assignment vs novation australia

What Is the Difference Between Assignment and Novation?

By Jordan Bramis Lawyer

Updated on November 7, 2023 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 .

Assignments

Other differences between an assignment and novation, choosing between assignment and novation, key takeaways.

To further your commercial endeavours, you may wish to transfer your rights under a contract to another party. The primary legal mechanisms for transferring the rights or obligations under a contract to a third party are assignment, which involves transferring benefits or rights and novation, which facilitates the transfer of both rights/benefits and obligations. It is crucial to understand that these concepts are different. Unfortunately, many people tend to confuse the two, leading to unwanted consequences in relation to legal contracts. This article will explore the key differences between the two.

Under a contract, where a party (the original party to the contract) is initiating an ‘assignment’, they are transferring some or all of their contractual rights to a third party, known as the “assignor”. The recipient of those contractual rights is known as the “assignee”. For instance, a party can transfer the right to receive payment or benefits under the contract through an assignment.

Following an assignment, the assignee gains the right to the benefits of the contract that the assignor has assigned. Furthermore, they gain the authority to initiate legal proceedings, either individually or in conjunction with the assignor. It is important to note, however, that the assignee does not become a contracting party to the original agreement. Under assignment, contractual burdens and liabilities cannot be transferred. Therefore, the assignor retains responsibility for fulfilling any remaining contractual obligations that still need to be discharged.

In most cases, assignment necessitates the consent of the obligor (the party obligated to fulfil the contract). The obligor needs to agree to the assignee taking over the rights held by the assignor. Additionally, the assignor must provide notice to the obligor about the assignment. This notice serves to inform the obligor that they should now deal with the assignee regarding the assigned rights.

By comparison, a novation agreement achieves the transfer of both rights and obligations to a third party. Here, the new party (the “novatee”) steps into the shoes of the original party (the “novator”) and assumes both the rights and obligations. 

A novation agreement essentially terminates the contract with the original party and creates a new contract with the new party. A novation agreement means you can substitute one party for another without changing the obligations agreed to in the original contract. 

Novation most often arises in big corporate takeovers or on the sale of a business. On takeover, deeds of novation are used to transfer contracts from the seller to the buyer and allow the buyer to carry on the seller’s business.

All involved parties, including the remaining contractual party, the novator, and the novatee, must unanimously agree to the novation. It is a collective decision to replace the old contract with a new one.

Novation creates an entirely new legal relationship. The old contract is set aside, and the new contract, which includes the novatee, comes into effect. Following novation, the novator is released from all obligations and liabilities associated with the original contract.

The choice between assignment and novation depends on various factors.

If a party wishes to maintain some level of involvement and responsibility in the original contract, assignment is often the better choice. It enables the transfer of specific rights while retaining some obligations. For a complete break from the original contract, where a party wishes to shed all obligations and liabilities, novation may be preferential.

One of the most important and sometimes overlooked steps is to document what you have agreed to in writing. Have your agreement written up, signed and stored safely. The area where most disputes and disagreements arise is where parties have not written down what they agree to. This results in a conflict that could have been easily avoided.

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This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.

If you intend to assign your rights under a contract to a third party, you can do so through an assignment or a novation. However, be aware that these differ. An assignment gives some rights to a third party, whereas a novation transfers both rights and obligations to a third party. Ensure that whichever method you choose, you document this in a written agreement.

If you need further assistance with an assignment or novation, our experienced contract lawyers can assist you 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 1300 544 755 or visit our membership page .

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What Is a Deed of Novation and How Does It Affect My Business?

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Assignment and Novation

What are assignment and novation clauses.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment and novation clauses

Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:

• assignment, for the transfer of benefits; and
• novation, for the transfer of rights/benefits and obligations

Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment clauses

A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.

Novation clauses

By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.

A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.

It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.

Option 1 – Assignment, novation and other dealings – consent required

A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].

Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld

(a)   [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld . 

