by the assignor. Additionally, the assignor must provide notice to the obligor about the assignment. This notice serves to inform the obligor that they should now deal with the assignee regarding the assigned rights.

By comparison, a novation agreement achieves the transfer of both rights and obligations to a third party. Here, the new party (the “novatee”) steps into the shoes of the original party (the “novator”) and assumes both the rights and obligations.

A novation agreement essentially terminates the contract with the original party and creates a new contract with the new party. A novation agreement means you can substitute one party for another without changing the obligations agreed to in the original contract.

Novation most often arises in big corporate takeovers or on the sale of a business. On takeover, deeds of novation are used to transfer contracts from the seller to the buyer and allow the buyer to carry on the seller’s business.

All involved parties, including the remaining contractual party, the novator, and the novatee, must unanimously agree to the novation. It is a collective decision to replace the old contract with a new one.

Novation creates an entirely new legal relationship. The old contract is set aside, and the new contract, which includes the novatee, comes into effect. Following novation, the novator is released from all obligations and liabilities associated with the original contract.

The choice between assignment and novation depends on various factors.

If a party wishes to maintain some level of involvement and responsibility in the original contract, assignment is often the better choice. It enables the transfer of specific rights while retaining some obligations. For a complete break from the original contract, where a party wishes to shed all obligations and liabilities, novation may be preferential.

One of the most important and sometimes overlooked steps is to document what you have agreed to in writing. Have your agreement written up, signed and stored safely. The area where most disputes and disagreements arise is where parties have not written down what they agree to. This results in a conflict that could have been easily avoided.

When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.

This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.

If you intend to assign your rights under a contract to a third party, you can do so through an assignment or a novation. However, be aware that these differ. An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement.

If you need further assistance with an assignment or novation, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page .

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Government Contract Novation Vs Assignment of Contract & FAR 42.1204 Novation Clause

Assignment of Contract Clause and Government Novation Agreement Business Sales FAR 42.1204

All should be aware that the contracting officer does not have to approve every assignment of contract transactions under the FAR 42.1204 contract novation clause .

Avoid the costly mistake of assuming that the government must approve all novations.
If done improperly, contractors can be found in breach of contract terms and can even face suspension or debarment .

Novation Agreement FAR 42.1204 Definition

In federal government contracting, developing a novation can be somewhat unique because depending on the facts of each case, the original parties may still be responsible for performance to the government. Whereas, in the commercial sector, the contract novation definition means that a new party to the contract essential substitutes the original party. In other words in the commercial sector, the original party’s obligation is discharged and substitution of an original party to a contract with a new party, or substitution of an original contract with a new contract.

Federal Government Contract Novation vs Assignment of Contract

Business Asset Purchase Agreement and Contract Assignment Clause Issues

What is the difference between assignment and novation? Simply executing a business asset purchase agreement and a signed novation contact agreement when buying or selling a business is not the end of the legal analysis when there is a government contract involved. The contracting officer must approve the assignment of government contracts and or novation agreement . Your novation letter should address critical issues that answer the contracting officer’s concerns about the risk of performance. Novating government contracts is all about minimizing the risk to the agency.

In one case , SBA OHA ignored the argument that when novating a contract, its purchase and sale contract with the buyer had the legal effect of divesting the seller of any control over the current contracts. In that case, there was no formally approved novation agreement FAR contract. As a result, the whole transaction went to waste because the parties lacked a full understanding of the rules. A Government contract may not be automatically transferred to a third party. See 41 USC 15.

In government contracting, if there is a performance problem, for example in construction, and a termination for default is an issue, or the surety is called upon for obligations under a performance bond, then the original party may not necessarily be discharged.
Assignment of government contracts decisions, when there is a purchase and sale agreement involving a company that has existing government contracts, should be met with caution.

On the issue of contract novation vs assignment , although the FAR 42.1204 assignment novation clause allows the buying and selling parties to execute a novation vs assignment agreement due to an asset purchase or stock sale, companies should still assess legal issues related to violation of SBA small business size standards.

Companies should always keep the agency involved from the beginning of the process to the end.

41 USC 6305 – Contract Assignment Clause – Prohibition on transfer of contract and certain allowable assignments

Under the federal contract assignment clauses, when there are business sales that involve government contracts, the purchase and sale agreement suggests that the contracts would be transferred to the buyer either through a business asset purchase agreement sale or stock sale.

However, the reality is that although FAR 42.1204 allows for a novation of contract agreement, the contracting officer is not obligated to approve it. A federal government contracting agency, only when it determines it to be in its interest, may accept a third party as the successor in interest when the third party’s interest in the contract arises out of the transfer of all of the contractor’s assets or the entire portion of the contractor’s assets involved in performing the contract. FAR 42.1204 (a). See also How Do Federal Government Contractors Deal With COVID-19 Problems ?

The contracting officer is not forced to approve the FAR novation clause language if the transaction is not in the government’s best interest.
If the government declines to novate a contract, the original contractor is still responsible for performance. FAR 42.1204 (c) contract novation clause.
If the assignment of contract is not recognized by the contracting officer, and the original contractor does not perform, the original contractor can be terminated for default.

Potential SBA Size Standard Violations

When assessing government novation contract law rules, the SBA found in one case that since there was no approved assignment of the contract through an approved government novation agreement, the two businesses were deemed affiliated through the identity of interest rule.

On appeal, OHA found that since there was no formal contract novation, the seller was still responsible for the contract performance, and both companies were in the same line of business. In that case, the SBA also found that there was no clear fracture between the buyer and seller. The two businesses were therefore also affiliated with the newly organized concern rule.

