novation vs assignment nz

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What is the Difference Between Assignment and Novation?

Assignment of contracts is a fairly common practice in the business world.

In an assignment, the person assigning the contract - the "Assignor" - assigns the benefits of the contract the Assignor holds to a new person (the "Assignee") who takes the benefit of that contract "the Assignee". Some contracts may expressly prohibit assignment and some contracts provide that a contract may not be assigned without the consent of the other party. If a contract has no provision relating to assignment, then the general rule is that it may be assigned, with a few exceptions. 1

Usually, a contractual party will want to ensure that if a contract is assigned, then the Assignee has sufficient skill and financial backing to continue to perform the contract and, if this is the case, it is important to make sure an assignment provision in a contract takes account of that so consent can be withheld if an Assignee does not fulfil those criteria.

Critically, in an assignment, the general law states that the Assignee takes the benefit but not the burden of the contract.

This means that if the Assignee does not perform the contract, the Assignor remains liable. This can sometimes leave the other contractual party with a remedy if the Assignee is insolvent and does not perform. 2 However, as noted earlier, the best way of dealing with an assignment request is to complete due diligence on the Assignee, since it may be that if you later need to make a demand on the Assignor (particularly if they are a company), the Assignor may no longer be able to meet that demand under the assigned contract if the Asignee fails to perform it. For example, a company selling its business to an Assignee may liquidate following the sale (after paying all creditors at that time and returning a final dividend to shareholders), which makes it very difficult to make any later claim against it if the Assignee does not perform the contract.

An assignment is fundamentally different from a novation. In a novation, a new contract is entered into between the new party (the "Novatee") and the other continuing contracting party/parties and the original party (the "Novator") is released from all of their obligations (usually from the date the novation takes effect). For this reason, a novation poses a greater risk to the continuing contract party or parties than an assignment since they have no recourse against the Novator if the Novatee fails to perform the contract. If someone makes a request to you for novation, you should treat the request very seriously. You should consider obtaining consideration for the consent or some form of guarantee and will need to complete very rigorous due diligence on the new party to make sure they can perform the contract. You should also check when you enter into a new contract with anyone that the contract does not allow the other party to novate the contract, particularly without your consent and a rigorous agreed process in place for that consent to allow you to assure yourself the party that takes novation can perform the contract.

Assignment and novation can be a tricky area of law. As always, if you have an issue with assignment or novation or encounter an unusual clause in a new contract concerning assignment or novation, you should take legal advice – we are happy to help!

For any enquiries contact:

Andrew Knight on (09) 306 6730 ( [email protected] )

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____________________________

1 Exceptions include "personal" contracts where the particular skill, identity or characteristics of a party are fundamental to the contract. Bare rights of litigation are also not assignable.

2 Note that Section 241 of the Property Law Act 2007 has special provisions in respect of leases that make assignors liable for payment of rent and obligation under the lease, but not for increased obligations the assignee and landlord might agree to on a variation of lease unless the lease provided for that variation.

This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

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March 13, 2024
Building and Construction Contracts , Building and Construction Law , Commercial and Business Case Law and Legislation

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

What is a Deed of Novation?
What is a Deed of Assignment?

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

Nature of the Contract: The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

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Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on February 01, 2023

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced.

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

The purchaser accepts complete liability
The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

If you need help determining if assignment vs. novation is best for you, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Contract Transfer
Novation Agreement
What is Novation of Contract
Novation of Contract
Contract Novation Letter
Deed of Novation
Contract Novation
Loan Novation Agreement
Assignment of Rights Example
Contract Novation Agreement

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This range of New Zealand novation agreements change the obligations and terms of a contract to another individual or party.

terminate a credit contract

How to terminate a nz loan contract, credit sale (hire purchase agreement) or other consumer credit contract, introduction.

If you change your mind about a New Zealand consumer credit contract (such as a loan contract or a hire-purchase agreement), or later discover that you will not be able to afford the payments, you may be able to modify or get out of the contract, in one of the following ways:

The law allows you a three-day "cooling off" period after you sign the contract to change your mind and cancel the contract.
You may be able to get out of the contract if the lender hasn't provided you with all the information that the law requires.
You may be able to get out of the contract if the contract or the lender's conduct is oppressive.
You may be entitled to have the contract amended if something unforeseen has caused you hardship.

The laws that protect people who enter into consumer credit contracts are contained in the Credit Contracts and Consumer Finance Act 2003 , which came into force on 1 April 2005. This Act simplifies the law by replacing both the Credit Contracts Act 1981 and the Hire Purchase Act 1971, and strengthens some of the protections for consumers. (Hire-purchase is now called a "credit sale" under the Act.)

That Act also contains special protections for consumers to do with home "buy back" schemes; these protections came into force in October 2003. See How to be protected against home "buy back" schemes.

What is a "consumer credit contract"?

In general, the protections in the Credit Contracts and Consumer Finance Act 2003 apply to consumer loans, hire-purchase agreements (credit sales) and other consumer credit contracts.

A "consumer credit contract" is defined as a contract where all of the following conditions exist:

you, the borrower, are an individual (as opposed to a company or other body), and
you've entered into the contract mainly for personal, domestic or household purposes (as opposed to business purposes), and
interest charges or credit fees are, or may be, payable under the contract, or a security interest (for example, over your car) is, or may be, taken under the contract, and
giving credit is part of the lender's business, or the lender makes a practice of giving credit on behalf of someone else, or the contract came about because a paid adviser or broker introduced you to the lender

These rules mean that a lender doesn't have to comply with the 2003 Act if, for example, the borrower is a small company, or the money is borrowed for business purposes. In cases where it's unclear to the lender whether the loan is for business purposes, the lender can ask the borrower to sign a declaration that it is for business purposes; if the borrower does so, the contract isn't covered by the Act and the lender doesn't have to comply with it.

These rules also mean that interest-free contracts can sometimes be covered by the Act. For example, a secured loan can be covered by the Act even if no interest is payable.

There is no maximum amount for a consumer credit contract. A contract will be covered by the 2003 Act if it satisfies the four conditions above, regardless of how much money is involved.

