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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.

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

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

Table of Contents

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

Key Differences Between Novation and Assignment Deeds

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

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

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

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

What is a Deed of Assignment?

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

Key aspects of an assignment include:

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

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

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

Choosing Between Assignment and Novation in a Construction Contract

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

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

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

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

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

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

Authored By Raea Khan

Director Lawyer, PBL Law Group

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What is the difference between Assignment vs. Novation

• April 4, 2024

When it comes to business agreements, there are some terms and concepts that can be confusing. Two such terms are assignment and novation. While they may seem similar, they have distinct differences that are important to understand to properly navigate business agreements. Our expert lawyers will explore the difference between assignment and novation, and how they can impact your business agreements.

Are you facing challenges with assignments or novations in your business contracts? Call us for a Free Consultation with our expert solicitors today on 0207 459 4037 or complete our booking form below to schedule your consultation.

What is Assignment?

Assignment is the transfer of rights and obligations from one party to another. This means that one party, known as the assignor, transfers their rights and obligations under a contract to another party, known as the assignee. The assignee then becomes responsible for fulfilling the obligations and receiving the benefits outlined in the contract.

Examples of Assignment

An example of an assignment would be if a company sells a piece of property to another company. The original company would assign their rights and obligations under the contract to the new company, who would then take over ownership of the property and be responsible for fulfilling the terms of the contract.

Another example would be if a freelancer assigns their rights and obligations under a contract to a subcontractor. The subcontractor would then take over the work and be responsible for fulfilling the terms of the contract.

Types of Assignments

Assignments can take various forms depending on the nature of the contract and the parties involved. Here are some common types of assignments:

Absolute Assignment

In an absolute assignment, the assignor transfers all their rights and obligations to the assignee without any conditions. This type of assignment is irrevocable and the assignor no longer has any control over the rights transferred.

Conditional Assignment

A conditional assignment is one where the transfer of rights and obligations is subject to certain conditions being met. The assignment only becomes effective when the specified conditions are fulfilled.

Partial Assignment

In a partial assignment, only a portion of the rights and obligations under a contract are transferred to the assignee. The assignor retains some control over the remaining rights and obligations.

Legal Assignment

A legal assignment involves the transfer of legal ownership of rights and obligations to the assignee. This type of assignment is enforceable in court and provides the assignee with legal protection against any claims from third parties.

Equitable Assignment

An equitable assignment does not involve the transfer of legal ownership, but rather an intention to transfer the rights and obligations. This type of assignment is based on principles of fairness and equitable remedies.

Multiple Assignments

Multiple assignments occur when the same rights and obligations are assigned to more than one assignee. This situation can lead to complex legal issues and disputes over which the assignee has a valid claim to the rights.

What is Novation?

Novation is the replacement of one party in a contract with a new party. This means that one party, known as the transferor, transfers all of their rights and obligations under a contract to a new party, known as the transferee. The transferee then becomes a party to the contract and is responsible for fulfilling the obligations and receiving the benefits outlined in the contract.

Examples of Novation

An example of novation would be if a company sells their business to another company. The original company would transfer all of their rights and obligations under the business contracts to the new company, who would then become responsible for fulfilling the terms of the contracts.

Another example would be if a company merges with another company. The two companies would enter into a novation agreement, where one company would transfer all of their rights and obligations under their contracts to the other company.

Types of Novation

Novation is a complex legal concept that involves the substitution of one party to a contract with a new party. There are several types of novation that are commonly used in business agreements. Here are the key types of novation:

Full Novation

A full novation involves the complete substitution of one party to a contract with a new party. This means that the original party relinquishes all rights and obligations under the contract, and the new party assumes full responsibility for fulfilling those obligations.

Parallel Novation

In a parallel novation, a new party is added to the existing contract alongside the original parties. This new party shares the rights and obligations of one of the original parties without replacing them entirely. This type of novation is often used in complex business transactions where multiple parties are involved.

Temporary Novation

Temporary novation is a type of novation where the substitution of parties is only for a specific period of time or under certain conditions. Once the specified period or conditions are met, the original party may resume their rights and obligations under the contract.

Permanent Novation

Permanent novation, on the other hand, involves a permanent substitution of parties in a contract. The original party permanently exits the contract, and the new party takes over all rights and obligations for the duration of the contract.