(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:

(i)      [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];

(ii)      [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;

(iii)     the proposed assignee is a competitor of [ insert name of Party B ]; or

(iv)       [ Insert name of Party B ] is in dispute with the proposed assignee .

Click  here  for information on how to use this boilerplate clause.

A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.

Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.

A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.

The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.

The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause.  Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.

A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:

• extraneous or disassociated from the subject matter of the contract;
• materially inconsistent with any provision(s) of the contract; or
• based on collateral or improper considerations.

It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.

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Deed of Novation vs. Assignment: Key Differences and Applications

Home > Construction Contracts > Deed of Novation vs. Assignment: Key Differences and Applications

• April 4, 2023

When it comes to transferring rights and obligations under a contract, novation and assignment are two common methods. While they may seem similar, they have distinct legal implications that can greatly affect the parties involved. This article aims to provide a clear understanding of novation and assignment, their key differences, and practical applications in various business scenarios.

Table of Contents

Understanding Novation and Assignment

Novation and assignment are two legal concepts used to transfer rights and obligations from one party to another. The follow are some key points to keep in mind:

• Assignment refers to transferring rights and obligations to a third party, but the original party remains bound to the original contract.
• Novation refers to substituting a new party in place of the original party, releasing the original party from its obligations under the original contract.
• Novation requires the consent of all parties involved, whereas assignment can be carried out without the consent of the other party.
• Novation is often used when a business or individual wants to transfer all of their obligations to another party, while assignment is used when a party wants to transfer only some of their obligations.
• Novation can be more complex and time-consuming than assignment because it requires all parties to agree to the substitution of a new party.
• Both novation and assignment have their benefits and drawbacks, and it’s important to understand the implications of each before making a decision.
• In general, novation is more appropriate when there is a fundamental change in the parties or obligations involved in a contract, while assignment is more appropriate for smaller transfers of rights or obligations.

Novation in Construction Contracts

Novation is a legal concept that often arises in business and contract law. Here are some key basics to understand:

• Definition: Novation is a process whereby a new party replaces an original party in a contract. This involves a complete substitution of one party for another and the release of the original party from their obligations under the original contract.
• Benefits: Novation allows for the transfer of rights and obligations to a new party, which can be beneficial in situations where the original party is unable to fulfil their obligations or wishes to transfer their interests.
• Key Features: In order for novation to take place, all parties must agree to the substitution of the new party for the original party. This requires a tripartite agreement between the original party, the new party, and the counterparty to the original contract. Additionally, the novation agreement must be in writing and signed by all parties.

Overall, novation is an important legal concept to understand in the context of contracts and business transactions, as it provides a mechanism for parties to transfer their rights and obligations to others while releasing themselves from the original contract.

Featured Content: What is a Deed of Novation?

Assignment in Construction Contracts

An assignment is a transfer of a right or benefit from one party to another. In other words, it involves the transfer of one party’s contractual rights or obligations to another. The key features of an assignment include:

• The original contract remains in force
• The assignee steps into the shoes of the assignor, assuming all rights and obligations
• The assignment must be in writing, signed by the assignor, and communicated to the obligor
• Assignability is subject to contract terms and applicable law

Related Content: What is a Deed of Assignment?

Key Differences Between Novation and Assignment

When considering a transfer of rights and obligations under a contract, businesses and individuals often have to choose between novation and assignment. While both methods achieve a similar outcome, they have distinct differences in their legal implications and requirements.

One key difference between novation and assignment is the transfer of contractual obligations. In a novation, the original contract is extinguished and replaced with a new one, where the incoming party assumes all rights and obligations under the original contract. In contrast, assignment only transfers the rights of the original party to the incoming party, leaving the original party responsible for fulfilling their contractual obligations.

Another difference is the requirement for consent from all parties involved. In novation, the consent of all parties – the original parties and the incoming party – is necessary for the transfer to be valid. In contrast, assignment only requires the consent of the original party and does not require the incoming party’s consent.

