There may be a variety of reasons that a contract would need to be transferred to another party. It can happen in the context of a company acquisition where a business buys the assets of another business or part of a business, during a merger of two companies into one or during a liquidation scenario. In each case, the acquiring company will want the contracts related to the relevant business to be transferred to them.
There are two basic methods used to achieve this; assignment and novation. Each has unique features that must be taken into account when deciding which is the preferred option.
Assignment
Under English law, only the benefit of a contract may be assigned and not the burden. This means for example that the buyer of a business (the assignee) will only take over the right to receive money for the goods or services that the business provides without the obligation to actually provide them. Similarly, it will only take over the right to be supplied with goods and services from that business’ suppliers and not the obligation to pay for them. Contracts will often contain anti-assignment provisions for this reason.
To overcome the obvious difficulties with assignment, anti-assignment provisions usually require express permission from the other contracting party. That way, the other party can ensure that the assignment contains a duty on the assignee to carry out the obligations under the contract as well as taking the benefits. This is also in the assignor’s interest and is usually backed by an indemnity in respect of any liabilities that might arise.
Novation
In strict legal terms, the clearest way to shift the rights and obligations under a contract to a new party is by novation. Novation requires that the original parties to a contract agree both with each other and the new party that the original contract is terminated and replaced with a new contract. That way the original contract is not actually transferred but a new contract effectively comes into existence.
Although novation might avoid the problems associated with assignment, it is not without its difficulties. If a business has significant numbers of low value contracts, the administrative burden and costs associated with reaching tri-partite agreement for each individual contract may be prohibitive.
Conclusion
If there is no prohibition on assignment in a contract, businesses are free to assign the benefits of that contract. However, the assignment should also contain a duty on the assignee to perform the obligations under the contract and an indemnity.
Although express written novation agreements might be impractical, the new company can take the risk of offering novation agreements in respect of each contract or provide notice that contracts have been transferred. Even if the novation agreements remain unsigned or notice is not acknowledged, consent to the novation may then be implied if the other contracting parties continue to deal with the new company under the same terms.
If you need assistance transferring contracts, Rollingsons has experienced lawyers who can assist you. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
