Assignment and novation are two methods of transferring contractual rights or obligations from one party to another. While they might seem similar and even interchangeable on the surface, they actually have very different uses, so it is important to have a good understanding of what you want to transfer and how you can do it.
In this blog post we will explain assignment and novation in detail, as well as suggest which to choose depending on your end goal. We will also explore how you can mitigate risk when transferring rights and obligations and highlight important matters to include in a deed of assignment or novation.
An assignment is where one party (the assignor) transfers rights or benefits owed to them under a contract to another party (the assignee). This might be done by a party who wishes to assign a right of payment to a debt collection agency in order to pay off a debt that the party has incurred.
Importantly, an assignment does not create a new contract between the assignee and the party with whom the assignor originally contracted (the continuing party), nor does it make the assignee a party to the original contract. For an assignment to be legal, all that is needed is for the assignment to be recorded in writing, signed by the assignor and sent to the continuing party.
The consent of the continuing party for rights to be assigned is not required by law, although it is required by many contracts. Sometimes there are exceptions to this requirement with the inclusion of clauses allowing rights to be assigned without consent to certain pre-approved bodies, such as bodies from the same corporate group as the assignor.
To understand how this works, consider assigning a lease. While the person to whom the lease initially belongs (the 'initial lessee') can assign their right of occupation of the premises to another party (the 'assigned lessee'), the initial lessee cannot assign their obligation to pay the owner of the premises (the 'lessor') rent. If the assigned lessee fails to pay rent, (subject to certain provisions) the initial lessee will still have the obligation to pay the lessor!
A novation is an agreement between the continuing party, the party assigning their rights, benefits or obligations (the novator) and the party receiving those rights, benefits or obligations (the novatee). It facilitates the discharge of the original contract between the continuing party and the novator and the creation of a new contract with the same terms between the continuing party and the novatee.
Novations are common in corporate takeovers and business sales, where a new corporate entity is assuming the place of an old one and “stepping in” to existing contracts. Novations can also be used in franchising to transfer the rights and obligations under a franchise agreement.
As a novation involves the creation of a contract, consent is required from all involved parties. This consent may be given by the continuing party and/or the novator in advance by inclusion in the original contract.
Interestingly, the lines between assignment and novation are starting to blur, particularly where parties are looking to pre-authorise the transferal of rights and obligations. In the case of CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, for instance, a sufficiently clear intent to pre-authorise the transfer of obligations as well as rights was found to be effective even when wrongly described as an assignment rather than a novation.
It is important to emphasise that the law still states that the obligations of a contract cannot be transferred without the consent of all parties involved. But, where a party has agreed in advance that a third party can later assume those obligations, that has been deemed sufficient consent to novate those obligations later, even when it was not correctly characterised as a novation.
Whether you are better off entering into a deed of assignment or a deed of novation depends on what you wish to transfer and your intentions of dealing with the relevant contract in the future.
An assignment is useful where the transferring party wishes to retain some involvement in the contract, as it allows them to transfer specific rights and hold others while keeping obligations.
A novation is the better option where the transferring party wants to completely exit the contract and shed all of their obligations and liabilities.
It is important to examine the contract in question before you make this decision to identify any clauses that deal with assignment or novation. Some contracts may prohibit or limit the use of assignment or novation without the continuing party’s consent. However, it is also common for contracts to require that the continuing party not unreasonably withhold that consent.
When transferring rights or obligations under a contract in any way, you should always document the terms you agree to in writing. Most contract disputes arise where an agreement is not put to writing.
To avoid disputes you must ensure that the document contains clear conditions of transfer. These should include when the transfer will take effect and if/how other parties should be notified of the transfer. It should also include terms of payment for the transfer, any rights for termination or reversal of the transfer and any conditions which must be fulfilled before the agreement can be finalised. The contract should also consider what will happen during the transitional stages, such as who - if anyone - will continue to perform the obligations at that time, what resources will be needed to facilitate the transfer and who will pay for it.
It is also advisable to undergo a background check on the new party. It is important to obtain information on its financial status and compare that with the existing party to determine whether it is likely the new party will be able to meet their obligations. You might want to get independent financial advice and consider whether you should seek securities and whether they will be able to meet any insurance requirements under the contract.
It is also important to obtain evidence of the new party’s ability to fulfil the contract. If the contract requires access to facilities and equipment to fulfil the contract, does the new party have access to those facilities and equipment? If licences or registrations are required, does the party hold them?
Common clauses in a deed of assignment:
Common clauses in a deed of novation: