difference between assignment and novation new york law

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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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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What is the difference between “novation” and “assignment”?

As general counsel to our small- and medium-size business clients, a large portion of our services consists of reviewing, modifying, and negotiating agreements – whether they are transactional in nature between our client and another party or concern our client and its personnel.  When these agreements need to be modified and/or assigned, there are several key legal concepts that need to be considered to ensure the enforceability of the revised or assigned agreements.  Two concepts that have been conflated, and should be clearly defined, are “novation” and “assignment.”

Under New York law, a novation occurs when there is (i) a previously valid obligation, (ii) an agreement by all parties to a new contract, (iii) the extinguishment of the old contract, and (iv) a valid new contract.   Callanan Indus. V. Micheli Contr. Corp ., 124 A.D.2d 960, 961 (3d Dept. 1986).  A novation does not discharge obligations created under a prior agreement unless it was so intended, and a novation cannot exist where there is evidence that the rights existing under the purportedly canceled agreement have been transferred or assigned to another party.  See Warberg Opportunistic Trading Fund L.P. v. GeoResource, Inc. , 151 A.D.3d 465 (1st Dept. 2017).

Contrasted with a novation which, if effective, discharges and supersedes a prior written agreement, an assignment is the complete transfer to another party of an interest or an undivided part of that interest, and such transfer must be complete insomuch as the assignor must be divested of control over the rights assigned.   Biosynexus, Inc. v. Glaxo Group Ltd. , 2006 N.Y. Slip Op. 50359 (New York Cty. Supr. Mar. 13, 2006). 

Unlike a novation, an assignment does not terminate the original written agreement.  Rather, there is a shift in the interests or rights that are being assigned to another party, while a novation must unequivocally state that it is intended to supersede a prior writing amongst parties.  As such, a novation must be demonstrated through clear documentary evidence that contains languages indicating that the new contract “revokes, cancels, extinguishes, supercedes, or otherwise satisfies a party’s obligations to the another under the original contract.”   See Bellco Drug Corp. v. Interactive Health Pharmacy Servs ., 2013 N.Y. Slip Op. 32327 (New York Cty. Supr. Sept. 25, 2013).

In contract formation, the intention of the parties is material, and as a result, the language used to memorialize these intentions must be explicit.  When entering any contract, the advice of a lawyer is invaluable to ensure that the intentions are clear, the language is accurate, and you are properly counseled as to the rights and obligations created thereunder in your favor.

Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.

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• 13 March 2018
• Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

There’s often, understandably, a bit of uncertainty about whether (and how) a party to a contract can “assign” (transfer) its rights, or pass on its obligations, under that contract, to another person.

In law, the general rule is that only the original parties to the contract can discharge or fulfil the obligations and enforce the rights created under it and nobody else gets a look in. This is called “privity of contract”.

Essentially, novation and assignment are both mechanisms to get around this restriction. However, while the end result is the same, there are some important differences between these two mechanisms.

Under an assignment, one party (the assignor) keeps performing their obligations under the contract, but transfers some or all rights to a third party (the assignee). The parties to the contract remain the same so privity of contract is preserved.

Assignments can be legal or equitable. In order for an assignment to be a legal assignment, the assignment must be agreed in writing, signed by the assignor, and the other party to the contract must be given notice of the assignment. A legal assignment is usually preferable as this allows the assignee to enforce the rights in their own name directly.

If the assignment is an equitable assignment because it does not fit the criteria for a legal assignment (for example, the other party was not given notice of it), the assignee will need to get the assignor to enforce the assigned rights on its behalf.

Contracts often require the consent of the other party before any assignment can take place. Some contracts expressly prohibit assignment. However, even where there is such wording in the contract, there is nothing stopping you from asking the party to consent to the assignment anyway, though you should take care to record any agreement in writing.

The main point to remember is that you cannot assign obligations under a contract to another party – you can only assign your benefits or rights. Even if the assignee agrees that they will take on the obligations under the contract, it is still the assignor who remains responsible for performance of the obligations and liable if they are not. In practice, what often happens is that the assignee does take over the performance of the contractual obligations but simply agrees to indemnify the assignor for any failures in performance.

It is also important to note that some rights may not be legally capable of assignment.

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When you novate a contract, the original contract effectively ceases to exist and is replaced with a new contract. The new contract contains exactly the same rights and obligations as the original contract, except that it substitutes one of the original parties (the outgoing party) with a third party (the incoming party).

