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

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

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

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

Key Differences Between Novation and Assignment Deeds

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

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

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

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

What is a Deed of Assignment?

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

Key aspects of an assignment include:

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

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

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

Choosing Between Assignment and Novation in a Construction Contract

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

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

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

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

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

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

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What Is Novation?

How novation works, novation vs. assignment.

Novation FAQs

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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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Assignment and Novation: Spot the Difference 12 November 2020

Transfer of rights
Contribution
EPC Contract
Power Plant

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

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

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

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

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

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

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

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"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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Legal briefing - Novation and assignment of contracts

Publication date: 19 May 2017

In this issue:

What is the difference between novation and assignment?

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

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

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

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

Table 1: Differences between novation and assignment

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

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

Example of novation

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

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

The following diagram demonstrates this novation.

Diagram 1: Transfer of both rights and obligations

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

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

Example of assignment

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

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

The following diagram demonstrates this arrangement.

Diagram 2: Transfer of rights only

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

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

Do I use a novation or an assignment?

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

a novation will usually be required.

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

an assignment will usually be required.

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

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

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

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

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

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

Due diligence

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

Background entity information on the new party

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

Financial status information

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

Evidence of the company’s ability to perform the contract

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

Proposed transitional arrangements

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

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

Novations: matters to consider

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

Assignments: matters to consider

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

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

A deed of novation will typically:

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

A deed of assignment will typically:

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

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

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

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

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

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

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

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

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

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

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

11 See note 3.

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

Deputy General Counsel Commercial

Senior Lawyer

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

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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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.

Difference Between Assignment, Novation and a Change of Control Clause

By Stephanie Mee Lawyer

Updated on October 14, 2022 Reading time: 5 minutes

What is the Right of Assignment?

What is novation.

What is a “Change of Control”?

How Do They Differ?

Key takeaways, frequently asked questions.

Contractual rights, obligations and performance are all essential factors of any contract landscape. Identifying the parties and their responsibilities are the key building blocks of any commercial arrangement. As a result, the rights of assignment, novation and what to do in the case of a change of control all influence the architecture of your contract.

As a business owner entering commercial contracts, knowing what these terms mean is vital. This article will explore the differences between e ach clause and their impact on your contract.

The right of assignment arises as a boilerplate clause in most contracts. This means that it is generally included as standard wording and is not usually subject to much rewording.

Typically, the right of assignment will look like the following:

A Party must not assign or deal with the whole or any part of its rights or obligations under this Agreement without the prior written consent of the other Party (such consent is not to be unreasonably withheld).

The effect is that you can assign certain rights under the contract to someone else with written consent. For example, the right to be paid a debt owed could be assigned to a third party, perhaps if that third party was wronged (such as in the case where the third party’s intellectual property rights were infringed).

However, assignment is limited in that only rights can be assigned, not responsibilities . For example, you cannot assign another party the actual obligation to perform the contract.

On the other hand, the right to novation allows for the transfer of responsibility or liability. That is, if you no longer wish to or are no longer able to perform the contract, you could novate it to a third party.

Imagine that you are being replaced by a third party, cut out of the contract and a third party put in your place with access to your rights and burdens. Even though novation only needs to deal with the burdens of a contract, it will typically handle the whole arrangement.

As a result, novation does not occur only between two parties. A ll three parties subject to this change must be involved and sign off on the change. Typically, y ou will use a deed , and all three parties to the change must sign and acknowledge that one party is stepping out, allowing another to step in.

What is a “Change of Control”?

A ‘change of control’ is another clause that affects who is a party to a contract and who has responsibilities for its rights and obligations. It is common to find this kind of clause in your contracts as a boilerplate or a general mention .

A change of control refers to the make-up of a contracting party. It looks at the ownership structure of the other business contracting with you and states that if there is a significant change in the legal ownership and control of that party, you can legally exit the contract.

It may look something like this:

We shall have the right to terminate, without prejudice to our other rights and remedies, with 30 days written notice to you if there is a Change of Control.

