Novation And Assignment Differences

Assignment and novation are not the same at all – just like California isn’t the same without Arnie as governator. Assignment and novation can be used to effect changes in your business and are used to achieve different things. This article explains the differences between the two.

Assignments

Under an assignment, you keep performing your obligations under 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 ordering 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 NovationAssignment
Requires the consent of all parties?Yes, consent of both original parties to the contract + the new incoming third partyDepends
Transfers benefits under contract?YesYes
Transfers obligations under contract?YesNo
Replaces a party to a contract?YesNo

 

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.

If you need further assistance with an assignment or novation, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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Novation vs Assignment

In businesses and commercial activities, contracts and agreements hold great significance, especially in these times of mergers and acquisitions, and change in partnerships in between projects. It is thus, prudent to know the differences between Novation and assignment to safeguard one’s financial interests when entering into a contract or agreement with another party.

Novation

Novation is a special type of contract having mechanism that allows a party in a contract to transfer all its obligations and benefits to another party, which is not an original party to the contract. This third party takes over the place of one of the original parties and fulfills its obligations. In Novation, the original contracting party must be left in the same position that he was in before Novation took place. Novation is a concept that is very ancient, and has been in force since Roman times. It is similar to the Hundi system prevalent in India since ancient times. When Novation takes place, the original contract stands annulled, and all burden and benefits of one party can be passed on to another party. For example, If Harry has taken a loan from Smith, but Smith wishes to get out of the contract, he enters into Novation with John who agrees to the benefits and burden due to him, and allows Smith to get out of the contract. Now the parties into contract are John and Harry, and Harry has to pay the loan back to John.

Assignment

Assignment is different from Novation as there is transfer of rights and obligations from a person to another, but the parties in the contract do not change as is the case with Novation. In an assignment, privity of contract exists between the original contracting parties. In an assignment, one of the contracting parties can transfer its rights under the contract to a third party. The thing to remember is that, by law, it is only rights that can be thus transferred to a third party without the consent of the other party. Thus, it is only the right to be paid, and not an obligation to make a payment that can be transferred under assignment.

What is the difference between Novation and Assignment?

• Novation requires consent of the original parties in the contract. On the other hand, this is not necessary in case of assignment

• In Novation, transfer of obligations is possible, while in assignment, obligations cannot be transferred

• In Novation, old contract is annulled and a new contract is made describing new rights and obligations

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"Difference Between Novation and Assignment." DifferenceBetween.Com. August 10, 2011. < https://www.differencebetween.com/difference-between-novation-and-vs-assignment/ >

Filed Under: ContractsTagged With: assignment, Contract, Hundi system, Novation

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