"The new company has taken over the project. Does that automatically release the old company?"

A contractor enters into a three-year service agreement with Company A.

One year later, Company A restructures its business. Its operations, employees and assets are transferred to Company B.

Company B starts issuing instructions and paying the contractor’s invoices.

The parties continue working without signing any further document.

Several months later, an earlier invoice remains unpaid. Company A says:

“Company B has taken over the contract. Claim against them.”

Company B responds:

“That invoice arose before we took over. It belongs to Company A.”

Moving performance from one company to another does not necessarily transfer the entire contract or release the original party.

The parties need to determine whether they intended an assignment, a novation or merely an informal operational arrangement.

1. A novation replaces an existing contractual relationship

Section 63 of the Contracts Act 1950 provides that where the parties agree to substitute a new contract for an existing contract, or to rescind or alter it, the original contract need not be performed.

A novation commonly involves:-

• the existing party;

• the incoming party; and

• the remaining counterparty.

All relevant parties must agree to the substitution.

The result is not merely that Company B performs some of Company A’s tasks. The intended effect is generally that Company B assumes the specified contractual position and Company A is released from the obligations covered by the novation.

2. Novation and assignment are not the same

An assignment commonly transfers a contractual benefit, such as a right to receive payment.

It does not automatically transfer the burden of performing obligations.

For example, a supplier may assign its right to receive money to a financier. That does not necessarily mean the financier must supply the goods or answer for defects.

A novation is usually required where an incoming party is intended to replace an outgoing party as the person responsible for future performance.

The correct mechanism depends on what is being transferred:-

• rights;

• obligations;

• the whole contractual position;

• a debt;

• receivables;

• assets; or

• a business undertaking.

Calling a document a “Deed of Assignment” does not make it capable of transferring every obligation in the contract.

3. The counterparty’s consent is essential

Company A and Company B cannot ordinarily decide between themselves that the contractor must accept Company B as the new contracting party.

The contractor originally assessed Company A’s:-

• financial standing;

• experience;

• licences;

• personnel;

• insurance;

• guarantees; and

• ability to perform.

Company B may have a different risk profile.

The contractor may agree to the substitution, impose conditions or refuse it where the original agreement does not provide otherwise.

Silence should not be treated as safe evidence of consent. Continued dealings may be relevant, but the parties should not leave the intended legal effect to inference.

4. Identify the effective date precisely

A novation agreement should state when the substitution takes effect.

Possible dates include:-

• the date of signing;

• a specified historical date;

• completion of a corporate restructuring;

• transfer of particular assets;

• receipt of regulatory approval; or

• satisfaction of stated conditions.

Backdating a signature is not an appropriate solution.

If the parties want the novation to take effect from an earlier date, the document can state the agreed effective date while recording the actual signing date accurately.

The tax, accounting and regulatory consequences of retrospective effect should also be examined.

5. Who is responsible for obligations arising before the effective date?

This is one of the most important questions in a novation.

The agreement should address:-

• unpaid invoices;

• work already performed;

• existing defects;

• accrued rebates;

• warranties;

• service credits;

• indemnity claims;

• confidentiality breaches;

• claims already notified; and

• liabilities discovered later but arising from earlier events.

The parties may agree that:-

• Company A retains all pre-novation liabilities;

• Company B assumes specified historical liabilities;

• certain rights and liabilities are apportioned; or

• the counterparty preserves its rights against Company A for earlier breaches.

The word “take over” does not answer these questions.

6. A release should not be wider than intended

The outgoing party will usually want a complete release.

The counterparty may be prepared to release it only from obligations arising after the effective date.

If the agreement states that Company A is released from “all claims whatsoever,” that wording might affect claims already accrued but not yet discovered.

The release should therefore distinguish between:-

• future performance;

• accrued rights;

• known claims;

• unknown historical claims;

• continuing warranties; and

• fraud or deliberate concealment.

The parties should also identify whether any settlement or waiver is being given in addition to the novation.

7. Existing amendments must be incorporated correctly

The original contract may already have been modified through:-

• supplemental agreements;

• change orders;

• extensions;

• side letters;

• pricing revisions;

• settlement agreements; or

• variations recorded in correspondence.

