assignment vs novation ny law

Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

Table of Contents

• What is a Deed of Novation? 
• What is a Deed of Assignment? 

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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• 13 March 2018
• Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

There’s often, understandably, a bit of uncertainty about whether (and how) a party to a contract can “assign” (transfer) its rights, or pass on its obligations, under that contract, to another person.

In law, the general rule is that only the original parties to the contract can discharge or fulfil the obligations and enforce the rights created under it and nobody else gets a look in. This is called “privity of contract”.

Essentially, novation and assignment are both mechanisms to get around this restriction. However, while the end result is the same, there are some important differences between these two mechanisms.

Under an assignment, one party (the assignor) keeps performing their obligations under the contract, but transfers some or all rights to a third party (the assignee). The parties to the contract remain the same so privity of contract is preserved.

Assignments can be legal or equitable. In order for an assignment to be a legal assignment, the assignment must be agreed in writing, signed by the assignor, and the other party to the contract must be given notice of the assignment. A legal assignment is usually preferable as this allows the assignee to enforce the rights in their own name directly.

If the assignment is an equitable assignment because it does not fit the criteria for a legal assignment (for example, the other party was not given notice of it), the assignee will need to get the assignor to enforce the assigned rights on its behalf.

Contracts often require the consent of the other party before any assignment can take place. Some contracts expressly prohibit assignment. However, even where there is such wording in the contract, there is nothing stopping you from asking the party to consent to the assignment anyway, though you should take care to record any agreement in writing.

The main point to remember is that you cannot assign obligations under a contract to another party – you can only assign your benefits or rights. Even if the assignee agrees that they will take on the obligations under the contract, it is still the assignor who remains responsible for performance of the obligations and liable if they are not. In practice, what often happens is that the assignee does take over the performance of the contractual obligations but simply agrees to indemnify the assignor for any failures in performance.

It is also important to note that some rights may not be legally capable of assignment.

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When you novate a contract, the original contract effectively ceases to exist and is replaced with a new contract. The new contract contains exactly the same rights and obligations as the original contract, except that it substitutes one of the original parties (the outgoing party) with a third party (the incoming party).

As you are creating a new contract, technically you need to provide fresh consideration. Usually a simple novation agreement between all the parties will be enough, but, if there is any doubt, the parties may choose to execute the novation as a deed instead, which dispenses with the need for consideration.

The novation agreement (or deed) will specify what happens to the liabilities under the original contract. In a typical novation, the outgoing party would be released from all liabilities and the incoming party would inherit these. However, this is up to the parties to decide; they could even decide that the outgoing party will remain liable for all of the liabilities under the original contract.

Novating the contract will release the outgoing party from any future obligations which may arise. This is a crucial difference between novation and assignment.

Although the novation agreement itself can be simple, the process of getting all the parties to the table to agree and execute might be more complex. The main issue for an outgoing party will be persuading the other original party to sign. The other original party often has concerns about service continuity and may want certain assurances or information about the incoming third party.

Equally, the other original party is not obliged to agree: they can refuse to novate and then sue for breach if the party trying to exit the contract fails to meet its contractual obligations. As they still have this other option, in any novation scenario, the outgoing party is probably in a weaker bargaining position, and the other original party may well use this to their advantage.

About this article

• Subject Novation and Assignment: Sisters, Not Twins
• Author Stephen James
• Expertise Commercial Real Estate
• Published 13 March 2018

Disclaimer This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Assignment and Novation Agreement: What You Need to Know

Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another. 3 min read updated on February 01, 2023

Assignment and novation agreements transfer the benefits and rights of a contract from one person or legal entity to another.

Definition of Assignment

The transfer of a benefit or interest from one person or legal entity to another is referred to as assignment. The obligations or "burden," of a contract, however, are not something that can be transferred.

When viewed from a building contract perspective, an employer can assign their right to have construction work performed along with their right to pursue legal action against the sub-contractor, if they don't perform quality work. Their obligation to pay for the work being performed, however, cannot be transferred to another person or entity. Likewise, the contractor can assign their rights to receive payment for performance of the contract. However, they cannot assign their obligation to make sure the work is completed according to the terms of the contract or respond to any claims, such as those that pertain to defective work that has been performed.

Once assignment has taken place, the assignee becomes entitled to any benefits associated with the contract that are assigned to them. This means that they now have the right and ability to pursue legal action against other parties involved in the contract to enforce their rights under the contract's terms. The assignor is still obligated to the other involved parties and will continue to be held liable for performing their part of the agreement due to the fact that burdens and obligations cannot be assigned.