The "cooling off" period: The right to cancel the contract

The Credit Contracts and Consumer Finance Act 2003 provides consumers with a period in which they can change their minds and cancel a consumer credit contract, as follows:

In the case of a loan, you have three working days after the initial signing of the contract to cancel it. You must do this in writing, and you must return all the money borrowed to the lender.
In the case of a credit sale (hire-purchase) where you haven't yet taken the goods home, you have three working days after the initial signing of the contract to cancel it, by notice in writing.
In the case of a credit sale (hire-purchase) where you have taken the goods home, you must give a written cancellation notice within three working days after the initial signing of the contract and pay the cash price of the goods within 15 working days of the initial signing. In other words, you can cancel the credit part of the arrangement, but not the agreement to buy the goods. You cannot simply take the goods back.

You must, however, pay interest for the period for which the credit was provided and the lender's reasonable costs of the cancellation.

No right to cancel in certain cases

You don't have the right to cancel if the credit is provided for less than two months and you haven't used any of the credit to pay the lender for money owed under a different credit contract.

The cancellation notice

The cancellation notice does not have to use any particular words. It can be expressed in any way that shows you intend to cancel or withdraw from the contract.

You can give the cancellation notice (and return the goods or money, or pay the cash price) to a lender by giving it to them or their agent or employee, or by posting it to the lender's last known home or business address.

(The cancellation notice can also be given by email or some other form of electronic communication if the lender has agreed to this being done.)

Creditor's failure to "disclose" makes the contract unenforceable

The law requires lenders to give certain information to borrowers (this is called "disclosure"). If you were not given this information within the time limits that the law specifies, the lender cannot enforce the contract against you. This means that they are not able to:

enforce the requirement that you pay interest, or
in the case of a credit sale (hire-purchase agreement), repossess the goods, or
in the case of a secured loan, take possession of the property you listed as security for the loan

What information does the creditor have to give me?

A consumer credit contract must be in writing and must be signed by both the borrower and the lender.

It must include the following information, which is called "initial disclosure":

the lender's name and address
the amount you're borrowing (in the case of a loan) or the price of the goods (in the case of credit sales/hire-purchase)
the annual interest rate and the method of charging it
the total interest to be paid
the length of any interest-free term
the amount of each payment
the number of payments
the total amount you will pay
when the first payment is due and how often the payments will be made after that
if it is a secured loan, details of the goods listed as security
all fees and charges other than interest, such as booking or establishment fees, insurance fees, credit check fees, and security valuation fees
default fees (that is, fees you will have to pay if you don't keep up your payments)
fees you may be charged if you pay off the goods or loan early
a statement of your right to cancel the contract (see above, "The â€˜cooling off' period: The right to cancel the contract")
how often "continuing disclosure" statements will be sent to you (if they're legally required in the particular case)

The format for initial disclosure

The information must be written clearly, concisely and in a way likely to bring it to the attention of a reasonable person. (Some model disclosure forms are included in the Credit Contracts and Consumer Finance Regulations 2004 (SR 2004/240) .)

It can be made in the form of an email or other electronic communication if:

you've consented to it being given to you in this way, and
the information is readily accessible so that you can refer to it again if you wish

When does initial disclosure have to be made by?

You must be given a copy of this information not later than five days after signing the contract.

No unreasonable fees

Lenders cannot charge unreasonable credit fees or default fees.

Re-opening consumer credit contracts that are oppressive

The Courts or the Disputes Tribunal can re-open a loan contract, credit sale (hire-purchase agreement) or other consumer credit contract if:

the contract is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice, or
the lender has exercised, or intends to exercise, a power under the contract in a manner that is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice, or
you were induced to enter into the contract by means that were oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice

In these cases, the Court or the Tribunal has the power to set aside the contract or vary its terms.

In general the Courts will not reopen credit contracts merely because, for example, a penalty interest rate is high, and will tend not to intervene if the borrower is experienced and clearly understood the contract. The Courts are more likely to intervene if the borrower's understanding was limited in some way â€“ for example, by not being able to speak or read English or by some disability.

Modifying the contract in cases of "hardship"

You can ask the lender to change the terms of the contract if you believe you are unable to keep up with the payments under the contract because of some unforeseen hardship - such as being ill or injured, or losing your job, or your relationship breaking up, or the death of your spouse or partner, or some other reasonable cause. However, you can't do this if you've already missed a payment or exceeded a credit limit.

If the lender doesn't agree to amend the contract, you can apply to the Courts or a Disputes Tribunal for it to amend the contract. The Court or Tribunal will give both you and the lender a reasonable chance to be heard.

What if I want to pay out the contract early?

You have the right to pay out the full amount at any time, but the lender has the right to charge you, in addition, their administrative costs for the repayment and a reasonable estimate of the loss the repayment has caused them.

Creditors can't "contract out" of the legal requirements

The protection given borrowers by the Credit Contracts and Consumer Finance Act 2003 applies even if the particular contract says it doesn't apply. In other words, lenders can't contract out of the rights given to borrowers.

Lenders can bring existing contracts under the 2003 Act

Consumer credit contracts made before 1 April 2005 are ordinarily not covered by the Credit Contracts and Consumer Finance Act 2003 .

However, a lender can choose to bring those existing contracts under the new Act, provided this does not increase any of the borrower's obligations. This allows a lender to operate a single system rather having to run two different systems, with one set of contracts covered by the old laws and another set covered by the 2003 Act.

Special rules for "buy back" schemes

Special protection for consumers were introduced on 14 October 2003 to cover home "buy back" schemes. These schemes, apparently common in South Auckland, have resulted in many homeowners losing their homes. For more information, see How to be protected against home "buy back" schemes.

Cautionary notes

If you are considering borrowing a large amount of money under a credit contract, it would be wise to see a lawyer before doing so in order to fully understand the effects of the agreement.
Guarantors should be aware that they generally do not have a legal right to get out of a credit contract.

Deed of assignment of contract

This New Zealand deed of assignment is used to transfer contractual rights and obligations from one person to another. The Deed provides for the outgoing party to promise the contract is valid and up to date.

