assignment novation agreement

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 updated on February 01, 2023

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.

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What is a novation agreement.

A novation agreement is a legal contract that transfers contractual obligations of one party to a third party. It can also replace a contractual obligation with another one. Either way, the new obligation must be agreed upon by all parties involved. Generally, a transferee, transferor and counterparty, must agree to these changes.

Novation Explained

Novation is used in contract law and business law which defines the act of:

Replacing an obligation with another obligation
Adding an obligation to perform
Replacing a party with another in an agreement.

There are three main ways to make a novation:

Novation: A simple novation doesn’t involve entry of a third party. Instead, someone who owes debt enters in a new agreement with their lender. Basically, you substitute a new contract in place of the old one.
Expromissio: Expromissio involves entry of a third party on to an agreement. This new party takes on obligations of the original party. Usually, a creditor accepts a new debtor in place of the original debtor.
Delegation: In this case, the party to a contract transfers their responsibility to another party. For example, you hire a general contractor to perform work on your house. The general contract delegates their responsibilities to a subcontractor. The subcontractor now has a duty to you to complete the work.

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. For instance, a sublease is an assignment. The landlord can still hold the primary renter responsible. In a novation, the primary party of the contract would also transfer all obligations and cannot be held accountable for the contract after novation is complete.

There are advantages and disadvantages to both a novation and an assignment. Assignment is often more convenient than a novation. Novation can protect sellers from future liabilities despite being a tedious process.

Want to learn more about novation? Here is an article on novation for you .

Jeremiah C.

Purpose of a Novation Agreement

Novation is used when a third party enters an agreement to replace a departing party in a contract. Usually, a new party would assume obligations to pay another party that the original party had intended to pay. This releases the debt from one party to another. There would generally be three parties involved: a transferee, transferor and the counterparty. All parties must sign the agreement.

Cancelling a contract can be messy and expensive. In such cases, one might find novation to be a better option. Through novation one party can simply find a third party to complete an original agreement. A few examples where a novation can be used are leases, transferring debt, real estate transactions, business deals, and construction projects.

There are certain risks of a novation. If the counterparty is unsure that the new party will be able to adequately complete obligations set under the contract, the counterparty might face consequences in the future but will not be able to hold the primary party accountable after novation.

Still not sure about the purpose of novation? Here is an article for you .

Examples of Novation

A few examples of novation can help you understand the process better. For instance, consider this case. Person A owes Person B $100. Person B already owes Person C $100. In this case, Person A and Person B can simply transfer their debt obligations through a novation. If all parties agree, Person A can just pay Person C $100. Person B will receive and pay no amount.

Novation can also allow for modified payment terms if all parties agree. Take the case of Person A, B and C mentioned above. Person C might agree to accept Person A’s jewelry as payment which has a value of $100–the debt amount. This transfer of jewelry can still constitute as repayment and resolution of all debt between the three parties.

Novation in mergers and acquisitions is common. A classic example is when a company, X, enters into a contract with another Company, Y. A novation can be included to ensure that if company Y sells, merges or transfers their business or parts of their business to another company, the new company that merges with or acquires company Y or parts of it, will assume obligations and liabilities of company Y in the contract with Company X. In this contract, a purchaser, merging party or transferee of Company Y will step into the role of Company Y in respect to their contract with Company X.

Novation is also used in financial markets. A bilateral transaction done through a clearinghouse intermediary in the derivatives markets is called novation. Here, sellers transfer securities to the intermediary or the clearinghouse which then sells the securities to buyers. The clearinghouse assumes the obligations and counterparty risk in case of a party defaulting. The clearinghouse also becomes responsible for vetting buyers based on creditworthiness.

Here is an article with more examples of novation .

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Who Should Sign a Novation Agreement?

A novation must be signed by all parties involved–the transferee, transferor and counterparty. The transferor transfers the obligations to the transferee in an agreement with the counterparty. One might consider signing a novation agreement in the following scenarios:

Unable to repay debt: If party A borrows money from party B, but is unable to repay the debt and has a third party, C, come in an offer to repay the debt, all parties can consider novation. Here party A would transfer all debt obligations to party C and walk away. Party B will receive the debt from Party C instead of Party A. In case of default, Party B will not be able to hold party A responsible.
Takeover transactions: In business transactions or corporate takeover, novation can be used to replace parties as per new takeover roles.
Sale of business: Novation during sale of a business is often used to replace or transfer business obligations between parties.
Financial Markets: Novation allows derivatives market to use bilateral transactions through an intermediary.

