Docklands Solicitor

Latest legal news from Docklands Solicitors, Kaslers Solicitors LLP.

Friday 3 June 2011

Assignment vs. Novation

When a party assigns its rights under a contract (“the assignor”) to a third party, he may do so without the consent of the other parties of the contract. However, the assignor will always remain liable under the original contract. This is another way of saying that with assignments of rights, the obligation under the contract remains with the assignor. For example, if Party A contracts with Party B to sell Party A's car to Party B for £10, Party A can later assign the benefits of the contract - i.e., the right to be paid £10 - to Party C. In such circumstances, C cannot sue B for breach of the terms of the contract between A and B and similarly B cannot sue C if the car turns out to be defective.

Unlike assignment, novation replaces the original party with a new party and therefore for a valid novation (a) all parties must assent to novation, (b) there must be previously valid contract, (c) the duties provided for in the contract be extinguished immediately, and (d) a new, enforceable contract need be created.

Not many businessmen appreciate the legal distinction between assignment and novation but it proved fatal in a recent case.

Mr Hall who operated through a limited company entered into an agency agreement with Mr Barnett who was trading as a partnership. Three years later, Mr Barnett for tax reasons, incorporated a company and continued its business through the newly formed company.

Mr Barnett then sent formal notices to all his clients and asked his clients to pay cheques out the company and he also changed the relevant stationary accordingly to show the proper name of the company. Mr Hall continued to pay Mr Barnett’s invoices under the agency agreement to the newly formed company of Mr Barnett.

Two years later Mr Hall found out that Mr Barnett was promoting his own products and sent a notice to Mr Barnett for breach of the agency agreement and gave him three months notice of termination. Mr Barnett then started a claim against Mr Hall for damages for compensation under the agency agreement in the sum of £190,000. The claimant in this case was Mr Barnett’s company.

In the hearing the judge agreed with Mr Hall that Mr Barnett has no standing to bring a claim, as Mr Barnett’s company was never the beneficiary under the Agency Agreement. The judge ruled although the benefit of Mr Barnett’s partnership was assigned to Mr Barnett’s company, the liability under the agency agreement still remained with Mr Barnett’s partnership.

In respect of the agency agreement, Mr Barnett should have substituted his partnership with his company by means of a novation agreement between three legal entities, Mr Barnett’s partnership, Mr Barnett’s company and Mr Hall’s company. Mr Hall’s consent would have been necessary for any novation agreement.

Labels: Assignment of Rights, Benefit under a Contract, Novation Agreement, Obligation under a Contract