assignment and novation indian law

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Contract Law
Contracts and Agreements

Novation, Rescission, Alteration under the Indian Contract Act

This article is written by Sachi Ashok Bhiwgade from Hidayatullah National Law University, Raipur. This article covers the basic differences and the essentials of novation, rescission and alteration of a contract under the Indian Contract Act, 1872.

Table of Contents

Introduction

A contract to be legally enforceable should be valid. Section 10 of the Indian Contract Act, 1872 provides the essential conditions that are to be complied with for a valid contract. They are:

Free consent;
Competency of the parties;
Lawful consideration and lawful object;
Not declared to be void under the law.

In case, a contract is entered into by the parties under coercion, threat, fraud, undue influence, etc such a contract will be invalid. Also, the object of contract should not be inconsistent with any other law.

The word ‘novation’ literally means to replace with a new contract and the same obligations are performed by different parties. Under novation, the liabilities under the existing contract are extinguished. The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all the parties. A new contractual obligation arises when parties novate a contract.

What is novation of Contract?

Novation of contract means creating a new contract while the old one is terminated and need not be performed. It is an act substituting a new obligation or party in a contract for the old one. Further, the newly substituted agreement should be valid, enforceable, have consideration and should be by the mutual consent of the parties. Basically, it should fulfil the requirements of a valid contract.

When a contract is novated, the original contract ceases to exist and the parties have to follow the new contract. Section 62 of the Indian Contract Act states that “if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not to be performed.”

Essentials of Section 62 of the Indian Contract Act

Consensus ad idem between the parties to a contract.
There should be a previous contract entered into between the parties.
Substitution, recession or alteration of a contract giving rise to a valid new contract.
Termination of the original contract.

The basic requirement of Section 62 was discussed by the Supreme Court in the case of Lata Construction & Ors v. Dr. Rameshchandra Ramniklal Shah , novation requires a complete substitution of a new contract in place of the old one and only in that condition the original contract does not have to be performed. The new substituted contract should rescind or completely alter the terms of the original contract. In Ramdayal v. Maji Devdiji , the court observed that novation takes place by introducing new terms in the contract or by introducing new parties. A contract of novation requires a party to agree to extinguish or discharge his obligation or debt. Unless this has been accomplished there can be no novation . Therefore the test is to know whether the parties intended to enter into a new contract between them or not.

For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character as held by the Calcutta High Court in the case of Juggilal Kamlapat v. NV Internationale .

In a partnership firm, the liabilities of an old firm are taken over by the new firm.
A lease agreement, where the tenant gives the lease to another party and makes him responsible for the obligations and responsibility arising from the lease agreement.
John owes 2 lakh rupees to Ram under a contract, Ram owes David 2 lakh rupees. Ram asked John to pay 2 lakh rupees to David in his place, but David does not agree and neither gives her consent to the agreement. Therefore, Ram still owes David 2 lakh hence, there is no new contract to enter.

Kinds of Novation of Contract

Novation is of two kinds:

Where the obligation under a contract is replaced with a new one, and
Where a party is replaced by another party.

Change in terms of the contract

The parties to a contract have the freedom to enter into a contract and alter its terms by mutual consent. When both the parties mutually agree to change the term of the contract which they have previously entered into, then the new agreement becomes binding on them. However, in case there is a clause in the contract stating that the terms of the contract can be altered by one party (unilaterally) such changes in the terms will be considered as valid. Hence, a party cannot by unilateral term impose conditions which were not a part of the original contract.

In the case of RS Amarnath Mehra v. Union of India, the court observed that calling of fresh rates at a lower price will not amount to a new contract. If a contract consists of a number of terms and conditions then it does not mean that each term or condition is a separate contract.

Similarly, in the case of Ramji Dayawala & Sons (P) Ltd v. Invest Import , the Apex Court held that a contract having a number of parts should have been assented by the contracting parties in the same manner and in the same sense, that is, it should have consensus ad idem.

Change in the parties to the contract

Under a novation agreement, it is possible that the terms of the contract provide for the replacement of one party to the contract by another party. This creates an obligation for one party in place of another party. Under this kind of contract, the new party assumes all the obligations under that contract and the party who has assigned his obligations to another party under such a contract will not be held liable for any future damages.

For instance: if A and B are parties to a contract, and A agrees to replace C in B’s place, then the existing contract between A & B will cease to exist.

In the case of Godan Namboothiripad v. Kerala Financial Corporation , the respondent (Kerala Financial Corporation) sanctioned loan to one Gopinath for purchasing a transport vehicle which was to be paid in instalments. He defaulted in making the payments and as a result of that, the respondent seized the vehicle. After that, the appellants executed an equitable mortgage confirmed to repay the balance amount. The court held that it was a novation of contract because the appellants took the liability to pay the dues and the original debtor (Gopinath Menon) ceased to be the debtor.

Difference between novation and assignment

The difference between novation and assignment is minimal but important and is discussed in the table below:

Novation of contract in an illegal agreement

The Court in Ratanlal son of Pannalalji v. Firm Mangilal Mathuralal observed that “ if there is a direct connection between a fresh contract after novation and the earlier illegal contract or the earlier collateral contract, the novated contract would still continue to be illegal or immoral and the Court would refuse to enforce the same”.

When is it ‘No Novation’?