As you are creating a new contract, technically you need to provide fresh consideration. Usually a simple novation agreement between all the parties will be enough, but, if there is any doubt, the parties may choose to execute the novation as a deed instead, which dispenses with the need for consideration.

The novation agreement (or deed) will specify what happens to the liabilities under the original contract. In a typical novation, the outgoing party would be released from all liabilities and the incoming party would inherit these. However, this is up to the parties to decide; they could even decide that the outgoing party will remain liable for all of the liabilities under the original contract.

Novating the contract will release the outgoing party from any future obligations which may arise. This is a crucial difference between novation and assignment.

Although the novation agreement itself can be simple, the process of getting all the parties to the table to agree and execute might be more complex. The main issue for an outgoing party will be persuading the other original party to sign. The other original party often has concerns about service continuity and may want certain assurances or information about the incoming third party.

Equally, the other original party is not obliged to agree: they can refuse to novate and then sue for breach if the party trying to exit the contract fails to meet its contractual obligations. As they still have this other option, in any novation scenario, the outgoing party is probably in a weaker bargaining position, and the other original party may well use this to their advantage.

About this article

• Subject Novation and Assignment: Sisters, Not Twins
• Author Stephen James
• Expertise Commercial Real Estate
• Published 13 March 2018

Disclaimer This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Contracts: The critical difference between Assignment and Novation

Introduction

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 the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the “Lidl Contract”). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the “ Trustee Contract”) and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones’ obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones’ obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don’t take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants’ contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164.

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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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Second Department Resolves Contract, Fiduciary Duty and Fraud Claims Involving Joint Ventures that Develop Real Property

• Posted on: Dec 6 2019

In Benjamin v. Yeroushalmi , 2019 N.Y. Slip Op. 08647 (2d Dept. Dec. 4, 2019) ( here ), the Appellate Division, Second Department considered an appeal involving an action to recover damages for breach of contract, breach of fiduciary duty and fraudulent inducement. The action involved the acquisition and development of real properly located in Mineola and Brooklyn, New York.

Beginning in 2007, the plaintiffs, Jim Benjamin (“Jim”), a real estate developer and investor, and his brother Behrouz Benyaminpour (“Bruce”), Jim’s brother and investment partner, entered into a joint venture agreement with the defendants, Moussa Yeroushalmi (“Moussa”) and his wife, Farzaneh Yeroushalmi (together, the “Yeroushalmi Defendants”), the purpose of which was to, among other things, purchase and develop properties in Mineola and Brooklyn, New York.

According to plaintiffs, in April 2007, the parties entered into a written joint venture agreement in connection with the acquisition and development of certain real properly located in Mineola, New York (the “Mineola Property”). The property was owned by the Metropolitan Transportation Authority (the “MTA”), which was selling the Mineola Property through a closed bid procedure. The MTA ultimately awarded the right to purchase the Mineola Property to the plaintiffs and the Yeroushalmi Defendants, with the parties agreeing to assign their rights to a third party. The difference between the purchase price of $12,222,000 and the assignment price of $13,500,000 was, according to plaintiffs, to be distributed as profits, with Jim to receive 30% of those profits. Plaintiffs alleged that the Yeroushalmi Defendants failed to distribute plaintiffs’ share of the profits pursuant to the Mineola Property joint venture agreement.

Plaintiffs further alleged that in April 2007, Moussa and Jim entered into a joint venture agreement for the purchase and development of certain real property located in Brooklyn, New York (the “Albemarle Property”). This transaction involved an entity owned by Moussa known as A1 Universal Construction Realty, LLC (“A1 Universal”), which entered into a contract of sale to purchase the Albemarle Property for $1,200,000. A1 Universal immediately flipped the purchase contract to a third party who agreed to purchase the Albemarle Property for $2,000,000. According to plaintiffs, they contributed $30,000 toward the down payment, and, pursuant to the joint venture agreement, the joint venture was entitled to 50% of any profits and the return of its closing costs upon a subsequent sale of the Albemerle Property. Plaintiffs claimed, inter alia , that Moussa failed to distribute the proceeds of a subsequent sale of the Albemerle Property.

In addition, Plaintiffs alleged that in July 2008, Moussa solicited them to invest funds in a beverage company called Hip Pop Beverages, LLC (“HPB”). According to Plaintiffs, Moussa made specific oral misrepresentations of material fact to induce them to invest $75,000 in HPB, which he allegedly knew to be false at the time he made them.

