assignment vs novation u s law

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 September 19, 2022

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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• Contract Transfer
• Novation Agreement
• What is Novation of Contract
• Novation of Contract
• Contract Novation Letter
• Deed of Novation
• Contract Novation
• Loan Novation Agreement
• Assignment of Rights Example
• Contract Novation Agreement

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

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Introduction

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?

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.

Key Differences Between Novation and Assignment Deeds

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.

Need a Deed of Novation or Assignment? Key Factors to Consider

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.

Selecting the Right Assignment Clause for Your Contract – Helping You Make the Right Choice

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

Authored By Raea Khan

Director Lawyer, PBL Law Group

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• 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.

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
• 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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Legal Implications of Contract Assignments

Contract assignments, whether by operation of law or voluntary agreement, trigger a complex array of legal implications that can substantially alter the rights, obligations, and liabilities of all parties involved. Novation and assignment differ in that novation extinguishes the original contract, while assignment transfers specific rights or obligations. The effects of assignment include the transfer of liabilities, changes to contractual relationships, and potential disputes. It is vital to examine the contract terms, applicable laws, and intent of the parties to determine the extent of the assignment. Understanding these complexities is imperative to navigate the intricate landscape of contract assignments, and further exploration reveals the nuanced details.

Table of Contents

Assignment by Operation of Law

In certain circumstances, a contract assignment can occur automatically, without the need for explicit consent or agreement, through a process known as assignment by operation of law. This type of assignment arises from the application of statutory provisions or court orders, rather than from the voluntary acts of the parties involved. For instance, in bankruptcy proceedings, the trustee in bankruptcy may assume control over the debtor's contracts, effectively assigning them to the trustee without the need for the debtor's consent. Similarly, statutory transfers, such as those arising from mergers and acquisitions, can also lead to the automatic assignment of contracts. In these scenarios, the assignment is deemed to have occurred by operation of law, and the parties are bound by the terms of the contract as if they had voluntarily agreed to the assignment. This type of assignment can have significant legal implications, and it is crucial for parties to understand the circumstances under which it can occur and the consequences that follow.

Novation Vs. Assignment

In the context of contract assignments, novation and assignment are two distinct concepts that are often confused. While both involve the transfer of contractual rights and obligations, they differ fundamentally in their nature and effects. This section will clarify the definitions of novation and assignment, highlighting their key differences and the implications for contractual obligations.

Definition of Novation

A novation, a tripartite agreement that substitutes a new party for one of the original parties to a contract, differs substantially from an assignment, which involves the transfer of a party's rights or obligations to a third party. Fundamentally, novation alters the contract's fundamental nature by replacing one of the original parties, whereas assignment only transfers specific rights or obligations. This distinction has significant implications for contract management and dispute resolution.

The benefits of novation include:

• Clarity and certainty : Novation provides a clear and explicit agreement among all parties, eliminating ambiguity and certifying that all parties comprehend their responsibilities and obligations.
• Fresh start : Novation offers a clean slate, allowing parties to start anew and move forward without the burden of past disputes or issues.
• Flexibility : Novation enables parties to adapt to changing circumstances and renegotiate terms to better suit their needs.
• Legal finality : Novation provides legal finality, establishing that all parties are bound by the new agreement and that previous obligations are discharged.

Assignment Key Differences

Assignment Key Differences (Novation Vs. Assignment)

While novation involves a tripartite agreement that substitutes a new party for one of the original parties, assignment merely transfers specific rights or obligations to a third party, highlighting fundamental differences in the contractual relationships and obligations of the parties involved. This distinction is vital, as it determines the contract priority and legal ramifications of each transaction. In assignment, the original contract remains intact, with the assignee stepping into the shoes of the assignor, whereas in novation, the original contract is extinguished, and a new contract is formed. This difference in contractual relationships affects the obligations and liabilities of the parties, with novation typically involving a more thorough transfer of rights and obligations. Understanding these key differences is imperative to navigate the complex landscape of contract assignments, facilitating that parties are aware of their rights and obligations under the contract.

Effect on Obligations

The contractual obligations of the parties involved undergo a significant transformation in both novation and assignment, albeit with distinct implications for the assignee, obligor, and assignor.

In novation, the original contract is effectively terminated, and a new contract is formed between the remaining parties. This leads to an obligation transfer, where the assignee assumes the original obligations, and the assignor is released from liability.

In contrast, assignment does not terminate the original contract. Instead, the assignee assumes the rights and obligations of the assignor, but the assignor remains liable for any breaches.

The key differences in the effect on obligations between novation and assignment can be summarized as follows:

• Novation releases the assignor from liability, while assignment does not.
• Novation involves a new contract, whereas assignment involves the transfer of rights and obligations under the original contract.
• In novation, the obligor's consent is typically required, whereas in assignment, consent may not be necessary.
• Novation leads to a complete liability shift, whereas assignment involves a shared liability between the assignor and assignee.

Note: The modified text replaces the words "result" and "results" with "leads" and "lead" respectively, to maintain contextual relevance.

Rights and Obligations Transfer

Contractual rights and obligations are inherently tied to the assignor and assignee, and their transfer requires careful consideration to avoid ambiguity and potential disputes. In the context of contract assignments, the transfer of rights and obligations is a critical aspect that merits attention.

A key concept in this regard is contractual privity, which refers to the direct relationship between the original contracting parties. When a contract is assigned, the question arises as to whether the assignee steps into the shoes of the assignor, assuming all the rights and obligations. A transferability analysis is necessary to determine the extent to which the assignee takes on the obligations and enjoys the rights of the assignor. This analysis involves examining the contract terms, applicable laws, and the intent of the parties involved. A thorough transferability analysis helps to clarify the rights and obligations of the assignee, facilitating a smooth handover and minimizing the risk of disputes. By carefully evaluating the transfer of rights and obligations, parties can facilitate a seamless succession and maintain the integrity of the original contract.

Consent and Notification Rules

Vital consent and timely notification are crucial prerequisites for a valid contract assignment, as they safeguard the interests of all parties involved and prevent potential disputes. The consent requirement ensures that the parties are aware of and agree to the assignment, while notification rules guarantee that all parties are informed of the changes.

