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There may be a circumstance where you need to transfer a contract to another party. For example, you may be selling a business and need to transfer the current contracts to the new party. Another situation may be where you feel as if you cannot continue to meet the obligations under your contract. If this is the case, there are a few ways to transfer a construct. One of the more effective strategies is to use a deed of novation. This article will explain:

  • what a deed of novation is;
  • what it should achieve;
  • whether a contract allows for a deed of novation;
  • if all the parties to a contract need to agree to it; and
  • the GST implications.

What Is a Deed of Novation?

A deed of novation is an agreement in which one party’s rights and obligations are transferred to a new party. The new party is called the ‘novatee’ and the original party to the contract is the ‘novator’. However, you should consider a few things before signing a one, to decide whether it is the right option for you.

What Should the Deed of Novation Achieve?

The main goal of a deed of novation is to transfer the rights and obligations of an existing contract to a third party. Essentially, a new contract is created between the novatee and the continuing party to the contract. Another method that can be used to transfer a contract is a deed of assignment. However, this method only allows for rights and not obligations to be transferred. Therefore, it is not seen as the best option. Rights mean any benefit that you receive from a contract, whereas obligations are those things that you are asked to do. 

For example, when a transport company receives payment for a service, the payment is the right and the service is the obligation. Thus, under an assignment your contractual benefits may stop but your obligations will continue. Under a deed of novation, the continuing contracting party will have legal rights to sue the novatee if they fail to perform their duty under a contract. This is in contrast to an assignment where the novator may still be liable for any breaches to the contract by the novatee. This is because the contract has merely been transferred compared to a new contract being drawn up.

It is also important that the deed of novation is executed on the same day that you are transferring the contract. If it is signed late, you may be in breach of your contract with the continuing party to the contract.

Does Your Contract Allow for a Deed of Novation?

Some contracts will expressly disallow it to be transferred to another party through a novation. If your contract expressly excludes a deed of novation, then it may not be possible to transfer your contract through this method. This is unless you come to some sort of agreement with the other contracting party. If your contract does not allow one, then you should discuss with your contracting party whether you can amend the contract to allow it.

Do All the Parties to a Contract Agree to it?

For a deed of novation to be executed, all parties to the contract must give consent. This is the case even if your contract allows for a deed of novation. Sometimes there may be more than two parties in a contract, so make sure everyone’s consent is given. If you sign one without all of the parties’ consent, you may be in breach of contract and liable to legal proceedings. Further, consent must be given in writing by all the parties. 

What Are the GST Implications?

It is also important that you know what the GST obligations are when signing a deed of novation. When a novation is undertaken, the burden of the payment of GST is transferred to the novatee in the contract. However, if a business is being sold then the GST is still a part of the old contract if the novation is entered into after the business has been sold. This means the novator and the continuing party to the contract still hold the burden of paying GST. It is important that you know your GST obligations to avoid any issues with Inland Revenue.

Key Takeaways

A deed of novation along with assignment is a great tool to transfer a contract between entities. The ability to transfer a contract is extremely important in business. This is especially if a business has been sold or if another party is looking to take up the contract. A deed of novation can only be undertaken with consent from all of the parties. It cannot be undertaken if it is disallowed in the contract. If you are unsure if you are allowed to undertake a deed of novation, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is a deed of novation the best way to transfer a contract?

This can depend on the type of contract and what you are aiming to do. If you are wanting to rid your hands of all responsibility of a contract then novation is the way to go as a new contract is formed between the parties.

Can any contract be transferred through a deed of novation?

No, some contracts will not allow it to be transferred via novation. If this is the case, speak with your contracting party to see if they are willing to allow a deed of novation.

Who holds the burden for paying GST?

This depends on when the contract is transferred. If the deed of novation is signed after a business is sold, then the novator holds the burden of paying GST.

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