Your business might find this clause beneficial if you are seeking to:

preserve and recognise an existing close business relationship with the other party;
avoid the outcome where a competitor or potential competitor comes into ownership of the other party;
avoid specific risks that may be posed by certain companies or groups.

Notably, not just any change to a counterparty constitutes a change of control. In contracts, a change of control will often be defined with reference to the Corporations Act . In this legislation, a change of control has occurred when another entity has the capacity to determine the outcomes of decisions for the counterparty, particularly financial and operating decisions. Other contracts will specify that there has to be a change of 50% of the counterparty’s board or ownership.

Both assignment and novation deal with how rights and obligations under a contract are transferred. A change of control addresses changes to the parties themselves, even as they remain linked to the rights and obligations.

In broad terms:

assignment deals with transferring a benefit or right to another party;
novation deals with transferring a burden (and often everything else in the contract) to another party; and
change of control deals with who the counterparty is and whether you feel comfortable continuing your commercial relationship with them, even if their ownership or leadership changes.

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A contract is built on several key building blocks, including who the parties are and t heir responsib ilities . The rights of assignment, novation and a change of control aim to address changes to these key building blocks. They a im to give boundaries to who can be a party to the contract and t heir obligations.

For more information about your commercial contract, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page .

Before you assign or novate, you will want to consider whether the new party can properly benefit from whatever you assign to them, or perform the obligations you intend to novate. You may also want to consider the work that has already been completed and who will be liable for that prior work. Likewise, think about how you will manage other agreements attached to the contract.

Generally, this is interpreted broadly and given a common-sense meaning. It will very much depend on the particular arrangement, the nature of the contract and the benefit being assigned. A consideration of what is reasonable may also look to defaults in obligations or solvency issues of the assignee.

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Difference Between

10 Tips for Understanding the Difference Between Novation and Assignment

Introduction.

Understanding the legal concepts Novation and Assignment are fundamental when entering contractual agreements, both parties involved in negotiations as well as legal professionals must grasp them to fully comprehend their implications and the benefits for both.

Novation involves the transfer of contractual rights and obligations; assignment differs in its fundamental nature and implications – being aware of these differences is vitally important when entering negotiations as well as legal advice services.

In this content outline, we will investigate the differences between novation and assignment by outlining their definitions, processes, legal implications and key distinctions. Additionally, we will present practical examples demonstrating their implementation across various situations.

By the time this content outline concludes, you will have gained an in-depth knowledge of both concepts to enable you to navigate contractual agreements with greater confidence and clarity.

What is Novation?

A novation is a legal concept which refers to the practice of replacing one party with another within an agreement, generally by creating an entirely new contract that replaces it and releases some rights and duties of both original parties, while taking on all obligations and rights belonging to their counterpart.

All parties involved must consent for this procedure which typically results in creating an entirely new contractual arrangement thereby effectively ending one contractual relationship while creating another one instead.

What is Assignment?

Legally defined, an assignment refers to the transference of rights or benefits within an asset or contract from one party (the assignor) to another (the assignee), without needing a new agreement being drawn up between them both. An assignment alters an original contract by assigning its rights and obligations to someone other than its original signatory; typically gaining them the ability to benefit from contract terms or perform them more readily than originally envisaged by its signator.

Once completed, no further rights or involvement from assignor remain; often their consent must be secured prior to proceeding as must fulfilling certain legal criteria such as having written evidence that supports assignment as required in original contracts or fulfilling specific conditions set out therein.

Comparative Table of Novation & Assignment

Sure! This table highlights the main differences between novation vs. assignment:

The specific legal requirements, implications and novation or assignment will vary depending on jurisdiction and contract terms. To ensure compliance with the applicable laws and regulations, it is recommended that you seek legal counsel when dealing with novation.

Examples and Scenarios

Example 1 of Novation: Transferring a Rental Agreement: Tenant A has signed a rental agreement for a commercial building with Landlord; however, Tenant B wishes to transfer that lease agreement over to them instead. Substituting Parties in a Construction Contract : Contractor X entered into a construction contract with Client Y; however, due to unforeseeable events he cannot complete his task of construction project completion on his own.