If you are looking to draw up a novation agreement, here is an example of a novation agreement .

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

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March 13, 2024
Building and Construction Contracts , Building and Construction Law , Commercial and Business Case Law and Legislation

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!

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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.

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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.

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Novation vs Assignment: Changing Parties in Contracts and Obligations

Readers looking to understand novation and assignment agreements will likely agree that navigating changing parties in contracts can be complex.

This guide provides a clear framework for deciding between novation and assignment, walking through key differences, legal considerations, real-world applications, and best practices to master the process.

You'll gain actionable insights on drafting novation agreements, securing consent, ensuring smooth obligation transfers, overcoming common hurdles, and more to confidently change parties in contractual obligations.

Introduction to Novation and Assignment

Novation and assignment are two legal concepts that involve transferring rights and obligations from one party to another in a contract.

Novation refers to substituting one party to an agreement with a new party, creating new contractual obligations. Assignment involves transferring rights or obligations from one party to another without necessarily releasing the assignor from their obligations.

Understanding the key differences between these two concepts is important when changing parties in legal agreements to ensure the intended legal implications.

Novation Meaning and Fundamentals

Novation means substituting an original party to an agreement with a new party. It discharges the existing contract between the original parties and creates a new contract with the new party.

In a novation, all parties involved must consent - the original parties to the contract agree to end obligations between them, and the new party agrees to take on those obligations. This releases the original obligor from the agreement and binds the new party.

For example, if party A has a contract with party B but wants party C to take over party B's obligations, a novation would end the AB contract and create a new AC contract. Party B would be released from the agreement.

Understanding Assignment in Contracts

Assignment refers to transferring rights or obligations under a contract from one party (the assignor) to another (the assignee).

In an assignment, the original parties to the contract remain the same. Only the beneficiary of rights or the obligated party changes. The assignor still owes obligations to the counterparty under the original agreement.

For example, party A has a contract with party B. Party A assigns their rights to payments or other benefits under the contract to party C. Party B still owes obligations, but payments now go to party C instead of party A.

Key Difference Between Assignment and Novation

The main difference between novation and assignment is that novation substitutes one of the original contracting parties with a new party, discharging the existing contract and creating a new one. Assignment keeps the original parties intact but transfers rights or obligations to a third party.

In a novation, the original party is released from the contract. In an assignment, the assignor remains a party to the original agreement.

Understanding this fundamental difference is crucial when changing parties in legal agreements to achieve the intended legal implications. Parties should clearly specify whether they intend a novation or an assignment during the amendment process.

How is a novation with a new party different than an assignment?

A key difference between a novation and an assignment is that a novation transfers both the benefits and obligations of a contract to a new party, while an assignment only transfers the benefits.

In an assignment , one party transfers the rights or benefits of a contract to another party. For example, Company A has a contract with Company B. Company A can assign their rights and benefits under that contract to Company C. However, Company A's obligations under the contract remain unchanged - Company A is still responsible for fulfilling those obligations, even though Company C now has the rights and benefits.

A novation goes a step further by also transferring the obligations. Using the example above, if Company A wanted to transfer both their rights/benefits AND obligations under the contract to Company C, that would be considered a novation. Company C would then take Company A's place as a party to the contract, taking on all the associated rights, benefits, and obligations.

In summary:

Assignment: Transfers only rights/benefits to new party. Original party retains obligations.
Novation: Transfers both rights/benefits AND obligations to new party. New party replaces original party to contract.

So while an assignment shifts some contract elements to a new party, a novation essentially substitutes the new party into the contract altogether. This transfer of obligations is the key distinction between the two.

What is the difference between novation assignment and transfer?

The key differences between a novation, an assignment, and a transfer are:

Creates a new contract between the parties
Transfers both rights and obligations to a new party
Requires consent of all parties involved
Transfers only rights/benefits to another party
Does not transfer obligations/burdens
Only requires consent of the assigning party
Refers broadly to conveying rights or property from one party to another
Encompasses both novation and assignment
Does not create new contractual relationships

In summary, a novation replaces one party with another in an existing contract through mutual consent. An assignment transfers just the rights/benefits to another party. And a transfer is an overarching term for conveying rights or obligations from one party to another.

What is a novation which changes the parties to the obligation?

A novation is a legal concept where the parties to a contract agree to substitute one party for another, discharge an existing obligation, and create a new contractual obligation. This effectively changes the parties to the original obligation or contract.

There are a few key things that constitute a novation:

There must be a previous valid obligation between the parties that they want to change by bringing in a new party. This can be an existing contract.

All parties involved - the old debtor, the creditor, and the new debtor - must agree to the novation. This agreement can be oral or written.

The previous obligation is discharged. The new debtor takes on a new obligation to the creditor. Essentially, the new debtor steps into the shoes of the old debtor.

A new contract is formed between the creditor and the new debtor containing the new rights and obligations. This new contract discharges the old contract.

Some examples where novation is used:

Company A owes Company B money. Company C agrees to take on Company A's debt. Company B agrees to discharge Company A and instead hold Company C liable for the debt. This substitutes Company C for Company A in the obligation.

A tenant wants to leave before their lease term is up. The landlord, tenant and new tenant agree that the new tenant will take over the remaining lease obligations. This substitutes the new tenant into the lease contract, discharging the old tenant.

So in summary, a novation changes the parties to an obligation by substituting a new party and discharging the old party from their duties or obligations under the initial contract or agreement. All involved parties must consent.

Can obligations be transferred or assigned to another party if so then how?

Obligations under a contract can be transferred or assigned to another party through a process called novation or assignment.

A novation involves the substitution of a new contract between the same parties or between different parties. This substitutes the original rights and duties under the old contract with the rights and duties under the new contract.

For example, if party A and B have a contract, they can mutually agree with party C to novate the contract and substitute party C for party B. This transfers all rights and obligations from party B to party C.

The key requirements for novation are:

Consent of all parties involved – the existing parties to the original contract and the new party
Extinguishing the rights and duties under the old contract
Creating new rights and duties under the new contract

An assignment involves transferring the rights/benefits under a contract from one party to another. However, the obligations remain with the original contracting party.

For example, party A assigns their rights and benefits under their contract with party B to party C. Party C can now enforce the rights that originally belonged to party A. However, the obligations still remain with party A.

The key requirements for a valid assignment are:

The subject matter must be assignable
Consent may be required from the other contracting party
There must be absolute assignment of rights

So in summary, novation transfers both rights and obligations to a new party, while assignment only transfers rights.

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Deciding between novation and assignment.

Novation and assignment are two legal mechanisms for changing the parties in a contract. Understanding when to use each can help streamline your legal obligations.

How to Novate a Contract

Novation allows you to bring in a new party to a contract and end the relationship with the existing party. For example:

Company A has a contract with Company B
Company A wants to replace Company B with Company C in the contract
Company A, B, and C sign a novation agreement
This agreement ends Company A and B's contract and creates a new one between Company A and C

Key things to know about novation:

Requires consent of all parties
Discharges original contract obligations
Creates new contract with new terms

So if you need to completely replace one of the parties, novation may be the best approach.

Assigning Obligations Without Changing Parties

Assignment transfers rights or obligations from one party to another without changing the original contractual relationship. For example:

Company X has a contract with Company Y
Company X assigns certain rights or duties under the contract to Company Z
Company X and Y's original contract remains intact

With assignment:

Original parties remain the same
Only transfers specific rights/obligations
Requires consent for total transfer of contract

So if you just need to transfer particular rights or duties, assignment may suffice without completely rewriting the contract.

Identifying Implied Novation

Sometimes a new contract can implicitly replace an earlier contract - this is an implied novation. Courts may rule a novation has occurred even without a formal agreement if the parties' conduct demonstrates intent. For example:

Company A defaults on contract with Company B
The parties enter a settlement agreement with new terms
They act according to the new terms
A court may decide this created an implied novation

So understand that entering new contracts can potentially impact previous ones. Seek legal advice to avoid unintended novations.

