Understanding the Difference Between a Novation and an Assignment Agreement!

Whether or not you know if you need a Novation or an Assignment Agreement can be the difference between a good risk management strategy that works versus an ineffective risk mitigation strategy.  Often times, clients will ask me to assign their contracts, intellectual property, licenses, permits, employment agreements, vendor agreements, customer agreements, but rarely will they ask me for a Novation Agreement.

It seems everyone is aware of the need to transfer title or right to receive the benefits of a contract or agreement to the proper individual or entity via an Assignment Agreement. So long as, there are no restrictions against assignments or change in control provisions or notice and approval requirements for assignments, it is fairly routine to prepare and execute an Assignment Agreement and record it with the proper agency.  This will ensure that the Assignee is entitled to continue to own title to the asset or rights to receive the benefits of a contract, and ensure that the proper individual or party is paid or receives the benefits.

However, the Assignment Agreement, even if it includes an indemnification provision (including the costs and fees of defending) does not protect the Assignor from claims by third parties to the contract, asset, intellectual property, customer agreement, vendor agreement, employment agreement, license, permit or anything else that is included in the Assignment Agreement.  The Assignor and his, her or its assets are still subject to claims from these third parties.  Thus, many Assignors fail to realize that he, she or it may not be as protected as the risk management strategy would lead them to believe.

Often, the protection of a corporation, limited partnerships, LLCs, S-Corps, or similar entities is lost by the Assignor and the personal assets of the individual are subject to claims by third parties.  The best method for ensuring that Assignors are not going to continue to be liable to third parties under contracts, licenses, permits, employment agreements, customer agreements, vendor agreements, or for intellectual property that has been assigned is to make sure that you Novate the prior Agreement.

A Novation Agreement requires that the prior agreement with the Assignor is extinguished, but the agreement and the obligations under the prior agreement will now be assumed by the Assignee.  Thus, the Assignor has to have the other party agree to Novate their Agreement with the Assignor and transfer the obligations of that agreement to the Assignee.  This will ensure that the obligations along with the benefits are being transferred to the Assignee.

If you have any concerns or questions relating to these matters, then please feel free to contact us.

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