difference between assignment and novation australia

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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Transferring contracts: assignment and novation explained

Whether it's due to internal restructuring or meeting commercial requirements like a business sale, many companies encounter the need to transfer contracts from one entity to another. However, it's important to note that this process is not as simple as replacing one party's name with another. In most cases, contracts can be legally transferred through one of two methods: assignment or novation.

Assignment:

An assignment of a contract involves transferring the rights (but not the obligations) of the outgoing party to the incoming party. Typically, an assignment doesn't require the consent or agreement of the other party involved in the contract (the continuing party), unless specifically stated in the terms of the relevant contract.

To effect an assignment, a deed is often executed by both the outgoing party and the incoming party. If the consent of the continuing party is necessary, it is usually convenient to include this consent in the deed and have the continuing party execute it as well.

An assignment does not relieve the outgoing party of its ongoing obligations to the continuing party under the contract. In order to protect the outgoing party against future breaches of contract by the incoming party, it is common for the assignment deed to include provisions where the incoming party:

• promises to the outgoing party that it will fulfil the outgoing party's contractual obligations after the assignment date; and
• provides indemnification to the outgoing party against any claims made by the continuing party for any failures by the incoming party to fulfil those obligations after the assignment.

Even if the consent of the continuing party is not required, for the assignment to have legal effect written notice of the assignment must be given to the continuing party. This written notice ensures that all parties involved are informed about the transfer.

Another method to transfer contracts is through novation. In legal terms, novation refers to the substitution of a new contract for an existing one, maintaining the same terms as the original contract, but between the continuing party and the incoming party instead of between the continuing party and the outgoing party. Unlike assignment, a novation transfers both the rights and obligations under the relevant contract from the outgoing party to the incoming party.

In practice, novation is commonly achieved by substituting the outgoing party with the incoming party. This means that, from the effective date of the novation, the incoming party assumes all the rights and obligations previously held by the outgoing party, and the continuing party releases the outgoing party from any further obligations under the contract.

It is important to note that the agreement of the continuing party is always required for a novation to be legally effective. While novation offers certain advantages over an assignment, such as a better legal liability position for the outgoing party, it can be more challenging to accomplish due to the necessity of securing the continuing party's agreement.

Similar to assignment, novation typically involves executing a deed of novation, which states the agreement of all parties to substitute the outgoing party with the incoming party.

Other methods:

In addition to novation and assignment, there are indirect methods available for transferring rights and obligations under a contract. For example, where a party to a contract is a company, it may be possible to transfer the company's rights and obligations under a contract by the shareholders of that company transferring their shares in the company to a third party. By doing so, the company remains a party to the contract, eliminating the need for assignment or novation. Instead, a new shareholder obtains control of the company and indirectly obtains the benefit of the rights, and the burden of the obligations, of the company under the contract.

Choosing the right transfer method

When faced with the need to transfer a contract, whether through assignment, novation, or an indirect method, it is important to consider several factors to determine the best option for your specific situation, including:

• The terms of the contract itself – examine the terms to identify any provisions that prohibit, allow, or impose conditions on the transfer of the contract. Understanding these contractual provisions will help determine the available options and any limitations associated with each method.
• Consider your ultimate goal in transferring the contract - evaluate which party should bear the responsibility for liability arising under the contract, both before and after the transfer. This assessment will help clarify which method of transfer aligns better with your desired outcomes.
• The commercial position of the parties - consider the commercial positions of the outgoing party, the continuing party, and the incoming party. Assess factors such as the willingness of the continuing party to provide consent for the transfer. Understanding the potential challenges or cooperation you may encounter from the relevant parties will assist in selecting the most viable transfer method.

By carefully evaluating these factors, you can make an informed decision on the most suitable transfer method for your specific circumstances.

For more information and to navigate the transfer process smoothly, please contact any member of the Sierra Legal team, whose contact details can be found here ( Link ).

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Assignment and Novation

What are assignment and novation clauses.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment and novation clauses

Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:

• assignment, for the transfer of benefits; and
• novation, for the transfer of rights/benefits and obligations

Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment clauses

A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.

Novation clauses

By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.

A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.

It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.

Option 1 – Assignment, novation and other dealings – consent required

A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].

Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld

(a)   [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld . 

(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:

(i)      [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];

(ii)      [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;

(iii)     the proposed assignee is a competitor of [ insert name of Party B ]; or

(iv)       [ Insert name of Party B ] is in dispute with the proposed assignee .