In normal practice, however, what happens is that the assignee will also take on the performance that the assignor is obligated to and the assignor will request to be indemnified in the event that the assignee breaches the contract or otherwise fails to perform. This is commonly known as an "assignment and novation agreement ". In scenarios such as this, the assignor will still be held liable for any liabilities that they may have incurred before assignment took place.

In construction contract scenarios, issues of assignment frequently arise when considering whether or not collateral warranties that have been granted to a party or parties that exist outside of the main contract may be eligible for assignment. Investors might require the developer to assign rights under the contract against contractors and design teams as a way of providing a measure of security. In addition, they may also require that benefits such as performance bonds or parent company guarantees are also assigned.

Assignment Provisions in Contracts

A lot of contracts either qualify or completely exclude assignment rights . The courts have also confirmed that clauses that prevent contractual parties from assigning benefits without permission from the other involved parties is considered to be legally effective and extends to all of the rights or benefits that may arise from the contract, including those pertaining to remedies. Some other frequently used qualifications pertaining to assignment rights include:

• Restricting assignments made without permission from other involved parties, even if said permission is unreasonably delayed or withheld
• Only one of the involved parties has the right to assign
• Only a specific set of rights can be assigned
• Only a certain number of assignments can be made
• Assignments can only be made to specific assignees who are named in the contract

In certain agreements, which include prohibitions pertaining to the assignment of rights and benefits, it can sometimes be possible to find the reservation of certain rights that allow for the creation of a trust or even to establish security over the contract's subject matter, rather than assigning the benefits or rights themselves.

Legal and Equitable Assignment

The Law of Property Act is what allows for the ability to legally assign debts or other chosen actions in which the following are notified in an official written document:

• The trustee
• Any other person considered relevant to the debt

If the assignment in question is in compliance with the formalities outlined in the Act, it is considered legal. If not, it is considered to be what is known as an "equitable assignment." Certain transfers can only be equitable assignments, such as:

• Oral assignments
• Assignments by way of charge
• Assignments of a portion of a chosen action
• Assignments in which proper notice has not been provided to the debtor
• Agreements to assign

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• Assignment of Contract Rights
• Assignment Law
• Assignment Legal Definition
• Assignment of Rights and Obligations Under a Contract
• Legal Assignment
• Assignment of Rights Example
• Assignment Contract Law
• Assignment Of Contracts
• Partial Assignment of Contract
• Consent to Assignment

Assignment and Assumption Agreement (Novation) (NY)

This assignment and assumption agreement template includes a novation agreement and may be used to transfer an agreement, governed by New York law, from one party to another. This template includes practical guidance, drafting notes, and alternate and optional clauses. This template addresses an assignor's transfer of rights and delegation of duties under a contract. Prior to using this template, counsel should confirm the transferability of the applicable agreement, as not all contracts are assignable. Sometimes anti-assignment clauses, legal concerns, and/or public policy issues, among other things, prevent assignment. A novation extinguishes an assignor's liability under an assigned agreement once it is executed by the assignor, the assignee, and the non-assigning party. A novation is the immediate substitution of a new contractual obligation for an existing one, with the intent of all of the affected parties to extinguish the latter. The assignee is deemed substituted for the assignor. A novation requires: (1) mutual assent, (2) immediate discharge of the old obligation, (3) consideration, and (4) the presence of a new party. See Kasper v Roberts, 464 N.Y.S.2d 642 (Civ. Ct. 1983). Without a novation, the assignor remains secondarily liable to the non-assigning party for the delegated obligations. See Worldcom, Inc. v. Prepay USA Telecom Corp., 741 N.Y.S.2d 532 (App. Div. 2002) and Mandel v. Fisher, 613 N.Y.S.2d 381 (App. Div. 1994). For more information, see Commercial Contract Assignment (NY) and Novation, Accord and Satisfaction, and Substituted Contracts. For a related template, see Novation Agreement (Short Form) (NY).

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Assignment and Assumption Agreement and Optional Novation (NY)

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Novation Agreement

Jump to section, what is a novation agreement.

A novation agreement is a legal contract that transfers contractual obligations of one party to a third party. It can also replace a contractual obligation with another one. Either way, the new obligation must be agreed upon by all parties involved. Generally, a transferee, transferor and counterparty, must agree to these changes.