Plaintiffs commenced the action asserting, inter alia , a cause of action alleging breach of contract with regard to the Mineola Property joint venture agreement (first cause of action), a cause of action alleging fraud in the inducement with respect to the HPB transaction (fourth cause of action), a cause of action alleging fraud with regard to the sale of the Albemarle Property (fifth cause of action), a cause of action alleging conversion of Bruce’s membership interest in a limited liability company that owned an interest in the Albemarle Property (“Albemarle LLC”) (sixth cause of action), causes of action alleging breach of fiduciary duty (seventh and twelfth causes of action), and a cause of action for a declaratory judgment as to Bruce’s membership interest in the Albemarle LLC (tenth cause of action).

In April 2015, the Yeroushalmi Defendants moved to dismiss the first, fourth, sixth, seventh, tenth, and twelfth causes of action, and the fifth cause of action insofar as asserted against them. The motion court granted the motion as to the first, fourth, seventh, and twelfth causes of action and denied the motion as to the fifth cause of action insofar as asserted against the Yeroushalmi Defendants and the sixth and tenth causes of action. Plaintiffs appealed, and the Yeroushalmi Defendants cross appealed.

The Appellate Division, Second Department affirmed the decision and order of the motion court.

Breach of the Mineola Property Joint Venture Agreement

The Court agreed with the motion court’s determination that the first cause of action, alleging breach of the 2007 Mineola Property joint venture agreement, should have been dismissed. The reason, said the Court, was due to a subsequent agreement dated July 2, 2008 (“2008 Agreement”), which the Yeroushalmi Defendants submitted, and which superseded and constituted a novation of the Mineola Property joint venture agreement. Slip Op. at *2.

Under New York law, a novation occurs “where the parties [to an agreement] have clearly expressed or manifested their intention that a subsequent agreement supersede or substitute for an old agreement.” Northville Indus. Corp. v. Fort Neck Oil Terms. Corp. , 100 A.D.2d 865, 867 (2d Dept. 1984), aff’d , 64 N.Y.2d 930 (1985). When that happens, “the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement.” Id .; Citigifts, Inc. v. Pechnik , 112 A.D.2d 832, 834 (1st Dept. 1985), aff’d , 67 N.Y.2d 774 (1986).

Consequently, since the Court found a novation of the Mineola Property joint venture agreement, it concluded that “the cause of action alleging breach of the Mineola [P]roperty joint venture agreement [could not] be maintained. Slip Op. at *2 (citations omitted).

Breach of Fiduciary Duty

The Court agreed with the motion court’s determination to dismiss the seventh and twelfth causes of action alleging breach of fiduciary duty.

“A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” but generally does not arise “between those involved in arm’s length business transactions.” EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005) (citations and quotation marks omitted). “If the parties … do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Id . at 20.

To plead a cause of action for a breach of fiduciary duty, a plaintiff must demonstrate: “(1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC , 83 A.D.3d 804, 807 (2d Dept. 2011) (quoting Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2d Dept. 2010)). A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR § 3016(b). Litvinoff v. Wright , 150 A.D.3d 714, 715 (2d Dept. 2017).

The Court affirmed the dismissal of these claims because plaintiffs failed to provide any detail upon which to find a breach of fiduciary duty. In this regard, the Court explained that the complaint “contained only bare and conclusory allegations, without any supporting detail.” Slip Op. at *2 (citations omitted).

Fraudulent Inducement

The Court agreed with the motion court to dismiss the fourth cause of action, alleging fraud in the inducement with respect to the HPB transaction.

A cause of action alleging fraud requires the plaintiff to plead: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance, and (5) damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009).

As this Blog has noted previously, one of the more challenging elements of the claim to satisfy is justifiable reliance.

In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”).

Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “[n]o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992).

Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted).

The Court held that plaintiffs failed to satisfy the justifiable reliance element of their claim. The reason, found the Court, was because “Jim relied solely upon Moussa’s alleged misrepresentations without conducting any investigation into the factual basis for that information or into the viability of HPB as a business opportunity.” Slip Op. at *2. As such, plaintiffs “failed to adequately allege justifiable reliance,” thereby making “the cause of action alleging fraud in the inducement … subject to dismissal.” Id .