Executing a Novation Agreement

Executing a novation agreement formally transfers the rights and obligations under a contract from one party to another. There are several key steps involved:

Drafting a Novation Agreement

A novation agreement should clearly identify the original parties to the contract, the party transferring rights/obligations (the assignor), the party assuming rights/obligations (the assignee), and the consent of all parties. Key provisions include:

Identifying information of original contract
Clear statement of assignor's intent to novate
Assignee's acceptance of rights and obligations
Original parties' consent
Signatures of all parties

Proper drafting ensures all parties understand the changes in legal relationships.

Understanding Consent in Novation

For a novation to be legally valid, all parties to the original contract must consent:

The assignor must consent to be released from the contract
The assignee must consent to assume the rights and obligations
The other original contracting party must consent to the substitution of parties

Unanimous consent is essential. If any party objects, the novation is not valid.

Incorporating a Novation Clause in Contracts

Parties can include a novation clause permitting novation under specified conditions, without needing further consent. This clause defines:

Conditions allowing novation
Notice procedures
Effective date

With a novation clause, parties agree in advance to potential future reassignments of contract rights/duties. This streamlines the novation process.

In summary, executing a valid novation requires proper drafting of terms, unanimous consent, and may be simplified by a novation clause. These steps formally transfer contractual rights and duties between parties.

Navigating Novation and Assignment Challenges

Novation and assignment of contracts can present legal and operational challenges. Here are some common issues and strategies to address them:

Securing Consent for Novation or Assignment

Identify all parties that need to consent and determine process for securing approvals
Highlight benefits to all parties to incentivize consent
For novation, offer reasonable concessions to relieve existing party of obligations
Consult legal counsel to ensure proper consent procedures are followed

Ensuring Smooth Transfer of Obligations

Create transition plan outlining handoff of duties and assets
Schedule meetings with involved parties to coordinate transfer
Establish clear timelines for assuming obligations under the new contract
Designate point persons to handle issues during transition period

Renegotiating Terms During Novation

Assess existing terms to identify areas for improvement
Consult legal counsel when drafting proposed amendments
Present suggested changes collaboratively, focusing on mutual benefits
Be prepared to offer reasonable concessions to facilitate agreement
Allow reasonable time for review and negotiation of new terms

Following structured processes can facilitate successful novations and assignments. Engaging partners collaboratively and securing proper legal guidance are key.

Real-World Applications of Novation and Assignment

Novation and assignment are important legal concepts that allow for changing parties and obligations in contracts. Here are some real-world examples and case studies showing how they are applied in practice:

Deed of Novation: A Case Study

A common scenario for novation is when Company A has a contract with Supplier B, but Company A is acquired by Company C. The three parties may execute a Deed of Novation so that Company C replaces Company A as the counterparty in the supply contract with Supplier B.

For example, Tech Startup Z had a 5-year licensing agreement with Software Company Y to use their proprietary platform. When Tech Startup Z was acquired by Conglomerate X, a Deed of Novation was signed so that Conglomerate X replaced Tech Startup Z as the licensee in the software agreement with Company Y. The original contract terms remained unchanged.

This allowed for a smooth transition of contractual obligations to the new party without needing to create an entirely new contract. It provided continuity for Supplier B while releasing Tech Startup Z from the duties owed under the licensing agreement.

Applying the ISDA Novation Protocol

The ISDA Novation Protocol is a standardized procedure that allows multiple parties to concurrently novate credit derivative contracts.

For instance, when Bank A merges with Bank B, the two institutions need to transition the derivatives contracts they each held to the merged entity, Bank C. Rather than negotiating many bilateral novations between counterparties, they can follow the ISDA protocol which allows them to novate contracts en masse.

The ISDA protocol sets forth the terms and documentation all parties must sign and exchange to implement the novations. This greatly simplifies and streamlines the process of transferring large volumes of complex financial contracts to a successor party.

Legal Considerations in Novation and Assignment

Novation and assignment are common practices in contract law that allow for changing the parties involved in a contract or transferring obligations from one party to another. However, there are important legal considerations surrounding these practices that must be examined.

Novation in Law: An Overview

Novation refers to the act of replacing one party to an agreement with a new party. Essentially, novation discharges the contractual duties between the original parties and creates a new contract with the same terms between the remaining original party and a new party. There are a few key legal principles governing novation:

All parties to the original contract must consent to the novation. This includes the party being replaced, the remaining original party, and the new incoming party.