Help With Government Contracting Companies for Sale

Oftentimes, buyers and sellers do not understand the complex regulations involved with government contracting companies for sale. Not only are novation agreements a potential issue, the due diligence needed and the ability to address buyers’ other business relationships that can impact their small business size status can be a huge problem. Contact Theodore Watson at 720.941.7200 for immediate help.

Legal Issues Regarding Novation Vs Assignment

Assignment vs novation. Know the difference: There are several legal issues that arise under federal contract novation agreement FAR law during the purchase and business sales, assignment and transfer of federal contracts when government contracts are involved. Common issues that occur with the assignment novation clause terms include: (1) whether the seller is simply trying to sell the contract with no real assets, (2) how to structure the asset purchase agreement and whether wait for contracting officer novation approval first and (3) to what degree does the contracting officer have to approve the novation. The first step is to be proactive in the early stages of the asset purchase or stock sale process.

Having the right contract clauses in the sales agreement is critical in the event that the contracting officer does not approve the contract novation. Other issues with novating a contract include the buyer maintaining its small business status in the event of recertification or option year decisions. Find out more about Signs of Being Under Investigation (Federal)

For additional questions about what is the difference between assignment and novation for federal contractors buying and selling a business that includes an assignment and FAR novation agreement or assignment of contract issues under FAR 42.1204 novation clause, or need help with government contracting companies for sale, call Watson & Associates’ government contract novation law lawyers for immediate help. Call 1-866-601-5518. FREE INITIAL CONSULTATION.

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Assignment and Novation Agreement: What You Need to Know

Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another. 3 min read updated on February 01, 2023

Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another.

Definition of Assignment

The transfer of a benefit or interest from one person or legal entity to another is referred to as assignment. The obligations or "burden," of a contract, however, are not something that can be transferred.

When viewed from a building contract perspective, an employer can assign their right to have construction work performed along with their right to pursue legal action against the sub-contractor, if they don't perform quality work. Their obligation to pay for the work being performed, however, cannot be transferred to another person or entity. Likewise, the contractor can assign their rights to receive payment for performance of the contract. However, they cannot assign their obligation to make sure the work is completed according to the terms of the contract or respond to any claims, such as those that pertain to defective work that has been performed.

Once assignment has taken place, the assignee becomes entitled to any benefits associated with the contract that are assigned to them. This means that they now have the right and ability to pursue legal action against other parties involved in the contract to enforce their rights under the contract's terms. The assignor is still obligated to the other involved parties and will continue to be held liable for performing their part of the agreement due to the fact that burdens and obligations cannot be assigned.

In normal practice, however, what happens is that the assignee will also take on the performance that the assignor is obligated to and the assignor will request to be indemnified in the event that the assignee breaches the contract or otherwise fails to perform. This is commonly known as an "assignment and novation agreement ". In scenarios such as this, the assignor will still be held liable for any liabilities that they may have incurred before assignment took place.

In construction contract scenarios, issues of assignment frequently arise when considering whether or not collateral warranties that have been granted to a party or parties that exist outside of the main contract may be eligible for assignment. Investors might require the developer to assign rights under the contract against contractors and design teams as a way of providing a measure of security. In addition, they may also require that benefits such as performance bonds or parent company guarantees are also assigned.

Assignment Provisions in Contracts

A lot of contracts either qualify or completely exclude assignment rights . The courts have also confirmed that clauses that prevent contractual parties from assigning benefits without permission from the other involved parties is considered to be legally effective and extends to all of the rights or benefits that may arise from the contract, including those pertaining to remedies. Some other frequently used qualifications pertaining to assignment rights include:

Restricting assignments made without permission from other involved parties, even if said permission is unreasonably delayed or withheld
Only one of the involved parties has the right to assign
Only a specific set of rights can be assigned
Only a certain number of assignments can be made
Assignments can only be made to specific assignees who are named in the contract

In certain agreements, which include prohibitions pertaining to the assignment of rights and benefits, it can sometimes be possible to find the reservation of certain rights that allow for the creation of a trust or even to establish security over the contract's subject matter, rather than assigning the benefits or rights themselves.

Legal and Equitable Assignment

The Law of Property Act is what allows for the ability to legally assign debts or other chosen actions in which the following are notified in an official written document:

The trustee
Any other person considered relevant to the debt

If the assignment in question is in compliance with the formalities outlined in the Act, it is considered legal. If not, it is considered to be what is known as an "equitable assignment." Certain transfers can only be equitable assignments, such as:

Oral assignments
Assignments by way of charge
Assignments of a portion of a chosen action
Assignments in which proper notice has not been provided to the debtor
Agreements to assign

If you need help with assignment and novation agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Novation and assignment

Changing the parties bound to a contract

What is novation, is novation a new contract, what is a deed of novation, why novation can be difficult, when do you use an assignment agreement to transfer a debt or obligation, transfer of a debt, transfer of service contracts.

Novation and assignment are ways for someone to transfer their interest in a contract to someone else.

Whilst the difference between assignment and novation is relatively small, it is an essential one. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations.

In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Statute law has created a few exceptions but they apply rarely.

The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine.

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.

Novation in practice

Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.

Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties.

Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place.

Other examples

The seller of a business transfers the contracts with their customers and suppliers to the buyer. A novation process transfers each contract by the mutual agreement of all three parties.

A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary.

A novation agreement is a new contract that 'extinguishes' the old one.

Because it is a new contract, there can be new terms within it, giving additional rights and obligations.

There are times when and why you should use a deed explains exactly when you need to use one. Novation is not among them.

A Deed of Novation is a relic from long ago when lawyers were even more inclined to cloak their knowledge in obscurity.

One of the main purposes in using the deed format is that it provides the necessity for an unconnected witness to sign the document. So it is that much more difficult for one of the parties to say it was forged or signed a year later than the date shown.

But in a novation, there are at least three parties by definition; three parties who are most unlikely to be connected and each of whom has their separate interest. So you can be pretty sure the agreement has not been tampered with. A witness cannot improve on that. So you do not need a deed.

Another reason to use a deed could be when there is no 'consideration', that is when one of the original contracting parties receives no benefit - monetary or otherwise - in return fot the novation. However, in commercial circumstances you could nearly always argue that there is an advantage to each of the parties. The extinction of the old contract or subjectively more favourable terms within the new contract would both count as fair consideration.

Do you need a deed of novation for your situation? The answer is usually no, as an agreement is fine.

The exception to the rule is that if the original contract was signed as a deed, you need to use a deed to novate it. Real property transaction are by deed. That includes a consent to assign a lease, which has three parties. There are special reasons for that.

There are other examples too, which are more obscure.

When a contract is novated, the other (original) contracting party must be left in the same position as they were in prior to the novation being made.

Novation requires the agreement of all three parties. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

The other original party may not understand the benefit to them of having the original contract novated and require extra information about the process that is time consuming to provide.

They may need extra assurance to be persuaded that they won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).

It is possible that they could play up to delay the transfer and squeeze extra concessions from you.

The only way to transfer your rights or obligations is by an agreement signed by all three parties.

But what happens if you are a service provider selling your business with tens of thousands of customers? You can hardly ask every one of them to sign up to their own separate novation.

In practice, a well drawn original agreement will contain a provision which permits the service provider to assign (transfer its contract) without the permission of the customer.

But what happens if it does not?

In practice what happens is that the buyer 'takes a flyer'. The deal is done in the hope that the customers stay with the new owner.

Maybe the buyer obtains an indemnity from the seller to cover their loss if many leave. Maybe the buyer will write to the customers to encourage them to stay. Maybe the customers simply make the next payment and thereby confirm acceptance in law.

In each of those cases, the acquirer will be safe because the customers remain (or become) bound to the terms of the original contract.

Net Lawman offers an assignment agreement to cover that exact situation, together with a draft letter of the sort that might convince customers to stay with the new owner.

The other situation in which assignment is used is where the new party trusts the original party assigning the contract. For example, a subsidiary company may assign contractual obligations to a parent company confident that the parent will uphold the contract.

A construction company is a subsidary in a group. It is working in partnership with another business on several projects to build houses. The other business is a minor partner in the deal. The partnership has run out of money and the smaller partner is unable to inject any more funds. The parent business is unwilling to have its subsidiary fund the remainder of the projects by itself.

A solution may be for the parent to pay both its subsidiary and the third party for the construction contracts to be assigned to it (in other words, buy the contractual rights from the partnership). The assignment provisions would give the parent the obligation to finish the project, which it may be able to do without the third party.

Assignment transfers benefits only

Even if the assignee promises to take on the liability of the assignor to the third parties, the assignor remains personally liable if they fail to do so. An obligation to a third party cannot be assigned without their consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in construction contracts but can apply in any agreement. If you attempt to assign a contract that cannot be assigned, you risk invalidating the original contract.

Personal obligations and assignment

Be particularly careful of an assignment if your obligations can only be performed personally. A good example would be sale of a hair dressing business. Quite apart from the risk of the clients leaving, the actual forward appointments could be interpreted as contracts with the seller, even though they would have no way to fulfill them because they have sold the business.

Buying the right document

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties. We offer a number of novation and assignment agreement templates for different situations.

For example: You borrow from a lender and you later want to transfer the debt to someone else (maybe a friend, a business partner or a the buyer of your business) so that they become liable to repay the lender instead of you. In this situation you should use an agreement that novates the debt .

This is a common consideration when a business is sold and outstanding debts of the business are transferred to the new owner (perhaps loans of money but maybe also loans of goods for sale).

Alternatively, you could novate in order to change who should pay back a personal loan between individuals.

Transfer of a right to receive the repayment of a debt

For example: You make a loan to someone (it could be money or goods) and later you want to change who receives the repayment (an agreement to change who the creditor is ).

The transaction might relate to the sale of a business where the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

For example: You provide a service to someone and you want to transfer the obligation of providing that service to another person or company.

Again, a common use for a service contract novation agreement is where a business is sold and the buyer takes on the service contracts of the seller. The service could be in any industry, from a fixed period gardening contract to an on-going IT or website maintenance. Novation changes who is providing the service.

Transfer of an architectural or building contract

For example: You buy a building or property development that is still under construction and you want the existing contractor to continue work despite the original contract being between the contractor and the seller.

In this situation you should use a novation agreement for a building contract .

Our standard assignment agreement can be used for most assignments (exceptions given below). It is not specific to circumstances.

Assignment of a business lease

If you wish to transfer a commercial property lease to another business tenant during the fixed term, Net Lawman offers an agreement to assign a lease .

We have an article specifically about assigning a business lease that may be useful further reading.

It is not advisable to assign a residential tenancy agreement. We would suggest that you cancel the original agreement and draw up a new agreement with the new tenants.

Assignment of copyright

We have number of assignment agreements for intellectual property rights .

They are effectively sale or transfer agreements where some rights are retained by the seller (such as to buyback the assigned work, or for the work only to be used in certain locations).

They relate to IP in media (such as a film or a music score) and to inventions.

Assignment of a life insurance policy or endowment policy

These agreements allows you to transfer the rights to receive payments from a life insurance policy or endowment policy. We offer both a deed of assignment of a policy on separation or divorce and a deed of assignment to gift or sell the policy to someone else .

