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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Novation and assignment

Changing the parties bound to a contract

What is novation, is novation a new contract, what is a deed of novation, why novation can be difficult, when do you use an assignment agreement to transfer a debt or obligation, transfer of a debt, transfer of service contracts.

Novation and assignment are ways for someone to transfer their interest in a contract to someone else.

Whilst the difference between assignment and novation is relatively small, it is an essential one. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations.

In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Statute law has created a few exceptions but they apply rarely.

The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine.

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.

Novation in practice

Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.

Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties.

Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place.

Other examples

The seller of a business transfers the contracts with their customers and suppliers to the buyer. A novation process transfers each contract by the mutual agreement of all three parties.

A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary.

A novation agreement is a new contract that 'extinguishes' the old one.

Because it is a new contract, there can be new terms within it, giving additional rights and obligations.

There are times when and why you should use a deed explains exactly when you need to use one. Novation is not among them.

A Deed of Novation is a relic from long ago when lawyers were even more inclined to cloak their knowledge in obscurity.

One of the main purposes in using the deed format is that it provides the necessity for an unconnected witness to sign the document. So it is that much more difficult for one of the parties to say it was forged or signed a year later than the date shown.

But in a novation, there are at least three parties by definition; three parties who are most unlikely to be connected and each of whom has their separate interest. So you can be pretty sure the agreement has not been tampered with. A witness cannot improve on that. So you do not need a deed.

Another reason to use a deed could be when there is no 'consideration', that is when one of the original contracting parties receives no benefit - monetary or otherwise - in return fot the novation. However, in commercial circumstances you could nearly always argue that there is an advantage to each of the parties. The extinction of the old contract or subjectively more favourable terms within the new contract would both count as fair consideration.

Do you need a deed of novation for your situation? The answer is usually no, as an agreement is fine.

The exception to the rule is that if the original contract was signed as a deed, you need to use a deed to novate it. Real property transaction are by deed. That includes a consent to assign a lease, which has three parties. There are special reasons for that.

There are other examples too, which are more obscure.

When a contract is novated, the other (original) contracting party must be left in the same position as they were in prior to the novation being made.

Novation requires the agreement of all three parties. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

The other original party may not understand the benefit to them of having the original contract novated and require extra information about the process that is time consuming to provide.

They may need extra assurance to be persuaded that they won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).

It is possible that they could play up to delay the transfer and squeeze extra concessions from you.

The only way to transfer your rights or obligations is by an agreement signed by all three parties.

But what happens if you are a service provider selling your business with tens of thousands of customers? You can hardly ask every one of them to sign up to their own separate novation.

In practice, a well drawn original agreement will contain a provision which permits the service provider to assign (transfer its contract) without the permission of the customer.

But what happens if it does not?

In practice what happens is that the buyer 'takes a flyer'. The deal is done in the hope that the customers stay with the new owner.

Maybe the buyer obtains an indemnity from the seller to cover their loss if many leave. Maybe the buyer will write to the customers to encourage them to stay. Maybe the customers simply make the next payment and thereby confirm acceptance in law.

In each of those cases, the acquirer will be safe because the customers remain (or become) bound to the terms of the original contract.

Net Lawman offers an assignment agreement to cover that exact situation, together with a draft letter of the sort that might convince customers to stay with the new owner.

The other situation in which assignment is used is where the new party trusts the original party assigning the contract. For example, a subsidiary company may assign contractual obligations to a parent company confident that the parent will uphold the contract.

A construction company is a subsidary in a group. It is working in partnership with another business on several projects to build houses. The other business is a minor partner in the deal. The partnership has run out of money and the smaller partner is unable to inject any more funds. The parent business is unwilling to have its subsidiary fund the remainder of the projects by itself.

A solution may be for the parent to pay both its subsidiary and the third party for the construction contracts to be assigned to it (in other words, buy the contractual rights from the partnership). The assignment provisions would give the parent the obligation to finish the project, which it may be able to do without the third party.

Assignment transfers benefits only

Even if the assignee promises to take on the liability of the assignor to the third parties, the assignor remains personally liable if they fail to do so. An obligation to a third party cannot be assigned without their consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in construction contracts but can apply in any agreement. If you attempt to assign a contract that cannot be assigned, you risk invalidating the original contract.

Personal obligations and assignment

Be particularly careful of an assignment if your obligations can only be performed personally. A good example would be sale of a hair dressing business. Quite apart from the risk of the clients leaving, the actual forward appointments could be interpreted as contracts with the seller, even though they would have no way to fulfill them because they have sold the business.

Buying the right document

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties. We offer a number of novation and assignment agreement templates for different situations.

For example: You borrow from a lender and you later want to transfer the debt to someone else (maybe a friend, a business partner or a the buyer of your business) so that they become liable to repay the lender instead of you. In this situation you should use an agreement that novates the debt .

