Novation vs. Assignment : A comparison

What’s the Difference?

Novation is a mechanism whereby one party can transfer all its obligations under a contract and all its benefits arising from that contract to a third party. The third party effectively replaces the original party as a party to the contract. When a contract is novated the other contracting party must be left in the same position as he was in prior to the novation being made. A novation requires the agreement of all three parties involved.An assignment is a transfer, recognised by law, of a right or obligation of one person to another. Assignment differs from novation is so much that the parties to the contract do not change. Most rights and obligations are capable of assignment.

A person can transfer their rights, benefits and liabilities under a contract to another person. Where the original contract stays intact and party transfers rights, benefits and liabilities under a contract (the assignor) to a new party (the assignee), this is called an “assignment”. An assignment must be absolute with no contractual strings to remain attached between the assignor and the other original contracting party. Nor does an assignment require the permission of the other original contracting party. An assignment is not possible where the services or the consideration was linked to the person of the party which wants to assign the contract. For example, if you hire a special performer, the performer cannot assign the contract to another performer. If an assignment creates a new or special burden to the other original contracting party, it may also be prohibited. Special provincial laws may exist to alter the common law with regards to assignments, such as “judicature acts” and readers are invited to consult these laws for further research.

Sometimes assignment operates under law such as in the case of a bankruptcy where a trustee comes in and takes over all the contracts between the bankrupt and the creditors. Another example of legal assignment is upon death, where the executor assumes the position of the deceased and to whom all contracts of the deceased are assigned.

The criteria for a successful novation is the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.

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