When the requisite conditions of novation are not satisfied then it will be considered as no novation. The Kerala High Court held in the case of Godan Namboothiripad v. Kerala Financial , that the essential features of a novation are the replacement or relinquishment of a right under the original contract by a new one and when these essential features are missing then, there will be no novation.

A unilateral act of one party

As discussed already, a party cannot on its own change the terms of the contract unilaterally. The Supreme Court in the case of Citi Bank N A v. Standard Chartered Bank held that novation, recission, and alteration under Section 62 requires that both the parties should agree to substitute, rescind or alter the existing contract with a new one. Such substitution, rescission or alteration has to be done bilaterally. In the case of Polymat India P. Ltd. & Anr vs National Insurance Co. Ltd. & Ors , it was held that the terms of a contract cannot be varied without the mutual agreement of the parties.

Intention of parties

All the parties to the contract have to agree to the new terms of the substituted contract. A novation contract will be ineffective when there is an absence of intention between the parties to alter, rescind or substitute a contract. In T.S. Duraiswami Aiyar And Ors. vs Krishnier , the court observed that substitution of one contract with another clearly depends upon the intention of the parties. Similar observation was made in the case of Calcutta Insurance, Madras vs Thirumalai Animal And Ors. and National Insurance Co. Ltd. v. Thirumalai Ammal And Ors .

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Rescission of Contract

To rescind means to cancel or revoke. Rescission under contract law means a party to the contract can cancel or terminate the contract. In this, the parties legally terminate a contract by mutual consent. Under Section 62, a party is allowed to rescind a contract but such rescission should only be in bilateral terms.

In the case of Union of India v. Kishorilal Gupta and Bros , the Calcutta High Court held that a contract under Section 62 of the Indian Contract Act can be rescinded only after there has been a breach.

Difference between Rescission and Novation

Alteration in terms of a contract .

Alteration in terms of contract happens when the parties enter into a contract and one of the parties wants to modify or change certain terms of the contract with the assent of the parties. Hence, once the parties sign the contract they cannot alter its term except in the case where all parties by the mutual consent agree to the alteration. For instance, change in the date or place of delivery in a contract of sale of goods between parties.

The Apex Court in the case of United India Insurance Co Ltd v. MKJ Cooperation held that material alterations in a contract can only be done by mutual consent of the parties.

In V Kameshwararao & Ors v. M Hemalathammarao , the court observed that a material alteration is one that varies the rights and liabilities of the parties ascertained by the deed or varies the legal effect of the instrument originally expressed.

Difference between Novation and Alteration

The basic difference between novation and alteration can be studied under the following table:

Contents of novation agreement

A novation agreement may contain the following:

Definitions;
Name of the parties;
Representations;
Rights of the third party;
Obligations of all the parties;
Effects of novation agreement;
Fees, costs, expenses;
Jurisdiction and the law governing the parties;
Counterparts.

As already seen in this article novation happens when there is a change in the terms of the contract or when parties to the contract change. It is also necessary that all the parties have consented to the changes and have not acted upon the contract unilaterally. The new agreement should contain the requisites of a valid contract.

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Sub-contracting and Assignment : Resolving the Legal Conundrum

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to “sub-contract” or “assign” their rights and obligations to a third party depending upon the nature of the contract.

In common parlance, sub-contracting and assignment are used interchangeably, however, a significant difference lies between the two when one examines the terms from a legal stand point. This post aims to discuss the concept of Sub-Contracting and Assignment and explains the key difference between the two concepts.

Sub-contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black’s Law Dictionary, a sub-contract is “where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor .” [1] A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Sub-contracting is generally undertaken in complex projects where the contract has a prolonged life cycle or multiple components for completion of a project, for instance, infrastructure contracts, construction contracts, renewable energy contracts or certain information technology-related contracts. However, the rights and duties of the sub-contractor under the sub-contracting agreement are relatively similar to that of the principal contractor in the main agreement.

Furthermore, while drafting a contract, one must ensure to incorporate a clause on sub-contracting which clearly spells out that parties to the contract shall sub-contract the rights and obligations only after seeking prior written consent from the other party. The sub-contracting arrangement maybe two-fold, depending upon the nature of the main contract:

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor’s agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments [2] upheld that in the absence of a back-to-back covenant in the main contract, “ the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate” . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party’s concurrence. Section 37 of the India Contract Act, 1872 (“ Contract Act ”) enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a “complete transfer of rights to receive benefits” accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of “rights” vis à vis assignment of “obligations”. The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited [3] categorically distinguished between assignment of “rights” and “obligations”. The court upheld that, “ an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties” . Primarily, the court clarified that obtaining prior consent to assign “obligations” under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan [4] , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison [5] , the defendant’s wife pledged to perform piano at a concert on a specific date. Due to “her illness”, she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant’s wife’s good health and personal talent, and the defendant’s wife’s illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract’s non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the “promisor’s expertise” in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the “agreement to sell” in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

The apex court has time and again reiterated that the best policy is to unequivocally state the intent with respect to assignment in the agreement to avoid litigation in the future. The contracting parties must expressly specify the rights and obligations stemming from assignment under a contract. Any agreed limitation on such an assignment must be expressly laid down in the contract to avoid adverse consequences.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While “sub-contracting” is delegating or outsourcing the liabilities and obligations, “assignment” is literally transferring the obligations. It will be not fallacious to say that an “assignment” transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

Archana Balasubramanian (Partner), Vaishnavi Vyas (Associate)

[1] Black’s Law Dictionary 4th ed. (St. Paul: West, 1951).