Novation Explained

Novation is used in contract law and business law which defines the act of:

• Replacing an obligation with another obligation
• Adding an obligation to perform
• Replacing a party with another in an agreement.

There are three main ways to make a novation:

• Novation: A simple novation doesn’t involve entry of a third party. Instead, someone who owes debt enters in a new agreement with their lender. Basically, you substitute a new contract in place of the old one.
• Expromissio: Expromissio involves entry of a third party on to an agreement. This new party takes on obligations of the original party. Usually, a creditor accepts a new debtor in place of the original debtor.
• Delegation: In this case, the party to a contract transfers their responsibility to another party. For example, you hire a general contractor to perform work on your house. The general contract delegates their responsibilities to a subcontractor. The subcontractor now has a duty to you to complete the work.

Novation vs Assignment:

Novation in contract and business law is different from assignment .

Assignment is generally valid as long as the party is provided notice whereas a novation requires agreement of all parties. An assignment only passes along benefits. whereas a novation transfers both benefits and obligations. For instance, a sublease is an assignment. The landlord can still hold the primary renter responsible. In a novation, the primary party of the contract would also transfer all obligations and cannot be held accountable for the contract after novation is complete.

There are advantages and disadvantages to both a novation and an assignment. Assignment is often more convenient than a novation. Novation can protect sellers from future liabilities despite being a tedious process.

Want to learn more about novation? Here is an article on novation for you .

Purpose of a Novation Agreement

Novation is used when a third party enters an agreement to replace a departing party in a contract. Usually, a new party would assume obligations to pay another party that the original party had intended to pay. This releases the debt from one party to another. There would generally be three parties involved: a transferee, transferor and the counterparty. All parties must sign the agreement.

Cancelling a contract can be messy and expensive. In such cases, one might find novation to be a better option. Through novation one party can simply find a third party to complete an original agreement. A few examples where a novation can be used are leases, transferring debt, real estate transactions, business deals, and construction projects.

There are certain risks of a novation. If the counterparty is unsure that the new party will be able to adequately complete obligations set under the contract, the counterparty might face consequences in the future but will not be able to hold the primary party accountable after novation.

Still not sure about the purpose of novation? Here is an article for you .

Examples of Novation

A few examples of novation can help you understand the process better. For instance, consider this case. Person A owes Person B $100. Person B already owes Person C $100. In this case, Person A and Person B can simply transfer their debt obligations through a novation. If all parties agree, Person A can just pay Person C $100. Person B will receive and pay no amount.

Novation can also allow for modified payment terms if all parties agree. Take the case of Person A, B and C mentioned above. Person C might agree to accept Person A’s jewelry as payment which has a value of $100–the debt amount. This transfer of jewelry can still constitute as repayment and resolution of all debt between the three parties.

Novation in mergers and acquisitions is common. A classic example is when a company, X, enters into a contract with another Company, Y. A novation can be included to ensure that if company Y sells, merges or transfers their business or parts of their business to another company, the new company that merges with or acquires company Y or parts of it, will assume obligations and liabilities of company Y in the contract with Company X. In this contract, a purchaser, merging party or transferee of Company Y will step into the role of Company Y in respect to their contract with Company X.

Novation is also used in financial markets. A bilateral transaction done through a clearinghouse intermediary in the derivatives markets is called novation. Here, sellers transfer securities to the intermediary or the clearinghouse which then sells the securities to buyers. The clearinghouse assumes the obligations and counterparty risk in case of a party defaulting. The clearinghouse also becomes responsible for vetting buyers based on creditworthiness.

Here is an article with more examples of novation .

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Who Should Sign a Novation Agreement?

A novation must be signed by all parties involved–the transferee, transferor and counterparty. The transferor transfers the obligations to the transferee in an agreement with the counterparty. One might consider signing a novation agreement in the following scenarios:

• Unable to repay debt: If party A borrows money from party B, but is unable to repay the debt and has a third party, C, come in an offer to repay the debt, all parties can consider novation. Here party A would transfer all debt obligations to party C and walk away. Party B will receive the debt from Party C instead of Party A. In case of default, Party B will not be able to hold party A responsible.
• Takeover transactions: In business transactions or corporate takeover, novation can be used to replace parties as per new takeover roles.
• Sale of business: Novation during sale of a business is often used to replace or transfer business obligations between parties.
• Financial Markets: Novation allows derivatives market to use bilateral transactions through an intermediary.