Benjamin stands as a good reminder of the pleading hurdles a plaintiff must overcome when alleging a breach of fiduciary duty and fraudulent inducement. As Benjamin shows, particularity is crucial, even in the more relaxed pleading environment of New York state court. See this Blog’s discussion of the differences between federal and state court with respect to pleading a claim with particularity ( here and here ).

Benjamin is also important for its application of the novation doctrine. Although novation typically occurs in the context of the original parties and a third party, Benjamin is an example of the doctrine’s application to the original parties only – the original parties sign a new agreement that supersedes the former one. The critical point here is the signed writing. An agreement that amends or modifies the terms of the original obligation ( i.e. , agreement) is valid only if it agreed to and signed by all parties.  

Note that novation differs from an assignment. An assignment only transfers a party’s obligations and does not require the consent of the third party, unless the contract specifically provides otherwise. An assignment does not terminate the obligations set forth in the original contract, while novation does.

Tagged with: Assignment , Breach of Fiduciary Duty , Business Litigation And Commercial Litigation , Fraudulent Inducement , Justifiable Reliance , Novation , Pleading Fraud with Particularity

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Assignment, novation and construction contracts - What is your objective?

Consider a not too hypothetical situation where the parties to a construction project (employer, contractor and sub-contractor) enter into a Deed of Assignment intending that the employer, having lost confidence in the contractor, would directly engage the sub-contractor to complete the sub-contract works. But what if no assignment has taken place? What are the terms of the contract under which the sub-contractor carries out the works for the employer?

Potential risks with assignment

In construction projects, main contractors often assign the benefit of their key sub-contracts to the employer in the event of contractor default and consequent termination of the main contract. The employer can then enforce the rights in the sub-contract against the sub-contractor, including rectification of the works and the performance of particular obligations.

However, there are potential risks associated with assignment in these situations as the Technology and Construction Court’s decision in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd demonstrated. We discussed this decision in Assigning a sub-contract on termination: which rights is the contractor giving up? In this case, the nature of the assignment meant that the main contractor could not pursue claims made by the employer against its sub-contractor under the sub-contract. This limited the main contractor’s ability to ‘pass on’ any liability it had under the main contract to the sub-contractor.

But what if the Deed of Assignment does not take effect as an assignment?

Assignment v novation

Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. 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.

Another key difference with novation is that the consent of all parties concerned must be obtained, which is why novation is almost always effected through a tripartite agreement. In the case of an assignment, it is not always necessary to obtain consent, subject to what the specific terms of the contract provide.

When deciding whether to assign or novate, parties should consider (i) whether there is in fact a burden to novate, (ii) whether the novatee will be willing to take on the burden, (iii) whether all parties will consent to the novation and indeed enter into the agreement. If there is no burden under the contract to transfer, then an assignment is likely to be the most appropriate way to transfer the interests.

Is the Deed for an assignment or a novation?

Although a document may be labelled a Deed of Assignment, if it has references to the transfer of ‘ responsibilities and obligations ’ and is a tripartite agreement these are characteristic of a novation as opposed to an assignment.

A key issue in such circumstances is to ascertain whether making use of the words ‘ assigning ’ and ‘ assignment ’ actually affects the characteristics of the document.

There has been some consideration of this characterisation issue by the courts. In the case of Burdana v Leeds Teaching Hospitals NHS Trust [2017] EWCA Civ 1980, by majority the Court of Appeal decided that on the facts of the case, although the Deed of Assignment in question referred to an ‘ assignment ’ of the benefit and burden, on proper analysis there was indeed a novation.

Furthermore, in the case of Langston Group Corporation v Cardiff City FC [2008] EWHC 535, Briggs J made it evident that even though the variation agreement in question did not use the word ‘ novation ’ and did not describe itself as such, the circumstances and effect of the agreement was indeed a novation and a new contract had been created.

It may be the case that even if a document does not describe itself as a novation, yet has the key characteristics of one, then as a matter of interpretation the courts would accept that the document takes effect as a novation.

Key characteristics of a novation

If entering into a document that purports to be a Deed of Assignment, tread carefully as it may well take effect as a novation, particularly if the following characteristics are present:

• It is a tripartite agreement;
• All the parties give their consent;
• The novator has been released from its obligations;
• There has been an acceptance of the terms of the novation on the part of the novatee and the substituted party; and
• There is a vesting of remedies.

What is your objective?

Although a document may well be labelled as an assignment, it may have the characteristics of and take effect as novation. Parties need to be cautious and consider what they want to achieve when assessing whether to assign rights or to novate them along with obligations.

This article was written by Anna Sowerby and Eveline Strecker. For more information, please contact Anna  or your usual Charles Russell Speechlys contact.

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Assignment and Novation: Spot the Difference 12 November 2020

The english technology and construction court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an epc contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits..

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

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"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

• Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
• In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
• It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

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What Is Novation?

How novation works, novation vs. assignment.

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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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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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Out-Law Analysis 10 min. read

Construction law terms: assignment and novation

14 Jul 2023, 12:44 pm

The terms ‘assignment’ and ‘novation’ are sometimes used interchangeably in relation to construction projects, but they are, in fact, very different.

While both involve bringing in a new party to the contractual arrangements, they have very distinct practical consequences. This guide examines the difference between both terms explains important differences, looks at how these differences have been illustrated in recent case law and offers some practical takeaways.

It is important to note that the ‘assignment’ of one party’s interest in a contract to another party is only partial, because the process only transfers the benefit of the first party’s interest. Assignment does not also transfer the first party’s obligations under that contract to the second party.

For example, the employer (Party A) under a building contract might assign the benefit of a collateral warranty granted to it by the contractor (Party B) or a subcontractor, to the purchaser of the development (Party C). That assignment does not transfer the burden of any of the employer’s obligations – they remain the same.

Another example showing how an assignment can only transfer the benefit of a contract, not the burden, under a building contract would be:

• the developer’s rights to have the works constructed or to sue the building contractor if the works are defective, are benefits – so can be assigned;
• the developer’s obligation to pay the contract price is a burden – so cannot be assigned.

The assignment of the benefit of a contract to Party C does not replace the parties to the original contract. However, after the assignment, Party C is entitled to the benefit of the contract and to enforce its rights against Party B. Party A cannot do so – as they have assigned those benefits onto Party C. However, because the burden has not transferred, Party A will remain liable to Party B for the performance of all obligations under the contract.

Read more in our construction law terms series

• Construction law terms: general and liquidated damages
• Construction law terms: design development and design change
• Construction law terms: termination at common law and under contract
• Construction law terms: claims under contract vs breach of contract claims
• Construction law terms: contractual notices and condition precedent notices
• Construction law terms: set off, abatement and counterclaims

The ordinary position is that an assignment will transfer the benefit of accrued and also of future rights. It is possible to agree something different – for example the transfer of future rights only – but clear and express words are required.

It is essential for parties that are considering assigning the benefit of a contract to check the terms of the contract first. This is because many contracts exclude or qualify the right to assignment, such as by limiting the number of times it can be assigned. By way of example, clause 7.1 of the standard form JCT Design and Build Contract 2016 states: “neither the Employer nor the Contractor shall without the consent of the other assign this Contract or any rights thereunder”.

In practice, however, this clause is very often amended, so parties must make sure to check the terms, and any schedule of amendments, carefully. 

One common amendment adds wording that the consent of the other party to assignment “shall not be unreasonably withheld or delayed”. While there is surprisingly little case law on what this means in practice, there is some authority to suggest that it means, at least, that the party required to provide consent must act honestly and in good faith, and must not withhold consent arbitrarily, capriciously or unreasonably.

Lastly, assignment can be statutory – sometimes referred to as ‘legal assignment’ – or equitable.  Statutory assignment must comply with the requirements of s.136 of the 1925 Law of Property Act, which includes a requirement to notify the other party to the contract (Party B) of the assignment in writing. If the assignment does not comply with the formalities in the Act, it will be an equitable assignment. 

The most pertinent difference between an equitable and statutory assignment is that the party (Party C) to whom the benefit is assigned cannot enforce in its own name and must join Party A in any action. This prevents Party B from being sued by Party C in circumstances where Party B has had no notice of the earlier assignment. 

If you want to transfer the burden of a contract as well as the benefit under it, you have to novate. In effect this creates a new contract between the two new parties and releases one of the parties from the contractual chain. The key requirement of novation is that it needs consent of all three parties involved. If Parties A and B have a contract between them, but Party A wishes to substitute Party C in its place then Parties A, B and C must all consent to this. 

Because the consent of all parties is required it will typically be documented in a tripartite agreement, signed by the novating party, the party to whom the contract is being novated and the third party. The agreement will in practice commonly be executed as a deed, otherwise some form of consideration must be provided by the party to whom the contract is being novated. 

If the parties do all consent to novation, the effect is that the original contract between Party A and B is extinguished and is replaced by a new one between Party B and C, which duplicates the rights and obligations of those under the original contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

In the context of a construction project, novation commonly occurs in design and build projects where the employer may engage consultants in the pre-construction design process. The building contract between the employer and contractor will often provide for the novation of these design consultants to the contractor. 

More generally, novation frequently occurs as a result of a company group restructuring or sale. On large infrastructure projects you might also see the novation of contracts to a special purpose vehicle (SPV) company that is set up specifically for the project. 

Key differences between assignment and novation

Case law involving assignment and novation

A good starting point is the Commercial Court case of The Argo Fund Ltd v Essar Steel Ltd, in which the judge summarised the four main differences between assignment and novation.

• A novation requires the consent of all three parties involved. By contrast, Party A can assign without the consent of either Party B or Party C – unless the contract states otherwise.
• A novation involves the termination of one contract and the creation of a new one in its place. In the case of an assignment Party A’s existing contractual rights are transferred to Party B, but the contract remains the same and Party A remains a party to it so far as its obligations are concerned.
• A novation involves the transfer of both benefits and obligations to the new party, whereas an assignment concerns only the transfer of benefits.
• Novation involves the termination of a contract and the creation of a new one so consideration is required, unless a party uses a deed which is generally enforceable without consideration. By contrast, assignment can be completed without the need for consideration.

Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd

There are a number of cases where it has not been entirely clear whether a contract has been assigned or novated. A recent example is the 2020 ruling in the dispute between Energy Works (Hull) Ltd and MW High Tech Projects UK Ltd. The employer, Energy Works, engaged MW High Tech (MW) as a contractor. MW engaged Outotec as subcontractor.

The project did not go as planned and Energy Works terminated the main contract, which provided that, on termination, MW must assign its subcontracts to Energy Works. MW did so, but there was confusion over whether it retained the benefit of any accrued or future rights under the Outotec subcontract. 

MW’s primary case was that the assignment of the subcontract only assigned future rights, not accrued rights. It argued, therefore, that it could claim for these past breaches. Its alternative case was that if accrued and future rights were transferred, then properly construed the assignment also transferred accrued and future liabilities and therefore took effect as a novation. 

On the primary case, the judge found that the natural meaning of the words “ assign the sub-contract ” was to assign the benefit of all rights under that contract, both accrued and future. She explained that it is possible to retain accrued rights, which could form the basis of a claim, and assign future rights only, however clear words are needed and were absent here.

On the alternative case the judge disagreed that the transfer took effect as a novation. The parties called the transfer an assignment which, whilst not conclusive, was consistent with the wider factual background that suggested there was no intention for the subcontract to terminate and be replaced with a new one – as would occur with a novation.

The practical effect of this assignment was that MW had transferred away its right to pursue Outotec for damages, including any argument that its delay was what caused the termination. However, in a ‘double whammy’, MW remained liable to pay Outotec for works done under the subcontract and for any further works Outotec performed after the assignment.

At the same time, MW could not claim payment in respect of those works until the final account’s reckoning – which would not be until 90 days after eventual completion. MW remained liable to Energy Works for liquidated damages, replacement contractor costs and any defects. 

Practical implications

Assignment and novation are different ways of transferring an interest under a contract, but with very different practical effects; the terms should not be used interchangeably. Parties should be especially careful in relation to post-termination assignment or novation terms.

They should also be clear what they are trying to do from the outset and consider how it has to be documented – by notice of assignment or deed of novation. Parties should check the terms of their contract. Is there a prohibition or other restriction on assignment? They must ensure they comply with them. For a legal assignment, parties must follow the requirements of s.136 of the 1925 Law of Property Act. This includes a requirement to notify contract counterparties. 

If a party is assigning a contract, or is to be obliged to do so post termination, they should consider carefully whether they want to assign accrued and future rights. If they wish to do something different – for example by retaining accrued rights so they have a route to claim against a subcontractor – then clear words are needed.

Co-written by Callum Miller of Pinsent Masons.

Editor's note 03/04/24:  This article was updated to properly reflect the outcome of the Energy Works v MW High Tech case. We regret the error.

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Contracts: The Critical Difference Between Assignment and Novation

Contributor.