[2] 2006 SCC OnLine Mad 1107

[3] MANU/SC/0428/1962

[4] Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

[5] (1871) LR 6 Ex 269

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Novations in India

Nitin sarin.

Managing Partner

[email protected]

Sitting at the recent Cape Town Convention Academic Project Conference held in Oxford in September 2017, an interesting discussion was taking place between New York law experts on one hand and English Law experts on the other.

The quality of discussions was crisp, immaculate and informative. The panel of the hour was being moderated by Sir Roy Goode (the brainchild of the Cape Town Convention) and Mr. Jeffrey Wool, Secretary General of the Aviation Working Group.

The New York practitioners were representing that under New York law, “ assignments ” of aircraft agreements are recognized while the English Law practitioners were arguing as to how “ novations ” were recognized in their jurisdiction.

Interestingly, the English law specialists highlighted the fact that the term “ novation ” remains undefined ( which is understandable considering the English legal system ). This got me thinking that the closest the British ever got to defining a “ novation ” was through enacting the Indian Contract Act, 1872 (Act No. 9 of 1872).

In 1872, India was still a colony of the British ( it would gain independence only 75 years later in 1947 ) and its laws were still made by England ( the Imperial Legislative Council ).

The Indian Contract Act 1872 contains section 62 which reads as under:

“ Contracts which need not be performed

62. Effect of novation, rescission, and alteration of contract:

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1, 000 rupees, and no new contract has been entered into.”

The Indian judicial system has, through precedent, certainly built on Section 62 over the last 145 years or so, however, it would still be somewhat of an erroneous statement to state that the British have never defined a “novation”.

Perhaps some food for thought for those English practitioners mentioned above?

Also, it is apt to answer one of the most commonly asked questions by our clients: “Would an Indian court accept a novation of a lease agreement?”

The answer, put succinctly is that Indian law recognizes the concept of a “ novation ” and especially in aircraft transactions, a valid novation of an agreement, which satisfies all the other tests of the Indian Contract Act, 1872 to be a valid contact ( offer, acceptance of offer, consideration and competency to contract, etc. ) would be treated as a valid and binding document in the eyes of law.

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Novation As a Means To Discharge Under Indian Contract Act

Introduction

An agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.) , the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” An agreement involves a promise from both sides, and when an agreement becomes enforceable under the law, a valid contract arises. A critical essential element of a valid contract is the offer and subsequent acceptance to form an agreement. An offer is the manifestation of the promisor’s mind, and an offer can be both positive and negative, that is, to do or not to do something. Towards this offer, consent should be signified and communicated by an act or omission. The promisee or the party accepting the offer intends to express their consent, and this consent is known as acceptance. Once a proposal is accepted by the other party and timely communicated to the party who proposed appropriately, it becomes a binding contract, provided that consideration and object are legal. The parties do have the intention to create legal relationships.

The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. The original contract’s obligations are terminated until a contract is novated. Any agreement can be novated, but only when there is a new contract, not a new deal, can the Novation take place. As a result, simply agreeing to replace an expired contract would not be binding until it is ratified and enforced by both parties. When parties novate a contract, they create a new contractual obligation.

Novation under the Indian Contract Law

Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract. Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. For instance, A owes B 10,000 rupees. X enters into an arrangement with Y and gives Y a mortgage of his (X” s) estate for 2500 rupees in place of the debt of 4,000 rupees. This is a new contract and extinguishes the old. Novation is of two kinds. These two kinds are:

Novation by Change in The Terms of Contract

The parties to the contract are free to modify the contract which they have originally entered. If they choose to modify/alter the original contract, their obligations or liability regarding the original contract extinguishes. In place of these obligations, they become bound by the obligations regarding the new contract. The case of Salima Janeen v. National Insurance Co. Ltd. is an important judgment in this regard. In this case, the appellant, Salima Jabeen, agreed insurance, under which the insured sum was Rs. 23 Lakhs, and her property was insured against fire. Subsequently, her property was set on fire by the militants, and the damage calculated by the two surveyors was Rs. 6,61,772, and the appellant accepted this sum in place of the agreed insured sum. The appellant was given the newly agreed sum. Subsequently, the appellant claimed a compensation of Rs. 23 Lakhs. But it was held that as the appellant accepted the newly agreed sum, she is not entitled to demand any further compensation from the National Insurance Company Ltd.

Novation by Change in The Parties to The Contract

Apart from changing the terms of the contract, it is possible that by Novation, liability may be created for one party in place of another. For instance, X is liable to perform an agreement in favor of Y. Z. could take over X Now, instead of X being obligated/liable towards Y, by Novation, Z becomes obligated towards Y. In S.B.I. v. T.R. Seethaverma , it has been noted that there should be a consensus among all three parties, that is, the individual who wants to be discharged from the obligation, the individual who undertakes to be liable in place of the person discharged, and the individual in whose favor the performance of the contract is to be made. The same rule is applicable in the contract of partnership. In the case of a Partnership firm, when a partner retires, his liability for the past acts continues. Such liability can be extinguished through the way of Novation, thus extinguishing the partner from such liabilities. This point has been upheld in section 32(2) of the Indian Partnership Act, 1932. It states that an agreement reached by a retired partner with a third party and the partners of the reconstituted firm may release him from any responsibility to such third party for actions of the firm committed before his retirement. S uch agreement may be inferred by dealing with such a third party and the reconstituted firm after knowing the retirement.