Bilateral Novation

Bilateral novation occurs when all parties involved in the contract agree to the substitution of one party with a new party. This type of novation requires the consent of all parties to the contract for the substitution to be valid.

Unilateral Novation

In unilateral novation, only one party to the contract seeks to be substituted by a new party without the consent of the other party. This type of novation may involve legal complexities and challenges, as the non-consenting party may seek to dispute the validity of the substitution.

Key Differences Between Assignment and Novation

While assignment and novation may seem similar, there are key differences that are important to understand including:

Transfer of Rights and Obligations

The main difference between assignment and novation is the transfer of rights and obligations. In assignment, the assignor transfers their rights and obligations to the assignee, but they still remain a party to the contract. In novation, the transferor completely transfers all of their rights and obligations to the transferee and is no longer a party to the contract.

Consent of All Parties

Another key difference is the consent of all parties involved. In assignment, the assignor and assignee must both agree to the transfer of rights and obligations. However, the other party in the contract does not need to give their consent. In novation, all parties involved must agree to the replacement of the transferor with the transferee.

In assignment, the assignor remains liable for any breaches of the contract, even after the assignment. The assignee is only responsible for fulfilling the obligations outlined in the contract. In novation, the transferor is no longer liable for any breaches of the contract, as they are no longer a party to the contract. The transferee assumes all liability for fulfilling the obligations outlined in the contract.

Impact on the Original Contract

In assignment, the original contract remains in effect, with the only change being the transfer of rights and obligations. In novation, the original contract is terminated and a new contract is created between the remaining party and the transferee.

When to Use Assignment vs. Novation

The decision to use assignment or novation in a business agreement depends on the specific circumstances and goals of the parties involved:

• Assignment is typically used when one party wants to transfer their rights and obligations under a contract to another party but still wants to remain a party to the contract. This can be beneficial if the assignor wants to maintain a relationship with the other party, or if they want to continue receiving benefits outlined in the contract.
• Novation is typically used when one party wants to completely transfer all of their rights and obligations under a contract to a new party. This can be beneficial if the transferor wants to completely exit the contract and have no further involvement, or if the transferee wants to become a party to the contract and receive all benefits outlined in the contract.

Expert Business Contract Solicitors

While assignment and novation may seem similar, they have distinct differences that are important to understand to properly navigate business agreements.

Assignment involves the transfer of rights and obligations from one party to another, while novation involves the replacement of one party with a new party. The decision to use assignment or novation depends on the specific circumstances and goals of the parties involved. By understanding the difference between assignment and novation, you can ensure that your business agreements are properly executed and fulfilled.

For expert legal advice on assignment and novation matters, don’t hesitate to contact our expert business and commercial solicitors at 0207 459 4037 for a Free Consultation today.

Karim Oualnan, Partner

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

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

Potential risks with assignment

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

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

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

Assignment v novation

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

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

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

Is the Deed for an assignment or a novation?

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

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

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

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

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

Key characteristics of a novation

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

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

What is your objective?

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

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

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Out-Law Analysis 10 min. read

Construction law terms: assignment and novation

14 Jul 2023, 12:44 pm

The terms ‘assignment’ and ‘novation’ are sometimes used interchangeably in relation to construction projects, but they are, in fact, very different.

While both involve bringing in a new party to the contractual arrangements, they have very distinct practical consequences. This guide examines the difference between both terms explains important differences, looks at how these differences have been illustrated in recent case law and offers some practical takeaways.

It is important to note that the ‘assignment’ of one party’s interest in a contract to another party is only partial, because the process only transfers the benefit of the first party’s interest. Assignment does not also transfer the first party’s obligations under that contract to the second party.

For example, the employer (Party A) under a building contract might assign the benefit of a collateral warranty granted to it by the contractor (Party B) or a subcontractor, to the purchaser of the development (Party C). That assignment does not transfer the burden of any of the employer’s obligations – they remain the same.

Another example showing how an assignment can only transfer the benefit of a contract, not the burden, under a building contract would be:

• the developer’s rights to have the works constructed or to sue the building contractor if the works are defective, are benefits – so can be assigned;
• the developer’s obligation to pay the contract price is a burden – so cannot be assigned.

