Choosing whether to novate or assign

The basic law is that A cannot transfer his obligations to C that he has under a contract with B, without B agreeing.

Novation is the legal mechanism where the rights and obligations are transferred with the permission of all parties (both new and old).

When it is possible to obtain the contractual consent of all three parties, use a standard, three-sided novation agreement.

If many contracts are being transferred at the same time, such as when one business buys another including customer contracts, it may be simply not practical to ask each other party (in our example, each customer) to sign a novation agreement.

So the parties that are transferring the contracts sign an assignment agreement and hope that the other original parties not object.

So that the original parties cannot cancel the contract if they do object, most businesses that have large numbers of contracts make sure that the terms of each contract allow them to assign the contract without permission. In that case, there is no breach of contract and the other original party cannot cancel.

If a client or customer becomes aware that his supplier has changed, and he continues to accept services from the new supplier, he will be deemed to have accepted the new contract. There is no specific time period or circumstance when you can be sure this has happened.

Why novation should not be by deed?

You may hear or read of a “deed of novation”. Many documents that can be simply signed are also referred to as deeds. This is due in part to the continued mystification of the law in some quarters.

A novation never needs to be by deed. If you want the full story, we have a longer article that explains why a deed of novation is unlikely to be required in practice.

Novating a debt

A common misconception is that novating a debt cancels an old debt and creates a new one to the new owner. Instead, novation just changes the parties to the original contract. However, in most cases, novation is an easier option than cancelling an old agreement and drawing a new one.

Completing a deed of assignment

For technical legal reasons, all assignments of life policies must be by deed and not by a simple signature. Each of these documents covers that and the drafting notes explain the finer points. The same witness can verify the signatures of both parties.

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