Novation vs Assignment
The main difference between novation and assignment is what happens to the original party's obligations. Novation replaces the original contract with a new one, so a new party takes over both the rights and the duties and the original party is fully released. Assignment transfers the contract's benefits, such as the right to be paid, and even when duties are delegated too, the original party usually stays liable. Novation always needs everyone's consent.
Novation vs Assignment at a glance
| Novation | Assignment | |
|---|---|---|
| What transfers | Both rights and obligations move to the new party. | Rights move to the new party; duties may be delegated separately. |
| Original party's liability | Released from future obligations under the contract. | Remains liable if the new party fails to perform. |
| Consent | Requires agreement of all parties, including the remaining counterparty. | Often allowed without consent unless the contract restricts it. |
| Legal effect | Ends the old contract and creates a new one. | Keeps the original contract in place with a new rights holder. |
| Paperwork | A novation agreement signed by all three parties. | An assignment document between the two transferring parties, plus notice to the other side. |
| Typical use | Selling a business and moving customer contracts to the buyer. | Transferring unpaid invoices to a finance company for early cash. |
| Main limits | The remaining counterparty can refuse, which blocks the novation. | Personal service contracts and anti-assignment clauses can restrict it. |
When novation applies
A business uses novation when it wants a clean exit, such as selling a division and having the buyer take over a long-term supply contract. The customer must agree, and once it does, the seller generally has no ongoing liability under that contract. For example, a contractor leaving a project may novate its subcontracts to the replacement contractor.
When assignment applies
A business uses assignment when it wants to transfer the benefit of a contract without renegotiating it, such as selling unpaid invoices to a finance company. Assignment is also common in asset sales and financing, where lenders take an assignment of key contracts as security. Many agreements require consent before assignment, so the contract's assignment clause is the first place to look.
Dates and deadlines to watch
Assignment clauses often require written notice to the other party, and that party can generally keep paying the original party until it receives notice of the assignment, so the notice date matters. A novation takes effect when all parties sign, and duties from before that date may stay with the original party depending on the wording. Check the contract for consent and notice steps.
Frequently asked questions
No, not on its own. The assigning party usually remains responsible if the new party fails to perform the duties that came with the contract. A full release requires either a novation or a separate written release signed by the other party to the contract.
Often yes, unless the contract says otherwise or the contract is personal in nature. Many commercial contracts include anti-assignment clauses requiring the other party's written consent. Some laws limit restrictions on assigning payment rights, and the effect of an anti-assignment clause varies by state and by the type of contract.
Not usually. When a company is sold through a stock purchase, the contracting entity often stays the same, so there may be no assignment at all, depending on the deal structure and state law. Many contracts close this gap with a change of control clause that requires consent or allows termination when ownership changes.