Additionally, novation typically involves more formalities than assignment, as a new contract must be drafted and executed, while assignment can often be done through a simple agreement. However, novation offers greater legal protection for the incoming party, as they are assuming all rights and obligations under the original contract.

Understanding these key differences is crucial when deciding which method to use. In the next sections, we will delve deeper into the legal implications and practical applications of novation and assignment.

Rights and Obligations

In a novation, the existing contract is extinguished and replaced by a new one, with the consent of all parties involved. In an assignment, the original contract remains in force, but the assignor transfers some or all of their contractual rights and obligations to the assignee.

Here are some key points to keep in mind regarding rights and obligations in novation vs. assignment:

• Novation involves the transfer of both rights and obligations from one party to another.
• In an assignment, the assignor transfers only their rights, not their obligations.
• In a novation, the original party is released from all obligations under the original contract.
• In an assignment, the assignor remains liable for the obligations they have transferred, unless the assignee has assumed them.
• It is important to note that in a novation, the new party must agree to assume all of the obligations of the original party under the contract.

Contract Termination

In terms of contract termination , novation and assignment have different implications:

• Original Contract Status: In a novation, the original contract is terminated and replaced with a new one, whereas in an assignment, the original contract remains in force and a new contract is formed between the assignee and the obligee.
• New Contracts: In novation, a new contract is formed between the obligor and the new obligee. In contrast, in assignment, there is no new contract, only a transfer of rights and obligations to the assignee.

It is important to carefully consider the implications of each method of contract termination before deciding which one to use in a particular situation. Legal advice may be necessary to ensure that the chosen method is appropriate for the specific circumstances.

Consent Requirements

In a novation agreement, all parties must agree to the transfer of obligations and rights to a third party. In an assignment agreement, only the assignor and assignee need to agree to the transfer of rights and obligations.

Here are some key points to consider regarding consent requirements in novation vs. assignment:

• Novation requires the consent of all parties involved, including the original parties and the new party taking over the obligations and rights.
• Assignment only requires the consent of the assignor and assignee.
• In a novation, all parties must sign a tripartite agreement, whereas, in an assignment, a bilateral agreement between the assignor and assignee is sufficient.
• If the original contract includes a clause prohibiting assignment, the parties must obtain the consent of the non-assigning party or have the clause removed before proceeding with the assignment or novation.

Consent is a critical component of both novation and assignment agreements. Failure to obtain proper consent can result in legal disputes and may render the agreement unenforceable.

Related Content: Essential Legal Requirements for Deed of Assignment

Practical Applications of Novation and Assignment

Novation and assignment have numerous practical applications across various industries, including construction, real estate, and business transactions. Here are some examples:

Novation in Business Transactions

Novation is commonly used in business transactions to transfer contractual obligations from one party to another, particularly in the following scenarios:

• Supplier restructuring: In a business that relies heavily on its suppliers, a novation agreement can be used to transfer contacts to new suppliers in the event of a supplier’s bankruptcy or insolvency.
• Mergers and acquisitions: Novation can be used to transfer contracts between companies during a merger or acquisition. This allows the new entity to assume contractual obligations and avoid legal disputes.

Assignment in Business Transactions

Assignment is also used in various business transactions, particularly in the following scenarios:

• Licensing agreements: In intellectual property licensing, the owner of the intellectual property can assign their rights to another party. This allows the licensee to use the intellectual property while the owner retains ownership.
• Intellectual property: In some cases, an individual or company may assign their intellectual property rights to another party. This can include patents, trademarks, and copyrights.

Overall, both novation and assignment provide flexible options for parties to transfer rights and obligations under a contract. The choice of which to use will depend on the specific circumstances of the contract and the parties involved.

