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There may be circumstances where your business will need to transfer a contract to another business. This could be the case because the business is sold or is being wound down. For example, a transport company may be sold to new owners, and they need to transfer the existing client contracts to the new owners. Whatever the circumstance may be, there are generally two ways to transfer a contract to another business; through assignment or novation. This article will explain: 

  • what a contract is;
  • how to transfer a contract through assignment; 
  • how to transfer a contract through novation; and
  • the difference between assignment and novation. 

What Is a Contract?

A contract is a binding agreement between two parties in which one party agrees to do something in exchange for something valuable, usually money. Examples include: 

  • service agreements; 
  • tenancy agreements; and 
  • employment contracts.

In some circumstances, contracts might be transferred to other individuals or businesses.

How to Transfer a Contract Through Assignment

Assignment is a process of transferring a contract in which one party (‘the assignor’) assigns its rights under a contract to another party (‘the assignee’), who is the person receiving the contract. Generally, a party can assign rights to a contract to another party without the prior permission of all contracting parties. The only circumstance where permission is needed is when a clause in the original contract requires it.

However, it is not possible to assign your obligations under a contract to another party. The main difference between a right and an obligation is that a right is something you gain, whereas an obligation is a responsibility to another party. A party cannot exclude any liability for itself under a contract unless with the prior permission of the other contracting party. 

For example, a transport company can assign the right of payment for their good to another party. However, they cannot assign the right to transfer those goods to another party. The outcome of an assignment is that the assignor remains responsible for fulfilling the obligations of the contract. Therefore, they will be liable if they do not perform this obligation.

How to Transfer a Contract Through a Novation

On the other hand, a novation is a process in which a party (‘the novator’) transfers its rights and obligations under a contract to another party (‘the novatee’). The novator who initially was part of the contract, ceases to be involved with that contract. A novation is inherently more dangerous for the contracting party than an assignment. This is because the party continuing the contract has no recourse against the novator if the novatee fails to uphold their obligations under the contract. The reason why is because the novator is not involved with the contract at all. 

Essentially, the novatee and the continuing contracting party create a new contract.  If someone asks you to transfer a continuing contract through novation, you should always heavily scrutinise the incoming novatee. This is to make sure that they can fulfil their obligations under the new contract. 

It is also important when entering into a new contract that you check to make sure that no clause allows for novation without your consent. 

The Main Differences Between Novation and Assignment

Who Holds the Liability in Each Case?

In an assignment, the assignee is assigned the rights of a contract but not the obligation of the contract. This means that the assignor still retains responsibility for the obligations of the contract. If the assignor does not fulfil their obligations, the contracting party has recourse against them. As such, the assignor will be held liable. 

A novation means that a new contract is formed between the novatee and the contracting party. As such, the contracting party cannot take any action against the novator if the novatee fails to provide their obligation. 

What Is Transferred?

An assignment only transfers the rights of the contract to the assignee. That is, you can only assign the benefits of the contract. However, under a novation, both the rights and obligations of a contract can be transferred. This means that you can transfer both your benefits and responsibilities to the new party, the novatee. A novation forms a new contract between the initial contracting party and the novatee.

Key Takeaways

Both an assignment and a novation are valid forms of transferring a contract in New Zealand. Though, they both come with their set of benefits and drawbacks. When transferring a contract, it is important to note your situation and the original terms in your contract to help you decide whether an assignment or a novation is best. Generally speaking, you can always undertake an assignment unless there is a specific clause in your contract that prohibits this. However, you can usually only undertake a novation with the prior consent of all resulting parties. If you have any questions about assignments or novations, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions 

Is there a best way to transfer a contract?

No, there is not a better way. Both novation and assignment have their advantages and disadvantages. Make sure to read your contract to see if there are any restrictions or permissions in conducting both of these methods.

Can any contract be transferred in a novation?

No, only if you have the consent of all of the parties. 

What is the difference between a right and an obligation?

A right is something you gain. Whereas, an obligation is a responsibility to another person.

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