Introduction

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 the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

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Lambert v Schiller

Hilscher & Hilscher, Catskill (J. Theodore Hilscher of counsel), for appellants.

The Baynes Law Firm, PLLC, Ravena (Brendan F. Baynes of counsel), for respondent.

MEMORANDUM AND ORDER

Appeal from an order of the Supreme Court (Tailleur, J.), entered December 12, 2016 in Greene County, which, among other things, granted plaintiff's cross motion for partial summary judgment.

This action arises from a June 2010 memorandum of understanding (hereinafter MOU) wherein defendants agreed to finance the sale to plaintiff of four parcels of land, totaling approximately 100 acres, for $300,000. Relevant here, the MOU stated that the purchase price of the first 7.8-acre parcel (hereinafter parcel one) was $60,000. The "basic terms" of the sale were that plaintiffs would make an initial $10,000 down payment then monthly payments in the amount of at least $5,000 for five years at a 6% interest rate on the balance. The MOU

further provided that all four parcels would be deeded to plaintiff "[a]fter $100,000 in principal payments [were] made" and that plaintiff would pay $60,000 of the principal by November 2010, at which time defendants would convey parcel one to plaintiff "with a mortgage of $40,000 remaining on it (the remaining principal amount of $40,000 having been spread over the other parcels)."

Plaintiff made the $10,000 down payment in June 2010 and a $5,000 monthly payment from July 2010 until September 2011. In August 2011, having made more than $60,000 in principal payments, plaintiff demanded that defendants provide the deed for parcel one. Defendants declined. Nonetheless, plaintiff took possession of parcel one and made considerable improvements to the property. With some exceptions, plaintiff continued to make regular monthly payments, albeit in varying amounts, from May 2012 until November 2013. In April 2014, defendants commenced a summary proceeding to evict plaintiff, mischaracterizing their [*2]relationship as landlord and tenant. The parties then executed a "contract for purchase and sale of real estate" (hereinafter the April 2014 agreement) that involved the sale of two parcels — including parcel one — totaling approximately 60 acres for $175,000 at a 6% interest rate. The April 2014 agreement provided that plaintiff would begin to make weekly payments "deemed rent [and] not refundable" if the property did not close. In July 2014, a court order was issued in defendants' favor requiring plaintiff to come current on his payments or face eviction. In August 2014, the parties executed a third contract (hereinafter the August 2014 agreement) wherein they agreed that plaintiff would purchase parcel one — as adjusted to approximately 12 acres by an intended boundary line agreement — for $76,000, payable in weekly installments. As in the April 2014 agreement, the weekly payments were characterized as rent in the event that the property did not close. Notably, neither the April 2014 agreement nor the August 2014 agreement referred to the MOU or credited any of plaintiff's previous payments.

In September 2015, plaintiff commenced this action seeking specific performance of the MOU, an equitable lien on parcel one, a constructive trust in the amount that plaintiff had paid defendants and to have the April 2014 and August 2014 agreements declared null and void because they were unconscionable, coerced or executed under duress. Defendants joined issue and filed counterclaims, including that plaintiff breached "the contracts and agreements" between the parties. Thereafter, defendants moved for, among other things, summary judgment dismissing the complaint and plaintiff cross-moved for, among other things, partial summary judgment on his cause of action for specific performance. Supreme Court, among other things, granted plaintiff's cross motion for partial summary judgment and directed defendants to deliver a deed to parcel one. Defendants now appeal.

Defendants' primary argument on this appeal is that plaintiff is not entitled to specific enforcement of the MOU because the April 2014 agreement was a novation and rescission of the MOU, the August 2014 was a novation and rescission of the April 2014 agreement and plaintiff failed to make the payments required pursuant to any of these agreements. Generally, a novation can be raised as a defense to an action on an existing agreement where a new agreement extinguishes any obligations arising from the existing agreement (see Miles v Houghtaling, 32 AD2d 714, 715 [1969]). "A novation has four elements, each of which must be present in order to demonstrate novation: (1) a previously valid obligation; (2) agreement of all parties to a new contract; (3) extinguishment of the old contract; and (4) a valid new contract" (Callanan Indus. v Micheli Contr. Corp., 124 AD2d 960, 961 [1986] [citations omitted]). If a party breaches a preexisting contract, there can be no novation because the first element is negated (see Wasserstrom v Interstate Litho Corp., 114 AD2d 952, 954 [1985]).

