Equitable Novation vs Assignment Explained

Key Takeaways

• Equitable novation occurs when contractual rights and obligations are transferred and all parties consent, ensuring full substitution of one party for another.
• Assignment transfers benefits but not burdens — the original party remains liable for contractual performance.
• Equitable novation extinguishes the old contract and replaces it with a new one, while assignment keeps the original contract intact.
• Novation is essential where ongoing obligations or liabilities need to be legally assumed by a new party.
• Businesses should consider consent requirements, liability exposure, and documentation before choosing between novation and assignment.
• In federal contracts, novation requires government consent, adding a layer of regulatory compliance.

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

Assignment

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee. 

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced. 

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada, or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

Equitable Novation Explained

Equitable novation refers to a contractual substitution that fully transfers both the rights and obligations of one party to another with mutual consent. It differs from assignment because it not only transfers benefits but also replaces the outgoing party entirely, extinguishing the original agreement. The new contract must clearly show the parties’ intention to discharge the old contract and create new obligations in its place.

Courts have recognized equitable novation as an arrangement that balances fairness between the original and substituted parties. It ensures that no party is bound to contractual obligations without consent. For example, in a construction or service contract, if Company A transfers a project to Company B, equitable novation ensures Company B assumes both duties and liabilities — and Company A is released from them.

Equitable novation also requires consideration — something of value exchanged — unless executed as a deed. Without clear consent or consideration, courts may treat the transfer as an assignment instead of a novation, leaving the original party liable.

Common Use Cases for Assignment

Assignment is frequently used in various business scenarios where transferring the benefit of a contract is necessary without disrupting its overall structure. Common situations include:

• Debt transfers, where a creditor assigns the right to collect a debt to another party.
• Commercial leases, where a tenant assigns their lease rights to a new tenant, though they may still be liable for obligations unless released.
• M&A transactions, where businesses transfer rights under supplier or customer contracts.
• Intellectual property, such as patent or copyright licenses, especially in tech or publishing sectors.

However, parties should ensure that the assignment does not breach any non-assignment clause in the original contract, which may render the transfer invalid or lead to disputes.

Novation

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

1. The purchaser accepts complete liability
2. The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
3. The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

Types of Novation in Practice

There are two main types of novation in contract law:

1. Standard Novation: This involves the full replacement of one contracting party by another. All parties agree that the original party is discharged, and the new party steps into their place with identical obligations and benefits.
2. Equitable Novation: This form arises when fairness demands the substitution of parties even if formal documentation is incomplete, as long as the parties’ conduct and mutual understanding indicate consent to replace the prior obligations.

In both types, the intention of all parties is the cornerstone. Without express agreement or clear evidence of intention, courts are reluctant to find a novation. This principle is especially important in complex commercial relationships, mergers, or outsourcing where performance continuity must be maintained.

When to Choose Novation Over Assignment

Novation is preferred over assignment in situations where:

• Liabilities must also transfer, such as in subcontractor replacements or outsourcing agreements.
• Complete discharge of the original party is desired.
• Continuing relationship with the new party is essential, such as in joint ventures or long-term service contracts.
• The contract includes a non-assignment clause, making assignment legally or contractually impossible.

Novation ensures that the new party assumes full contractual responsibility and that the outgoing party is no longer at risk for future performance failures.

Key Risks and Legal Considerations

When opting for novation over assignment, businesses should carefully weigh the following:

• Consent Requirement: Novation cannot occur without the consent of all parties — the outgoing party, the incoming party, and the counterparty.
• Discharge of Liability: Once novation is completed, the original party is released from obligations. However, any prior breaches remain actionable unless expressly waived.
• Regulatory and Industry Compliance: In public sector or government contracts, novation must comply with specific regulatory frameworks. For example, under federal procurement rules, novation agreements must be approved by the contracting officer to ensure performance continuity.
• Documentation: The new agreement should explicitly identify the rights, duties, and effective date of transfer to prevent ambiguity.
• Third-Party Rights: Non-assignment clauses or restrictions in the original contract can complicate the novation process, particularly in joint ventures or subcontractor replacements.

Properly executed novation provides certainty — ensuring the new party assumes all obligations and the outgoing party is free from future claims.

Key Legal Distinctions Between Assignment and Novation

Understanding the legal differences between novation and assignment is crucial:

These differences are particularly important in commercial contracts where risk, performance obligations, and legal enforceability are key concerns.

Practical Considerations for Businesses

When deciding between novation vs assignment, businesses should:

• Review contract terms: Some contracts prohibit assignment without consent or allow novation only under strict conditions.
• Assess ongoing obligations: If you need to transfer obligations, novation is the only valid route.
• Evaluate risk exposure: Assignment retains liability with the assignor; novation shifts it entirely.
• Get legal advice: Improper execution of either process can lead to unenforceable transfers or liability disputes.

Using written agreements that clearly define the rights and obligations being transferred helps mitigate potential legal risks. Businesses should also document consent (in the case of novation) to protect all parties involved.

Federal and Commercial Applications of Novation

Novation plays a crucial role in both public and private contracting contexts. In federal contracts, the Anti-Assignment Act limits the transfer of government contracts without approval. Contractors must submit a formal novation agreement outlining the change in ownership or control, including supporting documents such as the sale agreement, list of affected contracts, and evidence of authority. Only after the government contracting officer approves can the novation take effect.

In commercial settings, novation is commonly used in:

• Mergers and acquisitions, to replace the selling company with the acquirer in ongoing contracts.
• Outsourcing agreements, when responsibilities are transferred to a new service provider.
• Construction and infrastructure projects, where contractors or subcontractors are replaced mid-project.
• Financial transactions, such as the transfer of loan or lease obligations to a new borrower or lessee.

By contrast, assignment is preferable when the original party intends to retain liability but transfer certain benefits, such as payment rights. Businesses should document whether they intend an assignment or novation, as courts interpret the two differently based on consent and intention.

Frequently Asked Questions

1. What is equitable novation?
   Equitable novation is the substitution of one party in a contract by another, transferring both rights and obligations with the consent of all parties. It extinguishes the old contract and replaces it with a new one.
2. How does equitable novation differ from assignment?
   Assignment transfers only the benefits of a contract, while equitable novation transfers both benefits and burdens, fully replacing one party with another.
3. Is equitable novation legally binding without written documentation?
   In some cases, courts may recognize equitable novation based on conduct or mutual understanding, but written documentation is strongly advised to avoid disputes.
4. When is novation required in government contracts?
   Novation is required when a contractor wishes to transfer its rights or obligations to another entity, such as after a merger or acquisition. Federal approval is mandatory.
5. Can an assignment become a novation automatically?
   No. Novation requires explicit consent and intention from all involved parties. Without that, the transfer remains an assignment and the original party retains liability.

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