This is a common consideration when a business is sold and outstanding debts of the business are transferred to the new owner (perhaps loans of money but maybe also loans of goods for sale).

Alternatively, you could novate in order to change who should pay back a personal loan between individuals.

Transfer of a right to receive the repayment of a debt

For example: You make a loan to someone (it could be money or goods) and later you want to change who receives the repayment (an agreement to change who the creditor is ).

The transaction might relate to the sale of a business where the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

For example: You provide a service to someone and you want to transfer the obligation of providing that service to another person or company.

Again, a common use for a service contract novation agreement is where a business is sold and the buyer takes on the service contracts of the seller. The service could be in any industry, from a fixed period gardening contract to an on-going IT or website maintenance. Novation changes who is providing the service.

Transfer of an architectural or building contract

For example: You buy a building or property development that is still under construction and you want the existing contractor to continue work despite the original contract being between the contractor and the seller.

In this situation you should use a novation agreement for a building contract .

Our standard assignment agreement can be used for most assignments (exceptions given below). It is not specific to circumstances.

Assignment of a business lease

If you wish to transfer a commercial property lease to another business tenant during the fixed term, Net Lawman offers an agreement to assign a lease .

We have an article specifically about assigning a business lease that may be useful further reading.

It is not advisable to assign a residential tenancy agreement. We would suggest that you cancel the original agreement and draw up a new agreement with the new tenants.

Assignment of copyright

We have  number of assignment agreements for intellectual property rights .

They are effectively sale or transfer agreements where some rights are retained by the seller (such as to buyback the assigned work, or for the work only to be used in certain locations).

They relate to IP in media (such as a film or a music score) and to inventions.

Assignment of a life insurance policy or endowment policy

These agreements allows you to transfer the rights to receive payments from a life insurance policy or endowment policy. We offer both a deed of assignment of a policy on separation or divorce and a deed of assignment to gift or sell the policy to someone else .

Assignment and collateral warranties in the construction industry

Probably the most common use of assignment in the construction industry today is in relation to collateral warranties.

The collateral warranties given by consultants, contractors and sub-contractors in construction contracts are often assigned to subsequent owners or leases. Assignment can do no more than transfer rights available to the assignor. It is not capable of creating new rights and obligations in favour of an assignee.

So while the client can, in theory, assign the right to have a building adequately designed, it is unclear what right would be transferred to sue for damages in the event of breach. If the developer (who would usually be the assignor) has sold the building or created a full-repairing lease, then their right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

What is assignment in contract law?

30 January 2023

The long-term benefits of a contract may provide security; however, conditions may transform. If one of the parties decide to end the contract, the risks of not adhering to it or terminating it could result in legal action against them. 

As a safer option, transferring the contract to another person or company is possible. 

To ensure a secure transition and understanding of rights and obligations, it’s essential to become familiar with the relevant laws related to the contract assignment.

What does assignment of a contract mean?

In business contracts, assignment refers to transferring an agreement's rights, obligations, and property to another party. 

For example, most commercial tenancy agreements include a clause allowing the tenant to assign their lease to a third party, and that third party becomes the new tenant.

Unfortunately, assigning a contract does not provide you with complete security. You remain responsible for obligations and liabilities incurred before the assignment. 

Let's look at the assignment of a commercial property. The person assigning the contract (the assignor) will be liable to pay the rent owed under the tenancy agreement if the new tenant (the assignee) defaults on payment.

Can the burden of a contract be assigned?

The burden of the contract cannot be assigned. If the assignee fails to perform any of the contractual obligations, the other party can turn to you and demand you undertake any outstanding performance responsibilities.

If you want to transfer the burden of the contract along with its benefits, the agreement must be novated. Novation extinguishes the original contract and replaces it with another, under which a third party takes up rights and obligations, duplicating those of one of the parties to the original contract. 

The outgoing party surrenders its rights and is released from its obligations.

Learn how to novate contract

How do I assign a contract?

Contracts are normally assigned to a subsidiary, a business owned by another business, or a successor, the business that emerges from a sale, merger, or acquisition. 

Say you run a catering business that merges with a small hotel. The contracts held by the party may be assigned to the new business arising from the catering company/hotel merger.

A clause providing the right to assign a contract can be inserted into a commercial contract or real estate, as can a term prohibiting assignment, called an anti-assignment clause. The assignor and the assignee must carefully read the assignment's terms and follow the agreement's process.

Can a contract be assigned without consent?

If the contract is silent on whether or not the benefit of the agreement can be assigned, then in principle, assignment can take place without the other contracted party’s consent. 

However, certain contracts cannot be assigned, for example, contracts with personal rights, such as an agreement between an author and a publisher or a sportsperson and their agent. 