From the above discussion, it is clear that an agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.) , the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” The term “novation” means “to substitute with a new contract,” It refers to situations in which separate parties carry out the same commitments. Under the Indian Contract Law, a contract may be terminated by mutual consent or a violation of the contract. Section 62 of the India Contract, 1872 Act expresses the doctrine of Novation, one way to discharge a contract by consensus. Section 62 deals with the Effect of Novation, rescission, and alteration of contract. It states that the original contract will not have to be executed if the parties agree to replace it with a new contract or rescind or amend it. The original contract’s obligations are terminated until a contract is novated. Novation is of two kinds. These two kinds are Novation by a change in terms of contract and Novation by a change in the parties to the contract.

References:

The Indian Contract Act, 1872, No. 2(h) (Indian).
The Indian Contract Act, 1872, No. 2(e) (Indian).
Diganth Raj, What are the essentials of Contract? IPleaders, https://blog.ipleaders.in/what-are-the-essentials-of-contract/ (last accessed Apr. 30, 2021).
Meera Annie Koshy, What do you mean by revocation of proposals and acceptance under a contract? (2020) IPleaders, https://blog.ipleaders.in/mean-revocation-proposals-acceptance-contract/ (last accessed Apr. 30, 2021).
Diva Rai, Novation, Rescission, Alteration under the Indian Contract Act (2020)IPleaders, https://blog.ipleaders.in/novation-rescission-alteration-under-the-indian-contract-act/ (last accessed Apr. 30, 2021).
Dhriti Yadav, Novation-Discharge of Contract by Agreement LegalServicesIndia, http://www.legalserviceindia.com/legal/article-3115-novation-discharge-of-contract-by-agreement.html (last accessed Apr. 30, 2021).
The Indian Contract Act, 1872, No. 62 (Indian).
The Indian Contract Act, 1872, No. 62 (Illustration) (Indian).
Dr. R.K. Bangia, The Indian Contract Act, (12 th Edition, 2005), Allahabad Law Agency, Haryana.
Salima Jabeen v. National Insurance Co. Ltd., A.I.R. 1999 J. & K. 110.
Bangia, supra note 9, at 264.

Del HC | When does ‘Novation’ under the Contract Act takes place? Read while HC examines the scope of S. 8 of Arbitration Act

Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement. Factual Matrix The

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Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement.

Factual Matrix

The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.

Plaintiff sought for the recovery of Rs 2,58,24,648 being refund of the available interest-free refundable security deposit. A decree of mandatory injunction was also sought to handover the movable of the plaintiff which has been stated to be illegally detained by the defendant.

Facts leading to the present matter

Vide a Lease Deed, the defendant leased to the plaintiff the office premises in Dehradun with 22 parking slots for 9 years. Simultaneously a maintenance agreement was also executed between the parties which was co-terminus with the lease deed for payment of fit out and maintenance charges for the said premises.

As per the deed, there was a lock-in period from 01-01-2017 to 31-12-2022.

Fresh Agreement

Further, as per the plaintiff, a fresh agreement was arrived at between the parties in respect of use and occupation of the said premises and maintenance.

Hence plaintiff’s case was that the Lease Deed and Maintenance Agreement stood substituted/novated on account of the said Fresh Agreement.

Later, plaintiff initiated negotiations with the defendant for a reduction of rentals and maintenance, however, the defendant did not budge. In fact, the defendant illegally disconnected the electricity connection of the rented premises as a means to coerce the plaintiff to make payments.

Termination of Fresh Agreement

In March 2020 the plaintiff sent out a legal notice to the defendant terminating the Fresh Agreement. The said legal notice also sought a grant of access to the authorised representative of the plaintiff to remove the movable and the server. Hence, the present suit was filed.

Analysis, Law and Decision

Bench noted that in the original lease deed and the maintenance agreement, the parties agreed to settle their disputes through arbitration.

Counsel for the plaintiff pointed out that the plaintiff and the defendant at the time of execution of the Lease Deed and the Maintenance Agreement were family-held companies. The family exited from the plaintiff company sometimes in September 2018 and new management took over charge of the plaintiff company. It was strongly urged that there was a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21-02-2017 stood superseded and novated in view of the terms and conditions settled upon in the emails dated 26.09.2018 and 15.10.2018. In the novated contract, there was no arbitration agreement and hence, the present application is misplaced

Novation of Contract

Court observed that the correspondence exchanged between the parties on the basis of which it was pleaded by the plaintiff that there was a novation of a contract.

Now the question was, whether it could be said that on account of the exchange of the above-stated communication, the parties rescinded the old agreement being the registered Lease Deed and the Maintenance Agreement of the same and completely novated the contract.

In the above context, reference was made to Section 62 of the Contract Act:

“62. Effect of novation, rescission, and alteration of contract — If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”

Supreme Court’s decision in Lata Construction v. Dr Rameshchandra Ramnikalal Shah , (2000) 1 SCC 586 was also cited.

