What is the Difference Between an Assignment and a Novation in the UK?

As a business owner, you may encounter situations where you need to transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer rights or obligations under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them. 

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What is an Assignment? 

Under the terms of a standard contractual agreement, your business may receive rights or benefits, such as the right to be paid. You may wish to transfer the right to receive these benefits through an assignment to someone who is not a party to the original agreement. The assignment of the right can be granted to a third party through an assignment deed. This will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your rights. You cannot assign any rights conveyed in a contract to another person.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract. 

Common examples of assignments in business: 

Examples of Assignments in Business

• Intellectual Property Rights: A company may assign ownership of a patent or trade mark to another business.
• Commercial Lease Agreements: A tenant might assign their lease to a new tenant, transferring the right to occupy the property.

These examples illustrate how assignments can be used flexibly across various business contexts to transfer valuable rights and interests.

What is a Novation?

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to where you need to find a replacement to ‘step into your shoes’ as party to the contract. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

Novations often occur when businesses are acquired or sold, or when debt transactions are executed. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party, or when a company sells its assets (including contracts) to another business, and needs to novate all client contracts to the purchaser. In these situations, the transfer of these obligations would be agreed via a novation. 

It is crucial to understand that novation effectively creates a new contract, which means all parties must agree to the terms. This can be both an advantage and a challenge. On one hand, it allows for a clean break and a fresh start with the new party. On the other hand, it may require extensive negotiation to ensure all parties are satisfied with the new arrangement.

Two Key Differences Between an Assignment and a Novation

There are other differences between the two that business owners must be aware of.

1. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights, unless there is an express clause in the contract that mandates that assignment can only occur with consent. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure that no contractual terms prohibit you from transferring a benefit to a third party. Doing so may result in breaching the contract, and you will be liable for any resulting damages. 

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. Additionally, as other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by all parties to the original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term referring to the payment of value in exchange for a promise. To have a legally binding contract, there must be some form of consideration passing between the parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract. 

Given that novation of a contract extinguishes the previous contract and creates a new one, consideration would be needed for both the termination of the original contract and the creation of the new contract. Given that this can be tricky to organise, most novations are done by way of a deed, so that consideration is not needed.

On the other hand, since assignments do not involve the termination of a contract and the creation of a new one, you do not have to demonstrate that the parties to the contract exchanged consideration, and a deed is often not required.

It is important to note that while consideration is required for novations, it doesn’t necessarily have to be monetary. In some cases, the mutual release of obligations under the original contract can be considered sufficient consideration for the novation to be effective.

Key Takeaways

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration, as they involve the termination of one contract in order to create another. 

When deciding between an assignment and a novation, consider:

• The nature of what you’re transferring (rights only or rights and obligations)
• The willingness of other parties to consent to the transfer
• The need for a clean break from the original contract

If you need help transferring your rights, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.  Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

What is an assignment?

Assignments are a mechanism by which business owners can transfer a right or benefit granted to them under a contractual arrangement to a third party. 

What is a novation?

A novation transfers both a business owner’s rights and obligations under a contract to a third party.