service agreement is a contract that outlines the relationship between you and a customer to whom you will provide services. However, one day in the future, you may wish to transfer a service agreement that you signed with a customer to another business. This could come about for several reasons. To properly transfer a service agreement, you need to understand the legal options open to you and ensure that you take the right actions accordingly. This article considers: 

  • the situations in which you may wish to transfer a service agreement; and 
  • some options for how you can do this.

Why Would I Transfer a Service Agreement?

There are many situations which may call for the transfer of your service agreement to someone else. 

For example, if you want to:

  • sell your business;
  • set up a new company; or
  • sell the contract to someone else because you do not have time to do the work yourself.

Your reason for transferring the service agreement will impact the best method for the transfer.

How Can I Transfer a Service Agreement?

There are three key options for transferring your service agreement. These are: 

  • assignment;
  • novation; and 
  • subcontracting. 

1. Assignment

Assignment is a process that allows you to transfer your existing rights and benefits under the agreement to someone else. However, you cannot transfer your obligations or liabilities under the agreement. Accordingly, assignment does not change the service agreement and it is not necessary to sign a new agreement.

When you assign a right or benefit, you will be the “assignor” and the person or business you assign it to will be the “assignee”. The assignee will not become a party to the service agreement. They will only have the right to receive the benefit or enforce their right to receive this benefit. 

For example, you may assign the right to be paid the fee for the services performed under the service agreement. In this situation, you will still need to perform the services. The assignee will only be entitled to receive the fee or take action to recover the fee if the customer fails to pay as required by the agreement.

Often a service agreement will include a clause setting out whether an assignment requires consent from the customer.

2. Novation

Novation involves a full transfer of the service agreement from you to someone else. The other person or business takes on your role but under a new agreement. Typically, this means from the date of novation, the incoming person or business will assume both your:

  • rights and benefits; and
  • obligation and liabilities.

Therefore, you should only novate the contract to a person or business with the capability to perform the services in the agreement.

To novate a contract, all parties to the original contract and the new contract must consent. You can typically achieve this by signing a deed of novation. A deed of novation should set out whether: 

  • past rights and obligations will stay with you after the date of novation; or
  • the person or business you transfer the agreement to will take on your past rights and liabilities.

For example, if you sell your business, novating the whole service agreement to the new business owner will be the best option. This is because they will now be providing the services to the customer instead of you. Hence, they must receive the relevant payment for these services. This means they will be taking on your future rights and obligations. 

Generally, it is in your best interests for the new business owner to also take ownership of your past rights and responsibilities. This way, if a customer wants to make a legal claim against you for a past breach of your service agreement, this claim will be against the new business owner rather than against you.

3. Subcontracting

Another method of transferring your obligations under a service agreement is to engage someone else to perform some of the services for you. This is known as subcontracting the work. 

To do this, you must first make sure the service agreement allows you to use a subcontractor. Sometimes you may need to ask the customer for their permission before you engage a subcontractor, which will be set out in your agreement.

When you engage a subcontractor, they do not become a party to the service agreement with the customer. You will retain all of your: 

  • rights;
  • benefits; 
  • obligations; and 
  • liabilities.

This means you will also need to sign a separate contract with the subcontractor. In the subcontractor agreement, they will agree to carry out certain parts of the work for you in return for payment.

For example, if you are performing IT services and your customer asks you to develop a mobile app but you do not have the time or skills to do so, you can check the service agreement to see if you are allowed to subcontract. If you are, you can engage a separate mobile app developer to create the app. The customer will pay you and you will engage the subcontractor and pay the subcontractor.

It is very important to make sure that you pass through any responsibilities you have to the customer to the subcontractor, in your subcontractor agreement. Otherwise, you may not be able to hold the subcontractor responsible if something goes wrong and you are required to pay the customer. 

For example, your services agreement might require you to finish the work by a certain date. If you do not include this date in your subcontractor agreement, you will be solely responsible for any delays. This means you may need to pay compensation to the customer without any right to claim from the subcontractor, meaning you will be out of pocket.

Key Takeaways

You may want to transfer your service agreement to someone else because you are selling your business or you do not have time to complete the work yourself. In these circumstances, there are three main options to pass on the agreement, including:

  • assignment, which only transfers the specified rights under the agreement (like the right to payment);
  • novation, which transfers the whole agreement to someone else; and
  • subcontracting, which allows you to delegate some of the work to someone else but you will remain responsible to the customer. 

The best option for you will depend on your situation. If you need help transferring your service agreement, drafting a deed of novation or creating a subcontractor agreement, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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