Assignment and collateral warranties in the construction industry

Probably the most common use of assignment in the construction industry today is in relation to collateral warranties.

The collateral warranties given by consultants, contractors and sub-contractors in construction contracts are often assigned to subsequent owners or leases. Assignment can do no more than transfer rights available to the assignor. It is not capable of creating new rights and obligations in favour of an assignee.

So while the client can, in theory, assign the right to have a building adequately designed, it is unclear what right would be transferred to sue for damages in the event of breach. If the developer (who would usually be the assignor) has sold the building or created a full-repairing lease, then their right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

Legal briefing - Novation and assignment of contracts

Publication date: 19 May 2017

In this issue:

What is the difference between novation and assignment?

When is a novation or assignment required and which one do you use, issues to consider when deciding whether to agree to a novation or assignment, executing the novation or assignment.

Commonwealth entities encounter a variety of situations where contractual rights and obligations may need to be transferred from one legal entity to another. This can arise where a supplier is restructuring its operations or as part of a sale of a business. In these situations, there are 2 legal tools available to achieve a transfer of rights or obligations: novation and assignment. This legal briefing sets out some key considerations for Commonwealth entities when considering a novation or assignment.

While this legal briefing looks at novation and assignment of contracts generally, additional issues can arise in the context of interests in land, such as leases – these issues are beyond the scope of this legal briefing.

The following table compares the general principles that distinguish novation from assignment. 1

Table 1: Differences between novation and assignment

A novation is the mechanism by which a contract is terminated and a new contract is made between different or additional parties. 2 The new contract is generally on the same terms as the original contract. A novation has the effect of substituting one party for another party without necessarily changing the rights and obligations under the original contract. The rights and obligations under the original contract can be transferred to the new party.

A novation requires the consent of all the parties to the original contract as well as the consent of the new party. 3 It is a tripartite agreement between the original parties and the new party. Consent of all the parties to enter into the agreement is therefore crucial. 4 A novation usually takes the form of a deed.

Example of novation

The Commonwealth and B have a contract under which B provides certain services.

B is proposing to sell its business to C. C is prepared to take on B’s obligation under the contract with the Commonwealth. The Commonwealth undertakes its due diligence and agrees to the substitution of B with C. For the substitution to occur, a novation is needed. Once the novation is signed, C is responsible to the Commonwealth for the services under the contract.

The following diagram demonstrates this novation.

Diagram 1: Transfer of both rights and obligations

An assignment is the mechanism by which a party to a contract (the assignor) transfers its existing rights and benefits under that contract to a third party (the assignee). 5 Importantly, the assignor cannot transfer its burdens, obligations or liabilities to the assignee through an assignment. 6 This means that the assignor is not released from its obligations under the contract. Further, the assignee does not become a party to the original contract but can enforce their right to receive the assigned benefits.

An assignment does not require a new contract. The assignor must only record the assignment in writing, 7 sign it and provide written notice of the assignment to the other party to the contract. At law it is possible for an assignment of rights to take place without the consent of the other party to the contract. 8 This can be problematic if the other party to the contract prefers to deal with the assignor rather than the new third party. For this reason, most Commonwealth contracts contain a clause which prevents the contractor from assigning its rights under the contract, in whole or in part, without first obtaining the written consent of the Commonwealth. Sometimes the contract will also provide that the Commonwealth is not obliged to give its consent. Sometimes, this clause will refer to the consent not being ‘unreasonably withheld’.

Example of assignment

The Commonwealth and B have a contract under which B provides consultancy services to the Commonwealth. B wants to transfer its right to receive payment for the services to a third party, C. For this to occur, B can assign its rights to receive payment under the contract to C. This can be achieved through a deed of assignment between B and C. At law, the assignment can occur without any involvement of or consent from the Commonwealth. Importantly, B continues to remain a party to the contract with the Commonwealth, so B is still obliged to perform the services and B’s contractual liabilities remain unchanged. However, the third party, C, will have a legally enforceable right to receive the Commonwealth’s payment for the services that B performs.

Although C is not made a party to the original contract between the Commonwealth and B, the practical result of the assignment is that C can enforce the right to receive payment under the contract against the Commonwealth.

The following diagram demonstrates this arrangement.

Diagram 2: Transfer of rights only

Commonwealth entities are often asked to consider requests to novate or assign agreements. These requests can arise with funding agreements, contracts for goods and services and other agreements for a variety of reasons.

Where a change to the underlying contractual arrangements is requested, the Commonwealth entity will need to consider whether the proposed change is acceptable and determine whether a novation or an assignment is most appropriate. 9

Do I use a novation or an assignment?

Is the new party taking over both rights and obligations , with the existing contractor not to have an ongoing role under the contract?

a novation will usually be required.

Is the new party taking over contractual rights only , with the existing contractor continuing to be responsible for performing obligations?

an assignment will usually be required.

The table below outlines some common situations in which the question of novation or assignment might arise.

Table 2: Circumstances that may result in a novation or assignment

When an agency is considering whether to agree to a novation or assignment, there will be a range of matters that will need to be addressed. In some cases, it may be appropriate to terminate the existing contract and undertake a new procurement or funding process.

First, the terms of the existing contract should be considered. The contract may include provisions dealing directly with novation or assignment. Many Commonwealth contracts prohibit novation or assignment without the consent of the Commonwealth entity. This allows the Commonwealth entities to carefully select their suppliers, contractors, funding recipients and other parties that they are dealing with. It is common for these contractual provisions to specify that the Commonwealth will not unreasonably withhold approval for novation or assignment. Conversely, the contract may include a standing consent 11 by the Commonwealth to certain kinds of novation or assignment (for example, within the same corporate group). Even in this case, a formal deed of novation will usually still be required.

Second, when an agency is deciding whether to agree to a novation or assignment, it may need to consider a range of approval processes and risk management requirements that apply to this commitment of relevant money. It may be necessary to check the Public Governance, Performance and Accountability Act 2013 (in particular, s 15, s 16 and ss 25–29), the Public Governance, Performance and Accountability Rules 2014 (in particular, rule 18), the accountable authority instructions and other applicable legislation that may specifically apply to the contract.

Third, although strictly not directly relevant to the novation or assignment, it is common for variations to the contract to be raised at the same time. Agencies should approach any request for a variation as part of a novation or assignment in the same way they would at any other point in the contract period.

Due diligence

The information you need will vary from case to case but might include the following.

Background entity information on the new party

What are the management capabilities of the entity?
Has the Commonwealth previously dealt with the entity?
Is the body a foreign entity? If so, advice may be required as to whether it has executed a binding contract.
Is the body a partnership or unincorporated association? If so, who will be bound by the contract following the novation?
Is the body the trustee of a trust? If so, does the trustee have the requisite authority under the trust deed?
Do you have information on any relevant ‘fit and proper person’ considerations?

Financial status information

How does the financial status of the new contractor compare with that of the existing contractor?
Should you seek a parent guarantee or other security (is the body a $2 company)?
Do you require independent financial advice on any figures that the new party has provided?
Can the new party meet the insurance requirements specified in the contract?

Evidence of the company’s ability to perform the contract

What is happening to any key personnel under the contract? Are they moving to the new party?
Will the new party have access to all relevant facilities and specialist equipment?
Does the new party hold all relevant licences and registrations?
Do you have evidence that the company will satisfy the conditions or requirements of the contract – for example, will it hold funding in a special account or satisfy milestone requirements or any relevant eligibility criteria for funding?

Proposed transitional arrangements

If it is decided that a novation or assignment will be agreed to then it may be necessary to put transitional arrangements in place. Matters that may need to be considered will include the following:

What are the interim arrangements for performance of the activity (for example, arrangements between the time the novation is agreed to and the deed of novation is executed)?
Is there a transition plan?
What resources will be needed to manage the transition? Who will bear the cost?

Novations: matters to consider

Is the Commonwealth satisfied that the new contractor can perform the obligations under the contract and manage risk? Is the new contractor an acceptable entity to contract with in terms of due diligence process on probity issues, financial viability and capability?
Who will be liable for past performance or defaults before the new contractor takes over? Will the existing contractor remain liable for its performance or will the new contractor take on responsibility for any problems with the original contractor’s performance?
Will the novation have any impact on subcontracts or other contracts – for example, contracts with other parties working on the same site?
Are there any issues with the existing contractor’s performance that should be addressed and finalised before agreeing to the deed of novation? Make sure that you do not inadvertently make unintended amendments to the contract. For example, an acknowledgement of correspondence about a proposed novation which mentions a related delay in delivery may be taken to be acceptance of the delay.
Are there specific issues for the particular type of contract? For example, where a grant agreement deals with assets purchased with the grant, you may need to ensure those assets are being transferred to the new contractor (unless otherwise agreed).
Are there any existing securities or financial arrangements under the original contract that need to be replaced or updated? For example, even if both the existing and new contractor are subsidiaries of the same parent entity, an existing parent guarantee or other security may need to be amended to cover the new contractor. There may also be Personal Property Security Register entries that need to be updated.
At what point will the new contractor take over from the existing contractor: the date the novation deed is signed or a different date?
Are there any additional costs and who will bear these costs? Usually the party that is seeking the novation is required to meet the other party’s costs.

Assignments: matters to consider

Is the Commonwealth satisfied that the assignor can continue to perform its obligations under the contract without receiving payment?
Does the assignor have financial viability issues? Has the assignor sold its right to receive payment from the Commonwealth as part of a settlement of a debt with a creditor?
What is the underlying reason for the proposed assignment?
Is the proposed assignment detrimental to the Commonwealth?
Does the contract between the Commonwealth and the proposed assignor propose to create a confidential relationship or an enduring relationship? Does the Commonwealth want to have any engagement with the proposed assignee?

Once an agency has decided to accept a novation or assignment, the new arrangements must be recorded. The original contract may establish the form of instrument required to execute the novation or assignment. 12 In any event, the instrument may need to reflect the following.

A deed of novation will typically:

substitute one party for another
include mutual release of future obligations under the original contract between the Commonwealth and the original contractor
clearly specify responsibilities and liability of the original contractor and the new contractor for the pre-novation period – often supported by indemnities
include representations and warranties with respect to the power of the original contractor and the new contractor to enter into the deed of novation
include an agreement as to costs that the parties will bear in connection with the preparation, execution and completion of the novation – it is common for the other parties to pay the Commonwealth’s costs.

A deed of assignment will typically:

unconditionally transfer the relevant benefit to the assignee, giving the assignee complete control of that benefit, including the right to take legal action to enforce it
clearly specify whether there will be a redemption or reassignment in the future – for example, upon repayment of a loan
confirm arrangements for the ongoing performance of the contract by the assignee
include agreement as to costs to be borne by the parties in connection with the preparation, execution and completion of the assignment – it is common for the other parties to pay the Commonwealth’s costs.

1 See generally Olsson v Dyson (1969) 120 CLR 365, 388.

2 See Olsson v Dyson (1969) 120 CLR 365, 388.

3 See Olsson v Dyson (1969) 120 CLR 365, 388. Note that, in Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71, the Full Federal Court held that it is possible for a contracting party to prospectively authorise a novation to be made by another party unilaterally. See also CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335,134.