Choosing Between Novation and Assignment

Choosing between novation and assignment can be a crucial decision when dealing with contracts and business transactions. To determine which method is appropriate, one must consider the specific circumstances and goals of the parties involved. Both novation and assignment have their advantages and disadvantages, so it is important to weigh these factors before making a decision. Factors to consider include legal implications, risks, and benefits. Additionally, obtaining legal advice from a qualified attorney can provide valuable insight and guidance when deciding between novation and assignment.

Factors to Consider

When choosing between novation and assignment, it’s important to consider the following factors:

• The nature of the contract: Is it a service contract, a sales contract, or something else? Depending on the type of contract, one may be more appropriate than the other.
• The parties involved: Are all parties willing to consent to a novation, or would an assignment be more appropriate if consent cannot be obtained?
• The complexity of the transaction: Is the transaction straightforward, or does it involve multiple parties and obligations? Novation may be more appropriate for complex transactions where it’s important to transfer all rights and obligations.
• Time and cost: Novation may be more time-consuming and costly than assignment, so it’s important to consider the practical implications of each option.

Ultimately, the decision of whether to use novation or assignment will depend on the specific circumstances of the transaction and the preferences of the parties involved.

In conclusion, understanding the differences between novation and assignment is essential when entering into a contract. While both transfer rights and obligations to a new party, they do so in different ways and with different implications. Novation requires the consent of all parties involved, while assignment does not necessarily require the consent of the obligor. When choosing between novation and assignment, consider factors such as the complexity of the transaction, the level of risk involved, and the relationships between parties. 

As a construction lawyer with experience in residential building disputes, I have seen the importance of proper contract management firsthand. Don’t hesitate to contact me for a legal consultation and to learn more about how I can assist you with your construction contract needs.

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Differences between Novation and Assignment

Assignment and Novation are two concepts within contract law which concern the transferring of one party’s rights and obligations under a contract to an interested third party.

Whilst assignment and novation achieve a similar purpose, there are some very distinct differences that parties to a contract should be aware about when deciding which way to proceed.

The key difference is who bears the rights and obligations under the contract. That is:

• Under novation, all of the rights and obligations of one party is transferred to a third party by way of a replacement contract. The original contract is terminated and unenforceable.
• Under assignment, usually only some of the rights of one party are transferred to a third party. The original contract is not terminated and remains enforceable.

We have explored each of these concepts in greater depth below.

What is Novation?

Novation is where a contract between two parties is terminated to make way for a new contract between one of those parties and a ‘replacement’ third party. This can only occur with the mutual consent of all three parties. The terms of the new contract will in most cases remain the exact same as the original contract, with the only change being the third party is named in the new contract instead of the original contracted party. Effectively, the rights and obligations of the original contracted party are replaced by the rights and obligations of the third party under the new contract.

Novation Example

A enters into an agreement with B for B to supply it with goods. A few years into the agreement, B decides to sell its business to C. If all parties involved agree, B can novate its rights and obligations under the supply agreement to C. A new contract is drawn up with the exact same terms and conditions as the original contract, apart from the names of the contracted parties now being A and C.

Due to novation, A’s rights and obligations under the contract stay the exact same whereas C will take over B’s rights and obligations, namely the obligation to supply goods to A.

What is Assignment?

Assignment is where some (typically not all) rights or obligations under a contract are transferred from one party (“ Assignor ”) to a third party (“ Assignee ”). Whilst some rights and obligations under the contract can be transferred, the burdens and obligations of the Assignor under the contract cannot be fully transferred and the Assignor’s name will often remain on the contract. The Assignor will stay ‘on the hook’ unless it is released from liability by the other party to the contract or indemnified by the Assignee – this can be achieved by way of a side deed. The Assignee does not become a party to the contract, however, the Assignee is able to enforce rights and benefits under the contract that have been transferred to it.

Assignment can generally only occur if permitted by the contract and with the mutual consent of all three parties. In some circumstances, however, an assigning party does not always have to seek the consent of the other party to the contract before it assigns its rights and obligations under the contract to a third party. It is crucial to read the terms of your contract in order to understand the circumstances in which assignment is permitted (if at all).

Assignment Example

Party A and Party B enter into a construction contract. Party B decides to transfer the right to receive payment under the contract to one of its subsidiaries, being Party C. By way of assignment, Party B is still a party to the contract and retains its obligations and its other rights under the contract, however Party A now has the obligation to send payment to Party C instead of to Party B. Party C may also enforce this right to receive payment against Party A.

In this circumstance, Party B’s obligations stay the exact same, however their right to payment is transferred to Party C. Party A’s obligations will also remain the exact same apart from making sure payment goes to Party C.

Be sure to undertake due diligence checks

Before you agree to another party novating or assigning a contract, you should refer to the terms of the contract and also conduct your due diligence regarding the proposed new party. Be sure to check information such as:

• The financial status of the new party
• Under assignment, can the assignor still complete contractual requirements without getting paid
• Is the new party able to perform the same obligations as the original party
• Does the new party hold licenses required to perform its obligations
• Is the new party able to meet insurance requirements under the contract

We can help!

If you need advice in relation to your rights and obligations under a contract, or if you require assistance assigning or novating a contract, Keystone Lawyers are able to assist you in making sure you reduce your exposure risk whilst complying with your contractual obligations.

Assignment vs Novation – fancy words for the same thing? Nope.

Commercial Contracts , Business Contracts , Intellectual Property , IT , Sale/Purchase , Start Up

Assignment vs novation, two fancy words for the same thing? Nope. Stick around, and I’ll tell you why.

Hi, everyone, Simon here from The Contract Company . Contracts, it’s what we do all day every day and sometimes overnight.

So, the right of assignment is the right to assign rights. That doesn’t really help, does it?

And novation is the ability to transfer rights and obligations that you have under a contract.

Great, Simon, what does that mean? Okay, simple example.

Let’s say you run a lawn mowing business. The rights you have as the mower of the lawn is to receive payment. So you provide your services, i.e. you mow the lawn. The other party has to pay you.

Now, the right for you to receive payment is something you can assign to a third party. This means you could say to the person who’s paying you, “Don’t pay me, which you’re meant to do under the contract, “but pay that person over there.”

So you can usually do that, as in assign that right, without seeking the consent of the other party. Unless, of course, you vary that in a contract.

Most contracts will say you can’t assign the rights without the other party’s consent. But absent that sort of clause in a contract, you could transfer your right, in this case, to receive payment, to someone else.

Novation is basically the transfer of rights and obligations that would accrue under a contract.

So back to our mowing example. You mow a lawn for a living. You have obligations under the contract to mow the lawn, and you have rights under the contract to receive payment for doing so.

If you wanted to novate your rights and obligations, what that really means is you’re saying to the other party. “I wanna step out of the contract and substitute “a new person in.  That new person will take over “all the obligations I have under my contract. I.e. the obligation to mow the lawn for you “and any rights I have under that contract. I.e. the right to receive payment for my services.”

So that’s the main difference.

A Recap: Assignment vs Novation

Assignment is you can transfer rights, the ability to be paid. Novation, you can transfer obligations and rights. I must admit, from what I’ve seen, they are often confused in contracts .

While I’ve tried to make that as simple as possible, I did read, or at least skim through, a 330-page PhD assignment on assignment and novation. So it’s fairly more complicated than I’ve made out, but I hope that helps.

Anyway, any questions, 1-800-355-455. [email protected] that helps.

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Legal briefing - Novation and assignment of contracts

Publication date: 19 May 2017

In this issue:

What is the difference between novation and assignment?

When is a novation or assignment required and which one do you use, issues to consider when deciding whether to agree to a novation or assignment, executing the novation or assignment.