Click  here  for information on how to use this boilerplate clause.

A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.

Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.

A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.

The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.

The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause.  Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.

A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:

• extraneous or disassociated from the subject matter of the contract;
• materially inconsistent with any provision(s) of the contract; or
• based on collateral or improper considerations.

It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.

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What is the difference between assignment and novation?

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

Assignments

What is an assignment?

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

What are the formalities of an assignment?

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

What is a novation?

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

What are the formalities of a novation?

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

Boilerplate assignment/novation clauses

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

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

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

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.

Table of Contents

• 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!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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The Comprehensive Guide to Deed of Novation

Home > Construction Contracts > The Comprehensive Guide to Deed of Novation

• March 29, 2023

A deed of novation is a legal agreement that transfers contract rights and obligations to a new party, commonly used in situations where a third party is taking over an existing contract or when the terms need significant alteration. Novation creates a new contract between the original parties and the new party, while assignment only transfers rights and obligations. Our guide explains the purpose, benefits, and key features and provides guidance on drafting and implementing a novation agreement.

Table of Contents

Understanding Deed of Novation

A deed of novation is a legal document used to transfer the rights and obligations of one party under a contract to another party, while simultaneously discharging the original party from any further obligations. It effectively replaces one party with another, ensuring that the incoming party takes on all the contractual rights and obligations of the outgoing party. This can be particularly useful when a business is being sold, a project is being transferred to a new contractor, or a company is going through a restructuring. The deed of novation process involves obtaining the consent of all parties involved, drafting the deed, and executing the document in accordance with legal requirements. Given the complexities and legal implications of novation, it is crucial for businesses to seek legal advice before entering into a novation agreement. This is especially true when considering the differences between a deed and a contract. A deed is a written instrument that is executed with certain formalities and is considered binding on the parties even without consideration, whereas a contract requires consideration to be binding.

Novation Basics

Novation is a legal concept that involves the transfer of rights and obligations from one party to another. Here are some key points to help you understand the basics of novation:

Definition:

• Novation is the process of replacing one party in a contract with a new party.
• The new party takes on the rights and obligations of the original party, effectively stepping into their shoes.
• Novation allows for a seamless transfer of obligations and ensures continuity of a contract.
• It can help parties to avoid the need for a new contract, saving time and resources.
• It’s essential to be aware of the potential risks and benefits of using a deed of novation.

Key Features:

• Novation requires the consent of all parties involved.
• It is commonly used in situations where a business is sold, or where a contractor or supplier is replaced.
• A novation agreement is typically required to document the transfer of rights and obligations.
• The agreement should outline the specific terms of the novation, including the effective date and any changes to the original contract.

When dealing with contracts and business transactions, it’s crucial to comprehend the fundamentals of novation. All parties must be aware of their rights and responsibilities, and any transfer of these rights and duties must be properly recorded in a novation agreement.

When to Use a Deed of Novation

• A change in business structure, such as a merger or acquisition, where the parties involved need to transfer their rights and obligations under a contract to another entity.
• A transfer of ownership, where a new owner takes over an existing contract.
• A change in service provider, where a new contractor or supplier is brought in to replace the existing one. For instance, novation in construction can be a practical solution if a subcontractor on a construction project is unable to complete their portion of the work, a deed of novation can be used to bring in another subcontractor to take over and complete the tasks, ensuring the project stays on track.
• A restructuring of debts, where an existing debt is transferred to a new creditor.
• A change in project scope, where a new party is brought in to take over certain aspects of the project.

Novation vs. Assignment

The terms novation and assignment are frequently mixed up when discussing common contract law ideas. There are significant differences between them even though they both involve the transfer of contractual rights and obligations from one party to another.

In an assignment, one party (the assignor) transfers its rights and obligations under a contract to a third party (the assignee). The assignor remains a party to the contract and is still responsible for performing any remaining obligations. The assignee has no obligation to perform any obligations beyond those assigned to them.

In contrast, novation involves the replacement of one party with another. This means that one party (the transferor) transfers all of its rights and obligations under a contract to a third party (the transferee). The transferor is no longer a party to the contract, and the transferee assumes all the transferor’s rights and obligations under the contract. Novation requires the agreement of all parties involved, including the original contracting parties, the transferor, and the transferee.

