You are two weeks out from settlement on the sale of your business, and the buyer's lawyer has sent back a schedule of your customer and supplier contracts with one question in each row: will this one be assigned or novated. The same question appears when you register a company and want it to take over contracts you signed as a sole trader, or when you step out of a service arrangement and a related entity steps in. The answer decides who gets paid, who performs, and who stays liable if something goes wrong after the transfer.
The two options sound interchangeable, but they do different jobs. An assignment transfers the rights under a contract, typically the right to be paid, to someone else. The obligations, the promises you must perform, stay with you unless the contract or a later document says otherwise. A novation replaces one party altogether: the incoming party takes over both the rights and the obligations, and you are released from future performance once it takes effect.
The real question hiding inside "assignment or novation" is narrower than it looks. It is whether you need to move only the benefit of the contract, the right to be paid or to receive some other advantage, or the whole position, the benefit plus the burden of performing. If the answer is the whole position, only a novation does the job. One option that looks available but is not: an "assignment of contract" does not transfer obligations at common law, so you cannot hand over the work by assignment alone.
Factors to weigh before you transfer a contract
What you actually need to move
At common law you can assign a right under a contract, such as the right to payment, without the consent of the other party. What you cannot do is unilaterally transfer your obligations. The continuing party agreed to deal with you, not with a stranger, so the duty to perform cannot be pushed onto someone else without their agreement. That single rule drives most of this decision.
- Assignment: moves the benefit only. The right to be paid, to receive royalties, or to take delivery. You stay responsible for performing. The other party keeps dealing with you, which is why their consent is usually not required.
- Novation: moves the whole contract position. The incoming party steps into your shoes for performance and payment, and you are released from future obligations. Because it replaces the contract, everyone must agree.
Take a marketing services agreement as an example. Assign the right to the monthly fees to a factoring company and the factor collects the money, but you still have to deliver the campaigns. If a new agency is to deliver them instead, only a novation, agreed by the client, moves the whole arrangement across.
Who has to agree
Assignment generally needs no consent from the other party unless the contract requires it, but notice matters. Under s 12 of the Conveyancing Act 1919 (NSW), a debt can be assigned at law by a writing signed by the assignor, with express written notice given to the debtor, and the legal right passes only from the date of that notice. Until the debtor receives notice, they can safely pay the assignor and be discharged. Requirements of this kind are set out in state property legislation, for example s 12 of the Conveyancing Act 1919 (NSW), and the practical point is the same everywhere: give written notice, in the right form, as soon as the assignment is signed.
Novation is different because it is not, strictly speaking, a transfer at all. It is a new contract that discharges the old one. The High Court explained in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue [2012] HCA 6 that the enquiry is whether the parties agreed that a new contract is substituted for the old and that the obligations under the old agreement are discharged. Because the continuing party's rights and obligations under the old contract are being replaced, their consent is essential. No consent, no novation.
What the contract says
Most commercial contracts restrict transfer. "No assignment without prior written consent" clauses are common, as are change of control provisions that catch restructures and share transfers. Whatever the general law allows, a prohibition in the contract controls: assigning in breach of a "no assignment" clause can be ineffective or a breach in its own right. Read the assignment, transfer, and change of control clauses before you do anything else.
If the contract is silent on assignment, assigning your rights is still possible at law, but it is best practice to obtain written consent or at least give written notice. That removes any later argument about the scope of what was transferred, the effective date, and whether the other party was entitled to keep dealing with you.
Whether you need a clean exit
The most expensive mistake is choosing assignment when the real goal is to walk away. Assignment leaves your obligations intact, so if you want to stop performing, whether selling the business, exiting a client relationship, or retiring from a supply arrangement, assignment will not get you there. You need a novation, and that depends on the continuing party agreeing to release you.
Consider a business sale. The buyer wants the customer contracts so it can keep servicing clients, which means the buyer must be able to perform, so those agreements are usually novated. Pre-completion receivables and rebates, by contrast, are pure benefits and can be assigned. The sale documents should list each contract, say which treatment applies to it, and name who is responsible for chasing the consents.
If the other party will not agree to a novation, there are fallback protections to negotiate: indemnities from the incoming party, retention amounts held back from the sale price, and interim subcontracting or agency arrangements while you keep the contract. Also check guarantees. If the original deal was supported by a parent company guarantee, confirm whether it survives the transfer, and make sure any guarantors for the incoming party execute the deed where one is required.