Instead, Contractor X seeks to replace Contractor Z as responsible party. By agreement both parties (Contractor X and Z) agree on breaking away from his previous agreement in order to form one between Contractor Z and Client Y directly.

Example Assignments of Ownership Transfer in a Patent: Invention A holds a patent on its technological invention and decides to give his rights over to company B by assigning ownership and benefit rights over to it, giving B the chance to use and protect this innovation.

This assignment grants rights of use as well as any future royalties accruing thereto from using or protecting this invention in future projects by Company Assignation of Account Receivables: Supplier X still has outstanding accounts receivable with Customer Y and decides that these will be assigned to a factoring firm called Company Z as its right of collection will now lie with this factoring firm instead of Supplier X directly.

By assigning them this way, Supplier X transfers its right to payment directly with Company Z instead of to itself. Attentiveness to legal requirements and consensus among parties are of the utmost importance for successful business transactions.

Transfer of Obligations

There is a difference between assignement and novation when it comes to transferring obligations. Novation involves discharging an original contract and creating a new one with obligations fully transferred from one party to the other, in effect creating two contracts simultaneously and assigning new obligations entirely on to each new party responsible for fulfilling them all.

Transfer of obligations is key component of novation as it replaces one party’s responsibility with that of another party. Transferring Obligations: An assignment does not automatically involve the transfer of obligations; rather, its execution relies on agreement between both parties to assign both rights and responsibilities based on agreement terms or contractual arrangements between them; in most instances requiring consent of counterparty for transferring obligations via assignment. Assignment refers primarily to the transfer of rights. Unless otherwise agreed upon, assignor may remain responsible for fulfilling obligations until another agreement has been made.

Transferring an Existing Lease Agreement

Transferring a lease contract may involve either novation or assignment depending on its circumstances. These two methods can help transfer it. Here is more on this subject:

This process includes three steps. All parties involved (landlord, current tenant (assignor), and new tenant (assignee)) must agree upon a novation arrangement.

Release of Original Tenant (Assignor): Any rights and obligations stemming from their lease are transferred back to them as soon as it becomes an assignee agreement.

Create a New Lease Agreement: Add your new tenant as a signatory on this new agreement for their lease terms and conditions to reside. This new agreement should detail what conditions may arise during occupancy of the property by its tenants.

All parties involved, such as landlord, original tenant and new tenant must agree and sign onto a new lease contract which replaces their original one.

Assignment: As another means of transferring a lease agreement, assignment allows its rights and benefits to pass to its new tenant without losing them altogether. Usually this involves several steps. Consent of Landlord: Before assigning leases, in most instances the consent of the landlord must first be secured; either explicitly stated in the lease agreement, or alternatively obtained separately.

Notice to Landlords: An assignor provides written notification to his/her landlord about an assignment agreement as part of an official notice to renters process.

Contractual ownership – Once an assignment takes effect, its rights and obligations pass to its assignee tenant; however, any obligations to which either tenant was originally responsible remain the responsibility of both tenants unless agreed otherwise.

Review the original lease contract and consult a lawyer to ascertain which method would best serve to transfer a lease; the answer can depend on its terms, local regulations and your own jurisdiction’s specific legislation. Novation or assignation could both work, depending on local laws applicable in each jurisdiction.

Assignment of accounts receivable

It is becoming more prevalent for businesses to assign accounts receivable to third-party assignees as an easy way to transfer ownership rights on invoices they still owe and secure payment from customers more efficiently. Here’s how the typical assignment works:

An agreement: Companies looking to assign receivables enter into contracts with third-party entities such as factoring firms or financial institutions in order to assign accounts receivable. The terms and conditions will determine what accounts receivable are being assigned as well as any fees due for doing so.

Notification to Customers: Informing its customers of the assignment. This notification alerts debtors of their obligations to make future payments directly to the assignee. Assignation of Receivables – To assign receivables, one party transfers their right to collect payments on those receivables to another, often through an assignment agreement or notice of assignment that details all details about what accounts were assigned including amounts and due dates.