4 See F ightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473, 491–492; and Vickery v Woods (1952) 85 CLR 33, 345.

5 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 26.

6 ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338, 346 [12].

7 This is a legislative requirement in each state: see, for example, Property Law Act 1958 (Vic) s 134.

8 See Olsson v Dyson (1969) 120 CLR 365, 388.

9 In CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, [133], Sackville AJA (Bathurst CJ and Campbell JA agreeing) observed that the end result in a case of novation and a case of assignment may be similar.

10 In some cases the contract may require agency approval to some of these changes or other amendments to the contract. This is different from a novation or assignment.

11 See note 3.

12 In Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71, the Court stressed the importance of drafting novation and assignment clauses in the original contract clearly to avoid ambiguity when one or more parties later seek to novate or assign.

Deputy General Counsel Commercial

Senior Lawyer

The material in this briefing is provided to AGS clients for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.

Assignment and Novation: Spot the Difference 12 November 2020

EPC Contract
Power Plant
Transfer of rights

The English Technology and Construction Court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an EPC contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits.

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

Key contacts

Rebecca Williams

Partner London

Mark McAllister-Jones

Counsel London

"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

Assignment And Novation Agreement

Jump to Section

What is an assignment and novation agreement.

An assignment and novation agreement is a contract between two parties where one gives up their rights and responsibilities under an original contract. An assignment cancels the original contract and transfers the rights and responsibilities of one of the parties to another, third party. In novation, one of the parties surrenders their rights but retains the duties they took on under the original contract.

Each of these agreements allow a contract party to give up their rights if they desire. The specific type of agreement necessary depends on whether both parties can agree to removing both rights and responsibilities and canceling the original agreement

Common Sections in Assignment And Novation Agreements

Below is a list of common sections included in Assignment And Novation Agreements. These sections are linked to the below sample agreement for you to explore.

Assignment And Novation Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.4 5 ex10-4.htm ASSIGNMENT AND NOVATION AGREEMENT , Viewed September 18, 2022, View Source on SEC .

Who Helps With Assignment And Novation Agreements?

Lawyers with backgrounds working on assignment and novation agreements work with clients to help. Do you need help with an assignment and novation agreement?

Post a project in ContractsCounsel's marketplace to get free bids from lawyers to draft, review, or negotiate assignment and novation agreements. All lawyers are vetted by our team and peer reviewed by our customers for you to explore before hiring.

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Wilberforce Agyekum is an attorney with 16 years of experience practicing in areas of contracts, immigration, and criminal law. Wilberforce received a Bachelor of Science degree from Washington Adventist University, and Juris Doctorate from Seattle University School of Law.

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What Is Novation?

How novation works, novation vs. assignment.

Novation FAQs

The Bottom Line

Corporate Finance

Novation: Definition in Contract Law, Types, Uses, and Example

Investopedia / Julie Bang

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

To novate is to replace an old obligation with a new one.
In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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Canada: Novation Or Assignment, That Is The Question

In the context of asset acquisition, and assuming that the target's contracts are assets being transferred to the purchaser, the transfer of contracts typically requires the parties to the transaction to go through either the novation process or assignment of the contract from the seller to the purchaser.

Novation is a trilateral agreement between the original parties to a contract and the purchaser seeking to replace the seller to the contract. Novation transfers not only the rights and benefits under the original contract to the purchaser, but also the obligations, thus releasing the seller from all obligations under the original contract. All parties to the original agreement need to consent to the new agreement.

Novation has been referred to as the "Hail Mary" defence for parties seeking to avoid contractual liability, however, the standard of establishing novation is quite high. The Supreme Court of Canada (the SCC ) has established a three-factor test for establishing novation. The party asserting novation must prove:

the purchaser assumes complete liability;
the creditor (one of the existing party to the original contract) must accept the purchaser as principal debtor and not merely as an agent or guarantor of the seller; and
the creditor (one of the existing party to the original contract) must accept the new contract in full satisfaction of, and as substitution for, the old contract. [1]

The SCC also stated that in the absence of an express new agreement, a court should not find novation unless the circumstances are especially compelling. [2]

Assignment and assumption, on the other hand, transfer the contractual rights and benefits held by the assignor/seller to the assignee/purchaser, but not the assignor/seller's obligations under the contract. The burden under the original contract remains with the assignor/seller, thus the assignor/seller can be held liable if the assignee/purchaser fails to perform under the contract. The assignor/seller can protect itself from potential liability by obtaining an indemnity from the assignee/purchaser.

Unlike novation, an assignment does not extinguish the original agreement and does not create a new and separate agreement. The original contract remains in force. Also, unlike novation, depending on the terms of the subject contract, an assignment of the contract may not require the consent of all parties to the agreement. Depending on the terms of the agreement, the assignor/seller usually only needs to provide a notice to the non-assigning party.

If the contract is silent as to its assignability, then the courts have held that the contract is generally assignable, except for personal services contract, where consent must be obtained. [3] The SCC has held that personal services contracts are contracts based on confidences, skills or special personal characteristics such as to implicitly limit the agreement to the original parties, [4] and the determination of whether a contract is personal services contract is often made by the courts.

Assignment and assumption may be more convenient for the seller than novation given that the seller may not need to ask for consent from a third party to assign its interest in an agreement to the purchaser, however, the seller needs to be aware of the potential liabilities if the purchaser fails to perform under the assigned contract. Although novation can protect the seller from such future liabilities, it is a more cumbersome process for all parties involved, and may not be feasible if the third party refuses to provide consent. Therefore, it is essential for parties to assess their relationship with the third party before proceeding with novation.

[1] National Trust Co. v Mead et al. [1990] 2 SCR 410 (SCC).