If you are looking to draw up a novation agreement, here is an example of a novation agreement .

Get Help with a Novation Agreement

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Second Department Resolves Contract, Fiduciary Duty and Fraud Claims Involving Joint Ventures that Develop Real Property

• Posted on: Dec 6 2019

In Benjamin v. Yeroushalmi , 2019 N.Y. Slip Op. 08647 (2d Dept. Dec. 4, 2019) ( here ), the Appellate Division, Second Department considered an appeal involving an action to recover damages for breach of contract, breach of fiduciary duty and fraudulent inducement. The action involved the acquisition and development of real properly located in Mineola and Brooklyn, New York.

Beginning in 2007, the plaintiffs, Jim Benjamin (“Jim”), a real estate developer and investor, and his brother Behrouz Benyaminpour (“Bruce”), Jim’s brother and investment partner, entered into a joint venture agreement with the defendants, Moussa Yeroushalmi (“Moussa”) and his wife, Farzaneh Yeroushalmi (together, the “Yeroushalmi Defendants”), the purpose of which was to, among other things, purchase and develop properties in Mineola and Brooklyn, New York.

According to plaintiffs, in April 2007, the parties entered into a written joint venture agreement in connection with the acquisition and development of certain real properly located in Mineola, New York (the “Mineola Property”). The property was owned by the Metropolitan Transportation Authority (the “MTA”), which was selling the Mineola Property through a closed bid procedure. The MTA ultimately awarded the right to purchase the Mineola Property to the plaintiffs and the Yeroushalmi Defendants, with the parties agreeing to assign their rights to a third party. The difference between the purchase price of $12,222,000 and the assignment price of $13,500,000 was, according to plaintiffs, to be distributed as profits, with Jim to receive 30% of those profits. Plaintiffs alleged that the Yeroushalmi Defendants failed to distribute plaintiffs’ share of the profits pursuant to the Mineola Property joint venture agreement.

Plaintiffs further alleged that in April 2007, Moussa and Jim entered into a joint venture agreement for the purchase and development of certain real property located in Brooklyn, New York (the “Albemarle Property”). This transaction involved an entity owned by Moussa known as A1 Universal Construction Realty, LLC (“A1 Universal”), which entered into a contract of sale to purchase the Albemarle Property for $1,200,000. A1 Universal immediately flipped the purchase contract to a third party who agreed to purchase the Albemarle Property for $2,000,000. According to plaintiffs, they contributed $30,000 toward the down payment, and, pursuant to the joint venture agreement, the joint venture was entitled to 50% of any profits and the return of its closing costs upon a subsequent sale of the Albemerle Property. Plaintiffs claimed, inter alia , that Moussa failed to distribute the proceeds of a subsequent sale of the Albemerle Property.

In addition, Plaintiffs alleged that in July 2008, Moussa solicited them to invest funds in a beverage company called Hip Pop Beverages, LLC (“HPB”). According to Plaintiffs, Moussa made specific oral misrepresentations of material fact to induce them to invest $75,000 in HPB, which he allegedly knew to be false at the time he made them.

Plaintiffs commenced the action asserting, inter alia , a cause of action alleging breach of contract with regard to the Mineola Property joint venture agreement (first cause of action), a cause of action alleging fraud in the inducement with respect to the HPB transaction (fourth cause of action), a cause of action alleging fraud with regard to the sale of the Albemarle Property (fifth cause of action), a cause of action alleging conversion of Bruce’s membership interest in a limited liability company that owned an interest in the Albemarle Property (“Albemarle LLC”) (sixth cause of action), causes of action alleging breach of fiduciary duty (seventh and twelfth causes of action), and a cause of action for a declaratory judgment as to Bruce’s membership interest in the Albemarle LLC (tenth cause of action).

In April 2015, the Yeroushalmi Defendants moved to dismiss the first, fourth, sixth, seventh, tenth, and twelfth causes of action, and the fifth cause of action insofar as asserted against them. The motion court granted the motion as to the first, fourth, seventh, and twelfth causes of action and denied the motion as to the fifth cause of action insofar as asserted against the Yeroushalmi Defendants and the sixth and tenth causes of action. Plaintiffs appealed, and the Yeroushalmi Defendants cross appealed.

The Appellate Division, Second Department affirmed the decision and order of the motion court.

Breach of the Mineola Property Joint Venture Agreement

The Court agreed with the motion court’s determination that the first cause of action, alleging breach of the 2007 Mineola Property joint venture agreement, should have been dismissed. The reason, said the Court, was due to a subsequent agreement dated July 2, 2008 (“2008 Agreement”), which the Yeroushalmi Defendants submitted, and which superseded and constituted a novation of the Mineola Property joint venture agreement. Slip Op. at *2.

Under New York law, a novation occurs “where the parties [to an agreement] have clearly expressed or manifested their intention that a subsequent agreement supersede or substitute for an old agreement.” Northville Indus. Corp. v. Fort Neck Oil Terms. Corp. , 100 A.D.2d 865, 867 (2d Dept. 1984), aff’d , 64 N.Y.2d 930 (1985). When that happens, “the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement.” Id .; Citigifts, Inc. v. Pechnik , 112 A.D.2d 832, 834 (1st Dept. 1985), aff’d , 67 N.Y.2d 774 (1986).

Consequently, since the Court found a novation of the Mineola Property joint venture agreement, it concluded that “the cause of action alleging breach of the Mineola [P]roperty joint venture agreement [could not] be maintained. Slip Op. at *2 (citations omitted).

Breach of Fiduciary Duty

The Court agreed with the motion court’s determination to dismiss the seventh and twelfth causes of action alleging breach of fiduciary duty.

“A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” but generally does not arise “between those involved in arm’s length business transactions.” EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005) (citations and quotation marks omitted). “If the parties … do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Id . at 20.

To plead a cause of action for a breach of fiduciary duty, a plaintiff must demonstrate: “(1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC , 83 A.D.3d 804, 807 (2d Dept. 2011) (quoting Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2d Dept. 2010)). A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR § 3016(b). Litvinoff v. Wright , 150 A.D.3d 714, 715 (2d Dept. 2017).

The Court affirmed the dismissal of these claims because plaintiffs failed to provide any detail upon which to find a breach of fiduciary duty. In this regard, the Court explained that the complaint “contained only bare and conclusory allegations, without any supporting detail.” Slip Op. at *2 (citations omitted).

Fraudulent Inducement

The Court agreed with the motion court to dismiss the fourth cause of action, alleging fraud in the inducement with respect to the HPB transaction.

A cause of action alleging fraud requires the plaintiff to plead: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance, and (5) damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009).

As this Blog has noted previously, one of the more challenging elements of the claim to satisfy is justifiable reliance.

In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”).

Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “[n]o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992).

Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted).

The Court held that plaintiffs failed to satisfy the justifiable reliance element of their claim. The reason, found the Court, was because “Jim relied solely upon Moussa’s alleged misrepresentations without conducting any investigation into the factual basis for that information or into the viability of HPB as a business opportunity.” Slip Op. at *2. As such, plaintiffs “failed to adequately allege justifiable reliance,” thereby making “the cause of action alleging fraud in the inducement … subject to dismissal.” Id .

Benjamin stands as a good reminder of the pleading hurdles a plaintiff must overcome when alleging a breach of fiduciary duty and fraudulent inducement. As Benjamin shows, particularity is crucial, even in the more relaxed pleading environment of New York state court. See this Blog’s discussion of the differences between federal and state court with respect to pleading a claim with particularity ( here and here ).

Benjamin is also important for its application of the novation doctrine. Although novation typically occurs in the context of the original parties and a third party, Benjamin is an example of the doctrine’s application to the original parties only – the original parties sign a new agreement that supersedes the former one. The critical point here is the signed writing. An agreement that amends or modifies the terms of the original obligation ( i.e. , agreement) is valid only if it agreed to and signed by all parties.  

Note that novation differs from an assignment. An assignment only transfers a party’s obligations and does not require the consent of the third party, unless the contract specifically provides otherwise. An assignment does not terminate the obligations set forth in the original contract, while novation does.

Tagged with: Assignment , Breach of Fiduciary Duty , Business Litigation And Commercial Litigation , Fraudulent Inducement , Justifiable Reliance , Novation , Pleading Fraud with Particularity

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Lambert v Schiller

Hilscher & Hilscher, Catskill (J. Theodore Hilscher of counsel), for appellants.

The Baynes Law Firm, PLLC, Ravena (Brendan F. Baynes of counsel), for respondent.