The assignment of the benefit of a contract to Party C does not replace the parties to the original contract. However, after the assignment, Party C is entitled to the benefit of the contract and to enforce its rights against Party B. Party A cannot do so – as they have assigned those benefits onto Party C. However, because the burden has not transferred, Party A will remain liable to Party B for the performance of all obligations under the contract.

Read more in our construction law terms series

• Construction law terms: general and liquidated damages
• Construction law terms: design development and design change
• Construction law terms: termination at common law and under contract
• Construction law terms: claims under contract vs breach of contract claims
• Construction law terms: contractual notices and condition precedent notices
• Construction law terms: set off, abatement and counterclaims

The ordinary position is that an assignment will transfer the benefit of accrued and also of future rights. It is possible to agree something different – for example the transfer of future rights only – but clear and express words are required.

It is essential for parties that are considering assigning the benefit of a contract to check the terms of the contract first. This is because many contracts exclude or qualify the right to assignment, such as by limiting the number of times it can be assigned. By way of example, clause 7.1 of the standard form JCT Design and Build Contract 2016 states: “neither the Employer nor the Contractor shall without the consent of the other assign this Contract or any rights thereunder”.

In practice, however, this clause is very often amended, so parties must make sure to check the terms, and any schedule of amendments, carefully. 

One common amendment adds wording that the consent of the other party to assignment “shall not be unreasonably withheld or delayed”. While there is surprisingly little case law on what this means in practice, there is some authority to suggest that it means, at least, that the party required to provide consent must act honestly and in good faith, and must not withhold consent arbitrarily, capriciously or unreasonably.

Lastly, assignment can be statutory – sometimes referred to as ‘legal assignment’ – or equitable.  Statutory assignment must comply with the requirements of s.136 of the 1925 Law of Property Act, which includes a requirement to notify the other party to the contract (Party B) of the assignment in writing. If the assignment does not comply with the formalities in the Act, it will be an equitable assignment. 

The most pertinent difference between an equitable and statutory assignment is that the party (Party C) to whom the benefit is assigned cannot enforce in its own name and must join Party A in any action. This prevents Party B from being sued by Party C in circumstances where Party B has had no notice of the earlier assignment. 

If you want to transfer the burden of a contract as well as the benefit under it, you have to novate. In effect this creates a new contract between the two new parties and releases one of the parties from the contractual chain. The key requirement of novation is that it needs consent of all three parties involved. If Parties A and B have a contract between them, but Party A wishes to substitute Party C in its place then Parties A, B and C must all consent to this. 

Because the consent of all parties is required it will typically be documented in a tripartite agreement, signed by the novating party, the party to whom the contract is being novated and the third party. The agreement will in practice commonly be executed as a deed, otherwise some form of consideration must be provided by the party to whom the contract is being novated. 

If the parties do all consent to novation, the effect is that the original contract between Party A and B is extinguished and is replaced by a new one between Party B and C, which duplicates the rights and obligations of those under the original contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

In the context of a construction project, novation commonly occurs in design and build projects where the employer may engage consultants in the pre-construction design process. The building contract between the employer and contractor will often provide for the novation of these design consultants to the contractor. 

More generally, novation frequently occurs as a result of a company group restructuring or sale. On large infrastructure projects you might also see the novation of contracts to a special purpose vehicle (SPV) company that is set up specifically for the project. 

Key differences between assignment and novation

Case law involving assignment and novation

A good starting point is the Commercial Court case of The Argo Fund Ltd v Essar Steel Ltd, in which the judge summarised the four main differences between assignment and novation.

• A novation requires the consent of all three parties involved. By contrast, Party A can assign without the consent of either Party B or Party C – unless the contract states otherwise.
• A novation involves the termination of one contract and the creation of a new one in its place. In the case of an assignment Party A’s existing contractual rights are transferred to Party B, but the contract remains the same and Party A remains a party to it so far as its obligations are concerned.
• A novation involves the transfer of both benefits and obligations to the new party, whereas an assignment concerns only the transfer of benefits.
• Novation involves the termination of a contract and the creation of a new one so consideration is required, unless a party uses a deed which is generally enforceable without consideration. By contrast, assignment can be completed without the need for consideration.

Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd

There are a number of cases where it has not been entirely clear whether a contract has been assigned or novated. A recent example is the 2020 ruling in the dispute between Energy Works (Hull) Ltd and MW High Tech Projects UK Ltd. The employer, Energy Works, engaged MW High Tech (MW) as a contractor. MW engaged Outotec as subcontractor.

The project did not go as planned and Energy Works terminated the main contract, which provided that, on termination, MW must assign its subcontracts to Energy Works. MW did so, but there was confusion over whether it retained the benefit of any accrued or future rights under the Outotec subcontract. 

MW’s primary case was that the assignment of the subcontract only assigned future rights, not accrued rights. It argued, therefore, that it could claim for these past breaches. Its alternative case was that if accrued and future rights were transferred, then properly construed the assignment also transferred accrued and future liabilities and therefore took effect as a novation. 

On the primary case, the judge found that the natural meaning of the words “ assign the sub-contract ” was to assign the benefit of all rights under that contract, both accrued and future. She explained that it is possible to retain accrued rights, which could form the basis of a claim, and assign future rights only, however clear words are needed and were absent here.

On the alternative case the judge disagreed that the transfer took effect as a novation. The parties called the transfer an assignment which, whilst not conclusive, was consistent with the wider factual background that suggested there was no intention for the subcontract to terminate and be replaced with a new one – as would occur with a novation.

The practical effect of this assignment was that MW had transferred away its right to pursue Outotec for damages, including any argument that its delay was what caused the termination. However, in a ‘double whammy’, MW remained liable to pay Outotec for works done under the subcontract and for any further works Outotec performed after the assignment.

At the same time, MW could not claim payment in respect of those works until the final account’s reckoning – which would not be until 90 days after eventual completion. MW remained liable to Energy Works for liquidated damages, replacement contractor costs and any defects. 

Practical implications

Assignment and novation are different ways of transferring an interest under a contract, but with very different practical effects; the terms should not be used interchangeably. Parties should be especially careful in relation to post-termination assignment or novation terms.

They should also be clear what they are trying to do from the outset and consider how it has to be documented – by notice of assignment or deed of novation. Parties should check the terms of their contract. Is there a prohibition or other restriction on assignment? They must ensure they comply with them. For a legal assignment, parties must follow the requirements of s.136 of the 1925 Law of Property Act. This includes a requirement to notify contract counterparties. 

If a party is assigning a contract, or is to be obliged to do so post termination, they should consider carefully whether they want to assign accrued and future rights. If they wish to do something different – for example by retaining accrued rights so they have a route to claim against a subcontractor – then clear words are needed.

Co-written by Callum Miller of Pinsent Masons.

Editor's note 03/04/24:  This article was updated to properly reflect the outcome of the Energy Works v MW High Tech case. We regret the error.

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• 13 March 2018
• Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About this article

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

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Back to glossary

Assignment and novation.

Assignment generally means the transferring of an interest or benefit from one person to another.

In contract law, where A and B have made an agreement, A can transfer the benefit of that agreement to C, but not the burden. A remains contractually bound to perform their obligations to B, but any benefit accrues to C.

Assignments can be legal or equitable (for example if formalities, such as a requirement to notify in writing, are absent).

For A to transfer both the burden and the benefit to C, novation is required.

Novation is essentially a replacement of the original contract between A and B with a new one between C and B, under which C takes both the benefit and the burden of the agreement with B. When people talk of the “assignment” of a contract or lease, they usually mean novation.

The distinction between assignment and novation is more fully explained in a recent case involving construction contracts, Energy Works (Hull) Ltd v MW High Tech Projects Uk Ltd   [2022] EWHC 3275 (TCC), in which Pepperall J cites the classic dicta of Lord Browne-Wilkinson in  Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, at 103 :

“It is trite law that it is, in any event, impossible to assign “the contract” as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation. … Although it is true that the phrase “assign this contract” is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned…”

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Assignment and Novation: Spot the Difference 12 November 2020

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

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

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

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

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

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

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

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"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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Novation vs Assignment: Changing Parties in Contracts and Obligations

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

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

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

Introduction to Novation and Assignment

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

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

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

Novation Meaning and Fundamentals

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

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

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

Understanding Assignment in Contracts

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

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

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

Key Difference Between Assignment and Novation

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

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

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

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

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

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

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

In summary:

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

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

What is the difference between novation assignment and transfer?