The new contract created by the novation stands independent from the original. The new party assumes the obligations going forward but is not liable for any previous breach by the party it replaced.

For a novation to be legally valid, there must be consideration furnished by all parties. Typically the new incoming party provides fresh consideration in the form of money, services, etc.

Over the years, courts have further refined novation law through key rulings. For example, novation does not necessarily have to be expressly stated, but can be implied based on the conduct of the parties. Overall, meeting the legal requirements for valid novation ensures smooth transitions between contracts.

Understanding Subpart 42.12 - Novation and Change-of-Name Agreements

For government contracts, novation and change-of-name agreements have specific regulations under Subpart 42.12. Some key requirements under these rules include:

The contractor must submit a written request to the government contracting officer to recognize a successor regarding a name change or novation.

For a novation, the proposed new party must submit all the required documentation, like the proposed novation agreement and evidence of disposition of assets.

The contracting officer must determine if recognizing a successor to a contract is in the government's interest and if the proposed new party can fulfill the contract.

All parties must execute a legal novation agreement which is then recognized by the government. The new party formally assumes all obligations under the contract.

Adhering to Subpart 42.12 ensures proper novation protocol and protects the government's interests when parties change in their contracts. Following the guidelines facilitates swift approval of the agreement.

Overall, understanding the legal principles around novation and assignment enables smooth changing of parties in contracts. Both commercial and government transactions must meet key regulations for valid transfers of obligations.

Conclusion: Mastering Novation and Assignment

Summarizing the decision criteria for novation vs assignment.

When deciding between using novation or assignment, key considerations include:

Consent requirements : Novation requires consent of all three parties, while assignment only requires consent of the assignor and assignee.

Transfer of rights vs obligations : Assignment transfers rights under a contract to a new party. Novation transfers both rights and obligations to a new party.

Formality : Novation often requires more formal documentation than assignment.

Credit risk : Novation transfers credit risk to the new party. Assignment does not.

Best Practices for Novation and Assignment Processes

To ensure smooth novation and assignment processes:

Obtain proper consents from all parties as needed.

Execute formal documentation like a Deed of Novation or Assignment Agreement.

Notify relevant parties of the transfer once completed.

Formalize transfer timing and effective dates.

Overcoming Common Novation and Assignment Hurdles

Common challenges can be addressed by:

Allowing reasonable time for consents to be obtained.

Having templates ready for any required documentation.

Closely reviewing contract terms around amendments, transfers, assignments etc.

Maintaining open communication with all parties.

Offer vs Acceptance: Forming the Basis of Contracts
Breach of Contract vs Anticipatory Breach: Contractual Obligations and Expectations
Novation: Legal Concept Explained
Assignment: Legal Concept Explained

The Foreign Corrupt Practices Act: Law Explained

The Lanham Act: Law Explained

Structuring Your Business for Maximum Legal Protection

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Watson & Associates LLC Government Contracts Blog

To Avoid Costly Mistakes Call (866) 601-5518 for a Free Initial Consultation

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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Transferring contracts: assignment and novation explained

Whether it's due to internal restructuring or meeting commercial requirements like a business sale, many companies encounter the need to transfer contracts from one entity to another. However, it's important to note that this process is not as simple as replacing one party's name with another. In most cases, contracts can be legally transferred through one of two methods: assignment or novation.

Assignment:

An assignment of a contract involves transferring the rights (but not the obligations) of the outgoing party to the incoming party. Typically, an assignment doesn't require the consent or agreement of the other party involved in the contract (the continuing party), unless specifically stated in the terms of the relevant contract.

To effect an assignment, a deed is often executed by both the outgoing party and the incoming party. If the consent of the continuing party is necessary, it is usually convenient to include this consent in the deed and have the continuing party execute it as well.

An assignment does not relieve the outgoing party of its ongoing obligations to the continuing party under the contract. In order to protect the outgoing party against future breaches of contract by the incoming party, it is common for the assignment deed to include provisions where the incoming party:

promises to the outgoing party that it will fulfil the outgoing party's contractual obligations after the assignment date; and
provides indemnification to the outgoing party against any claims made by the continuing party for any failures by the incoming party to fulfil those obligations after the assignment.