Deed of assignment of contract with consent

This New Zealand deed of assignment used to transfer contractual rights and obligations from one person to another. The Deed provides for the outgoing party to promise the contract is valid and up to date.

Deed of nomination with vendor consent

This New Zealand agreement that provides for a purchaser under a contract to nominate someone else to be the purchaser in their place, with the consent of the vendor.

Nomination of purchaser

This New Zealand agreement that provides for a purchaser under a contract to nominate someone else to be the purchaser in their place. The new purchaser (Nominee) agrees to perform the obligations of the purchaser under the contract.

Transfer of contract

A deed that provides for one person to take over contractual obligations owed by another, with the consent of the other party to the contract. New Zealand focused.

Transfer of sale contract

An agreement that provides for a purchaser under a contract to be replaced entirely by a new purchaser with the agreement of the vendor. This creates a new contract (a novation) between the new purchaser and the Vendor (a novation). New Zealand focused agreement.

Assignment agreement

This template is for the transfer or assignment of contracts between two parties. New Zealand focused agreement.

Mutual cancellation of contract agreement

Agreement to cancel legal contract. Very useful if you require certainty that you are no longer bound. Suitable for any contract. New Zealand focused agreement.

Novation agreement: transfer of architectural or building contract

Easy to use New Zealand novation agreement for use where the customer of an architectural or construction contract changes part-way through the project (e.g. where the land and part-completed buildings are sold).

Novation agreement: transfer of service contract

Transfer a service contract between customers using this easy to use and effective novation contract. New Zealand focused agreement.

Variation of contract agreement

Change the terms of a legal contract using this New Zealand variation agreement. Using this document, you can insert, delete and amend words, paragraphs and clauses or renumber existing paragraphs.

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Contract variation

This range of New Zealand novation agreements change the obligations and terms of a contract to another individual or party.

Assignment agreement Assignment agreement

This template is for the transfer or assignment of contracts between two parties. New Zealand focused agreement.

Deed of assignment of contract Deed of assignment of contract

Deed of assignment of contract with consent Deed of assignment of contract with consent

Deed of nomination with vendor consent Deed of nomination with vendor consent

This New Zealand agreement that provides for a purchaser under a contract to nominate someone else to be the purchaser in their place, with the consent of the vendor.

Mutual cancellation of contract agreement Mutual cancellation of contract agreement

Agreement to cancel legal contract. Very useful if you require certainty that you are no longer bound. Suitable for any contract. New Zealand focused agreement.

Nomination of purchaser Nomination of purchaser

Novation agreement: transfer of architectural or building contract Novation agreement: transfer of architectural or building contract

Novation agreement: transfer of service contract Novation agreement: transfer of service contract

Transfer a service contract between customers using this easy to use and effective novation contract. New Zealand focused agreement.

Transfer of contract Transfer of contract

A deed that provides for one person to take over contractual obligations owed by another, with the consent of the other party to the contract. New Zealand focused.

Transfer of sale contract Transfer of sale contract

Variation of contract agreement Variation of contract agreement

Change the terms of a legal contract using this New Zealand variation agreement. Using this document, you can insert, delete and amend words, paragraphs and clauses or renumber existing paragraphs.

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What Is the Difference Between Assignment and Novation?

By Jordan Bramis Lawyer

Updated on November 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Assignments

Other differences between an assignment and novation, choosing between assignment and novation, key takeaways.

To further your commercial endeavours, you may wish to transfer your rights under a contract to another party. The primary legal mechanisms for transferring the rights or obligations under a contract to a third party are assignment, which involves transferring benefits or rights and novation, which facilitates the transfer of both rights/benefits and obligations. It is crucial to understand that these concepts are different. Unfortunately, many people tend to confuse the two, leading to unwanted consequences in relation to legal contracts. This article will explore the key differences between the two.

Under a contract, where a party (the original party to the contract) is initiating an ‘assignment’ , they are transferring some or all of their contractual rights to a third party, known as the “assignor”. The recipient of those contractual rights is known as the “assignee”. For instance, a party can transfer the right to receive payment or benefits under the contract through an assignment.

Following an assignment, the assignee gains the right to the benefits of the contract that the assignor has assigned. Furthermore, they gain the authority to initiate legal proceedings, either individually or in conjunction with the assignor. It is important to note, however, that the assignee does not become a contracting party to the original agreement. Under assignment, contractual burdens and liabilities cannot be transferred. Therefore, the assignor retains responsibility for fulfilling any remaining contractual obligations that still need to be discharged.

In most cases, assignment necessitates the consent of the obligor (the party obligated to fulfil the contract). The obligor needs to agree to the assignee taking over the rights held by the assignor. Additionally, the assignor must provide notice to the obligor about the assignment. This notice serves to inform the obligor that they should now deal with the assignee regarding the assigned rights.

By comparison, a novation agreement achieves the transfer of both rights and obligations to a third party. Here, the new party (the “novatee”) steps into the shoes of the original party (the “novator”) and assumes both the rights and obligations.

A novation agreement essentially terminates the contract with the original party and creates a new contract with the new party. A novation agreement means you can substitute one party for another without changing the obligations agreed to in the original contract.

Novation most often arises in big corporate takeovers or on the sale of a business. On takeover, deeds of novation are used to transfer contracts from the seller to the buyer and allow the buyer to carry on the seller’s business.

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

Novation creates an entirely new legal relationship. The old contract is set aside, and the new contract, which includes the novatee, comes into effect. Following novation, the novator is released from all obligations and liabilities associated with the original contract.

The choice between assignment and novation depends on various factors.

If a party wishes to maintain some level of involvement and responsibility in the original contract, assignment is often the better choice. It enables the transfer of specific rights while retaining some obligations. For a complete break from the original contract, where a party wishes to shed all obligations and liabilities, novation may be preferential.

One of the most important and sometimes overlooked steps is to document what you have agreed to in writing. Have your agreement written up, signed and stored safely. The area where most disputes and disagreements arise is where parties have not written down what they agree to. This results in a conflict that could have been easily avoided.

When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.

This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.

If you intend to assign your rights under a contract to a third party, you can do so through an assignment or a novation. However, be aware that these differ. An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement.

If you need further assistance with an assignment or novation, 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 .

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What Is a Deed of Novation and How Does It Affect My Business?

You’re entering into a deed of novation – what to consider?

What is the Difference Between an Agreement and a Deed?

How do I negotiate a sale of business agreement?

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Should you nominate, assign or novate an Agreement for Sale and Purchase of Real Estate?

February 13, 2012

in Property

1. Liability to the vendor 2. Enforcing the vendor’s contractual warranties and undertakings 3. GST implications

1. Does the purchaser named in the contract (contractual purchaser) remain liable to the vendor if the nominee / assignee / novatee (ultimate purchaser) fails to complete settlement?

It is important to note that in the case of assignment and/or nomination the contractual purchaser named in the Agreement for Sale and Purchaser of Real Estate will remain liable to the vendor in the event that the nominee / assignee does not complete settlement.

Only a novation will release the contractual purchaser from liability. This is because the vendor must be a party to and sign the Deed of Novation which includes a specific provision for the contractual purchaser to be released from all obligations under the original contract. In effect a new contract is created between the vendor and the novatee. The difficulty with a novation is obtaining the agreement and signature of the vendor.

2. Can the assignee / nominee / novatee (ultimate purchaser) sue the vendor for breach of the vendor’s warranties and undertakings contained in the contract?

A novatee can sue the vendor for breach of the vendor’s contractual warranties and undertakings because a novation creates a direct contractual relationship between the vendor and novatee.

A recent decision of the Supreme Court in Laidlaw v Parsonage [2009] NZSC 98 confirms that where an Agreement for Sale and Purchase of Real Estate records a named purchaser “and/or nominee”, the nominee though not a party to the Agreement is sufficiently designated by description in terms of section 4 of the Contracts (Privity) Act 1982 so that the nominee is entitled to sue the vendor for breach of contractual warranties and promises.

Previously, a formal assignment together with notice of the assignment being given to the vendor was the safest way (short of a novation) to ensure that the ultimate purchaser had rights to enforce the contractual warranties and promises against the vendor

3. What are the GST implications?

The Taxation (GST and Remedial Matters) Act 2010 has clarified the GST treatment of land transactions in the case of nominations (where a contractual purchaser has nominated another person or entity (the nominee) to receive the land from the vendor. All such supplies made from 1 April 2011 will be treated as one supply from the vendor to the nominee. The new rules do not apply to assignments or novations.

An assignment and, prior to 1 April 2011, a nomination (except bare nomination) could give rise to a second transaction (two supplies) for GST purposes. This could result in unanticipated liability for GST.

A bare nomination is where the contractual purchaser settles the transaction in full but the title is transferred to the nominee. A bare nomination creates only one supply for GST purposes between the vendor and the contractual purchaser. This is because there is no financial transaction between the nominee and the vendor.

A novation creates only one supply for GST purposes between the vendor and the novatee as the original contract is effectively cancelled and a new contract substituted. However, if a novation is entered into after the time of supply is triggered under the original contract eg: payment received (such as the deposit) or invoice issued (such as the settlement statement) then the GST position of the vendor and purchaser under the original contract must be reversed under section 25 of the GST Act and by satisfying credit note requirements.

It is very important to consider the different GST implications of assignment / nomination / novation before proceeding. It is strongly recommended that the GST treatment of the transaction is specifically addressed in Deeds of Nomination / Assignment / Novation so that the position is clear between the parties.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:

Fahra Manning [email protected] 09 379 0055

The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.

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28 August 2017

Be Careful When Transferring Contracts

A number of circumstance may give rise to you wanting to transfer a contract. for instance, you may have sold your business and you want to transfer your customer contracts or purchase contracts to the purchaser of the business..

Two common methods to achieve this are by assignment or by novation.

Each method has different consequences. It is therefore important to understand the differences when deciding which method best suits your needs before signing any document which transfers an interest in a contract.

An assignment is where a party (the “assignor”) assigns its rights under a contract to a third party (the “assignee”). The assignee may enforce its rights against the other original party to the contract. Assignments are frequently used to transfer the benefit of warranties to a third party (for example, building warranties).

In general, it is not possible to assign obligations under a contract to a third party. The reasoning behind this is that a party cannot unilaterally relieve itself of liability under the contract unless that other party agrees to this. In contrast, a party is generally permitted to assign its rights under a contract without the consent of the other party unless the contract provides otherwise. For example, a person can assign his or her right to payment for goods or services but not the obligation to provide those goods or services. Similarly, a person can assign a right to be supplied with goods and services but not the obligation to pay for them. The effect of this is that even after a contract has been assigned, the party whose rights are assigned continues to be responsible for the performance of the obligations that party owes to the other original party under the contract.

A novation is where an original party to a contract is replaced by a third party and all the rights and obligations of that original party (“outgoing party”) are transferred to the new party. The outgoing party ceases to be a party to the contract. Unlike an assignment, a novation requires all parties to agree to the new party replacing the outgoing party and to the outgoing party being released from liability for the future performance of its obligations under the contract. The remaining original party is only able to enforce the contract against the new party. This means the original contract is not transferred as such but a new contract effectively comes into existence.

The Supreme Court’s decision in the case of Savvy Vineyards 3552 Limited v Karaka Estate Limited highlights the importance of the distinction between assignments and novations.

Karaka Estate owned vineyards and entered agreements with Goldridge Estate Limited pursuant to which Goldridge would manage the vineyards and Karaka would supply grapes to Goldridge (“the agreements”). Under the agreements, either party was permitted to terminate them if the other party was placed in liquidation.

Goldridge intended to transfer its interest in the agreements to Savvy Vineyards and sent documents titled “Deeds of Assignment” which were already signed by Goldridge and Savvy Vineyards, to Karaka Estate for signing. The Deeds provided that Goldridge would be substituted by Savvy Vineyards in the agreements. The Deeds of Assignment were never signed or returned by Karaka.

After Savvy Vineyards commenced carrying out the management work, Goldridge was placed in liquidation and, in reliance on this, Karaka Estate terminated the agreements. The Supreme Court was required to determine whether the termination of the agreements by Karaka Estate was valid. Accordingly, the crucial issue was whether the transfer was carried out by way of novation or assignment.

If the transfer was by way of assignment, then Goldridge would still be a party to the agreements and Karaka would be entitled to terminate the agreements following the liquidation of Goldridge.

However, Savvy Vineyards argued that the transfer was by way of novation because Goldridge was substituted by Savvy Vineyards and was no longer a party to the agreements which meant that Karaka would not be entitled to terminate the agreements.

The majority of the Supreme Court held that the transfer was by way of novation and that the novation was effective despite Karaka not having signed the “Deeds of Assignment”. This meant that Goldridge was no longer a party to the agreements and Karaka did not have the right to terminate them.

The Court found that the name or title of the document transferring a contract is not conclusive proof of the method used to carry out such a transfer. The intentions inferred from the terms of the original contract, the document transferring the original contract, the surrounding circumstances and the conduct of the parties should also be taken into account when determining whether a transfer is by way of novation or assignment.

Concluding Comments

The method of transfer you choose will depend on the outcome you are trying to achieve and your particular circumstances.

If you intend that a new party is to take over the rights and the obligations under a contract, then it is best to transfer the contract by way of novation because this will result in both the rights and obligations being transferred to the new party and the outgoing party’s liability will come to an end. Further, the new party is not vulnerable to the actions of the outgoing party before and after a novation (such as the risk of termination of the agreement as highlighted in the Savvy Vineyards case).

However, a novation may not always be appropriate, practical or feasible. We can assist you to determine which method of transfer is available to best meet your needs. It is crucial to obtain legal advice from us before signing a document which transfers a contract to check that it actually achieves your desired outcome.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Jake Casey - Harkness Henry Managing Partner

Key Things to Consider Before Signing a Deed of Novation in NZ

By Dillon Balasingham

Updated on July 5, 2021 Reading time: 5 minutes

What Is a Deed of Novation?

What should the deed of novation achieve, does your contract allow for a deed of novation, do all the parties to a contract agree to it, what are the gst implications, key takeaways, frequently asked questions.

There may be a circumstance where you need to transfer a contract to another party. For example, you may be selling a business and need to transfer the current contracts to the new party. Another situation may be where you feel as if you cannot continue to meet the obligations under your contract. If this is the case, there are a few ways to transfer a construct. One of the more effective strategies is to use a deed of novation. This article will explain:

what a deed of novation is;
what it should achieve;
whether a contract allows for a deed of novation;
if all the parties to a contract need to agree to it; and
the GST implications.

A deed of novation is an agreement in which one party’s rights and obligations are transferred to a new party. The new party is called the ‘novatee’ and the original party to the contract is the ‘novator’. However, you should consider a few things before signing a one, to decide whether it is the right option for you.

The main goal of a deed of novation is to transfer the rights and obligations of an existing contract to a third party. Essentially, a new contract is created between the novatee and the continuing party to the contract. Another method that can be used to transfer a contract is a deed of assignment . However, this method only allows for rights and not obligations to be transferred. Therefore, it is not seen as the best option. Rights mean any benefit that you receive from a contract, whereas obligations are those things that you are asked to do.

For example, when a transport company receives payment for a service, the payment is the right and the service is the obligation. Thus, under an assignment your contractual benefits may stop but your obligations will continue. Under a deed of novation, the continuing contracting party will have legal rights to sue the novatee if they fail to perform their duty under a contract. This is in contrast to an assignment where the novator may still be liable for any breaches to the contract by the novatee. This is because the contract has merely been transferred compared to a new contract being drawn up.

It is also important that the deed of novation is executed on the same day that you are transferring the contract. If it is signed late, you may be in breach of your contract with the continuing party to the contract.

Some contracts will expressly disallow it to be transferred to another party through a novation. If your contract expressly excludes a deed of novation, then it may not be possible to transfer your contract through this method. This is unless you come to some sort of agreement with the other contracting party. If your contract does not allow one, then you should discuss with your contracting party whether you can amend the contract to allow it.

For a deed of novation to be executed, all parties to the contract must give consent. This is the case even if your contract allows for a deed of novation. Sometimes there may be more than two parties in a contract, so make sure everyone’s consent is given. If you sign one without all of the parties’ consent, you may be in breach of contract and liable to legal proceedings. Further, consent must be given in writing by all the parties.

It is also important that you know what the GST obligations are when signing a deed of novation. When a novation is undertaken, the burden of the payment of GST is transferred to the novatee in the contract. However, if a business is being sold then the GST is still a part of the old contract if the novation is entered into after the business has been sold. This means the novator and the continuing party to the contract still hold the burden of paying GST. It is important that you know your GST obligations to avoid any issues with Inland Revenue.

A deed of novation along with assignment is a great tool to transfer a contract between entities. The ability to transfer a contract is extremely important in business . This is especially if a business has been sold or if another party is looking to take up the contract. A deed of novation can only be undertaken with consent from all of the parties. It cannot be undertaken if it is disallowed in the contract. If you are unsure if you are allowed to undertake a deed of novation, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

This can depend on the type of contract and what you are aiming to do. If you are wanting to rid your hands of all responsibility of a contract then novation is the way to go as a new contract is formed between the parties.

No, some contracts will not allow it to be transferred via novation. If this is the case, speak with your contracting party to see if they are willing to allow a deed of novation.

This depends on when the contract is transferred. If the deed of novation is signed after a business is sold, then the novator holds the burden of paying GST.

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Assignment vs Novation in New Zealand

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What is the difference between an assignment and novation?

Sometimes we see clients getting confused between what an assignment is and what a novation is. This article answers that. Both are often used where one company wants another to step in and fulfill its role in a contract.

How does an assignment work?

In an assignment, the person assigning the contract to another person is called the “Assignor”. The person being assigned the contract is called the “Assignee”. It is the Assignee that receives the benefit of the contract. Some contracts cannot be assigned without the consent of the other party to the contract, and some contracts may expressly prohibit assignment. If there is no provision concerning assignment, then the general position is that the contract can be assigned to another. If the contract is assigned to the Assignee, they must perform their part to the contract. As such, the other party will usually want to check that the proposed Assignee has sufficient skill and finance to carry out the contract. Therefore, it is common for there to be an assignment provision in the contract that accounts for this, so that the other party can withhold consent if the proposed Assignee fails to meet those criteria.

It is important to note that although the Assignee is expected to perform the contract, they do not carry the burden of the contract. In other words, if the Assignee fails to perform their part of the contract, the Assignor remains liable. As a result, if the Assignee is insolvent then the other party can seek recourse from the Assignor or demand that they perform the contract. However, it may be that the Assignor is no longer able to meet a demand made under the assigned contract. Thus, it is best practice to perform due diligence on the proposed Assignee before the contract is assigned to them.

What about a novation?

In a novation, the new party, known as the “Novatee”, does not take over the existing contract. Rather, the Novatee enters into a new contract with the other party/continuing party. The original party that has exited the contract between them and the other party is called the “Novator”. Unlike an Assignor, the Novator is released from their obligations under that contract. As such, they do not carry the burden of the contract. It is the Novatee that carries the burden of the contract entered into subsequently. Consequently, if the Novatee fails to perform the contract, the continuing party cannot seek recourse from the Novator. Thus, a novation is of higher risk to the continuing party than an assignment.

In forming any contract, you should ensure that the contract does not allow the other side to novate the contract prior to obtaining your consent. Prior to entering into a novation, the continuing party should do due diligence on the proposed Novatee to certify that they are sufficiently capable of performing the contract.

Generally a good option is for a contract to be novated – it is then like the new party steps into the shoes of the old and there are fewer questions about who is doing what. However, there can be reasons why an assignment is better. If you have any questions about this then we would be happy to discuss.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact Steven Moe at [email protected]

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Assignment and Novation Difference

Published on 13th August, 2016 by Benjamin Li Yong Le

Many people even lawyers are confused by the difference between assignment and novation. This article will discuss and clarify any doubts between the two legal concepts.

Everyday I see people "assigning" contracts and other rights without knowing what assignment entails. Today I will discuss what an assignment actually is and whether novation should be a more appropriate option.

An assignment involves the transfer of an interest or benefit from one person (“Assignor”) to another (“Assignee”). However, the “burden”, or obligations, under a contract cannot be transferred.

Thus, an assignment usually applies to assignments of tenancies or debts whereby the Assignor still retains responsibility of the contractual obligations, and only gives away the benefits.

The Assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned.

In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified (contractual obligation whereby one party agrees to pay any losses or damage suffered by the other party) against any breach or failure to perform by the assignee. The assignor will remain liable for any past liabilities incurred before the assignment.

Usually when people say they want to "assign" something, they are actually referring to the concept of novation.

Novation is a legal mechanism whereby one party can transfer ALL its obligations under a contract and ALL its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract. A novation requires the agreement of all THREE parties involved - the assignor, the assignee and the third party to whom the rights are being transferred.

About the Author - Benjamin Li Yong Le

Benjamin Li Yong Le (“Ben”), is an Advocate & Solicitor of the Supreme Court of Singapore. Ben is currently running his own boutique corporate and commercial law firm under the name and style of L’Avocat Law.

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What Is Novation?

How novation works, novation vs. assignment.

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Corporate Finance

Novation: Definition in Contract Law, Types, Uses, and Example

Investopedia / Julie Bang

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

To novate is to replace an old obligation with a new one.
In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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What is the Difference Between an Assignment and a Novation in the UK?

By Edward Carruthers

Updated on 21 November 2022 Reading time: 5 minutes

What is an Assignment?

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them.

What is an Assignment?

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract.

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to and find a replacement. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a novation.

As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits.

But there are other differences between the two that business owners must be aware of.

1. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for damages.

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. In addition, as the other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by every party to that original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract, and you can take action against your business partner for breach of contract.

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration.

If you need help transferring your rights, our experienced contract lawyers can assist 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 0808 196 8584 or visit our membership page .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party.

A novation transfers both a business owner’s rights and obligations under a contract to a third party.

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Novation and assignment

Changing the parties bound to a contract

What is novation, is novation a new contract, what is a deed of novation, why novation can be difficult, when do you use an assignment agreement to transfer a debt or obligation, transfer of a debt, transfer of service contracts.

Novation and assignment are ways for someone to transfer their interest in a contract to someone else.

Whilst the difference between assignment and novation is relatively small, it is an essential one. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations.

In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Statute law has created a few exceptions but they apply rarely.

The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine.

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.

Novation in practice

Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.

Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties.

Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place.

Other examples

The seller of a business transfers the contracts with their customers and suppliers to the buyer. A novation process transfers each contract by the mutual agreement of all three parties.

A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary.

A novation agreement is a new contract that 'extinguishes' the old one.

Because it is a new contract, there can be new terms within it, giving additional rights and obligations.

There are times when and why you should use a deed explains exactly when you need to use one. Novation is not among them.

A Deed of Novation is a relic from long ago when lawyers were even more inclined to cloak their knowledge in obscurity.

One of the main purposes in using the deed format is that it provides the necessity for an unconnected witness to sign the document. So it is that much more difficult for one of the parties to say it was forged or signed a year later than the date shown.

But in a novation, there are at least three parties by definition; three parties who are most unlikely to be connected and each of whom has their separate interest. So you can be pretty sure the agreement has not been tampered with. A witness cannot improve on that. So you do not need a deed.

Another reason to use a deed could be when there is no 'consideration', that is when one of the original contracting parties receives no benefit - monetary or otherwise - in return fot the novation. However, in commercial circumstances you could nearly always argue that there is an advantage to each of the parties. The extinction of the old contract or subjectively more favourable terms within the new contract would both count as fair consideration.

Do you need a deed of novation for your situation? The answer is usually no, as an agreement is fine.

The exception to the rule is that if the original contract was signed as a deed, you need to use a deed to novate it. Real property transaction are by deed. That includes a consent to assign a lease, which has three parties. There are special reasons for that.

There are other examples too, which are more obscure.

When a contract is novated, the other (original) contracting party must be left in the same position as they were in prior to the novation being made.

Novation requires the agreement of all three parties. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

The other original party may not understand the benefit to them of having the original contract novated and require extra information about the process that is time consuming to provide.

They may need extra assurance to be persuaded that they won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).

It is possible that they could play up to delay the transfer and squeeze extra concessions from you.

The only way to transfer your rights or obligations is by an agreement signed by all three parties.

But what happens if you are a service provider selling your business with tens of thousands of customers? You can hardly ask every one of them to sign up to their own separate novation.

In practice, a well drawn original agreement will contain a provision which permits the service provider to assign (transfer its contract) without the permission of the customer.

But what happens if it does not?

In practice what happens is that the buyer 'takes a flyer'. The deal is done in the hope that the customers stay with the new owner.

Maybe the buyer obtains an indemnity from the seller to cover their loss if many leave. Maybe the buyer will write to the customers to encourage them to stay. Maybe the customers simply make the next payment and thereby confirm acceptance in law.

In each of those cases, the acquirer will be safe because the customers remain (or become) bound to the terms of the original contract.

Net Lawman offers an assignment agreement to cover that exact situation, together with a draft letter of the sort that might convince customers to stay with the new owner.

The other situation in which assignment is used is where the new party trusts the original party assigning the contract. For example, a subsidiary company may assign contractual obligations to a parent company confident that the parent will uphold the contract.

A construction company is a subsidary in a group. It is working in partnership with another business on several projects to build houses. The other business is a minor partner in the deal. The partnership has run out of money and the smaller partner is unable to inject any more funds. The parent business is unwilling to have its subsidiary fund the remainder of the projects by itself.

A solution may be for the parent to pay both its subsidiary and the third party for the construction contracts to be assigned to it (in other words, buy the contractual rights from the partnership). The assignment provisions would give the parent the obligation to finish the project, which it may be able to do without the third party.

Assignment transfers benefits only

Even if the assignee promises to take on the liability of the assignor to the third parties, the assignor remains personally liable if they fail to do so. An obligation to a third party cannot be assigned without their consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in construction contracts but can apply in any agreement. If you attempt to assign a contract that cannot be assigned, you risk invalidating the original contract.

Personal obligations and assignment

Be particularly careful of an assignment if your obligations can only be performed personally. A good example would be sale of a hair dressing business. Quite apart from the risk of the clients leaving, the actual forward appointments could be interpreted as contracts with the seller, even though they would have no way to fulfill them because they have sold the business.

Buying the right document

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties. We offer a number of novation and assignment agreement templates for different situations.

For example: You borrow from a lender and you later want to transfer the debt to someone else (maybe a friend, a business partner or a the buyer of your business) so that they become liable to repay the lender instead of you. In this situation you should use an agreement that novates the debt .

This is a common consideration when a business is sold and outstanding debts of the business are transferred to the new owner (perhaps loans of money but maybe also loans of goods for sale).

Alternatively, you could novate in order to change who should pay back a personal loan between individuals.

Transfer of a right to receive the repayment of a debt

For example: You make a loan to someone (it could be money or goods) and later you want to change who receives the repayment (an agreement to change who the creditor is ).

The transaction might relate to the sale of a business where the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

For example: You provide a service to someone and you want to transfer the obligation of providing that service to another person or company.

Again, a common use for a service contract novation agreement is where a business is sold and the buyer takes on the service contracts of the seller. The service could be in any industry, from a fixed period gardening contract to an on-going IT or website maintenance. Novation changes who is providing the service.

Transfer of an architectural or building contract

For example: You buy a building or property development that is still under construction and you want the existing contractor to continue work despite the original contract being between the contractor and the seller.

In this situation you should use a novation agreement for a building contract .

Our standard assignment agreement can be used for most assignments (exceptions given below). It is not specific to circumstances.

Assignment of a business lease

If you wish to transfer a commercial property lease to another business tenant during the fixed term, Net Lawman offers an agreement to assign a lease .

We have an article specifically about assigning a business lease that may be useful further reading.

It is not advisable to assign a residential tenancy agreement. We would suggest that you cancel the original agreement and draw up a new agreement with the new tenants.

Assignment of copyright

We have number of assignment agreements for intellectual property rights .

They are effectively sale or transfer agreements where some rights are retained by the seller (such as to buyback the assigned work, or for the work only to be used in certain locations).

They relate to IP in media (such as a film or a music score) and to inventions.

Assignment of a life insurance policy or endowment policy

These agreements allows you to transfer the rights to receive payments from a life insurance policy or endowment policy. We offer both a deed of assignment of a policy on separation or divorce and a deed of assignment to gift or sell the policy to someone else .

Assignment and collateral warranties in the construction industry

Probably the most common use of assignment in the construction industry today is in relation to collateral warranties.

The collateral warranties given by consultants, contractors and sub-contractors in construction contracts are often assigned to subsequent owners or leases. Assignment can do no more than transfer rights available to the assignor. It is not capable of creating new rights and obligations in favour of an assignee.

So while the client can, in theory, assign the right to have a building adequately designed, it is unclear what right would be transferred to sue for damages in the event of breach. If the developer (who would usually be the assignor) has sold the building or created a full-repairing lease, then their right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

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Nomination vs Novation – what is the difference?

Written by Rebecca Clark - Solicitor (Property) Cavell Leitch Christchurch

Nomination- How does it work?

We thought it timely to give a recap on how nominations work under the ADLS Agreement for Sale and Purchase (agreement). Under the agreement a vendor can agree to sell a property to a purchaser but that purchaser “nominates” a third party to actually settle the purchase.

The ability to nominate is a useful tool for purchasers for a number of reasons. For example, purchasers buying as a couple, with only one person available at the time of entering into the agreement. They may also decide for asset protection, tax reasons or otherwise that the purchasing entity should be a family trust, or other separate entity. It is quite important, particularly in places like Queenstown where clients are purchasing properties for the intention of renting or Air BnB that purchasers seek professional advice about the best type of entity for tax reasons.

