As general counsel to our small- and medium-size business clients, a large portion of our services consists of reviewing, modifying, and negotiating agreements – whether they are transactional in nature between our client and another party or concern our client and its personnel. When these agreements need to be modified and/or assigned, there are several key legal concepts that need to be considered to ensure the enforceability of the revised or assigned agreements. Two concepts that have been conflated, and should be clearly defined, are “novation” and “assignment.”
Under New York law, a novation occurs when there is (i) a previously valid obligation, (ii) an agreement by all parties to a new contract, (iii) the extinguishment of the old contract, and (iv) a valid new contract. Callanan Indus. V. Micheli Contr. Corp., 124 A.D.2d 960, 961 (3d Dept. 1986). A novation does not discharge obligations created under a prior agreement unless it was so intended, and a novation cannot exist where there is evidence that the rights existing under the purportedly canceled agreement have been transferred or assigned to another party. See Warberg Opportunistic Trading Fund L.P. v. GeoResource, Inc., 151 A.D.3d 465 (1st Dept. 2017).
Contrasted with a novation which, if effective, discharges and supersedes a prior written agreement, an assignment is the complete transfer to another party of an interest or an undivided part of that interest, and such transfer must be complete insomuch as the assignor must be divested of control over the rights assigned. Biosynexus, Inc. v. Glaxo Group Ltd., 2006 N.Y. Slip Op. 50359 (New York Cty. Supr. Mar. 13, 2006).
Unlike a novation, an assignment does not terminate the original written agreement. Rather, there is a shift in the interests or rights that are being assigned to another party, while a novation must unequivocally state that it is intended to supersede a prior writing amongst parties. As such, a novation must be demonstrated through clear documentary evidence that contains languages indicating that the new contract “revokes, cancels, extinguishes, supercedes, or otherwise satisfies a party’s obligations to the another under the original contract.” See Bellco Drug Corp. v. Interactive Health Pharmacy Servs., 2013 N.Y. Slip Op. 32327 (New York Cty. Supr. Sept. 25, 2013).
In contract formation, the intention of the parties is material, and as a result, the language used to memorialize these intentions must be explicit. When entering any contract, the advice of a lawyer is invaluable to ensure that the intentions are clear, the language is accurate, and you are properly counseled as to the rights and obligations created thereunder in your favor.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.