The assignee will then take responsibility for collecting payments from debtors and applying them towards assigned receivables, deducting any agreed-upon fees or purchase prices before sending any remaining funds back to assignor.

In most instances, assignors remain responsible for any disputes pertaining to receivables they assign; however, since collection rights were transferred over, this burden has now fallen on assignee.

Assignment of accounts receivables provides immediate working capital by turning outstanding invoices into cash quickly, decreasing risk and speeding up cashflow through faster funds receipt. Meanwhile, assignees earn money collecting receivables.

As with any financial or legal transaction, it is wise to seek professional advice in reviewing any agreement in order to comply with local regulations and laws.

Highlighting the key differences

Assign: Most contracts typically involve only the transfer of rights and benefits; all obligations and responsibilities remain with the original party unless agreed otherwise. Create A New Contract Novation: Novations refers to the process of creating an entirely new contract in place of one already existing. All parties involved must agree upon its creation; then an entirely new arrangement comes into being.

Assignment of Rights Does Not Create Contract: Transferring rights does not enact a new agreement; rather, the assignee assumes all of the original contract’s provisions while still fulfilling them as originally stipulated by its originator (in this instance).

By way of novation, the original contract is completely terminated; and in its place a new one comes into effect. When assigning is used instead of novation to dissolve an agreement, rights and obligations of that original contract remain with its assignee until otherwise agreed by both parties involved.

For any changes made after assignment consent must still be obtained prior to taking place. Agreement must be obtained from both sides when changing a contract’s subject matter; this includes both parties to the original agreement as well as those entering into it as new counterparties.

Consent must be obtained from both parties involved before assigning contracts; depending on the terms and conditions of your original contract, you may require both of their signatures as well.

Contract confidentiality: Novation: Novations establishes privity of contract between a new counterparty and party. For Assignment, neither counterparty and assignee have direct contractual ties – as third-party beneficiaries they enforce each others rights through third-party beneficiary arrangements.

These differences are crucial in order to illustrate the various effects and characteristics of novation vs assignment contracts transfers in order to comply with legal regulations and accurately assign rights and obligations between all involved parties.

Understanding their differences is necessary in order to successfully manage contract transfers in compliance with legal standards as well as accurately assign rights and obligations between participants involved.

Similarities Between Novation and Assignment

Although novation and assignment are distinct legal concepts, they share similarities in their application and purpose. Understanding these similarities will help clarify their relationship to one another.

Both agreements involve the transfer of contractual rights and obligations:

Novation: Through novation, rights and obligations can be fully transferred between parties to an existing contract and those involved in creating a new one with fresh parties.

Assignment: Under assignment, some rights and obligations of an original contract remain valid while certain rights or obligations are transferred to a third party. Both can occur voluntarily between parties:

Novation is a voluntary agreement between original parties and new ones that requires mutual consent for approval. Assignment, on the other hand, is also voluntary in that an assignor willingly transfers rights or obligations to an assignee.

Both documents can be used to transfer rights under a contract:

Novation: Novation is an innovative solution designed to facilitate the transfer of rights and obligations from one party to the next, ensuring an effortless transition without interrupting contractual obligations. Assignment: Assignment allows the assignor to transfer rights or obligations to an assignee, giving them either all of its advantages or burdens under a contract agreement. Even though novation and assignment share many similarities, it is crucial to comprehend their specific characteristics and legal ramifications; please see the following sections for details.

Both involve the transfer of contractual rights and obligations

Although novation and assignment are separate legal concepts, they do share similarities in their applications and purposes. By understanding these commonalities between them, one can better comprehend their relationship. Here are the key similarities between them:

Assigning contractual rights and obligations:

Novation: Novation is the process by which all rights and obligations transferred from original parties to new ones in a contract are fully transferred over, effectively replacing it.

Assignment: Assignment involves the transfer of specific rights or obligations from one party to another without changing the overall contractual arrangements, although both parties continue to retain rights and obligations under their original agreements.