Even if the consent of the continuing party is not required, for the assignment to have legal effect written notice of the assignment must be given to the continuing party. This written notice ensures that all parties involved are informed about the transfer.

Another method to transfer contracts is through novation. In legal terms, novation refers to the substitution of a new contract for an existing one, maintaining the same terms as the original contract, but between the continuing party and the incoming party instead of between the continuing party and the outgoing party. Unlike assignment, a novation transfers both the rights and obligations under the relevant contract from the outgoing party to the incoming party.

In practice, novation is commonly achieved by substituting the outgoing party with the incoming party. This means that, from the effective date of the novation, the incoming party assumes all the rights and obligations previously held by the outgoing party, and the continuing party releases the outgoing party from any further obligations under the contract.

It is important to note that the agreement of the continuing party is always required for a novation to be legally effective. While novation offers certain advantages over an assignment, such as a better legal liability position for the outgoing party, it can be more challenging to accomplish due to the necessity of securing the continuing party's agreement.

Similar to assignment, novation typically involves executing a deed of novation, which states the agreement of all parties to substitute the outgoing party with the incoming party.

Other methods:

In addition to novation and assignment, there are indirect methods available for transferring rights and obligations under a contract. For example, where a party to a contract is a company, it may be possible to transfer the company's rights and obligations under a contract by the shareholders of that company transferring their shares in the company to a third party. By doing so, the company remains a party to the contract, eliminating the need for assignment or novation. Instead, a new shareholder obtains control of the company and indirectly obtains the benefit of the rights, and the burden of the obligations, of the company under the contract.

Choosing the right transfer method

When faced with the need to transfer a contract, whether through assignment, novation, or an indirect method, it is important to consider several factors to determine the best option for your specific situation, including:

The terms of the contract itself – examine the terms to identify any provisions that prohibit, allow, or impose conditions on the transfer of the contract. Understanding these contractual provisions will help determine the available options and any limitations associated with each method.
Consider your ultimate goal in transferring the contract - evaluate which party should bear the responsibility for liability arising under the contract, both before and after the transfer. This assessment will help clarify which method of transfer aligns better with your desired outcomes.
The commercial position of the parties - consider the commercial positions of the outgoing party, the continuing party, and the incoming party. Assess factors such as the willingness of the continuing party to provide consent for the transfer. Understanding the potential challenges or cooperation you may encounter from the relevant parties will assist in selecting the most viable transfer method.

By carefully evaluating these factors, you can make an informed decision on the most suitable transfer method for your specific circumstances.

For more information and to navigate the transfer process smoothly, please contact any member of the Sierra Legal team, whose contact details can be found here ( Link ).

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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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.

Assignment and Assumption Agreement and Optional Novation | Practical Law

Assignment and Assumption Agreement and Optional Novation

Practical law standard document 6-519-2171 (approx. 21 pages).

What is the Difference Between an Assignment and a Novation in the UK?

By Edward Carruthers

Updated on 21 November 2022 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 .

What is an Assignment?

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them.

What is an Assignment?

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract.

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to and find a replacement. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a 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. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for damages.

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. In addition, as the other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by every party to that original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract, and you can take action against your business partner for breach of contract.

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration.

If you need help transferring your rights, our experienced contract lawyers can assist 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 0808 196 8584 or visit our membership page .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party.

A novation transfers both a business owner’s rights and obligations under a contract to a third party.

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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.

Assignment clauses

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.

Novation clauses

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.

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Templates Center

Novation Agreement Template

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

NOVATION AGREEMENT

This Novation Agreement (the “Novation”) is made as of the date of execution on the signature page below by and between [PARTY ASSIGNING THE AGREEMENT] , (the “Transferor”), and [PARTY BEING ASSIGNED THE AGREEMENT] (the “Party in Substitution”), with each having a place of business at the address indicated on the signature page below. Both the Transferor and the Party in Substitution may be referred to individually as a “Party” and collectively as the “Parties.”

