Assignment Deeds And Novation Deeds: What’s The Difference?

Changing who performs a contract or who receives its benefits is common in business. You might be selling part of your business, restructuring, or handing a contract to a related company. When that happens, two legal tools usually come up in Australia: an Assignment Deed and a Novation Deed.

They sound similar, but they work very differently - and choosing the wrong one can create unwanted liabilities, disputes or even a contract that doesn’t do what you thought it did.

In this guide, we’ll break down the practical difference between assignment and novation in plain English, explain when each is used, and share simple steps to help you pick the right approach for your situation.

What Is An Assignment (And When Would You Use It)?

Assignment is when one party (the assignor) transfers its rights (benefits) under a contract to another party (the assignee). Think of it as handing over what you’re entitled to receive, not what you’re required to do.

For example, a business might assign the right to receive payment invoices from a customer to another company (often within the same group). In many cases, obligations under the contract - the things you’re required to perform - stay with the original party unless the other contracting party agrees otherwise.

Key points about assignment:

• It transfers rights, not obligations. You typically cannot assign your contractual duties without the other party’s agreement.
• Consent is often required. Many contracts include a “no assignment” clause, or require written consent before assignment can occur.
• The original contract stays in place. Assignment doesn’t create a new agreement with the other party - it moves benefits to the assignee, while the assignor often remains on the hook for obligations.

Common use cases in Australia include assigning receivables, passing benefits of warranties, or transferring customer contracts in the context of an asset sale where the buyer will later look to formalise a broader transfer. If you need a deeper primer, our guide to the assignment of contracts covers this concept in more detail.

Assignment is usually documented by a short form Deed of Assignment. A deed is preferred because it can be used even if no money changes hands and it can strengthen enforceability. If you’re ready to prepare one, you can use a tailored Deed of Assignment for your situation.

What Is A Novation (And When Would You Use It)?

Novation is a complete substitution of one contracting party for another. All rights and obligations are transferred, and the original party is released. It’s as if the new party was always there from the start - but critically, this only happens if all parties (including the other side to the contract) agree.

In a novation:

• Both rights and obligations move to the new party. The incoming party steps into the shoes of the outgoing party for the remaining life of the contract.
• All parties must consent. Because the other party is now dealing with someone new in a legally binding way, their agreement is essential.
• The original party is released. Once novation takes effect, the outgoing party is generally no longer liable for future performance (subject to the terms you agree).

Novation is common when you sell a business or a book of contracts and want the buyer to take over delivery obligations, warranties and liabilities going forward. It’s also used in corporate restructures to move supplier or customer contracts into the correct entity.

Novation should be documented in a formal deed. A Deed of Novation will set out the release of the outgoing party, the effective date, and any conditions precedent (like paying a completion amount). This document ensures everyone is on the same page and the risk properly moves across.

Assignment Vs Novation: The Key Differences

Here’s how the two concepts compare at a practical level:

• What moves: Assignment transfers rights; novation transfers rights and obligations.
• Consent required: Assignment often needs consent if the contract says so; novation always needs consent from all parties.
• Who performs the contract: After assignment, the original party usually keeps performing; after novation, the new party performs.
• Liability going forward: After assignment, the original party remains liable for obligations; after novation, the outgoing party is released (subject to the deed).
• Effect on the contract: Assignment leaves the original contract in place; novation replaces it with a new contract involving the incoming party.
• When to use: Assignment is ideal when you only need to transfer benefits (like receivables); novation is ideal when you need a full “hand-over” of the contract.

If you’re unsure whether a deed format is necessary for your situation, it helps to understand how deeds operate in Australian law and why businesses often prefer them for important transfers. Our overview of what is a deed in Australian law explains the basics.

Which One Do You Need? A Practical Checklist

Use this step-by-step approach to decide whether an assignment deed or a novation deed is right for you.

1) Identify What You Want To Transfer

• Only the benefits (e.g. the right to get paid)? Assignment is likely appropriate.
• Both benefits and duties (e.g. delivery, warranties, support)? You’re looking at novation.

2) Check Your Contract

• Consent clauses: Many contracts restrict assignment and will require consent, notice or specific wording. A “no assignment” clause won’t usually block novation, but you still need all-party agreement to novate.
• Change-of-control clauses: If you’re selling shares rather than assets, a change-of-control provision might trigger consent requirements even without an assignment or novation. If you’re weighing structures for a transaction, our guide on share sale vs asset sale sets out the key differences.
• Anti-novation provisions: Some agreements specify that any change in the performing party needs consent or is prohibited.

3) Consider the Other Party’s Preferences

Even if assignment is legally allowed, the other party may prefer novation if the performer is changing. Why? Because they want certainty about who is actually doing the work and who is responsible if something goes wrong.

On the flipside, if you’re only moving receivables internally, the counterparty might be comfortable with assignment (especially if you continue delivering the service).