The consent and notification rules can be categorized into the following:

• Silent Consent : Implied consent, where the obligor's (party owing the obligation) silence or inaction is deemed as consent to the assignment.
• Explicit Waivers : Written waivers, where the obligor explicitly agrees to the assignment, releasing the assignor from their obligations.
• Contractual Requirements : Specific provisions in the original contract that outline the consent and notification procedures for assignment.
• Statutory Requirements : Laws and regulations that govern the consent and notification rules for contract assignments in a particular jurisdiction.

Impact on Contractual Relationships

When a contract is assigned, the contractual relationships between the original parties and the assignee undergo significant changes. The obligations of the parties shift, as the assignee assumes the rights and duties of the assignor. This alteration in party obligations can have far-reaching consequences, affecting the performance and enforcement of the contract.

Party Obligations Shift

Upon assignment, the obligations of the original parties to the contract are transferred to the assignee, effectively altering the dynamics of the contractual relationship. This shift in obligations can have significant implications for the parties involved, as it redistributes the contract risks and performance burden.

The assignee assumes the responsibilities and liabilities of the original party, including any outstanding obligations or debts. This can lead to:

• Increased exposure to contract risks, such as non-performance or breach of contract
• A heightened performance burden, as the assignee must fulfill the original party's obligations
• Changes to the original party's rights and duties under the contract
• Potential disputes or conflicts arising from the transfer of obligations

The shift in party obligations can also impact the contractual relationship, potentially leading to changes in the dynamics of trust, communication, and cooperation between the parties. It is essential for parties to carefully consider the implications of assignment and ensure that the terms of the contract are clear and comprehensive to avoid potential disputes or conflicts.

Rights and Duties

The assignment of a contract can substantially alter the allocation of rights and duties among the parties, potentially leading to a redefinition of their contractual relationships. This shift can have significant implications for the contractual boundaries, as the assignee may assume new rights and obligations that were previously held by the assignor. In particular, fiduciary obligations, such as duties of care and loyalty, may be transferred to the assignee, creating new responsibilities and liabilities.

The redefinition of contractual relationships can also lead to changes in the allocation of risk and liability among the parties. The assignee may assume new risks and liabilities, while the assignor may be released from certain obligations. This can have significant consequences for the parties' contractual expectations and may require adjustments to their contractual strategies. Furthermore, the assignment of a contract can also impact the contractual relationships between the parties and third parties, such as subcontractors or suppliers. A thorough understanding of the legal implications of contract assignments is essential to navigate these complex issues and ensure that the parties' rights and duties are properly allocated.

Dispute Resolution and Litigation

In the event of a contractual dispute arising from an assignment, parties may seek resolution through various means, including arbitration, mediation, or litigation . The chosen method of dispute resolution will substantially impact the outcome of the case.

In cases where litigation is pursued, court jurisdiction becomes a vital factor. The courts will need to determine whether they have jurisdiction over the matter, taking into account the assignment agreement and the parties involved.

Some assignment agreements may include arbitration clauses, which can affect the dispute resolution process. These clauses can dictate the forum for dispute resolution, the rules of procedure, and the powers of the arbitrator.

• The terms of the assignment agreement can influence the choice of dispute resolution method
• The jurisdiction of the court may be determined by the terms of the assignment agreement
• Arbitration clauses can limit the scope of judicial review
• The parties' rights and obligations under the assignment agreement can impact the dispute resolution process

Avoiding Unintended Consequences

Contractual disputes and litigation can be costly and time-consuming, making it imperative for parties to carefully consider the terms of an assignment agreement to avoid unintended consequences that may arise from misunderstandings or ambiguities. To mitigate these risks, a thorough examination is crucial to identify potential pitfalls and zones of uncertainty. This involves a detailed review of the contract, concentrating on key provisions such as assignment clauses, warranties, and indemnities. A meticulous contract review can help parties understand their rights and obligations, verifying that the assignment agreement accurately reflects their intentions. In addition, a well-drafted agreement can prevent disputes by providing clear and unambiguous terms, thereby reducing the likelihood of litigation. By conducting a thorough examination and contract review, parties can avoid unintended consequences and guarantee a smooth transfer of rights and obligations. This proactive approach can save time, resources, and reputational damage, ultimately facilitating a successful contract assignment.

Frequently Asked Questions

Can contractual rights be assigned to multiple parties simultaneously?.

Contractual rights can be assigned to multiple parties simultaneously, creating joint ownership or conferring benefits on multiple beneficiaries, but this may lead to complexities in rights management, benefit distribution, and potential disputes among assignees.

Do Contractual Obligations Transfer Automatically Upon Assignment?

Upon assignment, contractual obligations do not automatically transfer; instead, novation requirements must be fulfilled, and successor liability may apply, thereby guaranteeing the assignee assumes the obligations and the assignor is released from liability.

Is an Assignment Agreement a Separate Contract From the Original?

An assignment agreement constitutes a separate contract from the original, establishing a new contractual relationship between assignor and assignee, thereby creating a contract hierarchy, where the assignment agreement legally merges with the original contract.

Can a Contractual Party Assign Their Rights Without the Other Party's Knowledge?

In general, a contractual party can assign their rights without the other party's knowledge if the original contract remains silent on the matter, implying silent consent, allowing for unilateral decisions regarding assignment.

Does an Assignment Void the Original Contract Between the Parties?

An assignment does not automatically void the original contract between parties, but it may trigger novation requirements or contract termination clauses, depending on the specific terms and conditions outlined in the agreement.

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

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

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

Novation Agreement FAR 42.1204 Definition

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

Federal Government Contract Novation vs Assignment of Contract

Business Asset Purchase Agreement and Contract Assignment  Clause Issues

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

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

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

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

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

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

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

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

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

Potential SBA Size Standard Violations

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

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

Help With Government Contracting Companies for Sale

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

Legal Issues Regarding Novation Vs Assignment 

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

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

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

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Assignment vs. Novation

What's the difference.

Assignment and novation are both legal concepts that involve the transfer of rights and obligations from one party to another. However, there are some key differences between the two. Assignment refers to the transfer of a single party's rights under a contract to another party, while the original party still remains liable for the performance of the contract. On the other hand, novation involves the substitution of one party with another, where the original party is completely released from their obligations and the new party assumes all rights and liabilities. In essence, assignment is a transfer of rights, whereas novation is a transfer of both rights and obligations.

Further Detail

Introduction.

When it comes to legal agreements and contracts, there are various mechanisms that can be used to transfer rights and obligations from one party to another. Two commonly used mechanisms are assignment and novation. While both assignment and novation involve the transfer of rights and obligations, they differ in their legal implications and the extent of the transfer. In this article, we will explore the attributes of assignment and novation, highlighting their similarities and differences.

Assignment refers to the transfer of rights and obligations from one party (the assignor) to another party (the assignee). In an assignment, the assignor remains a party to the original contract, but transfers some or all of their rights and obligations to the assignee. The assignee steps into the shoes of the assignor and assumes the rights and obligations associated with the contract.

One of the key attributes of assignment is that it does not require the consent of the other party to the original contract. The assignor can unilaterally transfer their rights and obligations to the assignee without seeking the consent of the other party. However, the assignor must provide notice to the other party about the assignment, as failure to do so may result in the assignment being ineffective.

Another important aspect of assignment is that it does not extinguish the original contract. The assignor remains liable to the other party for any breaches or obligations that existed prior to the assignment. This means that the assignee can enforce the rights under the original contract against the assignor if necessary.

Furthermore, assignment can be partial or complete. In a partial assignment, the assignor transfers only a portion of their rights and obligations to the assignee, while retaining the rest. In a complete assignment, the assignor transfers all of their rights and obligations to the assignee.

It is worth noting that certain rights and obligations may not be assignable. For example, personal services contracts or contracts that involve personal skill or expertise may not be assignable without the consent of the other party. Additionally, assignment may be prohibited by the terms of the original contract.

Novation, on the other hand, refers to the substitution of a new party for one of the original parties to a contract. In a novation, the original contract is extinguished, and a new contract is formed between the remaining original party and the new party. The new party assumes all the rights and obligations of the departing party, effectively replacing them in the contract.

Unlike assignment, novation requires the consent of all parties involved. The departing party, the remaining original party, and the new party must all agree to the novation and execute a novation agreement. This agreement explicitly states the intention to substitute the original party with the new party and outlines the rights and obligations that will be transferred.

Novation has the effect of releasing the departing party from any further liability or obligations under the original contract. Once the novation is complete, the departing party is no longer bound by the terms of the contract and is relieved of any future obligations. The new party assumes all the rights and obligations as if they were an original party to the contract.

It is important to note that novation is a more complex process compared to assignment. It involves the creation of a new contract and the consent of all parties, which may require additional negotiations and formalities. Novation is often used in situations where a party wants to completely replace an existing party with a new party, such as in mergers and acquisitions or when transferring ownership of a business.

While assignment and novation both involve the transfer of rights and obligations, there are several key differences between the two mechanisms. Let's explore these differences:

Assignment does not require the consent of the other party to the original contract, whereas novation requires the consent of all parties involved. In assignment, the assignor can unilaterally transfer their rights and obligations to the assignee without seeking the consent of the other party. Novation, on the other hand, requires the explicit agreement of all parties to substitute the original party with a new party.

Legal Implications

Assignment does not extinguish the original contract, and the assignor remains liable for any breaches or obligations that existed prior to the assignment. The assignee can enforce the rights under the original contract against the assignor if necessary. In contrast, novation extinguishes the original contract and releases the departing party from any further liability or obligations. The new party assumes all the rights and obligations as if they were an original party to the contract.

Novation is generally more complex compared to assignment. It involves the creation of a new contract and the consent of all parties, which may require additional negotiations and formalities. Assignment, on the other hand, is a simpler process that does not require the creation of a new contract or the consent of the other party to the original contract.

Extent of Transfer

Assignment can be partial or complete, depending on the intention of the assignor. The assignor can transfer only a portion of their rights and obligations to the assignee, while retaining the rest. In a complete assignment, the assignor transfers all of their rights and obligations to the assignee. Novation, on the other hand, involves the complete substitution of a new party for one of the original parties. The new party assumes all the rights and obligations of the departing party.

Prohibited Assignments

While assignment allows for the transfer of most rights and obligations, there may be certain rights and obligations that are not assignable. For example, personal services contracts or contracts that involve personal skill or expertise may not be assignable without the consent of the other party. Additionally, assignment may be prohibited by the terms of the original contract. Novation, on the other hand, does not face the same limitations as assignment, as it involves the creation of a new contract with the consent of all parties.

In conclusion, assignment and novation are two mechanisms used to transfer rights and obligations from one party to another. Assignment involves the transfer of rights and obligations from the assignor to the assignee, while the assignor remains a party to the original contract. Novation, on the other hand, involves the substitution of a new party for one of the original parties, resulting in the creation of a new contract.

While assignment does not require the consent of the other party and does not extinguish the original contract, novation requires the consent of all parties and releases the departing party from any further liability or obligations. Novation is generally more complex compared to assignment, and it allows for the complete substitution of a new party. However, both assignment and novation have their own legal implications and limitations, which should be carefully considered when transferring rights and obligations under a contract.

Comparisons may contain inaccurate information about people, places, or facts. Please report any issues.

Contract Assignment versus Contract Novation – What’s the Difference?

In the context of contract law, understanding the differences between assignment and novation is important for effectively managing contractual relationships and obligations. They have significant differences in terms of their legal implications and requirements.

Assignment involves the transfer of rights from one party (the assignor) to another (the assignee) without altering the underlying contract or requiring the debtor’s consent. Key points include:

• Transfer of Rights: Only the benefits or rights under the contract are transferred. The assignor retains their obligations.
• Consent: The debtor’s consent is not required for the assignment to be effective. However, the assignee cannot be imposed with obligations without their consent.
• Notification: It is generally good practice, although not always legally required, to notify the debtor of the assignment.

For example, if Party B is owed money by Party A, Party A can assign the right to receive payment to Party C without needing Party A’s consent.

Novation, on the other hand, involves the replacement of an existing contract with a new one, requiring the consent of all parties involved. This creates a completely new contractual relationship and extinguishes the original contract. Key aspects include:

• Substitution of Parties: A new contract is formed where a new party (the novatee) replaces one of the original parties (the novator), with the consent of the remaining original party.
• Discharge of Obligations: The original contract’s obligations are discharged, and a new set of obligations is created under the new contract.
• Consent Requirement: All parties involved must consent to the novation for it to be valid.

