Contract Transfer: Everything You Need to Know
A contract transfer is a common action in contract law. There are many situations in which a transfer of rights and obligations is necessary, so it is crucial that you are aware of all aspects of contract transfer in the event you need to enter this type of agreement.3 min read
A contract transfer is a common action in contract law. There are many situations in which a transfer of rights and obligations is necessary, so it is crucial that you are aware of all aspects of contract transfer in the event you need to enter this type of agreement.
Characteristics of Assignments
An assignment is the process of transferring from one party to another of some or all rights to get performance as outlined in the contract. The assignor in the contract will no longer get any benefits of the rights assigned. These will be transferred to the assignee.
While the assignor will divest the contract rights, the assignment will not eliminate any performance obligations of the assignor to the non-assigning person. The non-assigning party will keep:
· The right to get the performance from the assignor
· The remedies against the assignor if the party does not perform
It is important that everyone is familiar of what the terms of the contract include. Assignment of obligations and rights is a very simple concept but with very important ramifications within the context of the law. There are major restrictions on the effect of assignment in a lot of cases.
All documentation needs to provide a clear explanation of the provisions regarding assignments. It should also outline why this is so essential for a contract to work properly. A company could choose to assign a contract to one party and assume that it will have rights outlined in the contract. However, an assignment will only transfer the company’s rights, such as getting paid.
The burden under the contract does not get transferred and will stay with the company. The burden can be dealt with in a couple different ways:
· The risk for the outgoing party will be financial with regard to non-performing claims. It can then seek indemnity from an incoming party for breach of failure to perform.
· The company can subcontract the performance to the party, meaning the company will then transfer the obligation to perform while the company is responsible those obligations.
Assignments are typically allowed by law except when it is prohibited against the assignment in a lease. When assignments are allowed, assignors do not need to contact the other parties in the contract. They can just assign rights. However, assignments can’t have a negative effect on the duties of the other parties to the contract. It cannot also prevent the other party from getting a complete performance.
Characteristics of Novation
Novation is an alternative to an assignment. Novating a contract will transfer the obligations and rights of an existing company to another business. The original obligations and rights will not be transferred.
A novation will end one contract and start another where a company will then take up the obligations and rights that are just like those in the original contract. A customer may not want to deal with a novation, preferring to pursue the original company if there is a default.
A novation agreement signed by all parties is not always the best way to get started. It can be an expensive way to go about the process since the existing company would need to provide agreements to every customer.
There is also a risk that a customer will refuse to sign the novation, will want to renegotiate the terms of the novation, or will seek to renegotiate the terms of the original contract.
Should the customer not sign the novation, it could still be possible for the establishment of novation to occur if the consent is received from the conduct of the customer. For instance, the consent can be inferred when a customer deals with a one specific company instead of the existing company over the course of time.
If the customer will not consent to a novation, the existing company will have the choice to end the contract if they choose to do so. This options is dependent on the terms of the individual contracts that are signed.
Assignment and novation are completely different. They can both be used to make changes in a business but in different ways. With assignments, you will continue to perform while giving some of your rights to another party.
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