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. 4 min read
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 contract to a third party, with the consent of the original counterparty.
The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.
The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced.
Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.
In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.
Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.
Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.
It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.
A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.
Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.
Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:
- The purchaser accepts complete liability
- The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
- The creditor to the original contract accepts the new contract as the replacement for the old one
Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.
If you need help determining if assignment vs. novation is best for you, you can post your job 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.
Hire the top business lawyers and save up to 60% on legal fees
Content Approved by UpCounsel
- Contract Transfer
- Novation Agreement
- What is Novation of Contract
- Novation of Contract
- Contract Novation Letter
- Deed of Novation
- Contract Novation
- Loan Novation Agreement
- Assignment of Rights Example
- Contract Novation Agreement
- Contact support
- Returning Customer?
- Sign in to your account
- New Zealand
- South Africa
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.
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.
Assignment and Novation: Spot the Difference 12 November 2020
- Transfer of rights
- EPC Contract
- Power Plant
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.
"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.
  EWHC 2537 (TCC)
 See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd  EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd  EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited  EWCA Civ 331, reported in our article here .
 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 .”
 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1 AC 85
Wfw further strengthens singapore disputes offering with new senior hire, wfw advises guinea as us$15bn simandou project core documents signed, wfw continues to excel in energy and infrastructure league tables, follow us on.
- Mining and Commodities
- Oil and Gas
- Corporate Jets
- Containers and Logistics
- LNG and Offshore
- Commercial Shipping
- Ports and Terminals
- Loan Portfolios
- Corporate Trust and Agency
- Debt Capital Markets
- Equity Capital Markets
- Structured Finance
- Corporate and Acquisition Finance
- Joint Ventures and Strategic Alliances
- Real Estate Disputes
- ECA Finance
- Islamic Finance
- Real Estate Finance
- Project Finance
- Asset Finance and Leasing
- Private Equity
- Hotels and Hospitality
- Environment, Health and Safety
- EU and Competition
- Financial Services Regulation
- Restructuring and Insolvency
Looking for someone?
Or view everyone
More about us
Visit our Insights Hub
The Sustainability Imperative – Part 2
Climate change and directors’ duties – clientearth v shell decision provides comfort for directors, a greener voyage: the eu emissions trading scheme finally given the all clear to set sail for maritime.
Enquiry type General New Client Accounts Recruitment
Please leave this field empty.
UK: 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 the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.
Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.
Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.
Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.
The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.
The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.
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. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.
If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.
Reference: Davies v Jones  EWCA Civ 1164 .
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 07/06/2010.
© Mondaq® Ltd 1994 - 2023. All Rights Reserved .
Login to Mondaq.com
Password Passwords are Case Sensitive
Forgot your password?
Why Register with Mondaq
Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms
Articles tailored to your interests and optional alerts about important changes
Receive priority invitations to relevant webinars and events
You’ll only need to do it once, and readership information is just for authors and is never sold to third parties.
We need this to enable us to match you with other users from the same organisation. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use.
- Practical Law
- Free trial Free trial
- Sign in Sign in
Practical Law UK Glossary 1-107-6442 (Approx. 4 pages)
- Lending: General
- After Death
- General Contract and Boilerplate
- Security and Quasi Security
What is the difference between an assignment and novation?
Sometimes we see clients getting confused between what an assignment is and what a novation is. This article answers that. Both are often used where one company wants another to step in and fulfill its role in a contract.
How does an assignment work?
In an assignment, the person assigning the contract to another person is called the “Assignor”. The person being assigned the contract is called the “Assignee”. It is the Assignee that receives the benefit of the contract. Some contracts cannot be assigned without the consent of the other party to the contract, and some contracts may expressly prohibit assignment. If there is no provision concerning assignment, then the general position is that the contract can be assigned to another. If the contract is assigned to the Assignee, they must perform their part to the contract. As such, the other party will usually want to check that the proposed Assignee has sufficient skill and finance to carry out the contract. Therefore, it is common for there to be an assignment provision in the contract that accounts for this, so that the other party can withhold consent if the proposed Assignee fails to meet those criteria.
It is important to note that although the Assignee is expected to perform the contract, they do not carry the burden of the contract. In other words, if the Assignee fails to perform their part of the contract, the Assignor remains liable. As a result, if the Assignee is insolvent then the other party can seek recourse from the Assignor or demand that they perform the contract. However, it may be that the Assignor is no longer able to meet a demand made under the assigned contract. Thus, it is best practice to perform due diligence on the proposed Assignee before the contract is assigned to them.
What about a novation?
In a novation, the new party, known as the “Novatee”, does not take over the existing contract. Rather, the Novatee enters into a new contract with the other party/continuing party. The original party that has exited the contract between them and the other party is called the “Novator”. Unlike an Assignor, the Novator is released from their obligations under that contract. As such, they do not carry the burden of the contract. It is the Novatee that carries the burden of the contract entered into subsequently. Consequently, if the Novatee fails to perform the contract, the continuing party cannot seek recourse from the Novator. Thus, a novation is of higher risk to the continuing party than an assignment.
In forming any contract, you should ensure that the contract does not allow the other side to novate the contract prior to obtaining your consent. Prior to entering into a novation, the continuing party should do due diligence on the proposed Novatee to certify that they are sufficiently capable of performing the contract.
Generally a good option is for a contract to be novated – it is then like the new party steps into the shoes of the old and there are fewer questions about who is doing what. However, there can be reasons why an assignment is better. If you have any questions about this then we would be happy to discuss.
This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact Steven Moe at [email protected]
PHONE: +64 3 348 8480 FAX: +64 3 348 6305
PHYSICAL ADDRESS: Level 1, 60 Cashel Street Christchurch 8013, New Zealand
POSTAL ADDRESS: PO Box 744 Christchurch, 8140, New Zealand
PHYSICAL ADDRESS: 1 Rimu Street, Riccarton, Christchurch 8041, New Zealand
POSTAL ADDRESS: PO Box 8020, Riccarton, Christchurch, 8440, New Zealand
PHONE: +64 3 348 8480 FAX: +64 3 348 6305
PHYSICAL ADDRESS: Level 1, 80 Rolleston Drive , Rolleston, 7614, New Zealand
PHONE: +64 3 755 8673 FAX: +64 3 755 8073
PHYSICAL ADDRESS: 26 Weld Street, Hokitika 7810, New Zealand
POSTAL ADDRESS: PO Box 44, Hokitika 7842, New Zealand
Parry Field Charitable Foundation
- Share on Facebook
- Share on LinkedIn
- Share on Email
Assignment and Novation
What are assignment and novation clauses.
The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.
Assignment and novation clauses
Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.
The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:
- assignment, for the transfer of benefits; and
- novation, for the transfer of rights/benefits and obligations
Each has unique features that must be taken into account when deciding which is the preferred option.
A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.
After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.
By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.
A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.
It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.
Option 1 – Assignment, novation and other dealings – consent required
A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].
Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld
(a) [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld .
(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:
(i) [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];
(ii) [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;
(iii) the proposed assignee is a competitor of [ insert name of Party B ]; or
(iv) [ Insert name of Party B ] is in dispute with the proposed assignee .
Click here for information on how to use this boilerplate clause.
A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.
Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.
A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.
The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.
The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause. Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.
A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:
- extraneous or disassociated from the subject matter of the contract;
- materially inconsistent with any provision(s) of the contract; or
- based on collateral or improper considerations.
It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.
Assignment and Novation Difference
Published on 13th August, 2016 by Benjamin Li Yong Le
Many people even lawyers are confused by the difference between assignment and novation. This article will discuss and clarify any doubts between the two legal concepts.
Everyday I see people "assigning" contracts and other rights without knowing what assignment entails. Today I will discuss what an assignment actually is and whether novation should be a more appropriate option.
An assignment involves the transfer of an interest or benefit from one person (“Assignor”) to another (“Assignee”). However, the “burden”, or obligations, under a contract cannot be transferred.
Thus, an assignment usually applies to assignments of tenancies or debts whereby the Assignor still retains responsibility of the contractual obligations, and only gives away the benefits.
The Assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned.
In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified (contractual obligation whereby one party agrees to pay any losses or damage suffered by the other party) against any breach or failure to perform by the assignee. The assignor will remain liable for any past liabilities incurred before the assignment.
Usually when people say they want to "assign" something, they are actually referring to the concept of novation.
Novation is a legal mechanism whereby one party can transfer ALL its obligations under a contract and ALL its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract. A novation requires the agreement of all THREE parties involved - the assignor, the assignee and the third party to whom the rights are being transferred.
About the Author - Benjamin Li Yong Le
Benjamin Li Yong Le (“Ben”), is an Advocate & Solicitor of the Supreme Court of Singapore. Ben is currently running his own boutique corporate and commercial law firm under the name and style of L’Avocat Law.
Read More Posts
Share This Article:
- Search Search Please fill out this field.
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.
- 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.
Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.
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.
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.
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 ."
Selling Your Home
Corporate Finance Basics
- Terms of Service
- Editorial Policy
- Your Privacy Choices
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
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.
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  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 .
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  NSWCA 335, , 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
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.
How can we help?
- 13 March 2018
- Commercial Real Estate
Novation and Assignment: Sisters, Not Twins
There’s often, understandably, a bit of uncertainty about whether (and how) a party to a contract can “assign” (transfer) its rights, or pass on its obligations, under that contract, to another person.
In law, the general rule is that only the original parties to the contract can discharge or fulfil the obligations and enforce the rights created under it and nobody else gets a look in. This is called “privity of contract”.
Essentially, novation and assignment are both mechanisms to get around this restriction. However, while the end result is the same, there are some important differences between these two mechanisms.
Under an assignment, one party (the assignor) keeps performing their obligations under the contract, but transfers some or all rights to a third party (the assignee). The parties to the contract remain the same so privity of contract is preserved.
