What Is The Difference Between Novation And Assignment?

Novation and assignment are two common legal concepts used to transfer rights and obligations under a contract. While both involve the transfer of interests in a contract, novation and assignment differ significantly in terms of what is transferred and the legal implications for the parties involved.

What Is The Difference Between Novation and Assignment?

Transfer of Rights and Obligations:

Novation: In novation, both rights and obligations under the original contract are transferred to a new party. The original contract is extinguished, and a new contract is formed, involving the new party. The original party is discharged from the contract’s obligations.

Assignment: In assignment, only the rights under the contract (such as receiving payment or benefits) are transferred to the assignee. The original party (assignor) retains responsibility for the obligations under the contract (such as performing services or making payments). The contract itself remains in place.

Legal Effect on the Original Contract:

Novation: Novation completely replaces the original contract with a new one. The new party assumes full responsibility for both rights and obligations, and the original party is released from any future obligations under the contract.

Assignment: Assignment does not alter the original contract, except for the transfer of rights. The assignor remains bound by the contract, and the assignee only receives the benefits of the contract without assuming the associated obligations.

Consent of All Parties:

Novation: For novation to occur, all parties involved must consent to the change. This includes the original parties as well as the new party, as they are replacing the old contract with a new one.

Assignment: For assignment, only the assignor needs to consent. The assignee does not need the consent of the other party unless specifically required by the contract (e.g., if the contract has a non-transferability clause).

Role of the Parties:

Novation: The new party in a novation assumes full responsibility for the contract and replaces the original party in every respect.

Assignment: In assignment, the assignee receives benefits but does not assume the duties or responsibilities of the original contract. The assignor remains liable for performing the contract's obligations.

Common Use:

Novation: Novation is often used when a party wants to transfer both the rights and obligations of a contract to a third party. This is common in business transactions where one party wants to exit the contract entirely.

Assignment: Assignment is frequently used when a party wants to transfer their rights under the contract (such as a debt collection or a right to receive payment) to another party without changing the obligations.

Legal Implications

Novation: The original party is discharged from further obligations. The new party takes on the complete responsibility for the contract, and the contract is treated as a new agreement.

Assignment: The original party remains liable for fulfilling the contract, even though the rights have been transferred. The assignor is still obligated to perform under the contract, and if they fail, they can be held responsible.

Example

Novation: Company A has a contract with Company B for providing services. Company A wants to transfer its obligations to Company C. After getting the consent of Company B and Company C, Company A enters into a novation agreement, which discharges Company A from the contract and replaces them with Company C.

Assignment: Company A has a contract with Company B to receive payment for services rendered. Company A decides to assign the right to receive the payment to Company C. Company A remains responsible for performing the contract, but Company C now has the right to receive the payment due under the contract.