WHEREAS, the Transferor entered into an agreement with [THIRD PARTY] (the “Other Party”) whereby [DESCRIBE AGREEMENT BETWEEN ASSIGNOR AND THIRD PARTY] on or around [DATE] (the “Agreement”);

WHEREAS, on or around [DATE] the Transferor obtained written consent from the Other Party to the novation of the Agreement to the Party in Substitution;

WHEREAS, the Party in Substitution has received a copy of the Agreement and agrees to perform pursuant to the terms and conditions articulated therein; and

WHEREAS, the Party in Substitution hereby accepts the novation pursuant to the terms and conditions hereunder.

NOW, THEREFORE, in consideration of the mutual promises, covenants, and conditions set forth herein, the Parties agree as follows:

NOVATION. Effective [DATE] (the “Effective Date”), the Party in Substitution shall be substituted for Transferor in the Agreement and shall assume all obligations and rights thereunder. The Party in Substitution undertakes to fully perform all such obligations under the Agreement in the place of Transferor and covenants to the Other Party to perform accordingly.

CONSIDERATION. In consideration of the novation granted hereunder, the Party in Substitution agrees and acknowledges that it shall pay to the Transferor $ [AMOUNT] on or before three (3) days from the date of this Novation. The Parties agree and acknowledge that the assignment hereunder shall not be effective until such amount is paid accordingly.

RELEASE. The Parties agree and acknowledge that the Transferor is hereby relieved from all obligations under the Agreement and as such: (i) the Other Party may not make any claim against the Transferor regarding the performance of the Agreement and (ii) the Party in Substitution shall be held liable for any and all matters arising under the Agreement.

INDEMNIFICATION. To the extent permitted by applicable law, the Transferor shall indemnify the Party in Substitution against all suits, claims, causes of action that the Other Party asserts against the Party in Substitution arising under or with respect to the Agreement, any other documents or instruments delivered pursuant thereto, or otherwise based on or related to any of the foregoing, including, but not limited to, contract claims, statutory claims, tort claims, and all other claims at law or in equity with respect to the rights and obligations sold and assigned pursuant to this Assignment that arise on or prior to the Effective Date

REPRESENTATIONS AND WARRANTIES. The Transferor represents and warrants that: (i) it is the legal and beneficial owner of the rights assigned hereunder; (ii) the rights assigned hereunder are free and clear of any lien, encumbrance, or other adverse claim to the best of its knowledge; (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Novation and to consummate the transactions contemplated herein.

MISCELLANEOUS.

Independent Representation. Each Party acknowledges that he or she has been represented by independent legal counsel of his or her own choice throughout all of the negotiations which preceded the execution of this Novation (or has waived such right) and that he or she has executed this Novation with the consent and upon the advice of such independent legal counsel.

Novation. No Party may assign or transfer its rights or obligations under or interest in this Novation without the prior written consent of the other Party.
Integration. This Novation constitutes the entire understanding and agreement of the Parties with respect to its subject and supersedes any prior agreements.
No Waiver. No term of this Novation may be waived, modified, or amended except by an instrument in writing signed by both of the Parties. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given.
Governing Law; Venue. This Novation shall be construed with and governed by the substantive laws of the State of [STATE] . Should any claim or controversy arise between the Parties under the terms of this Note or in furtherance of this Novation, such claim or controversy shall be resolved only in the state or federal courts located in [COUNTY, STATE] .
Counterparts. This Novation may be executed in one or more counterparts, each of which shall be deemed original, but all of which together shall constitute one and the same instrument.
Notices. All notices, requests, demands and other communications required or permitted under this Novation shall be in writing and shall be deemed to have been duly given, made and received only when delivered (personally, by courier service such as Federal Express, or by other messenger) or when deposited in the United States mail, registered or certified mail, postage prepaid, return receipt requested, or by email, addressed as set forth below or as communicated by either Party after the execution of this Novation:

Name: [NAME]

Address: [ADDRESS]

Email Address: [EMAIL ADDRESS]

Party in Substitution

Attorney’s Fees. The prevailing party in any action arising out of this Novation shall be entitled to recover reasonable attorney’s fees as part of any judgment

[signature page to follow]

IN WITNESS WHEREOF, the Parties have executed this Novation in accordance with the dates as indicated below.

[ASSIGNOR]:

_______________________________ _________

Signature Date

_____________________________________________

City, State, Zip

[ASSIGNEE]: