Assignment deeds and novation are used in different ways to create contractual changes which help achieve certain objectives. Novation deeds are legal documents used to transfer contractual rights and obligations to other parties, who are usually not party to the contract.
What is The Difference Between Assignment and Novation
The main difference is that under assignment, you keep performing your contractual rights and obligations, but delegate part of them to a third party. You still maintain responsibility for the liability of those rights and obligations.
In contrast, novation deeds transfer the entirety of your contractual rights and obligations to another party. Once the obligations are transferred from the original company to the third party, it is the third party who bears the responsibility of performing services and the right to receive compensation for those services.
Different levels of consent are required based on whether it is a deed of novation or assignment. For a novation deed all parties must consent, including the other party to the original contract. Consent must also be given by the third party who will be taking over your contractual rights and obligations.
Assignment deeds on the other hand may not require consent of all parties. To determine which parties must consent depends on the circumstances and requires inspection of the relevant deed or contract.
When Can I Use a Deed of Novation?
It is most common to use a deed of novation when a business is being sold.
This is because when a business is being sold, the business will have continuing contractual rights and obligations with other businesses such as suppliers or manufacturers. For example if you are selling a clothing business, you may have an existing supply agreement with your supplier.
In this case, it would be in the best interests of all parties to transfer the rights and obligations under the contract to the new owners of the business. Here, the previous owners are free of their obligations under the contract, while the new owners have an effective supply chain in place and the suppliers are able to continue business as usual.
What Exactly is a Deed?
Assignments and novations are most commonly in the form of a deed.
Deeds are legal documents whereby parties who sign the contract must have witnesses present, who also sign the contract. For the purpose of needing a witness present, assignments and novations usually require a physical meeting so the contract can be signed and effective at law.
On the other hand, ordinary contracts don’t require witnesses and can be perfected virtually or by telephone.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