[3] Canadian Encyclopedic Digest, 4 th ed , ( Thomson Reuters Canada, 2016) at Title 35, Contracts, XIII 1(d)(i).

[4] Rodaro v. Royal Bank of Canada , 2002 CanLII 41834 (ONCA).

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Assignment vs Novation in New Zealand

By Grace Holden

Updated on January 28, 2021 Reading time: 5 minutes

What Is an Assignment?

What is a novation, what are the differences between an assignment and a novation.

In commercial dealings, you may find yourself having to transfer a contract . There are two common ways of doing this; through assignment or novation. Although both reach the same outcome – a transfer of a contract – each process does so in a different manner and leaves you and other contracting parties in different positions. This article will elaborate on the difference between assignment and novation when transferring a contract.

An assignment of a contract is when an individual (‘the assignor’) assigns their benefits under the agreement to a new person or business (‘the assignee’).

For example, an owner of another business might owe you a debt. In this case, you can assign the right to be paid the debt to one of your employees, by entering into a deed of assignment.

Under the assignment process, however, an individual could not assign their contractual obligations to a new person or business. This new party could inherit the right to payment for a service, but could not be assigned to provide that service. This means that the assignor may continue to be responsible for carrying out their contractual obligations even after they have assigned the contract to a new party.

For example, if the business owner is only obligated to pay this debt on the basis that you will provide them with free products, they will not have to pay until you have provided these goods. You could not assign this obligation to provide goods to your employee, even if you have assigned them the benefit of being paid the debt owed.

Some contracts may contain a term that prohibits you from undergoing an assignment. However, it is a general rule that if a contract does not include such a term, you can undertake an assignment.

A novation is when an individual (‘the novator’) transfers its benefits, rights and obligations under a contract to a new person or business (‘the novatee’). This means that the novator no longer has to carry out any obligations under the contract.

For example, in a novation, you could transfer the benefit of being paid the debt owed to your employee, as well as the obligation to provide goods. You would no longer be obliged to help in the provision of the goods, nor would you be entitled to be paid the debt owed.

Essentially, a new contract has formed with the novatee and the other party to the contract.

1. Transfer of Benefits Versus Complete Replacement

Under an assignment, you can only transfer the benefits you receive from a contract to this new person or business. In contrast, through novation, you can transfer both contractual benefits and obligations to this new party. They will completely replace you as a contracting party.

2. Liability of the Original Party

As you can only transfer your contractual benefits through assignment, the contract may require you to continue performing any obligations.

Under a novation, this new person or business replaces you, and you cease to be a party to the contract . Hence, you no longer have an obligation to provide the goods or services that the agreement required you to supply, once a novation takes place.

This distinction is crucial if you are the ‘original party’ – either the assignor or the novator. Depending on the type of transfer you underwent, you may or may not still have obligations under that contract.

3. Consent of the Other Party to the Contract

Given the transfer of responsibility in a novation, it is a requirement that all contracting parties have consented to it. This allows all parties to ensure that:

the new person or business can fulfil the contractual obligations they are inheriting; and
the new person or business has sufficient skill to do so.

Since a transfer cannot occur under an assignment, consent from the other parties to the contract is not always necessary. However, there may be a term in the contract that requires approval from this other party. Therefore, it is useful to ensure that you are entirely aware of your contract’s contents before engaging in an assignment.

Key Takeaways

An assignment and a novation can transfer a contract. However, both differ in three key ways. Under an assignment, you can only transfer contractual benefits. Through novation, a new contracting party completely replaces you as a party to the contract. This means that your contractual obligations cease once a novation has occurred, yet can continue under an assignment. Therefore, consent from the other party to the contract may not always be necessary for an assignment. However, it is a requirement for a novation to take place.

Your contract may prevent you from undergoing an assignment without the consent of the other parties involved. Alternatively, your contract may prevent an assignment altogether. Therefore, you should understand the contents of your contract. If you have any questions about assignments or novations, contact LegalVision’s contract lawyers on 0800 447 119 or complete the form on this page.

Under an assignment, you transfer the benefits you receive from a contract to a third party whilst continuing to fulfil your obligations under the contract.

It is a general rule that if there is no exclusion of assignment in your contract, you may assign it. However, if there is a term that excludes assignment, you cannot do so. Likewise, if there is a term that only allows assignment with the other contract party’s consent, this must occur.

A novation is when a new person or business replaces you as a contracting party and inherits your rights and obligations under that contract.

There are three differences between an assignment and a novation. Firstly, under an assignment, you only transfer the benefits of the contract to the new party. In a novation, you transfer both your benefits and contractual obligations. Secondly, due to this complete transfer that occurs in a novation, the original party no longer has any contractual obligations. In an assignment, the original party may still have to fulfil these obligations. Thirdly, the other contracting parties are always required to consent to a novation, whilst it is only necessary for an assignment if specified in the contract.

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101 on Assignment and Novation Agreements

By aqila zulaiqha zulkifli ~ 6 january 2024.

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As a general rule, parties to an agreement must perform their respective obligations set out therein. However, where such performance becomes unfeasible or impossible to perform, parties may consider novating or altering the agreement. The present article, shall focus on novation of the said agreement.

A novation of an agreement is summarized as when an agreement is made between two contracting parties to allow for the substitution of a new party for an existing one.

There could be two (2) classes of novation [1] , that is:

where a new contract is substituted for an old one between the same parties; and
where a new contract is substituted for an old one between different parties.

Novation is provided for in Section 63 Contracts Act 1950 as follows:

“Section 63 Effect of novation, rescission and alteration of contract

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

Several examples are reproduced below:

A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
A owes B RM10,000. A enters into an arrangement with B, and gives B a mortgage of his (A's) estate for RM5,000 in place of the debt of RM10,000. This is a new contract and extinguishes the old.