A Novation takes place only when there is a complete substitution of a new contract in place of the old.

Bench further examined the scope of Section 8 of the Arbitration Act and referred to the Supreme Court decision in Vidya Drolia v. Durga Trading Corpn., (2019) 20 SCC 406

Bench noted that for rejection of a Section 8 application, a party has to make out a prima facie case of non-existence of valid arbitration agreement, by summarily portraying a strong case. Court should refer the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.

High Court opined that in light of the facts and circumstances of the present case prima facie it could not be said that there was a completely new contract and the old registered lease deed read with Maintenance Agreement were novated and substituted by a completely new contract.

Defendant’s email did not specifically state that all the terms and conditions stood superseded or novated.

Hence, Court found that the present issue required deeper consideration and would be best left to the arbitral tribunal to adjudicate upon.

Court appointed Justice G.S. Sistani as the Sole Arbitrator to adjudicate the dispute between the parties. [Knowledge Podium Systems (P) Ltd. v. S.M. Professional Services (P) Ltd., 2021 SCC OnLine Del 136 , decided on 25-01-2021]

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Submission Guidelines

Impact of Assignment and Novation on Arbitration Agreements

[ Kunal Kumar is 4th Year B.A., LL.B. student at National Law University, Jodhpur]

Introduction

In light of the judgment delivered by the Supreme Court in BALCO , Part I of the Indian Arbitration and Conciliation Act, 1996 (the “Act”) has no applicability to foreign-seated arbitration (except in case of agreements concluded prior to the judgment), and the parties shall be referred to arbitration under section 45. The only bar to refer parties to foreign-seated arbitrations are those which are specified in section 45 of the Act, [1] which makes it clear that if there is prima facie evidence of a valid arbitration agreement, the dispute should be referred to arbitration.

In World Sport Group , the Supreme Court held that a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44 shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Determining the validity of the agreement: does the assignment or novation of the agreement make it invalid?

If the agreement entered between the parties does not suffer from any lacuna, there is no fraud or misrepresentation which could have led the agreement to be null and void, and consent given by the appellant therein is qualified consent, the arbitration agreement will be a valid agreement and the parties shall have to be referred to arbitration. The Delhi High Court held in Mcdonalds that if the arbitration agreement is affected by some invalidity since its inception, such as lack of consent due to misrepresentation, duress, fraud or undue influence, then it is said to fall within the meaning of the expression ‘null and void’ under section 45.

The word “inoperative” can be said to cover those cases where the arbitration agreement has ceased to have effect, such as revocation or when an arbitral award has already been passed. The words “incapable of being performed” applies to those cases where the arbitration cannot be effectively set into motion. [2]

Assignment & Novation : Assignment of an arbitration agreement by substituting a third party is a valid procedure. It was observed in Kotak Mahindra Prime Ltd. v. Sanjeev that the assignability depends on the subject matter of the arbitration agreement and the assignment is regulated under the law of assignment of contractual rights and obligations.

But, under section 62 of the Indian Contract Act, 1872 ,when the main agreement is novated, rescinded or altered, it loses its validity and hence the arbitration agreement becomes void. The principle is that if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it.

However, courts have relied on the doctrine of severability to refer the dispute to arbitration. As held in Delhi Metro case, an arbitration agreement when assigned to a substituted third party will not novate the agreement and the obligations will flow from the main agreement which would have to be observed.

Severability of the arbitration agreement from the main contract

It is a well accepted jurisprudence that the arbitration agreement can be severed from the main agreement subsequent to its termination. [3] As severability tends to insulate the arbitration clause, it ensures that the arbitration shall be given effect provided severability of the arbitration clause is possible.

It was observed by the Supreme Court in Today Homes and Infrastructure Pvt. Ltd. , the arbitration agreement being a separate agreement does not stand vitiated if the main contract is terminated, frustrated or is voidable at the option of one party. The contrary opinion that the parties should not be referred to arbitration as all rights and liabilities flowing from the agreement get extinguished with termination of the main agreement, and nothing is left for the tribunal to decide, is not sustainable.

Article 6(4) of the ICC Rules of Arbitration permits the arbitral tribunal to continue to exercise jurisdiction and adjudicate the claims even if the main contract is alleged to be null and void or non-existent because the arbitration clause is an independent and distinct agreement.

The crucial test, as laid down in the case of Enercon (India) Limited , places reliance on the intention of the parties to arbitrate. If parties have agreed to resolve all their disputes by arbitration, they cannot at a later stage avoid such an arbitration agreement. In Chatterjee Petroleum Company & Ors . , it was observed that once the parties have agreed for arbitration, the Court should give effect to the arbitration agreement and litigation should not be resorted to.

Thus, in a foreign-seated arbitration, under section 45 of Act the courts shall have to refer the dispute to arbitration unless the arbitration agreement has become null and void , inoperative or incapable of being performed. As discussed above, an assignment and novation of the main agreement shall not be treated as a bar to refer the dispute to arbitration. Even if the main agreement gets terminated because of novation, the arbitration agreement can be severed from the main agreement to give effect to the intention of the parties.