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

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

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

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

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

There are a few key things that constitute a novation:

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

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

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

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

Some examples where novation is used:

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

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

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

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

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

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

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

The key requirements for novation are:

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

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

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

The key requirements for a valid assignment are:

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

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

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Deciding between novation and assignment.

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

How to Novate a Contract

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

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

Key things to know about novation:

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

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

Assigning Obligations Without Changing Parties

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

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

With assignment:

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

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

Identifying Implied Novation

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

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

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

Executing a Novation Agreement

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

Drafting a Novation Agreement

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

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

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

Understanding Consent in Novation

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

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

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

Incorporating a Novation Clause in Contracts

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

• Conditions allowing novation
• Notice procedures
• Effective date

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

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

Navigating Novation and Assignment Challenges

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

Securing Consent for Novation or Assignment

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

Ensuring Smooth Transfer of Obligations

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

Renegotiating Terms During Novation

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

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

Real-World Applications of Novation and Assignment

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

Deed of Novation: A Case Study

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

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

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

Applying the ISDA Novation Protocol

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

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

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

Legal Considerations in Novation and Assignment

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

Novation in Law: An Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion: Mastering Novation and Assignment

Summarizing the decision criteria for novation vs assignment.

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

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

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

Formality : Novation often requires more formal documentation than assignment.

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

Best Practices for Novation and Assignment Processes

To ensure smooth novation and assignment processes:

Obtain proper consents from all parties as needed.

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

Notify relevant parties of the transfer once completed.

Formalize transfer timing and effective dates.

Overcoming Common Novation and Assignment Hurdles

Common challenges can be addressed by:

Allowing reasonable time for consents to be obtained.

Having templates ready for any required documentation.

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

Maintaining open communication with all parties.

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Difference between Assignment & Novation of Contract

If you have entered into a contract with a client and wish to transfer your interests to a third party, of contract you may be wondering about the difference between assignment and novation. Both methods involve the transfer of an interest in a contract to a third party, although it is important to understand how each approach differs to be sure you have chosen the correct one.

Contractual obligations of a contract

The purpose of a contract between a buyer and supplier is to ensure that both parties receive what they want. Each party is legally bound to uphold their end of the agreement, whether it relates to the provision of a product or services, or the agreed payment for those goods or services.

Because the very nature of a contract is to bind each party to account, it can be complicated for either party extricate itself from that contract.

What is Assignment?

Assignment   transfers to a third party your rights to the benefits of the contract, without transferring the obligations of the contract. So assigning your interests to another party could mean that payment is to be made directly to that third party, instead of to you, but you would remain legally-bound to fulfil your end of the contract to the original co-party. You also cannot assign the obligation of payment to a third party if you are the buyer in a contract.

For example, if you are contracted to build a wall for a client, you may ask the client to directly pay a company that you owe money to, thereby assigning your interest to that company. However, you cannot assign the burden under the contract. So in this scenario you would still be responsible for building the wall – and would be liable if there was a fault with the finished product – even though the third party would receive the benefits of your end of the contract – i.e. the payment.

What is Novation?

Novation , on the other hand, is an agreement made with your co-party whereby you reassign your entire interest in a contract over to a third-party. This would mean that any subsequent services or payment required would pass directly between the other two parties, without you being in any way connected. It effectively allows one or more original parties to ‘drop out’ of the contract, and for replacement parties to be substituted in.

So, to use the example above, if you were contracted to build a wall for a client, but were unable to complete the job, you could agree with the client to novate the contract to a different contractor. That new contractor would from then on assume all your responsibilities for ensuring the job is completed, and would be held liable for any problems. They would also receive the full payment, whilst you would walk away with no further ties to the original contract.  

The difference between Assignment & Novation of Contract

In the case of assignment, the agreement of the co-party is not necessarily required. Most contracts include an assignment clause as standard, allowing transfer of rights to receive payment to a third party, without the buyer’s express consent. This is because service that the buyer receives has not changed: the original supplier is still obliged to fulfil their end of the contract as agreed at the outset. It is only the supplier whose interests in the contract will change – through opting to transfer payment on to someone else. So they are allowed to make this decision independently.

