Some contracts feature what is called an ‘assignment’ clause, which has the effect of transferring a benefit to another party. In a similar way, Novation clauses transfer the obligations, rights and benefits of a contract to another party (who basically replaces the original party). Both clauses can have the effect of preventing, allowing, or making conditional, a transfer to another party.

It is important to remember that this article only touches on the assignment of a contract itself and not the assignment of intellectual property, which usually warrants its own separate contract. For assistance in drafting one of these clauses, it is advisable that you speak with a contract solicitor.

What does an assignment clause look like?

There are several ways in which an assignment or novation clause can be worded. The following are several examples:

  • The parties to the agreement may only assign this Agreement, wholly or partially, with the prior written consent of the other party; 
  • Neither party may assign its rights under this Agreement; or
  • This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns.

Keep in mind that the third example reflects the old legalese that used to be used to express an assignment clause and most probably won’t be used as often nowadays.

What is the purpose of an assignment or novation clause?

Generally, a contract will only include rights and obligations of two parties. Sometimes a 3rd party might become a beneficiary of the contract, though will be unable to enforce its rights. All other persons are excluded from the contract.

With an assignment, the benefits of the contract are transferred to another party. Along with the transfer of the benefits under the contract, there is also a transfer of the rights to enforce those benefits, such as the right to sue another party in the event that it does not fulfil its obligations under the contract.

Novation allows a new party to step into the shoes of the party transferring their interests and obligations under the contract. In effect, novation equates to an exchange of one party for another party.

An assignment or novation clause will clearly define the parameters of who is allowed to assign and the conditional basis on which this can take place.

When is an assignment or novation used?

When buying a business, it goes without saying that much of the value is in the quality of the existing customer base, as well as the quality of the contracts with suppliers. When selling a business, ideally you want to finalise any existing debts or contractual obligations. By ‘novating’ or transferring the contracts to a new party, the new party usually inherits these debts and obligations.

Sometimes, however, you might wish to deal with just one party, like when you start up a new business, or you hire a contractor for a period of time. In these circumstances, you would only want to restrict assignment.

If you are meeting a new party that might replace the original party to the contract (to build rapport), you will want to be certain that he or she has the skillset that you are looking for. In these situations, where confidential information is being disclosed, it is advisable that your contract lawyer restricts assignment.

It is worth noting that a novation/assignment clause might afford the right to transfer rights and obligations to one party and not to another. For example, suppliers might be granted the right, whereas clients might not.

What are the risks?

The greatest risk of not having your contract lawyer review, and possibly restrict, your novation/assignment clause is ending up in a contract with an unknown party. This party might have different values and abilities, which can negatively affect your business. This can lead to a stressful scenario where everyday business activities are being interrupted.

On the flipside, however, not having the ability to assign your contracts with customers or suppliers might decrease the overall attractiveness (and value) of your business to a prospective buyer.

Conclusion

If you have not spoken with a contract lawyer about novation or assignment clauses, now is the time. These clauses are important for transferring interests and obligations without any doubt as to the boundaries and limitations (if any) of this transfer of interests. Our team of contract lawyers are ready to provide efficient and affordable advice. For a fixed-fee quote, contact LegalVision on 1300 544 755.

Lachlan McKnight

Next Steps

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.