Novation: Novation is an agreement among all involved parties–original and new -that involves replacing an original contract with one that replaces it voluntarily and mutually. All involved must agree upon its implementation before proceeding with novation and replacing it with one of their own choosing.

Voluntary agreement between parties:

Assignment: Assignment is a voluntary act wherein one party transfers specific rights or obligations to another without necessarily needing consent of both parties involved, although typically written notice will be sent out with regard to this change in status.

Impact on contractual relationships:

Novation: Novation is defined as the discharge of original parties’ obligations and the establishment of a new contractual relationship among new ones, effectively replacing their old contract with an entirely different agreement.

Assignment: Assignment does not constitute the termination of an existing contract; rather, it introduces a third-party (known as an assignee ) who assumes certain rights and responsibilities associated with that existing agreement.

Legal Implications:

Novation: By novation, original parties are relieved from their obligations under an existing contract and fully transferred over to new parties; original parties no longer bear responsibility for its obligations.

Assignment: Assignor remains ultimately liable for fulfilling their assigned obligations, although assignee has gained the ability to enforce them directly against each party involved. Novation and assignment both involve the transfer of contractual rights and obligations, but it is crucial to recognize their differences because each can have different repercussions for both the original contract and all involved parties.

Both can be used to transfer rights under a contract

Novation and assignment both serve to facilitate the transfer of rights under contracts, sharing several similarities that facilitate their transference. Such similarities include:

Transfer of Contractual Rights:

Novation: Novation allows for the transfer of all rights and obligations between original parties to new ones, including contractual rights such as payments, benefits or performance obligations.

Assignment: Assignment allows an assignor to transfer specific rights under their contract to an assignee, such as payments or intellectual property rights. B. Ensuring continuity of rights: By using assignment as a mechanism for passing specific contractual rights over to their new owners, assignments ensure their continuation over time.

Facilitating the continuity of rights:

Novation: Novation ensures the continuity of rights by replacing original parties with new parties who assume all of their responsibilities and rights as stipulated under the original contract, thus creating a seamless transition and safeguarding the original terms of it. Assignment: Assignment ensures that specific rights are passed effectively from assignor to assignee, enabling them to enjoy and exercise benefits previously held by assignor.

Enhancing flexibility and efficiency:

Novation: Novation is an effective means for parties to restructure their contractual relationships by adding new parties while simultaneously relieving original parties from any of their obligations, thus adapting contracts to changing circumstances.

Assignment: Assignment provides parties with a quick and effective means of assigning individual rights or obligations to third parties without completely revamping their original contract. Assignment is also an efficient means of allocating specific rights.

While both novation and assignment involve the transfer of rights under a contract, it is crucial to recognize their individual characteristics and legal implications to determine which approach would be most suitable in each instance.

Understanding the differences between novation and assignment is crucial for successfully managing contractual agreements.Novation involves replacing an existing agreement with one that meets all parties’ approval, leading to both discharge of existing contractual obligations as well as creating new ones; on the other hand, assignment involves passing specific rights or obligations from one party to another while keeping the original contract intact.

No matter their differences, novation and assignment share some similarities. Both involve the transfer of contractual rights and obligations, providing continuity for parties involved in an existing contract. Furthermore, both are voluntary acts which require consent from both sides involved and provide flexibility and efficiency when altering contractual relationships.

Novation Agreement: Everything You Need to Know

When a third party enters the agreement, it takes the place of the departing party. 3 min read updated on February 01, 2023

Updated October 8,2020:

A novation agreement transfers the contractual obligations of one party to a third party or replaces a contractual obligation with another one. All parties involved in this type of contract must consent to the changes.

About Novation

When a third party enters the agreement, it takes the place of the departing party. Usually, novation happens when a new party assumes an obligation to pay that an original party had incurred.

The debts transfer to someone else, releasing the original debtor from the obligation. The nature of the transaction depends on the agreement that the parties make.

Three parties are involved in a novation:

The transferee
The transferor
The counterparty

All must sign the novation agreement.

Corporate actions such as acquisitions and mergers involve a large number of novation contracts, and it's a common method for rescheduling loans.

