The difference between contract assignment and novation

Navigating the complexities of business management often involves dealing with unexpected changes. Sometimes, you might need to pass a contract to someone else because your business situation changes

The difference between contract assignment and novation

How you do this depends on the contract’s rules and whether it’s about assigning or novating. It’s like figuring out the best way to switch things smoothly when your business evolves.

Since the terms ‘assignment’ and ‘novation’ may well mean little to you, in this article, we’ll be looking at these concepts in more detail so that you’ll understand what to do when the time comes to transfer a commercial contract. 

What is a contract assignment?

A contract assignment occurs when Party A and Party B are in a contract together, but Party B transfers the contract over to Party C as a two-party exercise between Parties B and C. 

Once the contract assignment is completed, Party A will be in contract with Party C instead, and Party B will generally drop out of the picture. Party C will inherit the contract terms as is. The relevant document is known as a ‘Deed of Assignment’.

What is a contract novation?

Contract novation, on the other hand, is when Parties A, B and C all agree to the terms of the transfer of the contract from Party B to Party C, so that the process is a three-party (‘tripartite’) process. 

The end result is similar to an assignment by the conclusion of the process; Party A is in contract with Party C. However, there is a slight difference, since the novation is a three-party contract, it’s open to the parties to agree on new terms and conditions as part of the novation. The document is usually known as a ‘Novation Agreement’.

How do I know whether I need to assign or novate the contract?

The original contract may provide as to whether an assignment is permitted and whether any conditions apply to its assignment. If an assignment is allowed (and conditions are met), Party B is generally at liberty to assign the contract to Party C.

If the original contract doesn’t permit assignments or is silent on the subject, then it’s likely that the process will need to be approached by way of a novation since the consent of Party A will need to be obtained and documented and this is best done by way of a novation.

What happens if I need to transfer a contract as part of my business sale?

If you’re a sole trader selling your business, as the contract will be in your own name, you must follow the rules above to decide whether an assignment or novation is required.

If you’re trading via a company, and your business is being sold via a share sale, then the contracting entity isn’t changing, so this won’t trigger an assignment or novation. However, you’ll need to check to see if there is a ‘change of control’ clause which must be followed.

If you’re trading via a company, and your business is being sold via an asset sale, then the contracting entity is changing, so it will be either an assignment or novation, depending on the terms of the contract.

It’s important that you take legal advice if you’re unsure as to how to proceed, as your solicitor can check the terms of the contract in detail and advise appropriately.

Wrapping up 

If you need advice on a specific contract assignment or novation or are looking for general advice in this area, you’d contact a contract solicitor with appropriate expertise. 

By seeking legal advice through LawBite, you can ensure that the situation is handled correctly so that the contract remains valid and in force. Legal experts can guide you through the intricacies of contract law, providing tailored solutions to meet your specific needs.

Clive Rich
Clive Rich

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