You are selling your business, or a part of it, and the deal is almost done. The buyer will run the show from settlement, but a handful of contracts are still on foot under your name: a supply agreement with your main manufacturer, a lease, a service arrangement with a key customer. Those contracts have ongoing value, and you want them to move across to the buyer as part of the sale. At the same time you do not want to be personally chasing obligations under them for years after you have handed over the keys.
Two documents get floated in this situation: an assignment and a novation. Both are ways of transferring a contract, and both are commonly prepared as a deed. They are not interchangeable. The choice between them determines who is bound to perform the contract after it moves, who can sue to enforce it, and whether you are released from liability once the deal is done. Getting the label wrong on a document that is meant to hand a contract to somebody else is an expensive mistake. This article sets out the difference and the factors that should drive your choice.
Assignment and novation are different arrangements
The first thing to clear up is that assignment and novation do not move a contract in the same way, even though people often use the words loosely.
An assignment transfers the benefit of a contract. The High Court confirmed in ALH Group Property Holdings Pty Limited v Chief Commissioner of State Revenue [2012] HCA 6 that, at common law, describing a transaction as a transfer of a party's rights under a contract is closer to an assignment than to anything else. What moves is the right to receive performance under the contract, such as the right to be paid, to be supplied, or to collect what the other party owes. What does not automatically move is the burden, the obligations your side was performing. The general position is that the burden of contractual obligations cannot be passed to someone else without the other party's agreement. If you assign the benefit and say nothing more, you usually remain liable on the obligations of the original contract.
A novation is a different animal. As the High Court explained in the same case, a novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. All parties to the original contract, plus the incoming party, agree that the newcomer takes over the contract, and the old contract is discharged. Because the original agreement is replaced rather than merely transferred, both the rights and the obligations move to the newcomer, and the outgoing party is released from the contract. The newcomer becomes fully bound to the other side, and the other side becomes bound to the newcomer, as if the original contract had never existed with the outgoing party.
There is a practical consequence worth flagging early. When you novate, the parties lose the original contract and gain a substituted one. When you assign, the original contract survives and you transfer the benefit of it. That distinction drives the factors below.
Weighing the choice
What actually needs to move: the benefit, the burden, or both?
Start with the question of what you are trying to transfer, because assignment and novation answer it differently.
- Assignment suits a transfer of the benefit: If the point is to hand the buyer the right to be paid or supplied under a contract, and you are comfortable staying answerable for the obligations, an assignment can do the job. The buyer steps into your shoes as the party entitled to performance.
- Novation suits a full handover: If the buyer needs to take over the running obligations as well as the rights, and you need to walk away clean, novation is the arrangement that achieves it. The newcomer becomes the party who must perform and the party who gets paid.
A common mistake is to assume that assignment moves everything. It moves the benefit; it does not, without more, transfer the burden. If the contract has significant obligations still to come, an assignment of the benefit alone leaves the question of who performs those obligations unresolved.
Does the other party have to agree?
Consent is where the two arrangements diverge most sharply, and it is often the deciding factor.
- Novation always needs consent: The other party to the original contract must agree that a newcomer is substituted in and that you are released, and the newcomer must agree to take on the contract. Without all of those consents, there is no novation.
- Assignment of the benefit does not always need the other party's consent: Whether it does depends on the terms of the contract and the circumstances. Where the contract is silent, the benefit can often be assigned without asking. But if the contract contains an anti-assignment clause or requires the other party's consent, you cannot simply assign despite it.
The consent question also interacts with the type of contract. Contracts of a personal nature, where the identity of the party matters, such as a one-off consulting engagement that depends on particular skills, are harder to transfer by either route without the other party being on board. The practical point is that the need for consent must be assessed against the specific contract, not assumed.
Do you need to be off the hook after you leave?
This is the question most people answer without realising they are being asked. If you are selling a business, you generally do not want to stay liable to a supplier or a customer after you have sold the company or the business. You want a clean break.
- Under an assignment: You transfer the benefit but you do not automatically shed the burden. If you have ongoing obligations under the contract, you may remain personally liable to the other party for them after the assignment, even though the buyer has taken the benefit. You might seek an indemnity from the buyer, but that indemnity is only as good as the buyer, and the other party can still come after you.
- Under a novation: The original contract is discharged and a new one stands in its place. Your liability under the original contract ends, and the newcomer becomes the party the other side can hold responsible.
If your only goal is to pass on a stream of income under a contract to the buyer, an assignment may serve. If your goal is to exit the obligations entirely, novation is the arrangement that delivers that result, because it substitutes a new contract and releases you.
What does the underlying contract already require?
Before either document can do its job, the contract itself has to be checked, because it may control the route.
Many commercial contracts include a clause dealing with what happens when a party wants to transfer the contract. That clause can do any of the following:
- require the other party's written consent before any transfer;
- prohibit assignment outright;
- allow assignment of the benefit but not the burden;
- require reasonable additional terms before it will consent to a novation.