4) Map Out Timing And Dependencies

• For assignments: Do you need to give notice or obtain prior written consent? Will the counterparty pay the assignee from a future date?
• For novations: Do you need novations for multiple contracts to complete a transaction? Consider a condition precedent so the deal only completes once all required novations are signed.

5) Choose The Right Document

• Assignment Deed: Use when you’re transferring rights only and want a clear, binding instrument. A prepared Deed of Assignment is usually the right fit.
• Novation Deed: Use when the incoming party will fully replace the outgoing party for both rights and obligations. A Deed of Novation captures consent, release and the new relationship.
• Alternative: If neither is quite right and you’re only tweaking a contract (not changing the party), a Deed of Variation can amend terms without changing who’s on the contract.

Common Pitfalls, Consents And Drafting Tips

Getting the transfer mechanism wrong can create real risk. Here are the traps we see most often - and what to do instead.

“Assigning” Obligations (When You Actually Need Novation)

A frequent mistake is trying to “assign” the obligation to perform a service or warranty. In Australian contract law, you generally can’t assign obligations to a third party without the other party’s agreement. If obligations need to move, you need a novation. Attempting to shoehorn obligations into an assignment deed may render the transfer ineffective and leave the original party liable.

Missing Consent Or Ignoring a “No Assignment” Clause

Many commercial contracts prohibit assignment without consent. Proceeding anyway can be a breach and give the counterparty rights to terminate. Always check the contract for assignment or novation restrictions and plan your timeline to obtain consent.

Unclear Effective Dates And Accrued Liabilities

Be precise about what happens before and after the effective date. Who collects amounts accrued before the transfer? Who handles defects or claims that arise after transfer but relate to earlier work? Your deed should clearly allocate these risks.

Failing To Release (Or Bind) The Right Parties

A proper novation deed should release the outgoing party from future performance and bind the incoming party to the contract’s remaining obligations. If the release wording is weak or missing, the original party may stay exposed. Likewise, make sure the incoming party expressly assumes the obligations so there’s no gap.

Not Assigning Related Security Or Warranties

If you’re assigning receivables or other rights, consider whether related securities, guarantees or warranties must be assigned as well. Your deed should capture the whole bundle of rights that make the benefit valuable.

Overlooking Chain Transfers And Counterparty Notices

In more complex deals (e.g. an asset sale with multiple customers), organise your assignments or novations as a package with clear notices to each counterparty. Keep a register of who has consented and the status of each transfer to avoid gaps at completion.

Using The Wrong Document Format

In practice, businesses document these transfers as deeds, not simple agreements. Deeds carry formalities and advantages in enforceability, particularly where no consideration is paid. If you want a refresher on the concept, see the overview of what is a deed and when to use one.

Forgetting About Downstream Contracts And Compliance

Assignment or novation is often one part of a bigger change, such as a restructure or sale. Review your other agreements for change-of-control provisions, exclusivity, non-compete or notice requirements. If you’re transferring customers as part of a business sale, also think about how those customer terms were formed and whether any terms could be challenged. A quick check against the factors in what makes a contract invalid can help you spot risks early.

Aligning With Your Deal Structure

Whether you use assignment or novation depends on the wider transaction structure. In an asset sale, you usually need to transfer contracts (by assignment or novation) to the buyer. In a share sale, the company stays the same party to its contracts, but be mindful of any consent or change-of-control clauses. If you’re weighing those pathways, this comparison of share sale vs asset sale is a useful high-level guide.

Drafting Tips To Keep Things Simple And Safe

• Use the right instrument: Choose a clear, tailored Deed of Assignment or Deed of Novation rather than trying to retrofit an old template.
• Be specific: Identify the underlying contract, effective date, and exactly what is being transferred. Attach the contract if possible.
• Secure consent early: If counterparty consent is required, build this into your timeline and make completion conditional on getting it.
• Deal with accrued rights/liabilities: Spell out who gets pre-transfer receivables and who is responsible for pre-transfer claims.
• Include warranties and indemnities where appropriate: For example, the assignor can warrant it has good title to the rights being assigned and that the contract is in force.
• Check related instruments: Transfer any guarantees, securities or collateral warranties needed to make the transfer effective.

Key Takeaways

• Use an assignment deed to transfer rights (benefits) only - the original party usually keeps its obligations unless the other party agrees otherwise.
• Use a novation deed to transfer both rights and obligations - all parties must consent and the outgoing party is generally released for the future.
• Always check your contract’s consent and anti-assignment clauses, and plan time to obtain written consent where required.
• Be clear about the effective date, accrued receivables, and who is responsible for pre- and post-transfer liabilities.
• Choose the right instrument for the job - a properly drafted Deed of Assignment, a Deed of Novation, or a Deed of Variation if you’re only changing terms.
• If your transfer sits within a larger restructure or sale, consider broader deal mechanics like change-of-control provisions and whether it’s a share sale vs asset sale.

If you’d like a consultation on choosing and drafting the right Assignment Deed or Novation Deed for your situation, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.