Commonwealth entities encounter a variety of situations where contractual rights and obligations may need to be transferred from one legal entity to another. This can arise where a supplier is restructuring its operations or as part of a sale of a business. In these situations, there are 2 legal tools available to achieve a transfer of rights or obligations: novation and assignment. This legal briefing sets out some key considerations for Commonwealth entities when considering a novation or assignment.

While this legal briefing looks at novation and assignment of contracts generally, additional issues can arise in the context of interests in land, such as leases – these issues are beyond the scope of this legal briefing.

The following table compares the general principles that distinguish novation from assignment. 1

Table 1: Differences between novation and assignment

A novation is the mechanism by which a contract is terminated and a new contract is made between different or additional parties. 2 The new contract is generally on the same terms as the original contract. A novation has the effect of substituting one party for another party without necessarily changing the rights and obligations under the original contract. The rights and obligations under the original contract can be transferred to the new party.

A novation requires the consent of all the parties to the original contract as well as the consent of the new party. 3 It is a tripartite agreement between the original parties and the new party. Consent of all the parties to enter into the agreement is therefore crucial. 4 A novation usually takes the form of a deed.

Example of novation

The Commonwealth and B have a contract under which B provides certain services.

B is proposing to sell its business to C. C is prepared to take on B’s obligation under the contract with the Commonwealth. The Commonwealth undertakes its due diligence and agrees to the substitution of B with C. For the substitution to occur, a novation is needed. Once the novation is signed, C is responsible to the Commonwealth for the services under the contract.

The following diagram demonstrates this novation.

Diagram 1: Transfer of both rights and obligations

An assignment is the mechanism by which a party to a contract (the assignor) transfers its existing rights and benefits under that contract to a third party (the assignee). 5 Importantly, the assignor cannot transfer its burdens, obligations or liabilities to the assignee through an assignment. 6 This means that the assignor is not released from its obligations under the contract. Further, the assignee does not become a party to the original contract but can enforce their right to receive the assigned benefits.

An assignment does not require a new contract. The assignor must only record the assignment in writing, 7 sign it and provide written notice of the assignment to the other party to the contract. At law it is possible for an assignment of rights to take place without the consent of the other party to the contract. 8 This can be problematic if the other party to the contract prefers to deal with the assignor rather than the new third party. For this reason, most Commonwealth contracts contain a clause which prevents the contractor from assigning its rights under the contract, in whole or in part, without first obtaining the written consent of the Commonwealth. Sometimes the contract will also provide that the Commonwealth is not obliged to give its consent. Sometimes, this clause will refer to the consent not being ‘unreasonably withheld’.

Example of assignment

The Commonwealth and B have a contract under which B provides consultancy services to the Commonwealth. B wants to transfer its right to receive payment for the services to a third party, C. For this to occur, B can assign its rights to receive payment under the contract to C. This can be achieved through a deed of assignment between B and C. At law, the assignment can occur without any involvement of or consent from the Commonwealth. Importantly, B continues to remain a party to the contract with the Commonwealth, so B is still obliged to perform the services and B’s contractual liabilities remain unchanged. However, the third party, C, will have a legally enforceable right to receive the Commonwealth’s payment for the services that B performs.

Although C is not made a party to the original contract between the Commonwealth and B, the practical result of the assignment is that C can enforce the right to receive payment under the contract against the Commonwealth.

The following diagram demonstrates this arrangement.

Diagram 2: Transfer of rights only

Commonwealth entities are often asked to consider requests to novate or assign agreements. These requests can arise with funding agreements, contracts for goods and services and other agreements for a variety of reasons.

Where a change to the underlying contractual arrangements is requested, the Commonwealth entity will need to consider whether the proposed change is acceptable and determine whether a novation or an assignment is most appropriate. 9

Do I use a novation or an assignment?

Is the new party taking over both rights and obligations , with the existing contractor not to have an ongoing role under the contract?

• a novation will usually be required.

Is the new party taking over contractual rights only , with the existing contractor continuing to be responsible for performing obligations?

