assignment or novation

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

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Introduction

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

What is a Deed of Novation?

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

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

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

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What is a Deed of Assignment?

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

Key aspects of an assignment include:

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

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

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

Key Differences Between Novation and Assignment Deeds

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Choosing Between Assignment and Novation in a Construction Contract

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

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

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

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

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

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

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

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

Authored By Raea Khan

Director Lawyer, PBL Law Group

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What Is Novation?

How novation works, novation vs. assignment.

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Novation: Definition in Contract Law, Types, Uses, and Example

Investopedia / Julie Bang

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

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

• To novate is to replace an old obligation with a new one.
• In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
• In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
• In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
• Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

• Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
• Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
• Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives  market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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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.

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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.

• Construction Advisory & Disputes
• Construction Claims
• Construction Contracts
• Construction Disputes
• Infrastructure
• Litigation and arbitration
• Real Estate
• United Kingdom

Neal Morris

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• 13 March 2018
• Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About this article

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

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

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