Assignment and Novation Agreement: What You Need to Know
Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another.3 min read
Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another.
Definition of Assignment
The transfer of a benefit or interest from one person or legal entity to another is referred to as assignment. The obligations or "burden," of a contract, however, are not something that can be transferred.
When viewed from a building contract perspective, an employer can assign their right to have construction work performed along with their right to pursue legal action against the sub-contractor, if they don't perform quality work. Their obligation to pay for the work being performed, however, cannot be transferred to another person or entity. Likewise, the contractor can assign their rights to receive payment for performance of the contract. However, they cannot assign their obligation to make sure the work is completed according to the terms of the contract or respond to any claims, such as those that pertain to defective work that has been performed.
Once assignment has taken place, the assignee becomes entitled to any benefits associated with the contract that are assigned to them. This means that they now have the right and ability to pursue legal action against other parties involved in the contract to enforce their rights under the contract's terms. The assignor is still obligated to the other involved parties and will continue to be held liable for performing their part of the agreement due to the fact that burdens and obligations cannot be assigned.
In normal practice, however, what happens is that the assignee will also take on the performance that the assignor is obligated to and the assignor will request to be indemnified in the event that the assignee breaches the contract or otherwise fails to perform. This is commonly known as an "assignment and novation agreement". In scenarios such as this, the assignor will still be held liable for any liabilities that they may have incurred before assignment took place.
In construction contract scenarios, issues of assignment frequently arise when considering whether or not collateral warranties that have been granted to a party or parties that exist outside of the main contract may be eligible for assignment. Investors might require the developer to assign rights under the contract against contractors and design teams as a way of providing a measure of security. In addition, they may also require that benefits such as performance bonds or parent company guarantees are also assigned.
Assignment Provisions in Contracts
A lot of contracts either qualify or completely exclude assignment rights. The courts have also confirmed that clauses that prevent contractual parties from assigning benefits without permission from the other involved parties is considered to be legally effective and extends to all of the rights or benefits that may arise from the contract, including those pertaining to remedies. Some other frequently used qualifications pertaining to assignment rights include:
- Restricting assignments made without permission from other involved parties, even if said permission is unreasonably delayed or withheld
- Only one of the involved parties has the right to assign
- Only a specific set of rights can be assigned
- Only a certain number of assignments can be made
- Assignments can only be made to specific assignees who are named in the contract
In certain agreements, which include prohibitions pertaining to the assignment of rights and benefits, it can sometimes be possible to find the reservation of certain rights that allow for the creation of a trust or even to establish security over the contract's subject matter, rather than assigning the benefits or rights themselves.
Legal and Equitable Assignment
The Law of Property Act is what allows for the ability to legally assign debts or other chosen actions in which the following are notified in an official written document:
- The debtor
- The trustee
- Any other person considered relevant to the debt
If the assignment in question is in compliance with the formalities outlined in the Act, it is considered legal. If not, it is considered to be what is known as an "equitable assignment." Certain transfers can only be equitable assignments, such as:
- Oral assignments
- Assignments by way of charge
- Assignments of a portion of a chosen action
- Assignments in which proper notice has not been provided to the debtor
- Agreements to assign
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