In support of their motion for summary judgment, defendants rely on an affidavit by their attorney, the MOU, the April 2014 and August 2014 agreements and account statements — purportedly prepared by defendants — listing plaintiff's periodic payments pursuant to all three agreements. There is no dispute that plaintiff failed to pay $60,000 in principal payments by November 2010 as required by the MOU. Nonetheless, the submissions confirm that plaintiff made and defendants accepted "semi-regular" payments from July 2010 through September 2011, and that plaintiff had paid more than $60,000 in principal by August 2011. By November 2013, plaintiff had paid more than $86,000 on the four parcels. After the parties executed the April 2014 agreement, plaintiff paid and defendant accepted periodic payments in excess of $10,000 through July 2014. Defendants' submissions indicate that by the time plaintiff commenced this action, he had paid more than $96,000 towards the purchase of parcel one as described in the MOU.

We agree with Supreme Court's determination that plaintiff did not breach the MOU. [*3]Initially, defendants do not challenge Supreme Court's characterization of the MOU as an installment land purchase contract that gave plaintiff "equitable title to the property and an equitable lien on the amount of payment" (Heritage Art Galleries v Raia, 173 AD2d 441, 441 [1991] [internal quotation marks and citation omitted]). Where, as here, such an agreement does not include a provision that time is of the essence, the purchaser may tender performance within a reasonable time after the specified date for payment (see Highbridge Dev. BR, LLC v Diamond Dev., LLC, 67 AD3d 1112, 1114 [2009]). "[A] seller may unilaterally convert [a] contract into one making time of the essence by giving the buyer clear, unequivocal notice and reasonable time to perform" (Mills v Chauvin, 103 AD3d 1041, 1044 [2013] [internal quotation marks and citations omitted]). Defendants gave no such notice here. Rather, by accepting plaintiff's late payments over time, defendants waived their right to demand timely payments and plaintiff was entitled to assert his rights under the MOU (see Snide v Larrow, 93 AD2d 959, 959 [1983], affd 62 NY2d 633 [1984]).

Defendants do not dispute that, in August 2011, plaintiff demanded that defendants deliver the deed to parcel one pursuant to the MOU after he had made more than $60,000 in payments towards the principal balance of the sale price. We agree with Supreme Court that defendants breached the MOU when they failed to deliver the deed upon plaintiff's demand. Further, we agree that, because defendants breached the MOU, defendants' assertion that the April 2014 agreement or the August 2014 agreement was a novation necessarily fails as a defense (see Wasserstrom v Interstate Litho Corp., 114 AD2d at 954).

Turning to plaintiff's cross motion, "[t]o obtain summary judgment for specific performance of a real estate contract, [the movant] must demonstrate that he [or she] substantially performed his [or her] contractual obligation and was ready, willing and able to fulfill his [or her] remaining obligations, that defendant was able but unwilling to convey the property and that there is no adequate remedy at law" (Fallati v Mackey, 31 AD3d 879, 880 [2006] [internal quotation marks, brackets and citations omitted], lv denied 7 NY3d 711 [2006]). In our view, plaintiff met this burden by submitting uncontroverted evidence that plaintiff resided on and made substantial improvements to parcel one, time was not of the essence under the MOU, he paid $60,000 towards the principal amount due within a reasonable time, he demanded that defendants transfer title to parcel one and defendants refused to comply. Further, plaintiff averred that despite defendants' refusal to transfer the deed, he continued to make payments and improvements to the property.

As set forth herein, defendants did not dispute any of plaintiff's factual claims with regard to the payments paid pursuant to the MOU. Rather, defendants contend that the $60,000 in principal payments should have been allocated "to each of the three distinct properties" and that parcel one was to be transferred "with a mortgage of $40,000 remaining on it." This is not consistent with the MOU, which provided that the purchase price of parcel one was $60,000, and that the mortgage represented "the remaining principal amount . . . having been spread over the other parcels," and "in any case any parcel [would] be deeded and/or fully released of [the] mortgage lien upon the payment of the entire stated purchase price." Because there is no factual dispute that plaintiff paid the entire purchase price stated for parcel one, we find that Supreme Court properly granted plaintiff's motion for partial summary judgment as to parcel one.

Peters, P.J., Egan Jr., Clark and Rumsey, JJ., concur.

ORDERED that the order is affirmed, with costs.

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

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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.