MEMORANDUM AND ORDER

Appeal from an order of the Supreme Court (Tailleur, J.), entered December 12, 2016 in Greene County, which, among other things, granted plaintiff's cross motion for partial summary judgment.

This action arises from a June 2010 memorandum of understanding (hereinafter MOU) wherein defendants agreed to finance the sale to plaintiff of four parcels of land, totaling approximately 100 acres, for $300,000. Relevant here, the MOU stated that the purchase price of the first 7.8-acre parcel (hereinafter parcel one) was $60,000. The "basic terms" of the sale were that plaintiffs would make an initial $10,000 down payment then monthly payments in the amount of at least $5,000 for five years at a 6% interest rate on the balance. The MOU

further provided that all four parcels would be deeded to plaintiff "[a]fter $100,000 in principal payments [were] made" and that plaintiff would pay $60,000 of the principal by November 2010, at which time defendants would convey parcel one to plaintiff "with a mortgage of $40,000 remaining on it (the remaining principal amount of $40,000 having been spread over the other parcels)."

Plaintiff made the $10,000 down payment in June 2010 and a $5,000 monthly payment from July 2010 until September 2011. In August 2011, having made more than $60,000 in principal payments, plaintiff demanded that defendants provide the deed for parcel one. Defendants declined. Nonetheless, plaintiff took possession of parcel one and made considerable improvements to the property. With some exceptions, plaintiff continued to make regular monthly payments, albeit in varying amounts, from May 2012 until November 2013. In April 2014, defendants commenced a summary proceeding to evict plaintiff, mischaracterizing their [*2]relationship as landlord and tenant. The parties then executed a "contract for purchase and sale of real estate" (hereinafter the April 2014 agreement) that involved the sale of two parcels — including parcel one — totaling approximately 60 acres for $175,000 at a 6% interest rate. The April 2014 agreement provided that plaintiff would begin to make weekly payments "deemed rent [and] not refundable" if the property did not close. In July 2014, a court order was issued in defendants' favor requiring plaintiff to come current on his payments or face eviction. In August 2014, the parties executed a third contract (hereinafter the August 2014 agreement) wherein they agreed that plaintiff would purchase parcel one — as adjusted to approximately 12 acres by an intended boundary line agreement — for $76,000, payable in weekly installments. As in the April 2014 agreement, the weekly payments were characterized as rent in the event that the property did not close. Notably, neither the April 2014 agreement nor the August 2014 agreement referred to the MOU or credited any of plaintiff's previous payments.

In September 2015, plaintiff commenced this action seeking specific performance of the MOU, an equitable lien on parcel one, a constructive trust in the amount that plaintiff had paid defendants and to have the April 2014 and August 2014 agreements declared null and void because they were unconscionable, coerced or executed under duress. Defendants joined issue and filed counterclaims, including that plaintiff breached "the contracts and agreements" between the parties. Thereafter, defendants moved for, among other things, summary judgment dismissing the complaint and plaintiff cross-moved for, among other things, partial summary judgment on his cause of action for specific performance. Supreme Court, among other things, granted plaintiff's cross motion for partial summary judgment and directed defendants to deliver a deed to parcel one. Defendants now appeal.

Defendants' primary argument on this appeal is that plaintiff is not entitled to specific enforcement of the MOU because the April 2014 agreement was a novation and rescission of the MOU, the August 2014 was a novation and rescission of the April 2014 agreement and plaintiff failed to make the payments required pursuant to any of these agreements. Generally, a novation can be raised as a defense to an action on an existing agreement where a new agreement extinguishes any obligations arising from the existing agreement (see Miles v Houghtaling, 32 AD2d 714, 715 [1969]). "A novation has four elements, each of which must be present in order to demonstrate novation: (1) a previously valid obligation; (2) agreement of all parties to a new contract; (3) extinguishment of the old contract; and (4) a valid new contract" (Callanan Indus. v Micheli Contr. Corp., 124 AD2d 960, 961 [1986] [citations omitted]). If a party breaches a preexisting contract, there can be no novation because the first element is negated (see Wasserstrom v Interstate Litho Corp., 114 AD2d 952, 954 [1985]).