Different Kinds of Novation

There are three ways to make a novation and each is distinct.

The first, which has no official name, is simply known as a novation. This doesn't involve the introduction of a third party . Instead, someone who owes a debt enters into a new agreement with his or her creditor.
The second is called an expromissio, and this involves a third party entering the picture. The new party, or debtor, takes on the debt of the former debtor. When the creditor accepts this change, it discharges the first debtor from the debt.
The third kind is called a delegation, and this happens when a new creditor enters into the agreement in place of the old one. The debtor is discharged from the debt by the original creditor, who contracts some obligation for the new creditor.

Novation vs. Assignment

While novation and assignment are similar, there are important differences between them. A novation involves three parties, and all involved parties must consent to the new contract. A novation is able to transfer obligations as well as rights. An assignment doesn't transfer obligations.

Sometimes, a novation is called a “Hail Mary” defense for someone trying to avoid contractual liability. To establish novation, however, requires a rather high standard.

By contrast, assignment and assumption only transfer a party's contractual rights and benefits. Therefore, the original assignor/seller still has an obligation. This party can actually be held responsible if the assignee/purchaser doesn't fulfill the contractual performance. In order to protect itself from potential liability, an assignor may want to obtain an indemnity from the assignee.

Assignment doesn't necessarily require the consent of the third party the way that a novation does, and the original contract remains valid . Based on the agreement's terms, the assignor may only need to provide notice to the non-assigning party of the change.

In property law, for example, novation occurs when one tenant signs a lease over to another person. This new tenant then becomes responsible for paying rent and is liable for property damage. Novation is also common within the construction industry, when a contractor transfers a job to another contractor, as long as he or she has the consent of the client to do so.

Pros and Cons of Both

In many cases, assignment and assumption are more convenient for the seller than a novation since a seller might not need consent from a third party before assigning its interest. Still, the seller has to understand the liabilities it potentially faces if the purchaser doesn't meet contractual performance.

While a novation may protect sellers from future liabilities, it tends to be a more tedious process. In addition, if the third party doesn't provide consent, novation will not be possible. Before going ahead with novation, it's important for all involved parties to assess their relationship, particularly with the third party. If they don't believe the third party will provide the necessary consent, they may have to go with another option.

When faced with the scenario of transferring contractual rights and/or obligations, it's important to understand exactly what is being transferred. This is why it's vital that you fully comprehend all of the complex language in a contract. Consulting with a legal professional is one way to ensure you know what you're agreeing to before you sign a legally binding document .

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

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Novation Agreement

Jump to section, what is a novation agreement.

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

Novation Explained

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

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

There are three main ways to make a novation:

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

Novation vs Assignment:

Novation in contract and business law is different from assignment .

Assignment is generally valid as long as the party is provided notice whereas a novation requires agreement of all parties. An assignment only passes along benefits. whereas a novation transfers both benefits and obligations. For instance, a sublease is an assignment. The landlord can still hold the primary renter responsible. In a novation, the primary party of the contract would also transfer all obligations and cannot be held accountable for the contract after novation is complete.

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

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

Purpose of a Novation Agreement

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

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

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

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

Examples of Novation

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

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

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

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

Here is an article with more examples of novation .

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Who Should Sign a Novation Agreement?

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

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

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

Get Help with a Novation Agreement

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

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

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

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

Novation Agreement FAR 42.1204 Definition

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

Federal Government Contract Novation vs Assignment of Contract

Business Asset Purchase Agreement and Contract Assignment Clause Issues

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

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

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

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

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

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

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

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

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

Potential SBA Size Standard Violations

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

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

Help With Government Contracting Companies for Sale

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

Legal Issues Regarding Novation Vs Assignment

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

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

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

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Privacy Overview

UK: 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 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

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13 March 2018
Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

There’s often, understandably, a bit of uncertainty about whether (and how) a party to a contract can “assign” (transfer) its rights, or pass on its obligations, under that contract, to another person.

In law, the general rule is that only the original parties to the contract can discharge or fulfil the obligations and enforce the rights created under it and nobody else gets a look in. This is called “privity of contract”.

