What’s the Difference Between Assignment and Novation?

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

Assignments

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

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

Novation

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

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

Other Differences Between an Assignment and Novation

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

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

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

Deed of Novation Assignment
Requires the consent of all parties? Yes, consent of both original parties to the contract + the new incoming third party Depends
Transfers benefits under contract? Yes Yes
Transfers obligations under contract? Yes No
Replaces a party to a contract? Yes No

Key Takeaways

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

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

 

Frequently Asked Questions

What Is Assignment?

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

What is Novation?

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


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