What is the difference between assignment and novation

What is the difference between assignment and novation?

Transferring rights in a contract can be a bit like a game of musical chairs, where someone else steps into your position, usually by means of an ‘assignment’ or a ‘novation’. The words ‘assignment’ and ‘novation’ are often used interchangeably, but from a legal perspective the two are actually quite different.  We explain the differences between them to help you understand which is appropriate for your business – don’t make the mistake of using the wrong one!

Assignments

What is an assignment?

Under an assignment, you are transferring your rights and benefits under that contract to someone else, however you are still liable to fulfil your obligations under the original agreement and the original agreement can still be enforced against you.

What are the formalities of an assignment?

Assignments must be completed in writing, specifying the rights that are being transferred.  There is no obligation to obtain consent of other parties to the contract (unless the contract stipulates that you must do so – and they generally do) but you do have to notify other parties of the assignment.

Novation

What is a novation?

If you would like to transfer rights and benefits, as well as obligations (burdens) under a contract to someone else and remove yourself from the contract entirely, this is completed through a novation.  In a novation, one party is substituted for another.  These are often used for sale of business.

What are the formalities of a novation?

A novation requires consent of all the parties to the original contract as well as the person that the contract is being novated to.

Boilerplate assignment/novation clauses

It is common practice for most commercial agreements to have a ‘boilerplate’ (fairly standardised clause) that deals with ‘assignment, novation and other dealings’ which sets out requirements that must be met in order to validly transfer rights/obligations under an agreement.  Often, these will require notice in writing and consent of the other party and may specify that a ‘change of control’ in a company (e.g. where there has been an acquisition, restructure, merger or demerger or 50%+ change in ownership of a company) constitutes a deemed assignment.

Without such a clause, there is a common law right that parties can assign their rights without consent of the other party and as such, we generally recommend including one to avoid a party unilaterally assigning its rights under an agreement without the other party’s knowledge.

If you need assistance with an assignment or novation of a contract, do not hesitate to contact me at rosalyn@gladwinlegal.com.au or give me a call on 1300 033 934 for a no-obligation quote.