Essentially, novation and assignment are both mechanisms to get around this restriction. However, while the end result is the same, there are some important differences between these two mechanisms.

Under an assignment, one party (the assignor) keeps performing their obligations under the contract, but transfers some or all rights to a third party (the assignee). The parties to the contract remain the same so privity of contract is preserved.

Assignments can be legal or equitable. In order for an assignment to be a legal assignment, the assignment must be agreed in writing, signed by the assignor, and the other party to the contract must be given notice of the assignment. A legal assignment is usually preferable as this allows the assignee to enforce the rights in their own name directly.

If the assignment is an equitable assignment because it does not fit the criteria for a legal assignment (for example, the other party was not given notice of it), the assignee will need to get the assignor to enforce the assigned rights on its behalf.

Contracts often require the consent of the other party before any assignment can take place. Some contracts expressly prohibit assignment. However, even where there is such wording in the contract, there is nothing stopping you from asking the party to consent to the assignment anyway, though you should take care to record any agreement in writing.

The main point to remember is that you cannot assign obligations under a contract to another party – you can only assign your benefits or rights. Even if the assignee agrees that they will take on the obligations under the contract, it is still the assignor who remains responsible for performance of the obligations and liable if they are not. In practice, what often happens is that the assignee does take over the performance of the contractual obligations but simply agrees to indemnify the assignor for any failures in performance.

It is also important to note that some rights may not be legally capable of assignment.

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When you novate a contract, the original contract effectively ceases to exist and is replaced with a new contract. The new contract contains exactly the same rights and obligations as the original contract, except that it substitutes one of the original parties (the outgoing party) with a third party (the incoming party).

As you are creating a new contract, technically you need to provide fresh consideration. Usually a simple novation agreement between all the parties will be enough, but, if there is any doubt, the parties may choose to execute the novation as a deed instead, which dispenses with the need for consideration.

The novation agreement (or deed) will specify what happens to the liabilities under the original contract. In a typical novation, the outgoing party would be released from all liabilities and the incoming party would inherit these. However, this is up to the parties to decide; they could even decide that the outgoing party will remain liable for all of the liabilities under the original contract.

Novating the contract will release the outgoing party from any future obligations which may arise. This is a crucial difference between novation and assignment.

Although the novation agreement itself can be simple, the process of getting all the parties to the table to agree and execute might be more complex. The main issue for an outgoing party will be persuading the other original party to sign. The other original party often has concerns about service continuity and may want certain assurances or information about the incoming third party.

Equally, the other original party is not obliged to agree: they can refuse to novate and then sue for breach if the party trying to exit the contract fails to meet its contractual obligations. As they still have this other option, in any novation scenario, the outgoing party is probably in a weaker bargaining position, and the other original party may well use this to their advantage.

About this article

Subject Novation and Assignment: Sisters, Not Twins
Author Stephen James
Expertise Commercial Real Estate
Published 13 March 2018

Disclaimer This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Assignment and Novation

What are assignment and novation clauses.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment and novation clauses

Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:

assignment, for the transfer of benefits; and
novation, for the transfer of rights/benefits and obligations

Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment clauses

A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.

Novation clauses

By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.

A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.

It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.

Option 1 – Assignment, novation and other dealings – consent required

A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].

Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld

(a) [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld .

(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:

(i) [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];

(ii) [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;

(iii) the proposed assignee is a competitor of [ insert name of Party B ]; or

(iv) [ Insert name of Party B ] is in dispute with the proposed assignee .

Click here for information on how to use this boilerplate clause.

A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.

Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.

A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.

The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.

The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause. Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.

A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:

extraneous or disassociated from the subject matter of the contract;
materially inconsistent with any provision(s) of the contract; or
based on collateral or improper considerations.

It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.