For example, if Party A owes Party B $100, and Party B agrees to transfer this obligation to Party C, with Party A’s consent, a new contract is formed where Party A now owes $100 to Party C, and Party B is released from the original obligation.

Legal Distinctions

The main differences between assignment and novation lie in the nature of the transfer and the necessity for consent:

• Assignment: Transfers rights only and does not require the debtor’s consent.
• Novation: Transfers both rights and obligations, discharging the original contract, and requires the consent of all parties involved.

In summary, assignment allows for flexibility in transferring rights without complicating the original contract, while novation provides a clean slate by forming a new contractual relationship. Each mechanism serves different strategic needs, depending on whether one wishes to transfer benefits alone or completely restructure obligations and parties involved.

We assist a wide range of clients with all aspects of commercial law. Please do get in touch if you would like assistance.  Contact Steven Moe at  [email protected]  or Aislinn Molloy at  [email protected] .

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Contracts: The critical difference between Assignment and Novation

Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the “Lidl Contract”). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the “ Trustee Contract”) and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones’ obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones’ obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don’t take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants’ contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164.

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Assignment and Novation: Spot the Difference 12 November 2020

The english technology and construction court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an epc contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits..

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

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

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

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

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

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

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Rebecca Williams

Partner London

Mark McAllister-Jones

Counsel London

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

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

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

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

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

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

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

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

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

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

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

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

[1] [2020] EWHC 2537 (TCC)

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

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

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

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Assignment and Novation Difference

Published on 13th August, 2016 by Benjamin Li Yong Le

Many people even lawyers are confused by the difference between assignment and novation. This article will discuss and clarify any doubts between the two legal concepts.

Everyday I see people "assigning" contracts and other rights without knowing what assignment entails. Today I will discuss what an assignment actually is and whether novation should be a more appropriate option.

An assignment involves the transfer of an interest or benefit from one person (“Assignor”) to another (“Assignee”). However, the “burden”, or obligations, under a contract cannot be transferred.

Thus, an assignment usually applies to assignments of tenancies or debts whereby the Assignor still retains responsibility of the contractual obligations, and only gives away the benefits.

The Assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned.

In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified (contractual obligation whereby one party agrees to pay any losses or damage suffered by the other party) against any breach or failure to perform by the assignee. The assignor will remain liable for any past liabilities incurred before the assignment.

Usually when people say they want to "assign" something, they are actually referring to the concept of novation.

Novation is a legal mechanism whereby one party can transfer ALL its obligations under a contract and ALL its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract. A novation requires the agreement of all THREE parties involved - the assignor, the assignee and the third party to whom the rights are being transferred.

About the Author - Benjamin Li Yong Le

Benjamin Li Yong Le (“Ben”), is an Advocate & Solicitor of the Supreme Court of Singapore. Ben is currently running his own boutique corporate and commercial law firm under the name and style of L’Avocat Law.

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Novation vs. Assignment : A Comparison

What’s the Difference?

Novation is a mechanism whereby one party can transfer all its obligations under a contract and all its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract. When a contract is novated the other contracting party must be left in the same position as he was in prior to the novation being made. A novation requires the agreement of all three parties involved.An assignment is a transfer, recognised by law, of a right or obligation of one person to another. Assignment differs from novation is so much that the parties to the contract do not change. Most rights and obligations are capable of assignment.

A person can transfer their rights, benefits and liabilities under a contract to another person. Where the original contract stays intact and party transfers rights, benefits and liabilities under a contract (the assignor) to a new party (the assignee), this is called an “assignment”. An assignment must be absolute with no contractual strings to remain attached between the assignor and the other original contracting party. Nor does an assignment require the permission of the other original contracting party. An assignment is not possible where the services or the consideration was linked to the person of the party which wants to assign the contract. For example, if you hire a special performer, the performer cannot assign the contract to another performer. If an assignment creates a new or special burden to the other original contracting party, it may also be prohibited. Special provincial laws may exist to alter the common law with regards to assignments, such as “judicature acts” and readers are invited to consult these laws for further research.

Sometimes assignment operates under law such as in the case of a bankruptcy where a trustee comes in and takes over all the contracts between the bankrupt and the creditors. Another example of legal assignment is upon death, where the executor assumes the position of the deceased and to whom all contracts of the deceased are assigned.

The criteria for a successful novation is the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.

Novation and assignment are two mechanisms in contract law that facilitate the transfer of contractual rights and obligations. Below are 100 legal questions and answers comparing these two concepts.

What is novation in contract law? Novation is the process of replacing an original party to a contract with a new party, transferring both rights and obligations, with the consent of all parties involved.

What is assignment in contract law? Assignment involves transferring the rights or benefits of a contract from one party to another without transferring the obligations.

What is the primary difference between novation and assignment? The primary difference is that novation transfers both rights and obligations, while assignment transfers only the rights.

Does novation require the consent of all parties involved? Yes, novation requires the consent of the original party, the new party, and the counterparty.

Does assignment require the consent of all parties involved? No, assignment typically does not require the counterparty’s consent unless specified in the contract.

Can obligations be transferred through assignment? No, obligations cannot be transferred through assignment; only rights can be transferred.

Can obligations be transferred through novation? Yes, novation allows for the transfer of both rights and obligations.

What happens to the original contract in novation? The original contract is extinguished and replaced with a new contract involving the new party.

What happens to the original contract in assignment? The original contract remains in effect, but the rights are transferred to a new party.

When is novation typically used? Novation is used when all parties agree to replace one party with a new party, often in business mergers or restructurings.

When is assignment typically used? Assignment is used to transfer rights under a contract, such as the right to receive payment, without affecting the original obligations.

Is a new contract created in novation? Yes, a new contract is created that replaces the original contract.

Is a new contract created in assignment? No, the original contract remains, but the rights are transferred to another party.

Can novation be used to transfer service contracts? Yes, novation can transfer service contracts, requiring all parties’ consent to replace the original party.

Can assignment be used to transfer service contracts? Yes, assignment can transfer the rights under service contracts, but not the obligations.

What is required for a valid novation? A valid novation requires a tripartite agreement between the original party, the new party, and the counterparty.

What is required for a valid assignment? A valid assignment requires a written agreement between the original party and the assignee, subject to the contract’s terms.

Can novation occur without a formal written agreement? No, novation typically requires a formal written agreement signed by all parties.

Can assignment occur without a formal written agreement? Assignment can occur without a formal written agreement if the contract allows for it, but written documentation is recommended.

What is a practical example of novation? When a business is sold, the buyer might take over all contracts through novation, becoming responsible for both the rights and obligations.

What is a practical example of assignment? When a landlord sells property, they might assign the right to receive rent payments to the new owner without transferring any obligations.

Can novation be partial, transferring only some rights and obligations? No, novation transfers all rights and obligations in full, replacing the original party entirely.

Can assignment be partial, transferring only some rights? Yes, assignment can transfer specific rights as specified in the agreement.

Does novation require consideration? Yes, novation requires consideration to be legally binding, as it involves creating a new contract.

Does assignment require consideration? Assignment does not necessarily require consideration, but it may depend on the terms of the original contract.

What are the risks of novation? Risks include obtaining consent from all parties and ensuring the counterparty is not disadvantaged by the change.

What are the risks of assignment? Risks include the potential invalidity of the assignment if the contract prohibits it and the original party remaining liable for obligations.

How does novation affect third-party rights? Novation typically does not affect third-party rights, as it requires the consent of all parties involved.

How does assignment affect third-party rights? Assignment can affect third-party rights if the third party has not consented or if the contract prohibits assignment.

What is a deed of novation? A deed of novation is a formal document used to novate a contract, requiring signatures from all parties involved.

Is a deed required for assignment? A deed is not typically required for assignment unless specified by the contract or if the assignment involves real property.

Can novation occur orally? Novation generally requires written documentation to be legally enforceable.

Can assignment occur orally? Assignment can occur orally if the original contract allows for it, but written documentation is advisable.

What is the impact of novation on the original party? The original party is released from all rights and obligations once novation is completed.

What is the impact of assignment on the original party? The original party remains liable for any obligations under the contract even after assignment.

Can novation be reversed? Novation can be reversed by mutual agreement of all parties involved.

Can assignment be reversed? Assignment can be reversed if both the assignor and assignee agree, subject to the terms of the original contract.

Is novation more complex than assignment? Yes, novation is generally more complex due to the requirement for a new contract and consent from all parties.

Is assignment simpler than novation? Yes, assignment is generally simpler as it typically does not require consent from all parties.

What legal principle does novation rely on? Novation relies on the principle of creating a new contract to replace the original contract.

What legal principle does assignment rely on? Assignment relies on the principle of transferring rights under an existing contract without altering the contract itself.

What happens if the counterparty does not consent to novation? Novation cannot proceed without the consent of the counterparty.

What happens if the counterparty does not consent to assignment? Assignment can proceed without the counterparty’s consent unless the contract prohibits it.

Is novation used in mergers and acquisitions? Yes, novation is commonly used in mergers and acquisitions to transfer contracts to the new entity.

Is assignment used in mergers and acquisitions? Assignment is less common in mergers and acquisitions as it does not transfer obligations, which are often necessary in such transactions.

Can novation be used to transfer liabilities? Yes, novation transfers both liabilities and rights to the new party.

Can assignment be used to transfer liabilities? No, assignment cannot transfer liabilities, only rights.

What is the role of the original party in novation after the transfer? The original party has no further role in the contract after novation.

What is the role of the original party in assignment after the transfer? The original party may still have obligations to fulfill under the contract after assignment.

Can novation apply to personal service contracts? Novation can apply to personal service contracts if all parties consent and the services can be provided by the new party.

Can assignment apply to personal service contracts? Assignment typically cannot apply to personal service contracts as these often require the original party to perform the services.

Does novation discharge the original contract? Yes, novation discharges the original contract and replaces it with a new one.

Does assignment discharge the original contract? No, assignment does not discharge the original contract; it only transfers rights.

What happens to warranties in a novated contract? Warranties can be transferred and enforced by the new party in a novated contract.

What happens to warranties in an assigned contract? Warranties typically remain with the original party in an assigned contract unless explicitly transferred.

Can novation affect the enforceability of a contract? Novation can affect enforceability if the new contract terms are not clear or if not all parties consent.

Can assignment affect the enforceability of a contract? Assignment can affect enforceability if the original contract prohibits assignment or if the assignee fails to meet obligations.

What is a novation tripartite agreement? A novation tripartite agreement is a document signed by all three parties involved in the novation.

What is an assignment agreement? An assignment agreement is a document that transfers rights from one party to another under the original contract.

Can novation be used in government contracts? Yes, novation can be used in government contracts with the consent of the government entity involved.

Can assignment be used in government contracts? Assignment can be used in government contracts, but often requires approval from the government entity.

What is the legal effect of novation? The legal effect of novation is the creation of a new contract that replaces the original one.

**64. What is the legal effect of assignment? The legal effect of assignment is the transfer of rights under an existing contract to a new party, without affecting the original contract.

Can novation be used in international contracts? Yes, novation can be used in international contracts, provided all parties involved consent to the new terms.

Can assignment be used in international contracts? Yes, assignment can be used in international contracts, but it may be subject to local laws and regulations.

Is novation applicable in real estate transactions? Yes, novation is applicable in real estate transactions, particularly in transferring leases or purchase agreements.

Is assignment applicable in real estate transactions? Yes, assignment is often used to transfer rights under a real estate lease or contract to another party.

What documentation is required for novation? Novation requires a written agreement, often referred to as a deed of novation, signed by all parties.

What documentation is required for assignment? Assignment requires a written agreement, typically an assignment agreement, signed by the assignor and assignee.

Can novation be contested in court? Yes, novation can be contested in court if there is a dispute over the consent of the parties or the terms of the new contract.

Can assignment be contested in court? Yes, assignment can be contested in court if it violates the terms of the original contract or if the counterparty was not properly notified.

Does novation require a change in contract terms? Novation may involve changes in contract terms as it creates a new contract.

Does assignment require a change in contract terms? Assignment does not require changes in the original contract terms; it merely transfers rights.

What is the role of consideration in novation? Consideration is required for novation as it involves creating a new contract.

What is the role of consideration in assignment? Consideration is not always required for assignment, depending on the terms of the original contract.

How does novation affect indemnities? Indemnities can be transferred to the new party in a novation, subject to the terms of the new contract.

How does assignment affect indemnities? Indemnities generally remain with the original party unless explicitly transferred in the assignment agreement.

Can novation be used to transfer intellectual property rights? Yes, novation can transfer both the rights and obligations associated with intellectual property.

Can assignment be used to transfer intellectual property rights? Yes, assignment can transfer intellectual property rights, but not the associated obligations.

What are the typical uses of novation in the construction industry? Novation in the construction industry is often used to transfer contracts to new contractors or project managers.

What are the typical uses of assignment in the construction industry? Assignment in construction is typically used to transfer rights to payments or other benefits without altering obligations.

Can novation affect the timeline of contract performance? Yes, novation can affect the timeline as it involves creating a new contract with potentially new terms.

Can assignment affect the timeline of contract performance? Assignment typically does not affect the timeline as it only transfers rights.

What is a novation tripartite agreement? A novation tripartite agreement involves three parties: the original party, the new party, and the counterparty, all agreeing to the novation.

What is the effect of a novation on liability? Novation transfers liability from the original party to the new party, releasing the original party from future obligations.

What is the effect of an assignment on liability? Assignment does not transfer liability; the original party remains liable for obligations under the contract.

Can novation be used in employment contracts? Yes, novation can be used to transfer employment contracts from one employer to another with employee consent.

Can assignment be used in employment contracts? Assignment is generally not applicable to employment contracts as it involves transferring obligations that require personal performance.

What happens if a novation agreement is not properly executed? If not properly executed, the original contract remains in effect, and the parties may not be released from their obligations.

What happens if an assignment agreement is not properly executed? If not properly executed, the assignment may be invalid, and the original party retains their rights.

Can novation be used to change the jurisdiction of a contract? Yes, novation can include changes to the jurisdiction if all parties agree to the new terms.

Can assignment be used to change the jurisdiction of a contract? Assignment does not change the jurisdiction; it only transfers rights under the existing contract.

What are the benefits of novation? The benefits of novation include transferring all rights and obligations, creating a clear legal separation between the original and new parties.

What are the benefits of assignment? The benefits of assignment include the simplicity of transferring rights without needing the counterparty’s consent.

What are the challenges of novation? Challenges include obtaining consent from all parties and potentially renegotiating contract terms.

What are the challenges of assignment? Challenges include ensuring the assignment complies with the original contract terms and managing any residual obligations.

Can novation be used in financial transactions? Yes, novation is common in financial transactions to transfer obligations and rights between parties.

Can assignment be used in financial transactions? Yes, assignment is used in financial transactions to transfer rights, such as the right to receive payments.

How does novation impact third-party beneficiaries? Novation can impact third-party beneficiaries if their rights are altered in the new contract, requiring their consent.

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Expert Insights

Assignment, novation and construction contracts - What is your objective?

Consider a not too hypothetical situation where the parties to a construction project (employer, contractor and sub-contractor) enter into a Deed of Assignment intending that the employer, having lost confidence in the contractor, would directly engage the sub-contractor to complete the sub-contract works. But what if no assignment has taken place? What are the terms of the contract under which the sub-contractor carries out the works for the employer?

Potential risks with assignment

In construction projects, main contractors often assign the benefit of their key sub-contracts to the employer in the event of contractor default and consequent termination of the main contract. The employer can then enforce the rights in the sub-contract against the sub-contractor, including rectification of the works and the performance of particular obligations.

However, there are potential risks associated with assignment in these situations as the Technology and Construction Court’s decision in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd demonstrated. We discussed this decision in Assigning a sub-contract on termination: which rights is the contractor giving up? In this case, the nature of the assignment meant that the main contractor could not pursue claims made by the employer against its sub-contractor under the sub-contract. This limited the main contractor’s ability to ‘pass on’ any liability it had under the main contract to the sub-contractor.

But what if the Deed of Assignment does not take effect as an assignment?

Assignment v novation

Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. A novation creates a new contractual relationship - a ‘new’ contract is entered into.

Another key difference with novation is that the consent of all parties concerned must be obtained, which is why novation is almost always effected through a tripartite agreement. In the case of an assignment, it is not always necessary to obtain consent, subject to what the specific terms of the contract provide.

When deciding whether to assign or novate, parties should consider (i) whether there is in fact a burden to novate, (ii) whether the novatee will be willing to take on the burden, (iii) whether all parties will consent to the novation and indeed enter into the agreement. If there is no burden under the contract to transfer, then an assignment is likely to be the most appropriate way to transfer the interests.

Is the Deed for an assignment or a novation?

Although a document may be labelled a Deed of Assignment, if it has references to the transfer of ‘ responsibilities and obligations ’ and is a tripartite agreement these are characteristic of a novation as opposed to an assignment.

A key issue in such circumstances is to ascertain whether making use of the words ‘ assigning ’ and ‘ assignment ’ actually affects the characteristics of the document.

There has been some consideration of this characterisation issue by the courts. In the case of Burdana v Leeds Teaching Hospitals NHS Trust [2017] EWCA Civ 1980, by majority the Court of Appeal decided that on the facts of the case, although the Deed of Assignment in question referred to an ‘ assignment ’ of the benefit and burden, on proper analysis there was indeed a novation.

Furthermore, in the case of Langston Group Corporation v Cardiff City FC [2008] EWHC 535, Briggs J made it evident that even though the variation agreement in question did not use the word ‘ novation ’ and did not describe itself as such, the circumstances and effect of the agreement was indeed a novation and a new contract had been created.

It may be the case that even if a document does not describe itself as a novation, yet has the key characteristics of one, then as a matter of interpretation the courts would accept that the document takes effect as a novation.

Key characteristics of a novation

If entering into a document that purports to be a Deed of Assignment, tread carefully as it may well take effect as a novation, particularly if the following characteristics are present:

• It is a tripartite agreement;
• All the parties give their consent;
• The novator has been released from its obligations;
• There has been an acceptance of the terms of the novation on the part of the novatee and the substituted party; and
• There is a vesting of remedies.

What is your objective?

Although a document may well be labelled as an assignment, it may have the characteristics of and take effect as novation. Parties need to be cautious and consider what they want to achieve when assessing whether to assign rights or to novate them along with obligations.

This article was written by Anna Sowerby and Eveline Strecker. For more information, please contact Anna  or your usual Charles Russell Speechlys contact.