In contrast, novation must be agreed by all parties. The original co-party must be happy to receive the agreed service or product from a new party, the transferor must be happy to pass on all their interests in the contract, and the transferee must be happy to take on the burden of the contract, as well as the benefits.

Whilst the transferor and transferee may be happy with the arrangement, novation can be complicated by the original co-party. This party is likely to need assurances that there will be no change to what they are receiving and may need convincing that it is in their best interest to transfer the contract. Otherwise there is the risk they will use the situation to their advantage to secure a better deal in the new contract. In addition, the original party may still be required by the other parties to retain some liability under the original contract.  

Novation of contracts during the sale of a company

During the sale of a business (an asset or business sale) novation would be used to transfer all the existing contracts of the business over to the buyer. The buyer would then be responsible for fulfilling those contracts going forward, and the clients would be bound to pay the new business owner.

Since the sale of a business involves numerous contracts and clients, there is a risk that not all customers will agree to the novation. Whist there are various means to try to resolve this, it is a risk that the buyer must take on, since existing clients are not legally bound to novate their contracts to the new owner. This should be carefully managed during negotiations for the sale of the business.  

Summary: choosing the right course of action

Assignment transfers only the rights to payment to the third party, whilst the original party remains responsible for meeting the terms of the contract. In the case of novation, a third party essentially replaces the original party in the contract, assuming both their benefits and obligations.

Whichever route you are considering, it is important to seek expert legal advice to ensure you are choosing the right course of action in your circumstances.

The contents of this article  do not constitute legal advice  and are provided for general information purposes only.

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What Are Assignment and Novation Clauses in a Loan Agreement?

By Jake Rickman

Updated on 12 September 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 Are Novation and Assignment? 

Novation and Assignment in Practice

• What Assignment Means for Your Business 
• Key Takeaways 

Frequently Asked Questions

If you get to the final stage of a business loan application, the bank will present you with a loan agreement . While some terms in the loan agreement may be familiar, others might be vaguer. For example, the lender’s right to ‘assign or transfer all its rights and obligations by novation’. This article will explain what novation and assignment mean in your loan agreement, how it operates, and how this impacts your business. 

What Are Novation and Assignment? 

Novation is a legal process that transfers rights and obligations under a contract to a third party with both parties’ consent. 

On the other hand, assignment is the right to transfer the contractual obligations of one party to a third party, regardless of whether the other party to the contract consents. 

To understand how novation and assignment apply to your loan agreement and how these rights might ultimately affect your business, it is important to consider novation and assignment in practice.

The law does not easily release parties from their contractual obligations. Otherwise, contracts would not have much legal effect. For example, after your business signs a loan agreement, you cannot simply notify the bank that another person or company will make the loan repayments on your business’s behalf. Likewise, unless the contract states otherwise, the bank must make the loan money available to your business and cannot rely on another party to do so on its behalf. 

Hence, the bank may rely on clauses in the loan agreement to release them from their obligations. Consider the following example. 

Bank A provides your company with a revolving credit facility of up to £1m. However, a year goes by, and you have not drawn on the facility. Consequently, Bank A may no longer want to honour its contractual obligation to your company.

However, Bank A cannot just transfer the loan without your approval. Hence, if you consent to Bank A’s request to sell the loan to Bank B, the law calls this novation. This means that you are essentially creating a new loan contract with Bank B. After novation, the original party, Bank A, disappears.

Even if you are not prepared to consent to Bank A’s request, it may still want to transfer the loan. Where the loan agreement contains an assignment clause, Bank A may nevertheless transfer its rights to benefit from your business’ repayment to Bank B. The law calls this an assignment.

What Assignment Means for Your Business 

Provided a bank has notified your business in writing that it intends to transfer its rights to a named third party, you are obligated to make payments to the new bank. 

If the bank does not specify the third party’s identity, your obligations do not change. 

You should also know that the bank your business initiated the loan agreement with is still obligated to provide you with any money it has promised. If it does not, you may have a legal claim against the bank. 