Primary tabs

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 ]

business law
landlord & tenant
property & real estate law
trusts, inheritances & estates
wex definitions

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COMMENTS

Assignment vs Novation: Everything You Need to Know
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.
Novation vs Assignment: Which One Is The Correct One?
Novation and assignment are both terms used in contract law. Novation is the act of replacing one party in a contract with another party, while assignment is the act of transferring rights or obligations from one party to another. Novation is the proper term when a new party is being substituted for an existing party in a contract.
Assignment and novation
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.
Assignment vs. Novation: What is the Difference?
An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement. If you need further assistance with an assignment or novation, our experienced contract lawyers can assist you as part of our LegalVision ...
Assignment or Novation: Key Differences and Legal Implications
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 ...
Novation: Definition in Contract Law, Types, Uses, and Example
Novation is the act of replacing one party in a contract with another, or of replacing one debt or obligation with another. It extinguishes (cancels) the original contract and replaces it with ...
Assignment and Novation: Spot the Difference
Novation. Whereas assignment only transfers a party's rights under a contract, novation transfers both a party's rights and its obligations. Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the ...
Legal briefing
Table 1: Differences between novation and assignment. Novation. A novation is the mechanism by which a contract is terminated and a new contract is made between different or additional parties. 2 The new contract is generally on the same terms as the original contract. A novation has the effect of substituting one party for another party without necessarily changing the rights and obligations ...
Assignment and Novation Agreement: What You Need to Know
Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another. Definition of Assignment. The transfer of a benefit or interest from one person or legal entity to another is referred to as assignment. The obligations or "burden," of a contract, however, are not something that can be ...
Differences Between Assignment and Novation
As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits. But there are other differences between the two that business owners must be aware of. 1.
Novation And Assignment: What Is The Difference?
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 ...
What's the Difference Between Assignment and Novation?
Therefore, it is important to understand those differences. Moreover, assignment is a partial transfer (in respect to the rights of a contract) to a third party. A novation is a complete transfer of that contract (rights & burden) to another party. In both instances of transferring rights or obligations to a third party, consult a contract lawyer.
Assignment, Novation and Change of Control Clause
The rights of assignment, novation and a change of control aim to address changes to these key building blocks. They a im to give boundaries to who can be a party to the contract and t heir obligations. For more information about your commercial contract, our experienced contract lawyers can assist you as part of our LegalVision membership.
Assignment And Novation Agreement: Definition & Sample
An assignment and novation agreement is a contract between two parties where one gives up their rights and responsibilities under an original contract. An assignment cancels the original contract and transfers the rights and responsibilities of one of the parties to another, third party. In novation, one of the parties surrenders their rights ...
10 Tips for Understanding the Difference Between Novation and Assignment
Novation: Novation allows for the transfer of all rights and obligations between original parties to new ones, including contractual rights such as payments, benefits or performance obligations. Assignment: Assignment allows an assignor to transfer specific rights under their contract to an assignee, such as payments or intellectual property ...
Novation Agreement: Everything You Need to Know
A novation is able to transfer obligations as well as rights. An assignment doesn't transfer obligations. Sometimes, a novation is called a "Hail Mary" defense for someone trying to avoid contractual liability. To establish novation, however, requires a rather high standard. By contrast, assignment and assumption only transfer a party's ...
Contracts: The critical difference between Assignment and Novation
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby ...
Novation Agreement: What is a novation agreement (2023)?
Novation vs Assignment: Novation in contract and business law is different from assignment. Assignment is generally valid as long as the party is provided notice whereas a novation requires agreement of all parties. An assignment only passes along benefits. whereas a novation transfers both benefits and obligations.
FAR 42.1204 Novation Clause vs Assignment of Contract
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 ...
Contracts: The Critical Difference Between Assignment and Novation
Assignment and novation in the Construction Industry. Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. ...
Novation 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.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 ...
Assignment and Novation
Learn the difference between assignment and novation, and how to draft clauses to regulate the transfer of rights and obligations under a contract. Find boilerplate clauses, commentary and examples for various scenarios.
assignment
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 ...

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

Table of Contents

Key Differences Between Novation and Assignment Deeds

What is a Deed of Assignment?

Choosing Between Assignment and Novation in a Construction Contract

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What Is Novation?

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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.

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