Whether it be for internal restructuring purposes or to meet other commercial requirements such as in the context of a sale of business, many businesses face the issue of needing to transfer a contract from one entity to another.

Unfortunately, it’s not as simple as crossing out one party’s name and inserting another! Most contracts may be legally transferred by a party (the outgoing party) to another entity (the incoming party) in one of the following 2 ways:

• by assignment; or
• by novation.

Assignment

An assignment of contract involves the transfer of the rights (but not the obligations) of the outgoing party under the contract to the incoming party. An assignment does not require the consent or agreement of the other party to the contract (the continuing party), unless the terms of the contract expressly require it.

An assignment is usually effected by a deed signed by the outgoing party and the incoming party. If the continuing party’s consent to the assignment is required, then it is generally convenient to include the consent in the deed, and also have the continuing party sign the deed.

An assignment will not relieve the outgoing party of its ongoing obligations under the contract, at least as between the outgoing party and the continuing party. To give the outgoing party some protection against future breaches of contract by the incoming party, it is common, in an assignment deed, for the incoming party to:

• promise to the outgoing party to carry out the outgoing party’s contractual obligations after the assignment date; and
• indemnify the outgoing party against claims against it by the continuing party for any post-assignment failure by the incoming party to carry out those obligations.

Even if the continuing party’s consent to the assignment of another party’s rights under a contract is not needed, for the assignment to have legal effect, the continuing party must be given written notice of the assignment.

Novation

At law, a novation is actually the substitution of a new contract for an existing one, on the same terms as the existing one, but between the continuing party and the incoming party instead of being between the continuing party and the outgoing party.

In practice, however, a novation is usually effected by substituting the incoming party for the outgoing party, so that on and from the effective date of the novation, the incoming party acquires all of the rights and obligations of the outgoing party under the contract, and the outgoing party is relieved by the continuing party from any further obligations under the contract.

In any case, a novation always requires the agreement of the continuing party.

A novation is generally preferable to an assignment from the outgoing party’s perspective, because it results in a better position in terms of legal liability. However, a novation can be more difficult to achieve because the continuing party’s agreement must be secured.

Other methods

There are also indirect methods of transferring the rights and obligations under a contract. For example, if a party to a contract is a company, it may be possible to effect a transfer of its rights and obligations under the contract by the shareholders in the party transferring their shares in the company. That way, the company remains a party to the

contract (and no assignment or novation is needed), but a new shareholder obtains control of the company and thereby indirectly obtains the benefit of the rights, and the burden of the obligations, of the company under the contract.

Which option is best for me?

To determine whether assignment, novation or an indirect method is best for you, you should consider:

• The terms of the contract itself – does the contract prohibit, allow or place any conditions on any method of transfer?
• Your ultimate goal, including in relation to who should be responsible for liability arising under the contract before and after the transfer.
• The commercial position of each of the outgoing party, the continuing party and the incoming party – for example, how readily will the continuing party give its consent?

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.