Novation against assignment

Why the burden will not move on its own

A customer chose to contract with a particular supplier, and the law does not let that supplier hand the obligation to somebody else without permission. Otherwise anybody could offload a difficult job onto a weaker business and walk away, leaving the customer with a counterparty they never assessed. Rights are different, because it usually makes no difference to a debtor who receives the payment. That asymmetry is the whole of the distinction. Assignment moves what a party is owed. Only novation, with everybody agreeing, moves what a party owes. Businesses trying to transfer a contract by assignment alone typically discover this when a claim arrives addressed to them for work that a different company performed.

Novation in a business sale

This is where most people meet the concept. A buyer purchasing a business as a going concern wants the customer contracts, and each one has to be novated individually unless the sale is of the shares in the company that holds them, in which case nothing moves because the counterparty has not changed. Novating fifty contracts means fifty consents, which is slow and gives every customer a moment to renegotiate. Sellers manage it by starting early and by presenting the novation as an administrative step with a short deed rather than as an invitation to reopen terms. Buyers manage it by making completion conditional on a stated proportion of contracts by value being novated.

What the deed has to settle

Four things. The effective date, from which the incoming party takes over. What happens to rights and liabilities that accrued before that date, which normally stay with the outgoing party, so an unpaid invoice or an existing claim does not travel. A release of the outgoing party from future obligations, which is the point of the exercise and is sometimes quietly omitted from documents drafted by the incoming party's side. And confirmation that the remaining party consents and will treat the incoming party as if it had been the original. Everything else is usually a restatement of the existing terms, which should be attached rather than retyped.

Assignment clauses, and what they usually say

Most commercial contracts restrict assignment, and the wording varies in ways that matter. A prohibition on assignment without consent, with consent not to be unreasonably withheld, is the common middle position and gives the assigning party a route. An absolute prohibition means no route at all. Many clauses carve out assignment to a related body corporate, which is what allows internal restructures. Some allow assignment of the right to receive payment while prohibiting anything else, which is aimed at invoice financing. Read the clause before promising a buyer that contracts will transfer, because the answer differs contract by contract and the discovery is always late.

Subcontracting, which is neither

A party who cannot transfer a contract can often still get somebody else to do the work, by subcontracting. That leaves the original party fully liable to the customer and adds a second agreement underneath. It is the right answer where a business needs capacity rather than an exit, and the wrong answer where the intention is to leave the relationship, since the obligations have not moved anywhere. Most contracts restrict subcontracting too, usually more loosely than assignment. Where a customer's consent is needed, ask for it in writing rather than assuming that silence after an email counts, because it will be raised if the subcontractor performs badly.

The practical order of work

Identify the contracts that matter by value and by criticality. Read the assignment and change of control clauses in each, and sort them into three groups: transfers freely, needs consent, cannot transfer. Draft one novation deed template and use it for everything, so the counterparty sees a standard document rather than a bespoke one. Approach the largest counterparties first and in person, because they are the ones who will renegotiate and you want to know early. Track consents in a list with dates. And keep the executed deeds with the original contracts, because in two years somebody will need to prove that a particular customer relationship was properly transferred.

Questions people ask