Assignment and Novation Guideline

At common law, a party to a contract may only assign its “rights” not its “obligations”. Accordingly, a contractor may assign the right to perform the services and to receive payment but cannot assign the obligation that it owes to the State to provide the services. As such, on assignment the original contractor remains liable to the State for performance of the contractual obligations by the assignee.

Novation on the other hand effectively constitutes a new agreement between the State and the incoming contractor as if the incoming contractor was the original contracting party from day one of the contract. The original (outgoing) contractor is effectively released from all past and future obligations under the contract. It is for this reason that outgoing contractors much prefer novation to assignment, as they are absolutely released from the contract. An assignment leaves a residual liability on the outgoing contractor’s accounts.

One of the first tasks to undertake on being approached by a contractor requesting an assignment or novation is to understand what process has occurred/is being proposed to introduce the new party to the contract. Is it an asset sale, a sale transfer or something else?

The reason for this is to allow the State to review the contract and determine what rights it has in dealing with the proposed arrangements.

The State can choose to novate or assign. However, each contract should be reviewed to determine the State’s rights in that regard.

Agreement to assign or novate should never be automatic. Your agency should carry out due diligence on the proposed assignee/new party just as it would during the tender process.

The following list of questions are provided as examples of the type of questions to ask the contractor. The questions will need to be tailored to each contract and not all may be relevant in every situation. However, they should help to gather information that is needed to make a decision to decide whether to consent to a novation. Sample questions to ask when considering whether to novate:

• What is the contractor’s strategy and timeframe for managing the proposed novation?
• What difference in corporate structure will there be between the outgoing and incoming contractors?
• Will the novation have any effect on the performance of the services under contract?
• Will there be different directors and senior managers (for example, Chief Executive Officer, Chief Finance Officer and Chief Operating Officer) following the novation?
• Will there be any changes to other key personnel?
• Will the incoming contractor have the necessary finances to fulfil the obligations of the contract in the short, medium and long term?
• Will the incoming contractor have the appropriate insurance policies in place?
• Is the contractor party to any other contracts or arrangements that may be affected by the proposed changes, for example, subcontractors?
• Will the incoming contractor be employing the same employees as the outgoing contractors, and if not, how will the incoming contractor manage the resulting loss of expertise and experience?
• Will all the outgoing contractor’s assets be transferred to the incoming contractor?
• How will the contractor manage any intellectual property that is relevant to the services provided?
• How will the contractor manage the transfer of any relevant records?

The assignor/outgoing party should generally be advised of this process and that it will be required to meet all costs associated with of this exercise. Equally the assignor/outgoing party should be advised that it would be required to meet all other costs and expenses incurred by the State in connection with the assignment/novation, for example, legal costs.

The State should not agree to use any assignment/novation document prepared by the assignor/outgoing party/incoming party, as these will not have been prepared with the State’s interests in mind.

The State may also be entitled to impose conditions on the assignment/novation, for example, requirement for a bank guarantee, director’s guarantees, etc. The State should also be 100 per cent satisfied that there is no existing breach of the contract by the assignor/outgoing party.

Another issue to consider is timing. The State is often approached “after the fact”, particularly with novations. For example, the takeover has already taken place and the State is being asked to “rubber stamp” the assignment/novation. It should never do so. An assignment or a novation without the State’s prior consent is, in most instances, a breach of contract, and the first response by the State in this situation should be to advise the contractor of that fact and that the State is considering its position. In such cases the “breach” may give the State bargaining power, in respect to the assignment/novation, but also the contract generally. This may put the State in a position to demand variations to the contract as a condition of its consent to novation, which otherwise it would not be in a position to require.

Assignment and novation templates are available here. However, each case needs to be considered on its merits and appropriate amendments made to reflect the particulars of the assignment/novation. Requests to assign or novate require careful and detailed consideration – State Solicitor’s Office advice should be sought on each of these circumstances.