What is the Difference Between Assignment and Novation?

In Short

• Assignment transfers only rights or benefits to another party, while novation transfers both rights and obligations.
• Assignment keeps you responsible for existing obligations, whereas novation fully replaces you in the contract.
• Always document the transfer clearly and get the right consents to avoid disputes.

Tips for Businesses

Before transferring rights or obligations, check your contract to see what is allowed. Decide if you want to keep any involvement or make a complete exit. Put the terms in writing, carry out due diligence on the new party and seek legal advice to avoid costly mistakes.

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Table of Contents

• Assignments
• Novation
• Other Differences Between an Assignment and Novation
• Choosing Between Assignment and Novation
• How to Mitigate Risks Associated With Assignment or Novation
• Key Takeaways
• Frequently Asked Questions

There may be instances, such as when you sell your business or merge contractual obligations with a third party, where you wish to transfer your rights under a contract to another party. There are two main ways to transfer rights or obligations under a contract: assignment and novation. Assignment transfers benefits or rights, while novation transfers both benefits or rights and obligations. These concepts are different, though similar, and it is not uncommon to confuse them. However, such confusion can lead to unwanted consequences in legal contracts. This article will explore the key differences between novation and assignment.

Assignments

An ‘assignment’ under a contract is when one party (the ‘assignor’) transfers some or all of its rights under the contract to a third party (the ‘assignee’). 

After an assignment, the assignee gains the right to the benefits that the assignor assigned. The assignee also gains the authority to initiate legal proceedings, either individually or with the assignor. However, the assignee does not become a party to the original contract. Under assignment, contractual burdens and liabilities cannot be transferred. Therefore, the assignor remains responsible for fulfilling any remaining contractual obligations. When you assign debt to a debt collection agency, the assignee can enforce the right to receive payment against the other contracting party, but you must still perform your other obligations under the contract.

In most cases, the assignee needs consent from the other contracting party to assign any rights under the contract. However, the contract can override consent requirements or set them out explicitly. It is also common to require notice of the assignment, allowing the other contracting party to understand how the assignee impacts the performance of any contractual obligations.

Novation

In comparison, a novation agreement transfers both rights and obligations to a third party. Here, the new party (the “novatee”) takes over the role of the original party (the “novator”) and assumes both rights and obligations.

A novation agreement effectively ends the contract with the original party and forms a new contract with the new party. This allows you to substitute one party for another without changing the obligations agreed to in the original contract.

Novation often occurs in corporate takeovers or business sales. In takeovers, deeds of novation transfer contracts from the seller to the buyer, enabling the buyer to continue the seller’s business.

All involved parties, including the remaining contractual party, the novator, and the novatee, must unanimously agree to the novation. This is a collective decision to replace the old contract with a new one.

Other Differences Between an Assignment and Novation

Choosing Between Assignment and Novation

Deciding between assignment and novation depends on several factors. If you want to keep some involvement and responsibility in the original contract, assignment is often the better choice. It allows you to transfer specific rights while keeping some obligations. For a complete break from the original contract, where you want to shed all obligations and liabilities, novation may be preferred.

You should also refer to the existing contract and see whether it refers to assignment or novation. 

One of the most important and sometimes overlooked steps is to document what you have agreed to in writing. Most disputes and disagreements arise when parties do not write down their agreements. This leads to conflicts that could have been easily avoided.

How to Mitigate Risks Associated With Assignment or Novation

When transferring contractual rights through assignment or novation, parties often encounter avoidable legal complications that can be costly. Understanding these two common mistakes helps ensure your transfer proceeds smoothly and achieves the intended outcome.

1. Ensuring the Document is Clear on the Conditions of the Transfer

A deed of assignment should clearly define which specific rights and/or obligations are being transferred to prevent disputes about the scope of the transfer. Some essential terms include: 

• effective dates;
• notice requirements; 
• payment terms; 
• termination rights; or 
• conditions precedent. 

2. Performing Background Checks on the New Party

You should verify the new party’s financial capacity to meet contractual obligations and their legal authority to enter the agreement. Without adequate due diligence, you may transfer rights to someone who cannot perform their obligations under the contract, potentially leaving you liable for their failures. This oversight can become particularly problematic in novation arrangements where you rely on the new party’s complete assumption of responsibilities.

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Key Takeaways

Assignment or novation can help you transfer your contractual rights or obligations to a third party. However, be aware that assignment and novation differ. Assignment gives some rights to a third party, while novation transfers both rights and obligations to a third party. Therefore, you should make sure to document the method of transfer, include clear terms in the deed and conduct due diligence on the new party entering the arrangement . To ensure your assignment or novation is effective, consult with a lawyer before taking any action.

If you need further assistance with an assignment or novation of your contract, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions