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Commercial notes
Number 32 | 15 July 2009
NOVATION AND ASSIGNMENT
Government agencies often need to consider requests to novate
or assign agreements. These requests can arise with funding
agreements, leases, contracts and other agreements for a variety
of reasons including where an entity (for example, a company)
ceases to exist, restructures, merges or sells its business.
This note looks at novation and assignment of contracts generally.
Assignment of leases is not within the scope of this note because,
being interests in land, different considerations apply to leases.
Katrina Leach* Senior Lawyer
Five key questions on novation and assignment
1When will a novation, assignment or other change to the
contract be required?
2What is the difference between novation and assignment,
and which one do you use?
3What issues need to be considered in deciding whether to
agree to a novation or assignment?
4Due diligence: what information do you need to consider
a request for a novation or assignment?
5What should be included in a novation deed?
Lynette Lenaz Senior Executive Lawyer
T 03 9242 1358 F 03 9242 1481
lynette.lenaz@ags.gov.au
*Katrina Leach is currently on extended leave. Please contact
Lynette Lenaz if you have any questions on this Commercial Note.
The material in these notes is provided to AGS clients for general information only and should not be relied upon for the purpose of a particular
matter. Please contact AGS before any action or decision is taken on the basis of any of the material in these notes. © AGS All rights reserved
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When will a novation, assignment or other change to the
contract be required?
Is a change to the contract required?
Is a different legal entity taking over the rights or obligations under the
contract?
 a
novation, assignment or other change to the contract is likely to
be required.
The table below outlines some common situations in which the question of
change to the contract might arise. Most changes in Commonwealth contracts
are made by way of a novation rather than an assignment.
Table 1: Is a change to the contract required?
Novation, assignment or other
change usually required
Contractual change not usually
required1
a company wants to transfer to
a third party its rights to receive
payments under the contract.
a company changes its name but
remains the same legal entity
a company sells the relevant
business to another company
there is a change of ownership
in the company (i.e. new
shareholders)
the contract is performed by a
different company in the same
company group
the contract is performed by a
different division/branch of the
same legal entity
the head contractor withdraws and
the Commonwealth deals directly
with a subcontractor
there is a change in subcontractors
What is the difference between novation and assignment, and
which one do you use?
Where a contractual change is required, you will need to determine whether a
novation or an assignment is most appropriate.
Commercial notes 15 July 2009
Do I use a novation or an assignment?
Is the other party taking over both rights and obligations?
 a novation will usually be required.
Is the other party taking over contractual rights but not obligations?
 an assignment will usually be required.
Most changes in Commonwealth contracts are made by way of a novation.
Novation
An agreement that has the effect of substituting one party for another party
without changing the rights and obligations under the original agreement is called
a novation. A novation gives rise to a new agreement on the same terms as the
original agreement, with the original agreement being discharged. A novation is a
tripartite agreement and usually takes the form of a deed executed by the original
parties and the new party.
This process is illustrated as follows: the Commonwealth and B have an agreement
for the provision by B of vehicle repair services on the Commonwealth’s car fleet. B
has sold his automotive business to C. Party C is prepared to take on B’s obligation
under the agreement with the Commonwealth. The Commonwealth undertakes its
due diligence and agrees to the substitution of B with C. In order for the substitution
to occur, a novation is needed. Once the novation is executed, C is responsible to the
Commonwealth for the repair services.
The following diagram demonstrates this arrangement.
Diagram 1: Transfer of both rights and obligations
BEFORE
Commonwealth
Original contract
Party B
AFTER
Party B
Commonwealth
Novation
New contract formed
between Commonwealth
and Party C (original
contract terminated)
Party C
Transfer of rights
and obligations,
substitution
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Assignment
An agreement that transfers one party’s rights in a contract but not its
obligations or liabilities to a third party is called an assignment. An assignment
of rights in a contract can sometimes take place without the consent of the
other contract party. However most Commonwealth contracts contain a clause
which prevents the contractor from assigning the contract, in whole or in part,
without first obtaining the written consent of the agency. Sometimes the
contract will also provide that the agency is not obliged to consent but any
refusal should not be unreasonable. Consent usually takes place by letter.
For example, the Commonwealth and B have an agreement for the provision by
B of office cleaning services in Commonwealth offices. B wants to transfer its
right to receive payment for services rendered to the Commonwealth to a third
party C. For this to occur B will need to assign its rights to receive payment to
C by means of a deed of assignment between B and C. This can occur without
any involvement from the Commonwealth if the agreement does not provide
for Commonwealth consent. Importantly, B continues to remain a party to the
contract with the Commonwealth i.e. B is still obliged to perform the services
and B’s contractual liabilities remain unchanged.
The following diagram demonstrates this arrangement.
Diagram 2: Transfer of rights only
BEFORE
Commonwealth
Original contract
Party B
AFTER
Commonwealth
Obligations
Party C
Party B
Transfer of rights
only (not
obligations)
Assignment deed
Commercial notes 15 July 2009
What issues need to be considered in deciding whether to agree
to a novation or assignment?
What does the original contract say about the right to novate or
assign?
— Does the novation or assignment require approval?
—Are some types of novations or assignments approved in
advance (for example, within the same corporate group)? Even
in this case, a formal novation will usually still be required.
—Is there a requirement that approval not be unreasonably
withheld?
The Commonwealth is not usually obliged to consent to a novation
or assignment of an agreement. In some cases it may be appropriate
to terminate the contract and undertake a new procurement or
funding process.
What approvals are required, and from whom? Check the Financial
Management and Accountability Regulations Reg 9 and 10
requirements, the Chief Executive’s Instructions and any applicable
governing legislation in particular.
For novations
Is the Commonwealth satisfied that C can perform the obligations
under the agreement and manage risk? Is C an acceptable entity to
contract with in terms of due diligence process on probity issues,
financial viability and capability (see below)?
Who will be liable between B and C for past performance or default
prior to C taking over? Is it still B (requiring an ongoing indemnity
by B) or will C be liable in relation to rectifications, indemnity or
liquidated damages claims, delays in ongoing performance due to
problems with performance by B, etc?
Will the novation have any impact on subcontracts or other
agreements; for example, multiple parties working on the same site?
Are there any issues with B’s performance that can be addressed
in the deed of novation? Be careful to ensure that you do not
inadvertently make unintended amendments to the contract. For
example, an acknowledgement of correspondence about a proposed
novation which mentions a related delay in delivery may be taken to
be acceptance of the delay.
Are there specific issues for the particular type of agreement? For
example, where a funding agreement deals with assets purchased
with the funding, it may be necessary to ensure those assets are
being transferred with the funding (unless otherwise agreed).
Are there any existing securities or financial arrangements under the
original agreement that need to be replaced? For example, even if B
and C are subsidiaries of the same parent entity, an existing parent
guarantee or other security may need to be amended to cover C.
At what point will C take over from B: the date the novation deed is
signed or a different (earlier or later) date?
Are there any additional costs (for example, stamp duty) and who will
bear these costs? Usually the party seeking the novation is required
to meet the other party’s costs.
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Due diligence: information you need to consider whether to
agree to a novation or assignment
The information you need will vary from case to case, but might include the
following.
√
Background entity information on the new party
—What is the organisational capacity and corporate structure of
the body?
For example:
– What are the management capabilities of the entity?
–Has the Commonwealth previously dealt with the entity?
—
What type of body are you dealing with?
For example:
–Is the body a foreign entity?
Advice may be required as to whether it has executed a
binding agreement.
–Is the body a partnership or unincorporated association?
If this is the case, who will be bound by the contract
following the novation?
– Is the body the trustee of a trust?
If this is the case, does the trustee have the requisite
authority under the trust deed?
—Do you have information on any relevant ‘fit and proper person’
considerations?
√
Financial status information
—Should you seek a parent guarantee or other security (is the body a
$2 company)?
—Do you require independent financial advice on any figures provided by
the entity?
√
Evidence of the company’s ability to perform the contract
For example:
—Can it meet the insurance requirements specified in the agreement?
—Do you have details regarding:
–the sale of the business etc (as applicable) (for example, will the
body acquire and operate all the facilities/provide the services
listed in the agreement)
–personnel involved and evidence that they will be able to perform
the agreement (including holding any special qualifications such
as licences)?
—Do you have evidence that the company will satisfy the conditions or
requirements of the agreement; for example, hold funding in a special
account, satisfy milestone requirements or any relevant eligibility
criteria for funding etc?
Commercial notes 15 July 2009
√
Proposed transitional arrangements
—What are the interim arrangements for performance of the activity (for
example, arrangements between the time the novation is agreed to and
the deed of novation is executed)?
—Is there a transition plan?
—
What resources will be needed to manage the transition?
What should be included in the novation deed?
What a deed of novation needs to cover will depend on the circumstances, but
typically it will do the following:
√substitute one party for another
√
i nclude mutual release of obligations under the original agreement
between the Commonwealth and the current entity
√
c learly specify responsibilities and indemnities of the current entity
and the new entity if applicable for the pre-novation period
√
i nclude representations and warranties with respect to the power
of the current entity and the new entity to enter into the deed of
novation
√include agreement as to costs to be borne by the parties in connection
with the preparation, execution and completion of the novation.
Katrina Leach has broad experience in advising on and drafting a range of contracts. She
has acted as probity advisor for many government agencies in a variety of procurements.
Lynette Lenaz is a specialist commercial lawyer whose area of expertise is Commonwealth
contracting and tendering. She has considerable experience in applying the
Commonwealth Procurement Guidelines to complex commercial projects. Lynette has also
developed tender documentation and is an experienced negotiator and drafter.
Notes
1 In some cases the contract may require agency approval to some of these changes or other
amendments to the contract. This is different from a novation or assignment.
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AGS contacts
AGS has a large national team of lawyers who specialise in advising on
contracts, including assignments and novations. Please contact our Chief
Counsel Commercial, John Scala, our Commercial National Practice Leader,
Linda Richardson, or one of the following specialists for assistance with any
contract issues.
Tony Beal
Philip Crisp
Henry Addison
Rachel Chua
Helen Curtis
Terry De Martin
Peter Kidd
Andrew Miles
John Snell
Adrian Snooks
John Williams
Kathryn Grimes
Simon Konecny
Mark Sheridan
Kate Brophy
Paul Lang
Garth Cooke
Kenneth Eagle
Lynette Lenaz
Teresa Miraglia
Cathy Reid
Jo Ziino
Peter Blennerhassett
Gary Power
Lee-Sai Choo
Scott Slater
Peter Whatson
James Docherty
Alexandra Hall
Peter Bowen
Thuy Luu-Nguyen
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