Party autonomy is a foundation stone in the success of building the whole process of arbitration. Intervention by the national courts, if excessive or too intrusive, will defeat the whole arbitration process, destroying its sanctity and benefits; and in the long term may lead to crumbling of the institution of arbitration.

– Kunal Kumar

[1] Shin-Etsu Chemical Co. v Aksh Optifibre , (2005) 7 SCC 234.

[2] Albert Jan Van Den Berg, The New York Convention, 1958: An Overview at p. 11.

[3] Mulheim Pipe coatings GmbH v. Welspun Fintrade Ltd. and Anr. (Bom HC, 2013).

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...respondent No. 1 to process the application of the petitioner for assignment and novation of the contract of respondent No. 2 in favour of the petitioner. The ess...representations for novation of the contract but respondent No. 1 has not novated the contract so far. Hence, the present writ petition. Supporting his claim, counsel for the...27.10.2020. Hence, it is obvious that process of assignment of the contract by respondent No. 2 in favour of the petitioner was completed much before the date of making of the application for seeking...

...clients of ICICI Bank in favour of the assignee”. That, the assignment of a debt can never carry with it the assignment of the obligations of the assignor. Unless there is a novation of the contract by all...the borrower(s), an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all parties. Ther...the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. That, rights under a contract are always assignable unless the ...

...been only an assignment of the portion of on-share contract by Tellabs, Denmark to the assessee and there has been no novation of the portion of the on-shore contract between Tellabs, Den...:"31. We have perused the terms of the assignment of portion of onshore contract by Tellabs Denmark to the Assessee and the terms subject to which such assignment w...Tellabs Denmark. Section 62 in The Indian Contract Act, 1872 lays down the effect of novation , rescission, and alteration of contract . It lays down that if the parties t...

...deemed to be breach of entire contract . (b) Tellabs has only sub-contracted the offshore contract to the Assessee. (c) There was no novation of the contract between P...the on-shore contract shall not amount to novation of the contract in favour of Assignee. (d) Tellabs Denmark continues to be liable despite assignment . The TPO has again made a ref.... Performance guarantee was also given by the assessee to PGCIL.29. It is the plea of the learned counsel for the Assessee that the effect of all the above was that the assignment of onshore ...

...assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of ...liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between...simple terms. An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of...

....2, which has held that if a contract is assignable, an arbitration clause will follow the assignment of the contract . The learned counsel Mr.Mo...end. It is also submitted that in the wake of the Assignment - cum- Novation Agreement, there is no subsisting contract between the applicant and the respondent and ...only deals with the invoiceable work and the BTA or the Assignment -cum- Novation Agreement do not foreclose the issue of assignment ...

...respondent in his plaint inter alia raised a plea of novation of contract . Such a plea was advanced on the premise that a substantial amount was to be expended for eviction of the tenants who were...jurisdiction.23. The issues raised before the appellate court viz. whether there had been a novation of contract or whether the plaintiff was ready and...conclusion that there had been no novation of contract , he was ready and willing to deposit the entire amount. No conditional offer was permissible in a suit for specific performance of contract ...

...be transferred by assignment or novation of the contract . However, to be operative the assignment must also amount to a novation of the contract and requires consent ...assignor and the assignee. Therefore, to be operative and binding the assignment / novation of contract must fulfil two conditions, viz. (i) that a new debtor has consented to assume the liability ...certain pre-requisites to consider the proposal of transfer and assignment of loan which are not proved nor claimed to have been complied with. Therefore, for want of consent of the plaintiff Bank...

...there a novation of contract as alleged in para. (6), cl. (e) of the written statement of defendants 2 and 3 ? (2) Did defendants 2 and 3 take possession of the suit lands as a result of such novation ...between them and respondent 1 on 30th May 1924, that the sale contract should be cancelled, and that they should remain in possession of the lands until repayment of the sum of Rs.16,100 already paid by...of contract ? There was thus no suggestion of anything but a contractual charge in the pleadings or at the trial, and by his judgment dated 27th September 1937, the learned District...

...contains the principle of “ novation ” of contract .10. One of the essential requirements of “ novation ”, as contemplated by Section 62, is that there should be complete...entirety by the new agreement.9. We may, at this stage, refer to the provisions of Section 62 of the Indian Contract Act which provides as under:“62. If...the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”This provision...

...commentary on the Transfer of Property Act (11th Edn., p. 1028) dealt with the issue of “ Assignment of Contracts” and explained its meaning and further explained as to what can be assigned by the ...agreement in favour of the defendant. The defendant stepped into the shoes of NACC US and , in fact and law, the assignment agreement is one between the plaintiff and the defendant. A reference to the...only be an assignment of rights arising under a contract but not the “burden of a contract ”. ILR (1906) 33 Cal 702 at p. 707 In Tolhurst v. Associated Portland Cement...

...varied and the variation is sufficient to absolve the debtor from the performance of the original contract . It was held that the creditor cannot fall back on the original contract and cannot sue thereon. This decision is ...assigned except with the consent of the promisee and when such consent is given it is really a novation resulting in substitution of liabilities. But rights tender a contract are assignable unless the... contract is personal in its nature or the rights are incapable of assignment either under the law or under the agreement between the parties. The assets and liabilities of the firm were transferred to the...

...contention that what was sought to be discharged is only a charge. Therefore, such letters or arrangements during the arbitral proceedings con not be considered as novation of contract or total assignment ...Arbitrator. The Learned Arbitrator though factually found that there is no novation of contract or assignment while holding so applied Section 130 of the Transfer of Property Act which relates to ...understanding which has been agreed by the claimant themselves, there is substitution of new contract , same operate as novation of contract which has not Page 5 / 18 / O.P.No.183 of 2017 and A.No.1404 of...

...:- ""7.2 I have carefully considered the rival submissions and the facts of the case. The appellant has termed the two Deed of Assignment as " contract of .... In your precise Grounds of Appeal, you have termed the two Deed of Assignment as 23 " Contract of Novation ", as...forms and frills. 6. The CIT(A)-3, Mumbai failed to appreciate when there is a perfect understanding between the contracting parties to the contract of novation , the...

...Section 62 of Indian Contract Acts, there has to be substitution of one contract by the other. The power of attorney cannot by any stretch of imagination be said to be .... The contention is that by virtue of said power of attorney, there was novation of contract between respondent Nos. 4 and 1 and, therefore, the applicant is absolved from his liability under the two Bank... contract was substituted and that there was novation . The contention that by virtue of power of attorney, there was transfer of interest and that the applicant ceased to be liable is also stoutly...

...the fifth respondent in favour of the fourth respondent." The assignment of a debt can never carry with it the assignment of the obligations of the assignor, and unless there is a ...Section 130 of the Transfer of Property Act, 1882. Therefore, such an assignment cannot be legally sustained without novation of original contract executed by the fifth respondent and ...borrower(s), an assignment of a debt can never carry with it the assignment of the obligations of the assignor unless there is a novation of the contract by all parties. Therefor...

...obligations under the financial instruments "as if the said financial instruments were executed by the fifth respondent in favour of the fourth respondent." The assignment of a debt can never carry with it the ...legally sustained without novation of original contract executed by the fifth respondent and guarantors of the financial assistance granted by the third respondent. Such assignment cannot be under...were executed by the clients of ICICI Bank in favour of the assignee", i.e., Kotak Mahindra Bank Ltd. According to the borrower(s), an assignment of a debt can never carry with it the assignment of the obligat...

.... 11. In reply, Counsel for Respondent has vehemently argued that contract of loan between the parties had become insignificant after the execution of assignment of agreem... contract and had created a fresh relationship between the parties...discharging the old loan of the Appellant given to the Corporate Debtor. It is also submitted that result of the said assignment is evident from the 17th Annual Report of the year 2016-17...

...) 2 SCC 672 : (AIR 2008 SC 1343). The general rule is that, though a party may assign the benefits and obligations of a contract to...an assignee, he will not be relieved of his obligations towards the other contracting party unless it is also a party to the assignment , in which event there is an assignment coupled with novation ..., (a new contract between the assignee and the other contracting party), (Shrikant) (AIR 2006 SC 918).24. One of the...

...has vehemently argued that contract of loan between the parties had become insignificant after the execution of assignment of agreement on 29.03.2017 and as a matter of fact the loan was ... contract and had created a fresh relationship between the parties discharging the old loan of the Appellant given to the Corporate...Debtor. It is also submitted that result of the said assignment is evident from the 17th Annual Report of the year 2016-17 in which the non-current portion of the long-term borrowings...

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Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on February 01, 2023

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.

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.

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:

The purchaser accepts complete liability
The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
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.

If you need help determining if assignment vs. novation is best for you, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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What Is Novation?

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Novation: Definition in Contract Law, Types, Uses, and Example

Investopedia / Julie Bang

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

To novate is to replace an old obligation with a new one.
In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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Contracts: The Critical Difference Between Assignment and Novation

Contributor.

Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .” This concept is used in both contract and property law. The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise. For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C. That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C. In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law. First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee . That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C. Second, rights cannot be assigned when they materially change the obligor ’s duty and rights. Third, the obligor can sue the assignee directly if the assignee does not pay him/her. Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

(2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor. It can only be delegated if the promised performance is more commonplace. Further, an obligee can sue if the assignee does not perform. However, the delegee is secondarily liable unless there has been an express release of the delegee. That is, if B does want C to teach guitar but C refuses to, then B can sue C. If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor. If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .

Property Law

Under property law, assignment typically arises in landlord-tenant situations. For example, A might be renting from landlord B but wants to another party (C) to take over the property. In this scenario, A might be able to choose between assigning and subleasing the property to C. If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term. Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not.

[Last updated in May of 2020 by the Wex Definitions Team ]

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Assignment and Novation: Spot the Difference 12 November 2020

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EPC Contract
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Transfer of rights

The English Technology and Construction Court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an EPC contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits.

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

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Rebecca Williams

Partner London

Mark McAllister-Jones

Counsel London

"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

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What is the Difference Between an Assignment and a Novation in the UK?

By Edward Carruthers

Updated on 21 November 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

What is an Assignment?

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them.

What is an Assignment?

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract.

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to and find a replacement. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a novation.

As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits.

But there are other differences between the two that business owners must be aware of.

1. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for damages.

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. In addition, as the other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by every party to that original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract, and you can take action against your business partner for breach of contract.

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration.

If you need help transferring your rights, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party.

A novation transfers both a business owner’s rights and obligations under a contract to a third party.