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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What Is Novation?

How novation works, novation vs. assignment.

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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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• Transferring Federal Government “Other Transaction” Agreements

As we discussed in a prior Alert , parties buying or selling a business must consider how to properly transfer the seller’s contracts to the buyer. Part 42 of the Federal Acquisition Regulation (“FAR”) addresses the contract administration and audit services for federal Government contracts. FAR Subpart 42.12 addresses a contractor’s ability to transfer federal Government contracts. 48 CFR § 42.12. Federal Government contracts cannot be transferred unless buyer and seller comply with detailed “novation” requirements, the federal Government approves of the proposed transfer, and a novation agreement is signed by the Government, the buyer and the seller. 48 CFR § 42.1203.

Less traditional federal agreements may not be subject to these time-consuming and expensive novation requirements. For example, agreements made under the federal Government’s “other transaction” authority (sometimes referred to as “OTAs”) are not subject to the provisions of the FAR and should be much easier to transfer.

This Alert provides (i) an overview of the law regarding the assignability and novation of federal Government contracts, (ii) a background of Congress’s “other transaction” authority, (iii) an explanation of why OTAs are not subject to the novation requirements of FAR Subpart 42.12; and (iv) practical considerations when seeking to transfer an OTA.

Government Contracts – Unlike Non-Government Contracts – Are Not Freely Assignable

Contracts are freely assignable under the laws of most States. A contract at common law is presumed to be assignable unless the contract expressly says otherwise. See Restatement (Second) of Contracts § 317. Moreover, unless an anti-assignment provision within a contract expressly states that an attempted assignment is “void” or “void ab initio,” many courts will give effect to an attempted assignment, notwithstanding a contract’s anti-assignment provision, and will find the assigning party to be in breach of the contract. See Restatement (Second) of Contracts § 317; 29 Williston on Contracts § 74:22 (surveying anti-assignment cases).

Federal Government contracts, unlike traditional contracts at common law, are not freely assignable. The 1949 Anti-Assignment Act, 41 U.S.C. § 6305(a) (formerly 41 U.S.C. § 15), prohibits the transfer of a contract where the Government is a party. Under the Anti-Assignment Act, any attempted assignment of a federal Government contract is prohibited and void, regardless of whether the contract addresses its assignability. An attempted assignment in violation of the Anti-Assignment Act annuls the contract, except for the Government’s right to pursue remedies for breach of contract. 41 U.S.C. § 6305(a).

Notwithstanding this statutory prohibition, and because the Anti-Assignment Act is intended for the protection of the Government, the Government may consent to a transfer of its contract after receiving and approving a detailed, written request submitted by the proposed transferor. See FAR 42.1204(e), (f). If this “novation package” is approved by the Government, the buyer, seller and the Government will sign a novation agreement which allows the Government to recognize the transferee as the successor-in-interest and avoid a violation of the Anti-Assignment Act. See FAR 42.1204(h), (i). The steps required to obtain a novation are discussed in our earlier Alert . A successful novation process may require weeks, or even months, to complete, depending on the circumstances.

Other Transaction Agreements

What are otas.

Congress authorized several major agencies to enter into “other transaction” agreements to carry out basic, applied and advanced research projects. 10 U.S.C. § 4021(a). OTAs refer generally to transactions with federal agencies other than grants, cooperative agreements, or FAR-regulated contracts. OTAs are legally binding instruments that can be structured in a variety of ways, offering greater freedom of contract than traditional federal Government contracts, and allowing for contract terms that more closely resemble business-to-business agreements. The “other transaction” authority gives federal agencies the flexibility to access state-of-the-art, cutting-edge technology solutions through a contract tailored to the particular project and needs of the Government.

While FAR-based contracts encourage competitive bidding and the continuity of regulated FAR clauses, OTAs, by contrast, allow agencies to bypass certain FAR requirements, which can speed up the acquisition process and decrease the cost of administering such agreements. The flexibility of OTAs may better advance new technologies and processes through prototyping or models to evaluate the feasibility of a new technology. The U.S. Departments of Defense (“DoD”), Health and Human Services, and Homeland Security all used their “other transaction” authority to respond quickly to the COVID-19 pandemic; these agencies cited the speed of awards as a major reason to use OTAs in connection with COVID-19 procurements, including vaccine manufacturing. [1]

Are OTAs subject to the FAR?

OTAs are widely regarded as not being subject to the requirements of the FAR. Congress intended that OTAs function as an alternative to FAR-based agreements to encourage otherwise reluctant companies to provide prototypes and other cutting-edge technologies without the FAR’s regulatory constraints and burdens. The FAR applies to “all acquisitions as defined in part 2 of the FAR,” and FAR Part 2 does not include a definition of “other transaction.” 48 C.F.R. § 1.104. Subpart 4 of the FAR, which prescribes policies and procedures relating to the administrative matters of contracting, specifically excludes “other transactions” from the definition of a “contract action.” 48 C.F.R. § 4.601. While OTAs are legally binding agreements, courts and administrative agencies have not considered them to be “contracts” subject to the requirements of the FAR. [2]

Similarly, the Government Accountability Office (“GAO”) has described OTAs as agreements “other than contracts, grants, or cooperative agreements that generally are not subject to federal laws and regulations applicable to procurement contracts.” [3] The DoD has stated to Congress that “other transaction agreements […] are referred to as agreements to distinguish them from the traditional procurement contracts governed by the FAR and procurement laws.” [4] The Office of the Undersecretary of Defense for Acquisition and Sustainment has described OTAs as helpful due to their ability to “foster new relationships and practices involving traditional and [non-traditional defense contractors], especially those that may not be interested in entering into [FAR]-based contracts with the Government.” [5]

Are OTAs Assignable Without Complying with FAR Part 42?

Because OTAs are not “contracts” governed by the FAR, a valid transfer of an OTA should not require the onerous and expensive novation process required by FAR Part 42. Rather, an OTA should benefit from the common law presumption of free assignability that applies to most non-Government contracts.

In practice, an OTA may include novation or novation-like terms that parties must follow in connection with a requested transfer. Alternatively, a Government authority administering an OTA might require parties to follow a novation or novation-like process, even if such provision is not included in the OTA, to provide the Government with assurances that the proposed transferee will perform if the assignment is approved. In either scenario, the transferor may face resistance from the Government if the requested transfer process is not followed. This risk can be addressed by negotiating with the Government to include assignability provisions in the OTA.