Consider a scenario where a homeowner and a contractor agree to build a house. Then, to finish some of the work, the builder signs a contract with a subcontractor. If the builder transfers the homeowner contract to the subcontractor, the subcontractor would assume all of the builder’s responsibilities and privileges under the contract. The homeowner would now interact with the subcontractor rather than the builder, and the builder would still be accountable for any outstanding obligations.

However, if the builder and the subcontractor agree to a novation, the subcontractor would assume all of the builder’s rights and responsibilities under the contract, essentially replacing the builder. The homeowner would deal directly with the subcontractor since the builder would no longer be a party to the agreement.

Related Content: Deed of Novation vs. Deed of Assignment

Key Differences

Novation and assignment are two methods of transferring rights and obligations in a contract from one party to another. However, there are key differences between the two in terms of legal implications:

• Rights and Obligations: In novation, the original contract is extinguished, and a new contract is created with the new party. As a result, the new party assumes all the rights and obligations of the original party. In assignment, the original party remains responsible for the performance of the contract, while the assignee only acquires the right to receive the benefits of the contract.
• Contract Termination: In novation, the original contract is terminated and replaced with a new contract. In contrast, assignment does not terminate the original contract, and the assignor remains responsible for the performance of the contract.
• Consent: In novation, the consent of all parties involved is required for the transfer of rights and obligations to occur. In assignment, only the consent of the assigning party is required, and the other party may not necessarily be informed of the transfer.

Understanding these key differences is essential to determine which method is appropriate for a specific situation.

Practical Applications

Business Transactions

• When a business merges with another company and wants to transfer contracts with a third party
• When a business sells its assets and wants to transfer its contractual obligations to the buyer

Supplier Restructuring

• When a supplier wants to assign their contract to a subcontractor
• When a supplier goes out of business and needs to transfer their contracts to another supplier.

In each of these scenarios, a deed of novation can be used to transfer contractual rights and obligations to a third party.

Related Content: Deed of Novation: Case Study

The Deed of Novation Process

The process of creating a deed of novation involves several steps. First, all parties involved must provide their consent to the agreement. This is typically done through a tripartite agreement, which outlines the rights and obligations of all parties. Once consent is obtained, the deed must be drafted, which includes specifying the key components and legal requirements of the agreement. Finally, the deed of novation must be executed and implemented, which involves terminating the original contract and replacing it with the novation agreement. It’s important to ensure that all steps are completed correctly to ensure the validity and enforceability of the novation agreement.

 Related Content: Deed of Novation Process

Obtaining Consent

Obtaining consent is a crucial aspect of the deed of novation process. All parties involved in the agreement must provide their consent, and it is essential to ensure that everyone understands the implications of the novation. A tripartite agreement may be necessary to secure the consent of all parties involved. The agreement should clearly state the roles and responsibilities of each party, as well as any changes to the original contract. Without proper consent, a deed of novation may not be legally enforceable.

Drafting the Deed

Drafting the Deed of Novation is a crucial step in the novation process. It must be carefully drafted to ensure that all parties’ rights and obligations are properly accounted for. The key components of a Deed of Novation include a clear statement of the agreement’s purpose, the parties involved, and the obligations and liabilities of each party. Legal requirements, such as the need for signatures and witnesses, must also be considered. It is advisable to seek legal advice when drafting the Deed of Novation to ensure that it complies with legal standards and adequately addresses all relevant issues.

Related Content: How to Draft a Novation Agreement

Mitigating Risks in Construction Contracts

When it comes to construction contracts , there are several risks that principals must be aware of and take steps to mitigate. One such risk is the transfer of rights and obligations to a new party, which can occur through novation or assignment. To mitigate this risk, principals can include “no assignment” clauses in their contracts, which prevent parties from transferring their rights and obligations without prior consent. In addition, negotiating clear and comprehensive contract terms that protect the interests of all parties can also help mitigate risks in construction contracts. It is important for principals to consult with legal experts to ensure that their contracts adequately address potential risks and protect their interests.

No Assignment Clauses

No-assignment clauses are contract provisions that prohibit the transfer of rights or obligations to a third party without the consent of the other party. These clauses are often included in construction contracts to mitigate risks and maintain control over the contractual relationship. No-assignment provisions are helpful for preventing unwanted transfers, like those to unreliable or inexperienced contractors, but they can also obstruct legal transfers. It’s crucial to comprehend a no-assignment clause’s purpose and how it can be altered or waived when discussing a contract that contains one. To fully protect themselves, principals may consider including other risk-mitigating provisions, such as performance bonds or liquidated damages clauses.

