Ways your business can tackle or mitigate the COVID19 impact: Deed of Assignment or Deed of Novation?
The “privity of contract” in Law means that only parties to a contract are obligated to fulfill the contract and have the right to enforce it. However, the concepts of novation and assignment have been developed to sidestep ‘’privity of contract’’. Assignment and novation are two legal concepts of contract law that are often confused.
They affect changes in contractual obligations and rights of parties and are utilized to achieve different objectives. Their use may be critical for businesses or individuals seeking to combat or mitigate the economic impacts of the COVID19.
Deed of Assignment
With a deed of assignment, the performance of your contractual obligations remain but some rights are given to a third party, however, liability remains with the original contracting party. It is advised to always ensure that there are terms in the original contract permitted for assignments to be undertaken. If you attempt to assign rights that cannot be assigned, you risk nullifying the original contract.
Example: Party A would like to continue performance of contractual obligations with a client but Party A also wants to increase its subsidiary’s cash flow. Party A enters into an assignment with the client, to assign/transfer client’s obligation of payment from Party A to the subsidiary.
Example: A company wishes to transfer a commercial property lease to another business tenant during the fixed term, in order to accommodate the COVID19 impact on its cash flow. An agreement can be made to assign the lease obligation to another company.
Deed of Novation
Deed of novation allows the transfer of both rights and obligations to a third party. It is a way of substituting one party to a valid contract with another party. If a company or individual wishes to get out of an agreement due to the impact of COVID19, they are able to find a new party to take it on. One of the original parties is released from all liability and the new party assumes all responsibility for the contract performance. It must be noted that the original contracting party, which remains as a contracting party after the novation, must be left in the same position as they were prior to the novation being made. All three parties must consent to a deed of novation.
Example: If a holding company novates its rights to its subsidiary, and the subsidiary then subsequently acquires the obligation to perform services and the right to receive payment for those services. The holding company would no longer have an agreement with the client as the subsidiary would obtain the rights and obligations.
Example: A construction company transfers a construction contract to a new substitute contractor, as the construction company is not able to finish the project due to COVID19 impact. A deed of novation can transfer the right to finish the project to the substitute contractor.
Example: An individual/company enters into a loan agreement with a Lender, however, due to the COVID19 impact, the individual/company can no longer pay the monthly loan installments to the Lender. The company can transfer this debt to another individual/company, which becomes liable to repay the Lender.
Example: An IT Company provides a service to a company and the IT company wants to transfer the obligation of providing that service to another affiliate company that can provide the service. Novation can change who is providing the service.
Things to consider for Novation:
- Does the original agreement or contract allow for novation?
- All three parties need to consent to the novation.
- Will the novation have any impact on other agreements?
- When should the novation be effective?
Panayiotis Z. Toulouras LLC deals with a broad range of services in relation to corporate and commercial law, our specialist team is here to guide and provide further information on various ways you or your company can tackle or mitigate the impact of COVID-19:
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