The paperwork and the formalities
Transfers of this kind are usually documented by deed, because a deed is enforceable without consideration. That matters more than it sounds. In Olsson v Dyson (1969) 120 CLR 365 the High Court held that an oral promise to give away a debt failed to transfer it, and a gift of a chose in action made without a deed can fail for want of consideration. A properly executed deed removes that problem.
The deed needs to name the right parties and state the effective date, and it should be clear about the details people forget:
- Parties: the outgoing party, the incoming party, and the continuing party where there is one.
- Transfer mechanics: which rights are assigned and from when, or for a novation, the release of the outgoing party and the substitution of the incoming party from a stated date.
- Accrued rights: who keeps the receivables earned before the effective date and who answers for breaches that happened before it.
- Warranties and indemnities: authority and capacity to enter the deed, and protection if the transfer causes a loss.
- Boilerplate: notices, governing law, and correct execution.
Execution also has to be right. Companies execute deeds in the way the Corporations Act 2001 (Cth) allows, and individuals need their signatures witnessed, so use the correct signing blocks rather than treating the deed like an email attachment.
Special rules that change the answer
Some categories of contract carry transfer rules of their own on top of the general law:
- Leases: an assignment of lease almost always needs landlord consent. For retail premises the landlord's power to refuse is limited: under s 39 of the Retail Leases Act 1994 (NSW) consent can be withheld only on specified grounds, such as the incoming tenant having inferior financial resources or retailing skills. Expect the landlord to ask for financial information, and often a bank guarantee or personal guarantee from the incoming tenant.
- Customer data and privacy: transferring customer contracts usually moves personal information with them. The incoming party has to comply with the Privacy Act 1988 (Cth), which applies to organisations generally once annual turnover passes $3 million (see s 6D) and to some smaller businesses, including health service providers and businesses that trade in personal information. Update privacy policies and customer-facing terms, and check whether new consents are needed.
- Intellectual property: assigning licence income to another entity in your group is straightforward, but substituting the licensor or the licensee changes the relationship the other side agreed to, so it needs their agreement and usually a novation or a fresh licence.
- Consents at settlement: in a business sale, consents often arrive after the contracts were meant to transfer. Make each transfer conditional on settlement, specify the effective time, and provide for interim subcontracting or agency arrangements until consent arrives, then novate once it does.
How an Artificer Legal lawyer can help you choose and document the transfer
The choice looks simple on a diagram and is rarely simple inside the contract. An Artificer Legal practitioner can work through the decision with you: read the transfer, consent, and change of control clauses and tell you which transfers are even available; test the assumption that the other party will consent, and model what happens if they will not, who stays liable, what the fallback is, and how long an interim arrangement would need to run; sort the contract schedule in a business sale into assigned and novated, with the consents and effective dates against each one; and draft the deed of assignment or deed of novation with the right parties, accrued rights, warranties, and indemnities.
Professional help is usually worth it when the contract restricts transfer, when the deal involves leases, customer data, guarantees, or intellectual property, or when the transfer is part of a larger transaction where timing matters. A lawyer is also the person who spots the side issues before they become disputes: landlord consents on leases, privacy obligations on customer data, guarantees that need to follow the transfer, and the precise drafting of accrued rights that nobody thought to negotiate. It is cheaper to have that conversation before you sign the transfer than after the first claim arrives.
Move the burden or just the benefit
The question that decides assignment versus novation is not which document you prefer. It is whether you need to move the burden as well as the benefit. If you only want to redirect the right to be paid, an assignment does that, and written notice to the debtor is what completes it. If you want to stop performing and have someone else step into your place, only a novation releases you, and that release depends on the continuing party agreeing to it.
Everything else follows from that. Assignment keeps your obligations intact and usually needs no consent beyond what the contract requires. Novation substitutes a new party into the whole contract and needs all three parties to sign. Check the contract's transfer clauses first, document the transfer by deed, be precise about accrued rights and effective dates, and remember that leases, privacy, and intellectual property each add their own rules. When the transfer is part of a larger deal, keep a schedule of what was assigned and what was novated, with the date each took effect, so that the paper trail matches the deal you actually made.