• an assignment will usually be required.

The table below outlines some common situations in which the question of novation or assignment might arise.

Table 2: Circumstances that may result in a novation or assignment

When an agency is considering whether to agree to a novation or assignment, there will be a range of matters that will need to be addressed. In some cases, it may be appropriate to terminate the existing contract and undertake a new procurement or funding process.

First, the terms of the existing contract should be considered. The contract may include provisions dealing directly with novation or assignment. Many Commonwealth contracts prohibit novation or assignment without the consent of the Commonwealth entity. This allows the Commonwealth entities to carefully select their suppliers, contractors, funding recipients and other parties that they are dealing with. It is common for these contractual provisions to specify that the Commonwealth will not unreasonably withhold approval for novation or assignment. Conversely, the contract may include a standing consent 11  by the Commonwealth to certain kinds of novation or assignment (for example, within the same corporate group). Even in this case, a formal deed of novation will usually still be required.

Second, when an agency is deciding whether to agree to a novation or assignment, it may need to consider a range of approval processes and risk management requirements that apply to this commitment of relevant money. It may be necessary to check the Public Governance, Performance and Accountability Act 2013 (in particular, s 15, s 16 and ss 25–29), the Public Governance, Performance and Accountability Rules 2014 (in particular, rule 18), the accountable authority instructions and other applicable legislation that may specifically apply to the contract.

Third, although strictly not directly relevant to the novation or assignment, it is common for variations to the contract to be raised at the same time. Agencies should approach any request for a variation as part of a novation or assignment in the same way they would at any other point in the contract period.

Due diligence

The information you need will vary from case to case but might include the following.

Background entity information on the new party

• What are the management capabilities of the entity?
• Has the Commonwealth previously dealt with the entity?
• Is the body a foreign entity? If so, advice may be required as to whether it has executed a binding contract.
• Is the body a partnership or unincorporated association? If so, who will be bound by the contract following the novation?
• Is the body the trustee of a trust? If so, does the trustee have the requisite authority under the trust deed?
• Do you have information on any relevant ‘fit and proper person’ considerations?

Financial status information

• How does the financial status of the new contractor compare with that of the existing contractor?
• Should you seek a parent guarantee or other security (is the body a $2 company)?
• Do you require independent financial advice on any figures that the new party has provided?
• Can the new party meet the insurance requirements specified in the contract?

Evidence of the company’s ability to perform the contract

• What is happening to any key personnel under the contract? Are they moving to the new party?
• Will the new party have access to all relevant facilities and specialist equipment?
• Does the new party hold all relevant licences and registrations?
• Do you have evidence that the company will satisfy the conditions or requirements of the contract – for example, will it hold funding in a special account or satisfy milestone requirements or any relevant eligibility criteria for funding?

Proposed transitional arrangements

If it is decided that a novation or assignment will be agreed to then it may be necessary to put transitional arrangements in place. Matters that may need to be considered will include the following:

• What are the interim arrangements for performance of the activity (for example, arrangements between the time the novation is agreed to and the deed of novation is executed)?
• Is there a transition plan?
• What resources will be needed to manage the transition? Who will bear the cost?

Novations: matters to consider

• Is the Commonwealth satisfied that the new contractor can perform the obligations under the contract and manage risk? Is the new contractor an acceptable entity to contract with in terms of due diligence process on probity issues, financial viability and capability?
• Who will be liable for past performance or defaults before the new contractor takes over? Will the existing contractor remain liable for its performance or will the new contractor take on responsibility for any problems with the original contractor’s performance?
• Will the novation have any impact on subcontracts or other contracts – for example, contracts with other parties working on the same site?
• Are there any issues with the existing contractor’s performance that should be addressed and finalised before agreeing to the deed of novation? Make sure that you do not inadvertently make unintended amendments to the contract. For example, an acknowledgement of correspondence about a proposed novation which mentions a related delay in delivery may be taken to be acceptance of the delay.
• Are there specific issues for the particular type of contract? For example, where a grant agreement deals with assets purchased with the grant, you may need to ensure those assets are being transferred to the new contractor (unless otherwise agreed).
• Are there any existing securities or financial arrangements under the original contract that need to be replaced or updated? For example, even if both the existing and new contractor are subsidiaries of the same parent entity, an existing parent guarantee or other security may need to be amended to cover the new contractor. There may also be Personal Property Security Register entries that need to be updated.
• At what point will the new contractor take over from the existing contractor: the date the novation deed is signed or a different date?
• Are there any additional costs and who will bear these costs? Usually the party that is seeking the novation is required to meet the other party’s costs.

