Assignment and novation are not the same at all – just like California isn’t the same without Arnie as governator. Assignment and novation can be used to effect changes in your business and are used to achieve different things. This article explains the differences between the two.
Under an assignment, you keep performing your obligations under contract but give some rights to a third party. For example, an assignment could be relevant if you have a bigger business where you have one parent company and also some subsidiary companies. You want the parent company to keep performing its obligations under a contract but you want the parent company’s clients to make payment to a subsidiary to increase cash flow for that company. You would enter into a deed of assignment with the client to permit the client to pay the subsidiary.
By comparison, a novation achieves the transfer of both rights and obligations to a third party. Using the above example, if the parent company ‘novated’ its rights to the subsidiary, the subsidiary would obtain the obligation to perform services and the right to receive payment for those services.
Novation most often arises in big corporate takeovers or on the sale of a business. On takeover, deeds of novation are used to transfer contracts from the seller to the buyer and allow the buyer to carry on the seller’s business.
Other Differences Between an Assignment and Novation
As with most legal documents, in ordering to be binding parties must consent to them in one way or another. Depending on whether you need a novation or an assignment, you need to ask permission from different parties. With a novation, all parties must consent. If you are novating your rights under contract to a third party, you need the consent of the other party to the contract and the third party who will be obtaining your rights.
With an assignment, only some parties must consent. To be absolutely sure of the consent requirements, best practice is always to go through the contract or deed with a fine tooth comb to understand the requirements.
The difference between a novation and an assignment are summarised below.
|Deed of Novation||Assignment|
|Requires the consent of all parties?||Yes, consent of both original parties to the contract + the new incoming third party||Depends|
|Transfers benefits under contract?||Yes||Yes|
|Transfers obligations under contract?||Yes||No|
|Replaces a party to a contract?||Yes||No|
An assignment and novation differ in several important ways. Assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Novations are most often used in corporate takeovers or the sale of a business.
Finally, one of the most important (and sometimes overlooked) steps is always to document what you have agreed to in writing. Have your agreement written up, signed and stored safely. The area where most disputes and disagreements arise is where parties have not written down what they agree to. This results in a painful conflict that could have been easily avoided.
If you need further assistance with an assignment or novation, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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There may be a variety of reasons that a contract would need to be transferred to another party. It can happen in the context of a company acquisition where a business buys the assets of another business or part of a business, during a merger of two companies into one or during a liquidation scenario. In each case, the acquiring company will want the contracts related to the relevant business to be transferred to them.
There are two basic methods used to achieve this; assignment and novation. Each has unique features that must be taken into account when deciding which is the preferred option.
Under English law, only the benefit of a contract may be assigned and not the burden. This means for example that the buyer of a business (the assignee) will only take over the right to receive money for the goods or services that the business provides without the obligation to actually provide them. Similarly, it will only take over the right to be supplied with goods and services from that business’ suppliers and not the obligation to pay for them. Contracts will often contain anti-assignment provisions for this reason.
To overcome the obvious difficulties with assignment, anti-assignment provisions usually require express permission from the other contracting party. That way, the other party can ensure that the assignment contains a duty on the assignee to carry out the obligations under the contract as well as taking the benefits. This is also in the assignor’s interest and is usually backed by an indemnity in respect of any liabilities that might arise.
In strict legal terms, the clearest way to shift the rights and obligations under a contract to a new party is by novation. Novation requires that the original parties to a contract agree both with each other and the new party that the original contract is terminated and replaced with a new contract. That way the original contract is not actually transferred but a new contract effectively comes into existence.
Although novation might avoid the problems associated with assignment, it is not without its difficulties. If a business has significant numbers of low value contracts, the administrative burden and costs associated with reaching tri-partite agreement for each individual contract may be prohibitive.
If there is no prohibition on assignment in a contract, businesses are free to assign the benefits of that contract. However, the assignment should also contain a duty on the assignee to perform the obligations under the contract and an indemnity.
Although express written novation agreements might be impractical, the new company can take the risk of offering novation agreements in respect of each contract or provide notice that contracts have been transferred. Even if the novation agreements remain unsigned or notice is not acknowledged, consent to the novation may then be implied if the other contracting parties continue to deal with the new company under the same terms.
If you need assistance transferring contracts, Rollingsons has experienced lawyers who can assist you. For more information please contact James Crichton via e-mail email@example.com or by telephone on 0207 611 4848.