Key Takeaways 

Assignment and novation in a loan agreement refer to a lender’s ability to transfer its loan obligations to a third party. If the bank sells the benefit under the loan agreement (i.e. your loan repayments) to another party, this is called an assignment. If the bank notifies you that it has assigned its rights to a third party, you must direct repayments to the third party provided it informs you of the third party’s identity. The bank can also ask you to release it from its obligations to make money available to your business. This is called novation. However, if you do not consent, the bank must continue to honour any terms in the initial loan agreement. 

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An assignment in a loan agreement is where the bank sells its rights to receive your loan repayments to another lender. Provided you are properly notified, you must direct any future payments to the third party. Notably, an assignment does not release a bank from any obligations it owes you.

A novation is where the borrower consents to the lender’s request to transfer the lender’s rights and obligations under a loan agreement to a third party lender. The effect is that you will now owe your obligations under the loan agreement to the third party. In turn, the new lender carries out the initial lender’s obligations. You can enforce these obligations against the new lender.

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Contracts: The Critical Difference Between Assignment and Novation

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Introduction

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

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

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

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

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

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

Assignment and novation in the Construction Industry

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

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

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

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

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

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

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

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

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

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

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

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

Legal Distinctions

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

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

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

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Assignment and novation – what is it and where do you stand?

Aug 29, 2017 |

It is common within the construction industry for a developer or employer to transfer the rights or obligations under the construction documents to a third party. This is usually done in one of two ways: by assignment or by novation.

Common examples of documents that are often assigned or novated include collateral warranties, professional appointments and building contracts.

Assignment and Novation: What are they?

Assignment is the transfer of an existing interest from one party to another. Assignment only transfers the benefit of a contract (a right) such as a right to sue. For example, if a building contract between A (employer) and B (contractor) is assigned to C (a third party), C has the right to sue B if the works are not constructed properly but the obligation to make payment under the contract remains with A. The rights assigned to C operate only from the date of the assignment and are not retrospective.

The burden (an obligation) of a contract is not assignable.

Novation is the transfer of an interest from one party to another but unlike assignment, novation includes both the benefit and the burden of a contract. It requires the consent of all parties involved (whereas an assignment would only involve A and C in the above example). Also, novation has retrospective effect, so that C would be treated as if it had always been the contracting party with A and B had never been involved.

Why assign?

The assignor may assign the benefit to a third party without the other contracting party’s formal agreement (providing there is nothing in the contract preventing or limiting assignment). Assignment also does not require the consent of the other party as only the benefit is being transferred therefore no obligations are being transferred to the third party. It is often therefore easier to arrange than a novation and is mostly used when a commercial development is finished and the new owner of the development wants to have the rights to sue under the building contract and other construction documents in case anything goes wrong in future.

Why novate?

Novation is carried out using a tripartite agreement with the agreement of all three parties for example A (employer), B (contractor) and C (third party). The novation extinguishes the contract between A and B and replaces it with a new contract on the same terms between A and C. B has no further obligations under the contract. Novation is often used in design and build (D&B) contracts where (for example) the architect has carried out the first stage design work for the employer and is then novated to the D&B contractor to carry out the second stage design work and to be part of the contractor’s team during the construction phase.

It is acceptable within the construction industry to limit the ability of assigning a document to two occasions only. If the parties want to assign both the rights and obligations under the contract, this is not possible.

Novation requires all parties’ consent which can lead to delays while negotiations are taking place. The terms of novation should be clear and failure to execute the document properly may result in the loss of one party’s rights.

Key things to consider

Will assignment be all you need or do you require novation? What are the parties’ intentions? If it is intended from the outset that certain documents will require novating in the future, agree the form of the novation document at the outset and append this form to professional appointments and building contracts.

Be careful to check whether your contract has a prohibition against assignment, either completely or not without the other party’s consent. If you fail to get the required consent the assignment will be ineffective. Standard form building contracts usually contain a prohibition on assignment without the contractor’s consent.

FIS members can contact the FIS Legal Helpline (0191 230 8860) or email [email protected] for assistance.

Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on September 19, 2022

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee. 

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced. 

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

• The purchaser accepts complete liability
• The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
• The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

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Assignment vs. Novation

What's the difference.

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

Further Detail

Introduction.

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

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

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

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

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

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

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

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

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

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

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

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

Legal Implications

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

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

Extent of Transfer

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

Prohibited Assignments

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

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

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

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