Cutting through the legalese: “Assignment and Novation”

We are often asked about the difference between assignment and novation. The two are similar, but not interchangeable. Here we clarify:

Novation is used to replace one party to a contract with a new party. A novation is only valid with the consent of all parties to the original contract. A contract transferred by novation will transfer all of the benefits and burdens of that contract. For example an Employer appoints an Architect to design a building and pays him some fees for the initial drawings. Later, the Employer appoints a Contractor to build the build under a “design and build” contract. In order to keep continuity of design, the Architect is novated from the Employer to the Contractor so that the Architect now works for the Contractor, and it is the Contractor who pays the Architect’s fees going forward.

Assignment is the complete transfer of the rights to receive the benefit of the contract. When assignment takes place and the benefit is transferred but the burden/obligation will always stay with the original party. For example on completion of building works (and after release of retention) the original Employer sells the building. The Employer assigns the building contract to the Buyer. The Buyer does not have to pay the Contractor anything but the Contractor now owes the duties previously owed to the Employer, to the Buyer instead. It is the Buyer, not the Employer who has the right to sue.

The difference between novation and assignment is that novation transfers the burden as well as the benefit. Novation should therefore be used where there are ongoing obligations on both parties.  

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.