Contractual rights and obligations are everywhere when engaging in business and commercial relationships and help to dictate the manner in which parties conduct and protect themselves.  So what happens when you need those rights and obligations transferred to a third party? When should those rights be ‘assigned’, and when should those rights be ‘novated’.

Morrissey Law & Advisory look into the difference between and an assignment and a novation.

Assignment

An assignment is a mechanism by which a party to a contract (the Assignor) transfers its rights and benefits under the contract to a third-party (the Assignee). Only the rights and benefits can be transferred, as obligations, burdens and liabilities under a contract cannot be transferred as part of an assignment.[1]

The Assignor is not released from their obligations under the contract and the Assignee does not become a party to it but they can enforce the rights they have received to secure the benefits assigned.  The right to assign the benefit must be provided by the contract or otherwise agreed between the parties.

An example of an assignment includes where a contractor is performing works under a contract and wishes to transfer the right to receive payment for the works to a third party. The contractor will still be an active party to the contract and continue to perform its contractual obligations and the third party has the right to enforce receipt of payment.

Novation

A Novation is the process by which a contract will be extinguished to make way for a new contract between different or additional parties.[2]

The new contract is on the same terms as the previous one with the exception of the replacement or addition of parties. The effect of a novation is to change the parties with which the rights and obligations of the contract lie without necessarily changing those rights and obligations. A novation is achieved by way of a novation agreement (a deed) which is entered into by the existing and new parties and will require the consent of all parties involved.[3]

An example of a novation is where a contractor is performing ongoing works for a principal but the contractor is in the process of selling their business to a third party. If a novation deed has been executed, a new contract has been created and the third party will be vested with the rights and obligation under the contract with the Principal.

What should be considered?

Parties will need to consider each of these issues when determining whether they will assign or novate an agreement:

Novation Assignment
Obligations and liabilities under the agreement will be transferred. YES NO
Although deed may attempt to
Rights and benefits under the agreement will be transferred. YES YES
But not necessarily all of them
Parties to the agreement can be substituted or added to. YES NO
Consent from all parties will be required. YES NO
Depending on the agreement

 

Issues that should be considered include but are not limited to:

  • whether the new party has the ability to perform the obligations
  • who will be liable for past works under the contract?
  • how will it affect subcontractors?
  • are there existing financial agreements or securities that need to be updated?

 

Takeaways

The main things to remember at the outset is that an assignment will give rights to a third party while a novation effectively terminates the agreement and creates a novated agreement under which a third party receives both the rights and obligations of the agreement.

With these mechanisms, the devil is in the details so it is important to have the deed by which the agreement is assigned or novated in writing and properly drafted which will assist in a smooth transition and help to prevent disputes later on.

 


[1] Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 26
[2] Olsson v Dyson (1969) 120 CLR 365, 388
[3] Vickery v Woods (1952) 85 CLR 33, 345

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.