Assignment and Novation: what is the difference?

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Novation and Assignment

Novation and assignment

This article explains the difference between assignment and novation.

Do you want to download a novation or assignment agreement?

Net Lawman has recently updated and expanded its selection of assignment and novation agreements. You can either visit our collection using this link: Novation and assignment, or jump further down the page to Novation or Assignment? to read about them.

Introduction

The difference between assignment and novation is relatively small. Both achieve the same end, the “transfer” of a contract between two parties.

Its important to understand the difference though, as using an assignment agreement when you should novate might result in the original contract remaining, leaving you liable for the other party not performing the contract.

The reason to assign or novate: changing the parties bound to a contract

In 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 concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine, namely how do you change the parties to an agreement.

In this article, we’ll first look at novation and then move on to assignment. At the end, we’ll cover some common situations for use.

The definition of novation

The word ’novation’ is derived from the legal code of ancient Rome. In Latin, it simply means ’replace’ or ’substitute’. In modern English, it retains its meaning: novation is a mechanism where one party transfers all its obligations and benefits under a contract to a third party. The third party effectively replaces the original party as a party to that contract.

Novation in practice

When novation happens, the original contract is superseded by a new contract between the one of the original parties and the new third party.

For example: Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter deals with the MoT. Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties. For the sum of £30 to each of them, Michael persuades Peter and Fred to enter into a novation agreement whereby Fred takes over Michael's obligations to Peter and Fred now deals with Peter in Michael's place.

What is a deed of novation and when to use one?

You can novate either using a novation agreement or a deed of novation. If you use an agreement, as with all contracts, there must be “consideration”: each side must “give” some value for the rights he takes. Consideration is usually assumed to be the discharge of the original contract and the original parties' contractual obligations to each other.

Sometimes, however, there is no consideration. Structuring the arrangement as a deed of novation removes the requirement for consideration (a deed can still be used if there is some as well), so it suits many more situations. Net Lawman structures all novation agreements as deeds.

If the consideration is unclear, or there is none, you should use a novation agreement drawn as a deed. In practice, the difference is only in the few words used at the signing point but the effect is significant.

Why novation can be difficult

When a contract is novated, the other (original) contracting party must be left in the same position as he was in prior to the novation being made. In practice, this requires that all three parties sign the agreement. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

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

	2.	He may need extra assurance to be persuaded that he won’t be worse off as a result of the novation (especially common where the novation transfers service contracts between suppliers).

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

Making the novation easier

Planning how you inform the third party and how you seek his acceptance of the novation can make the transfer process much easier. Usually either the transferor or the transferee writes to the third party and requests acceptance of the novation.

The letter can take any approach (as it’s not a legal document), but often a simple notification and request for acknowledgement is enough. The easier it is for the third party to accept, the more likely the novation is likely to be successful. Simple things, like including a pre-paid return envelope with the letter and a form to sign, make the process easy for the third party.

What is assignment and why does it differ from novation?

There is a key difference between novation and assignment. This difference is that, with assignment, the parties to the contract do not change - privity of contract still exists between the original parties, so both retain the original rights and liabilities. Whereas novation changes the parties to the contract, assignment leaves the contract in place, but transfers rights of one party to someone else.

This has two effects:

	1.	With assignment, the consent of the other original party is not necessary.

	2.	Assignment transfers benefits only and not obligations. Even if the new assignee promises to take on the liability of the assignor to the third parties, the assignor (the original party to the contract) remains personally liable if he fails to do so. An obligation to a third party cannot be assigned without his consent.

When assignment can be invalid

Terms in an original contract can restrict or prohibit assignments. These are called non-assignment clauses and they can apply in any contract. If you attempt to assign a contract that has one of these clauses and cannot be assigned, you risk invalidating the original contract.

Novation or Assignment?

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties.

Net Lawman offers a number of novation and assignment agreements for different situations. More information is available if you follow the link to the introduction pages:

Transfer of a debt

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 he becomes liable to repay the lender instead of you.

In this situation you should novate using: Novation agreement (deed of novation): transfer debt to new debtor.

This is a common situation 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, this agreement can be used to transfer who pays 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.

In this situation you should novate using: Novation agreement (deed of novation): transfer debt to new creditor.

Common uses for this agreement would be where a business is sold and the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

Transfer a service provider

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

In this situation you should novate using: Deed of novation: transfer of service contract.

Common uses for this agreement would be 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. This agreement 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 novate using: Novation of architectural or construction contract on sale of land.

Assignment

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

You can find it here: Deed of assignment.

Assignment of a business lease

If you wish to transfer a business lease (company tenancy) to another party during the fixed term, Net Lawman offers a deed of assignment for this purpose. Contact us for more information.

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 two documents that assign intellectual property:

Generally, Agreement to assign intellectual property can be used for any type of IP including tradenames, logos and artistic rights.

Copyright assignment covers copyright of any type, including for software, books, plays, paintings, documents, articles etc.

Assignment of a life insurance policy or endowment policy

This agreement allows you to transfer the rights to receive payments from a life insurance policy or endowment policy, perhaps as a result of a separation or divorce or perhaps because you wish to gift or sell the policy to someone else.

You can find it here: Agreement (deed) to assign a life insurance policy or endowment policy.

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 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 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 his right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

If you’re still unsure whether you should novate or assign

If by chance you find any error in this information page, do please tell us. We should also welcome your suggestions for new subjects for information pages. These notes:
Do not provide a complete or authoritative statement of the law;
Do not constitute legal advice by Net Lawman;
Do not create a contractual relationship;
Do not form part of any other advice, whether paid or free.