Practical Considerations

Companies considering a transaction involving a federal Government contract, OTA, or other agreement should consider the following items:

• Consider the transaction structure : If federal Government contracts are part of a larger transaction, consider whether the transaction can be structured as a stock purchase to avoid the novation provisions of FAR Part 42. Under FAR 42.1204(b), a novation agreement is unnecessary when there is a change in ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract.
• Coordinate communications with the contracting officer: Buyers and sellers should consider when and how to communicate with the contracting officer or other Government authority about a possible transfer. If OTAs are involved, and the transaction structure would otherwise fall within the novation requirements of FAR Part 42, communicate early with the federal Government to determine whether the Government would agree to a transfer without following the requirements of FAR Part 42. If the Government authority will insist upon the parties following a novation process, the buyer and seller will need more time to prepare.
• Adjust the acquisition timeline : A novation request, once prepared and submitted, can take several months to receive Government approval. Given this timeline, buyers and sellers should not expect a novation agreement to be a closing condition in a typical transaction. Rather, the buyer and seller should agree to coordinate post-closing with respect to any Government requests related to the novation process.
• Make interim plans for performance : Given the uncertain approval timeline, the parties may require an extended bridge or subcontract agreement to ensure continued performance of outstanding obligations under a contract, OTA or other agreement, pending Government approval of a requested novation. Without a bridge agreement, the transferor may be unable to perform the Government contract after selling the business. Moreover, buyer and seller should not assume the Government would agree to extend deadlines or milestones to accommodate a transaction.
• Plan in the purchase agreement for a potential rejection of the novation request : The federal Government is not obligated to approve a novation request. If the request is not approved, the transferor will remain obligated to perform the contract. The contract may be terminated for default if the original contractor is unwilling or unable to perform. Buyers and sellers should consider these possibilities when structuring their transaction. Consider addressing in the purchase agreement what happens should the Government deny the novation request.
• Budget accordingly : The transaction budget should include the legal, accounting and other expenses required to prepare the novation documentation and any related agreements, should the contracting officer require a novation.

[1] U.S. Government Accountability Office, GAO-21-501, COVID-19 Contracting, Actions Needed to Enhance Transparency and Oversight of Selected Awards (July 2021).

[2] See, e.g., United Launch Services, LLC v. United States, 138 Fed. Cl. 664 (2018) (citing John Cibinic, Jr. et al, Formation of Government Contracts 21 (4th ed. 2011)); MD Helicopters, Inc. , B-417379 (Apr. 4, 2019); and Blade Strategies, LLC , B-416752 (Sept. 24, 2018).

[3] Matter of: MorphoTrust USA, LLC , B-412711 (May 16, 2016) (citing U.S. General Accounting Office, GAO-03-150, Defense Acquisitions: DoD Has Implemented Section 845 Recommendations but Reporting Can be Enhanced 1 (2002)).

[4] Congressional Research Service Report, Department of Defense Use of Other Transaction Authority: Background, Analysis, and Issues for Congress 2 (Feb. 22, 2019).

[5] Office of the Under Secretary of Defense for Acquisition and Sustainment, Other Transactions Guide 4 (Version 2.0, July 2023).

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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.

Novation Or Assignment, That Is The Question

Contributor.

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

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

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

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

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

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

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

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

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

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

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

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

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What is the Difference Between Assignment and Novation?

Assignment of contracts is a fairly common practice in the business world.  

In an assignment, the person assigning the contract - the "Assignor" - assigns the benefits of the contract the Assignor holds to a new person (the "Assignee") who takes the benefit of that contract "the Assignee". Some contracts may expressly prohibit assignment and some contracts provide that a contract may not be assigned without the consent of the other party. If a contract has no provision relating to assignment, then the general rule is that it may be assigned, with a few exceptions. 1

Usually, a contractual party will want to ensure that if a contract is assigned, then the Assignee has sufficient skill and financial backing to continue to perform the contract and, if this is the case, it is important to make sure an assignment provision in a contract takes account of that so consent can be withheld if an Assignee does not fulfil those criteria.

Critically, in an assignment, the general law states that the Assignee takes the benefit but not the burden of the contract.  

This means that if the Assignee does not perform the contract, the Assignor remains liable. This can sometimes leave the other contractual party with a remedy if the Assignee is insolvent and does not perform. 2  However, as noted earlier, the best way of dealing with an assignment request is to complete due diligence on the Assignee, since it may be that if you later need to make a demand on the Assignor (particularly if they are a company), the Assignor may no longer be able to meet that demand under the assigned contract if the Asignee fails to perform it. For example, a company selling its business to an Assignee may liquidate following the sale (after paying all creditors at that time and returning a final dividend to shareholders), which makes it very difficult to make any later claim against it if the Assignee does not perform the contract.

An assignment is fundamentally different from a novation. In a novation, a new contract is entered into between the new party (the "Novatee") and the other continuing contracting party/parties and the original party (the "Novator") is released from all of their obligations (usually from the date the novation takes effect). For this reason, a novation poses a greater risk to the continuing contract party or parties than an assignment since they have no recourse against the Novator if the Novatee fails to perform the contract. If someone makes a request to you for novation, you should treat the request very seriously. You should consider obtaining consideration for the consent or some form of guarantee and will need to complete very rigorous due diligence on the new party to make sure they can perform the contract. You should also check when you enter into a new contract with anyone that the contract does not allow the other party to novate the contract, particularly without your consent and a rigorous agreed process in place for that consent to allow you to assure yourself the party that takes novation can perform the contract.

Assignment and novation can be a tricky area of law. As always, if you have an issue with assignment or novation or encounter an unusual clause in a new contract concerning assignment or novation, you should take legal advice – we are happy to help!

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____________________________

1    Exceptions include "personal" contracts where the particular skill, identity or characteristics of a party are fundamental to the contract. Bare rights of litigation are also not assignable.

2     Note that Section 241 of the Property Law Act 2007 has special provisions in respect of leases that make assignors liable for payment of rent and obligation under the lease, but not for increased obligations the assignee and landlord might agree to on a variation of lease unless the lease provided for that variation.

© McVeagh Fleming 2020

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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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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