Assignment and Novation: Transferring Contracts in Singapore
There are 2 methods of transferring a contract in Singapore.
- If you want to transfer just the rights under the contract, you can perform an assignment of the contract.
- On the other hand, if you want to transfer both the rights and obligations under the contract, you can perform a novation of the contract.
Assignment: Transferring Only Your Rights Under the Contract to a Third-Party
If you wish to transfer just the rights (i.e. benefits) of your contract to another person, an assignment is the appropriate choice for you.
For example, you may want to assign the right to receive cash payouts from your life insurance or endowment plans to a loved one, for his/her benefit.
Since an assignment only transfers the rights under the contract, you will still retain your obligations under the contract.
Finally, your assignee (i.e. the person you’ve assigned the contract to) will not be a party to the contract. The contract will still be between you and the other original party to the contract.
Can your contract be assigned?
Contracts of a personal nature, such as employment contracts, cannot be assigned. This is because these contracts have been signed with parties specifically for certain exclusive qualities that these parties have. (For example, the parties’ skills or styles of performance.) The parties to these contracts therefore cannot be “replaced” so easily.
Commercial contracts may also contain a clause expressly excluding or limiting their assignment unless certain conditions have been fulfilled.
Here is a sample restriction of assignment clause:
“Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, to the benefit of and enforceable by the parties and their respective successors and assigns.”
When deciding whether to assign your contract, you should therefore check whether it contains any clauses providing for conditions on assignment.
Requirements for assignment
Once you have determined that your contract can be assigned, you can start to prepare for its assignment.
The requirements for assignment are:
- The assignment has to be absolute. This means that it has to be unconditional;
- The assignment cannot be by way of charge. The assignment cannot be made in return for security;
- The rights to be assigned must be clearly identified;
- The assignment has to be in writing and signed by the assignor;
- The other party to the assigned contract is given clear and unambiguous notice of the assignment in writing. The notice can be given by either the assignor or the assignee. However, the notice must also be unconditional.
Contracts can be assigned without the consent of the other party to the contract.
If all the above requirements are met, the assignee will have the right to sue the other party to the contract for the benefits provided under it (if required).
If not all of the requirements have been met, the assignment will still be valid. However, the assignee will not be able to sue the other party to the contract directly.
Instead, he will have to join you (the assignor) as a party first. In other words, you will have to be a party to the action as well.
Novation: Transferring Both Your Rights and Obligations Under the Contract to a Third-Party
If you would like to transfer both the rights and obligations under a contract to another party, then a novation is the appropriate choice.
For example, when selling your business, you may wish to novate your existing contracts with your suppliers to the new business owner, so that any outstanding debts under these contracts will be transferred to him.
Since novation has the effect of transferring both your rights and obligations to a third-party, the previous contract will effectively be extinguished. A new contract is then formed between the other party to the previous contract, and the third-party.
Can your contract be novated?
Your contract may expressly exclude or limit the right to novate. You should therefore check whether it contains any clauses providing for conditions on novation before proceeding.
Here is a sample restriction of novation clause (which also happens to restrict assignment):
“A party must not assign or novate this agreement or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party which consent may be withheld at the absolute discretion of the party from whom consent is sought.”
Requirements for novation
A novation can be executed formally by way of a written agreement or by deed.
A novation can also arise through the parties’ conduct. For example, sending a notice of novation to the other parties of the original contract can suffice.
In either situation however, consent of all parties to the original contract is required. The new contract must also meet all the legal requirements for contract formation.
If you require legal advice on assigning or novating a contract, and/or on drafting the necessary documents to execute an assignment or novation, you may get in touch with one of our corporate and commercial lawyers.
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