In support of their motion for summary judgment, defendants rely on an affidavit by their attorney, the MOU, the April 2014 and August 2014 agreements and account statements — purportedly prepared by defendants — listing plaintiff's periodic payments pursuant to all three agreements. There is no dispute that plaintiff failed to pay $60,000 in principal payments by November 2010 as required by the MOU. Nonetheless, the submissions confirm that plaintiff made and defendants accepted "semi-regular" payments from July 2010 through September 2011, and that plaintiff had paid more than $60,000 in principal by August 2011. By November 2013, plaintiff had paid more than $86,000 on the four parcels. After the parties executed the April 2014 agreement, plaintiff paid and defendant accepted periodic payments in excess of $10,000 through July 2014. Defendants' submissions indicate that by the time plaintiff commenced this action, he had paid more than $96,000 towards the purchase of parcel one as described in the MOU.

We agree with Supreme Court's determination that plaintiff did not breach the MOU. [*3]Initially, defendants do not challenge Supreme Court's characterization of the MOU as an installment land purchase contract that gave plaintiff "equitable title to the property and an equitable lien on the amount of payment" (Heritage Art Galleries v Raia, 173 AD2d 441, 441 [1991] [internal quotation marks and citation omitted]). Where, as here, such an agreement does not include a provision that time is of the essence, the purchaser may tender performance within a reasonable time after the specified date for payment (see Highbridge Dev. BR, LLC v Diamond Dev., LLC, 67 AD3d 1112, 1114 [2009]). "[A] seller may unilaterally convert [a] contract into one making time of the essence by giving the buyer clear, unequivocal notice and reasonable time to perform" (Mills v Chauvin, 103 AD3d 1041, 1044 [2013] [internal quotation marks and citations omitted]). Defendants gave no such notice here. Rather, by accepting plaintiff's late payments over time, defendants waived their right to demand timely payments and plaintiff was entitled to assert his rights under the MOU (see Snide v Larrow, 93 AD2d 959, 959 [1983], affd 62 NY2d 633 [1984]).

Defendants do not dispute that, in August 2011, plaintiff demanded that defendants deliver the deed to parcel one pursuant to the MOU after he had made more than $60,000 in payments towards the principal balance of the sale price. We agree with Supreme Court that defendants breached the MOU when they failed to deliver the deed upon plaintiff's demand. Further, we agree that, because defendants breached the MOU, defendants' assertion that the April 2014 agreement or the August 2014 agreement was a novation necessarily fails as a defense (see Wasserstrom v Interstate Litho Corp., 114 AD2d at 954).

Turning to plaintiff's cross motion, "[t]o obtain summary judgment for specific performance of a real estate contract, [the movant] must demonstrate that he [or she] substantially performed his [or her] contractual obligation and was ready, willing and able to fulfill his [or her] remaining obligations, that defendant was able but unwilling to convey the property and that there is no adequate remedy at law" (Fallati v Mackey, 31 AD3d 879, 880 [2006] [internal quotation marks, brackets and citations omitted], lv denied 7 NY3d 711 [2006]). In our view, plaintiff met this burden by submitting uncontroverted evidence that plaintiff resided on and made substantial improvements to parcel one, time was not of the essence under the MOU, he paid $60,000 towards the principal amount due within a reasonable time, he demanded that defendants transfer title to parcel one and defendants refused to comply. Further, plaintiff averred that despite defendants' refusal to transfer the deed, he continued to make payments and improvements to the property.

As set forth herein, defendants did not dispute any of plaintiff's factual claims with regard to the payments paid pursuant to the MOU. Rather, defendants contend that the $60,000 in principal payments should have been allocated "to each of the three distinct properties" and that parcel one was to be transferred "with a mortgage of $40,000 remaining on it." This is not consistent with the MOU, which provided that the purchase price of parcel one was $60,000, and that the mortgage represented "the remaining principal amount . . . having been spread over the other parcels," and "in any case any parcel [would] be deeded and/or fully released of [the] mortgage lien upon the payment of the entire stated purchase price." Because there is no factual dispute that plaintiff paid the entire purchase price stated for parcel one, we find that Supreme Court properly granted plaintiff's motion for partial summary judgment as to parcel one.

Peters, P.J., Egan Jr., Clark and Rumsey, JJ., concur.

ORDERED that the order is affirmed, with costs.

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

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What Is Novation?

How novation works, novation vs. assignment.

• Novation FAQs

The Bottom Line

• Corporate Finance

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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Assignment and Novation: Spot the Difference 12 November 2020

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• Power Plant
• Transfer of rights
• Contribution

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.

Key contacts

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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Contract Assignment: New York | Practical Law

Contract Assignment: New York

Practical law state q&a w-000-2743  (approx. 13 pages).

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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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