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DEFINITION

Assignment

Assignment involves the transfer of an interest or benefit from one person to another.

However the 'burden', or obligations, under a contract cannot be transferred.

Novation

Novation, in contract law and business law, is the act of either:

(a) replacing an obligation to perform with another obligation;

(b) adding an obligation to perform;

(c) replacing a party to an agreement with a new party.

Situations

An assignment and novation differ

in several important ways. Assignment

gives some rights to a third party,

whereas a novation transfers both rights

and obligations to a third party.

Novations are most often used in corporate mergers, acquisition or the sale of a business.

Governing Law

DIFFERENCES

EFFECT

NOVATION

VS

ASSIGNMENT

\

The effect of a novation

is to discharge an existing

contract between two parties

and enter into a new contract,

usually on the same terms

between the ongoing party and

a new party.

TT Martech Sdn Bhd v Wing Construction Sdn Bhd (M) Sdn Bhd (2004) 8 CLJ 685.

Novation must be a tripartite agreement involving the original debtor and the creditor of the choses in action and the intended party agreeing to substitute in the place of the debtor to deliver the choses in action to the creditor (G Ramchand v Lam Soon Cannery Co Ltd (1954) MLJ 239 at 241).

Novation terminates the privity of contract between the original contracting parties, and replaces it with a new contract between the ongoing party and the incoming party.

Accordingly, if a party wishes to shift its obligations under a contract to another party and be absolved from its liability to fulfil those obligations, it will generally need to affect a novation.

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