Assignments can be legal or equitable. In order for an assignment to be a legal assignment, the assignment must be agreed in writing, signed by the assignor, and the other party to the contract must be given notice of the assignment. A legal assignment is usually preferable as this allows the assignee to enforce the rights in their own name directly.
If the assignment is an equitable assignment because it does not fit the criteria for a legal assignment (for example, the other party was not given notice of it), the assignee will need to get the assignor to enforce the assigned rights on its behalf.
Contracts often require the consent of the other party before any assignment can take place. Some contracts expressly prohibit assignment. However, even where there is such wording in the contract, there is nothing stopping you from asking the party to consent to the assignment anyway, though you should take care to record any agreement in writing.
The main point to remember is that you cannot assign obligations under a contract to another party – you can only assign your benefits or rights. Even if the assignee agrees that they will take on the obligations under the contract, it is still the assignor who remains responsible for performance of the obligations and liable if they are not. In practice, what often happens is that the assignee does take over the performance of the contractual obligations but simply agrees to indemnify the assignor for any failures in performance.
It is also important to note that some rights may not be legally capable of assignment.
+44 118 960 4674
When you novate a contract, the original contract effectively ceases to exist and is replaced with a new contract. The new contract contains exactly the same rights and obligations as the original contract, except that it substitutes one of the original parties (the outgoing party) with a third party (the incoming party).
As you are creating a new contract, technically you need to provide fresh consideration. Usually a simple novation agreement between all the parties will be enough, but, if there is any doubt, the parties may choose to execute the novation as a deed instead, which dispenses with the need for consideration.
The novation agreement (or deed) will specify what happens to the liabilities under the original contract. In a typical novation, the outgoing party would be released from all liabilities and the incoming party would inherit these. However, this is up to the parties to decide; they could even decide that the outgoing party will remain liable for all of the liabilities under the original contract.
Novating the contract will release the outgoing party from any future obligations which may arise. This is a crucial difference between novation and assignment.
Although the novation agreement itself can be simple, the process of getting all the parties to the table to agree and execute might be more complex. The main issue for an outgoing party will be persuading the other original party to sign. The other original party often has concerns about service continuity and may want certain assurances or information about the incoming third party.
Equally, the other original party is not obliged to agree: they can refuse to novate and then sue for breach if the party trying to exit the contract fails to meet its contractual obligations. As they still have this other option, in any novation scenario, the outgoing party is probably in a weaker bargaining position, and the other original party may well use this to their advantage.
About this article
- Subject Novation and Assignment: Sisters, Not Twins
- Author Stephen James
- Expertise Commercial Real Estate
- Published 13 March 2018
Disclaimer This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.
Read, listen and watch our latest insights
- 24 August 2023
Recruiting internationally: Employing overseas workers
To employ individuals from overseas, with the exception of Irish nationals, it is imperative to ensure compliance with specific prerequisites and initiate the formal permission procedure.
- 23 August 2023
- Litigation and dispute resolution
Freehold Block Management – Regulation of ASTs
This guide is correct as at July 2023. The upcoming Renters Reform Bill will, once passed into law, introduce significant changes to ASTs and an up to date guide will be published in due course.
- 22 August 2023
- Privacy and Data Protection
Overview of Data Subject Access Requests
In recent months, we have witnessed a series of high-profile data breaches that have brought data protection issues to the forefront of the public’s mind and with this comes an increase in Data Subject Access Requests (DSARs).
- 21 August 2023
Ethnicity Pay Reporting: Government response to the consultation
The Government consulted on a mandatory approach to ethnicity pay reporting in 2018. Which sought views on the benefits of gathering, monitoring and publishing ethnicity data; data handling, amongst other key areas.
- 17 August 2023
- Corporate and M&A
Succession and exit planning: What you need to know – Reading
Our interactive seminar will cover succession planning and your exit strategy, what this means for SMEs, things you might want to consider and where to get support.
- 16 August 2023
PSNI and Electoral Commission Data Breach
Both the UK Electoral Commission and the PSNI, announced serious data breaches. This article looks at what happened to cause the breaches, and what lessons employers can learn from this about processing data and how to protect the information.
A novation is an agreement made between two contracting parties to allow for the substitution of a new party for an existing one. The original contracting party who is replaced by the new party with the novation is excused by the novation, and therefore the original party who is replaced gives up any rights they have against the other original party to the contract. Both original contracting parties must agree to the novation.
Generally, novation is sometimes called a substituted contract. In this context, a novation is a new obligation that extinguishes and replaces an old contract or obligation . Novation can be used as a defense against any claim from the old agreement because the old agreement is void . While both novation and substituted contracts are replacing old contracts with new contracts, novation can be used for substitution of parties specifically.
Novation is governed by the choice of law provision in each contract that determines which state’s laws apply. Where no provision exists, novation will be governed by the relevant jurisdiction .
See also: assign
[Last updated in August of 2023 by the Wex Definitions Team ]
- commercial activities
- business law
- business sectors
- commercial transactions
- wex definitions