Regarding the transfer of rights and obligations within a contract, two frequently employed legal methods are deeds of assignment novation. Even though both approaches encompass the transfer of rights and responsibilities, they contrast in several ways, such as their effects on the original contract and the requirement of the necessary consent by the parties involved.
Rights and Obligations
In the context of a deed of assignment, the assignor transfers its rights and responsibilities to the assignee, while the initial contract remains valid. Conversely, novation entails establishing a fresh agreement that replaces the original one, forming a new agreement involving the transferor, transferee, and obligor.
Requirement of Consent
To ensure the validity of an assignment deed, the assignor needs to notify the obligor about the assignment, although the obligor’s consent isn't necessary. Conversely, novation demands agreement from all parties—transferor, transferee, and obligor.
Novation in detail
How it works
Novation mandates the approval of every party engaged, including the fresh entrant adopting the responsibilities and rights. The procedure encompasses these stages:
Agreement: All involved parties need to reach a consensus on the novation's terms and the new setup.
Paperwork: A novation agreement needs preparation and endorsement from all parties concerned.
Notification/approvals: All pertinent entities, such as financial institutions or insurers, must be informed of the novation and provide their consent/approval.
Execution: The novation becomes operational once all parties have inked the agreement and the requisite paperwork is finalized.
Novation in action:
· When a fresh contractor assumes control of a construction venture from the original contractor, taking on all the rights and duties specified in the initial agreement.
· In the context of a construction project, if a subcontractor, grappling with financial issues, intends to transfer their responsibilities to another subcontractor, the primary contractor can agree to novate the contract. This process allows the new subcontractor to inherit the obligations and commitments of the original subcontractor.
· An engineering company, commissioned by a municipality to design and build a new road, decides to sell the design and construction contract to another firm. The municipality approves a novation, permitting the new firm to take over the contract and conclude the project
· If a supplier holding a contract with a contractor to deliver construction materials opts to sell their business to another entity, the contractor can consent to a novation. This facilitates the transition of the contract to the new company, ensuring the new entity fulfills the supplier's duties as stipulated in the contract.
Assignment in detail
How an assignment works
The typical procedure for assignment includes these stages:
The initial contracting parties need to reach a consensus on the assignment.
The assignor (the entity transferring rights and obligations) is required to formally inform the other party in writing about the assignment.(typically)
The assignee (the new party assuming rights and obligations) must acknowledge the assignment in written form. (again, typically)
Assignment in action
· A subcontractor transfers their entitlement to payment for their services to a third party, often a lender, as collateral for a loan.
· A contractor delegates their right to receive payment from the project owner to a supplier or vendor, aiming to settle expenses for materials or equipment utilized in the undertaking.
· A property developer relinquishes their right to collect payments from buyers of individual units within a development to a lender, thereby obtaining financing for the venture.
· A contractor relinquishes their right to receive payment from the owner and assigns it to a joint venture partner, distributing the risk and reward of the project.
Grasping the distinctions between assignment deeds and novation is vital for selecting the right method of transferring rights and responsibilities. Prior to making a decision, it's advisable to consult legal experts for guidance on which approach to adopt.
If you need help in further understanding the distinction between assignment and novation, or require some assistance in transferring certain rights and obligations, feel free to contact us to schedule a complementary consultation.