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Novation of contract : what you need to know
Novation is covered under Section 62 of the Indian Contract Act, 1872. It is a convenient and simplified process that allows contracting parties to modify the terms of the original agreement and replace the old contract with a new one. Novation also allows the parties the option of keeping the terms of the contract the same while changing the ...
Novation, Rescission, Alteration under the Indian Contract Act
The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all ...
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Assignment. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
PDF Assignment of Rights and Its Practical Relevance in Financial
The common law did give effect to three kinds of transactions, viz. novation, acknowledgement and power of attorney, which to some extent did the work of assignment.1 As per the Indian contract law, any type of contract may be assigned as long as there is consent involved in the assignment. It needs
Novation, Rescission, Alteration under the Indian Contract Act
The term 'novation' literally means to replace with a new contract and the same obligations are performed by different parties. Under novation, the liabilities under the existing contract are extinguished. The doctrine of novations is acknowledged under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation ...
Assignment of Contract
The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the 'promisee' is necessary for ...
Novations in India
The answer, put succinctly is that Indian law recognizes the concept of a "novation" and especially in aircraft transactions, a valid novation of an agreement, which satisfies all the other tests of the Indian Contract Act, 1872 to be a valid contact (offer, acceptance of offer, consideration and competency to contract, etc.) would be ...
India
Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of ...
Novation As a Means To Discharge Under Indian Contract Act
An agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (I.C.A.), the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the I.C.A., 1872 as "every promise and every set of promises ...
Del HC
Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement. Factual Matrix. The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.
Contracts: The critical difference between Assignment and Novation
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby ...
Impact of Assignment and Novation on Arbitration Agreements
Assignment & Novation: Assignment of an arbitration agreement by substituting a third party is a valid procedure. It was observed in Kotak Mahindra Prime Ltd. v. Sanjeev that the assignability depends on the subject matter of the arbitration agreement and the assignment is regulated under the law of assignment of contractual rights and ...
Assignment or Novation: Key Differences and Legal Implications
Assignment. Transfer of rights or obligations. Transfers both the benefit and the burden of a contract to a third party. Transfers only the benefit of a contract, not the burden. Consent Required. Novation requires the consent of all parties (original parties and incoming party).
Assignment and Novation: Are They the Same?
As part of that process, the terms "Assignment" and "Novation" are often used interchangeably. But they are not the same thing, each method is distinct. each of them has unique features that needs to be strictly considered when deciding which is the preferred option. This article explains the critical differences between the two.
Assignment, novation and construction contracts
Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the ...
assignment+and+novation+of+contract
In the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd. reported in (1963) 3 S.C.R. 183 the Supreme Court has held that the law on the subject of assignment of a contract is well settled. An assignment of a contract might result by transfer either of the rights or by transfer of obligations thereunder.
Assignment vs Novation: Everything You Need to Know
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.
Novation: Definition in Contract Law, Types, Uses, and Example
Novation is the act of replacing one party in a contract with another, or of replacing one debt or obligation with another. It extinguishes (cancels) the original contract and replaces it with ...
Assignment and novation
Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the ...
Contracts: The Critical Difference Between Assignment and Novation
Assignment and novation in the Construction Industry. Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party.
assignment
assignment. Assignment is a legal term whereby an individual, the "assignor," transfers rights, property, or other benefits to another known as the " assignee .". This concept is used in both contract and property law. The term can refer to either the act of transfer or the rights /property/benefits being transferred.
Assignment and Novation: Spot the Difference
Novation. Whereas assignment only transfers a party's rights under a contract, novation transfers both a party's rights and its obligations. Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the ...
Differences Between Assignment and Novation
As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits. But there are other differences between the two that business owners must be aware of. 1.
Novation of Contract Explained
The novation of contract process typically occurs during business mergers, lease agreements, transactions in financial markets, and real estate deals. Novation can be streamlined by incorporating modern solutions like contract management software. How novation in contract law works. Novation of contract breathes new life into two-party contracting.

Novation, Rescission, Alteration under the Indian Contract Act

Introduction

What is novation of Contract?

Essentials of Section 62 of the Indian Contract Act

Kinds of Novation of Contract

Change in terms of the contract

Change in the parties to the contract

Difference between novation and assignment

Novation of contract in an illegal agreement

When is it ‘No Novation’?

A unilateral act of one party

Intention of parties

Rescission of Contract

Difference between Rescission and Novation

Difference between Novation and Alteration

Contents of novation agreement

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Assignment vs Novation: Everything You Need to Know

What Is Novation?

The Bottom Line

Novation: Definition in Contract Law, Types, Uses, and Example

Key Takeaways

Types of Novations

Novation Uses

Financial Markets

Real Estate

Government Contracting

Example of Novation

What Is a Novation?

What Is The Meaning of Novation Agreement?

Is Novation a New Contract?

Contracts: The Critical Difference Between Assignment and Novation

Introduction

Assignment and novation in the Construction Industry

Corporate/Commercial Law

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Contract Law

Property Law

Assignment and Novation: Spot the Difference 12 November 2020

The English Technology and Construction Court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an EPC contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits.

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Rebecca Williams

Mark McAllister-Jones

Related insights

What is the Difference Between an Assignment and a Novation in the UK?

What is a Novation?

What is an Assignment?

1. Novations Require the Consent of All Parties

2. Novations Require Consideration

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