You must obtain consent from all parties to the original contract and the third party agreeing if you want to novate a contract.

Can you assign part of a contract?

You cannot assign part of a contract if the benefit is a ‘chose in action’. 

A ‘chose in action’ refers to the personal rights over property that can only be claimed or enforced via legal action. For example, you cannot assign only the intellectual property rights of a contract, as these can only be enforced by bringing a claim to court. 

A ‘chose in action’ is sometimes called the ‘right to sue’. This is a highly complex area of law, and you must speak to one of our Contract Law Solicitors before making any attempt to assign a contract.

Does the assignment of contracts need to be notarised?

No, the assignment does not have to be notarised to be a valid assignment.

Can I leave a contract assignment early?

Technically, you can leave early, as the burden of the contract cannot be assigned; you could walk away, leaving the assignor to carry out their remaining responsibilities under the original agreement. 

However, the other party to the contract and the assignor may bring a claim against you for other breaches related to the original agreement or the assignment.

Get legal assistance from LawBite

When considering the risk associated with assigning a contract, seeking professional legal advice is highly recommended. 

Starting at just £180 + (VAT) for a small review, our expert contract lawyers will be able to look through your contract precisely to determine whether assigning it is possible. With our expertise, you can trust that your rights and interests will be safeguarded. Book a free 15 minute consultation  or call us on  020 3808 8314 .

Additional resources

• Breach of contract - a quick guide
• The Consumer Contracts Regulations 2013
• What is a construction contract?
• The essential contracts every business needs
• Contracts - what is consideration?
• What is the difference between RFI, RFQ, RFT and RFP?

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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Hall Ellis Solicitors

assignment of contract rights, novation and assignment clauses

Assignment of contract rights .

There is no such thing as an assignment of a contract.

It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1993 UKHL 4 (22 July 1993):

It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation. Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.

In short, contracts are not assigned:

• ownership of assets is assigned.
• Contractual rights are transferred. They're novated.

So when it comes to “assigning” (ie transferring or novating) contracts, there are 3 possibilities:

• Transfer all or part of the burden of the contract to another person. This is novation
• Assign all or part of the benefit of the contract to another person
• Transfer the whole of the benefit and the burden to another person. This is also novation.

The general law does not require any particular formality to novation.

Where a supplier notifies a contracting partner that they will be replaced by another supplier, and then starts to receive supply from the new supplier without objection or complaint, there's a good chance the contract has been novated.

That's acceptance of a new contract (and termination of the old contract) by conduct.

When businesses enter administration or liquidation, potential purchasers might express an interest in “acquiring the contracts” of the business. That requires novation of each contract, individually.

Novation is a fundamental principle of contract law, and is closely related to privity of contract . It's pretty difficult to understand one without the other.

What do "Assignment Clauses" in Contract do then?

Assignment clauses either:

• confirm the general operation of the law - ie no transfers of contractual rights. It expressly prohibits or enables transfers of the burden or the benefit of the contract.
• displace or override the general rule of law of novation, in favour of one party or both parties.

Do you need one or not?  That depends.

Context of Assignment Clauses

Contracts impose strict liability on the contracting parties to perform their legal obligations. 

It means this: if a seller does not perform what they are required to do under the contract to the standard fixed by the contract, they’re in breach of contract , and liable to make good on a legal remedy for breach.  Likewise, if a buyer does not do what they are legally required to do, they’re in breach of contract, and facing the same consequences .

For example, take a company supplying SaaS related services:

The SaaS supplier hosts its SaaS solution in the cloud for its customers.  The SaaS supplier doesn't own its own infrastructure for the hosting. It subcontracts the hosting to a dedicated hosting company, such as Rackspace. That subcontracting doesn't relieve the SaaS supplier from its obligations to perform the contract: in this example, host the SaaS solution in the cloud to its own customers. Using Rackspace to host the SaaS solution is just a delegation of the contractual duty of the SaaS supplier to provide services to the customer. If the hosting fails, the SaaS supplier is liable to its customers for the breach of contract. Not Rackspace.

Assignment clauses permit transfer of contractual obligations to perform the burden of the contract to third parties. So, where the obligation to perform is assigned to a third party and it's not performed, it will be the party that has taken over the burden of the contract (ie the assignee) that will be liable to the customer. Not the original contracting party (which would be the SaaS supplier in the example above).

The end result is that one of the original contracting parties is no longer a party to the contract: that’s novation. 

Example: Assignment Clause

A boilerplate provision to prevent assignment of the benefit and burden in a contract might be:

Neither party may without the prior written consent of the other party assign a benefit or obligation imposed in this Agreement.

The reference to “obligation” is usually redundant, because it can't be transferred without the consent of the other party in the first place.