The novation should identify the complete contract being transferred.

If the agreement refers only to the original contract dated three years earlier, the parties may later dispute whether subsequent variations were included.

An updated schedule of existing purchase orders, work in progress, invoices and claims can reduce uncertainty.

8. What happens to guarantees and security?

A transaction may be supported by:-

• a corporate guarantee;

• a personal guarantee;

• a performance bond;

• a bank guarantee;

• a charge;

• a deposit;

• an insurance policy; or

• retention money.

Substituting the principal contracting party can affect these arrangements.

A guarantor or security provider should not automatically be assumed to remain liable after the underlying contract has been materially changed or replaced.

The parties may need:-

• written confirmation from the guarantor;

• replacement guarantees;

• amendments to security documents;

• consent from a bank;

• a new bond; or

• continuation endorsements from insurers.

The novation should not become effective before essential replacement security is in place.

9. Regulatory licences may not be transferable

Company B may be willing to assume the contract but lack the licence, permit or approval required to perform it.

This is particularly important in regulated industries involving construction, healthcare, finance, transport, telecommunications or government procurement.

The agreement should identify:-

• the licences required;

• whether they are held by the correct entity;

• whether customer approval is necessary;

• whether a tender condition restricts substitution;

• whether foreign ownership rules are affected; and

• what happens if approval is refused.

A novation agreement cannot validate performance that the incoming party is legally prohibited from undertaking.

10. Employees and assets do not move merely because the contract is novated

The incoming party may require personnel, equipment, premises, software and records to perform the contract.

Those items need their own transfer or access arrangements.

A complete restructuring may therefore involve:-

• asset-transfer documents;

• employment arrangements;

• intellectual property licences;

• data-transfer protocols;

• tenancy or lease assignments;

• financing consents; and

• notices to customers and suppliers.

The novation replaces a contractual party. It does not automatically transfer every resource required by that party.

11. How should payments be handled during the transition?

The parties should reconcile:-

• invoices issued before novation;

• advance payments;

• deposits;

• credits;

• retention sums;

• work in progress;

• taxes;

• payment instructions; and

• bank-account changes.

A counterparty should independently verify any request to redirect payments to a new bank account.

Corporate restructuring is sometimes used as a pretext for payment-redirection fraud.

The novation agreement and verified corporate communication should clearly state who is entitled to each payment.

12. Data and confidential information require separate attention

Performance of the contract may involve customer records, employee information or other personal data.

The parties should determine:-

• what data may be transferred;

• the legal basis and purpose;

• required notices or consents;

• access controls;

• security measures;

• retention periods; and

• responsibility for earlier data breaches.

A broad clause stating that “all records shall be transferred” may be insufficient where personal or regulated information is involved.

13. Required corporate approvals must be obtained

Each company should confirm that the novation has been properly authorised.

Depending on the transaction, this may involve:-

• board resolutions;

• shareholder approval;

• approval under the constitution;

• consent from lenders;

• approval from a contracting authority; or

• compliance with related-party procedures.

The authorised signatory should execute the agreement in accordance with the Companies Act 2016 and the company’s internal requirements.

14. When is a simple amendment more appropriate?

Not every change requires a novation.

If the same parties remain and only the price, scope or completion date changes, a variation or supplemental agreement may be sufficient.

A novation is more appropriate where one contracting party is being replaced or the parties intend to extinguish the existing contract and substitute another.

Using a novation unnecessarily may affect accrued rights, guarantees or limitation issues. Using a simple amendment when a party is actually being replaced may leave the original party liable.

What should a novation agreement answer?

At minimum:-

• What contract is being novated?

• Who is leaving and who is entering?

• When does the substitution take effect?

• Which rights and obligations transfer?

• Who bears historical liabilities?

• Which accrued rights are preserved?

• Is the outgoing party released?

• Do guarantees and security continue?

• How are payments and work in progress treated?

• What consents and approvals are required?

• How will records and data be transferred?

• What happens if a condition is not satisfied?

A novation agreement should create a clean contractual transition.

If it merely says that Company B “takes over everything,” the parties may continue performing while carrying three different understandings of who remains responsible.