Negotiating Contract Terms

When negotiating construction contracts, it’s important to keep risk mitigation in mind. One effective way to do this is by including specific clauses in the contract that address potential issues and ensure all parties are protected. For example, a contract might include a clause that limits liability in the event of delays or disputes, or a clause that specifies the consequences of a breach of contract. Additionally, parties can negotiate specific terms that allocate risk appropriately, such as by requiring a contractor to carry sufficient insurance coverage or by specifying that the principal will be held harmless for certain types of damages. Engaging with lawyers ensures that contract terms are fair and sensible and that all parties understand their rights and responsibilities.

In conclusion, a deed of novation can help contracting parties. It lets parties transfer rights and duties with consent. The deed of novation has key differences from assignment, and understanding these differences is crucial in determining the appropriate legal action. Novation is widely used in various industries such as construction, business transactions, and supplier restructuring. 

As a construction lawyer with 10 years of experience specialising in residential building disputes, I highly recommend seeking legal advice when it comes to novation agreements to ensure that your rights and interests are protected. If you require legal advice or assistance with a construction-related dispute, do not hesitate to contact me for a consultation.

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• Assignment and Novation Guideline

In this Guideline you will find information about:

• the difference between assignment and novation
• when a contractor requests an assignment or novation

State consent to assignment or novation

• additional resources.

For the complete list of guides, see the  Procurement Guidelines .

Assignment and novation

Every now and then a contractor may request that the contract be ‘assigned’ or ‘novated’. This might happen where the supplier is undergoing some kind of corporate restructure.

The general position, established in most templates, is that the State is not obliged to agree to an assignment or novation and is not even required to act “reasonably” in considering any such request. However, each contract should be reviewed to determine the State’s rights in that regard.

Difference between assignment and novation

At common law, a party to a contract may only assign its “rights” not its “obligations”. Accordingly, a contractor may assign the right to perform the services and to receive payment but cannot assign the obligation that it owes to the State to provide the services. As such, on assignment the original contractor remains liable to the State for performance of the contractual obligations by the assignee.

Novation on the other hand effectively constitutes a new agreement between the State and the incoming contractor as if the incoming contractor was the original contracting party from day one of the contract. The original (outgoing) contractor is effectively released from all past and future obligations under the contract. It is for this reason that outgoing contractors much prefer novation to assignment, as they are absolutely released from the contract. An assignment leaves a residual liability on the outgoing contractor’s accounts.

Contractor requests an assignment or novation

One of the first tasks to undertake on being approached by a contractor requesting an assignment or novation is to understand what process has occurred/is being proposed to introduce the new party to the contract. Is it an asset sale, a sale transfer or something else?

The reason for this is to allow the State to review the contract and determine what rights it has in dealing with the proposed arrangements.

The State can choose to novate or assign. However, each contract should be reviewed to determine the State’s rights in that regard.

Agreement to assign or novate should never be automatic. Your agency should carry out due diligence on the proposed assignee/new party just as it would during the tender process.

The following list of questions are provided as examples of the type of questions to ask the contractor. The questions will need to be tailored to each contract and not all may be relevant in every situation. However, they should help to gather information that is needed to make a decision to decide whether to consent to a novation. Sample questions to ask when considering whether to novate:

• What is the contractor’s strategy and timeframe for managing the proposed novation?
• What difference in corporate structure will there be between the outgoing and incoming contractors?
• Will the novation have any effect on the performance of the services under contract?
• Will there be different directors and senior managers (for example, Chief Executive Officer, Chief Finance Officer and Chief Operating Officer) following the novation?
• Will there be any changes to other key personnel?
• Will the incoming contractor have the necessary finances to fulfil the obligations of the contract in the short, medium and long term?
• Will the incoming contractor have the appropriate insurance policies in place?
• Is the contractor party to any other contracts or arrangements that may be affected by the proposed changes, for example, subcontractors?
• Will the incoming contractor be employing the same employees as the outgoing contractors, and if not, how will the incoming contractor manage the resulting loss of expertise and experience?
• Will all the outgoing contractor’s assets be transferred to the incoming contractor?
• How will the contractor manage any intellectual property that is relevant to the services provided?
• How will the contractor manage the transfer of any relevant records?

The assignor/outgoing party should generally be advised of this process and that it will be required to meet all costs associated with of this exercise. Equally the assignor/outgoing party should be advised that it would be required to meet all other costs and expenses incurred by the State in connection with the assignment/novation, for example, legal costs.

The State should not agree to use any assignment/novation document prepared by the assignor/outgoing party/incoming party, as these will not have been prepared with the State’s interests in mind.

The State may also be entitled to impose conditions on the assignment/novation, for example, requirement for a bank guarantee, director’s guarantees, etc. The State should also be 100 per cent satisfied that there is no existing breach of the contract by the assignor/outgoing party.

Another issue to consider is timing. The State is often approached “after the fact”, particularly with novations. For example, the takeover has already taken place and the State is being asked to “rubber stamp” the assignment/novation. It should never do so. An assignment or a novation without the State’s prior consent is, in most instances, a breach of contract, and the first response by the State in this situation should be to advise the contractor of that fact and that the State is considering its position. In such cases the “breach” may give the State bargaining power, in respect to the assignment/novation, but also the contract generally. This may put the State in a position to demand variations to the contract as a condition of its consent to novation, which otherwise it would not be in a position to require.

Additional resources

Assignment and novation templates are available here . However, each case needs to be considered on its merits and appropriate amendments made to reflect the particulars of the assignment/novation. Requests to assign or novate require careful and detailed consideration – State Solicitor’s Office advice should be sought on each of these circumstances.

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Articles > Startups

The Difference Between Assignment Deeds and Novation Deeds

August 25, 2021   Philip Evangelou

Assignment deeds and novation are used in different ways to create contractual changes which help achieve certain objectives. Novation deeds are legal documents used to transfer contractual rights and obligations to other parties, who are usually not party to the contract. 

What is The Difference Between Assignment and Novation

The main difference is that under assignment, you keep performing your contractual rights and obligations, but delegate part of them to a third party. You still maintain responsibility for the liability of those rights and obligations. 

In contrast, novation deeds transfer the entirety of your contractual rights and obligations to another party. Once the obligations are transferred from the original company to the third party, it is the third party who bears the responsibility of performing services and the right to receive compensation for those services. 

Different levels of consent are required based on whether it is a deed of novation or assignment. For a novation deed all parties must consent, including the other party to the original contract. Consent must also be given by the third party who will be taking over your contractual rights and obligations. 

Assignment deeds on the other hand may not require consent of all parties. To determine which parties must consent depends on the circumstances and requires inspection of the relevant deed or contract. 

When Can I Use a Deed of Novation?

It is most common to use a deed of novation when a business is being sold. 

This is because when a business is being sold, the business will have continuing contractual rights and obligations with other businesses such as suppliers or manufacturers. For example if you are selling a clothing business, you may have an existing supply agreement with your supplier. 

In this case, it would be in the best interests of all parties to transfer the rights and obligations under the contract to the new owners of the business. Here, the previous owners are free of their obligations under the contract, while the new owners have an effective supply chain in place and the suppliers are able to continue business as usual. 

What Exactly is a Deed?

Assignments and novations are most commonly in the form of a deed.

Deeds are legal documents whereby parties who sign the contract must have witnesses present, who also sign the contract. For the purpose of needing a witness present, assignments and novations usually require a physical meeting so the contract can be signed and effective at law.

On the other hand, ordinary contracts don’t require witnesses and can be perfected virtually or by telephone.  

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What’s the Difference Between Assignment and Novation?

Posted on December 20, 2020 November 10, 2022 Author Editor

Assignment and novation are not the same. Assignment and novation can be used to effect changes in your business and are used to achieve different things.

Assignments

Under an assignment, you keep performing your obligations under the contract but give some rights to a third party.

For example, an assignment could be relevant if you have a bigger business where you have one parent company and also some subsidiary companies. You want the parent company to keep performing its obligations under a contract but you want the parent company’s clients to make payment to a subsidiary to increase cash flow for that company. You would enter into a deed of assignment with the client to permit the client to pay the subsidiary.

By comparison, a novation achieves the transfer of both rights and obligations to a third party. Using the above example, if the parent company ‘novated’ its rights to the subsidiary, the subsidiary would obtain the obligation to perform services and the right to receive payment for those services.

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.

Other Differences Between an Assignment and Novation

As with most legal documents, in order to be binding, parties must consent to them in one way or another. Depending on whether you need a novation or an assignment, you need to ask permission from different parties. With a novation, all parties must consent. If you are novating your rights under contract to a third party , you need the consent of the other party to the contract and the third party who will be obtaining your rights.

With an assignment, only some parties must consent. To be absolutely sure of the consent requirements, best practice is always to go through the contract or deed with a fine-tooth comb to understand the requirements.

The difference between a novation and an assignment are summarised below.

Key Takeaways

An assignment and novation differ in several important ways. Assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Novations are most often used in corporate takeovers or the sale of a business.

Finally, one of the most important (and sometimes overlooked) steps is always 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 painful conflict that could have been easily avoided.

Frequently Asked Questions

What Is Assignment?

Under an assignment, you keep performing your obligations under a contract but give some rights to a third party.

What is Novation?

A novation transfers both your rights and obligations to a third party.

If you can spare a few dollars for the creators of this website to continue their research to bring you more great content, any amount, no matter how great or small, would be greatly appreciated.

Assignment & novation clauses in commercial contracts

Contributor

3.1 Assignment

An assignment clause usually allows a transfer of rights, benefits and obligations under a contract from one party to another.

A party will usually wish to ensure that it continues to deal with the party it originally contracts with. There may even be an option of terminating the contract in the event of an attempt at substituting the other party or in the event of a change of control in the other entity.

It is often desirable to have a process to have the final right of approval of any change in the other party.

In contractual relationships, where one of the parties has the "upper hand" over the other 5 assignment clauses can often operate unilaterally preventing the lessee from assigning.

Some documents may expressly permit the chosen party to assign its interest at will and without the necessity of requiring the weaker party's approval 6 (eg winery in a grape purchase contract).

A change of control clause should also be considered. Such a clause governs the situation where there is a change in the ownership or control of a party to the contract.

It should define the events constituting a change of control. It will provide that any change of control (that falls within such definition) will:

• Trigger a certain set of events such as termination; or
• May be deemed to be an assignment. Such a deeming provision will then trigger the same information and approval processes necessary in an assignment situation.

3.2 Novation

Novation is a method of releasing a party from the contract and introducing a new one in his or her place.

Novation differs from assignment in that novation requires the consent of all the parties to the existing contract.

The new contract may be between the parties to the existing contract only or new parties may be substituted.

The consideration for the new contract is the mutual discharge by the parties of the obligations under the old contract.

3.3 Extract of assignment clause from standard deed

6.7 Assignment

[Alternative 1 – General Assignment Clause]

• Rights arising out of or under this deed are not assignable by one party without the prior written consent of the other party.
• A party must not unreasonably withhold its consent./ A party may withhold consent in its absolute discretion.
• A breach of clause 6.7(a) by one party entitles the other party to terminate this deed.
• Clause 6.7(c) does not affect the construction of any other part of this deed.

[Alternative 2 – Assignment clause that binds one party only]

Party 1 may assign its rights under this deed and each Collateral Security without the consent of Party 2.

[Alternative 3 – Assignment prohibited]

[/] The rights created by this deed are personal to the parties and must not be dealt with at law or in equity.

3.4 Extract of assignment clause from standard lease

6 Assignment and Subletting

6.1 No interest to be created without consent

Subject to clause 6.2, the Lessee is not to assign this Lease or create in favour of any person an interest in this Lease or the Premises, or allow any person to use or occupy the Premises, without the Lessor's consent.

6.2 Requirements for assignment of subletting

The Lessee may assign the Lease and the whole of the Premises or sublet a part or the whole of the Premises if:

• at least 14 days before the date of the proposed change in the occupation of the Premises, the Lessee:
• applies for the Lessor's consent; and
• supplies to the Lessor evidence acceptable to the Lessor that the proposed assignee or sub-Lessee is experienced in and of good reputation in relation to conducting a business permitted by this Lease, and is financially able to conduct that business; and the Lessor consents to the assignment or sublease;
• The Lessee delivers to the Lessor, before the date of the proposed change in occupation, a completed agreement (or deed), in a form prepared or approved by the Lessor's solicitors, by which:
• the proposed assignee or sub-lessee agrees with the Lessor to be bound by this Lease as from the date that the assignment or sublease takes effect; and
• any guarantor required under this clause gives to the Lessor a guarantee and indemnity in the terms of that clause in respect of the liability of the assignee or sub-lessee;
• the Lessee has remedied any outstanding default on the Lessee's part or the Lessor has waived the default;
• the Lessee pays to the Lessor on demand the Lessor's expenses, including legal costs,
• incurred in making enquiries to satisfy itself concerning the matters specified in clause 6.2(a)(ii); and
• in connection with the preparation, completion and stamping of the assignment or sublease and any other related documents, and the stamp duty on all those documents;
• if requested by the Lessor, the Lessee arranges for the proposed assignee or sub-lessee to obtain from a bank or other person acceptable to the Lessor a guarantee of the obligations under this Lease to be assumed by the proposed assignee or sub-lessee;
• in the case of an assignment, the Lessee has withdrawn any caveat lodged by it in respect of its interest in the Premises; and
• nothing in this clause 6.2 affects an assignment to a company which has similar underlying ownership to the Lessee if the parties comply with clause 6.2(b).

6.3 Lessee remains liable

The Lessee remains fully liable under this Lease if the Lessee assigns this Lease or creates an interest in this Lease or the Premises in favour of any other person, whether or not the Lessee has complied with the requirements set out in clause 6.2.

6.4 Change in control

If the Lessee is a company, and there is a change in control of the Lessee (or if the Lessee is a subsidiary, any change in the control of its holding company):

• the change in control is to be taken to be an assignment of the Lessee's interest in the Lease; and
• if requested by the Lessor, the Lessee is to obtain from a bank or other person acceptable to the Lessor, a guarantee of the Lessee's obligations under this Lease on terms acceptable to the Lessor. The Lessee shall be deemed to have complied with this clause 6.4(b) by provision of a guarantee by the directors of the Lessee;

and in this clause 6.4:

• "control" means control of the composition of the board of directors or control of more than 50% of the shares with the right to vote at general meetings; and
• words defined in the Corporations Act have the meanings given to them by that Act.

6.5 Exclusion of statutory provisions

The provisions of sections 80 and 82 of the PLA do not apply to this Lease.

6.6 Costs and expenses

The Lessee is to pay to the Lessor on demand all fees and expenses payable by the Lessor to any agent or consultant engaged by the Lessor in connection with a proposed assignment or sub-letting.

4. Entire Agreement

The effect of an entire agreement clause is to prevent the parties relying upon any discussions, statements, understandings or other documents that are not expressly embodied or contained in the contract .

The effect of the clause is to make the contract a single 'stand alone' document containing the whole of the agreement of the parties.

Its purpose is to prevent the parties claiming subsequently that the contract does not accurately reflect the agreement reached or the understanding of the parties.

All successive drafts and versions of a contract (particularly the final one to be signed) should be checked to ensure that there are no terms not previously discussed or negotiated.

The effectiveness of entire agreement clauses will ultimately depend upon the parties' approach and conduct in the negotiation of the contract and its terms. In order to be totally confident in relying on the clause, compliance will usually be required with the applicable laws and requirements relating to:

• Unconscionable conduct;
• Misleading and deceptive conduct; and
• False and misleading representations.

4.1 Extract of entire agreement clause from standard business sale agreement

• This agreement supersedes all previous agreements in respect of its subject matter and embodies the entire agreement between the parties.
• The Buyer acknowledges that no representations, warranties, promises, undertakings or agreements have been made by the Seller or any Related Corporation or any person acting, or purporting to act, on behalf of the Seller or a Related Corporation in connection with the sale of the Business or the Business Assets other than as expressly set out or referred to in this agreement [or a Related Agreement].
• The Buyer acknowledges that it has not relied on any statement, representation, warranty, promise, undertaking or agreement (whether express or implied, oral or written) resulting from or implied by conduct made in the course of communications or negotiations in connection with the sale of the Business or the Business Assets, which is not set out in this agreement [or a Related Agreement].
• [Seller addition] Nothing in this clause 22.12 will exclude any liability which the Vendor would otherwise have to the Purchaser in respect of false, misleading or fraudulent statements made by the Vendor prior to the date of this Agreement.

4.2 Extract of no reliance or inducement clause from AMPLA Joint Venture Agreement

Each party warrants and agrees that when entering into this agreement it relied exclusively on the following matters independently or any statements, inducements or representations made by or on behalf of any other party (including without limitation by the officers, employees or agents or any other person acting on behalf of a party):

• its own inspections, investigations, skill and judgement;
• the terms expressly contained in this agreement; and
• opinions and advice obtained independently of any other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Corporate/Commercial Law

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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.

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