For these reasons we always suggest that, where possible, the “and/or nominee” option is left untouched on the front page of the agreement, to allow our clients the freedom to decide how to proceed.

Rights under nomination

A nominated party can enforce the agreement in the same way as the original signing party. So for instance a nominated purchaser has the benefit of the warranties under clause 7 of the agreement, and can still enforce those warranties against the vendor.

A vendor may have concerns trusting a nominated purchaser they know nothing about. The original purchaser under the agreement will remain liable to the vendor under the agreement in the event the nominated purchaser defaults and does not complete settlement.

We think this should provide some comfort to both purchasers and vendors alike who are found in this situation.

Novations and nominations sound similar, and both give the purchaser the ability to transfer their interest in the agreement to a third party. However, a novation requires the agreement of the vendor. Unlike a nomination, novation will release the original purchaser from all liability under the contract. Essentially a novation creates a new contract entirely between the novated purchaser and the vendor. When acting for a vendor we are usually wary of novations for this reason.

Whether acting for a vendor or purchaser, we would suggest it is best to leave available the option to nominate under the agreement. The vendor is protected if the nominee defaults, but it provides a purchaser with greater flexibility in the transaction and may mean a more successful outcome for a purchaser client in the long term.

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COMMENTS

Assignment vs Novation in New Zealand
There are three differences between an assignment and a novation. Firstly, under an assignment, you only transfer the benefits of the contract to the new party. In a novation, you transfer both your benefits and contractual obligations. Secondly, due to this complete transfer that occurs in a novation, the original party no longer has any ...
What is the Difference Between Assignment and Novation?
As always, if you have an issue with assignment or novation or encounter an unusual clause in a new contract concerning assignment or novation, you should take legal advice - we are happy to help! For any enquiries contact: Andrew Knight on (09) 306 6730 ( [email protected]) See our Expertise pages. ‍ Contract Law.
Novation In Business Contracts
Contract Assignment vs Contract Novation. There's a pretty large difference between contract assignment and contract novation. ... We're an online legal provider operating in New Zealand, Australia and the UK. Our team services New Zealand companies and works remotely from all around the world. 5.0
Assignment or Novation: Key Differences and Legal Implications
Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on ...
How Can I Transfer a Contract to Another Business in NZ?
Call 0800 005 570 for urgent assistance. Otherwise, complete this form and we will contact you within one business day. How to Transfer a Contract Through a Novation. On the other hand, a novation is a process in which a party ('the novator') transfers its rights and obligations under a contract to another party ('the novatee').
When Can I Assign a Contract in New Zealand?
There is an alternative to assignment called novation. However, all the contracting parties must permit a novation to occur. If you need any legal assistance with assignment, LegalVision's experienced contract lawyers can help. Call us today on 0800 005 570 or fill out the form on this page. Frequently Asked Questions.
Assignment, novation and construction contracts
An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. A novation creates a new contractual relationship - a 'new' contract is entered into.
Assignment vs Novation: Everything You Need to Know
A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one.
NZ Contract variation (Novation agreements)
NZ$ 29.00. An agreement that provides for a purchaser under a contract to be replaced entirely by a new purchaser with the agreement of the vendor. This creates a new contract (a novation) between the new purchaser and the Vendor (a novation). New Zealand focused agreement. Get This Document.
Assignment and novation
If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third ...
NZ > Business Documents > Contract variation
An agreement that provides for a purchaser under a contract to be replaced entirely by a new purchaser with the agreement of the vendor. This creates a new contract (a novation) between the new purchaser and the Vendor (a novation). New Zealand focused agreement. Buy This Document.
Assignment vs. Novation: What is the Difference?
However, be aware that these differ. An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement. If you need further assistance with an assignment or novation, our experienced contract lawyers can ...
Should you nominate, assign or novate an Agreement for Sale and ...
There are three main issues to consider when deciding whether to assign, nominate or to novate in respect to Agreements for Sale and Purchase of Real Estate as follows: 1. Liability to the vendor. 2. Enforcing the vendor's contractual warranties and undertakings. 3. GST implications. 1.
Be Careful When Transferring Contracts
A number of circumstance may give rise to you wanting to transfer a contract. For instance, you may have sold your business and you want to transfer your customer contracts or purchase contracts to the purchaser of the business. Two common methods to achieve this are by assignment or by novation. Each method has different consequences.
Key Things to Consider Before Signing a Deed of Novation in NZ
The main goal of a deed of novation is to transfer the rights and obligations of an existing contract to a third party. Essentially, a new contract is created between the novatee and the continuing party to the contract. Another method that can be used to transfer a contract is a deed of assignment. However, this method only allows for rights ...
What is the difference between an assignment and novation?
In an assignment, the person assigning the contract to another person is called the "Assignor". The person being assigned the contract is called the "Assignee". It is the Assignee that receives the benefit of the contract. Some contracts cannot be assigned without the consent of the other party to the contract, and some contracts may ...
Contracts: The critical difference between Assignment and Novation
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby ...
Assignment and Novation Difference
Today I will discuss what an assignment actually is and whether novation should be a more appropriate option. An assignment involves the transfer of an interest or benefit from one person ("Assignor") to another ("Assignee"). However, the "burden", or obligations, under a contract cannot be transferred. Thus, an assignment usually ...
Novation: Definition in Contract Law, Types, Uses, and Example
Novation is the act of replacing one party in a contract with another, or of replacing one debt or obligation with another. It extinguishes (cancels) the original contract and replaces it with ...
Differences Between Assignment and Novation
As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits. But there are other differences between the two that business owners must be aware of. 1.
Novation And Assignment: What Is The Difference?
A novation process transfers each contract by the mutual agreement of all three parties. A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary. Is novation a new contract? A novation agreement is a new contract that 'extinguishes' the old one.
Nomination Vs Novation
Novations and nominations sound similar, and both give the purchaser the ability to transfer their interest in the agreement to a third party. However, a novation requires the agreement of the vendor. Unlike a nomination, novation will release the original purchaser from all liability under the contract. Essentially a novation creates a new ...

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