Changing and transferring contracts — overview

Contracts can be:

• varied by agreement

• have rights transferred by way of an assignment

• have rights and obligations transferred by way of a novation

Variation

Written contracts will invariably contain, either a prohibition on any variation or allow changes to be made provided such changes are in writing and signed by the parties or their authorised representatives. A person purporting to vary a contract must have the authority to do so.

An agreement that does not need to be in or evidenced in writing may be varied by the oral agreement of the parties.

Any agreement to vary a contract is subject to general contract principles and needs to be supported by consideration.

If an attempted variation fails due to a lack of consideration or other formality, it is still possible to give effect to an attempt to vary by way of waiver or promissory estoppel.

If the underlying agreement confers benefits or rights on third parties or it is subject to the guarantee of a third party, in certain circumstances the consent of the third party may be required before the changes will take effect.

Assignment

Unless assignment is prohibited in a contract, a party may generally assign the rights (benefit) under the contract to a third party, without the consent of the other party.

A person cannot usually assign the obligations (burden) under a contract. Contracts which are of a personal nature (ie where it matters that a certain party performs the contract, eg employment contracts or taking part in a boxing match) cannot and would not usually be assigned.

Commercial contracts usually restrict assignment. Normally, there is either a strict prohibition or assignment is permitted either with the consent of the other party or to a select group of persons ie a party's group of companies (but there may need to be a stipulation that these rights should be re-assigned to the assignor if the recipient leaves the group of companies).

Assignments are categorised as either being statutory or equitable. A statutory assignment must:

• be in writing and signed by the assignor

• only transfer the benefit of the contract

• not be by way of charge only

• be absolute

• assign rights that are wholly ascertainable

• give notice of the assignment to the other party to the original contract

An equitable assignment may arise when any of the requirements for a statutory assignment are not satisfied.

An assignment takes effect 'subject to equities', which means that an assignee takes the rights under the contract subject to any defences available against the assignor (ie those that are available to the other contracting party prior to any notification of the assignment), whether the assignee has notice of these or not.

A prohibition or limitation on assignment may not prevent a party holding the rights under the contract on trust on behalf of a third party. Parties can also delegate or sub-contract their rights to assign.

Novation

Novation allows both the rights and obligations under contracts to be transferred by one party to a third party. A novation effectively cancels the current contract and replaces it with a new one. Novation is normally done by agreement but may also be achieved by conduct.

The outgoing party is usually discharged of its obligations and liabilities, these are assumed (in some form) by the incoming party either from a specific date or in their entirety.

As a new contract is formed, it must comply with general contract principles.