Contract Assignments vs Subcontracting

Assignment clauses shouldn't be confused with subcontracting clauses .

The general law provides that a contracting party is entitled to subcontract works to a third person, unless there is a contractual restriction preventing it.

It would be quite a mistake to regard that as an "assignment" of the obligations under the contract.

It isn't a transfer of the contract, or any part of the burden of the contract.

It's a delegation .

Subcontracting performance of contractual obligations:

• is permitted where personal performance is not required to produce the result intended by the contract
• means performance by the subcontractor will discharge the principal contracting party's obligations.
• The principal contracting party remains liable if the subcontractor does not complete performance on behalf of the principal contracting party. 
• Boilerplate Clauses
• Who are you actually contracting with? Separate Legal Entities
• Increasing Liability for Breach of Contract: Indemnities 

Contract Law Solicitors

Contract law can be tricky. Sometimes it's matter of seeing what has happened before when parties have tried to transfer a contract to ascertain what is likely to happen in the case at hand.

Transferring contract rights and obligations can be a serious business. Getting it wrong can mean a party is in breach of contract,  leading to termination and damages claims. 

If you're in business and need legal advice on a contract, call +44 20 7036 9282 to speak for an initial chat with one of our contract law solicitors or email your enquiry to [email protected] .

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

By Edward Carruthers

Updated on 21 November 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

• What is an Assignment? 

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you 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. 

What is an Assignment? 

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

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. 

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 and find a replacement. 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.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a novation. 

As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits.

But 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. 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 no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for 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. In addition, as the 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 every party to that 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 for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between 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, and you can take action against your business partner for breach of contract. 

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

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. 

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 .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party. 

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

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Contracts: assignment

Practical law uk practice note 7-381-7509  (approx. 44 pages), get full access to this document with practical law.

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• Increase efficiency
• Enhance productivity
• Improve response time
• General Contract and Boilerplate
• Substantive Law
• 1 Scope of this note
• 2 What is an assignment?
• 3 Effect of assignment
• 4 When is assignment used?
• 5 Types of assignment
• 6 Assignment formalities
• Personal contracts
• Assignments prohibited by public policy
• Construing non-assignment provisions
• Requirements for consent
• Circumventing restrictions on assignment
• Legal restrictions on non-assignment provisions
• "Conditional benefit" exception discredited for assigning contractual obligations
• Creating a legal assignment
• When are legal assignments used?
• Who must consent?
• Must a legal assignment be in writing?
• Who must sign the assignment?
• Is consideration required?
• Notice of assignment
• Notice must be in writing
• Must the notice take any particular form?
• Does the notice need to state the date of the assignment?
• When should notice be given?
• Who can give notice?
• To whom can notice be given?
• Can notice be given in advance of assignment?
• Can the other contracting party demand sight of the assignment agreement?
• Which methods of giving notice are valid?
• Effect of non-assignment provision on a notice of assignment
• What happens if notice of assignment is not given to the other contracting party?
• Creating an equitable assignment
• When are equitable assignments used?
• Must an equitable assignment be in writing?
• Is notice of assignment required?
• Subject to equities
• Recovery of loss by assignee
• 14 Assignment of a third party right
• Conditional fee agreements
• Construction agreements
• Consumer contracts
• Security arrangements
• General reading
• Assignment of other choses in action
• 17 Drafting assignment provisions
• 18 Section 136 of the Law of Property Act 1925

What constitutes a valid assignment of a contract?

Published by a lexisnexis dispute resolution expert.

This Practice Note identifies what can be transferred when assigning rights under a contract and how to effect a valid assignment of a contract.

For guidance on common contract assignment scenarios, see Practice Note: Assigning contracts—common scenarios and considerations.

For guidance on the key practical and commercial considerations when assigning contracts, see Practice Note: How to assign rights under a contract.

Note also that when discussing assigning contractual rights, reference may also be made to assigning ‘ chose in action ’ in the sense that the benefit of a contract has been held to be a chose in action.

When is assignment of contracts relevant for consideration?

Contracts, or rather, rights under contracts, are frequently assigned as part of the way companies run their businesses. When advising a party in relation to a proposed or purported assignment (transfer) of a contractual right where there may be a dispute, you will need to consider:

what, when and how rights can be assigned

how an assignment can be challenged

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Related legal acts:

• Insolvency Act 1986 (1986 c 45)
• Law of Property Act 1925 (1925 c 20)
• Powers of Attorney Act 1971 (1971 c 27)

Key definition:

Chose in action definition, what does chose in action mean.

A right to something such as a payment of a debt or other contractual right that can be recovered through legal action

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Contracts: The Critical Difference Between Assignment and Novation

Contributor.

Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

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Contracts: assignment | Practical Law

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Assignment and Assumption Agreement

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