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Assignment
It means there is a change to the parties to a particular contract. From the perspective of the other party (the original counterparty to the assignor), it means the person against whom it can exercise its contractual rights and the person to whom it owes its contractual obligations changes. If the contract represents a particularly important or sensitive deal and the parties only signed the contract because they have faith in the particular counterparty concerned, the original parties may not want the contract to be freely transferable at the option of a single party and in those cases there will be an express clause prohibiting assignment unless all parties agree to it.
Novation
A person has rights and obligations (or benefits and burdens) under a particular contract. If it transfers to a third party its contractual rights only, this is called an assignment. If it transfers to a third party the whole bundle of its rights and obligations, this is called a novation. An agreement may be called an "assignment agreement" or "assignment and assumption agreement" but the substance of the transaction will determine the character of the transaction and in fact a novation transaction may be what is being effected. Under an assignment, the assignor is still responsible for performance of contractual obligations towards the counterparty even after the date on which the assignment is completed. For that reason, the assignor will opt for assignment only if it has satisfied itself that its obligations have been performed in full or if it can tolerate the burden of any remaining obligations which have yet to be performed.
These two types of transactions also differ in terms of their perfection steps (i.e. steps which would need to be completed by the assignor and the assignee before a third party is compelled to respect such assignment under the relevant governing law). For example, if English law were the governing law of the original contract, an assignment requires service of a notice of such assignment on the counterparty whereas a novation requires express consent of the counterparty.
For convenience, reference will be made to assignments only in the remainder of this article unless there is a particular distinction to be made between assignments and novations.
Rationale
An assignment is a way in which the assignor can “exit” the transaction. The assignee will take the place of the assignor and continue the contract with the counterparty. If the value of the original contract is significant, the assignor may be paid a separate fee or premium by the assignee as consideration for purchasing this contract.
Separately, an assignment may be used by the assignor as collateral for a financing that the assignor is raising from lenders. The provision of such collateral can make it more likely that a financing will be secured as well as potentially increasing the size of the loan.
Form of agreement
The assignment agreement (if it is an assignment agreement in name only) should ensure that the assignee is not responsible for any defaults of the assignor prior to the completion date of the assignment and that the assignor is not responsible for any defaults of the assignee on and after the completion date of the assignment. As regards any claims or disputes which have accrued prior to the completion date of the assignment, the assignor and the original counterparty should reserve their respective rights. The assignor may be asked to give specific representations and warranties to assure the assignee such as whether the original contract is legally valid and enforceable; whether there are any outstanding breaches of contract; whether the assignor has a good title to the contract (or whether there are any third parties such as security takers which have rights to or encumbrances over the contract). In terms of buying and selling of loans (which are receivables held by the assignor) between banks and financial institutions, it is customary that the assignor does not give specific representations and warranties to the assignee regarding the quality of the original contract and that the assignee is expected to carry out its own diligence on the original contract as well as the original counterparty's ability to perform its contractual obligations. Changes to the terms of the original contract will require the consent of the original counterparty and, in most cases, such consent may be impracticable to obtain and hence the terms of the original contract are usually left intact. If the assignee wishes to make a substantial number of amendments to the original contract and the original counterparty is amenable to such amendments, it will be more rational and economical to enter into a new contract with the original counterparty based on the form of the original contract (as opposed to tailoring the assignment agreement needlessly) and to have the original parties terminate the original contract concurrently.