A consent or anti-assignment clause can block an assignment, and it can be enforced. If a contract is silent and the benefit is freely assignable, an assignment may be straightforward. If consent is required, the practical question becomes whether the other party will give it, and on what terms, which can affect the commercial viability of the deal.
The form of the transfer also matters. A legal assignment of a contractual right generally needs to be in writing and expressly assigned, and the debtor, the other party, must be given notice before the assignee can enforce the right in its own name. Novation, because it substitutes a whole new contract, has its own drafting demands. These are matters of detail that a practitioner can work through against the actual contract.
What formalities apply?
The label "deed" is not incidental. Assignment and novation documents are often prepared as deeds, and there are sound reasons for that.
A deed is a document that takes effect immediately upon execution, and it does not need consideration to be binding. That can matter for an assignment, because a gratuitous transfer of a contractual right for no value can be ineffective at law unless it is in a deed. Preparing the document as a deed is one way to make a transfer of this kind hold up even where no consideration has been given for it.
The execution rules for a deed depend on who is signing. For a company, the Corporations Act 2001 (Cth) s 127 sets out the position. A company may execute a document, including a deed, without a common seal if it is signed by two directors, or a director and a company secretary, or, for a proprietary company with a sole director who also holds the relevant office or has no secretary, by that director alone. Under s 127(3), a company may execute a document as a deed if it is expressed to be executed as a deed and is executed in the way the section provides.
Two points in that section are worth knowing, because they contradict what many people assume about deeds:
- No witness is required: Where a company executes a deed under s 127(1), s 127(3A) makes clear that the execution does not need to be witnessed, regardless of whether the document is in physical or electronic form.
- No delivery is required: Section 127(3B) provides that delivery is not necessary if a company executes a document as a deed in accordance with s 127(1) or (2).
Electronic execution is available. Section 127(1) notes that the requirement to sign may be satisfied electronically under Division 1 of Part 1.2AA, which is about technology neutral signing. In practice this means a company can often sign an assignment or novation deed electronically, and people who deal with the company can rely on the assumptions in s 129 about the authority with which the document was executed. The old idea that a deed must be signed in a physical meeting with witnesses present is no longer accurate for companies executing under s 127.
The position can differ for individuals and in particular state and territory legislation, so the formality that applies to your deal depends on who the parties are and where the contract is governed.
Where an Artificer Legal practitioner helps you make the call
The decision between an assignment and a novation is rarely settled by the document itself. It is settled by the facts of your contract and your commercial objectives, which is exactly where a lawyer adds value.
A practitioner at Artificer Legal can start by pulling the actual contract and working out what it allows. That means checking for consent and anti-assignment clauses, identifying which rights are assignable and which are not, and confirming whether the burden can be moved at all in the circumstances. It is not unusual for the answer to turn on a clause in a supplier agreement that you have not looked at since it was signed years ago.
From there, the question turns to what you are trying to achieve in the sale. If you want a clean exit with the buyer taking on the supplier obligations and you released from them, a novation is probably the right answer, but it depends on the other party agreeing. If you are prepared to stay on the hook and simply want to hand over the benefit, an assignment may be cheaper and quicker. A practitioner can model the downside of each: where you would end up liable if the buyer defaults, what the other party could do if you assign despite a consent clause, and whether the indemnity you are relying on would actually hold up.
The drafting is where the value shows. Getting the document wrong can turn a supposed novation into something the High Court recognised in ALH Group: a transaction that, because the original contract was never discharged, is not a novation at all, with the consequences that flow from that. An Artificer Legal practitioner will draft so the document expresses its legal effect accurately, obtains the necessary consents, and produces the release and substitution the parties intend, then advise on the correct execution so the deed is enforceable.
Move the benefit, or the burden too
If you remember one thing from this article, make it this: decide whether you need to move only the benefit of the contract, or whether you also need to move the burden and be released from it. Everything else follows from that answer. Assignment transfers a benefit and leaves you on the obligations unless the other party agrees otherwise. Novation substitutes a new contract with the other party and the newcomer, discharges the old one, and gets you out.
To summarise the key points: assignment and novation are distinct arrangements under Australian contract law. Assignment transfers the right to receive performance under a contract but does not, without more, transfer the burden of its obligations. Novation replaces the original contract with a new one agreed by all three parties, moving both rights and obligations and releasing the outgoing party. Novation always requires the consent of the other party to the original contract, while assignment may not, depending on the terms. Contracts often contain clauses that control whether and how a transfer can happen. The documents are commonly executed as deeds, and for companies the execution requirements under s 127 of the Corporations Act 2001 (Cth) allow execution without a witness and with no requirement of delivery, with electronic signing available. When you are selling a business and contracts need to move, the safe course is to have a lawyer check the underlying contracts and draft the right document, because the difference between assignment and novation is the difference between walking away and staying on the hook.