Novation and Assignment - The Difference Explained
Introduction
Readers will have come across novation agreements as well as the assignment of rights in a contract. What is the difference between the two?
In a contract between two parties, novation will allow one party, let us say the client, to transfer all of its benefits and burdens under that contract to a third party. The third party will replace the original party to the contract and will become the client, generally on the same terms as the first contract so that it is as if the new party had always been the client and all the contractor's obligations will be owed to the new client, not the original client. The two parties to the original contract, together with the new party will need to consent and sign a novation agreement.
By way of example, in a contract between a client and an architect, the benefit for the client is the services that the architect provides, whilst the burden is the duty to pay for those services. The benefit and burden is reversed for the architect. If the client wishes a contractor to take over the architectural design responsibility and therefore arranges for the execution of a novation agreement the consequence is that the original contract between the client and architect is now a contract between the contractor and the architect.
It should go without saying that a novation agreement is not a stand-alone document. Whilst it is creating a new contract it relies on the original contract between the two original parties in order to define the contract between the new client and the architect.
Under an assignment, the parties to a contract will not change. The transfer will only involve the benefit, not the burden, of a contract. It is an exception to the usual legal rule in that a person who is not a party to the contract is permitted to obtain benefit from that contract. The person being assigned the benefit of the contract does not have to endure the burden, such as paying the other contracting party for such benefit.
The use of assignment is frequently found in collateral warranties provided by contractors, sub-contractors and consultants in which the benefits conferred on the recipient of the collateral warranty who could for example be an owner of land, are transferred to subsequent owners or lessees of that land. Such warranties often seek to restrict the number of times such assignment may take place.
Care should be taken when encountering both concepts. For instance, in the novation scenario provided above, what would happen if a pre-novation breach by the architect were identified after the date of novation? The short answer would be that it depends on how the novation agreement is drafted.
Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.
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