Assignments: matters to consider

• Is the Commonwealth satisfied that the assignor can continue to perform its obligations under the contract without receiving payment?
• Does the assignor have financial viability issues? Has the assignor sold its right to receive payment from the Commonwealth as part of a settlement of a debt with a creditor?
• What is the underlying reason for the proposed assignment?
• Is the proposed assignment detrimental to the Commonwealth?
• Does the contract between the Commonwealth and the proposed assignor propose to create a confidential relationship or an enduring relationship? Does the Commonwealth want to have any engagement with the proposed assignee?

Once an agency has decided to accept a novation or assignment, the new arrangements must be recorded. The original contract may establish the form of instrument required to execute the novation or assignment. 12 In any event, the instrument may need to reflect the following.

A deed of novation will typically:

• substitute one party for another
• include mutual release of future obligations under the original contract between the Commonwealth and the original contractor
• clearly specify responsibilities and liability of the original contractor and the new contractor for the pre-novation period – often supported by indemnities
• include representations and warranties with respect to the power of the original contractor and the new contractor to enter into the deed of novation
• include an agreement as to costs that the parties will bear in connection with the preparation, execution and completion of the novation – it is common for the other parties to pay the Commonwealth’s costs.

A deed of assignment will typically:

• unconditionally transfer the relevant benefit to the assignee, giving the assignee complete control of that benefit, including the right to take legal action to enforce it
• clearly specify whether there will be a redemption or reassignment in the future – for example, upon repayment of a loan
• confirm arrangements for the ongoing performance of the contract by the assignee
• include agreement as to costs to be borne by the parties in connection with the preparation, execution and completion of the assignment – it is common for the other parties to pay the Commonwealth’s costs.

1 See generally Olsson v Dyson (1969) 120 CLR 365, 388.

2 See Olsson v Dyson (1969) 120 CLR 365, 388.

3 See Olsson v Dyson (1969) 120 CLR 365, 388. Note that, in Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71, the Full Federal Court held that it is possible for a contracting party to prospectively authorise a novation to be made by another party unilaterally. See also CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335,134.

4 See F ightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473, 491–492; and Vickery v Woods (1952) 85 CLR 33, 345.

5 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 26.

6 ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338, 346 [12].

7 This is a legislative requirement in each state: see, for example, Property Law Act 1958 (Vic) s 134.

8 See Olsson v Dyson (1969) 120 CLR 365, 388.

9 In CSG Limited v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, [133], Sackville AJA (Bathurst CJ and Campbell JA agreeing) observed that the end result in a case of novation and a case of assignment may be similar.

10 In some cases the contract may require agency approval to some of these changes or other amendments to the contract. This is different from a novation or assignment.

11 See note 3.

12 In Leveraged Equities Ltd v Goodridge (2011) 191 FCR 71, the Court stressed the importance of drafting novation and assignment clauses in the original contract clearly to avoid ambiguity when one or more parties later seek to novate or assign.

Deputy General Counsel Commercial

Senior Lawyer

The material in this briefing is provided to AGS clients for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.

Articles > Startups

The Difference Between Assignment Deeds and Novation Deeds

August 25, 2021   Philip Evangelou

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.  

About Philip Evangelou

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