Novation requires the consent of all parties as a new contract is substituted for an existing contract and a former party is discharged. Whether there was is no written consent, to novation may, however, be inferred from conduct and not only by way of express words [2] .

Unlike assignments (See our article on Assignment of Debt in this link ), a novation is not to assign or transfer a right or liability. Rather, it is to extinguish the original contract and replace it with another [3] .

The effect of it is that the original contract between parties need not be performed. It is a practical way to rescue a transaction amicably between parties and to avoid a situation where a party to the agreement is stranded without recourse or is forced to resort to litigation to recoup it’s losses.

[1] See the High Court case of Malaysian International Merchant Bankers Bhd. V. Datuk Mohd. Salleh & Anor. [1988] 1 CLJ Rep 786. [2] See the High Court case of Malaysian International Merchant Bankers Bhd. V. Datuk Mohd. Salleh & Anor. [1988] 1 CLJ Rep 786 . [3] See the High Court case of H & R Johnson Tiles & Anor v H & R Johnson (M) Bhd [1998] 4 MLJ 13

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Assignment vs Novation: Everything You Need to Know
Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a ...
Novation vs Assignment: Which One Is The Correct One?
Novation is the act of replacing one party in a contract with another party, while assignment is the act of transferring rights or obligations from one party to another. Novation is the proper term when a new party is being substituted for an existing party in a contract. This new party assumes all of the rights and obligations of the original ...
Assignment or Novation: Key Differences and Legal Implications
Assignment. Transfer of rights or obligations. Transfers both the benefit and the burden of a contract to a third party. Transfers only the benefit of a contract, not the burden. Consent Required. Novation requires the consent of all parties (original parties and incoming party).
Assignment vs. Novation: What is the Difference?
However, be aware that these differ. An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement. If you need further assistance with an assignment or novation, our experienced contract lawyers can ...
FAR 42.1204 Novation Clause vs Assignment of Contract
Novating a contract that involves a federal government contract can be painless so long as buyers and sellers of businesses understand how the process works. In addition, before committing to a future sale or purchase of a business, understand the difference between an assignment vs novation.. All should be aware that the contracting officer does not have to approve every assignment of ...
Assignment and novation
If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third ...
Assignment and Novation Agreement: What You Need to Know
Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another. Definition of Assignment. The transfer of a benefit or interest from one person or legal entity to another is referred to as assignment. The obligations or "burden," of a contract, however, are not something that can be ...
Novation And Assignment: What Is The Difference?
A novation process transfers each contract by the mutual agreement of all three parties. A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary. Is novation a new contract? A novation agreement is a new contract that 'extinguishes' the old one.
Legal briefing
Table 1: Differences between novation and assignment. Novation. A novation is the mechanism by which a contract is terminated and a new contract is made between different or additional parties. 2 The new contract is generally on the same terms as the original contract. A novation has the effect of substituting one party for another party without necessarily changing the rights and obligations ...
Assignment, novation and construction contracts
Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the ...
Assignment and Novation: Spot the Difference
Novation. Whereas assignment only transfers a party's rights under a contract, novation transfers both a party's rights and its obligations. Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the ...
Contracts: The critical difference between Assignment and Novation
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby ...
Differences Between Assignment and Novation
As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits. But there are other differences between the two that business owners must be aware of. 1.
Novation Agreement: What is a novation agreement (2023)?
Novation vs Assignment: Novation in contract and business law is different from assignment. Assignment is generally valid as long as the party is provided notice whereas a novation requires agreement of all parties. An assignment only passes along benefits. whereas a novation transfers both benefits and obligations.
Assignment And Novation Agreement: Definition & Sample
An assignment cancels the original contract and transfers the rights and responsibilities of one of the parties to another, third party. In novation, one of the parties surrenders their rights but retains the duties they took on under the original contract. Each of these agreements allow a contract party to give up their rights if they desire.
Novation: Definition in Contract Law, Types, Uses, and Example
Novation is the act of replacing one party in a contract with another, or of replacing one debt or obligation with another. It extinguishes (cancels) the original contract and replaces it with ...
Contracts: The Critical Difference Between Assignment and Novation
Assignment and novation in the Construction Industry. Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party.
Novation
Novation agreement has two different meanings in different contexts. While in contract law, it refers to replacing an existing party or obligation with another. ... Novation vs Assignment. Although novation is an alternative to the assignment, they both have differences. The former allows all the parties to substitute any of them with another ...
Canada: Novation Or Assignment, That Is The Question
The original contract remains in force. Also, unlike novation, depending on the terms of the subject contract, an assignment of the contract may not require the consent of all parties to the agreement. Depending on the terms of the agreement, the assignor/seller usually only needs to provide a notice to the non-assigning party.
Assignment vs Novation in New Zealand
There are three differences between an assignment and a novation. Firstly, under an assignment, you only transfer the benefits of the contract to the new party. In a novation, you transfer both your benefits and contractual obligations. Secondly, due to this complete transfer that occurs in a novation, the original party no longer has any ...
Assignment and Assumption Agreement and Optional Novation
An agreement to be used when a party transfers specified contracts to another party, including an assignment of all of its contractual rights and delegation of all of its contractual duties. This form contains provisions to incorporate an assumption of the delegated obligations and an optional novation into the assignment agreement. It also includes common representations and warranties ...
101 on Assignment and Novation Agreements
Novation is provided for in Section 63 Contracts Act 1950 as follows: "Section 63 Effect of novation, rescission and alteration of contract. If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Several examples are reproduced below:

Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

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