Potato, Potahto; Tomato, Tomahto: an assignment and a novation, the same thing - right?
Okay, you’ve become a party to a contract and that contract requires you to pay money; but then you sell your business (or whatever) and you ‘assign’ the contract → you are free and clear, right? Wrong!
There are a number of reasons why you might want to transfer part or all of an existing contract to another party; it could be part of a sale of business, the contract might be valuable or you might not be able to perform the work anymore. As part of that process, the terms ‘assignment’ and ‘novation’ are often bandied about interchangeably. Unfortunately, they do not mean the same thing, and it is actually important to understand the difference so you get the outcome you are bargaining for.
At the most basic level:
- an ‘assignment’ transfers the rights and benefits of the contract, but does not free you from the obligations; in that respect the original agreement remains unchanged; and
- a ‘novation’ is where you want to transfer both the rights and obligations under an agreement; it ends both your benefit and your burden (unless the ‘new’ contract (ie; ‘novation’) states otherwise).
Looking at some of the important differences between the two:
If you want to keep performing your obligations under the agreement but give away some rights, you should seek an assignment. In simple terms, you cannot ‘assign’ your obligations or liabilities. The original agreement will otherwise remain unchanged and will remain enforceable against you.
With an assignment, you will remain a party to the agreement and liable for performance under the contract. Even if you have contracted with some other person to perform the contract on your behalf, unless the terms of the original contract require it (including through some implied term that you had been engaged to perform the contract personally), there is typically no requirement to obtain consent of the other parties to achieve an assignment. But there is a requirement to give the other party ‘notice’ of the assignment, so practically speaking most people either seek consent or there are terms drafted into the contract that set out when an assignment is allowed and on what conditions.
Assignments must be documented in writing to clearly identify what rights are being transferred; they must be unconditional and the assignment, to be effective, must be ‘notified’ to the other contract parties.
If you want to transfer all of your rights and be relieved of all your obligations under a contract (essentially removing yourself from the contract, then you must do so through a ‘novation’. A novation ends the original contract between the original parties, and creates a new contract; this is usually achieved through a single deed of novation. The novation has the effect of substituting one party for another without necessarily changing the rights and obligations under the original contract (although such changes might be agreed).
For a novation, given you are trying to remove yourself from a contract, consent is an essential element. All parties (new and old) must consent.
Unlike an assignment, a novation can be in writing or can be oral.
A court will take into account what the parties have said to each other, their conduct and course of dealings in determining whether there was an agreement to novate or simply and attempt to assign or something altogether different (perhaps a subcontract? or an agency?).
Proving any form of contract requires clear proof of terms and intention. Proving that there was an oral agreement to ‘novate’ can be a lengthy and expensive process, as the reason you might need such proof will be for reason that the other party refuses to acknowledge that is had agreed to what you are asserting, thus claiming you are still bound by the contract. Proving terms and intention is best done through a written document.
Both an assignment and a novation will ‘transfer’ rights under a contract. A document might be called ‘an assignment’ but if it seeks to transfer all rights and obligations of a party, to effectively substitute one party for another and if all parties have consented to that substitution, then, despite the name, it may actually be a ‘novation’.
As you can see, despite the similarities, there are fundamental differences between assigning and novating. Arm yourself with this knowledge before you start the process of ‘assigning’ or ‘novating’ to ensure you are not giving away too little or too much.
A short example: I have used finance to buy my six tractors; I sell the tractors and assign the finance with the consent of the financier. If the assignment is in not writing, then there is no ‘assignment’ at all. If there is an ‘assignment’, I am still liable to the financier, but now so is the assignee.
If you have any questions about how an assignment or novation works, please get in touch with our Business team.